Earnings Call: Q3 2020

Oct 22, 2020

Afternoon. This is Pilara de la Garza, Head of Strategy and Investor Relations for WellMex. Thank you for joining us today to review the results for the third quarter twenty twenty. Today with me is Guillermo Luedero, President and Chief Executive Officer for Walmart de Mexico Central America and Milton Brandt, Interim Chief Financial Officer. The date of this webcast is 10/22/2020. Today's webcast is being recorded and will remain available at www.walmex.mx. Before we start, let me remind you that the content of this webcast is property of Walmart de Mexico, E. C. A. E. Sebe and is intended for the use of the company's shareholders and the investment community. It should not be reproduced in any way. This webcast may contain certain references concerning Walmart de Mexico E. A. E. C. B. Future performance which could materially impact the company's actual performance. Now it's my pleasure to introduce you to our CEO, Guilhureiro. Thank you, Pilar, and good afternoon, everyone. Thank you for joining us today to review our third quarter results. We continue to see a great amount of disruption and volatility in the environment, which has challenged us to work differently and to adapt to changing customer needs. Our commitment continues, being true to our purpose of helping people save money and live better. We continue to respond to the many ways our associates, customers, business partners and communities need us. Before I discuss our third quarter results, I'd like to give you an update on our response to COVID-nineteen in Mexico and in Central America. Our priority remains consistent keeping our associates and customers safe. It's amazing to see the impressive job our associates are doing during a very difficult time and I can't thank them enough for it. Whether serving our customers directly or supporting those who do, they are making a difference. During our first quarter and second quarter webcast, we outlined a number of measures to support our associates, such as the change in payment frequency from biweekly to weekly so they can have quicker access to their earnings, a discount to buy everyday needs in stores that's now also enabled for online shopping and a medical line to support associates' and their families' health and well-being. All those measures continue in place. And in addition to them, last quarter we made a partial repayment of the annual bonus for operations associates as a recognition for their constant effort to serve our customers. We also continue to take preventative measures to keep our stores clean and maintain a healthy environment. Our frontline associates have always been a priority in our company. We continue to support them and to look for ways to operate as safely as possible. As we enter the holiday season, it becomes increasingly important not to let our guard down, to continue monitoring the situation daily and to follow the authorities' guidelines. Our next priority is serving customers. Our customers' preferences have been changing as the pandemic evolves and we are doing everything we can to serve them. Our supply chain is operating at full speed. Our store continues to operate with the required social distancing measures and health protocols and we continue to take additional cleaning and sanitizing measures to keep customers safe. We remain committed to our everyday low prices philosophy, ensuring the lowest price on a basket of goods. As we shared with you in our previous webcast, earlier in the year we launched Los Essentiales campaign, which consists in providing the lowest price for nearly 300 basic items and maintaining this low price for an extended period of time with the goal of reinforcing even further our low price value proposition. During the third quarter, we extended this program to 60 basic school supply items to support our customers during the back to school season. Our private brand products are a great alternative and have an important role during these times as customers are becoming more price sensitive. We can offer great quality products at the lowest price while driving loyalty. We launched an event featuring our private label products in Walmart, Superama and Bottega Herrad, where we achieved double digit sales growth. We continue to respond to the needs of our communities. In collaboration with other organizations, we were able to support more than forty five thousand people affected by COVID-nineteen by donating over 33,000,000 pesos to help them afford everyday needs through our Gift Cards program. In the past months, several areas of the region have been impacted by natural disasters such as Hurricane Hana and Tropical Storm Hernan. Together with the Mexican Red Cross, we donated more than 27 tons of food to over 10,000 people to support relief efforts. Frontline workers in our communities continue to be an example during these times and they deserve our deepest admiration and respect. In an effort to support them, we decided to grant a 10% discount in pharmacy products to all doctors, nurses, paramedics, police officers and firefighters who shop at our stores. We know these are challenging times for our business partners and suppliers too, especially for the small ones, as many of them were not prepared for the unprecedented and accelerated shift we were experiencing from the physical to the digital world. We launched Walmart Handprinte Digital, a digital strengthening program designed for entrepreneurs with micro and small business that were affected by the COVID-nineteen contingency and that requires support to enter the digital world as an alternative to face the crisis. We made this program possible through the alliance between Fundacion Walmart and Fundacion Pro Empligo Productivo AC, and we hope this initiative will contribute to reactivate the economic activity in the country. Collaboration between our suppliers and our teams remains close and strong. As an additional measure to support our micro and small suppliers, we decided to keep the reduced payment terms indefinitely to help them finance their operations. We are doing everything we can to help strengthen our community of families, friends and associates. We know together we'll get through this. Now, let's begin with the financial results for the third quarter twenty twenty. Please consider that when I talk about Central America, I'm making reference to figures on a constant currency basis. At a consolidated level, total revenues increased 6.7%. Mexico delivered total revenue of Ps. 135,200,000,000.0, an increase of 6.5% over last year. In Central America, total revenue reached Ps. 30,100,000,000.0, a decrease of 4%. For the nine months from January to September, Romex total revenues grew 9.7%. In Mexico, we saw an 8.9% increase and in Central America, a 0.4% decline. Our performance has been consistent and same store sales growth continues to be the main driver. In Mexico, store sales increased 5.4%. All regions and formats had a positive performance. The North and Metro regions delivered the highest same store sales growth followed by the South And Center regions. The Center delivered softer growth as the macroeconomic situation in the region is softer than in the rest of the country. Looking at the performance by format, Sun's Club posted the highest same store sales growth, followed by Superama and Walmart. The exposure to high and mid socioeconomic level customers, the one stop shop nature of the formats and a compelling omnichannel offering have been key drivers of the strong performance in those formats. In Sam's, we hosted another edition of our open house event where we invited customers to shop at our clubs and online without a membership so they can experience firsthand the amazing merchandise and value they can find at Sam's Club. At Walmart, we launched Semanas de Trescura in the Southeast region of the country. The program continues to reinforce our Fresh division by offering great quality products at very low price throughout the week, aligned with our EDLP philosophy. We know fresh is a key traffic driver and we are innovating and finding ways to improve our value proposition. Bodega sales growth continues to be softer than the rest of the business as our Bodega customers is the most price sensitive and is facing challenging times. In terms of categories, food and consumables delivered the highest growth followed by general merchandise and apparel. With operating restrictions for non essential business across the country, families continue to stay at home and prepare more meals than usual and our food and consumables divisions have benefited from that trend. Within general merchandise, during the quarter, we experienced strong growth in categories such as home, as customers looked for ways to improve their living space while they were required to stay in their house or computer and tablets, as most students started the school year virtually given the social distance measures. However, the back to school season was much softer than usual given the uncertainty around the time of students physically returning to school. As expected, school supplies, uniforms and snack sales were weak, though we saw a slight recovery later in the period. The apparel division has suffered the most during the pandemic. In order to provide our customers better access to our apparel catalog, we started to offer apparel items online to our on demand platform. We saw a sequential improvement from the quarter two to the quarter three and we'll continue to find ways to resume growth in the division. Before I move on to the next stop, I'd like to give you an update on the new labeling rule adoption. We worked on an implementation schedule with our suppliers to make sure our customers find the products with the right labels on our shelves once the rule is implemented. We are progressing quickly. I'd like to thank our suppliers for this great effort. Despite the situation, we continue to innovate and to position our business for the future. During the quarter, we launched the first self checkout stations in Sansk Club and expect to finish the year with this solution implemented in about 20% of the clubs. We know customers want a frictionless experience and they are getting more familiar with digital solutions. So they really appreciate this new future. Self checkout not only offers a seamless shopping experience for customers, it also translates into great opportunities for our clubs as in some of them up to 28% of the transactions are moving through this solution. We're also leveraging technology to do our jobs in an efficient way amid this unprecedented situation. We have more than 3,400 stores and 31 distribution centers across six countries and it's very important for us to keep close contact with our stores, groups and DC associates. Given the situation we are facing, we restricted travel to visit stores and clubs And to keep our operating discipline, we start to use technology with our units virtually. This technology is allowing us to do more visits, more frequently and to do more targeted visits, which translates to faster decision making. We are able to visit stores in Baja, California and Cancun on a single morning, something unthinkable with physical visits. More associates can join the store tours and we are inviting our suppliers too, which encourage an end to end vision. Additionally, this new supervision technology drives savings and productivity. We had a similar situation for our customer experience factory. Nowadays, it's not safe to do focus groups or to interview our customers in person. So we are doing virtual focus groups and visits to customers' house. This way, we can keep listening to them and learning from their journeys to make sure our customers are always in the center of all of our decisions. Now let's talk about omnichannel. The investments we have made in our omnichannel business have us in a unique position to serve customers. Being close to the customer is becoming even a greater competitive advantage as the online demand remains almost as high as in March when the pandemic was declared. The surge in demand we saw earlier in the year led to a drop in our service levels. For April, the NPS dropped 26 points. By building capacity, investing and fine tuning our models, we have been able to improve ourselves, taking it beyond pre COVID-nineteen levels. During September, we hit an all time max in NPS in Super AM and Walmart by improving NPS by 48 points versus our lowest score in the year. I want to congratulate our associates for this great achievement. You can expect us to continue to focus on improving customer experience as it is key to keep customers in our ecosystem. On the third quarter, we finished the rollout of SUNS on Demand to our 164 clubs and we extended the offering to more categories such as pharmacy. We also progressed with implementation of our crowd sourcing model, which will be critical to improve service levels in an efficient way. To further improve the customer experience and extend the assortment, we launched self-service returns in our Walmart app. Now customers can return or cancel orders in a frictionless way at the store or using a delivery company. This feature will help reduce costs and improve the overall returns experience. On our last webcast, Ignacio shared with you that we launched Bodega 1P operations for general merchandise through our bodegaorav.com.mx site. So far, we've had a great response from our customers. They appreciate access to a wider variety of items at a low cost, the convenience of being able to pay at our stores with their preferred payment method and the practicality of receiving their items at home or of picking them at their nearest store at no extra cost. In the third quarter, we took our omnichannel offering to the next level by starting grocery home shopping in Bodega. We are offering delivery and pickup, which has been welcomed by our customers. So far, the service is enabling 40 stores and we plan to expand it to 100 stores by the end of the year. There is a lot to learn from our Bodega customer when it comes to omnichannel. We are sure there's great potential to provide a seamless shopping experience to our customers. Our assets, our brand and our customers' trust position us uniquely to win in this space. The omnichannel growth momentum continues and we are seeing significant improvements in profitability. During the quarter, e commerce sales grew by 201% and GMV by 191%. E commerce sales represent 3.8% of Mexico sales and contribute two seventy basis points to total sales growth. We know customers appreciate our e commerce offering and are likely to continue to buy online once the situation normalizes. The AnyPaaS evolution and the progress we have done in our omni business tell us we are in the right path to continue to serve them going forward. So we believe it's critical to continue to invest and improve our service levels to keep customers in our ecosystem. Now looking at the performance versus the market. We have been able to expand sequentially the same store sales growth gap versus the self-service and clubs market measured by Antarct throughout the year. As consumer hubs slowly return to a more normal state, our everyday low price proposition continues to gain strength, especially amid the high low promotional environment we typically experience during the summer. During the third quarter, we grew three forty basis points ahead of the market. Our associates are doing a great work in serving customers and operating with discipline and they are rewarding us with their loyalty. Now let's talk about Central America. We continue to face a challenging environment, yet we have managed to grow ahead of the market to gain share in most of the countries. We are focusing commercial activities on base key items and reinforcing our price leadership through campaigns such as Aquilotenes or Locenes Es Citas Pagano Domenos. We are also making progress through our productivity and innovation agenda. We opened our first omnichannel store in the region, Walmart Supercenter Regia, Estia in Costa Rica. In this new store prototype, we are taking into consideration our customers' new shopping hubs to provide an enhanced shopping experience. The store is equipped with pickup station and enabled to do home delivery. It is the first store with self checkout, has a revised and leaner catalog and our associates have a multitask profile, which translates into greater productivity. Regarding omnichannel, we accelerated considerably our omnichannel plans due to the pandemic. As of today, we have more than 200 stores with omnichannel capabilities, in which we offer pickup and delivery, providing a seamless and safe shopping experience to our customers. Moving to new store growth. We continue to invest in the region despite an uncertain environment as we believe in the long term potential of the region. We had to defer store construction and remodels due to practical impossibility of returning permits and license or due to the social distancing measures. Now, we're resuming new store growth at a faster pace, following authority guidelines for construction and to make sure conditions are safe to resume activities. We opened 24 new stores during the quarter, 19 in Mexico and five in Central America, which compares to nine stores and 12 stores opened in the first and second quarters respectively. New stores contribution total sales growth during the third quarter was 1.4%. I'd like to highlight that during the third quarter, we opened an omnichannel SUNS club in Ciudad Juarez, Chihuahua. It's very exciting as our previous SUNS opening was in 2018. We will continue to focus omnichannel and on driving same store sales in SUNS and we will open new clubs as appropriate. In closing, I would like to say thank you for our associates again. You have stepped up to the challenge and you are making it possible for families to safely get what they need, while positioning our company to win. Our business is resilient and our financial strength allows us to continue innovating and investing to build a business that's even more prepared to face future challenges. I would like to invite all the investment community to join our virtual omnichannel tour on October 28. We are very excited to share with you all the new projects and innovations in our business. I wish you and your families good health and I look forward to seeing you in person when the time is right. Now, I'll turn it over to Milton. Thanks Guy and good afternoon to all of you. Thank you for joining us today to review the financial results of the third quarter twenty twenty. I will start with Mexico. During the third quarter, total revenues grew 6.5%. We experienced a shift to lower margin categories and we invested further in price, yet we were able to keep gross margin at 23.3% of revenues. Disciplined expense controls allow us to maintain SG and A at 14.4% of revenues and growing in line with total revenues, even though we incur higher costs to operate related to COVID-nineteen pandemic. EBITDA grew 5.2%, resulting in an 11.5% margin. Now, I will talk about results in Central America. Please remember that when I talk about Central America, I'm referring to figures on a constant currency basis. Total revenue decreased 4%. Gross margin expanded 50 basis points to 25.1% due to a better inventory and shrink management. General expenses represented 19.9% of revenues, reflecting an impact of Ps. $383,000,000 due to the royalty payment. EBITDA margin for the quarter was 9%. Excluding the royalty payment, EBITDA margin would have been 10.3%. At a consolidated level, total revenues grew 6.7%. Gross profit increased 7%, resulting in a 23.6% margin and expenses grew 9.4. Consolidated EBITDA margin contracted 40 basis points to 11% and net income decreased 0.9%. Underlying results were positive. Excluding the royalty payment, EBITDA margin would have been 11.3% and net income would have grown 3.2%. Now, let's see the results for the first nine months of twenty twenty. In Mexico, total revenues increased 8.9%, gross profit margin expanded by 10 basis points to 22.8% and expenses increased 10.9%. Operating income grew 6.9% and EBITDA margin contracted 30 basis points to 10.8%. Excluding the payment to the SAT, general expenses would have grown below total revenues rate, representing 14.1% of revenues and EBITDA margin would have expanded 20 basis points to 11.3%. In Central America, total revenues decreased 0.4%. Gross margin expanded 10 basis points to 24.3%. General expenses represented 18.9% of revenues, including the royalties payment. EBITDA margin reached 9%. Excluding the royalties payment, it would have expanded 20 basis points to 10.3%. At a consolidated level, total revenues increased 9.7%. Gross profit margin expanded 10 basis points reaching 23.1% and expenses increased 13.2%. Operating income increased 4.7% and EBITDA margin contracted 40 basis points to 10.5%. Net income decreased 21.9% affected by the payment to the SAT and the royalties in Central America. Excluding the SAT and royalties payments, general expenses would have represented 14.7% of sales growing below total revenues. Operating income would have increased 12.7 and EBITDA margin would have expanded 20 basis points to 11.1%. Net income would have increased 12.9%. Now moving to the balance sheet. As we grow and invest in the business, our financial strength increases. We closed the quarter with 38,300,000,000, 17,800,000,000.0 pesos or 86.6% more than in 2019, as last year the second dividend payment took place in August and this year the second payment will be in November. Inventories increased 4.7%, 200 basis points below consolidated total revenues growth and accounts payable increased 6.6%. Cash generation increased 1.1% versus last year, reaching Ps. 65,000,000,000. After investing Ps. 16,200,000,000.0 in our business, we returned Ps. 14,000,000,000 to our shareholders in the form of dividends during the last twelve months. In closing, I would like to echo Guy's comments in saying we look forward to seeing you in our first virtual omnichannel tour on October 28. Please contact our Investor Relations team in case you have any question. Thank you for your interest in our company. I wish you and your families good health and happy holidays. As always, we will make ourselves available to receive your calls and answer any questions you may have.