Good afternoon, ladies and gentlemen. Welcome to the Eurocash Group first half, 2024 results, conference call. We appreciate your time and interest in joining us today. Presenting here today are our CEO, Mr. Paweł Surówka.
Good afternoon.
Our Group CFO, Mr. Jacek Owczarek.
Good afternoon.
They will walk us through the key highlights of our performance over the last six months, and with that, I will turn it over to Paweł to begin the presentation.
Thank you very much, Jan. Once again, also welcome, ladies and gentlemen. Thank you very much for joining our call and jumping right into the discussion of our Q2 results. And I think that, you know, to jump right into it, obviously, it needs to be said that this is not the set of numbers that we were hoping to present, and they are below our expectations, and this what we hoped to be able to provide to you. As you know, we have been impacted by the same headwinds as our competitors that you have also seen with our two major stock-listed competitors, in the sense that, we, you know, this second quarter has been particularly driven by three major components.
One is, and still ongoing weakness of the Polish consumer, which, put a pressure and, negative dynamic on the sales figures that we see. That was all paired with, the deflation or disinflation in several key categories, so pressure on the top line. Second element is, pressure on the cost side, which, you know, where we still experience, strong inflation on the, particularly labor rental costs. And the third element, which, you know, started to be very present in the second quarter, is a pressure on our margins, driven by, the price war that we have seen in the entire retail, segment.
So all those three factors have led to, you know, a mix of headwinds that it was difficult to fare, and hence the set of numbers that we are now presenting are less of what we expected and clearly presented a challenge to most of our business units in the Eurocash Group. Summing this up, so for the first half our sales 1% below last year, again led also by deflation. That is different in the wholesale and the retail unit, but it is, you know, also dependent on the mix between different categories that we have that all experience slightly different deflationary pressures. But for example, in the retail space, we had a net deflation of something like 1.8%, and that has also been a factor in the recurring reducing our top line.
EBITDA went down 16% year-on-year. EBITDA margin dropped by 40 basis points. As we said, a challenging market environment. The cost optimization that we've started, we believe is visible in our numbers, and that is together with a better and more focused approach to our buying efforts and having competitive prices, the two major elements that we are now focused on. That, unlike the market trends that I have just described, is something that we can drive as Eurocash Group, and we remain very much committed to exercise and execute the management program that we have set up, our strategy that we have done. The cost savings that we have said are ongoing. The financial situation is stable.
We are well below one time debt to EBITDA on a pre-IFRS level, and our cash conversion is healthy. So in the terms of the financial stability, those headwinds are not affecting us. It's just a question of our profitability, obviously. So again, bringing this a little bit more and zooming in on the wholesale segment, again, we have decline of sales by 2.1%. That is different in our service company, which is defying the trends and growing by 2%. But the entire segment had -10%, and on the EBITDA level, -13%. Again, that is a mix of cost pressures and then also pressures on the margin.
On the retail, we have flat sales results, and for the first half, a flat like-for-like, which we believe is something that compares competitively to the rest of the market, particularly also when we look at the big players out there. Particularly as, obviously everybody is contributing on prices, but when we take into account the fact that we had part of our stores opened on Sundays last year and the fact that in a lot of our stores, we have very aggressively reduced prices, particularly when we look at our price index compared to the last year, which obviously brings us down in terms of like-for-like. The flat like-for-like, we think is actually something that compares quite well to our competitors.
When we look at pure transaction levels, we think shows that Delikatesy Centrum is actually recuperating in the overall market. But still, like for like, so flat in this first half with an EBITDA of - 11. Here again, the major factors being labor costs, store costs altogether between labor and rent, and lower margin that is affected by the price war that I've already mentioned. Something we would really like to highlight is that, you know, being given all the challenges, challenging headwinds that I've just described, the performance of our growth platforms is really something that is very encouraging. Frisco now showing a growth of 21%, Duży Ben too 24%. I'll come to that later.
But we really believe that, you know, this is confirming our strategy on betting on those two companies that now are part of our core to really deliver the growth for the company. And I think that both companies have shown that they are real engines of growth for our company in their own right. So that's as an executive summary. Let's jump a little bit more into details. So as already mentioned, sales down by 1.1%. The overall EBITDA down by 16% in the second quarter.
Having said that, when you look at the EBITDA margin, we have a real decline of something of 30 basis points, which when we compare it to the kind of decline of EBITDA margins of our competitors, we believe is actually a relatively low decline, and we think it's up to the investors to judge. But we believe that that is a confirmation of the commitment that we've done and the effort that we have put into optimizing our costs, and that the cost measures that have been taken on beginning of last year and are still underway and we are still doing shows that we are able to offset part of the negative elements by gaining in efficiency and therefore does...
You know, all those sales trends and pressures on margins and on costs do not translate directly into our EBITDA margin, which we will discuss later. Obviously, you know, maybe the key trends that I've described in the beginning, visually shown once again, we, you know, in a certain way from our point of view, are right now this beginning of the year in a perfect storm where we have still a very, very high inflation on costs here, visualized by the growth of minimum wage, paired with evermore declining CPI. That obviously brings down sales. On our own mix, that's even more pronounced when I speak about the inflation that we have on our food mix.
Then obviously, the entire food market is coming down, and we can see that in the overall market. Discounters and supermarkets are the only one growing. Obviously, this is a Nielsen definition. In supermarkets, you have players also like Dino. When we look at the market that we are also kind of exposed to, which is the independent market, where you have more on the grocery side, you can see that the growth simply was very mitigated. So in a certain way, our sales dynamic is a reflection of market trends altogether. So, going down a little bit deeper into segments, as you have seen, we have declining sales in the wholesale part, pretty much stable sales in retail, and healthy growth in the project side.
On the EBITDA part, the one part that I would like to add is that, when we look at our EBITDA, there are two elements that we would say are maybe not non-recurring or in a certain way, also, special for this quarter. The one part is that we have still in the first half, a total of PLN 15 million of restructuring costs that are linked to our cost savings program that you can, you know, as I mentioned, is very much doing its job, and we will continue having some of those restructuring costs also in the third quarter, being given that restructuring is still ongoing. The other element that we would like to point out is that we have a disproportionately high cost right now coming in on the Frisco side.
The growth that you are seeing is also linked to the fact that we have opened a new warehouse here in Warsaw. However, that is the nature of Frisco, that those very big investments in a very big automated warehouse that opened just in the beginning of the year. It is creating a lot of costs compared to the sales in the ramp-up phase, and this ramp-up phase has been very much pronounced in the first and second quarter. So the PLN 8 million that we now see in the first half, they are, you know, tearing down the results of Frisco down by this disproportionate element, growth of cost. And this growth of cost will be mitigated every quarter by the high growth of sales that we have in Warsaw.
And therefore, we wanted to point out that this reduced or higher cost in Frisco is something that will go away in the next quarters and will help us improve the results even more. So might have been something that maybe on the analyst side, not all of you had in the models, those two elements: the non-recurring restructuring costs and the Frisco warehouse. That is pretty much the same picture only on Q2, and I don't think it necessary that I comment the numbers. You have all seen them. You know, as I already mentioned, the cost side is something that we are very much focused on because it's something that, you know, is in our hands, and it was part of our strategy to deliver more efficiency.
You have seen the growth in minimum wage, that we have shown that it is in over Poland, that is up, north of 20%. A predominant majority of our workers are, either on minimum wage or directly linked to minimum wage. Nevertheless, the total growth of, our labor and social security costs has grown only by 6%. I think that shows the effort that has gone in that entire segment.
Then when you compare this to flat growth of costs in the third-party services and then a clear reduction on the materials and energy side, you can see that, you know, we are very close to our commitment of offsetting completely the growth and the cost inflation coming from the minimum wage over the entire year, and I think that we are delivering on that promise in the second quarter. When it comes down to. So here again, you can see the total costs, excluding depreciation and another way to visually show that, you know, total costs are under control and we are still in the second quarter. A big portion of our cost-optimizing efforts are still have to hit our P&L.
What we would like to point out is that, you know, these things have to also be taken out in comparison to our growth platforms that are growing and that obviously are adding to costs because you cannot grow over 20% without adding costs. Again, I think we are showing that management is delivering the discipline that we have promised. Then obviously, something that we are proud of, something that our CFO, Jacek Owczarek, can be very proud of as well, is the fact that our financial situation is very, very stable. Debt to EBITDA is well below one. We are keeping...
You know, we are very much focused on deleveraging the company, having a strict view also on working capital, in all lines and then being better and better and really allocating working capital where we see the best return for it. So trying still, even though interest rates in Poland have not declined and are relatively high compared to inflation and in real terms, the financial costs and the overall leverage is going down, and we want to be more efficient with every quarter. As you can see, overall, our cash conversion cycle is very much in line with what we have shown you also in the past. So quickly going through the different segments.
Wholesale, again, negative sales dynamics in the cash-and-carry segment, positive in the service segment, and then, negative also in the distribution segment. Again, there is a calendar effect to it. Obviously, the Easter change between quarters has not helped. There's a market trend, but obviously, that is something that, you know, is being given, that we also have a relatively high portion of fixed costs. Such a sales decline is not helping to build our EBITDA margin, so therefore has been reduced by 30 basis points. And that is also linked to the price investments that we had to do, particularly in the cash-and-carry segment, to really stay competitive.
So the EBITDA margin decline that you can see is a mix of higher costs and then also investment in margin that allows us to keep competitive prices even in this market environment. Overall, we can see that the sales trends after the second quarter have somehow improved. We had a relatively good summer, but still, we are far away from the real kind of sales uptick linked to an overall return of sales dynamics in the overall market that we expected. I frankly expected for the second half of this year, very much hope that this will come as the Polish consumer starts to consume again. For the time being, what we see, second quarter negative sales dynamic in the wholesale section. Oh, okay.
And here, this is the same view on the second quarter. So here, decline in EBITDA margin a little bit more pronounced, but you know, again, linked more to the cost and margin investment that we had done. On the retail side, as mentioned, we have flat sales with lower EBITDA margin. Here, the same mix of cost elements, particularly on the store cost side, obviously, both rental and labor cost. On the other side, you know, deflation here a little bit more pronounced in our mix, minus one point eight. And again, has to be said that Delikatesy Centrum has invested a lot in prices.
We have put, I will mention that a bit later, a lot of our stores in a different price index, and therefore, when we compare year-on-year, that is weighing on our like-for-like. So overall, Delikatesy Centrum, I would say, keeping their ground, but obviously being given where the market is altogether, like-for-like, not where we would like it to be. And then obviously we have to react to the price situation that we have on the market, and therefore, margin is below what we would like to see, both in the first half and the second quarter.
And, what also needs to be said is that, while, you know, again, we have a negative like-for-like, what is in a certain way encouraging is something that we can do is evermore improve and refine the Delikatesy Centrum concept that we believe, again, is the real supermarket concept in Poland, where we have invested. I mentioned this last quarter very strongly in remodeling our stores based on the new teams', new consumer assortment, the way that we have also changed the layout in a very, very big push on freshness and on our meat counter, that we believe are our key competitive advantages and differentiators when we look at our main consumer competitors.
I can only report as we are transforming more and more of our stores into the new Delikatesy model, that this is showing quite promising results. We have by now transformed 30 stores as a test model to still test the new model in real life. What we can see is that in transactions, and I think this is the best way to measure it, being given that we are also applying a different price mix, different mix and categories. When we just look at transactions, we can see that those 30 stores, compared to a different group that has not undergone the implementation of the model, is experiencing a seven percentage points higher transaction dynamic for that period.
That means that, you know, we feel very much encouraged to implement the model in the entire Delikatesy Centrum network. That is not so much a change in layout as a change in assortment, and we will be doing this in cooperation also with producers for the entire Delikatesy network. Until the end of the year, we will focus on our own stores, but next year we will work on the entire network to really still work on the competitiveness on Delikatesy Centrum in this very competitive environment. But again, we think that with the changes that we've implemented and with the model that we have now tested, Delikatesy Centrum can stand its ground in the Polish food retail market, and we can see it in the like-for-like numbers. Sorry, I was pushing the wrong number.
So in terms of projects, again, as I mentioned, very encouraging growth from Duży Ben and Frisco. The overall segment growing by 70.6%. The biggest driver here being Duży Ben and Frisco, that are our key projects that we are really focused on. The EBITDA growing, but obviously also being weighed down, as I said, by costs on the warehouse level in Frisco. So if that wasn't the case, the improvement of EBITDA would have been even better. As I already mentioned, we have an overall 20%+ growth in the second half in Frisco and Duży Ben. In Frisco, the growth is now both in the big cities and in Warsaw.
That is linked to the fact that, you know, we continue reaping the benefits of Barbora leaving the market and us, Frisco, being the only actual pure player in e-grocery in Poland right now, really leveraging its market dominance in that space, but also growing in Warsaw, thanks to the newfound capacities in the new warehouse. We are really now targeting our marketing spend on Warsaw, where it is the most efficient. Obviously, Warsaw is the market we want to grow. Mostly, we have, you know, the highest density, the biggest efficiency in terms of logistics, the highest AOV, and we have also the most affluent clients. So in that space, we have the best interest and a real interest investing in Warsaw.
We have also, you know, by bringing up the number of clients, the number of orders, have also experimented with more same-day deliveries and a little bit of a smaller delivery sizes. Therefore, you can see that on the overall baskets, and there's a deflationary element to that, but also the fact that on the same-day deliveries, we have, you know, we tend to have smaller orders, the AOV coming a little bit down, but being more than offset by number of orders. And that's also something where, you know, how we try to adapt our model to make it appealing to the biggest possible number of consumers....
And I think that the Frisco team is doing a very good job in continuing growing this segment, and I think Frisco has really proven that it is, you know, not only been given a boost by the COVID crisis, but is really taking that market and implemented the e-grocery market. Even in this very challenging environment, where clients are still very cost-conscious, Frisco is able to convert people into digital sales, which are perceived as premium. And as consumer behavior improves, as you know, people become more relaxed with prices, which we hope will happen in the foreseeable quarters, Frisco will continue leveraging its position on the market.
When it comes down to Duży Ben again, very, very healthy growth, continuing to really take the market, and this is really part now of our retail core. Duży Ben, for us, is the category killer in terms of alcohol retail in Poland. In our perception, it is the convenience player for alcohol, and we are now focused on growing Duży Ben, not only on the big cities, but particularly also outside of the big cities, as a substitute in a certain way or as a very attractive alternative to for franchise owners for their stores, if they want to change into a more modern outfit, into a more modern way to operate, and that is something that we will now try to scale at length.
Because Duży Ben is showing that it's delivering very, very healthy growth in like-for-like, in sales, in margin overall, and both companies are way on their way we would like to be, not only on sales, but also in terms of reaching their break-even points, so before we go to Q&A, maybe just two elements, so as I said, we are being affected by market trends that, you know, we don't have any influence on. It is difficult to say in what term the sales outlook will change. That's why we would like to avoid, you know, giving any kind of guidance for the second half of the year. What we can see, obviously, seasonally, Q3 is better than Q2, because we had a good summer.
Overall, that is something that is good for the independent market, but the kind of return of the consumer and actual trend on consumer behavior trends that I was hoping for, being given the real wage growth that we are seeing in Poland, that, you know, you can see reflected in our cost side. A lot of people had a real growth in their minimum wage, and that would translate into a real change into consumption. That is not something that we are experiencing yet. The market is not seeing that, and for the time being, it's very difficult whether this is a story of the second half of this year or more something of the next year. That will very much depend on, you know, how the outlook will be.
So, you know, we tend to just, you know, see how the trend is going. What we are very much focused on as Eurocash management is to deliver those elements that we can control, and one of them is the cost element. As I said, for the time being, we are implementing the program that we have announced, and that should allow us to offset the price inflation that we've experienced this year. We are continuing a new program that we will announce to you shortly, and that should allow us to even further not only offset the cost inflation that we are seeing, but building our competitiveness and profitability for the second half of the year, but particularly also with mind of the next year, and that's something that we will communicate to you shortly.
The other element that we are very much focused as a group is our competitiveness in terms of prices. We want to be, and have to be competitive, being given how sensitive to prices the market still is, and our price competitiveness is not only a question of our own profitability, we are price givers to our clients, and that is also a question of the competitiveness of the entire independent market. Therefore, how good we negotiate prices, how good we are cooperating and negotiating with producers, is obviously a question of keen interest for us in the Eurocash Group. In that sense, I can only say I'm looking forward to working, and that is maybe a news that you have seen coming up yesterday as well, together with our earnings.
I'm very much looking forward to working with our new management board member, Marcin Celejewski, who will join us first of October, replacing Przemek Ciaś, who has decided to leave the board, and I'd like very much to thank him for the great work that he's done over 15 years in our group. Marcin Celejewski joins us after tremendous and experience in several FMCG players, leading FMCG players in Poland, like Unilever and particularly the Heineken Group, Żywiec, where he has been working until three years ago as head of sales. Marcin is somebody we know well. He's been advising us and working on us on the EuroPlatform POS system that he has when being in the Heineken Group developed, and that was a little bit his brainchild.
He has helped us bringing this to the Eurocash Group, and then as leading our franchise operations, has been key in delivering the qualitative change that we've been able to do in this segment, using our POS systems on the franchise stores to negotiate promotions that were very competitive to the modern market in the traditional stores. So today, the stores, the over 5,000 stores that are connected to us in our POS systems, are able to benefit from promotions, both multi packs promotion, but also simply maximum price promotions that are very competitive to what you would see in, you know, our main retail players all around Poland.
That is thanks to the technological side, where we are able, as a platform, to negotiate on their behalf, retail segments, but it is also thanks to the negotiation and ongoing work of Marcin, who has been able to negotiate this with producers, getting people on board, convince people to invest in this kind of work on the traditional market. Therefore, I think that Marcin's experience with the traditional market and the technological side on this, his approach, a very analytical approach and work on data, and last but not least, his experience with producers, his knowledge on how producers work and how we should negotiate with them, will be key for us to bringing our company in the next chapter. I think that he will help us transform the buying department going forward.
So we'd very much like to welcome Marcin and hope that he'll be able to help us deliver on that second key element that we are now focused as a group, which is, you know, delivering our price competitiveness, which should, you know, in both elements, both cost efficiency and price competitiveness, allow us to continue grabbing market share, converting more and more franchise stores to our franchise. We're gonna drive further our franchise expansion and rebuild the dynamic that we've accustomed the Eurocash investors in the last two years, which is to deliver a better result every quarter, year-on-year, which I hope is a trend that we will regain very quickly. Thank you very much. And now let's go on to questions.
Yes, we have already, you know, good set of them. However, if you'd like to ask questions, put that in the chat panel. We will try to address it, either still today or over the next meetings or, you know, phone calls, which we can arrange with you. So the first group of questions, you know, relates to Lidl and Biedronka price war. Do you have any view on the duration of the price war? Is the difficult environment bringing some of your wholesale smaller players out of the business? And, how you see the gross margin, which in the second quarter was on a similar level, despite of the price war.
So if you could comment and give some outlook for the second half of the year.
So, you know, when it comes down to the price war, obviously, as you have rightly pointed out, it is being driven mostly by players in the discount market, and price wars have the particularity that then they get a little bit their own dynamics. So it's very difficult to assess from our end how long this is ongoing, and quite frankly, I think I'm probably the wrong person to be asking that question. There are other market players that are more in the driving seat when it comes down to this dynamic. But again, my experience with price wars is that at some point, they get a life on their own. So super difficult for us to assess, and I wouldn't venture into giving you any kind of outlook.
We can only see that, you know. We can see its effects, we can see that it's here. Definitely something that surprised me, and I did not see coming in that scale because I'm not sure this is, by now, you know, a development that is really helping anybody. Having said that, you know, we cannot, you know, complain about the market being what it is. We have to be competitive in that market. So as you have seen, we try very much to be doing our best to fare in the ocean that, you know, that we are faring on. In a certain way, you know, we, as the most modern, most integrated player on the traditional market, have a certain advantage in such an environment.
I mentioned earlier that, you know, we are the one platform that is able to provide competitive prices for traditional stores, thanks to our POS systems, thanks to also to our hard franchise models. And we can see that both our hard franchise models and the stores that are connecting to us have better prices, and we are able to deliver this to them. So, the way I see it is that, you know, never waste a good crisis. Clearly, to answer your question partially, is that this is bringing pressure on a lot of traditional store owners. The pressure is disproportionate, I would say, in store size. You see, store closing. So store closings, we think, will be on a similar level this year as it were, and last year.
So we don't see an accentuation of, you know, store closure dynamics. But still, when we look at store closures, they are very intense, you know. They are very skewed towards smaller stores, which is why we also had more sales decline in the cash and carry segment. But from our point of view, the approach is really never waste a good crisis. The pressure that we are now experiencing in the traditional market is kind of leveraging what we've also always tried to tell to our clients, which is we need to integrate. We need to invest into cost efficiency. We need to negotiate better and negotiate as a whole.
And we believe that, you know, being given what our main job as Eurocash is, which is, on the one hand side, getting more and more of our clients into becoming one of our franchise stores, so franchise expansion. Second, improving our loyalty, so getting our clients to buy more and more from Eurocash and allowing cost efficiency, particularly through digitalization and connecting to our stores through the POS systems, and then hardening the franchise model. These are all things that vindicate what we've been always saying, because for a lot of traditional stores, that's the only way to be faring in this kind of market environment. And I think as Eurocash, we are showing that our model works because, as I mentioned in the retail section, Delikatesy Centrum has not...
Has actually improved its price index to its main competitors over the last couple of quarters, which is how we were able to close the like-for-like gap to them. And as you have rightly pointed out, we have had to invest margin, but not to the extent that some of our competitors. Which means if we negotiate as a whole, if we negotiate from a modern point of view where we can guarantee execution, we can get producers also to believe in our systems and give us the investments needed to keep a competitive price. And I think this is something that we understand.
I think that's something that Marcin Celejewski understands, and I think that being given the very, very difficult market environment that we have is actually something that is going to make the proposition of Eurocash on the traditional market more and more compelling. So even though I agree with the analysts of you out there who are predicting that the traditional market will have pressure on its growth and that overall, we're looking at a declining market, we think that our growth in terms of market share and our competitive advantage will continue improving, being given this price pressure that we see, being given the kind of qualitative changes that we've improved. I hope that is an answer to your question.
Thank you very much. So the second group of question is touching the topic of restructuring of our costs and savings with a representative question. These are the savings resulting from the cost side optimization programs. You have reported already visible in the second quarter, or they will be only visible in the subsequent quarters. Do we expect to report restructuring costs also in future quarters? And how we see generally, you know, the implementation of the cost restructuring so far, where do we see the savings?
So again, I tried to show that, you know, part of our efforts on cost efficiency, I believe, are visible in our numbers because as we've shown, our labor costs are growing by six percentage points versus 20%+ , you know, increase in dynamics and the minimum wage and overall labor costs. So I think that, you know, the impact is visible, and it's also visible in the fact that, yes, we have sacrificed 40 basis points, but again, that is much less than you can see with our competitors.
Generally, our commitment has been to, over the entire span of this year, to fully mitigate the impact of labor costs, which, you know, summed up at the beginning of the year when we announced it to a total cost saving of some PLN 200 million. That should bring our total costs as a percentage of sales to the same percentage level as we were in 2023, and I see us very much being on track to deliver that promise.
Thank you. Let's see. Third set of questions refers to the break-even plans for Duży Ben and Frisco. How we see them because the plans have been ambitious, you know, for this and next year. Whether we are delivering on that because the opening in Frisco, the new warehouse, is clearly putting pressure on the Frisco results as well.
It is putting pressure on Frisco results, but that's... that was planned. We knew we would open the new warehouse, and we knew that, you know, the cost side will grow because that is how it is. Obviously, when you double your infrastructure capacity in a city, and you double your warehouse surface in a big city like Warsaw, obviously, you need time to ramp up and offset the cost with the sales, so that was very much in our model. I believe we've never, you know, given a target date for Frisco to reach break even, but we see Frisco very much being in line on delivering our expectations, particularly on the sales growth.
So I think that Frisco, this year, will deliver our projections in terms of growth, so very much on track to achieve, you know, the one billion target that we have set it for, in terms of sales, and that is also pretty much the break-even point. And I think we've alluded to the fact that it will happen probably somewhere around 2026, and we see it very much being on track to doing so. When it comes down to Duży Ben, our expectation is that it should be actually reaching break even and, you know, coming to a net zero contribution, in the next year.
Thank you very much. So, we addressed almost all questions. If anything remains, you know, still unaddressed, please contact me. I'll be happy to share, you know, with you additional information, and we are slowly getting to the end of our presentation for today.
Thank you very much. Thank you very much.
Thank you.