Almacenes Éxito S.A. (EXITO) Earnings Call Transcript & Summary

[Audio Gap] second quarter 2023 results. Please note that this conference is being recorded. We highlight that the information contained in this presentation and any statements to be made during the call regarding Exito's business outlook, projections and operating and financial targets as well as information currently available are the company's management beliefs and assumptions. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, market conditions and other operating factors may affect Exito's future performance and lead to results that differ materially from those expressed in such forward-looking statements. [Operator Instructions] I'm pleased to present our CEO, Mr. Carlos Mario Giraldo; and CFO, Mrs. Ivonne Windmueller. Please move now to Slide #3 to see the agenda. We will cover Grupo Exito’s DR listing process, the update on ESG strategy, quarterly highlights, financial performance and conclusions. Recall, we conclude with the Q&A session in which all participants can raise their hands to ask questions or sell them through the chat available at the bottom of the screen. In any case, please indicate your full name and company's name. Thank you for your attention. I will now turn the call over to Mr. Carlos Mario Giraldo.

Thank you, Maria. I want to give a welcome to all of you to this reporting of our second quarter results. If we go to Slide #5, we will make a reminder of the Exito listing process and -- which is the spin-off of Exito from GPA. As a reminder, this means that distribution of GPAs 86% shares out of the near to 97% share that it has in Mexico, distributing it to its shareholders through ADRs and BDRs and increasing the float of Exito to near 53% and its shareholder base by near to 250,000 shareholders. This will drive a potential unlocking of Exito share plan. The listing update is as follows. The BDR and ADR filings are already approved by the regulators in Brazil and the U.S., we are pending the approval by the Colombian regulator and registration in Deceval, the Central Securities deposit in Colombia. That transaction completion tour test, it would be in the second half of the month of August according with the calculations that we have been able to make. If we go to Slide #7, I will come back to our ESG initiatives development. These are the main highlights. As always, we make a big focus in children nutrition. We got during this first half to near to 60,000 complementary packages for children complementing the work that the Instituto de Bienestar familiar does in Colombia. We imposed the last surface, which is our hydroponic solutions that are being placed in popular neighborhoods in the house and benefiting women-led households where Exito is making the complete commercialization. These are being made in places like comuna 13 in Medellín or Siloé in Cali, not only by Exito but by other institutions and always these products are being sold at Exito stores. We had -- for the moment, 9,500 tons or precollection of recycling in our stores, 42% of our leadership positions are led by female and 92% of the fresh products that Exito sales are locally sourced, of them, 85% bought directly. I would like you to see that we are putting a link of an alliance that Exito is doing with Google to promote small farmers, giving them a technological improvement to improve their productivity. This is being done in the region of Uraba and in the regions in Santander for the moment. Going to Slide #9. We go to our financial and operational highlights for the second quarter. I will say we had a double-digit growth in comparable sales in the consolidated comparable sales of 12.4% and which is equal to high single-digit consolidated 8.5% growth in net revenue for this second quarter. Recurring EBITDA grew by 6.6% with a 7.7% margin, which is a margin better than the margin that we had in the first quarter with very important gross margin expansion. And despite the expense pressure that we are receiving out of salaries, utilities, occupation costs as most retailers and many companies are receiving not only in Colombia but in many other countries. Our net result was slightly negative for the quarter given the high interest rates in Colombia, the credit card provisions of TUYA and our spin-off expenses concentrated in the last 2 quarters. Our free cash flow came to COP 92,000 million. We registered a high historic omnichannel share in Colombia of 12.7%, driven by food home delivery. Our real estate consistent contribution continues to be a reality in this quarter, growing in the consolidated results by 17.8%, imposed by real estate in Colombia but also the real estate galleries in Argentina. I would like to read what we can see there about corporate governance to be very precise. Casino Group stated in June 26 about the possibility of disposal of its assets in Latin America. And here, I relate specifically to Exito. And I do -- I read it exactly. GPA and Exito are assets that may be sold as part of the group's 3-year plan for sale of assets. And that on this stage, there are no milestones and no sale process of going for GPA, the only active project at the moment involving these 2 companies is the segregation of Exito’s and GPA’s business. I want to read this because, of course, what we have been communicating about this is everything that has been done through relevant public communication to the market. Moving to Slide #11, we speak about that top line in the 3 countries and our consolidated sales. In Colombia, we had revenues growing by 4.2%, which in comparable basis, our sales growing at 9%. And this is comparable because in the basis, we had a non-VAT-very strong base with a net 5.54% impact. This full impact is in Exito format, which is the format that carries the products of nonfood, which are normal in the non-VAT days. It's important to make clear that non-VAT days are eliminated now from Colombia. And in this first half, we had the last 2 in the base. So no longer are we going to have the effect of non-VAT days in that base. Carulla had a 15.4% increase in sales out of a premium market, low elasticity to inflation and the contribution of the 10-minute delivery, a strong project that we have ongoing. Our Surtimayorista cash and carry had a growth of 13.6%, mainly out of expansion. And it's important to note, and this is very important that through an important effort that we have done to contribute to the Colombian consumer, our internal food inflation was 4.4 percentage points lower than the national CPI. This is very important because it's an effort of productivity of negotiation with our suppliers without impacting our gross margin but impacting very favorable well-being of our consumers. In Uruguay, we had strong sales growing 13.5% in local currency, a 5.9 points above inflation. And with fresh market Disco and Devoto stores, being the big contributors with 58% share of the sales in Uruguay. Argentina has revenue growing 153% against an inflation of around 120%. Our performance is much better than the market. However, given the exchange rate, this makes less Colombian pesos of 3.7% reduction in Colombian pesos. The important thing is that the local sales continue to be very strong and very healthy with an important contribution from the cash in carry, which now arrives to a share of near to 14% of sales in Argentina. Consolidated sales for Grupo Exito for the quarter had an increase of 8.2% in the second quarter, which is a comparable increase in sales of 12.3%. Complementary revenue had an important contribution with an increase of 16.5%, driven by real estate. Going to Slide #12. I want to remind the important contribution that innovation formats have had in the results not only in sales but in profitability of the group. It really is a big driver of growth and ROR. Today, this innovation formats arrive to near to 42%, the sales of Exito, Carulla and adding to that the Surtimayorista. Exito Wow now represents 35% of the Exito brand sales. Those stores with more than 24 months have a growth of 27 points above the rest of the brand and the ROI of drug conversions is above 67%. The Carulla Fresh Market stores represent now 61% of the sales of Carulla brand. Those stores with more than 24 months of maturity, have sales 14.7% above the rest of the brand with an important ROI of 19.3%. Let me go to Slide #13 when I put together all those initiatives that Exito has to penetrate what we call the traditional market, which is made mostly by the mom-and-pops in Colombia, which are more than 200,000 in Colombia and still represent more than 33% of the total consumer goods market. Here, I start with Cash & Carry, Surtimayorista. This is our low-cost proposition going to end consumer and also professional consumer with the lowest cost point in operation of 10%. We now have 59 stores with 13 openings that have been done during the year. They represent 5.5% share in sales and they have an ROI of 32%, which is very good considering that it is a low-cost format. Then we have Misurtii is our B2B app, one of the most important B2B as in Colombia, which has been there for 1.5 years and now represents sales of around $7 million. They are selling to around 17,000 active mom-and-pops and it's a high potential growth avenue for the organization. Let me also make a special mention of our Aliados program or partnering with the mom-and-box and independent supermarkets. Now we have around 1,700 big-sized superetes or independent supermarket. It is a co-branding proposition with Surtimax and Super Inter. Sales year-to-date account for the year to $25 million and the focus that we have with this program is having more partners, but the most important is representing a higher percentage of their sales. This is a high potential also initiative for the company given the important proposition that we have for this mom-and-pops, especially coming from our complementary businesses, but also from our low-cost private brands, especially the Ekono private brand. Let's go to Slide #14, and we see that consistency in our omnichannel omni customer differentiation initiative. It grew during the first half of the year by 9.7% in sales -- they account for a share of 12.5% of the total Colombian sales. In food, the share is 11.3%. Let me make here a point that this is one of the highest shares in all America of any retailer. We had 89,000 home deliveries during the first half and our food home deliveries increased and sales increased by 26%. It's interesting to note that we come from a 4.3% share pre-pandemia, to current sustainable 12.5% share. This is a great alternative and continues to be a great alternative to work our proximity without having to do an extensive investment in bricks. The focus of our omnichannel strategy are increasing our marketplace for nonfood, the click and collect service, both for food and nonfood in our stores, Exito and Carulla app and the quick delivery or fast delivery service that we're doing in the main cities of Colombia. Going to Slide #15, we speak about estate. Real estate as a solid reality and potential. Viva Malls, our alliance with Fondo Inmobiliario Colombia, where we hold 51% is the first shopping mall operator in the country with near to 35% market share in GLA gross leasing area. In total real estate Viva Malls plus the real estate that we operate out of Viva Malls accounts to 771,000 square meters with one of the highest occupancy rates of 97% and with revenues growth of 21.7%. We are in the design development of the introduction of the IKEA store to the metropolitan area of managing in Viva Envigado, adding 18,000 square meters. Viva Malls at 100% has a value at current exchange rate of around COP 750,000 million, according with the recent valuations that have been made. Excuse me, it's $750 million according with these recent valuations. Slide #16. We speak about a new project that was announced recently to the market and to the Colombian public. It is going to be placed in Cartagena, which is now probably after Bogota, the most dynamic place in sale of real estate in Colombia. It is a best in all locations. This project will be to the outskirts of Cartagena in the route to Barranquilla in residential, touristic development. It's #1 in Colombia. And this project of Viva Cartagena would be under current plan mitigation opening in some moment of 2026. This is alliance and analyze between Baba and the best designers, constructors of Colombia and initial real estate shopping mall development has an estimated area of 35,000 square meters. This will complement very well the portfolio of products that Viva Malls has in Colombia. In Slide #17, continuing with complementary businesses, I would say that they are a key part of our monetization model, as you know, Exito Credit Card, which is an alliance of 50 with Bancolombia, it has had a difficult year given the financial sector increase in delinquency and high provisions. Provisions and coverage are better than legal requirements in a very also to management of the company. We have a little above 2 million credit cards and near to 5 billion loan portfolio, keeping the A rating that we have had during the last years. Punto Colombia, I always speak about Puntos Colombia because of the importance of this loyalty coalition leader also an alliance with Bancolombia, putting together the customer base of both companies. It makes a lot of sense that the #1 retailer and #1 back, put together the customers, it is a great complementation of the issuance and the retention of points. We brought also allies into this coalition. Today, we have around 387 allies, which now they are partners that issue or redeem points and they pay for that and the retention of these partners now accounts to 33% of the total retention. Clearly, this is the #1 brand in loyalty in Colombia, as measured by Kantar, and the penetration of Puntos Colombia is near to 1 out of every 3 households in Colombia, which is huge. Puntos Colombia is widely traded today and increasingly valuable for our customers. Now I give the word to Ivonne Windmueller, our CFO, to go through our financial results and our international operations, and I will come later with some conclusions.

Thank you, Carlos Mario. Good morning, and thank you for joining us this morning. I will be presenting the financial results of the company for the quarter and for the first half. Let's continue on Slide #18 to review the operating performance by country where we see a top line growth and efficiencies across the 3 countries, but is still affected by the inflationary pressures in the cost and in expenses. In Colombia, as previously presented, net revenues at COP 3.7 billion with 4.2% growth boosted by real estate results and our resilient top line evolution despite non-VAT day effect in the base, with sales growth, thanks to the performance of food, omnichannel and the increased share of the innovative formats. Gross margin at 22.7%, with an improvement of 42 basis points and 6.2% growth, boosted by the real estate business despite price investment and inflationary effect in the cost of goods. SG&A grew 13.3% and reached a rate of 19.2%. A strong action plan around COP 45,000 million for the quarter to mitigate the inflationary pressures on wages, utilities and other fixed costs and the additional effect on the increase of the operational tax with an impact of around 38 basis points in rate. Colombian recurring EBITDA for the quarter at COP 27,250 million decreased 6.7% and with 7.3% rate deteriorated in 86 basis points. The result reflects the positive contribution from real estate and other complementary businesses and the income from the sale of our real estate development project, offset by sales performance due to lower consumption, inflationary production costs and expenses and the higher operational tax. Uruguay, with a top line that grew 34.2% in Colombian pesos and 13.4% in local currency around 6 percentage points above local inflation, driven by the positive dynamics of the commercial activities, the contribution of the Fresh Market stores, reaching a share of 58.2% of sales and the performance of the omnichannel. Gross profit grew 9.9% this above revenues and reached a rate of 35.6%, improving 145 basis points. This thanks to the improved consumption trend. SG&A grew below revenues and improved its rate due to the internal cost efficiencies. Recurring EBITDA at COP 118,553 million grew 59.6% and improved its rate in 180 basis points, reaching a margin of 11.3%. The Uruguayan operation continued as the most profitable business unit in the group. And finally, Argentina with net revenues in Colombian pesos affected by FX effect, but in local currency with growth of 153%, this around 32 percental points above local inflation. The sales driven by a positive commercial trend and increased omnichannel share, the outstanding performance of the Cash & Carry format and the real estate business contribution with solid occupancy levels. The gross margin at 34.5% improved 63 basis points and grew 157% in local currency, thanks to cost efficiencies. SG&A deteriorated 172 basis points, impacted by inflationary pressures, partially mitigated by the strict cost control. Return EBITDA grew 15.4% in local currency and reached COP 6,628 million with stability in rates. Let's move forward to Slide 19 to review the company's consolidated results. The strong margin gains across the 3 countries and the focus on action plans in cost and expenses, led to a recurring EBITDA growth of 6.6% in the quarter and 7.8% in the first half. The first half showed a double-digit top line growth of 13.5%, a solid growth, thanks to the commercial performance in Uruguay and Argentina and the positive contribution of real estate and complementary businesses in Colombia. Uruguay and Argentina recurring EBITDA growth in local currency in the first half of 27.6% and 193.2% respectively, offsetting the Colombian operational outcome that was impacted by: first, a strong base effect of 2 non-VAT days, 1 in each quarter; and second, a higher operational tax with an impact of 26 basis points at consolidated level. Recurring EBITDA for the first half at COP 782,676 million with 7.8% growth and a 3-year double-digit CAGR of 11.7%. On a comparable basis, when excluding nonrecurring real estate income and the operational tax effect, EBITDA grew 12.1% for the semester. Going to Slide 20. The group share net result for the first half 2023 was COP 38,934 million and reflected the positive contribution of the operating performance coming both from the retail and real estate businesses and the positive effect on income tax due to a lower deferred tax by a higher tax loss. With the negative variations during the quarter as well for the first half are coming from. First, an impacted net financial results due to higher interest rates above 7 percental points is increasing our cost of debt. Second, a higher minority interest coming from the improved performance in Uruguay and the real estate business in Colombia with Viva Malls. Third, an impacted result in the financial business Tuya to higher provisions amidst the nonperforming loans deterioration across the financial sector. And fourth, higher nonrecurring expenses, reflecting a base effect with income from sale of property in Argentina and additional higher expenses related to the depositories. Finally, on Slide #21. Regarding the cash and debt position of the company, we would like to highlight our last 12 months positive free cash flow of COP 92,000 million. Net financial debt with a negative variation of COP 111,000 million this when excluding dividend payments, this as a result of higher investments, with the pressure on the financial expenses reflecting higher refer rates and negative variation in working capital explained by lower payables from non-VIP Day in the space and lower cash level effect of year 2022 closing. The gross debt increased COP 532,000 million from higher revolving credit lines in use for seasonal requirements. As a conclusion, solid cash flow position of the company allows the strategic and recurrent operational investments and the dividend payments to our shareholders. Now as a summary for the financial results. We had a Colombian perimeter with sales growth impacted by non-VAT days base effect of around 5.4 percentage points, mitigated by the positive performance of innovative formats and omnichannel with full sales growth at double digits and the contribution of the real estate business. SG&A with strong expenses action plan as an effort to mitigate the inflationary pressures and impact of higher operational tax. Uruguay with sales performance above inflation and gross margins benefited by consumption trends and cost efficiencies with an EBITDA margin at double digit [Technical Difficulty] Hello, everyone. Do you here. We had here a technical problem.

Yes, we can hear you.

Okay. Thank you. Okay. So I continue. I was in the summary of the financials. I was in Uruguay, so Dubai with sales performance above inflation, and gross margin benefited by consumption trends and cost efficiencies with an EBITDA margin at double digits, improving its level. Argentina sales over 30 percentage points above local inflation, gross margin gains and control of expenses to mitigate inflationary impacts led to a stable EBITDA margin. Consolidated net revenue for the semester grew at double digit and SG&A with pressures, partially mitigated by the constant cost action plan and efficiencies that led to an EBITDA growth of 7.8% and 12.1% when excluding the base effects. Net results with positive operational contribution offset by higher financial costs, negative contribution from Tuya and higher nonrecurring expenses, a solid capital structure and free cash flow generation. Thank you for your attention. And now I give the floor back to Carlos Mario for the conclusion.

Thank you very much. I go to Slide #23 with the conclusions. First of all, we expect the spin-off completion by the third quarter with a value creation opportunity for shareholders. We saw during the quarter, strong sales in the 3 countries in comparable basis, an EBITDA consolidated growth of 6.6% with gross margin expansion and an important job against the pressure that we are receiving in expenses. Our net result impacted by interest rates and credit card temporary high provisions plus the spinoff onetime costs, cash generation at COP 92,00million from real estate and working capital evolution and real estate in Colombia and Argentina, an omnichannel and innovation and Uruguay as the best performers during the quarter, I wanted to highlight the consistency in the performance of our innovation formats both in profitability and growth and omni-store strategy of the company. This would be the main conclusions and now we open it to Q&A.

[Operator Instructions] The first question comes from Nicolas Larrain from JPMorgan.

I have 2 actually, the first one is, Carlos, if you could comment a bit on how you've seen trends now in July, specifically in Colombia and Uruguay, we're seeing very strong in Uruguay and some deceleration in Colombia. So interesting to know what you're seeing over the latest weeks? And my second question goes into the debt position. We've seen Exito taking more debt over the past quarters and also discounting more receivables or doing more factoring. I wanted to understand like what's the motivation behind this? And if this is just on -- because of the commercial or anion you guys are having? Or just to maybe understand what's going on there.

Okay, Nicolas, thank you. Let me refer to your first question and then I hand the second one to Ivonne. In trends today, I would speak about what we see in July and what we expect probably for the second semester, we see that as you saw in the second quarter in Colombia, the consumption has weakened out of consumer competence, high interest rates, I would say, consumer credit scoring tightening by most institutional -- financial institutions and volumes going down. We believe that this is something that is going to go through at least during the following months. And of course, we're working a lot in maintaining our margins while maintaining an important contribution to the consumer, especially with our unviable portfolio of products and also keeping the contribution that we are receiving, especially for the real estate business. The interesting thing is that we see that formats like Carulla or the high-end Exitos have a lower elasticity to inflation and to this consumption trend, and that's positive for the company and that we see that the e-commerce online omnichannel consumption trend continues to be very strong. What opportunities do we see looking forward, that inflation in consumer goods is going down. It's going in a very rapid way down. It came to half what it was in food since December, and we think it will be in single digits very rapidly, and that will stimulate consumption. And second, that we expect that government subsidies will be activated soon, and they are especially important in the low-end areas of consumption in the main cities of Colombia. Ivonne?

Thank you, Nicolas, for your question. So regarding the higher debt, we are seeing higher nonrevolving credit facility -- revolving facility, sorry, mainly for seasonal effects during the first half. And regarding the factoring the factoring that you mentioned that we are increasing. It's important here to remind that during the last half of last year, we had an impact on our factoring process coming from the electronic invoice and the Tax Office platform. So we had lower balance of factoring. But when we compare the first half 2023, in the first half of 2022, we are aligned in factoring balance. We are just likely recovering from the impact that we had during the second half in our factoring processes and [indiscernible].

Sorry, I didn't refer to Uruguay and Argentina, but I can say is that Uruguay and Argentina, both continue to have very strong consumption trends as we saw during the first half of the year.

[Operator Instructions] So now we have questions from Julian Ausique.

I have a few questions and the first one is regarding Tuya, the financial -- the banking business. I would like to understand how much were the provisions for the quarter. And also, I would like to understand about the capitalization that Tuya announced last 27 of July, Exito will participate in what will be the impact of the cost of this transaction for the capitalization of Tuya. And my second question is regarding the cash generation. And I would like to understand if it's the case for the CapEx that the company has, like Planet techs year? And if it's enough or not.

Thank you, Julian. I'll refer to CapEx. -- will continue in a non [ outed ] way with our CapEx plan, which was around between $100 million and $120 million, and we keep that scenario focusing on the opening of Surtimayorista stores, some Carulla stores and conversion and investment in technology and in logistics for our omnichannel. And then I hand it to Ivonne for Tuya.

Okay. So for Tuya, I am not able to refer to the provisions. But as Carlos Mario mentioned during the presentation, the provisions have increased because the portfolio has been deteriorated and this is a deterioration across the financial sector. As of the capitalization Tuya revealed a couple of days ago, we as shareholders are participating in the capitalization. We as shareholders, together with Bancolombia, we are supporting the -- our financial business, Tuya during the cycle of macroeconomic and across financial sector impact.

And it is it possible soon to know on how much the Exito will participate like the amount?

50% of the capitalization.

[Operator Instructions] There are no further questions at this time. I will now turn the call to Mr. Carlos Mario Giraldo for closing remarks.

Yes, I would like to thank you all for this participation in the call. I would say highly enthusiastic with all the management team and with our Board for the historic moment that Exito leaves because this spin-off process is going to give a high liquidity to our shares, not only in the Colombian Stock Exchange, both in the Brazilian and in the U.S. stock exchange through the ADRs Level 2. This will permit to give visibility to the share and to the fundamentals of the company and to accelerate our growth in that future. The second thing is that we see consistency in our strategy and in our profitable growth through innovation, through omnichannel penetration and monetization of the traffic and the confidence that we have coming from our customers. We are addressing the main top end market in a very efficient way, while finding alternatives to proximity through omnichannel home delivery and low-cost market through Surtimayorista, or MiSurtii app and the Aliados program. This is a year of big tasks, not only in top line dynamics in Colombia but also in margin protection and expense control strategy in which we are working in a very persistent way. There are new bets coming from the traditional market penetration where Exito has great assets as its private brands and the alliance that it has with mom-and-pops plus the cash and carry, the leadership in food e-commerce, which is more than half the market in Colombia, the marketplace increased through our technological platform, which is now having more than 1,000 vendors and the real estate new projects and data monetization. I hope to see you for the results call in the Q3 where we hopefully will now have a new reality in our shareholder base. Thank you very much.

That concludes today's conference. Thank you for participating.