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Edited Transcript of SORIANAB.MX earnings conference call or presentation 25-Feb-20 4:00pm GMT

Monterrey, Mexico Mar 4, 2020 (Thomson StreetEvents) — Edited Transcript of Organizacion Soriana SAB de CV earnings conference call or presentation Tuesday, February 25, 2020 at 4:00:00pm GMT

Organización Soriana, S. A. B. de C. V. – CFO

BBVA Corporate and Investment Bank, Research Division – Team Leader & Chief Analyst

* Nicole M. Zaragoza

GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division – Research Analyst

Monex Casa de Bolsa, S.A. de C.V., Research Division – Stock Analyst

[Interpreted] Hello, good morning, everybody. I am glad to have you here on this telephone conference, where the company — with me is Rodrigo Benet, Finance Director. We — we’re going to summarize the fourth quarter of 2019 and the yearly amounts and then talk about the objectives that we’ve had for 2020.

As you know, during 2019, we still have the effects of the operational and the integration for origin and our activities of Comercial Mexicana. We worked very hard to recover our customers from the first quarter until the promotions that we have currently with the idea of not losing the ability to demonstrate that our provision problems for — are thing of the past. We increased our sales, 4.10% against the year before — during these campaigns. Nonetheless, our recovery of the customer has been slow. We are very influenced for — by the results of the stores of (inaudible) Mexicana, which have demonstrated a gradual improvement and constant — and gradual improvement. Previously, we had to take important decisions at the level of organizational structure, having as an objective to bring all of these stores to the — replace debt level. We are very confident that we’ve taken the necessary actions to reduce the falls, and we are going to continue to find ways to improve the specific performance of each store, offering our consumers a better buying experience and to recover their confidence.

We are convinced that every day, there are better ways to do things. And we’ve been reinforcing this idea without the whole — throughout the whole exercise. This year, we’ve made very good investments and improvements of the system that will allow us to ensure the availability of products throughout the whole chain, reinforcing the provision, the supply chain and — to the benefit of our clients. We have worked consistently in optimized sales floor, identifying opportunities for — value for our clients, offering better services or more services in more locations. Such as that in 2019, we did 17 major remodels, which made the offering in our plazas and offered complementary services and more traffic and getting a cycle of sales that are more efficient for the clients and more productive for the organization. What — before is, together with an investment plan for the company and also a long span at the — to where we can be, and we’re doing the steps necessary to do this. And continuing with our global tendencies in electronic commerce, we keep on pushing Soriana [Total Com], a business that had a growth of 63.2% against last year with a catalog of 1,000 products and 2.5 days average delivery time. About the good end of 2019, we had an aggressive campaign, taking into account that the market — they have better and better offerings and quality of products that we can place at the — each of our clients. We did a very good attractive products per category to give the clients the opportunity to open a big catalog — big portfolio at very good prices and financing options and specifically, throughout our offer of credit through Soriana, we managed to grow — or allowed us to grow at 6.6%.

During 2019, we redefined and finalized the strategy to be able to recognize and know our customers. We did very important programs that are pushing these programs. Taking into account the strength of our programs, the biggest program in Mexico as a pillar for the strategy this year, we are — have a better contact and more direct with our customers. Derived from the information given to us in each one of the visits using the card, the loyalty card, and which helps us to give them a better buying experience and helping us improve our business. One of the best agreements that we’ve made with company, with [British] about the retail using for loyalty program and in commercial ideas. So we have developed a direct relationship with our customers based on communications and promotions that we’ve done according to their buying patterns. At the end of 2019, as part of this implementation phase, our commercial teams have access to the systems for this project. And we are generating the first planned — business plans based on these metrics, together with our commercial associates. In the last quarter, we implemented promotions that offer better value to our customers according to their buying patterns, which will translate eventually to an implementation. The other agreement that we’ve made is the one that we’ve made with PAYBACK, which is a subsidiary of American Express with our loyalty program with many brands in Mexico and the benefit of adding ourselves to this loyalty program for Soriana. With this alliance — with this partnership we’ve had made 2 million of our participating customers available, and we haven’t used the promotional platform at the end of 2019. We launched more than 350 million coupons to use this with the idea to give them to our clients. And according to their buying patterns, we’ve implemented strategies to attract to our shops the associates of PAYBACK who didn’t buy before. And during December of 2019, those new customers were 2.1% of the sales of the participating formats. With the Soriana loyalty program or — and their associations, we’ve consolidated our position, and we are knowing — we’ve known our consumer — Mexican consumer better than anybody else to be able to comply with their needs through a buying experience that is more personalized all the time. And it will help with the financials — with the books in our company. Finally, the plan to reduce inventory that we started at the end of 2019, which has — which is a priority in 2020, which is focused in — reduce the defective inventory. We’ve managed to do several technology actions such as automatization of the process of — ordering process. The definition of our [VIN] and our numeral — numbers, the catalog restructuring as well as the execution of a cleaning program and/or a getting rid of inventory in the storage.

The strategic decisions that we took in 2019, which we will follow up on 2020. Our strategies that look easy, but they have a cultural change and operational change for the business. It is an obstacle or is a challenge that — an economic and international economic uncertainty, we can only focus every day, what is most important, which is to satisfy our clients, anticipating any adverse situation and being proactive in the reactions of the consumer and the sector. About our financial objectives for 2020, we’re going to share that we are looking at a share growth of same stores of 4% (sic — see presentation slides “3% to 4%”). And expansion of 10 EBITDA base points CapEx of MXN 2.6 billion,(sic — see presentation slides “MXN 2.1 billion”) focused on remodeling of stores and systems as well as opening 4 other stores, new ones and MXN 4.8 billion. And at this moment, I’m going to finish my presentation, and you can ask questions about the financial for 2019.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

(foreign language)

Nicole Zaragoza, GBM.

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Nicole M. Zaragoza, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division – Research Analyst [2]

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(foreign language)

[Interpreted]

Rodrigo, I have a couple of questions to ask. The first one would be, can you give us a little bit more color, more detail about the same-store sales? How are the stores behaving in (inaudible) and Soriana? And also about sales, we’ve noted that you have an increase in other income, approximately more or less MXN 100 million. Can you explain this, please?

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Unidentified Company Representative [3]

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Yes. I’m very glad to do so. Basically, in the behavior per format — and I’m going to talk per format and not just the converted stores. It depends a lot on what we grab, what I’ve — we’ve been saying we have a city club that 3 years ago is in a different platform, technological platform and that migration hasn’t worked, and it has a result, it’s an incredible result. And this year wasn’t an exception, and it finished with more or less 5% or close to 5%. When we’re looking at self-serve format, that’s where we start seeing the biggest differences, specifically in the Hiper, Mercado format, which absorbed the majority of the Comercial Mexicana stores to give you a little bit of detail on this. If we are talking about the fourth quarter for our stores, hyper — Hiper not taking into account the Comercial Mexicana stores, we are single digits, more than 4%. And when we talk about Comercial Mexicana stores, we still have them as negative, more or less, in one single digit. But it is important that the Comercial Mexicana stores we’ve had since the first quarter, they’ve been negative double digit, and they have evolved very positively. Today, I can tell you at the end of the year, we are close to 50% of those stores for Comercial Mexicana had sales — same-store sales were positive. For February, we are talking about around 70% of these stores, same-store sales, that are positive. So our expectation is that for the first semester of the year, there’s going to be a convergence of the design of both chains. Nonetheless, their origin, they’re going to be the same. And basically — this on the first question, to answer your first question. About the other income. Essentially, the biggest differentiator that we have is for an increase of sale of land, which compared against last year, gives us an important increase because of the land or the property that we sold. And they’re next to places where — not using it. And we saw an opportunity to sell them at a good price.

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Nicole M. Zaragoza, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division – Research Analyst [4]

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[Interpreted] Perfect. And a follow-up about the operational results. Can you explain the increase, the relevant increase about the taxing?

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Unidentified Company Representative [5]

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[Interpreted] It looks to me like — go ahead. I’m sorry, I interrupted you.

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Nicole M. Zaragoza, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division – Research Analyst [6]

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[Interpreted] I’m sorry. Just — that was the question.

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Unidentified Company Representative [7]

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[Interpreted] It seems that it’s — looks like 43%. And it was an average of 30% more or less. It basically has to do with deferred taxes, and that is where you can see the biggest variation. We’re talking about the taxes. I don’t know if you’re opening the taxes, the total provision of taxes. But when you open them up, the deferred taxes and the cost taxes, there is a reduction of 5.6%. So we have to do the — with the effect of the deferred taxes. That we don’t have it in the — we have an expansion plan. These are negative deferred taxes, and the effect is that our balance for deferred taxes is getting smaller. That we’re not having that benefit of the deferral anymore, but the cost — taxes, the current taxes, which has a flow — a negative flow of cash has in — reduction of 5.6%.

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Nicole M. Zaragoza, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division – Research Analyst [8]

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(foreign language)

[Interpreted] Could you repeat the guidance that you’re giving for the CapEx and EBITDA margin expansion? And you’ve mentioned the CapEx for remodeling and systems, can you give me a little bit more detail about the timing that this is going to take? And what are you doing with the CapEx?

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Unidentified Company Representative [9]

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[Interpreted] Yes, of course. Essentially, the guidance that we gave is 4% increase of the same-store sales. 10 basis points of EBITDA, a CapEx of 2,000 — MXN 2.1 billion. As you mentioned, it’s very focused in remodeling and updating our stores. And on the opening of 4 new units, 2 have been opened already, and the rest is going to systems. A little bit about the period of time. The reality is that we expect the CapEx — the majority is going to be in the second half of the year. The first half of the year, we are taking in the planning, and it requires a lot less flow of CapEx. That MXN 2 billion is going to be spent at the second end. And our focus — of our cash flow is because we’re paying debt.

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Nicole M. Zaragoza, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division – Research Analyst [10]

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[Interpreted] And about remodeling, it is basically focused in which format?

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Unidentified Company Representative [11]

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[Interpreted] No, really it’s more than a format focus, it has a focus in the operational needs for each one of the stores that if we see it per unit, the one that is going to take more is Hiper, Mercado, but we — which being our most important format for the company. But the reality is that we’re paying attention to all of our stores at this time.

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Operator [12]

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(foreign language) Ulises Argote, JPMorgan.

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Ulises Argote Bolio, JP Morgan Chase & Co, Research Division – Analyst [13]

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[Interpreted] Well, a couple of quick questions. First, can you share a little bit of details how you can see the guidance of 4% of same-store sales that you’re doing, the traffic pattern? And second, can you give us — if we’re going to be closing stores in 2020? Or are you done closing stores per location, closing locations?

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Unidentified Company Representative [14]

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[Interpreted] Look, the reality is that we believe that the tendency has been not only for Soriana, but for the whole sector from 18 to 24 months, which the — and the growth has been per store, not per traffic. In January and February, we continue to see that tendency, I don’t see any element in which, today, tells me that there was a change because basically, it says 60 — 75% is going to come through the traffic. The format, specific formats that have been a trend has had a different trend that could be expressed, which has had a very good result, and it is getting better participation in the market. What — compared to the rest of the formats. The second one is the Super format, which maybe has a variation where this is balanced. And our general terms, us and the sector, are going to need to be with ticket and traffic. It has been in the last 18 to 24 months.

And the second question about the closing. Remember that, that is based on different strategies. And the first closings had to be with efficiency after the purchase of Comercial Mexicana. We’ve also seen opportunities for those same stores. Even though I say that they are close, they are opening a different store or a different format like in Veracruz and San Luis Potosi also, which we reopened, and that has allowed us to take advantage of an efficient and Sodimac. Sodimac and we have managed to have better commercial areas, Sodimac, like in the stores in Soriana. And of course, we know that last year, we were going to have some closings, perhaps to change format or to put them into a real estate business. And specifically in rented stores, we’ve had final closings when we had in the same influence area, another store that can capture the whole market. And we have the benefit to get rid of a rental contract. I wanted to comment also that the stores, which is the competition, it was closed. They’ve told — they’ve authorized to close 5 stores. And so — in the next 2 quarters, we are going to — in the process of closing those stores.

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Operator [15]

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(Operator Instructions)

(foreign language) Miguel Ulloa, BBVA.

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Miguel Felipe Ulloa Suárez, BBVA Corporate and Investment Bank, Research Division – Team Leader & Chief Analyst [16]

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[Interpreted] It has — related to the markets that we’ve seen, the normal markets for Soriana. There are close — per share. Is there a plan to come back to stability and what period of time will it take?

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Unidentified Company Representative [17]

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[Interpreted] Yes, without a doubt, you will remember that we can say that before the stages of purchase of Soriana, our margin was around 8% and — to 8.5%. We continue to see it. The reality is that I’m saying that today in our Hiper, Mercado, we have better margins than that to those levels. So Miguel, it’s one of our objectives. It’s more than our strategy to continue to go forward to better levels than 8%. And in last few years, something that hasn’t helped us is the pressure of energy that we’ve had, which is the second most important thing in the company. And the loss of sales and the same-store sales that we had in Comercial Mexicana because of the logistical and technological and operative integration, we couldn’t take advantage of the results. Today, we can see that is much more probable, and we are recovering the same-store sales and the EBITDA and the gross margin. We’ve had a stability of more than a decade. Nonetheless, the competitive pressure that we’ve had in the last 10 years, especially in the Northern country, we’ve managed to maintain our gross margin. So I am completely convinced now with a healthy same-store sales is going to give us growth in gross margin. And this has been one of the big things that characterizes Soriana is controlled expenses. We’ve seen it in 2019 in March that we started with this plan. Every quarter, we had a reduction in cost, practically. So I think we can have that combination of a growth in gross margin. And for 2020, we can maintain that under-inflation. And that little by little is going to give us the advantage, operational advantage to be able to expand more.

So the mix of formats that we have right now, without a doubt, we’re going to be over 8%. It’s one of our objectives at the mid-range that we have right now.

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Miguel Felipe Ulloa Suárez, BBVA Corporate and Investment Bank, Research Division – Team Leader & Chief Analyst [18]

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[Interpreted] Rodrigo, the second question has to do with the programs that you are implementing with PAYBACK on dunnhumby in Lat Am. Is there a way which we can follow the impact of these programs on the top line?

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Unidentified Company Representative [19]

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[Interpreted] Well, look, I’m going to tell you. The program (inaudible) is the generation of better sales and more personalization, but it’s also a specific program for dunnhumby that will allow you to optimize your promotional investment. Dunnhumby doesn’t only help us to know where to invest, but also to know where we are overinvesting in prices in promotions that are not being valued by our clients or they’re not being used. So we have an effect with — a positive effect on the top line and also a positive effect on the margin. On the other hand, we know that the programs in this way is a bit more efficient way to generate a perception of pricing. And so that is why it’s going to help a little bit, I think, this, combined with a database that is important, which we have about 2 million customers with all the information that PAYBACK gave us — is giving us a great accounting, almost 200,000, 300,000 used for — that we have in (inaudible) little by little an inch from every angle, we are having better accountability. We have the tools to track all of the purchases. And I believe that the biggest differentiator is that we have as a partner that is going to allow us to give us more value for those tons and tons of value or information that in the past has been difficult to manage. Today it’s established, and we’ve started our first pilots for our providers with very positive results. Our international providers, you know dunnhum, in other parts of the world. They’ve seen the proven track record in other countries. So we’re having a very good reaction, a very positive reaction. It’s also it’s — time is a change of strategy. And this type of thing is not from one moment to the next. I think we’re going to have short-term results, quite short-term results. But this is a positioning at medium — at a medium period for positioning.

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Operator [20]

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Veronica Uribe from Monex.

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Verónica Uribe Boyzo, Monex Casa de Bolsa, S.A. de C.V., Research Division – Stock Analyst [21]

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[Interpreted]

The — what is your expectation for the same-store growth for 2020? And taking into account that it’s been 3%, it seems a little bit higher. And I want to understand a little bit, where exactly is it that you’re getting this expectation? On one side is the improvement of the format that — before, they used to belong to Comercial Mexicana, but I see if there is a specific format that is going to have a better performance than the rest. And the second question has to do with the federal payments or the payments to the federal government that you are doing for the growth for the sales. I want to know if you are — have been affected or benefited from this behavior?

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Unidentified Company Representative [22]

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[Interpreted] Well, the first one, you have to take into account very easily and very simplified, in the same-store sales, we have a comparison, which is easier that we have to recover. It is a challenge. But remember, we talked about a year, we had same sales — same-store sales at 4 — 3.5%, and it is at 3.5%. So we have to have better goals than we’ve had the year before to be able to do that recovery of the market. We are conscious that it is above the sector. But the comparison in a — one way or another is forcing us to do that.

On the other hand, the second question, I’m sorry, is the federal government taxes we’ve seen in the past. At the end of the year, they changed the rules on how to participate in these benefits on — these program. But basically, it’s a movement of months, it has gone — taking a little while. We’re participating, and it is working. They are very big amounts and I’m going to tell you that they represent a benefit — a substantial, significant benefit at least 4 of the stores in the area specifically.

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Operator [23]

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(foreign language) (inaudible) Santander.

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Unidentified Analyst [24]

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[Interpreted] You’re saying that sales are going to grow — same-store sales are going to grow 4%, what’s the EBITDA growth?

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Unidentified Company Representative [25]

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[Interpreted] The guidance that we are giving at this moment is to expand 10 basis points. And your model depending on what you bring, you could help to have a good forecast.

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Unidentified Analyst [26]

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(foreign language) [Interpreted] It’s 10 basis points during this year. What is the amount in — the accounting amount. The total accounting amount?

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Unidentified Company Representative [27]

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[Interpreted] If I’m not mistaken, I think we have a detail a little bit. So that you can do it very easily in the models and the sub director and in the press releases, I think it’s the fourth page where we’re putting in the amount of the effects of CRF, so that you can look at them and you can use them. And more or less I would say let me — without the effects of [ICRF], the expansion would be 3%, in pesos. And basic — and 10 basis points for the margin expansion.

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Operator [28]

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(foreign language)

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Unidentified Analyst [29]

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[Interpreted] Can you quantify a little bit if you have a short-term impact on the minimum? What is — if this trend continues, can we see something that impacts the 2021 and the following years?

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Unidentified Company Representative [30]

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[Interpreted]

Thank you. The reality is that we didn’t have it since last year. In certain areas, there were important increases or significant increases. Let’s talk about the frontier, which received last year a very big increase, but we saw very positive. It was our best zone, and it wasn’t just our best zone, but also in the best sector with an increment — an increase — double-digit increase in expansion and the margin. So at the end of the day, the truth is what we believe is that this was a positive tendency trend. We don’t pay minimum wages. It has a correlation, it will have an implication in the negotiation of salaries with the units that we have. The negotiations have been closed. We don’t see a substantial impact this year. But on the other hand, I would like to emphasize the positive effect that the family — those families that have a minimum salary when they’re implemented, today can’t cover their basic needs. Therefore, that increase — and 90% is going to products for the categories of the products that we sell. So it’s a virtuous circle. At least that’s the experience that we’ve had at the frontier or the area of the frontier. Like you say, there is no derivation from that because we have closed negotiations; and two, we are generating a positive consumer cycle.

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Operator [31]

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(foreign language)

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Unidentified Analyst [32]

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[Interpreted] Rodrigo, last question. You have a growth in e-commerce sales of 70%. What does this represent in total sales. And what is the increase? And where are the sales coming from? Do you have a breakdown of what platform you’re using? And platforms from third parties outside?

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Unidentified Company Representative [33]

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[Interpreted] Look, today — I’m going to answer the first question first. The commerce — e-commerce are less than 1% of the company’s sales and total sales. Therefore, the impact that they have on our sales is very minimal. Here, what we really are focusing very much is in the accelerated growth that is happening, like it’s doing 70%, like we said, and where are this — where is this growth coming from, like you mentioned on third parties. Today, we don’t have a marketplace. And today, we have direct sales that we do or that we buy. And we have a proxy vendor who at the end — to have a better strategy from our product catalog.

We had our provider catalog without the cost of inventory. When the client buys to me at this moment, I’ll buy it from the provider. So this makes it — more affiliation for the working capital without inventory, and we can increase the looks at our page. In 2020, we’re going to have the same focus to implement the number of articles through these drop ship vendor articles, and we’re going to have direct articles, of course, but the most push is going to be for proxy vendors, and we’re also complementing with the product catalog from our street — from our store, our portal, so that people can use or do an automatic online purchase. They buy it, and then they pick it up at the store, if we have it available, and it is the closest store to them. So they buy it and then they pick it up. And little bit to develop the strategy for Soriana for the marketplace, but we don’t have it ready, and it’s not going to be ready in 2020. We’re working on it, but it’s not going to be launched in 2020.

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Operator [34]

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(foreign language)

(Operator Instructions)

[Interpreted] There are no more questions Ricardo. We have a question from Sara (inaudible) from Santander.

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Unidentified Analyst [35]

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[Interpreted] Could you repeat the CapEx for the year? I couldn’t hear it.

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Rodrigo Jesús Benet Córdova, Organización Soriana, S. A. B. de C. V. – CFO [36]

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[Interpreted] MXN 2.1 billion.

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Operator [37]

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[Interpreted] No more — No additional questions on the telephone right now.

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Unidentified Company Representative [38]

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[Interpreted] Very well. Thank you very much for your participation, and good afternoon. Thank you.

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Operator [39]

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[Interpreted] Ladies and gentlemen, thank you for your participation on today’s call. This finishes the program, and you can disconnect. Thank you.

[Portions of this transcript that are Interpreted were spoken by an interpreter present on the live call.]

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