Grupo Comercial Chedraui, S.A.B. de C.V. (CHDRAUIB) Earnings Call Transcript & Summary

Good morning to all participants, and welcome to the Grupo Comercial Chedraui's Third Quarter 2023 Conference Call. Participating in the conference call today will be Mr. Jose Antonio Chedraui, CEO of Grupo Comercial Chedraui; Mr. Carlos Smith, CEO of Chedraui USA; Humberto Tafolla, Grupo Chedraui CFO; and Arturo Velazquez, IRO for the company. We will begin the call with the initial comments on Grupo Comercial Chedraui's third quarter financial results by the company's CEO, Mr. Jose Antonio Chedraui.

Good morning to all, and welcome to our presentation of Grupo Comercial Chedraui's third quarter 2023 results. I am pleased to report that we continued to thrive in Q3 due to better-than-expected private consumption trends in Mexico and the U.S. This is despite a foreign exchange impact on our consolidated sales caused by the appreciation of the Mexican peso against the U.S. dollar in the last 12 months. Nonetheless, our profitability continues to improve as a result of a strong focus on cost control, operational efficiencies and inventory management in both Mexico and the U.S. At the same time, we continued to grow organically by opening 23 stores in Mexico and 1 in the U.S., and we are on track to reach our target of 60 store openings in Mexico and 4 in the U.S. during 2023. We will now review the results for the third quarter of 2023, starting with the highlights of our consolidated performance, continuing with the performance of each region and ending with a review of the financial results. On Slide 4, our consolidated sales show a slight decline of 0.7%, mainly explained by a 15.6% foreign exchange impact on Chedraui USA sales when converted to Mexican pesos. Sales in the U.S. represented 53% of consolidated sales in the current quarter. However, our cost control and operating efficiency strategy has proven effective and mitigated the currency translation impact. As a result, Consolidated EBITDA margin grew 56 basis points versus the prior, representing 8.9% of sales. This 8.9% is close to the peak level of 9% reached in Q2 of 2023. On Slide 5, our cost control and operational efficiencies, along with strong working capital management and reduced bank debt led to improved net income and profitability levels. The 4-year compound annual growth rate for net income is 59.3% with total net income in the quarter totaling MXN 1,935 million. Profitability viewed through return on equity stands at 18.5% and represents a 360 basis point increase compared to the third quarter of 2022. In the following slides, we will review operations in Mexico and in the U.S. As we can see on Slide 6, customers continue to prefer the value proposition offered by Chedraui through its various store formats as we aim to provide our customers the products they desire at the best possible price without sacrificing customer service. This unwavering commitment to the customer has allowed our same-store sales to grow above ANTAD since 2022. On average, in 2023, we've grown with a positive spread of 287 basis points. Another positive factor in Mexico guided by our strict cost control strategy is seen in our EBITDA growth, especially in EBITDA margin, which stands at an all-time high of 9%. In the next slide, Slide 7 are some of the key highlights for Mexico's retail business during the quarter, 9.5% same-store sales growth, which outperforms ANTAD's 6.6% increase. Total sales continued to grow at double-digit levels. In this quarter, 17.3% above Q3 of 2022. All regions are growing, with the South and Southeast continuing to outperform the rest of the country, 23 store openings during the quarter and 88% in the last 12 months, including the Arteli acquisition. This growth has resulted in an expansion in our sales floor area of 5% compared to the third quarter of 2022. As we commented in the previous conference call, during the second quarter of 2023, we launched the [Foreign Language] campaign, which concluded during the third quarter of 2023. You have served favorable reception from our customers from this campaign, which can be seen in the positive figures released in this quarter. Finally, on Slide 8. It's noteworthy the comment once again that our EBITDA margin continues to improve, reaching an all-time high levels. Our operating leverage and continuous focus on cost and expenses has allowed us to report a 9% EBITDA margin for this third quarter of 2023. Regarding the real estate division, we continue with positive trends as revenues grew 13.4% in the quarter compared to the same period of last year, reaching MXN 337 million. EBITDA grew 9.5%, increasing from MXN 201 million in 2022 to MXN 220 million in the quarter. Noteworthy to mention that in the past 12 months, our leasable area grew by 2.3%. Now I will turn the meeting over to Carlos Smith, CEO of Chedraui USA, so he can comment on relevant aspects of our U.S. operation. Carlos, please go ahead.

Thank you, Antonio. Please turn to Slide 9. Chedraui USA continued to perform well in the last quarter. Customer count continues to grow, boosted by an attractive price offering and our store remodeling program, which have compensated for a slowdown in economic activity, a reduction of government aid and deflation in some categories that have impacted sales. As a result, same-store sales grew by 3.2% in dollar terms, with total sales growth of 3.7%. With particular strength at El Super and Fiesta Mart. When consolidating sales, the 15.6% foreign exchange impact related to the appreciation of the Mexican peso versus the U.S. dollar resulted in a 12.5% decline in Chedraui USA sales for the quarter compared to previous year. Despite this currency impact, EBITDA performance in the quarter remained solid, achieving a 55 basis point margin expansion to 8.3% of sales. It is noteworthy to comment that all banners increased EBITDA margins compared to the previous year as a result of operating efficiencies and improved inventory management. During the quarter, we opened 1 new superstore in Las Vegas, Nevada or 3 more stores expected by year-end. Our debt reduction plan is on track with a $136 million reduction through September 2023. Our U.S. operation remains committed to driving profitable growth, delivering value to our customers and further expanding our presence through these successful banners as we deploy different strategies to continue to drive sales at all formats . That concludes our report on the U.S. operations.

Thank you, Carlos. We turn to the consolidated financial results on Slide 11. In the third quarter of the year, we recorded consolidated sales of MXN 64,294 million, a 0.7% decline year-over-year. As Chedraui's U.S.A. sales were impacted by the Mexican peso appreciation. Gross profit increased 1.9% with a 61 basis point expansion in gross margin, while operating expenses without depreciation and amortization decreased 0.4%. Due to this, consolidated EBITDA grew 6% to MXN 5,712 million and represented 8.9% of sales. During the quarter, financial expenses decreased 13% to MXN 1,118 million, driven by lower debt in the quarter. The foreign exchange impact and higher interest earned by a favorable cash position in Mexico. Moving on to the consolidated net income for the quarter. The result increased 31.9% versus the prior comparative period, reaching an amount of MXN 1,935 million and representing 3% of sales. Please move to Slide 12. Our financial leverage decreased from 0.42x in the same period of 2022 to 0.09x in this quarter. This results from the company's ability to generate free cash flow over the last 12 months. Finally, the year-to-date CapEx invested reached MXN 5,297 million, which is equivalent to 2.7% of sales. Now if you allow me, we will move on to the question-and-answer session.

[Operator Instructions] Our first question comes from the line of Bob Ford with Bank of America.

Congratulations for the quarter. Antonio, can you discuss the performance of your Supercito units? How are you thinking about the pace of new store openings for Supercito and the white space or the concept? And then Carlos, can you also discuss what's behind the gap in performance between Smart & Final and the Hispanic Divisions? And how we should think about the same-store growth as we move forward? Thank you.

Supercito keeps outperforming our projections. We're very happy with the format. At the moment, now we have 113 Supercito stores, and we're doing really, really well return on invested capital. It's higher than our bigger stores. So we're very happy with the format. We plan to open this year 50 stores, which have opened already, I believe, 33 at the moment. So the format keeps doing really, really good. We think that in the coming years, we could double the number of openings in this format -- year-by-year, that means that by 2024, we would be opening over 100 stores, and then we'll try and do over 200 and keep growing through this program. Maybe, Carlos, you can help us answer the next question. Thank you.

Absolutely. So as we discussed in our comments, customer count was really solid during the quarter, including our customer count growth at Smart & Final, which was north of 2% during the quarter. As you know, about 30% of our sales in Smart & Final come from what we call our business customer, which includes several business customers specific items as well as club packs. And typically, those are high-ticket items. And we've seen a decline in the sale of those items. As you know, the economic backdrop today is complicated. A lot of consumption is food at home. Restaurants are beginning to see less trips. So I think that's impacting us a little bit there. But we're fortunate that we've got the household consumer that hedges that on the Smart & Final side. So the important part there for us is to continue to execute really, really well, changing some of our in-store merchandising techniques to get a lot more value-type items into the basket. And that's really our focus. Our focus is to take advantage of this customer count growth that we're seeing in all 3 banners and maximizing units per transaction. So as you've heard me say before, I think that during difficult times, our formats are very, very well positioned given their strong value proposition. And Smart & Final is no different, even though it's got a broader competitive set that we have to deal with, but we're bullish on continuing to drive customer count and execute well by putting more items in the basket.

And Carlos, is this trend sufficiently pronounced to consider a mix shift toward more items that are tailored for that final retail consumer?

Yes. Well, it's a combination of both, okay? So it's -- we have to tweak the merchandising to our business customers as well as our households. So it goes both ways.

Our next question comes from the line of Luis Willard with GBM. Please proceed with your question.

So well, first of all congratulations. And second question, I hope it comes out politically correct if possible. But I wanted to pick your brain regarding the [indiscernible] micro factors. In particular, this year opportunities that might arise which [indiscernible] or so a bit for example, perhaps having one focus on something else and make the operations.

I'm over of the investigation, just for the news, I understand that it comes from potential vendors that are not happy with the prices that they receive for [indiscernible], but I'm not sure about it. I don't think it's going to change much the commercial strategy that they use in Mexico. But that's my personal feel -- so I think it's going to take long. And in the short term, I don't see -- and I have not seen any changes in the pricing strategy, for example, that will show us that they reduce the pressure that they put on the vendors to support the strategy. I have not seen any changes at the moment that I was.

So it's just a wait and see at this point in time, correct?

Yes. Yes, I think you just have to wait and see.

Our next question comes from the line of Alvaro Garcia with BTG Pactual.

First of all, I hope your team a safe throughout the Hurricane Otis. Two questions. The first one on Mexico. Sort of a bigger picture question on the proximity format. We've obviously seen a lot of new stores from you guys with Supercito. -- seen a lot of new stores from [indiscernible]. It's a bigger picture question on sort of where you think this demand is coming from? What's driving that demand in the sense? Do you think that the average Mexican family might be making the spend purchase at these type of formats more frequently going forward? Or is it a different occasion altogether, sort of perhaps trying to get more color on what's driving that demand and whether it's eating into some of the market share, some of the larger formats? That's my first question. Thank you.

Thank you, Alvaro. Well, I believe that, first of all, the consumption occasion for this format, it's basically reposition. I think that the customer continues to visit the bigger formats once every 15 days, probably 3x a month. I believe that we are also gaining share against the informal market, which, at the moment, covers probably 50% to 55% of the total market. So yes, I believe there is a huge opportunity for this proximity format. We have seen the growth, as you mentioned, of [indiscernible] ourselves as well as Bodega [indiscernible]. So we think there's huge opportunity for this format in most of the metropolitan areas of the bigger cities around Mexico.