Bizim Toptan Satis Magazalari A.S. (BIZIM) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Bizim Toptan Fourth Quarter 2019 Financial Results Conference Call and Webcast. Today's speakers are Hüseyin Balci, CEO; Önder Arikan, CFO; and Isil Bük, Investor Relations Manager, Head of Investor Relations. I would like now to hand over to your host, Isil Bük. Madam, please go ahead.

Thank you. Good afternoon, everyone. And thanks for joining us today to discuss Bizim Toptan's 2019 fourth quarter results. The presentation is now available on the Bizim Toptan Investor Relations website and also on the webcast link of the conference. Before we start our webcast, we would like to thank our former CFO, Özden Erol Dündar, for her valuable contributions to Bizim Toptan. And I would like to wish good luck to our new CFO, Önder Arikan, and we will give a brief information about him. Önder was graduated from Bogaziçi University Department of Business Administration. And then he got his MBA degree from Bogaziçi University. He started his professional carrier at METRO Cash & Carry's Finance Department and later he worked at Joker and Markafoni. Önder joined Bizim Toptan in 2017, and before taking the CFO role, he was the Head of Budget Reporting and Profit Planning department of the company. Today, I am pleased to join the webcast with our CEO, Hüseyin Balci; and our new CFO, Önder Arikan. Our webcast has 3 main parts. Firstly, General Manager, Hüseyin Balci, will explain his comments about the quarter and highlight the outstanding parts. Secondly, our CFO, Önder Arikan, will detail the financial results of the quarter and share expectations of 2020. And thirdly, we will open the call for your questions. Please note that the presentation, which contains the usual form of disclaimer concerning forward-looking statements, can be accessed through our website. The presentation and the entirety of today's discussion are conducted subject to the disclaimer. In the interest of time, we will not read the disclaimer. If there is no objection, we propose to this right into the recourse for the purpose of the conference call. Lastly, please note that all figures are in Turkish lira unless otherwise stated, and rounding differences may occur. Hüseyin Bey, the floor is now yours.

Thank you, Isil Hanim. Esteemed investors and analysts, welcome to Bizim Toptan's conference call for the fourth quarter of 2019. Before I start my speech, I have to say that we are feeling very sad about our market resources and extend my condolences to the families and our nation. May God rest their souls in peace. I want to continue today's conference call. I am very glad to say that 2019 was a successful year for Bizim Toptan by continuing to realize strong results, regardless of the market conditions. I mentioned the market conditions because during the second half of the year, especially during the fourth quarter 2019, market conditions were different than initial expectations. Turkey's CPI decreased to 10% levels on average and customers' confidence index didn't show significant improvement. Under that condition, in fourth quarter 2019, Bizim Toptan continued to increase customer number by 13%. And during the full year of 2019, our key customer number reached to nearly 2 million with an increase of 31%. Total sales and main category sales growth rates are both significantly higher than inflation. Sales to targeted customers groups were remarkable during the fourth quarter. Sales to HoReCa customers increased by 27%, traditional sales growth was 19%, sales to corporate customers increased by 14% and individual customers purchase increased by 11%. On top of that focus in fourth quarter 2019, number of SEÇ Markets reached 801 by beating the year-end target and sales through that channel increased by 61%. As a result, Bizim Toptan not only continued to increase its customer number, it also continued to improve the sales mix on behalf of the loyal and profitable customers. Evidence of that improvement can be seen on the slide. Some of SEÇ, HoReCa, individual and corporate sales reached to 46% of total sales, which is 4 percentage point higher than last year. The successful implementation of channel mix improvement continued to show its results on sales and profitability figures. Bizim Toptan's sales increased by 16% with a strong growth of 21% main category sales. Excluding sugar sales, which was affected by strategic goals, main category sales increased by 23.4%. In that point, I would like to mention 2 things: Firstly, I want to share Bizim Toptan's internal main category inflation. During the last quarter of the year, average main category inflation is about 8%. So it is obvious that Bizim Toptan's real main category growth is around 15% or 16%. Secondly, I would like to highlight our strategy once again. You know that tobacco and sugar sector are 2 sectors that we don't have 100% control over them. And they are not the main focus areas of Bizim Toptan because of their low margins. That's why in some quarters of the year, they fluctuated and then fluctuations shadowed total sales growth. Starting with the third quarter 2019, on top of the market condition, we strategically started to eliminate the bulk sales of that product. Also in 2020, we will deepen our strategy for eliminating bulk sales of sugar and tobacco. Instead of this, we will focus more on main category products. Now I would like to continue with another achievement of our company. By the end of 2019, number of SEÇ stores reached 801. So that means we surpassed both our store number and sales revenue guidance about SEÇ. Also, we continued to increase the coverage of PROSAF. As of December, we increased PROSAF operations to 90 stores in 66 (sic) [ 65 ] cities of Turkey. Profitability ratios were settled down in strong and sustainable levels. During the quarter, gross margin was 11% with a 13.8% main category gross margin. On top of that, Bizim Toptan surpassed 1% net margin even under the IFRS 16 implementation. And excluding the IFRS 16 implementation, net margin increased to 1.2%. Dear all, as being the CEO of Bizim Toptan, I am glad to share that successful quarterly and yearly results. For 2020, our first aim is to make Bizim Toptan a more digital company, which is ahead of the market. For reaching that target, we will finalize our investments, which can be named as of one-off expenses. And meanwhile, we target to show significant real main category growth by maintaining the current profitability levels of the company. We believe that when you finalize the project, everything will be different, both for Bizim Toptan and all our stakeholders. As being the CEO of the company, I strongly believe this. Now I would like to leave the floor to Önder Bey for financial figures and details. Thank you.

Thank you, Hüseyin Bey. Good afternoon, everyone. I would like to thank our former CFO, Özden Dündar, once again, for her variable contributions to Bizim Toptan. Thank you for taking the time to join us on our call today. I am very happy to share Bizim Toptan's sustainable results, which mostly surpassed our year-end expectations. First of all, I would like to start with the sales revenue performance of Bizim Toptan. In the last quarter, total sales increased by 16% and reached to TRY 1.2 billion with 1.7% tobacco sales growth and 21% main category sales growth. Due to the strategic reasons, sugar sales growth, which are counted under the main category, was almost flat. This is why sales figures were partially shadowed. Excluding the sugar sales, main category growth would be 23%, which is nearly triple of average quarterly internal inflation, this was 8%. In like-for-like figures, growth was also significant as we are achieving higher sales with less number of stores. Excluding the sugars, main category like-for-like growth was 25%. In the next page, in full year figures, it is obvious that Bizim Toptan's performance is strong and sustainable, both top line and like-for-like. Total sales reached TRY 4.5 billion with a 21% year-on-year growth rate. Excluding the wholesale growth, it increased to 28%. Main category growth was 24% with a 26% like-for-like growth. Excluding the sugar sales, it increased to 27 percentage growth and 28% like-for-like growth. Our next slide is about SEÇ Markets. I would like to give information about SEÇ Markets, which is another subject of the company. We are very happy to say that number of SEÇ Markets reached to 801 stores by surpassing our year-end targets. Also, Bizim Toptan generated TRY 450 million sales revenues from SEÇ system, which was also higher than year-end targets. Please note that during 2019, we revised year-end targets for the SEÇ 2x. It is obvious that SEÇ system is one of the crucial parts of Bizim Toptan's multichannel sales strategy and its results will be more significant in the following years. With those figures on the diversified customer base and diversified sales mix, I would like to continue with the restrictions on profitability figures. Next slide is about gross profit and gross profit margin. In the last quarter, total gross profit increased by 5% and gross margin reached to 11% compared to 12.2% of last year's same quarter. Excluding the interest rate difference subject to IFRS 18 compared to same period of last year, gross margin would be 13.3%. Main category gross margin was 13.8%, which surpassed its strong and sustainable new normal of Bizim Toptan. Although the interest rates subject to the IFRS 18 have decreased, Bizim Toptan maintained strong gross margins in main category. Excluding the decrease of interest rates compared to same period of last year's, main category gross margin would be 17.1%. In the full year of 2019, gross profit increased by 26% and gross margin increased by around 40 bps compared to last year's. Total gross margin reached to 11.4%, and main category gross margin stands at 14.2%. Now I will continue with operating expense slide. In last quarter, OpEx over sales ratio was 7.2% compared to 7.9% of last year's. However, those figures are calculated under the IFRS 16 implementation. If the figures were calculated before IFRS 18 for during the like-for-like comparison, OpEx overall sales ratio would be 7.8%, with a 10 bps improvement compared to the same period of the to last year's. In the full year, OpEx overall sales ratio was 7.1%. Excluding the IFRS 16 implementation, it will be 7.7% and the exact -- same of last year's. Under the huge increase in minimum wage and all other inflationary cost increases, which happened in the beginning of the year, and our decision to invest to the profitable sales for steel, keeping the OpEx overall sales ratio balance should be mentioned as another success of Bizim Toptan. Let's turn to EBITDA on the next slide. Including the IFRS 16 impact, in the last quarter, EBITDA reached to TRY 62 million and EBITDA margin was 5.3%. If the IFRS 16 implementation is excluded, EBITDA would decrease by 9% and EBITDA margin would be 3.9%. Please note that EBITDA decrease is completely related with interest rate decrease, subject to IFRS 18. Please note that 1.5 years ago, we were talking about EBITDA margins, about 3 and 3.5 percentage. Now we continue to sustain EBITDA margins close to 4%, excluding IFRS 16 impact. This is really crucial and proof of Bizim Toptan's success. During the full year, including the IFRS 16 impact, EBITDA was TRY 259 million. EBITDA margin was 5.7 percentage. Excluding the IFRS 16, EBITDA increased by 34% and EBITDA margin improved by around 40 bps compared to the same period of the last year and reached to 4.4%. Please note that this is the best yearly EBITDA figure of Bizim Toptan that obtained ever. In that point, I would like to say that including IFRS 16 impact, Bizim Toptan surpassed its year-end EBITDA margin target. Also excluding the IFRS 16, Bizim Toptan was very close to its year-end target as well. Let's move to net income slide. In last quarter, including the IFRS 16 impact, net income was TRY 11.3 million by reaching a net margin of 1%. It is crucial for the company to reach 1 percentage target with the impact of IFRS 16. If the IFRS 16 implementation is excluded, net income would be doubled and reach to TRY 14.4 million with a net margin of 1.2%. For the full year, net income reached to TRY 33 million whereas, excluding the IFRS 16 implementation, net income doubled and reached to TRY 43 million. In that point, I would like to highlight that both 2 figures, including and excluding IFRS 16 impact, net income surpassed year-end guidance of the company. Now I want to talk about capital expenditures. During the quarter, we opened 2 stores and closed 1 of our existing stores. So we reached to 175 stores in 69 cities of Turkey. During the quarter, we not only opened new stores, refurbished existing stores but also started investment about digitalization, in line with our budget. So total CapEx spending of the quarter was around TRY 38 million. In the full year, total CapEx spending was TRY 72 million with a ratio of 1.6%. Here, I would like to highlight that in 2020, we are planning to invest in digitalization on top of the new store openings. So total CapEx over sales ratio is planned to be around same figures of 2019. Now I would like to give you information about working capital structure and financial position of the company. We continue our working capital strategy by collecting credit card receivables right after the transaction date. And also, we continue to work on improving inventory management. During the last quarter, market conditions were still suitable for getting benefits from early payment opportunities. So we got benefit from this opportunity. Although we did some early payments to our suppliers, we were able to show some profit by improving negative cash conversion cycle to around minus 28 days. More important than that, we continue to stay in real negative cash conversion cycle without factoring credit card receivables. Let's move to balance sheet structure. Bizim Toptan continued to have a strong balance sheet in last quarter of last year. We continue to stay in net cash position and keep our debt free at FX risk structures. Our total cash was nearly TRY 394 million, including our limited liability, which has amounted to TRY 9 million. However, because of IFRS 16, there are short-term, long-term rental contractual obligations in our balance sheet now. Even if all of those obligations and regular leasing steps are considered, Bizim Toptan continues to keep its net debt position by TRY 230 million. Next slide is about financial expenses. Most of the financial expense is related to credit card factoring expenses. However, we continue to get interest revenue by using excess cash after using it in our daily transactions. The company's last interest yield and interest expense is shown on the slides. We generated TRY 1.9 million gain from that transaction. Moreover, we did some early payments during the quarter and got benefits of early payments about TRY 0.5 million on top of the gross margin advantage. Next slide about company's last 2019 targets and actual figures. We finalized the year with 175 stores. Although it seems lower than our store number target, I have to explain that it has resulted from higher store closures than our expectation. During the year, we opened 5 new stores as we planned, and we closed 4 of our existing stores because of their performance. I am very glad to say that we surpassed SEÇ Market targets, as you know that we had revised up our SEÇ Markets targets 2x in 2019. Now we reached to 801 stores and generated TRY 450 million sales revenue. Our top 3 tell us about revenue growth. Due to lower inflation compared to initial targets and also low growth of tobacco and sugar sales, which is strategic action of the company, sales revenue growth is 21%. Although it seems 3 percentage points lower than targets, main category growth and excluding sugar and tobacco growth figures are 24% and 27%, respectively. Next KPI is EBITDA margin. Including the IFRS 16 impact, we surpassed our targets by reaching 5.7% EBITDA margin. Excluding the IFRS 16, EBITDA margin was 4.4%, which is just 10 bps lower than the target and resulted from interest rate change subject to IFRS 18. In the bottom line, we surpassed guidance both excluding and including the IFRS 16 implementation. In a like-for-like comparison, we doubled our net income and reached TRY 43.5 million. It is TRY 3.5 million higher than our guidance. Including the IFRS 16 impact, we generated TRY 33 million profit, which is also higher than our year-end target. To sum up, I would like to tell that Bizim Toptan has done business in a more sustainable and profitable way during 2019, and it means the management of the company, we named last year as a successful year for our company. Now I would like to talk about 2020 KPIs. This year, we are planning to open at least 4 new stores in net. Also, we plan to reach at least 1,000 SEÇ stores. We believe SEÇ system has already become one of the discount chains in Turkey and it has a huge growth potential. By the end of the year, it is targeted to generate at least TRY 640 million revenue from SEÇ system. As both Hüseyin Bey and I mentioned in our speech, tobacco and sugar markets are partially state-controlled markets because of special taxes and agricultural credit cooperative. In addition to this, both 2 products have limited profitability. Due to that reason, we plan to focus more on main category products, excluding sugar. In 2019, sales of main category, excluding sugar, grew by 27%. This year, we target to grow at least 20% in that category. On the current inflation rates, it is clearly seen that our target is highly challenging. We believe with the new Bizim Toptan business model, we can achieve this target. Dear all, as you know, EBITDA calculation becomes less meaningful after IFRS 18 and IFRS 16 implementations. Due to that reason, we increase our focus more on bottom line. Due to that reason, we are not sharing any EBITDA target. At the bottom line, we plan to keep at least 2019 nominal profit, including our one-off expenses related to digitalization expenditures. We will share a detailed analyze of net income generation and one-off expenses in each quarter. We believe more for being a more digitized and as we see the growing company, we have to this investment in 2020. Please note that these are planned just for 2020 so that starting from 2021, we won't be having any one-off expenditures like this. Before I finalize my speech, I would like to say that we are 100% confident about the future of the company. We are looking forward to sharing sustainable, better results with you in 2020. With this, we would like to start for the Q&A session. Operator, you may now poll the questions.

Are there any questions?

[Operator Instructions] We have a question from Cemal Demirtas from Ata Invest.

My question is about your guidance. Maybe I missed the -- part of it. You mentioned that you have a net income higher than 2019, and you mentioned about one-off expenses. How much one-off expenses -- or like expense you're expecting in the digitalization for 2020? Because the maintaining the -- that nominal value, just giving higher than TRY 33 million looks very conservative and it's a wide range. I don't know. Is there any reason you gave such a number that's almost -- it's wide open? And the other question is about your growth side. You mentioned higher than 20% in main category. What are the expectations for the other, like tobacco and sugar side?

Thank you, Cemal. We don't want to share an exact figure about the one-off expenditures, but we can easily say that if those figures are included under today's condition, we will be sharing at least 20% higher net income guidance for being on the, of course, conservative side because in the beginning of the year and some of the reasons that we all know about global and national political and economic environment, we prefer to share conservative guidances. That's why it seems conservative to you. So on -- being on the safe side, you can assume at least 20% of the -- 20% higher net income figures, excluding the one-off expenditure. What's the second question? It's about the tobacco and sugar...

Yes. The other about sugar -- yes, yes.

Yes. In the beginning of the year, right now, those figures are lower than the same period of the last year because as Hüseyin Bey and Önder Bey mentioned in our speech -- in their speeches, we are trying to eliminate the bulk amount of sales, both on the tobacco side and sugar side. You know that on the sugar side, it's partially a state-controlled market and we have to do early payment for getting sugar. And also, the profit margin of the sugar is limited, which is around 2.53% level, you can assume. So due to that reason, because of the working capital reasons, we don't want to work with the bulk amount of sugar sales because in the wholesalers, mostly when we work with the big wholesalers, we provide some bonuses or some other advantages. And then on top of those figures and the early payment of the sugar, of course, we get some profit on the bottom line but it's limited. Instead of using our cash forming that business, we prefer to invest in main category products for getting profitable and sustainable growth rate. Due to that reason, we are trying to eliminate the bulk sugar sales. And also on the tobacco side, you know that the payment terms of the tobacco is limited compared to the other products, around 10 days average payment terms, you can assume. So because of the working -- using our working capital more efficiently and getting a better profitability ratio, we prefer to invest in main category sales. And after eliminating the sugar and tobacco sales, of course, including payer lower performances, we continue to gather top line growth, which is maybe in line with inflation figures right now. But excluding those products, we are targeting aggressive growth rates.

We have a following question from Berna Kurbay from BGC Partners.

I have got 2 questions, and I'm sorry if I'm making you repeat some of the comments but the line was a little blurry. So just on the one-off expenses that you expect, can you talk about the nature of these expenses? Are these related to digitalization? I think I've got that one. And are we talking about these one-off expenses as part of your OpEx? Or where do we see those in the income statement? And were there any such one-off expenses in 2019? And my second question is, this is more of a technical one, could you please remind us of the IFRS 18 impact that you have in the presentation, which raises the gross margin if this standard wasn't applied?

Thank you for the question. Our one-off expenses are mostly related with digitalization. We will see those expenses on our OpEx side. But at the end of each quarter, we will submit -- we will show you these one-off expenses in separate lines also. So they're digitalization-related figures. The second question was about IFRS 16, right, not 18?

18.

No. IFRS 18.

IFRS 18. Gross margin...

I think you mentioned that the gross margin would have been 13.8% without IFRS 18, but it was 11% in the fourth quarter. So there is 2.8% difference between the 2. What does that exactly entail?

For IFRS 18, we are doing a reclass between our gross profit and below EBITDA about our purchases with payment terms. So if interest rates are getting higher, we will benefit on gross profit margin. But below EBITDA, we have contra-effects. So compared to last year, our interest rates are getting lower. This is why it affected our gross margins and IFRS figures.