Carrefour SA (CA) Earnings Call Transcript & Summary

Hello and welcome to the Deutsche Bank Depositary Receipts Virtual Investor Conference, dbVIC. My name is Zafar Aziz, from the Deutsche Bank team. I'm pleased to announce that our next presentation will be from Carrefour from France. Before I introduce our speaker, a few points to note. Please submit your questions in the questions box to the right of the slides. Also, all of today's presentations are recorded and can be accessed via the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Sébastien Valentin, Director of Financial Communications and Investor Relations of Carrefour, which trades on the Euronext at Paris under the symbol CA and in the U.S. on the OTC Markets as CRRFY. Over to you, Sébastien.

Good morning, everyone. It's a pleasure to be with you today to give you a quick overview of Carrefour, its key strategic pillars and the path that we're going through right now. So I'm Sébastien Valentin. I'm the Head of Financial Communication and Investor Relations. I joined the company 4 years ago and it's been quite an exciting ride. At the time, Carrefour, we were exiting COVID, which had been a interesting time for retailers, for food retailers and notably for hypermarkets, which were pretty much the only stores open at the time. So a lot of challenging comps but we've been able to navigate quite well. I will go through a very quick presentation, overview of the company and then a bit more detail about the strategy and where we stand currently. So as you can see, we operate directly in 8 countries, 6 of them are in Europe, 2 of them are in Latin America. So the core markets for us are France and Spain for Europe. And then we are a very large leader on the Brazilian market and typically with a very strong format on the Cash & Carry segment called Atacadão, which is the leading brand in the country. We have about 80 million household customers, most of them who we know quite well with a strong part of loyalty members, which obviously gives a lot of value because data becomes more and more incremental in this retail world, 15,000 stores across the world, multi-format and omnichannel. This is also something quite specific to Carrefour. We operate hypermarkets, supermarkets, convenience stores and obviously, e-commerce, which is growing actually much faster than physical stores. This may have seen -- has been seen as some kind of a backdrop at some point or weakness. But as time goes by, everybody increasingly understands the virtue of this multi-format presence for Carrefour, which help us keep the customer in a very close loop, know him better, get more contacts and touch points with him. We have about 10 billion transactions in our data lake, which is probably 80% of the transactions we have achieved over the past 5 years. Again, this is critical in the transformation of this industry and typically on a new activity, which is retail media. Retail media is already quite strong in the U.S. I'm sure some of you have seen the earnings made by some of -- by the largest food retailers in North America. It is starting in Europe, it's at a lower level but very promising and we have a very, very clear ambition to be the leader on retail media in Europe. In order to do that, we typically partner with Publicis, which is the advertising company, which provides us with the best technology and we bring our know-how obviously, as a food retailer. We have a very strong ESG commitment. Our purpose is food transition for all, which is to give quality food at accessible prices to all customers. As I said, we have leading positions, #1 in Brazil, #2 in France and Spain. And we are a very large employer. We are the second largest private employer in France, the first largest private employer in Brazil. And obviously, it's a very staff-intensive kind of industry. We presented our 4-year strategic plan, which I will try to sum up -- to sum up here briefly. Obviously, the idea is to make the best accessible to our customer, which is in line with our [indiscernible]. Distinctive offer, private label, the push of private label has been one of the key moving parts within Carrefour over the past 7 years. We started from 20% ballpark of private labels under the previous management team and there was a very clear priority given to private label when our new Chairman and CEO, Alexandre Bompard was appointed. We've come from 20-plus to 37% of private labels and we have a target where we feel very comfortable, which is to reach 40% of food sales in 2026. That has been supported by inflation but beyond inflation that has been supported by a strong push in the range of products that we offer. And obviously, it's a very competitive proposition for the customers. One way to think of it is obviously profit-wise, the private labels are probably 30% cheaper than the national brands for quality, which is actually very comparable and they translate into roughly the same EBIT in absolute terms. So the price is lower, the EBIT is the same. The unique omnichannel model, I just discussed that. The database that we're building, densification of our convenience store network. This is probably the only format in Europe, which still has potential for growth and we're growing faster than anyone with the convenience stores, which obviously help us massify, create more density and again, more access to the customers. A strong commitment to climate change and to fight climate change, we have a carbon neutrality target in e-commerce by 2030 and 2040 for the integrated stores. We are sticking to the 1.5-degree trajectory from the Paris agreements. And we have a very clear rule that we will not sell products from suppliers that do not stick to this rule by 2026. We announced that 2 years ago. At the time, we had 25% of suppliers with that 1.5% (sic) [ 1.5-degree ] trajectory, it is now 47% and we are on track to convince most of them to follow that route. The idea is obviously to optimize the business model. We had the first phase, as I told you, Alexandre Bompard joined Carrefour, as Chairman and CEO, mid-2017. We had the first plan, Carrefour 2022, which was really to put Carrefour back in the game. We were a bit behind competition in different aspects. There has been a lot of transformation accomplished. We met 90% of the targets we had on that plan. And clearly, the new strategy is to give Carrefour competitive edge and be best-in-class in Europe and Latin America. Simpler, better performing model. We are actually mutualizing Europe. This is very new for Carrefour. We are mutualizing purchasing, we're mutualizing support services, back offices, accounting, IT, et cetera. And that will create, obviously, a lot of leverage for improvement. That includes purchasing FMCGs. That also brings obviously a lot of cost savings and we've been quite consistent at cost savings in the company, roughly EUR 1 billion of savings every year, over the past 7 years. Franchise is also critical. It happens in different ways. We franchise very clearly all convenience stores. And then we convert the hypermarkets and supermarkets either to franchise or management leases, which is one way to strip out the cost and strip out cyclicality, increase earnings and that's a model that we like and that we intend to pursue going forward. And obviously, we unlock value from all kind of assets. I spoke about retail media. Just one thing to have in mind, there is about EUR 14 billion or EUR 15 billion worth of real estate within the company, which is actually probably 30% north of the current market cap. So these are the key elements. Big picture. We optimize the European business, which is quite mature with limited supply -- supply growth potential. And then we have growth, obviously, in Latin America, notably in Brazil. A quick word on the performance that we've achieved under this new management team over the past 6 or 7 years, as you can see, this is for France. We started from a quite low point on 1.3% EBIT margin and you can see that the performance has been extremely consistent in terms of optimizing margin. We have a midterm target of 3%. And again, there's no reason to believe that we won't be able to deliver that in the next years. This is obviously based on operational excellence, the way managing the stores. We hear a lot of questions on what's the future of hypermarkets. There is some kind of identity crisis or there was some kind of identity crisis around hypers. We have a very strong conviction that it's a great business, provided it's operated as it should be. So -- and we've seen a lot of improvement in the performance and the profitability of hypermarkets, which is making sure that the customer finds what he wants, that all the key blocking elements for satisfaction are stripped off. And then obviously, cost discipline and I spoke about the cost savings we've been implementing. Obviously, increase in private label penetration increase and support the margin enhancement. Retail media delivers amazing margin, probably north of 50% at EBIT level. So obviously, this is something that we explore and could be a game changer for the entire industry. Profitability of e-commerce. As a starting point, e-commerce was not profitable in Europe because it was free. So the extra cost of preparing the order, delivering the order was not really reflected in the customer's expense. That is progressively increasing because it's a fixed cost business. And so as scale is picking up, we get to a satisfactory level of profitability. We're not completely, or quite breakeven but very close to it now. And again, confident that we will reach breakeven by the end of the strategic plan. Lease management, I discussed that. This is the transformation of hypermarkets in France. And then obviously, the mutualization of Europe, which is starting to bear fruit and generate more profits. This slide also is critical. It highlights the cash flow generation. And cash flow is the central KPI in Carrefour. What we do, if you want to have a very, like 3-second pitch of the equity story, what we do is increase EBITDA in a very recurring manner. At the same time, we have a stable level of CapEx, which is slightly below EUR 2 billion a year. We don't plan to increase that number. Then obviously, there will be bits and pieces, a little bit of tax, a little bit of working cap and those kind of things. But at the end of the day, we grow EBITDA steadily. We have fixed level of CapEx and that creates more net free cash flow every year. And as you can see, the performance has been quite steady. 2023 was a bit specific, obviously, with the inflationary peak that we went through, which had a very, very favorable impact on working capital. So we generate -- we have a structurally negative working cap as everybody in this industry. Generally, that amounts to about EUR 250 million or so. Last year, because of that working capital effect, it went up to north of EUR 600 million, which is why net free cash flow increased so quickly. So what we anticipate, obviously, now that inflation has stabilized, is to go back to this trajectory, which take us to this EUR 1.7 billion target which is the key KPI for the execution of the Carrefour 2026 plan. And again, we now have a steady track record of delivery on that ground. Together with that cash generation, obviously, we have implemented a quite generous, I would say, shareholder compensation policy. As you can see here, we distribute dividends and we've been very consistent in share buyback programs. And as you can see, it's been increasing. Total compensation now was pretty much total net free cash flow given back to shareholders in '21, '22, '23. We decided at the beginning of the year to increase the share of dividend versus share buyback, which was a function of discussions we had with key shareholders, typically European investors, they like dividends a lot, maybe a bit better than buybacks. I know that American investors can have a different view. And then again, the idea behind this is also the fact that dividend is pretty much secure. We have a strong commitment. We will increase dividend 5% minimum every year, whatever happens. This is a commitment from the Board of Directors and from the management team. So you know 100% that this is coming. When it comes to buyback, we are very committed to buyback. We absolutely intend to carry on with this buyback policy. But again, it's not 100% given. So if anything happened, any massive once-in-a-lifetime M&A opportunity, it could be challenged. So this was one way to say -- on this EUR 1-point-something billion that we give back to shareholders, we secure a larger part. So we increased dividend by 80% last year. And again, this is the strategy that we intend to carry on regarding shareholder compensation. A few strategic highlights on what keep us busy these days. These are the key strategic pillars of what we do. Obviously, private labels, I discussed that. It's been increasing. Actually, we had acceleration in the pickup of private labels in 2023. We have a conviction that national brands were probably a bit aggressive in taking advantage of inflation to increase profits. At the same time, we were a bit more conservative on private labels. And so the gap in price has increased. It used to be 20%, 25% cheaper than the national brands. And now we're probably 25% to 30% cheaper, which obviously makes it even more attractive for the customer. So we gained 3 points last year coming from -- 34% to 37% of food sales coming from the private labels. We do not anticipate any kind of way back. It's always pretty solid when consumers start buying the private label. So obviously, there can be some reluctance sometimes saying, maybe if it's 25% cheaper, maybe the quality is cheaper. But we all know that's not the point. We know that the difference in price predominantly comes from marketing and packaging and so on. So the quality is really very comparable. Actually, we test products before we launch them and blind test with customers. And as long as it doesn't match, the satisfaction of the private brand, we don't sell it. So we're confident on that. And we know that we can build on this 37% to go to 40% by 2026. We can probably go a bit higher than that. So we will carry on with the strategy. But at the end of the day, there is a limit to it because as we operate a large number of hypermarkets, we need to provide a choice to the customer. You visit a hyper because you want the choice, you need the private labels, you need the national brands. E-commerce, as I said, is a key pillar of our strategy. Digital is a key pillar of our strategy. Alexandre Bompard said, a few months ago, you cannot be a retail leader, if you're not a digital retail leader. We invest a lot and we have more than EUR 500 million of IT CapEx every year, IT and digital. We are probably state-of-the-art when it comes to e-commerce and retail media in Europe. Unlimitail is the joint venture we created with Publicis on this activity. Not only it handles retail media for Carrefour but we also act as a marketing and advertising agency for other retailers. We have about 30 smaller food and nonfood retailers in Europe and LatAm that are actually customers of Unlimitail, so we act as an advertising agency, we charge fees and this is also growing nicely. Then a couple of words about M&A. We acquired Grupo BIG in Brazil in 2022. It was the former Walmart operations in Brazil, which we bought from Advent. The integration has been a bit complex because we closed the deal at the time when the market in Brazil was turning down actually. So we took advantage of this to speed up the integration process. We converted all the stores to our brands, to Carrefour and this Cash & Carry concept of Atacadão. It also gave us a few Sam's Club stores. I'm sure you know Sam's Club probably better than I do because they're not in Europe but it's a very successful banner. So we have -- we started with 5 and we now have 10 Sam's Club in Brazil and it's growing very nicely and generates high profits. And then last year, we announced the acquisition of Cora and Match in France. Cora was #7 or 8 in the French market. And actually, it was an acquisition, which will create tremendous value. We talk about probably around 4x EBITDA post synergy, which obviously is very good money at work. We are in the process of integrating the stores. We will convert the first Cora stores, which is the hypermarket brand, probably in the next couple of weeks and the plan is to be complete before the end of the year. Match is a very nice supermarket brand, which is in the Northeast of France, which is where we have the smallest presence, very complementary. And we will keep the brand as it is because the brand equity in the region is probably stronger than the Carrefour market. Label. Then again, to talk about expansion briefly. As I said, most of our expansion is in Brazil with Atacadão, which happens to be the most profitable format in the company, generates probably north of 5% of EBIT margin. And again, this is the fastest-growing brand within the organization. We actually tested Atacadão with the first opening in France a few months ago. We're not sure about the opportunity for the market in Europe. It's something that's not really present in Europe today. But again, the business is so great and the model is so great that we felt we really had to test it. So we have this first franchisee, which opened 2 months ago and depending on the performance, we will see if there is a way to grow Atacadão more in Europe. A few words about the key financial highlights for the first semester. So we had sales up 12.1% like-for-like at EUR 40.6 billion. We generated EUR 500 million of cost savings, which is part of the very recurring savings that we generate. Again, we have a target of EUR 1.2 billion for this year. So half year, we were really on the right path. EBIT of EUR 743 million, up 6.2%, driven by Brazil, where we do see recovery. Obviously, Europe is a bit more sluggish. We are in these interesting times in Europe where, obviously, we aren't done with the crazy inflationary peak that we went through mid-'22 and over 2023. We are at that point where we do see purchasing power of European customers getting better. But for the moment, it has not completely translated into any kind of pickup or trading up in customer habits. So volumes are still marginally negative in Europe. And we start to see very initial signs of improvements in customer behavior. Typically, just a couple of examples, organic food, which has been the first segment to be hammered with the inflationary peak, were negative high single digits. They're back to positive since June. We are mid-single-digit positive on organic. And national brands, as I said, probably with the wrong pricing policy through the inflation are now getting a bit better. So these are the first things that we'll see. We have confidence that things are -- will get back to where they were before the inflationary peak but it's difficult for us to get a sense of timing because we have no benchmark. The last time we had such an inflation in Europe was probably 40, 50 years ago, the food retail had nothing to do with the current market. So it's going the right path, slowly but surely, that -- at least that's our feeling. And obviously, stable performance in free cash flow over H1 and confidence on this good level of cash flow, which I highlighted before, when it comes to the full year. I have a couple of slides about M&A. We discussed already, Grupo BIG. So again, EUR 2.3 billion of run rate synergies were achieved on that transaction. We paid EUR 6.5 billion -- sorry, BRL 6.5 billion for the acquisition of Grupo BIG. We raised the synergy number to EUR 3 billion by the end of 2025. So again, very, very good money at work, leadership consolidated in the Brazilian market. As I said, at the time of the acquisition, the markets in Brazil was not supportive. We delivered a lot of cost synergies but there was no top line synergies just because the market was so negative. We now have some recovery -- very clear recovery in Brazil since the beginning of the year. And on top of these cost synergies, we now have top line synergies and this is why we have capacity to increase this target. We did a few adjustments in the portfolio. We sold some nonprofitable stores where we analyzed that there was no potential to do much better, which is also supporting the performance. And again, this is definitely driving the performance of the overall Carrefour Brazil in the country. And then Cora and Match, as we discussed, 60 hypermarkets in France and 115 supermarkets in the Northeast of France. We paid EUR 1.05 billion for the acquisition which, again, consolidates our leadership, takes us to par level with the #1 food retailer in the country. Obviously, some synergies there. Maybe I can take advantage of this slide to give you just a quick explanation of how we think of M&A. We do have appetite for M&A. We are a natural consolidator in this industry, because of the scale of our balance sheet, because of the scale of Carrefour. And we get a lot of propositions from sellers. We obviously decided to focus purely on the markets where we already have presence. We are not contemplating any new market. So that would be the 6 European markets and the 2 Latin American markets, midsize deals probably, there are no real massive leaders or players that could be multibillion-dollar acquisitions, we don't look at that. And the way we operate is very simple. We strive by assessing the strategic appeal of the target. Is it complementary from a geographical standpoint, like is the case for Cora? Is it something that we can convert to our brands? Is it a market niche that we would like to explore? So typically, we did some acquisitions on organic brands for food retail. If there is a strategic appeal, then we will dig in the numbers, trying to assess the level of synergies that we can generate. And based on that, we can define what's the facial price we pay that take us to an accretive transaction for synergies. If there is a way, we're happy to do it. If it doesn't work on the finance, we will pass. And actually, we pass on a very vast majority of the opportunities that arise in terms of M&A. So these were the information I wanted to share with you. I'm happy to take your questions.

Okay. So the first question is why are you entering the Indian market with the Apparel Group when it wasn't successful for Carrefour in the past? That's a great question. Actually, the answer is in the question. India, China, for that matter, are definitely countries where you need the local presence. It's much easier to do business in India, if you're Indian and we believe that we have the right local partner. It's risk-free for us. It's a master franchise contract. There's no money at work from Carrefour. They will act as a master franchisee and grow the brand on our behalf. So it's fairly marginal, I would say, in terms of economic impact. But again, growing the visibility for the brand. We will sell a little bit of private labels to these stores. And this is why, again, it's a risk-free operation, which just grows our presence at the global level. It's interesting and there can be great promises in this country, which is not an easy market. Should we expect a onetime bump in revenue from the Olympics? Yes but small. We did see a bump in summer during the Olympics. It was pretty much restricted to the Paris region. So it's just a few millions and again, that's not a game changer at the level of Carrefour. That said, it was very, very positive from a image standpoint. The buzz around the Olympics was wonderful, as you probably saw and the image of Carrefour inside, within this event was great. So very positive feedback from customers, very positive feedback from employees. There was a lot of activation that was made internally at the time of the Olympics and it creates a lot of involvement, I would say, from everyone, customers, employees, et cetera. It was a pretty big success. How do we plan to improve margin in face of rising costs? Well, this is something that we've been able to do quite regularly over the past 6 or 7 years. So part of that is you cannot really manage to do that if you don't turn around every stone, which is what we tried to do, being better on the top line, being better at what we do within the way we service the customers and then huge discipline on cost. That is absolutely critical. As I said, we generate EUR 1 billion of savings roughly every year, which is organization, which is renegotiating, which is making sure that everybody -- everything is to the bone, which is the way this business should be operated. We have methodologies in our stores. Typically, a few years ago, we implemented a new method to prepare the stores in the morning to fill the products in the alleys and so on and we gained 2 hours in the morning. So instead of opening -- or staff joining store at 3 a.m., they now start at 5 a.m. And consequently, we save 2 hours of night shift and they finish their shift at 1:00 p.m. instead of 11:00 p.m. (sic) [ 11:00 a.m. ]. And that means that they are in the store between 11 and 1 and they're here to service the customers, to help them and that creates, again, more satisfaction, better satisfaction rate from customer, more stickiness. And so you need to do your business properly. And then again, we do see margin improvement coming from the European mutualization. When we mutualized national brand purchasing from -- out of Madrid in our central platform that creates better margins. The organization is constantly reviewed. So it's a constant focus. In this business, if you want to be good, you need to sell cheap. And if you want to sell cheap, you need to operate cheap. And you also need to improve your margin. And this is what we -- that we do. And again, I think the track record we have is critical. Growth drivers for 2025. Well, the growth driver for 2025, hopefully, we'll get to some recovery in Europe. As I said, we've been through tough times and pressure on volumes. We have seen negative volume for food retail in Europe for the first time since World War II. And as I said a few minutes ago, we do see some signs of trading up after 18 months of trading down and we see that purchasing power is improving. So at some point, it will translate into better volumes and obviously, better volumes will obviously support profitability and this will be an important growth driver for Europe. As I said, what we do for growth in Europe is make the business better. We don't really grow supply, except for convenience stores but we don't open any hypermarkets or supermarkets. So growth is more people in the stores and then better way to operate the business to improve the bottom line. And then obviously, we have growth in Brazil, where there is potential for expansion. So these are the drivers that I would highlight. One question on AI. I still have a couple of minutes left. How do we use AI and data analytics? This is absolutely critical and it impacts everything we do in the business. So we obviously understand the customer much better and we know how to service him better. We know how to target the customer better in the proposition that we can have on loyalty programs and promotions and all those kind of things. We also use AI for assortment, in order to place the right orders, in order to optimize inventories in the stores, et cetera. So it is really picking up in a very clear way and that's been the case probably for the past 18 months now. It is actually difficult to give you a sense of where AI will take the industry over the next 3 to 5 years, just for a simple reason, which is that I think today, nobody really understand what AI will actually be in 3 or 5 years. We know that it's increasing exponentially at crazy pace. The opportunities that we get from AI are changing probably every month or every week. So we stay very, very close to this. We actually have great partnership with some of the greatest developers of AI and I'm thinking of Google, for example, which is a key partner for Carrefour, it is absolutely game-changing for this industry. I think I have about 20 seconds left but I'm done with the questions that I can see here on the chat. So thank you very much to all of you for your time. And obviously, myself and my team, we're happy to answer any additional questions you may have. We're quite easy to find. Thank you very much.