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

Good morning, everyone. Thank you for joining us today for Grupo Exito's Second Quarter 2024 Results. Please note that this conference is being recorded. [Operator Instructions] I'm pleased to present Mr. Carlos Calleja, CEO of Grupo Exito; Mr. Carlos Mario Giraldo, General Manager of Colombia; and Mr. Ivonne Windmueller, CFO of Grupo Exito. Please move now to Slide #2 to acknowledge the note on forward-looking statements. Moving to Slide #3, we have the agenda. We will start with words from our CEO, Mr. Carlos Calleja, to then continue with the financial and operating highlights and financial performance during the second quarter and first half of 2024, followed by conclusions. The call will conclude with the Q&A session in which all participants can raise their hands to ask questions or send them through the chat available at the top 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 Calleja.

Hello, everyone. Thank you for joining us this morning. It's a pleasure to be here again. It's my second call to go over our second quarter results. I can honestly say it's been several months of a lot of hard work, challenges, but also big opportunities. I have spent a lot of time traveling the region. Argentina, Uruguay and especially Colombia, which is an incredibly diverse country of different regions in itself, cultures, customer characteristics and challenges. As I walk the stores, I'm every day more convinced of the quality of our team, the great work ethic of our people across all countries, their commitment, their passion for what they do, their desire to serve and their understanding more every day that we need to deliver results in terms of the bottom line. A quick update on that. Our new scorecards at the store level have been adjusted to reflect this objective and give the operations teams visibility in terms of their performance regarding net income and not just operating income. We are still facing challenging macroeconomic headwinds, but we also know that a challenging environment brings opportunities. How are we planning on capturing those opportunities, by working with a clear purpose and differentiated strategy in terms of how we serve our customers by putting in the extra effort, by being more productive, more efficient and striving to be better every day. By doing all these things as a team, we will take care of the company, we will take care of our families. We will take care of our children, and these are topics of conversation that we are having at our stores. It's a shared commitment among all of us to support each other in our gran família as we like to say that we are building that makes us stronger. That is the definition and spirit of Grupo Calleja, which now includes Grupo Exito. At our last call, I spoke a bit about strategies we are developing to face the challenges, and grow both in market share and the bottom line. Let me update you on the progress and then pass it over to Carlos Mario and Ivonne, who will provide more details. I'm happy to say we have launched commercial strategies that are starting to yield effective results. Thanks to various sales initiatives, we continue to gain significant market share in the same-store measure according to Nielsen's reports. I should say we are seeing numbers and a positive trend we haven't seen in years. The 3 most important initiatives we have been moving forward with are: one, our brand unification strategy; two, our assortment expansion strategy; and three, our promise to offer savings through aggressive high-low promotions and competitive pricing strategies, which is key, not only in these difficult times that the consumer is going through, but in general. The brand unification strategy aims to strengthen our retail brands with focus on 2 aspirational leading and emblmatic brands that are the heart, mind and preference of Columbians, Exito and Carulla, thus enhancing our national presence. This allows us to create synergies and increased focus within the organization while strengthening the positioning of our 2 national brands. The transition is being carried out gradually with the premise of preserving store locations, proximity and customer knowledge, guiding the retail structure towards more empowerment at the store level and operational challenge resolution, as well as increasing sales in stores and generating cost efficiencies. We ask our store leaders to take care of their businesses with an owner's mentality. Through this unification process, we can simplify the organization structure and execution while increasing focus on growing sales per square meter and implementing company-wide deals and promotions, improving competitiveness across all stores. The decisions made for this strategy have lead to significant change in the company's operations in line with our search for a lean and effective organization. And we are simulating them well. To date, we have converted 12 stores, 6 to Exito and 6 to Carulla Express. In terms of the entire migration to Exito and Carulla, our current time line takes us roughly 3 years to complete. In the meantime, we continue to work hard to strengthen those stores outside of the 2 main brands with the same promotional support and care and strengthen them and not lose time with regards to realizing short-term opportunities for improvement. With assortment expansion, our goal is for customers to find a greater range of products in our stores and thus complete their entire shopping needs with us. We have seen interesting incremental growth with our SKU increases and are convinced that it is a winning strategy. Customer feedback has been super positive as well. This strategy is currently implemented in 100 stores nationwide, an assortment has increased by more than 25%. The right selection of new products to ensure they sell well is key, and we are super focused on this issue in order to minimize an increase in days inventory or affect cash flow negatively. Our savings and promotional initiatives are developed to increase loyalty, traffic and spending within our stores. Our tactical high-low promotions allow us to drive traffic to our stores and capture a greater share of wallet when there is liquidity in the market. We have strengthened the commercial plan for full basket purchases, activating biweekly weekends, paydays usually around the 15th and 30th of each month, aimed at providing customers with large sizes to stock up their pantry and capture restocking purchases as well, activating the other weekends with lower cost, smaller size products, helping customers adjust their shopping and fill their interim needs. Early results show promise. This is a tested strategy that has worked for us as a group in El Salvador allowing us to successfully compete with the biggest retailer in the world. It makes me happy to see this rolling out and gaining traction in Colombia. Basically, what we're doing here because it might be difficult to understand is -- through our high-low strategy and through our promotional strategy, which is our high-low strategy and aligned with it, we're able to capture market share and share of wallet more targetedly and more tactically focusing our major, major promotions and discounts on those weekends where there are pay days and when people have the capacity to buy. So it's much more tactical and strategic, you're not generally going out just sort of blanket coverage to capture wallet. You're doing it specifically and targetedly when there is liquidity when people have money in their wallets. And that's much more effective and much more efficient. We continue to extend our traditional annual promotions, super well known in the Colombia market such as Aniversario Éxito, Aniversario Carulla, Mega Prima, which in its most recent version in July was held across all retail brands for the first time. We have strengthened our [indiscernible] [domésticos] offering special discounts in categories such as fruits and vegetables, meats and dairy and liquors going into the weekend. Fruits and vegetables usually on Tuesdays -- not usually, on Tuesdays. And meats and dairy on Wednesdays. Response from customers has been impressive, especially in the meat where we are seeing significant incremental traffic on Wednesdays, and we are just beginning. We continue with customer loyalty initiatives that provide special discounts for them to buy their preferred products such as [indiscernible] Exito and [indiscernible] Carulla. Our unbeatable price [indiscernible] offer is a savings alternative for Colombians that started more than 10 years ago and has evolved over time. Today, it is permanently present in all Grupo Éxito stores in Colombia and in e-commerce channels. It has now been strengthened and includes a portfolio of over 1,000 products both private and national brands, many of which are basic household items. In challenging times for household economies, we are, as we say in Spanish, tightening our belts [Foreign Language] in an effort with our suppliers to offer a wide range of products, most of them basic items at the lowest prices in our sector so that Colombian families can continue shopping every day at our stores to meet their essential needs. These strategies are permanently developed across 4 Exito brands nationwide. Exito Carulla, Super Inter and Surtimax, as well as in e-commerce channels. Over 80 brands from Grupo Éxito suppliers have joined this initiative to offer in addition to private brands, leading national brands and top SKUs. For the first time, key product categories are included in the strategy beyond food, including entertainment, home [indiscernible] and textiles, while maintaining the promise at the lowest market prices relative to quality. Both customers and suppliers are happy with what we are doing. Suppliers like us know that volume is key for the market share that they are looking for and growth as well in today's challenging environment. These initiatives help them with that. Regarding the quarterly results, which Carlos Mario and Ivonne will explain in more detail, I would like to mention the following. We see that Grupo Exito's consolidated results for the second quarter show a better trend than those of the first quarter. While this demonstrates the company's resilience and its ability to respond to market and customer needs amid macroeconomic conditions impacting regional consumption, we are not satisfied with the profit figures and are aware of the hard work ahead to improve profitability. We know we still have work to do in terms of efficiency and are on it as they say. We remain convinced that we need to transform the company into a more agile and dynamic organization. As I mentioned in the previous teleconference, we are working on this in Colombia, Uruguay and Argentina. Cost reduction, a leaner organizational structure, process simplification and synergies between countries are some of the issues we are addressing to become more efficient, agile and profitable. I would say we are undoubtedly in a transitional and transformational process this year. We're also breaking down barriers between different organizations in the 4 countries and are starting to work collaboratively across the regions. This allows us to unleash the full potential of our people in each country for the benefit of the whole. The challenges we are facing have driven us to seek alternatives to navigate the current situation as effectively as possible, understanding that we have to come out of this period stronger and more efficient than ever. Here, I will turn it over to Carlos Mario and Ivonne, who will provide more details on the second quarter results.

Thank you, Carlos. After Carlos' introduction, I will take you to Slide #6 to go over our consolidated highlights for the second quarter. We have total consolidated revenue of COP 5.1 billion. That is plus 6.5% without FX and minus 0.9% with the foreign exchange impact. The sales in Colombia were flat in pesos. They were slightly positive in volume. In Uruguay, we had sales growing by 4.4% and in Argentina by 192%. Our EBITDA was COP 341 billion that is a margin of 6.7%, decreasing by 13.5%. It is important to highlight that the second quarter EBITDA had a better trend than the first one at 100 basis points evolution versus the previous quarter. We had an increase in free cash flow of COP 130 billion that is growing by [42% to 43%], and the net results decreased by 18.7 -- the net results decrease in -- were negative COP 18.7 billion. We have to again highlight the strength in omnichannel share 11.3% in all the regions, and in Colombia 14.5%. There was a very strong and positive advance in expenses given the big important emphasis that we have done, as Carlos has said before, we had expenses growing by 2.2% in the consolidated level and 2.6% in Colombia. That compares against an inflation of around 7% today, but the pressure of previous year inflation which was above 9%. If we go to Slide #8, we see top line sales being driven by our international operations. Again, in Colombia, we had a sales flat, but the units and volume increasing by 0.3% and this compares against the result of total market measured by [indiscernible], the Department of National Statistics, which in the 12 months between May and May chose the retail total in Colombia going down by 4.4%. It's important to say that our market share in same stores had an important gain, both in food and in nonfood, for the full first half of the year. Being the second quarter even better than the first quarter asset trend. Food sales in Colombia grew by 2.4% compensating with the decrease -- the important decrease that we had in nonfood. In Uruguay, [indiscernible] discount had a food inflation of 140 basis points below the national level. Its sales grew by 4.4%, in line with food inflation. The fresh market continues to drive sales in Uruguay and now represent 59% of the total sales after discount [indiscernible]. In Argentina, the retail sales grew by 192%, but below inflation. The general market was impacted by the adjustment of the government measures designed to reduce inflation in Argentina. Real estate in Argentina had a strong 94.5% occupancy rate and Cash & Carry continues to have an important share of retail sales with 16% share for the full first half. Going to Slide #9. And I want to focus in the next 3 slides because as Carlos said they are an important part of the current commercial strategy, and expense control strategy of Colombia. Let's go first to the commercial focus that commercial focus is around [indiscernible] brands and formats, the best product assortment in the market and a smart investment in innovation around Wow and Fresh pillars. Let's go first to the gradual unification under Exito and Carulla brands. We started this year. For the moment, our plan is to add with 4 potential unification transformations of a full potential of around 150, which should be around in 3 years counting this year. The first [indiscernible] conversions are already executed and their first results are really encouraging in growth of sales per square feet. And up to date, after these 12 conversions that were done by the end of the second quarter with those done in July and August, we have arrived now to 19. And again, I repeat, by the end of the year, we should arrive near to 40 of these transformations. The second thing, and the second part -- the second pillar is assortment. We believe that Exito, Carulla and all our brands are deemed to have the best assortment in the national retail, both in food and in nonfood. This is a contrasting against many banners, which are offering only a very short assortment of products. And this is a value add to our customers. Already 100 stores have increased by around 25%, the assortment that is around 3,000 products and the rest of our stores will be completed by the end of the [indiscernible] third quarter. As Carlos said, we are introducing near to 80 new supplier brands, national leading brands, regional important brands and some private brands. That includes also nonfood, both in apparel and in electronics. The third pillar is innovation continuity with a smart investment in 18 Wow and Fresh stores that is taking to very important 18 stores, the best pillars of Wow and Fresh those with the best ROI that has been experienced in the previous years. An example of some of these pillars are Cocina del Mercado, the electronics, look and feel [indiscernible] the apparel boutiques of architects [indiscernible], the Pets corner and the liquor cellar within others. Let's go to Slide #10, and let's speak about those pillars which are directed to enforce and to improve always our positioning in creating savings to our customers. As Carlos said, not only for this difficult moments for consumers, but as a general trend that we will be keeping in the future. This price pillars start with a very strong, high and low for a customer, especially when the customer has availability of money in the pay days. This is something we are doing in a very close alliance with our suppliers. Secondly, we are reinforcing our well-positioned concept of available prices, around 1,000 SKUs, introducing as innovation SKUs with national leading brands around between 400 and 500 with the alliance with our main suppliers. This assures always the lowest price in each city, and we do not have in 1 or 2 cases, will reinforce 2x the price difference to our consumers to give always the confidence to our customers. This [indiscernible] also includes electronics and apparel massive reference. And then the third figure of savings is taking our promotions of Exito, which are very well known, the 3 promotional events to all the brands. So now the promotions are going to be not only for the Exito brand, but for all the banners at the same time, this makes more efficient the assortment, the negotiation with suppliers, and of course the communication of the event. We recently introduced the 3 weekly strong demand days. They started in July, and they are going forward in a very strong way, and they started very dynamic. [indiscernible] days for Tuesdays in fruit and vegetables; all Wednesdays with meat and dairy products; and all Fridays in liquors and snacks. These [systematic pays] are going also to all our banners. And as Carlos said the first signs that we see are very encouraging. Slide #11. This is the part in which we speak about what we have been doing in cost and expense structures. This complement aggressive sustainable savings plan and process optimization. To obtain a leaner operation, which improves agility and profitability. As a result, we see that in the second quarter, we saw a 2.6% SG&A growth which is around 1/3 the general inflation that we are seeing and this is sustainable towards the second half of the year given the measures that have already been taken and implemented and those that will be implemented in the next months. There is already a plan of captured savings of around $31 million. This includes within others, renegotiation with service and platform supplies, a leaner structure, mainly at headquarters and support levels. The impact on occupation costs, on energy costs and IT contracts and also very important, improving our shrinkage levels. Let's go to Slide #12, where we again speak about sales in Colombia, which were driven in the quarter by [indiscernible] and by food. We had consumer goods growing by 3.1% and fresh products by 4.7% while nonfood sales decreased by 4.2%, given the high interest rates and lack of use of credit cards by the consumers. And of course, the fact that nonfood products are not a necessary in this moment. They are a disposable expenditure, what we believe that as the interest rates go down first, and economy improves. This will be the first product to see an improvement in their sales as has been the trend in previous periods and in previous cycles. The low-cost Surtimayorista consumer goods had a sales increase of 3.1%. Misurtii, which is our B2B app going to the mom and pops, saw a growth 1.7x that is, it multiplied it sales against the previous year quarter by 1.7x. In Slide #13, we speak about omni-channel sales. This is a strong highlight for the organization, especially in Colombia, where the share of omni-channel sales increased by 44 basis points to 14.5%. During the quarter, we had 5.8 million orders. Food sales share was 13.3% in omnichannel. This is top in the region, even including retailers in the U.S. For the total first semester, we had COP 1.1 billion sales that is above $250 million, which makes it very material, increasing by 4.4%. Exito and Carulla apps had an increase in sales of 33%. In Slide #14, we speak about our very strong real estate business. It is ratified as the #1 commercial real estate operator in Colombia with 787,000 GLA, 97% occupancy and recurring revenues growing by 4.6% at a consolidated level, given the fact that we also have a strong real estate operation in Argentina. In Colombia, those revenues grew by 8.5% in recurring terms. We will be opening during the next month a [indiscernible] store in Viva Envigado, which will make Viva Envigado the first shopping mall in Colombia by GLA. Innovation will also come to Viva Mall with [indiscernible], which is directed to new companies and mainly to digital customers. I'll give the word now to Ivonne to go through financials and then come back with some [indiscernible].

Thank you, Carlos Mario. Good morning, and thank you for joining us today. Let's continue on Slide #15 to review the operating performance of the company. Starting with Colombia, as previously presented, net revenues for the quarter up COP 3.7 billion, driven by food, especially the Fresh categories and Omni-Channel. Other revenues grew 1.8%, thanks to the recurring real estate operation and other complimentary business performance that were partially offset by a base effect of development fees in property sales. When excluding this nonrecurring base effect, revenues grew 0.5% in the quarter and 2% in the first half. Quarterly gross margin at 22%, 64 basis points below last year, reflected the price investment for commercial activities and the base effect of property sales and administrative fees accounting for 28 basis point margin loss, compensated by the positive real estate recurring performance that grew 11.4%. SG&A grew 2.6% below inflation despite a [indiscernible] which increased at double digits and the impact of other index expenses. This was achieved, thanks to the ongoing cost control action plans and efforts that amounted COP 78,000 million during the quarter and 132,000 during the first half This actions plans were already highlighted by Carlos Mario previously. Colombia recurring EBITDA for the quarter at COP 230,653 million, decreased 14.6% in the 6.2% rate reflects the impacted sales performance, the inflationary pressures in cost and expenses, the base effect of the nonrecurring real estate income, partially mitigated by the positive contribution from the real estate and other complementary businesses, as well as the strong action plans in cost and expense. When excluding the nonrecurring base effect, EBITDA decreased 9.8% in the quarter and 10.7% in the first half. Uruguay for the quarter with a top line that decreased 7.3% in Colombian pesos due to exchange rate effects. In local currency, a positive top line evolution of 4.6% driven by the non-recurring [indiscernible] and performance of the Fresh market stores, increasing its shares up to 60%. Gross profit in local currency grew 7.4%, above the revenues growth and reached a rate of 36.6%, improving 98 basis points. Thanks to the solid sales evolution, the improvement in logistic costs and better negotiation with suppliers to support their commercial activities. SG&A grew 10.7% in lower currency impacted by labor and occupancy costs. Recurring EBITDA for the quarter at COP 108,821 million, increased 3.6% when excluding the FX effect and with double-digit margin of 11.2%. For the first half, EBITDA grew in local currency 4.6% with margin up 11.5%. The Uruguayan operations remains therefore as the most profitable business unit in the group. Argentina, with the net revenue grew 191.7% in local currency and 8.9% in Colombian pesos. Sales performance reflecting macroeconomic context affecting the consumption and partially compensated by the real estate business contribution with solid occupancy levels at 94.5%. Gross margin at 32.2%, reducing 230 basis points, showing a higher price competition and the increased share of the cash and carry format. SG&A grew slightly below sales growth in local currency, thanks to the ongoing plans and efforts in the cost control. Recurring EBITDA for the quarter reached COP 2,475 million in an almost flat evolution of local currency. For the first half, EBITDA decreased 12.8%. At consolidated level, net revenue reached in the quarter COP 5 million and decreased 0.9%. When excluding FX effect from international operations, net revenues grew 6.5%. Top line reflected the consistent commercial strategy, the omni-channel share improvement in other revenues with positive contribution driven by the performance of the recurring real estate revenue. Gross margin impacted by the slowdown consumption, the price investment for commercial activities to group sales dynamics and the higher base effect of nonrecurring real estate revenue [indiscernible]. In terms of SG&A, the consistent focus and action plans in cost and expense partially compensated the inflationary pressures in wages and other expenses. The second quarter closed with a consolidated recurrent EBITDA at COP 341,931 million with 6.7% margin, reflecting a better trend quarter to quarter decreasing 13.5%. When excluding nonrecurring base effect, EBITDA decreased 10.2%. EBITDA for the first half decreased 70.7% with a margin loss of 118 basis points, out of which 45 basis points are coming from nonrecurring base. Going to Slide 16, the [indiscernible] for the quarter showed [indiscernible] recovery compared to the previous quarter closing with a loss of COP 18,735 million. Net result impacted by the operational contribution that reflected the consumption trend and inflationary pressures in Colombia and Argentina in addition to the devaluation [indiscernible] International operations. The financial business closure with negative effect during the quarter affected by higher credit loss. As compensation, we have the following effects: first, lower nonreturn expenses. Second, [indiscernible] interest-rate negotiations of long-term lines and the progressive reduction of the interest rate reference index. And there's a positive effect in deferred tax due to higher fiscal losses and adjustment of value for assets. First half closed with a loss of COP 56,598 million reflected the lower operating contribution and higher nonrecurring expenses for the restructuring process in Columbia. Going to Slide 17. Regarding the cash and debt position of the company, we would like to highlight a positive free cash flow of COP 130,000 million with a slight net financial debt variation of COP 59,000 million despite the impacted operating performance affected by the regional market conditions. We continue with a strong focus on investment optimization and prioritization to warranty liquidity and cash protection and [indiscernible] environment. Working capital improvement despite high inventory levels to support the commercial strategy that were compensated by a better performance in payables, thanks to the joint efforts with suppliers to boost the sales. As a conclusion of the financial for the first semester, we had a resilient top line performance affected by the slowdown in consumption in our base effect on real estate revenues in Colombia. To highlight the solid omni-channel performance boosted by good sales and the positive recurring results of the real estate business. The consistent and strict cost and expenses, actual plans compensated the inflationary pressures, allowing the Colombian operations to grow its expenses below inflation. The strategic investment in its optimization together with action and control at working capital level led to a free cash flow [regeneration] despite the impacted operational results. Thank you for your attention, and now I give the floor to [indiscernible].

Thank you, Ivonne. I would start by saying that one of the most important decisions taken in the last years is that of gradually unification of our brands under the leading top of mind and better share of market, Exito and Carulla brands. This does not [indiscernible] that we will not invest -- in the meanwhile, in the rest of the brands, they will receive all the commercial strategies while they are being converted. This is a plan that we have for around 150 stores in 3 years. The second one is a strong commercial strategy to boost savings and sales, putting a strong, high and low strategy during pay day times, [indiscernible] days during all weeks in Wednesdays, Tuesdays and Fridays, competitive pricing strategies and strengthening our assortment expansion to all the stores. Like-for-like consistent market share gains during the first semester, both in food and in nonfood. Our Colombian internal food inflation of 1.4 percentage points below the national inflation of 5.27% in pool, which shows the price competitiveness of Grupo Exito at this moment. Colombia with a very solid omni-channel performance with a share of 14.5%, growing food omni-channel by [indiscernible] real estate business, both in Colombia and in Argentina, with occupancy levels at the top, highlighting the 97.4% level in Colombian shopping malls. Both EBITDA and net results are -- had a better trend for the second quarter as compared with the first quarter. Thanks also to our consistent cost control plan deployed. Colombian expenses growing by only 2.6%, which is around 1/3 part of the inflation pressure that we had from the previous year. Strong results in Uruguay remaining the most profitable operation. And finally, I would say, which is very important, the cash position benefited by [indiscernible] cash flow evolution of a growing 42.3%. This would be the conclusion. Now we go to Q&A. And at the end of that Q&A, we will have the final remarks coming from Carlos Calleja.

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

Thank you, everyone, for joining us today. I want to thank the team also for their participation. And before finishing, I just want to reiterate our objective of transforming the company into a more efficient and productive business. Retail is our core, and that's where our focus is. As CEO of Grupo Exito, I am determined to work tirelessly with our team in this ongoing effort. We like to say we have to do things better today than yesterday and better tomorrow than today. There is no expiration date for improvement. Yes, we are facing challenges [indiscernible]. We're also taking the difficult and necessary decisions one needs to take when facing such hurdles and are convinced that we will come out of this period stronger and better positioned than ever. I am convinced these actions will lead to improved results and bring good news for those shareholders who believe in this company. I'm optimistic about the changes we are making and grateful to the team that has embraced them with determination. We are all working together to ensure the sustainability and future of our company. [indiscernible] including Grupo Exito is committed to dignifying the lives of all citizens in the countries where we work, and we'll continue to strive towards this goal today, tomorrow and always. Thank you very much. And have a good day. I think we're all set.

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