Earnings Call: Q1 2020

Apr 28, 2020

Good 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. Today with me is Guillermo Laredo, President and Chief Executive Officer for Walmart de Mexico Central America and Milton Brand, Interim Chief Financial Officer. The date of this webcast is 04/28/2020. 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 ES Avede SEB 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 Esa Avede SEB'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 Luedo. Thank you, Pilar, and good afternoon, everyone. Thank you for joining us to review Wallach's first quarter results. Before I discuss our results, I'd like to take some minutes to give you an update on Wallach's response to COVID-nineteen. We know it's top of mind for our shareholders, so we believe it is important to share the steps we are taking to keep our people safe and our facilities clean. Our priority is to take care of each other just as we always have in difficult times. Most of our stores continue to break in regular hours. And in the past several weeks, we have taken a number of preventive hygiene and safety measures to keep them clean and to help our associates and customers stay safe and healthy. We enforced the sanitization process in our facilities. We increased the associate focus on cleaning, especially in high traffic areas and provided face masks and gloves for their protection. We implemented social distancing measures inside the stores, such as installing protection glasses at the checkout, meeting the number of customers inside the store and designating spots for customers to queue in certain areas, keeping an appropriate distance. We are providing sanitizing solutions for customers at the store entrance, and we took additional cleaning and safety measures in the home delivery services. We are monitoring the situation daily and following the government's indications. We will adjust business operations and policies as needed. We are taking very seriously our commitment to create shared value for our customers, associates, suppliers, and the community in which we operate. Our founder, Sam Walton, instituted our everyday low price philosophy. And during these unprecedented times, it is more important than ever to be true to our philosophy so we can help customers live better. We are working for our suppliers and business partners to contain the prices of the products with the highest demand. The price containing the work we carry out involves not allowing price to increase to the extent possible, always considering that its containment action does not affect the rest of the chain, especially in small and medium producers. With the goal of reinforcing even further our low price value proposition, we launched the Glossa Sensiales campaign across our Bottega formats. This initiative consistently provide the lowest price in one hundred and twenty five days guidance and maintaining this low price for sixty days with the purpose of supporting our most price sensitive customers. We also stepped up our efforts in the Walmart Foundation to help those who need it the most. Recently, we donated 150 tons of food to more than 22,800 seniors. Additionally, we donate a 100,000,000 pesos to finance the construction of a temporary COVID-nineteen unit, enabled with more than 900 beds to provide medical service for the healthcare system patients in Mexico City. It's a joint effort with other Mexican companies and foundations. We know these are challenging times for our business partners too. As many other business calls revision, some have had to temporary close or significantly reduce their operations. We want to help, so we are waiting in line for our micro and small towns in Mexico for the months of April and May. Additionally, we are leveraging solid capacity currently used by some of our business partners, So we can deal with the high volume and traffic that we are facing with the support of their employees. This is a difficult time for some of our suppliers as well. So we decided to reduce the payment term to seven days for micro and small suppliers in April, May and June. A large percentage of our 30,000 suppliers in Mexico are a small business who could benefit from this problem. We also bought over 700 tons of fruits and vegetables to small farmers to support local producers. We hope that these actions will help our business partners and suppliers financially whether the current situation and take care of their employees. Now I'd like to talk about our people. Words can't express how proud we are of each one of our associates for the incredible effort they have put in over the past several weeks. We are truly grateful for the vital service they are providing to their community. In the face of uncertainty, they keep us moving forward and they continue to deliver for our customers and for each other. To show our appreciation, we granted a special bonus for associates in stores, clubs and distribution centers. We've changed the salary payment frequency from biweekly to weekly so that associates can have quick access to their earnings. We provide transportation allowance for distribution centers with difficult access, and we extended a discount for our associates to buy everyday needs. As a safety measure, more than 30,630 associates in vulnerable conditions, among them pregnant women and adults over six years of age, were granted permission to be absent with pay, and associates from our home office are working remotely. In addition, we are bringing more people who want to make a difference providing for customers to our Walmart family. In these past days, over 20,500 new associates have joined our team to help us serve our customers. As Sam Walton used to say, our people make the difference. And I truly believe the right work our associates are doing to serve customers and supporting the others during this time is really making a difference in our communities. Not all heroes wear capes, some wear vests. Thank you. Now let's talk about the financial results for the first quarter twenty twenty. I'd like to begin by discussing sales performance and then Newton will cover the financial results for the quarter. Please consider when I talk about Central America, I'm making reference to figures on a constant currency basis. I would like to note that the sales and results that we are about to see are not from the ordinary course of our business. They are the products of the high demand for an essential service during emergency. And when this situation finishes, we will face other challenge, so they should not be taken into account to forecast our future performance. During the first quarter, total revenues grew 12.9, 12.5% in Mexico and 8% in Central America. In both regions, growth continued to be driven by a healthy same store sales performance, largely impacted by the high demand generated by the emergency. In Mexico, same store sales grew 10.8%. All regions and formats delivered a positive performance. The North and South regions had the highest same store sales growth followed by the center and metro regions. In terms of formats, SUNS posted the highest same store sales growth, followed by Superama, Bottega and Walmart. In the self serve formats and in SUNS, growth was driven by our core divisions. Food and consumers delivered the highest growth followed by general merchandise. Apparel sales were impacted by the situation as customers' portraits are leaning towards essential goods. In Central America, we adopted additional measures suggested by development of each country to keep associates and customers safe and healthy, such as reducing operating hours and closing several stores. Nicaragua delivered the highest same store sales growth followed by El Salvador, Guatemala and Costa Rica. Sales performance in Honduras was softer as the government required the closing of stores during the COVID-nineteen situation. I would like to highlight that we started home delivery operations in Central America to help customers stay home and keep their families safe. In Mexico, we accelerated our omnichannel efforts to serve customers better during these unprecedented times. We know customers want and need to be served differently, and we are moving fast to adapt to those changing needs. We have experienced a significant increase in the e commerce demand. The number of orders doubled as the social distance measures were implemented, and the number of downloads of our on demand mobile apps increased almost 350% versus '19. In response, we forced our logistic capacity in Walmart and in Super Amo by increasing our last mile fleet by a 106%. We have also accelerated the hiring of peakers welcoming more than 1,700 associates, and we improved our associate value proposition. Additionally, we launched the on demand platform in SaaS, and customers seem to be appreciating the experience we are providing. We are planning to expand this service to 100 clubs by the April. To do so, we are accelerating our technology integration. During the quarter, e commerce sales grew 68% and GMV 78%. It represented 1.6% of Mexico sales and contributed 70 basis points to total sales growth. Our pickup and delivery sales play a really important role for our customers, especially right now. We will continue to adapt and make the adjustments required to serve our customers better. Moving to new store growth. We continue to invest in the region despite an uncertain environment. During the quarter, our first omnichannel distribution center started operations in Merida, New Caption, and we opened a new and bigger e commerce fulfillment center in Mexico City, fulfilled on first part merchandise. During April, we opened our second omnichannel distribution center in Chihuahua. This new distribution center will allow us to improve service and inventory distribution in the Northern region and will enable new store growth. We also opened nine new stores during the quarter, two in Mexico and six in Central America. New stores contribution to total sales growth for the first quarter was 1.9%. We continue to build the new stores that were already under construction and or have promised to start with construction work. However, we are privileging the help of our associates and contractors, and in some cases, deferring store constructions and remodeling due to the practical possibility to becoming permanent license or due to limitations for starting a new construction given the social distancing measures and not due to an impossibility or reluctance to continue investing. During the quarter, we surpassed the total untapped same store sales growth by six fifty basis points. The department store segment by more than 1,000 basis points, the specialized store segment by eight sixty basis points and is in line with the self-service and clubs segment. In Mexico and Central America, social distancing measures drove higher in house consumption, which translated into higher sales in March across the grocery retail sector. Sales have been volatile during the month of April. And going forward in the year, we expect it to face a more challenging macroeconomic environment, which could have a direct impact in consumption. Given the volatility we are seeing in the market, for now we will not report monthly sales. Our company was built on a foundation that managed for long term success. The decision aligns investors with the long term view we take to reach shareholder value. In closing, I would like to reiterate our commitment to Mexico and Central America. We are all living very challenging times, and we know customers and communities are relying on us now more than ever. Thanks for the opportunity to serve you. Rest assured, we are doing everything we can to provide a safe shopping experience for our customers and a healthy environment for our associates and communities. Now, Milton will cover the financial results of the quarter. Thanks, Guy, and good afternoon to all of you. I will start by covering results in Mexico. During the first quarter, total revenue grew 12.5%. We leveraged expenses by 50 basis points, and we were able to maintain a 22.5% gross profit margin despite a change in the sales mix towards lower margin categories and price investment to keep our low price value proposition across formats. Operating income increased 21.6%, and EBITDA margin expanded by 60 basis points, reaching 11.6%. Now let's move to Central America. Please consider that when I talk about Central America, I am referring to figures on a constant currency basis. Total revenues increased 8%. Gross profit increased 8.5% resulting in a 24.1% margin. General expenses increased 13.1%. The royalties payment agreements, which we previously announced and become effective beginning in 2019, impacted expenses by $478,000,000. Excluding this effect, we would have leveraged expenses by 70 basis points. Operating income decreased 4.8% and EBITDA margin reached 9.1%. At a consolidated level, total revenues grew 12.9%. Gross profit increased 13.2%, resulting in a 22.8 percent margin. We achieved 20 basis points of expense leverage as expenses grew 180 basis points below total revenues growth. Consolidated EBITDA margin reached 11.1% and net income increased 15.4%. Now moving to the balance sheet. As we grow and invest in the business, our financial strength further improves. During the quarter, cash position increased by 28.4% to Ps. 37,900,000,000.0, 8,400,000,000.0 more than last year. Inventories increased 7.5% compared to a 12.9% increase in total revenues, and payables increased 11.8%. Working capital management is a key element of our financial strategy, and we will continue focusing on both inventories and payables going forward. As we manage this unprecedented situation, we continue to be focused on delivering shareholder value. Cash generation increased by 11.3%, reaching 68,800,000,000.0. Over the last twelve months, we returned Ps. 30,300,000,000.0 in the form of dividends to our shareholders and invested Ps. 19,700,000,000.0 in our business. Thank you very much. And as always, we will make ourselves available to receive your calls and answer any question you may have.