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

Welcome to Bizim Toptan First Quarter 2020 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 will now hand over to your host, Isil Bük. Madam, please go ahead.

Thank you. Good afternoon, and good morning, everyone, and thank for joining us today to discuss Bizim Toptan's 2020 first quarter results. The presentation is now available on the Bizim Toptan Investor Relations website and also on the webcast investor conference. Today, I am pleased to join the webcast with our CEO, Hüseyin Balci; and our CFO, Önder Arikan. Our webcast has three main parts. Firstly, our CEO, Bey Balci, will explain 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. And thirdly, we will open the call for your questions. Please note that the presentation, which contains the usual formal disclaimer concerning forward-looking statements can be accessed through our website. The presentation and entire cover 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 take [indiscernible] into the record for the purpose conference call. Lastly, please note that all figures are in Turkish lira, unless otherwise stated, and [indiscernible]. Hüseyin Balci, the floor is now yours.

Thank you, Isil. Bizim investors and analysts, welcome to the Bizim Toptan conference call for the first quarter of 2020. I hope all of you and your loved ones are healthy and safe under the COVID-19 situation. I wish [indiscernible] and healing to anybody who are here right now. And I hope that pandemic will be over both in our country and across the world. This sad pandemic is an extra ordinary situation for all of us. I would like to start my speech by giving information about the precautions that we have taken against it. First of all, I would like to highlight that we have 2 main purposes under COVID-19 situation. First one is protecting the health of our employees and our customers. And the second one is providing uninterrupted service to the public. For keeping employees healthy and maintaining the sustainability of sales force, we announced obligatory rules for all of the employees who work in stores and there others. I would like to tell some of [indiscernible]. Each employee has to use medical mask and medical gloves, which we have provided for them. [indiscernible] are done washing hands and faces. Afterwards, masks and gloves must be changed with the unused ones. Sales force have to use face shield. All of the employees have to keep social distance in common field. Also, and based on company management, we did analyze and make plans in case of any risks. So sales force was divided into 2 groups and single shift working as we are present for minimizing the infection risk. We have supported to store sales force to customer representatives and distribution staff. Also, we hired new employees and increased the headcount. In addition to these actions, we have taken precautions for the health of our customers for that purpose. All of the stores have been disinfected regularly. [indiscernible] and metals faces are disinfected frequently. [indiscernible] are presented after each customers. We provide [indiscernible] in the absence of the stores for customer usage. We have given the customer numbers while accepting then inside of the stores. Also, in [indiscernible] [ 15 minutes ] announcement about the precaution and social distancing are done. Here, I summarize some of the actions that we have taken against COVID-19. Now I would like to continue with some key figures about customer site. Firstly, during the first 3 months of the year, we have [ surpassed ] 1 million customer number [ with a ] 25% increase compared to the same period of last year. Meanwhile, number of the B2B customers increased by 3%, which is again critical under this circumstances. On top of that, in first quarter 2020, number of such markets reached 845, in line with our year-end target and sales to the channel increased by 69%. Not limited to this, based to others have customer growth were remarkable as well. During the first quarter, Phase [ 1 ] individual customers increased by 47%. Phase [ 2 ] corporate customers increased by 22%. HoReCa channel grew by 14% and traditional sales growth was 5%. With that improvement sales mix towards lower unprofitable customers, some of such HoReca, individual and corporate sales reached to 52% of total sales, which is 9 percentage points higher than the same period of last year. The successful implementation of multichannel case model is one of critical features of Bizim Toptan, which makes the company resilient to any macroeconomic or market dynamic changes. We experienced the benefit of the [indiscernible] in the quarter, and we think we will get more benefits of that strategy in the following quarters as well. As a result, during the quarter, main category sales, excluding to sugar and tobacco, grew by 28%, which is more than double of the internal inflation. But also it is more than our year-end growth targets by reaching [ 11.2% ] gross margin. We not only continue to provide best prices to our customers, but also maintain strong and sustainable profitability margins. Although we have one-off expenses -- we have one-off expenses by generating net income in line with the guidance. We showed all determination for keeping our promises to all stakeholders. Here, as [indiscernible], the CEO of Bizim Toptan, I can say that not only Bizim Toptan increased, also all of the retail and [indiscernible] employees are working [indiscernible] for providing service to public. I would like to thank them for their efforts. And before finalizing my speech, I would like to highlight my confidence to Bizim Toptan's strong multichannel sales strategy for generating better results under any circumstances. Now I will leave floor to Önder. He will continue for detailing the financial figures. Thank you.

Thank you, Hüseyin Bey. Good afternoon, everyone. Thank you for taking time to join us on our [indiscernible]. I hope all of you and your loved ones and happy and safe under the COVID-19 situation. I would like to start with the [indiscernible]. Bizim realized [indiscernible] first quarter [indiscernible] and like-for-like is again. In line with our strategy, in particular sales, excluding the sugar and tobacco, increased by [ 78% ], which is 99% like-for-like growth. [indiscernible]. This is significant support of mix sales. Total fee revenue increased by [ 15% ], and these [indiscernible]. Due to the decrease in [indiscernible] sales by [indiscernible] [ 36% ], top line growth was [indiscernible]. Also [indiscernible] consumption market was affected because of COVID-19 pandemic. Bizim Toptan market share [indiscernible] was adopting [indiscernible] to change in the market conditions. Thanks to the marketing sales model, it was easy for us to cover the negative effect of COVID-19. [ TAG ] system in due to customers, traditional channel and potions are the group of customers, which -- higher than the previous one. Like the last quarter, each market continues to be one of the [indiscernible] top line. We are [indiscernible] to say that number of stage markets reached to 845 stores as of the first quarter's, in line with our [indiscernible]. Also, Bizim Toptan brought its own reports in hedge by generating TRY 147.1 million revenue during the first quarters. Also, fixed procurement ratio improved and reached to 67.5%. I believe Bizim Toptan [indiscernible] by customer base and [indiscernible] will be supported for showing continuous and strong growth moving to whole year, and that is of the scenarios, which could happen under the COVID-19 situation. I would like to continue with profitability figures. In the first quarters, Bizim Toptan continued its strong contributed strong [indiscernible] and cash book gross margin level. Moving to quarter's, total gross profit increased by 11%, and gross margin reached to 11.2% compared to 11.5% in the same quarter last year. Excluding the interest rate decrease, subject to IFRS 16, compared to same period of last year's, gross margin would [ be ] 12.9%. If we eliminate both the IFRS 16 [indiscernible] reclassification in both years, gross margin would be 9.9% in last quarter's. That is, it was 8.6% in the same period of last year's. Main [indiscernible] gross margin was [ 13.2% ], which can a strong and sustainable new [indiscernible] as well. Also the interest rate subject to IFRS 16 has decreased. Bizim Toptan maintained a strong gross margin in main contributing again. Excluding the decrease of interest rates compared to same period of the last year, Bizim category gross margin was 15.4%, owing to customer category mix improvement in gross margin side. Now I will continue with operating expense, right? In the first quarter's, OpEx increase was 30.3%. OpEx over sales ratio was 8.4 compared to 7.4% of last year's. Around 1.5 million [indiscernible] related to the expenses and around 1 million [indiscernible] digitalization and [indiscernible] operating [indiscernible. I want to highlight that, excluding one-offs, OpEx increases realized mean category sales increase. Let's turn to EBITDA on the next slide. EBITDA slightly decreased by 11.4% and reached to TRY 51.6 million compared to same period of the last year's. EBITDA margin [ stood at ] 4.4% in the last quarter's compared to 5.7% of the same period of last year's. Interest rates decreased subject to the IFRS 16, the reason of the EBITDA margin, which seems lower than the same result of last year's. Although it gets strong and not in normal level. If the interest rate decrease is eliminated, EBITDA margin would be highest around 1.7 percentage points than current level, actually the improvement of [indiscernible]. Let's move to the net income slide. In first quarter's, net income was TRY 3.8 million [indiscernible] last year's same quarter's level, in line with the guidance. Also, we announced a guidance in line with the last year's. Net income would be near double of this, excluding the one-off expenses. It is as I mentioned those one-off costs, which was to [ pass ] around TRY 2.5 million. In the next slide, the bridge analysis create a short improvement of net income at its real evaluation. Each [indiscernible] one-off cost and the discounted discrete, if income will stay higher than it was [indiscernible] of last [indiscernible]. We prefer to show the same bridge analysis for displaying the potential of the company in the following quarters. Now I'd like to talk about capital expenditures. During the quarter, we opened 1 store and closed 3 of existing stores. Meanwhile, we continue the construction of the 4 stores, 3 of which has already opened in April. So we reached 173 stores by the end of the quarter. However, we are on track of our store opening plan. Also effect here project regarding the ERP system has been continued according plan. As a result, during the quarter, total CapEx spending was around TRY 8.4 million, with 0.7% CapEx-over-sales ratio. Now I would like to give information about working capital structures and financial position of the company. We continue our working capital strategy by collecting credit card receivables right after direction day, and also we continue to work on improving inventory management. However, because of the COVID-19, we invested on inventory [indiscernible] to customers' demand. Also we did preparation for the Ramadan period, this by total amount of inventory and inventory days were increased. During the quarter's, market conditions were still suitable for getting benefits from early payment opportunities. As a result, we did some repayment for getting better prices. Let's move to the balance sheet structures. Bizim Toptan continues to have a strong balance sheet in the first quarter. We continue to stay in net cash position and keep our debt free and it is this structures. Total cash was [ nearly ] TRY 390 million, including [indiscernible] supply [indiscernible], which is amounted TRY 11 million. However, because of IFRS 16, there are short-term long-term landfill contraction obligation in our balance sheet now, even if all those obligations and the [indiscernible] leasing step [indiscernible], Bizim Toptan continue to keep its net cash position. Now I would like to talk about our [ 2020 ] plan. We mentioned our united CPI with a strong [indiscernible]. We know that economic condition travel time and effect of COVID-19 into economy is escalated. We trust Bizim Toptan still strong [indiscernible] and elastic business model. You know our potential is higher value. But for now, we prefer not to change any part of our guidance. We are looking forward to sharing sustainable -- results this year in the second quarter of 2020. With this, we would like to start for the Q&A session. Operator, you may now all the questions, please.

[Operator Instructions] The first question comes from Gorkem Goker from Yapi Credit.

I have a couple of questions. First, could you please share your new store opening guidance for 2020? You closed 3 stores in a single quarter. When compared with previous years, I guess this is somewhat high and 6 new stores in the rest of the year. Do you still maintain that target? And could you please provide a timetable for that? And also regarding the contraction on your tobacco and sugar sales, could we take first quarter results as this for the rest of the year? And on a quarterly basis development, what are your expectations? And lastly, we see an increase on your staff personnel number, the highest figure for staff on a quarterly basis on end-of-period numbers. I mean, I missed the first part of your presentation. If you have already talked about it, sorry for that, but how your personnel expenses should develop in the rest of the year.

Thank you for the question. First of all, for closing, we closed 3 of our stores. One of the tariff-related with the Earth Cape in the Energy Area. We closed down our [indiscernible] stores. But now we are -- we already displaced it in new stores. There are some unplanned store closings related with nature of [indiscernible]. But at the end of the year, we are still promising [ to ] store numbers. In our guidance, we would end up with 179 stores at the end of the year. Second question, tobacco sales. Both tobacco and sugar mean controlled by the government. As for instance, after the pandemic, environment is a little bit different than this first month. So in April, we are experiencing the sales increase in tobacco. So we -- I can say that it will continue as the first quarter of the year. Currently, we are performing because on tobacco, the U.S. but sugar is still in line with our results in the first quarter's. The third question about staff increase, right? That shouldn't be --

[indiscernible] We have [indiscernible] increase. We have increased some of staff for the new store openings. As we mentioned, in the second quarter's, we have -- we'll be opening some of them -- 3 of them, we have already opened. In the second quarter, we'll be having 4 new stores. So due to that reason, in the first quarter's, we start to hire the related person now for that. And also after the COVID-19 situation, of course as the -- a higher demand of the customers, we hired some additional personnel. Also we prefer to hire them for -- as a precaution for any [indiscernible]. And also we hired some personnel for our macro distribution system professional sales force. So due to that reason, on [ 4 ] stores, tough numbers, it seems higher than the previous year. This is completely related with the pre-opening employment and COVID-19 related employment and also the professional sales force. And the total cost of the -- so for example, the personnel cost increase, most probably in line with the first quarter figures for the whole year's.

[Operator Instructions] The next question comes from [indiscernible] from Dennis Infest.

I hope you can hear me okay. I was wondering how do you see your margin evolution for the remainder of the year. Obviously, there is some decline in gross margin side, particularly on the main categories. And I was wondering how you see the gross margin evolution from here and perhaps also the EBITDA margin. And my second question is regarding your HoReCa business. Can you talk a little bit about the performance of that business because all the restaurants and cafes, when most of the offices are closed at the moment. So how we should see the situation there? And maybe you can also talk a little bit about your HoReCa-specific stores. As far as I can remember, you had those stores in your portfolio. How you see the performances there? And are they, I mean, virtually shutdown or anything like that?

Yes. First, HoReCa question. Currently, as you mentioned, most of our customers have closed down. So in April, we are experiencing sales decrease on that side. But as I mentioned, we talked on like a plane with multiple engines, so we can cover the sales force from other channels. And for the HoReCa, could be in the company, they are also working but what happen after the pandemic, after -- I can't say even being normal because all the standards in the restaurants, in the cafes, all will be changed. And we are trying to adapt ourselves to change market conditions, changing customers' behaviors. So we are looking at our product portfolio. We are taking us approach to the new normal. First -- yes, and financial, currently, we can't cover growth coming from HoReCa-related business by individual traditional channels. And we believe that under current circumstances, we can deliver the results we promised in the beginning of the years. Gross margin, as we mentioned, [indiscernible] our main contributed sales increasing by almost 30%. And our low-margin businesses like tobacco and sugar is decreasing. This is also why we can generate gross margin improvement, excluding the interest rates. As a company, we are trying to focus on most profitable, sustainable businesses. And we will deliver our promises, our guidance -- under our guidance. And [indiscernible], we will try to increase our gross margin and EBITDA margin. That's why we have higher gross margin that compared to previous years, but also highest OpEx over sales ratio compared to previous year. But our OpEx [ decrease ] is less than our gross profit and main category sales increases.

Maybe in that point, I can highlight that when we exclude the discount effect of the IFRS 16, we don't see a gross margin decline. In contrast to this, we are improving our gross margins more than 1 percentage point, as Bey mentioned in the speech. Excluding all of the IFRS 16 impact, the gross margin increased, I guess, [ 100 and ] can be sort of something like that. And when we calculate main category gross margin and also the total gross margin the same discount rate of the same period of last year, I can say that both the main category gross margin and the total gross margin and also EBITDA margin is higher than existing figures, around [ 107 ] basis points. So due to that reason, the sales mix and the customer has improved. And now we are seeing the positive reflection when we exclude the rediscount rate impact. Meanwhile, you mentioned some [indiscernible], but in some of our stores, our professional sales team some micro distribution for the HoReCa customers, but now we don't have a [indiscernible] stores. Now all of the stores are accepted for other customers. So due to that reason, we don't do any strategic change in our stores. The store loss are related with earthquake. And that occupational has regulations related. And so due to that reason, regarding the HoReCa cost insurance under the COVID-19, we don't do anything like the store closure or something like that. And also maybe we can highlight the situation of the APPRO because we -- now we are experiencing the real impact of HoReCa customers in April because the COVID-19 announced in the 11th of March. So during the first quarter, the HoReCa customers impacted [indiscernible]. But now in April, we can directly see the impact of COVID-19 on the HoReCa customers. I mean the basis for the home quarantine and some hotels or small hotels, like the cafeteria, restaurants, most of smart stores are -- they are not performing well. So due to that reason, our declines -- our sales for this customer decline. However, with the half of them, market sales strategy, we can't lift the eliminated sales decline. And on top of that, we are seeing better figures from other customer segments. So in April, our figures both the top line and the main category, excluding the sugar, almost to March, at least the same as the first quarter average. You can assume maybe slightly better figures than the first quarter's growth rate. Although, of course, the customers are affected due to the COVID-19 situation.