Earnings Call: Q2 2023

Jul 27, 2023

Summary

Q2 sales rose 14.6% and EBITDA grew 15.2%, with gross margin expanding to 27.8%. Store expansion remains the primary cash use, while July growth was healthy but more moderate than H1.

Good morning, everyone, and welcome to La Comer's second quarter results conference call. Before we begin, I would like to remind you that the information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and concerns, and actual results may differ materially. Please refer to the detailed note on page 2 of the presentation. I would like to turn the call over to Mr. Rogelio Garza, Chief Financial Officer of La Comer. Please go ahead, Rogelio. Thank you, Yolot, and thank you to everybody for being with us today. We are going to have a brief presentation of the second quarter results, and after that, we could have some questions. Just to review, you should be seeing our presentation. Yes, Rogelio. Yes. The highlights for the second quarter of 2023 is a total increase in sales of 14.6% and same store sales of 10.5%. We can see that the new stores have contributed to the growth of the company in a very healthy way. The new stores that we have opened have had very good results. In addition to that, we have an increase in gross margin, and a gross margin for the quarter of 27.8%. We are maintaining our EBITDA margin in 10.4%. As you can see in the graph, we have maintained a differentiation versus the market. During this quarter, we have grown in same store sales above the growth of ANTAD self-service section, and we grew 10.5%, and then had growth a little bit above 8%, 8.1%. All formats, regions, and categories have presented increases in sales. By product category, we continue to see an increase in the participation of categories that includes prepared food, tortillas, and bakery. By region, the region that has contributed more to the growth of the company is the western region. We have stores in the western part of the country that have grown very well and have substantial increases in sales. As you can see in this graph, we maintain a good participation of e-commerce, La Comer en tu Casa, our own initiative. It has had a participation around 7.5%, a little bit less than that, but a very healthy participation of the total sales of the company. The agreements that we have with some other players, with Rappi and Cornershop, participates above 4% of the total sales of our participation. The participation of all the e-commerce for La Comer remains in very healthy levels. We have experienced a normalization of this number, but we continue to see very stable operations in this part. If we see the gross profit for the quarter, we can see an increase of 17% in the gross profit and an increasing margin of almost 60 basis points from 27.2% to 27.8% in gross margin. This is because we have a big increase. The change in the mix of product has helped us in contributing to this increase in the gross margin. We have an increase of 24% in sales of the category of prepared foods and bakery that usually have, at the level of gross margin, higher margins. In addition to that, we have very good numbers in our logistic cost. We have been gaining some efficiencies in logistics, and we maintain very good levels of inventory management. The shrinkages that we have in our inventory has been very well controlled in a very healthy level, and we remain with this good performance in the operation of our inventory. That all has contributed to the increase in our gross margins. At the EBITDA level, we maintain our margin in 10.4%. Our total EBITDA for the quarter growth, 15.2%, reaching MXN 1,014 million. At this level, we have some pressures in some expenses. Especially expenses related to salaries. There have been some changes in the labor legislation in Mexico that have contributed to the increase in the cost of labor in our company. One change is the change in holidays, because of some changes in the legislation in Mexico that increases the number of holidays that employers can afford or can have. In addition to that, we have increases in the contribution to the social security that the employer, the company, has to contribute to social security, a higher proportion of the salary. These changes in the legislation have an impact on the total labor expense that we have. Additional to that, we have made some efforts in order to be more productive and in order to diminish the impact of these changes in the legislation. But of course, we need to be sure that the level of service that we provide in our stores remains the same. Part of our very clear strategy is differentiation. In order to provide better quality and better service in our stores, we need to have good levels of labor and to have the labor with enough training. That, of course, has some pressures in the level of expenses that we have. But it is important for us to maintain the level of service in our stores because our strategy is based in the fact that the service, the quality, and the shopping experience is better in our stores, and that's why we continue to provide good service in our stores. Additional to that, we have some other expenses that have had some big increases during this quarter. One of these is packaging expenses, because we continue moving all our packaging to make it more environmentally friendly. And usually, the package that is ecological packaging is more expensive, but it's something that we are very committed with, and we continue moving toward doing all our packaging in more ecological friendly materials. The other account that has had very big increases in expenses is La Comer en tu Casa, our e-commerce efforts. We have improved our processes in this effort in this part of the business to provide better service, better times of delivery of the orders, and all these efforts have represented an increase in expenses that we have had during this quarter. If we see the highlights of the cumulative numbers of the first half of 2023, we have an increase in total sales of 14.5%, an increase in same store sales of 11%. Our gross margin for the first half of the year is 28.4%, and we have an EBITDA margin of 11.2% during the first half of the year. Really, the same trends or the same effect that we explained in the first quarter applies more or less for the whole first half of the year. In regards of the expansion plan that we have, the projects that we have for this year, we opened two new stores during the month of May in 2023. Those two stores are located in the metropolitan area of Mexico City. They are performing very well. Actually, we are having very good increases in our sales because of the contribution of these two new stores. For the total 2023, we expect to open four stores in total. Originally, we had plans to open six stores during 2023, but two of those stores have been delayed because of some delays in the processes, and we expect to open those two additional stores in the first part of 2024. In addition to that, we expect to make the remodeling of two or three stores during the year. If we see our contribution, our social responsibility, and ecological responsibility, we continue moving to all our packaging in an ecological-friendly way. We are continuing making efforts in order to make all our packaging friendly with the environment. We contribute to several organizations in order to have social responsibility. We continue contributing to Fundación Mexicana de Desarrollo Rural. That is a foundation that makes educations for people in the agricultural part of the country in Mexico. We contribute to Promotoría de Chapultepec, that is a very well-known park in Mexico City, and we contribute to that effort. We contribute with help, Un Kilo de Ayuda and Banco de Alimentos and Cáritas that are. All these are organizations that provide food to needed people. I think that's all the presentation that I have for you today. We could have some questions. If you have additional questions, we could answer your question at this moment. Thank you, Rogelio. We are ready to open the microphone for any question. If you may, please raise your hand or just let us know that you want to make a question for Rogelio. Yes, we have one. I don't know who is the one. Please- Right. Yeah. Yes, we have one, but it has not a name, so please open your microphone and ask the question. This is me, I think. This is Rajiv. Oh from Barclays for Brent. Hi, Rajiv. Rogelio coming in. Hi. Yes. Thank you. Thanks for all the information today. We just had two questions. One, if we could have more clarity for performance by format, just how it's been going for the quarter, and also how July is trending, how you see consumer trends or performance so far in this next quarter. Thank you. Okay. Yes, during the quarter, we saw very good performance of La Comer format. It's our format that has grown more than the other formats. But all the formats have positive numbers. After that, City Market was the second format that has more growth. Both of those formats have increases in margin very well, very good increases in margins. Maybe the format that has performed a little bit below the average is Fresko because we have some new stores there that have, at this moment, they don't have the margins or the profitability that are from our mature stores. They are catching in the profitability, those new stores in Fresko that represent a good proportion of the new sales in that format. In July, we continue to see healthy levels of growth, but maybe a little bit lower than in the first half of the year. Still at very good levels at this moment. We have to remember that at this moment, we are in one of our more important campaigns, La Temporada Naranja. That, for us, is our summer campaign that is very important for us, and we are, at this moment, in the middle of the campaign, and it's having good results. We are having very good results on all our different offers that we have in this campaign. As I mentioned, we still see very healthy levels of growth, maybe a little bit more moderate than the first half of the year, but still very healthy. Okay. Okay, great. Thank you so much. Any just comments on trade down that you've been seeing in the industry as a whole or anything like that? Not at this moment. Not very clear. For the analysis that we have done, we haven't seen anything like that. Okay. Okay, perfect. Thank you so much. Okay. Okay. We are ready to answer questions if you don't have any. I think- Okay Miguel Llulla is having a question. Oh, go ahead, Miguel, please. I think Miguel Llulla is asking, in terms of capital allocation, where are the uses of cash for second half 2023 and 2024? I think in this part, we are going to continue with our expansion plan. The idea to have the cash that we have at hand, the main purpose of that is the expansion of the company. We have very good projects for this year and for next year, and we expect to continue investing in new stores. Most of the investment is for the expansion and the opening of new stores. In addition to that, if the cash flow generation of the company remains in healthy levels, we expect to continue paying dividends the next years, 2024 and the following years. The second question that I have, Miguel, is are the improvements in working capital sustainable? We think that the improvements in working capital is something that, for us, it's very important to have a very healthy inventory. Something that is very important for us is to have the inventory very good. That doesn't mean that we have very low levels of inventory. We want to have the inventory. We think that the inventory promotes growth in sales. We need to have good products in inventory in order to be ready to sell those products. For us, the most important thing is to have the inventory in very good situation, very healthy inventory with no parts of the inventory that are not in good shape for being sold. I would say that the levels that we have of inventory and suppliers are more or less stable in the future. We don't expect big changes in that respect. I don't know. Okay. Okay, Miguel Llulla. Hope this helps. Well, at this time, there are no more any other question in the queue, so if you don't want any other question, please proceed to closing remarks. Hi. Oh, another question. Yes, if I make a question. Sure. Thank you for the call and the space. I would like to know what percentage of sales are imported products, and if given the significant appreciation of the peso, is there a benefit in the margins, or can we expect something in that case? Yes, we have, for all our products, we estimate that around 23%, 25% of the total product we sell are imported in some way, directly or indirectly. But we don't see an specific impact in gross margin because of the imported product, because usually you transfer to the customers the changes in the FX in order to continue being competitive in the market. The food retailer sector in Mexico is very competitive, and you need to continue offering prices that are competitive in the market. That's why usually, when you have an appreciation or a depreciation in the foreign exchange, usually you need to impact those changes to the final price to the customer. Okay. Thank you very much. What is the reason of the increase in the amount in taxes? Yes, usually, because in Mexico, the financial accounting and the fiscal accounting are different, because for fiscal reasons, you have some impact of the inflation. Some numbers, for fiscal reasons, you need to make adjustments for inflation. Usually, when we have higher levels of inflation, you have a decrease in the effective rate of income rate that you use for taxes. What we have seen in the last year is a diminishing the inflation number in the country. For that reason, our provision for taxes has been increased to, or in some way normalizing to higher levels of the rate of income tax that we apply is a little bit higher because of that, the change in the inflation that we have this year versus the previous year. Okay. Thank you very much. You are welcome. Thank you, Sarah. Let us wait five seconds. They are telling me to wait for another question. Five, four, three, two, one. No? Okay. At this time, there are no more questions in the queue, so, please, Rogelio, please proceed to closing remarks. Thank you everybody for your attendance to this conference call. If you have any additional questions, please contact Yolo. Thank you. Bye. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.