Central Retail Corporation Public Company Limited (CRC) Earnings Call Transcript & Summary

[Foreign Language]

[Foreign Language]

[Foreign Language] Good afternoon, everyone. Nice to see some of you, again, analysts and some new names and also fund managers as well. For the first section, I will talk a bit about the financial side, and I'll go into a bit about the business in Thailand. First of all, I'm very happy to announce a very strong quarter both in the top line and bottom line, in which they both came in, in line with our target, and in some areas, actually slightly above as well. As you know, last year, or 2 countries which is Thailand and Vietnam, we were hit by COVID starting in Q2 and then it ramped up in Q3. So if you compare the numbers year-on-year, our numbers will be excellent year-on-year because of the low base last year. So in some of the slides that we'll present to you will also be Q-on-Q. So you can also see the good recovery that we are showing post-COVID from end of last year and continuing to Q2 this year. Let me start with the revenue. We are growing -- or we grew 23% in Q2 year-on-year to THB 56.8 billion. Our core EBITDA has grown 77% to THB 7.365 billion. Again, this is from a good rise in sales, increasing gross profit margin and also excellent cost savings as well. And our core NPAT has grown from a negative in Q2 last year to THB 1.967 billion. This is our core NPAT. It excludes foreign exchange translation loss and also one-off or right one-off items. If you look at the bottom left, it shows the mix of our sales and our mix of our EBITDA. You can see that the pink part of the pie at the bottom has grown from last year, 22% to 25%. So fashion is recovering fast, both in Thailand and also in Italy. Food remains the same at 39% contribution and hardline dropped a bit from last year, 39% to 36%. This is not because hardline had a negative growth, but because the growth in fashion and food is higher than hardline for Q2. If you look at EBITDA, the fashion contribution has increased dramatically from 22% to 44%. Food and hardline dropped a bit because of the higher growth and higher improvement -- better improvement in fashion bottom line as well. If you look at the margin, our margin in all segments are -- have improved in hardline, in food and absolutely in fashion. If you go to the next slide. This is the first half. I won't dive into too much, but just again, reviewing the numbers. This have been positive, 19% on the revenue side, 45% EBITDA, and also NPAT, again, from an amount of THB 152 million to THB 3.2 billion on the core NPAT. And again, similar to on the quarter side, fashion sales mix has increased both on sales and a lot on the EBITDA side. Next. Our revenue is actually split into 3 components, the sales of goods, rents on service income and also other income. This slide will show you both the year-on-year and also the Q-on-Q. If you look at the left-hand side, the sales contributes about 90% of our revenue. It's similar growth on year-on-year as our total revenue of 22%, but in terms of Q-on-Q, it also grew 1%. This is not a normal situation that regularly happens because typically, we're in a seasonal period where Q2 is slower or lower than Q1. But because of the good recovery in fashion in some of the businesses, Q2 is now higher than Q1 for this year. If you look at first half, again, it's 19% over year-on-year. Rental and service income grew 32% year-on-year and 11% Q-on-Q, primarily from the best operation in Thailand and Vietnam, expansion of 2 big locations in Thailand and Vietnam and also a lower discounts in both of our countries. If you look at the other income, which primarily is promotion income, logistics income, on year-on-year basis, it grew 20% Q-on-Q, it dropped slightly 4%, for the first half grew 13%. Again, you can see that all of our income drivers have a good growth year-on-year. In terms of EBITDA, again, we have shown excellent performance mainly coming from sales, higher sales, better gross profit margin and also good cost control. If you compare with Q1, we have grown 13% Q-on-Q. And if you look at the bottom, EBITDA margin to revenue sales, it has increased from last year 9% to 13% this year and also increased from Q1 11.5%. So again, we can see that we are in a very good recovery, not just on the top line, but also on the bottom line Q-on-Q. In terms of the core NPAT, you can see that Q-on-Q, good growth of 61%. In terms of the margin, last year was negative, Q1 was 2.2%, and this year, it's 3.5%. Next, now in terms of our gross profit, again, apart from our sales recovery, we're seeing healthy gross profit being driven primarily from a fashion recovery in both Thailand and also Italy. Food has remained flat versus last year. And hardline has dropped a little bit from last year. But if you look at Q-on-Q, hardline is increasing as well. If you look at the graph on the left-hand side, first, again, the improvement is about 200 basis points, both year-on-year and Q-on-Q. And if you look at first half, the improvement is about 145 basis points year-on-year. In terms of the GP on the rental and rendering services, it's also showing a slight improvement from year-on-year, also Q-on-Q to 72.6% now. However, if you look at the gross profit from the first half last year and also first half this year, this year is slightly negative, mainly because of Vietnam because last year, Vietnam has not really entered the big COVID situation yet. But this year, we are still recovering from COVID. So the discount is still higher compared to the last year same period. Next, in terms of SG&A, again, this is where we are, I would say, doing a good job also during the COVID and also after the COVID period that has been locked down. The main thing or the main guideline that we have given all the businesses that we manage is that, for the cost control, you can only increase 50% of the sales growth increase. So for example, if sales were to grow 10%, you are allowed to grow only 5%. Again, this is the guideline that we enforce and we are continuing to do so. And if you look at the impact, if you look at Q2 -- if you look at the 11%, excluding foreign exchange loss, SG&A has grown 11% compared to a sales growth of about 23%. In the first half, SG&A has increased by 10% and our sales growth has increased 19%. So, so far, so good that most of the BUs are maintaining this guideline in terms of managing their cost. And what it means to SG&A to revenue, if you compare for 3 years on the left-hand side, Q2 is sitting at 27.4%. And then first half is sitting at 26.8%. So we are much lower in terms of SG&A to revenue in the last 3 years and especially compared to 2019. So we're very good for optimal state. On the right-hand side, I want you to look at I guess we don't have the Q-on-Q. But again, it's very hard to compare the year-on-year because of the low base last year. But I'll give you some information, it's not in the presentation. In terms of Q-on-Q, our personnel grew only 1%. Our net depreciation and rent only grew 3%. Our marketing expense, because of the opening of the country, open up new stores and also fully operating outsource, it grew 8%. Utility on Q-on-Q grew 14%. This is the item that we are looking quite strictly on, and with the latest information that the Thai government will be increasing the FT rate in September, this part will be a pressure, a new sector for us that we need to handle in the second half. Other expense for the Q-on-Q increased about 16%. That includes FX loss. If you extract that, will be about 7%. So Q-on-Q, our expense did not increase that much, except for utility. So far, we are increasing good top line and well managing the costs as well. I will dive into that a bit later in terms of giving you what we have done so far. Next 4 slides, I will dive into a bit on the business of the segments, the 4 segments that we have. On the food side, we have done well at a 23% increase year-on-year, which is the green. The Thailand performance is that the black and Vietnam performance is on the gray. So Thailand has performed a growth of 5%, while Vietnam grew at 49%. For Thailand, the amount is a little bit lower mainly because we are restructuring Family Mart at the moment, as you know, we have decreased about 400 stores. So that has an impact on our top line. If you were to extract that out, like-for-like sales will be about 8% to 9% for Thailand. And in terms of first half, Thailand grew about 6%, while Vietnam grew about 31%. Total food is about 17%. Same-store sales growth year-on-year is at the bottom, so positive for this quarter, 4% Thailand and 38% Vietnam. If you look at the right-hand side, it shows the core EBITDA for our food. So Q2 EBITDA grew 43% year-on-year, EBITDA margin is 8.8%, and the first half grew 28% year-on-year. EBITDA margin is 9%. To compare against 2019, if we take out the TFRS impact, the margin for food is now higher than 2019. So a very good job for Thailand and also Vietnam team. At the bottom, it shows in terms of the store numbers. You can see that in Tops format in Thailand grew 33 stores. Family Mart, I mentioned already dropped about 400 stores. Big C changed its format from Big C to the Tops market, so it declined 4 stores. And the Lanchi, Tops market, which is a mid format size, grew about 9 stores. Our next, hardline for our group comprises of 4 business units in Thailand, which are Thaiwatsadu, Power Buy, OfficeMate and B2S, and we have and NK electronic store in Vietnam. All of the BUs are recovering well, both top line and on bottom line. If you look at the top left, the blue chart, the blue column, the blue is the overall total, Thailand is in black, Vietnam is in gray. Again, Vietnam grew 24% year-on-year. Thailand grew 11%. In the first half, Vietnam grew 20%, Thailand grew 15%, and overall grew 16%. If you look at the bottom, same-store sales growth, hardline grew 2%. Thailand grew negative 2%, while Vietnam grew 24%. The reason that Thailand negative same-store sales growth primarily come from Power Buy where it switches most of the sales from store into events. So however, if you look at the total growth of like-for-like for Power Buy, it actually grew double digits. In terms of core EBITDA, again, our second quarter grew 18%. EBITDA margin increased to 11.1%. First half grew 10% and EBITDA margin grew to 11.4%. Again, similar to the food, if you take out the impact of TFRS and compared with 2019, margin for the hardlines of EBITDA is over 2019 levels already. In terms of the numbers of stores, Thaiwatsadu and Baan & Beyond grew 5 stores compared to last year. Power Buy grew 8 stores. B2S, OfficeMate grew 8 stores, Nguyen Kim stage flat compared to last year. Fashion segment, which for the past 2 years has been a big drag to our company. But with the strong recovery starting in Q4 last year and ongoing for the first half, the fashion segment, both in Thailand, also and Italy will be a star until the end of the year and also next year as well. If you look at the numbers, again, the pink is the total. Black is Thailand and gray is Vietnam. In Thailand grew 40% -- sorry, the gray is Italy. Black is -- Thailand grew 40% and Italy grew 33% for Q2. For first half, Thailand grew 25%, Italy grew 39%, overall 28%. So this is the strongest growth for our segments. If you look at the bottom, same-store sales growth is very high at 56% for both countries. In terms of core EBITDA, again, it's THB 3,200 million or a growth of 250% year-on-year. EBITDA margin was 21.7% compared to 8.6%. First half, 19.6% with growth of 122% year-on-year. If you compare against TFRS -- 2019, excluding TFRS, fashion is the only segment that has not come back to 2019 level, it's about 2%. In terms of store stats, we increased 2 stores, and we closed 21 small formats in CMG. And the last one is the property. So similar to fashion, property is also recovering very, very well. You can see the rental property in both countries about the same and 32% and margin is improving as well on the second column. On the right-hand side, if you look at the first half, the occupancy is the only one that has dropped, mainly coming from Vietnam because of the impact of COVID, mostly for the new stores that we opened during the COVID. And the bottom part, as you can see that in Thailand and Vietnam, we have plus 1 plus 1 new stores versus last year. In terms of the balance sheet, again, there are not -- there hasn't been much movement. If you compare between end of June also end of December, our asset actually declined by THB 3 billion. Primarily coming from cash, dropped about THB 5 billion. This is for the uses of inventory, for investment and also paying accounts payable. Inventory increased because of more stores, PPE increase because of no more new stores and renovations. On the right-hand side, similar, it declined by 1% primarily from other liabilities that drop and lease liabilities, while the equity increased primarily from positive net income. In terms of the ratio, we are improving on the ratios for ROE, ROA, but again, still behind our target of 15% for ROE and ROA about 5%. We'll probably hit that by next year because the earnings we used this 12-month trailing. And lastly, in terms of the capital structure, we have -- are remaining very, very strong, and we still have ample room for more leverage, if needed. You can see that our net debt to equity increased slightly from 1 to 1.1x. If you look at the net debt EBITDA improving from 3 to 2.7x and our interest coverage ratio improving from 6 to 8x. And on the right-hand side show the long term and short term, you can see that if you combine -- which is short term, it's about 30% -- sorry, this long term is about 30%, while the short plus the current portion is about 70% at the moment. And this is the last slide for the financial, which I want to spend a little bit more time because this is very, very important. As you can see from the financial results in Q1 and Q2, we have put a lot of focus, effort and measures in place to control the 4 key costs. Firstly, the cost of goods. Second, the cost of our operation. Thirdly, the cost of our investment. And fourthly, the cost of our capital, which we actually started during the pandemic, but also after the pandemic. These cost management is very critical to our business strategy going forward. Not only should navigate us through this turbulent time, but also to increase our profitability, ROI going forward. If you look at the bottom left -- I'll start with the gross margin quickly, there's 3 things that we did. Number one -- in terms of the promotion pricing strategy, number one, we lowered our discount. Again, people are moving back into the stores. We don't have that much [ hold-up ] to recover. So the price that we're actually setting and selling are at a much higher level and less discount. Number two is a big project that we're doing right now, starting in our fashion, where we are reviewing our plan in terms of optimizing our discount strategy, looking at brands, SKUs, categories and locations because some of the brands or category are elastic or inelastic depending on the promotions you give. So this is the big projects that we're going to -- we're doing for fashion and has implemented already. And we'll continue to do so and has been reaping good rewards, and we will continue to do this for the other BUs as well. Lastly is the passing through the cost to our end consumers. The second one is inventory management. Again, we have been very strict with the entire process from the buy and to the clearance. So we've put many processes in place, and we're also looking very stringently on the inventory days for all the BUs and also making sure that the buy is focus on the top selling and not the long trailing SKUs. And lastly, is the pulling our sourcing and aligning the commercial terms throughout our business units. The second one is the SG&A expense management. Again, as I mentioned before, we have a guideline where SG&A can only increase by 50% of the sales growth increase, and we have implemented very strictly this throughout. Those included in terms of staff expenses. Staff contributes about 35% of our SG&A. So we are making sure that we're reviewing our SOPs in terms of running our stores with fewer staff. We're using our staff more to sell not only in stores, but also omnichannel and hence, we're also becoming more effective in terms of our team. We're reducing our marketing as well. So shifting into more digital and making sure we deploy only marketing programs that have high ROIs. The other one is our energy saving. Again, I mentioned this many times in our meetings, where we're deploying a lot of the solar panels throughout our projects in Thaiwatsadu to announce a property. Again, for the first 2, you can see the GP enhancement and also the SG&A enhancement for these projects. The last one is actually our investment and our capital. We are now prioritizing our capital to proven and successful formats in high-growth formats and also high return. We're also reducing as much as possible the CapEx per store, utilizing construction materials from our own BUs like Thaiwatsadu and also doing full bidding. And we're also managing our CapEx to be within the means of our cash flow from operation. The other one is in terms of our capital structure. So we're balancing right now between effectively matching our costs of leveraging and also making sure that we understand the risks involved the next 2 years about the global risk. So we're looking in terms of refinancing loans to long-term loans. And exploring other sources of capital. Again, if you look at the net debt equity, it's lower at 1.1x. Again, this is what we're doing at the moment. And I think we're going to be implementing more measures going forward because in the second half, we will be facing with more macro pressures on electricity and on other external factors. So I think that ends the financial.

[Foreign Language]

In terms of the business highlights, I will share with you what we have done in the first half and also what we are planning to do in the second half. We'll start with the property because the property houses most of our business units inside is entity. So far in the first half, we have opened one mall called Ban Chang and it's our 25th mall. You can see on the left-hand side with the green highlights with NLA 15,000 square meter with net sellable area [ department ] of 6,000, with but occupancy rate of 92%. So this is a pretty successful opening. As of Q2, our occupancy stood at 94.7%, and in terms of operations, we are improving, as I mentioned before, because of improving traffic than a fewer discounts. In the second half, we will open 2 more malls. In Q3, we'll be opening in August, a mall in Phuket, Thalang, number 6, with 23,000 NLA and 8,000 square meter of NSA, which is a department store. So far, we have leased out about 90% -- sorry, we will open with about 90%, so quite high at the opening. And in October, we'll be opening one called Rachapruek in Bangkok with similar size as the one opening in Thalang. This will increase our space by about 14% year-on-year for the mall space. Also with -- on the mall side, we are undergoing 2 renovation projects this year, which have been completed already. One is Chachoengsao, which we have added space above 5,000 square meter and Srisamarn about 3,000 square meters. These 2 projects have been completed already in May this year. And in terms of [ rework ], we'll continue to do that next year. For the mall part, we plan to open 3 to 4 malls each year and also for major renovation, probably 2 to 3 each year as well. That once we do it, the AAR should increase and the whole ROI of the project will increase as well. In terms of the department store, again, we now have 75 department stores in Thailand, we have Central banner, which is 25 locations and Robinson at 50. For the first half, so similar to property we opened in Ban Chang, first half we saw tremendous growth, as I mentioned, in top line and bottom line. Sales are recovering very well if you look at Q1 versus Q2, in all locations from tourists to Greater Bangkok and also an up country. And in July, actually, the recovery is now about 90% of 2019 levels. So, so far, the trend has been very strong. And even at the 90% level, this does not include the impact from tourism, which is normally about 10% contribution. So hopefully, as more people come back in the second half of next year, we will be getting back to 2019 level very quickly. Another thing is that in the second half, we will be opening 2 department stores in the 2 malls and also reopening 2 department stores in Phuket. One is Patong in September and the second one in Jungceylon. So all of our department stores will be open. On the right-hand side, you'll see some renovations. We have 3 major renovations, Ladprao, Chidlom, Rama 2. Ladprao, Rama 2 are almost completely done. Chidlom will be completed next year. As you can see with the recovery, Central Ladprao has recovered to 102% of sales from a 2019 level, and Chidlom is actually at 93% of 2019 levels as well. Again, renovations for department stores are also a key driver for top line. The next will be Thaiwatsadu. This year will be the start of an accelerated expansion for Thaiwatsadu format. In total, this year, we plan to open 10 stores compared to historical about 3 to 5 stores. This year, we plan to open 7 Thaiwatsadu, of which Chaiyaphum, if you look on the left-hand side, that's already opened in March. The second format is Thaiwatsadu plus Baan & Beyond, 2 of that. We have opened one already in Ban Chang actually in August. And the other one is Baan & Beyond home, BnB home. So those are the 3 formats and 10 locations this year. By the end of 2022, we will have 75 stores altogether with additional space of about 120,000 square meter or an increase of about 11%. And if you look at the right-hand side, it shows the number of provinces we're in. Again, we're in 40 at the moment, and we'll expand it into 42. In terms of the performance so far of the source that we opened, there exceeded our budget and also for the new format that we opened, which is a combination of Thaiwatsadu and Baan & Beyond, we opened one Srisamarn last year. They exceeded our budget or feasibility by 10%. And Ban Chang, which is opened in August this year, already exceeded our target as well. Ban Chang is about 17,000 square meter space. So, so far, Thaiwatsadu format is doing a very good job with the current format and also the new format. If you go to the next slide, food, similar to hardline, we will also be expanding the footprint of our food segment a lot this year. In Thailand, we have 3 banners under the Tops brand, one is called Tops market, the second is called Tops food hall and, and we have Tops Daily. Then in next month, we will open the new Tops called Tops CLUB. For this year, we will be opening all together 44 stores of Tops. 14 stores will be the first half, which we opened and 30 stores in the second half. The Tops market in first half, we'll opened 5. Second half we'll open 8. Food Hall, we opened one in first half and none for the second half. Tops Daily, we'll opened 8 -- already opened 8 and we'll open 22 more in the second half. On the Tops market, you can see some of the pictures also on the Tops Food hall. These are pictures of a new concept where we open up supermarket both Tops Food hall to Tops market as a stand-alone basis. So this will now allow Tops to market to go beyond the traditional way of expanding, which is through malls. So hopefully, by doing standalone, we'll be able to accelerate opening up our supermarkets going forward in Thailand. Now this is the exciting one. So this is the fourth banner of Tops, so it's called Tops CLUB. We plan to launch our first store in Bangkok, Rama 2 by the end of September. It is a membership warehouse retail format very, very similar to the highly successful format of Costco and Sam's Club in the U.S. In terms of customers, we target B2C and B2B. So majority will be B2C. So it would be family-wise with Mom & Kids, [indiscernible]. In terms of what we're going to offer, it's going to be exclusive and imported products. 70% of our SKU will be imported products. Private labels and also great value of general merchandise. Most of the products will be served in the big pack sizes, and we only have about 3,500 SKUs that will be provided. So be highly, highly success selective. If you compare the SKU 3,500 supermarket, there's a difference of about 17,000. So supermarket is about 20,000. [indiscernible] is about 3,500. Again, as I mentioned, we will roll out in Rama 2 by end of September, and we plan to launch about 8 to 10 stores in the next 5 years. Each store will contribute about THB 1 billion in sales per year. This is our goal format. If you remember, end of last year, we launched 2 formats called go! WOW and go! Power. These formats are for the mass market and also for the up country in Thailand. For go! WOW, we have already launched 23 stores and go! Power, we have already launched 8 stores. And now we're about to launch the latest format of go!. If you go to the next slide, so this is our newest concept. So it's a very, very simple name, it's just called go!. It's the same name that's in Vietnam. So this go! format will house 5 offerings. One is the GO! Hypermarket, the second is go! WOW. Third is the go! Power, fourth is a playground and fifth is a food court. We will be opening our first store in Nakornsrithammarat, which is Southern of Thailand at the end of August. And 3 more stores will be opening in Q4. Each location has a size of about 4,000 square meter. Hypermarket is about 1,500 to 1,700 and the rest will be for the other formats, about 2,000 square meter. So next. This concept, as I mentioned just now, we'll be expanding -- penetrating the up country area and mostly on the secondary districts. Again, it's a low-price, low-cost model. If you look at the left-hand side, in terms of merchandise, it's going to be more tailored for the low growth, affordable prices. In terms of marketing, it's going to be more localized. There will be out-of-home marketing will be local KOL, will be local events. In terms of operation, again, it's low cost and no frills. CapEx will also be low. If you look at the right-hand side, as I mentioned, we'll be opening 4 stores this year, and we'll be targeting the south of Thailand at the moment. And if it's successful, we'll be rolling out these many formats next year and the year after. There will be another growth driver for us. In terms of another strategic driver, which is the JV and investments in 2 third parties. Last year, we have invested in Mercular and Grab. As you know, Grab is performing very, very well in Thailand. -- we have done well with them in terms of the quick commerce side. And this year, we'll be partnering with them in terms of the FinTech, which is a buy now pay later launching at the end of the year. In terms of the right-hand side, you can see that we have already partnered with actually three, one carrier is actually signed MOU, but we will sign the contract in 2 or 3 months' time. So there will be at least 4 partnerships happening this year or maybe more. And this will be a way that we will expand and strengthen our ecosystem in terms of offering or channel or customers. In terms of some of the highlighted ones, The Asian Parents, again, The Asian Parent is an app, which is the largest Mom & Kids platform in Southeast Asia with about 35 million followers, so with the partnership here, investment in this company, we're able to strengthen our Mom & Kids category in Thailand through increasing the membership clubs of the [ Miniclub ] promote more products in terms -- within their apps and also sell their private labels in terms -- in our channel as well. In terms of OfficeMates, again, I think this news just came out, we had a joint venture with Ergotrend selling furniture. So we will expand these categories throughout our channels, offline and both online. And the ones I want to highlight a bit more will be Gulf. If you go to the next slide. The most recent one is that we entered into a 50-50 JV withdraw to establish a company called Greengen Energy. The objective of this company is to produce solar energy and distribute it within CGE and Central Group and also external parties. The JV company would actually rent space from Thaiwatsadu. So Thaiwatsadu actually has a big move on all of its locations. And Thaiwatsadu only use part of it for the internal usage, which I mentioned before. So this will be access capacity that this company will use and we'll be selling and earning income and revenue to Central Group and also to external parties. We will be launching about 5 by, I guess, we'll launch by end of this year with 9 megawatts at the end of the year. And we will expand this outside our ecosystem in the first half of next year. Again, the target is to supply power about 130 megawatts for this JV. This again will increase revenue for us and also save costs and in terms of our CRC and ESG goal, we'll be able to migrate 30% of energy using solar power in the next 5 years. And last for me will be for Italy. Again, just to recap, Italy or La Rinascente department store makes up about 6% of our sales. In quarter 2, you can see that he has a strong recovery versus '19 is now 90%, both in terms of sales and also in terms of traffic. All the stores are now open. The COVID measure has been lifted in April, and you can see that the sales boosted by the local and European customers. Gross profit has also increased tremendously from lower discounts and less promotions. If you look on the right-hand side, the first half it's about THB 5.7 billion with a growth of about 39% year-on-year. And I'll pass it on to [indiscernible]

So let's go to the update on Vietnam [indiscernible]