Organización Soriana, S. A. B. de C. V. (NEMAKA.MX) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to Organización Soriana's Second Quarter 2025 Earnings Conference Call. With us today are Mr. Rodrigo Benet Cordova, CFO of Organización Soriana; and Ms. Claudia Gonzalez Romero, Head of Investor Relations for Organización Soriana. Together, they will be discussing the financial performance for the second quarter of 2025 and providing a summary of the latest news on the company. [Operator Instructions] Please note that the conference call may be recorded. I will now turn the conference over to Mr. Rodrigo Benet Cordova, CFO of Organización Soriana. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us in this conference call. Today with me, as you already hear, is Claudia Gonzalez, Head of Financial Planning, and together, we will be through the results of some important information of what has happened during this period. Regarding the financial results of the second quarter, it's important to highlight that the Mexican retail has shown moderate resilience adapting to both global and domestic channels. Consumer confidence has played a key role in retail performance with a mixed trend during the quarter as well as the effect of the remittance reduction comparing with the same quarter of 2024. As a result, we were facing cautious spending patterns, particularly in durable goods and discretionary spending in all of our store formats. In the second quarter, the top line of the income statement closed in MXN 45.8 billion with a nominal increase of 1.7%. This derived from the net effect of the opening of 3 new stores, the 2 stores that we have to close and a large number of rented premises and other income mainly coming from onetime concepts like insurance recovery. On the last week of May this quarter, we started with our emblematic promotional campaign, Julio Regalado, including several categories within the supermarkets, complete basket, private label, innovation. And we incorporate also different categories in general merchandise and other kind of products, trying to offer to our clients a very complete value proposition in order to increase the sales of the company. We also had a greater offer of products with the lowest market price under our promotional campaign, relocos, precios relocos. Also, we added VAT refunds to some of the general merchandise categories and we were very focused in pushing the sale of our private label as we already mentioned. But at this day, we have renovated hundreds of SKUs with our renewed design and quality for all divisions. In this regard, private brand products have been very well accepted and in fact, increased the loyalty of these products due to the highly quality and variety that we can offer. As of today, the total sales of the private brand have an increase of 9.3%, and the participation is almost 13% in Soriana format. And in City Club, we can say that the number is a double-digit growth. In addition, the loyalty program of Soriana Ya at the second quarter closed with 8.1 million active clients where the average ticket is 62% higher than the non-registered clients. Reason why we are confident and we'll continue pushing very hard to accelerate the affiliation of our clients to be able to enjoy multiple benefits they have at the moment that they take the Soriana Ya card. Also, I'm talking about the performance by region. We can outstand the performance in the states of Baja California Norte, Zacatecas and Jalisco, particularly for the hypermarket format. In the case of the supermarket format, basically, we have a better performance also in the north part of Mexico, Baja California Norte, Chihuahua and also good performance in Tamaulipas. Going to the performance of our digital business. This line had an increase of 19% in the total sales, another important increase in the number of total orders of 44% compared with the same quarter of last year. Finally, and to end with the top line of the P&L. Regarding the real estate business, the total income reached a figure of more than [ MXN 5 billion, ] showing an increase of 12% due to new rent premises and the attraction of more institutional brands at our national level. Right now, the occupancy rate is practically 90%. Going down in the P&L. The gross profit reached MXN 10.9 billion in this quarter, which represents a gross margin of 23.9%, an increase of 4.6% against same period of last year as a result of better negotiations with suppliers regarding Julio Regalado campaign, and a very good performance in the shrink reduction. Also, regarding the operating expenses line, there was an increase of 8% versus last year, reaching MXN 7.9 million, which represents almost 17% over sales. This increase in the operational expense is basically attributable the cost of personnel delivered from an improving the coverage of vacancies and increasing the salaries. And also the net effect of the new stores that we opened in the last 12 months. As a consequence of the variations just mentioned, the company's EBITDA for the quarter reached MXN 3 billion, which represents 6.6% over the same and represent a decrease of 3.7% compared with the same quarter of 2024. Going down regarding the financial items. Net financial cost closed at MXN 694 million, showing a decrease of 11%, basically to the net effect of the financial products, the increase of more than 120% due to a higher cash balance and the reduction of 7.6% in the cost of the average -- in the cost of the debt of the company, also with a reduction in the balances of the debt. Finally, the net income of the quarter reached MXN 743 million, which represents 1.6% over the sales. That is basically a percentage very similar to the one that we obtained last year. Moving to talk about the progress of the business that we have with our partner, Falabella. I'm pleased to inform you that Sodimac already have 15 stores operating with very good performance, and we are planning to open 1 more store still in 2025 with very important plans to accelerate the growth for next year. On the other hand, I'm talking about the financial business, the portfolio of the credit card that we have with Falabella is continue growing in a very important pace. Right now, we have more than 980,000 active card holders. We are operating with physical malls in more than 100 stores. And basically, we have digital version of the credit card in all the chain of the company, in all the other formats of Soriana. Right now, the credit portfolio closed in MXN 6.1 billion, which actually represents an increase of more than 30% compared to the portfolio that we used to have in the second quarter of last year. We are very pleased with the performance of Falabella and it turns to be every day a more important commercial tool to attract clients and to give more benefits to the clients of Soriana. Finally, and as an update of the expansion plan and investment, the program or the CapEx for the company. In the last 12 months, we have invested close to MXN 3 billion, mainly in store remodeling, maintenance. And as you already hear, the opening of the [indiscernible] stores in the last 12 months. And finally, I would like to share with you that the recent alliance that we have with FAZT has been a total success. Right now, we have 3 charging stations already working in Ramos Arizpe, in Valle de Bravo and also here in Monterrey. This alliance is intended to build the biggest network of ultra-fast charging stations in Mexico, which shows a very high potential growth in the electric vehicle market and as well as our -- is also an important part of our social responsibility strategy. The main goal of this initiative is the installation of more than 1,000 charging stations by the year 2030. And we are very confident that everything is going very well. The performance of this FAZT station has been very, very positive. Basically, we already sent the results and the information to the Bolsa. So with this, we can end with my intervention. And please, if anyone have any other questions, we can go to the Q&A session in order to try to answer all the doubts that you can have. Thank you very much for joining us.

[Operator Instructions] The first question is from Mr. Bob Ford from Bank of America.

Can you expand a little bit on the plans to accelerate the growth in Sodimac. And I'm just curious what you've seen in terms of the evolution of 4-wall returns, your ability to maybe begin to fund or more than fund all the central administrative functions, the scale that you're beginning to enjoy, maybe how the maturation periods are evolving. And when you think about growth. How do you think about the -- maybe the magnitude of the operation within Mexico and then your ability to really leverage the real estate that you currently hold to facilitate that expansion?

Sorry, Bob. We have a misunderstanding in the communication. Can you repeat the question, please? Sorry.

Of course, it was a fairly long one. I'll try to do it even short at this time. But my question was about Sodimac. And you commented on accelerating the growth of Sodimac. And I was just curious how it's evolved with the 4-wall returns are, whether or not you're covering all the central administrative expenses at this point? And then how you can really leverage the real estate that you're holding to accelerate the growth? And I'm just curious of adjacencies to existing hypermarkets or maybe reducing the size of some stores or how you're envisioning this growth path.

Sure. Well, first of all, we are very happy with the performance of Sodimac both mainly because we start to see in all the investigation that we have in terms of marketing that the brand starts to be much recognized in Mexico as a good solution for the home improvement sector. And that is something really important for us. At the end of the day, no matter that Sodimac is a very well-known name in South America, in Mexico, it was the first time of the brand in the country with a competitor that have a very important participation in the sector. So what the main goal was to position the name, not only in front client but also in the name of the suppliers because at the end of the day, it's also something that we have to work and that we have been working in the last years to have an important relation with the key suppliers for the home improvement sector. Saying that, it is part of the strategy to have a critical mass. The idea, Bob, is to open another -- at least another 5 stores next. And yes, we will take advantage of the real estate platform of Soriana Still, Bob, in Soriana, we have not too much but close to 60 stores of hypermarket that still have a huge sales area, more than 9,000, 10,000 square meters of sales area that makes sense to make a reduction and take probably part of the reserve area or part of the parking lot and try to have a combo of hypermarket with Sodimac or supermarket with Sodimac is something that we already have done, actually, particularly in the offices that we used to have the headquarters of Comercial Mexicana. That is exactly what happened. We put that combo between a Soriana hypermarket with Sodimac. So yes, then the short answer is yes. We will take advantage of the Sodimac real estate platform. Still, we have a couple of units that we can keep Sodimac in order to accelerate the growth. No matter that, Sodimac has their own real estate strategy, their own real estate structure. Looking for very good locations in order to ensure the growth of the company. How many stores still we see in Mexico, hundreds. I mean, particularly remember that the home improvement sector have a lower penetration than the food retail sector. So I think that still, the opportunity is really, really important. And still, we have very important cities that we don't have a presence of a single store. Guadalajara, Puebla, Aguascalientes. I mean, still, there is a lot of opportunities, or even in Monterrey that we already have stores in particular in Monterrey, very easily we can talk about another 5 to 6 stores just in the metropolitan of Monterrey. So still, there is a lot to do in terms of expansion.

Yes. I guess that's my curiosity, right? Because 5 -- and on a base of 15, it's a big number. But 5, when you're thinking about a market that can hold 100s and you've got adjacencies that can facilitate 60, it seems small. So it gets me back to the beginning of my question, which is how are the returns on the investment evolving? And how should we think about the profitability of the concept?

Well, still there are not the returns on investment capital that we want, mainly I think that particularly the main important goal is to increase still the sales more than the margins. In terms of the gross margin, we feel a little more comfortable with the margin that right now we have. The more important opportunities coming from the sales, but also Bob, it's related with the penetration of the brand and that we have to continue leveraging the structure of the company. Obviously, the returns on capital as a company, Sodimac is still not in the level that we want. But when you look at our store level, because still, the critical mass that we have is not enough. When you see at the store level, they are not too bad, and there are continuous growing year-by-year. At the end of the day, it makes sense. We need more critical mass in order to start to obtain the returns on investment capital that we want as a company, not at store level.

Our next question is from Mr. Alejandro Fuchs from Itau BBA.

I have 2 quick ones, if I may. The first one, I wanted to see if you can break down same-store sales maybe between average ticket and traffic, that would be very helpful. And second one, Rodrigo, maybe if you can walk us through a little bit of how is the company thinking about top line same-store sales growth relative to gross margin. We saw another big gross margin improvement this quarter, but maybe a little bit more pressured same-store sales. So how are you guys thinking going forward with that relationship?

Sure. Well, first of all, going up about the breakdown of the ticket, the average ticket and the clients. Unfortunately, I say unfortunately because obviously, it's not what we want. We have an increase in the ticket, in the average ticket and a decrease in the number of clients. That is basically the response for the first question. I'm talking about the performance in the sales and the relationship with the gross margin. It's something that I repeatedly said in different conference call. We are, right now, protecting the gross margin, trying to be more efficient, in particular, in terms like the reduction of the shrink, better negotiation with suppliers or even in the other income sources like the real estate or the financial business that have been a very important help in the past to increase the gross margin. But at the end of the day, it's very clear that the main lag of the company is in increasing same-store sales and increase the productivity of the sales. If your question is going in the sense that if we are willing to invest more gross margin to accelerate the sales, the response is yes. But particularly right now, when we see like promotional like Julio Regalado in which we are very aggressive in the prices or the prices that we have for the basket products that actually we show every week to the federal government, the basic basket. In all of that measures, we are competitive. So it's very clear that obviously, price is very important. It's one of the top values that the client needs in order to take a decision between Soriana or other stores. But it's very clear that it will not be only the reduction of price, the one that will give us more sales. And that is why we are also working to have a more comprehensive value proposition, growing our private brand, the acceptance of the private brand is really, really good. I mean, it's very -- in some sense, it's difficult to see that our private brand sales are growing basically almost at double digit, but the total same-store sales of the company are the lowest of the market. So obviously, it makes sense that say, okay, we have to increase the value proposition of the private brand and the number of articles that we have with that and the number of categories that we cover with the private brand is also very clear for us that we have to continue investments, making important investments in the mall and in the stores and the appearance of our facilities to the client. Another kind of thing, obviously, working with the personnel that we have in the stores. Because at the end of the day, there are other important things that for us is very clear that still we have an opportunity and the client is demanding from Soriana. And that is the reason behind the results in which we don't have the same-store sales that we want and that we are very conscious that we have the lowest same-store sales in the market. So we are working on that. If we see the investment -- making investment of more gross margin into prices will keep that recovery of traffic, we will do it without any doubt. But right now, we believe that we also have to change and invest in other things, not only price. And again, I don't want to say that price is not critical because it is. It's just that right now, we know because we are hearing the clients that we need to work in several other things, not only price. I don't know if I'm clear with the response, Alejandro.