Earnings Call: Q1 2021

Apr 27, 2021

Earnings release

Afternoon. This is Pilara de la Garza, Head of Strategy and Investor Relations for WALMEX. Thank you for joining us today to review the results for the first quarter twenty twenty one. Today with me is Guillermo Lurero, President President and Chief Executive Officer for Walmart de Mexico Central America and Milton Brand, Chief Financial Officer. The date of this webcast is 04/27/2021. Today's webcast is being recorded and will be available at www.walmex.mx. Before we start, let me remind you that the content of this webcast is property of Walmart de Mexico, ESA Abbe SEB and is intended for the use of the company's shareholders and investment community. It should not be reproduced in any way. This webcast may contain certain references concerning Walmart de Mexico ESSAB's future performance that should be considered as good faith estimates made by the company. These references only reflect management's expectations and are based upon currently available data. Actual results are always subject to future events, risks and uncertainties, which could materially impact the company's actual performance. Now it's my pleasure to introduce our CEO, Gil Ureiro. Thank you, Pilar, and good afternoon, everyone. Thank you for joining us today to review our results for the 2021. Before starting with the quarterly performance, let me give you a quick update on our operations and support actions in the face of the ongoing pandemic. Our hearts are with all of those affected by the pandemic. The beginning of the year was particularly difficult for the countries in which we operate, as cases, hospitalizations and deaths increased after the holidays. Today, we are in a better situation, yet we can't let down our guards. Our priorities remain consistent. The first one is to support our associates. We are very proud of each one of them, and we have tried to show them our respect and gratitude with our words and our actions. During February, we decided to increase the discount we granted to our associates to shop online or at their stores from six percent to 10%. Besides keeping all the health and safety measures in place in our stores, DCs and offices, we are evolving our business model to serve our customers how they want to be served by expanding our omnichannel capacity and developing new solutions beyond retail. I will talk about this in more detail later in the presentation. We are also doing our best to help our communities, suppliers and business partners. We decided to turn the temporary financing program we implemented last year for micro and small suppliers into a permanent program. We will continue to work hand in hand with all our suppliers and business partners to deliver our value proposition for our customers. We continue to face challenging times. However, it's also time that presents great opportunities. During our World Match Day, we shared with you a new chapter of our strategy. 2020 accelerated many customer trends, and we have the talent, culture and assets to enter a new era of retail from a position of strength. We feel encouraged by the opportunity in front of us. We are building new capabilities and businesses and designing them to work together in a mutually reinforcing way. The self serve business is the foundation of everything, and we will continue to invest in it to develop the leading retail ecosystem in Mexico. Now let's look at our performance on the quarter. Please consider that when I talk about Central America, I am making reference to figures on a constant currency basis. We had an atypical comparison base in first quarter twenty twenty one as we lapped the leap year and the panicky purchases triggered by the start of the pandemic in 2020. We managed to grow total revenues in Mexico by 0.5%. However, revenues decreased 2.7% in Central America, resulting in a 0.3% decrease in consolidated revenues. Despite a tough comparison, our underlying performance is strong. We reached a twelve point six percent two year stock and total revenues growth at the consolidated level. Let's start by reviewing Mexico's results. During the quarter, same store sales decreased 0.6%, which is a positive 10.2% on a two year stock. Sans Club continues to show momentum. During the quarter, we hosted our open house event, where we allowed customers to shop with a Delta membership and try out the great merchandise and value in our clubs. We had an exclusive online sale where we received five online orders every minute, and we hosted virtual concerts that our members enjoy. At Walmart, we run seasonal campaigns with different focus areas, from beauty to cleaning or gardening to support our customers while they continue to stay at home. During the quarter, we also changed the look of our Super AMOS website and app to start to transition into the Walmart Express concept. Later in the year, we'll merge both apps and Walmart Express customers who have access to our broader general merchandise assortment. The NPS for Walmart Express Online is one of the highest among our formats, which shows our customers appreciate this chance. In Bodega, we refreshed our iconic campaign Moraya and reinforced the multi sales, driving 30% sales growth. Six out of 10 customers bought an item that participated in the campaign. Regarding regions, the North and South posted the highest growth. Performance in the Central and Metro regions was softer as the operating restrictions imposed by the authorities were strengthening these regions at the beginning of the year, and the macroeconomic conditions are less favorable than in the rest of the country. Looking at same store sales by category, apparel and general merchandise showed improvement versus previous quarters, while our core divisions, grocery and consumables, faced a much tougher base as panic purchases last year were focused on those divisions. During the first quarter twenty twenty one, we were able to exceed the market's growth. We outpaced the self-service and club segment measured by Antag by three seventy basis points. Our everyday low price proposition continues to gain strength, and our efforts to operate with discipline and continue to improve our service levels are allowing us to gain our customers' loyalty. We continue to face a challenging environment in Central America, yet we have been implementing many initiatives to keep winning our customers' loyalty. We are reinforcing our price leadership through commercial campaigns such as Tresso Jorjos or Quetzales Campiones and providing quality products at the best prices through our private brands. Our customers responded in a positive way. And in the quarter, the private brands' share of total sales increased to 190 basis points. We are also making progress with our productivity and innovation agenda, increasing the number of retail ready packaging items. We continue to optimize our assortment, and the percentage of transactions done through our self scan and self checkout solutions increased 1,000 basis points in first quarter twenty twenty one versus last year. Moving to other topics. As all of you know, our goal is to build the omni driven ecosystem, and we are moving fast in this direction. In the quarter, we expanded our on demand service in Bodega to 34 traditional stores. We now have the service available to 135 Bodega stores in 23 states. Even in this early stage, Despensa two Casa has a double digit share of total e commerce sales of the format. We also enabled 60 additional Walmart and Super AM stores with on demand services, reinforcing our coverage in key cities such as Queretaro, Puebla, Yucatan, Guanajuato and Tamaulipas. We expanded the crowdsourcing model to 55 new stores with encouraging NPS and on time results. This model allow us to serve customers faster and to handle the variable demand. Using our stores as fulfillment centers to leverage our proximity to our customers is a key strength that we continue to develop. We are testing a hub model for the on demand business, where we consolidate orders in a high density and demand areas to provide a consistent and faster service and improve our customers' experience overall. We launched a new technology to close the gap between what we offer in store and online, especially in the apparel and toys categories. We have also enabled merchandise from Peaches, our dollar store type department on On Demand. I'd like to highlight that during the quarter, we reached another record NPS for On Demand, and we'll continue to improve our business and invest to provide the best shopping experience for our customers. To leading omni, we need to accelerate extended assortment, and I have good news to share with you about this. During the quarter, we launched our virtual stores to bring brands that our customers love to our marketplace in Walmart and Bodegro Herrera. We now have 30 virtual stores complement your assortment with a compelling apparel, home, lifestyle, electronics and outdoors offering. We are just starting, but the opportunity is very encouraging, and I want to congratulate the team for this achievement. E commerce contribution to total sales growth continues to accelerate. During the quarter, contribution increased 190 basis points versus first quarter twenty twenty, reaching 2.6%. GMV growth was 155% and net sales grew by 164%, representing 4.2% of Mexico sales, 2.6 times the penetration we had in first quarter twenty twenty. I'd like to highlight that in 2020, we were able to expand our market share on e commerce by two eighty basis points, as measured by Eurow Monitor. We can't be prouder of how our associates are adapting to change and accelerating our strategy. Customers welcome us serving them in new ways. Our strengths and assets position us uniquely to serve them and are being monetized in ways we haven't tapped into before. We are making progress with cash. This quarter, we launched a two percent cashback to reward our customers' loyalty. Key use cases like online payments and card on file, which means customers will be able to link their cards to their Cash account, will be launched later in the year. During first quarter twenty twenty one, 215,000 new users joined Beige, resulting in a 385,000 users base. We launched Beige in Sans Club and the pilot for home broadband Internet to continue to reinforce our connectivity ecosystem. Our advertising business is growing very fast, increasing the number of advertisers by more than 100 during the quarter, and sales grew over 80%. We launched a campaign in collaboration with Nestle and Procter and Gamble to help those who need it the most. Each time a customer buys a participating item, we donate an essential everyday item. We are excited about the revenue generating potential of our advertising business, Walmart Connect, which we expect to grow mid double digits this year. Logistics is one of the key enablers of our strategy. Our network has been characterized as a competitive advantage, and we'll continue to invest it to further reinforce our position. We are currently building two new DCs that will be ready to operate soon: one in Villermosa for fresh merchandise that will open 2022 and one in Mexicali for dry goods that is about to start operations. This DCs will generate circa 3,200 direct and indirect jobs, serving 10 states and more than 500 stores. Besides new PCs, our investment is also dedicated to the automation of our existing facilities. During the quarter, automated sorters and conveyors started operations in Aistada De Mexico, the seas. We are resuming new store growth at a faster pace. For Neotores' guidelines for construction and making sure conditions are safe, we opened 24 stores in the 2021, which is the largest number of openings in our first quarter for the last five years. In February, we opened Suns Club Santin to Luca, Estado De Mexico. It's a very special club that reflects how we are adapting our prototypes for our customers' evolving needs. Besides being fully omnichannel and inclusive for people with disabilities, it's our first lien club as we implemented a new structure that empowers our associates even more. During the opening week, we reached record member affiliation and sales with almost 3,000 new memberships. I'm very proud of our associates for this achievement. For the quarter, new stores' contribution to total sales growth was 1.1%. Regarding Walmart Express, last year, we opened two new stores and converted six stores. Customer response has been positive, and results are encouraging. Currently, we are remodeling 15 stores that will be ready during April. Our plan is to finish all the conversions from Superama to Walmart Express by the end of the year. We take a multi stakeholder deal because we know that mindset and approach delivers the most valuable, sustainable business over time. By January, we removed plastic bags from 100% of our stores, showing our commitment with sustainability. We were included in the Bloomberg Gender Equality Index for the fourth consecutive year as the only self substituted in Mexico who is part of the index. We ranked first place on medical survey as the company with the best response during the pandemic. We will continue to focus on creating trust and share the value for our stakeholders, using our strengths to help people live better and preserve the planet. Before finalizing, I would like to mention that we have been preparing our company to fully comply with the recent amendments to the federal labor law and other labor tax and social security laws, and we can confirm we'll be ready to adopt to them. The implementation of these amendments does not change our financial expectations for the year or our ability to deliver strategic plans. Our associates are a greatest strength and a key enabler for our strategy. We want Altmark to continue to be the place where they can beat themselves, where they can learn, grow and have fun. Thank you very much. Now I'll turn it over to Milton, who will cover the financial results of the quarter. Thank you, Guy, and good afternoon, everyone. Thank you for joining us today to review our results for the first quarter twenty twenty one. Before I cover the quarterly results, let me remind you of our financial framework, which focus on four levers for value creation. The first one is quality growth. We will continue to drive broad based profitable and sustainable growth across the different formats, regions and categories, leveraging the e commerce momentum and previous investments. The second one is an ideal seek mindset. We remain laser focused on operating efficiency and delivering sustainable expenses leverage. The third is strategic capital management. We continue to optimize our working capital and to invest in high return projects. The fourth is to deliver shareholder value. Let's review the first quarter results. I will start with Mexico. During the first quarter, revenues increased 0.5%. We continue to work with our suppliers to provide the lowest prices to our customers. We saw higher growth in margin driving categories such as apparel and home than in the rest of the business, which led to a 50 basis points gross profit margin expansion. Expenses grew 2.9% as we paid a gratitude bonus to our stores, clubs and deceased associates to show them our appreciation for their hard work. And we invested in technology and in our e commerce business. These investments are key to enable our Omni led ecosystem and to accelerate growth going forward. As a result, operating income grew 80 basis points ahead of total revenues and EBITDA margin expanded by 10 basis points to 11.7%. Now, I will talk about results in Central America. As Guy mentioned, top line growth continued to be softer in the region given the macroeconomic environment and the restrictions in place to contain the pandemic caused by COVID-nineteen. The team did a great job launching campaigns and reinforcing our pricing positioning to drive sales. Despite the price investments, we worked together with our suppliers and reinforced our cost analytics program. So we were able to expand our gross margin by 70 basis points. We will remain focused on price investments and in driving productivity by implementing technology and simplifying our business. Reducing price changes, optimizing assortment and implementation of self scan are some of the projects that allowed us to leverage expenses during the quarter. Operating income increased 8.8% and EBITDA margin expanded by 100 basis points to 10.1%. Looking at the consolidated figures, Total revenues decreased 0.3%. As Mexico and Central America delivered gross profit expansion, consolidated gross profit margin reached 23.3%. Operating income expanded by 20 basis points to 8.7% and EBITDA margin was 11.4%, 30 basis points higher than in first quarter twenty twenty. Net income expanded to 5.9% of sales, growing 100 basis points ahead of total revenues. Now moving to the balance sheet. As we grow and reinvest in the business, our financial strength increases. We closed the quarter with a cash position of 29,800,000,000.0 pesos. Inventories increased 5.6% primarily due to a low base in 2020 as our inventory position was affected by the panic purchases and accounts payable ended the quarter at Ps. 79,200,000,000.0. In the last twelve months, we had a strong cash generation that enable us to pay 30,900,000,000.0 pesos in dividends to our shareholders and invest 16,700,000,000.0 pesos to enhance our business, even with the resulting from the measures imposed by the authorities in the various countries in which we operate. Working capital require 5,700,000,000.0 pesos. We paid 17,200,000,000.0 pesos in taxes and finished the quarter with a cash position of 29,800,000,000.0 pesos. Our company is resilient. By operating with discipline and becoming more productive, we will be able to offer the best prices to our customers and a better shopping experience while we deliver results and transform our business. We will continue to generate strong cash flows that will allow us to invest and to build a business that is even more prepared to face future challenges. To finalize, I would like to say thank you to our associates. You have stepped up to the challenge and you are making it possible for families to safely get what they need while delivering our strategy and positioning our company to win. Thank you again for joining us today. As always, we will make ourselves available to answer the question you may have.