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

Good afternoon, everybody. Welcome to the phone conference on the results for Q4 and end of the year 2024 by Organización Soriana. Today, we are joined by Mr. Ricardo Martin Bringas, CEO of Organización Soriana; and Mr. Rodrigo Benet Cordova, CFO of Organización Soriana. And today, they will discuss the financial performance of the organization, and they will give us a summary of the latest news about the company. [Operator Instructions] Please keep in mind that the phone conference can be recorded. I now give the floor to Ricardo Martin Bringas. Please go ahead.

Hello. Good afternoon, everybody, and thank you for joining us in this phone conference. We will be discussing the financial results of Q4 '24 as well as the end of year figures. So overall income of Q4 add up to MXN 48.992 billion, which is an 0.8% decrease compared to the same quarter of the previous year. There is an impact of [indiscernible] in the increase in sales due to extraordinary revenues received in Q4 '23 after selling groceries and recovering insurance claims due to Otis Hurricane in Acapulco, which creates a very difficult comparison. But if we were to exclude this effect, that's on comparable of 2023, the quarterly increase in income would have been at 3.2%. At a yearly level, income is MXN 179.112 billion with a total sales increase of 1.7%. This shows an impact of 113 basis points in the increase versus that of 2023 due to the extraordinary income that was previously mentioned. Regarding the state performance. It is worth noting the increase in sales in Baja California for all formats and [indiscernible]. Speaking of total costs. In the quarter, we reached MXN 11.674 billion, which represents 23.8% on sales, which is an increase of 2.1% and a 70 basis point improvement versus the same quarter of the previous year. This is due to an increase or an improvement in losses and commercial negotiations. At a yearly level, gross income reached MXN 42.428 billion, which represents 23.7% on sales, which is an expansion of 90 basis points versus 2023 and a 5.7% increase. Moving on to expenses. The concept with greatest impact in the quarter as well as in the year has been personnel costs with 89.7% yearly increase, mainly due to a 20% increase in salary. In addition to the 18 new stores and better vacancy coverage than the previous year all across the country. On the other hand, energy costs had a 3% increase. This is a very well controlled increase below inflation despite the new stores, an increase in fees due to the implemented actions nationwide we want to control the consumption of energy. Now going to the transition process of LP gas to natural gas in stores. In the quarter, fourth quarter, we were able to supply successfully 6 new stores, which increased to 273 units in natural gas, which allowed us to decrease 50% of our expenses in energy as well as CO2 emissions. Speaking of facility and equipment maintenance, we had a yearly increase of 4.9% due to the acceleration in remodeling and preventive maintenance as part of the annual operational continuity plan where in each year, we prioritize investments to cover most needs in our stores and the least amount of tenants possible, seeking the best operational conditions and structural conditions favoring our customers. For this reason, the increase in general expenses in Q4 was 11.6%, and at the yearly level, it was 10.3%. Due to the aforementioned, the EBITDA of Q4 2024 was MXN 3.904 billion, which represents an 8% margin with a 60 basis point contraction and a 7.9% decrease. However, considering the non-comparable effect of MXN 895 million due to the extraordinary concepts previously mentioned, sales would result in a MXN 3.345 billion base in 2023 and EBITDA increase, normalized of course, of 16.7%. At a yearly level, we reached MXN 12.707 billion, which represents 7.1% on income and a 1.5% decrease versus the previous year. And setting aside the extraordinary concepts of 2023, we would have a comparable base of MXN 12.010 billion and a 5.8% increase versus the previous year, which means that we have an effect of 734 basis points in the year in comparison. Lastly, speaking about net income, we closed the quarter at MXN 1.857 billion, which was an increase of 3.8% on sales, which represents a decrease of 15% versus the same quarter of the previous year. And if we set aside the extraordinary concepts of 2023, the comparison would give us a result of a 44% increase in net income. At a yearly level, net income was MXN 3.909 billion, which represents 2.2% on sales and a 22.5% decrease compared to the previous year. Now if we eliminate the extraordinary concepts previously mentioned, the comparison will show a 5.8% decrease. Additionally I would like to mention the progress in the expansion plan, which has been one of the main aspects we had in '24. We were able to open 18 new stores, mainly in the formats of Hiper and Super, expanding our market share in states such as Baja California Norte, Chihuahua, Quintana Roo, Nuevo León, Coahuila, San Luis Potosí and Nayarit. We were able to reach 85,997 square meters in stores. And we had [ 3,100 ] new jobs, and we were also able to remodel 39 stores across the nation, and we have continuous investment in 220 stores with a total investment of [ MXN 6.219 ] billion throughout the year. Regarding related investments to our transformation projects. During 2024, we were able to transform operations of 7 distribution centers of the [indiscernible] through the implementation of the [ Blue Yonder ] warehouse management platform, which has improved productivity. The staff productivity allowing for an initial improvement of 30% in receiving and shipment times, which translates to an increased capacity in our centers to process the operations with future perspective of greater efficiency. This project is the result of investment of over MXN 180 million, which will add this year with all of the distribution centers of the company that will allow to enable new distribution models in the future of Soriana. In store, we had a project with AI based on a machine learning algorithm that helps stores maintain products in shelves, avoiding them to stay in the warehouses, mitigating losses due to lag. This algorithm analyzes inventory and product rotation in each shelves, sales frequency and the elasticity of products to determine when we do have products that's in the shelf or that is soon to be -- that is soon to run out. We also modified price signaling system with a solution that allows improved performance we used to use and benefit of [ maintaining ] prices and promotions in addition to ensure the updates of that pricing and promotions in benefit of operation and our customers. During '24, we invested MXN 930 million in updating technologies for both DCs, stores and headquarters. In addition, we invested MXN 520 million in the joint business with Falabella. This business now has 880,000 total clients, a credit portfolio MXN of 5.110 billion, and that now has a 20% payment participation payment share -- 20% in payments with credit card in our branches above international banks. Sodimac now has 15 stores with presence in 8 states across Mexico, and 2 new stores opening in Q4, both in Guadalajara and Monterrey, showing an acceptance of clients with an increase of content sales, both online and in store. Another important subject is the relaunch of our in-house brand which, without a doubt, is another long-term objective that's very important. And I want to share some significant progress. In Q4, the income of in-house brands in stores showed a 14.7% increase, indicating that currently, the in-house is 14.8% of total sales. There's still a lot of ground to cover. But after 2 years of starting this project, we have good results. In '24, we managed to launch or renew 1,229 [ codes, ] a high sales participation, [ article ] selection that allows us to have different products that customers appreciate and we can confirm their preference throughout the last 8 months where we have 5 main brands, and we were able to achieve 70% of sales in our in-house brands such as Precissimo, which is the first price brand. There's also Valley Foods with a great selection of edible groceries. We also have basic concepts, buyers of Quality Day, which are the divisions with greatest growth in groceries, frozen goods and general items and clothing with a great selection across several countries. This makes us very proud. And it shows that we are on the right path. Regarding our digital channels, we would like to share with you that in 2024, we had a 14% increase in sales and a 45% increase in orders. Similarly, City Club has had an excellent acceptance by our associates with a 158% growth and an average ticket in digital sales of 72%, which is greater than that of physical stores. And this is very beneficial to the digital side of the business of the company. Another important subject for the company is our loyalty program, which is now turning 25 years, which has been placed strategically compared to the competitors by adding more value to customers immediately due to their purchases and preferences. So the loyalty program, Soriana YA, has positioned itself amongst our customers who make it as an essential part of their purchasing experience in their everyday lives, not only when it comes to accumulating and trading reward points or accumulating electronic money, but they can also access carefully selected product selection of different brands and exclusive sales for them. In our loyalty program, Soriana YA, we have over 8 million customers who are making transactions on a monthly basis that represents about 50% of the sales value of the company. And the average ticket of loyalty customers is 54% greater than that average ticket of unidentified customers. As you can see, the company has been developing several ways to reach the main objective, which is recovering market share. And this objective shall remain. For this reason, we will continue informing -- reporting each quarter the progresses on these new initiatives. Now speaking about real estate business. In 2024, total income was MXN 2.946 billion, which represents a 4.9% growth versus the previous year with an average occupancy improvement surpassing -- going from 85.8% to 89.4%. We've been having important alliances with important gyms, trading 14,950 square meters as well as cafeteria and restaurant franchises and also a high flow of customers that will allow more traffic to our locations. Without further ado, we would like to move on to our Q&A session, where we will gladly answer all of your questions.

[Operator Instructions] First question is by [indiscernible] from Santander Asset Management.

I have a question about consumption. Could you give us an overview of how you foresee early this year? And if you can mention about regions and categories, I would really appreciate it.

So consumption is a bit complicated, rather low when we started this year. I would say that since November, late November, early December, it's been low, especially those that were benefited by social programs last year that haven't received so much support in that regard, and you can tell, it shows. You can see this given the flow of people mainly in the Southeast of Mexico, a little bit, not as much, but some in the Central side of Mexico. And a little less impact in the North Pacific as well as in the North of Mexico. And also there's a decrease in acceleration we saw in Q4 '24, that is a decrease as a country. And that, of course, impacts the rest.

Do you think this is general or do you see this in more specific areas?

I would say this is in [indiscernible] in general items. And in supermarket, it would be in categories such as luxury categories. Customers are currently migrating to smaller packages. And this also goes to show how consumers have been affected because they're looking to buy their groceries with less money. But it's mainly [ textiles clothing. ]

[Operator Instructions] Next question is by Miguel Ulloa from BBVA.

So my question is regarding the expectations for this year. If you could please share with us, especially what these look like in stores?

When it comes to growth, we foresee a 4% to 5% increase [indiscernible], of course. Regarding investments, we believe being focused on remodeling and new stores over [ MXN 5 billion. ] So we're looking at about 6 stores basically and 9 remodelings.

I have another question. When it comes to investing in AI, if you can tell us what are the most important ones you currently have implemented and what results you're getting?

What we did last year was basically in store sales and working on the logistics of the product or items to the station in warehouses basically. We make sure there are no missing items in the store because there was -- because previously, items didn't flow properly in some stores and we've been using AI to help our operations to quickly identify what items are needed and then transfer them in a timely manner with regards to the store. And in terms of the DC, in this new system, we recently implemented WMS called [ Blue Yonder ]. And well, we also have some AI algorithms there that help us, especially when it comes to fresh items to better operate these items, preserving the quality of said items. That is basically where we are applying AI.

Next question is by [ Christina Morales ] from [indiscernible].

I wanted to ask if you could give us a breakdown of what you expect, how much each initiative will provide when it comes to savings of cost and expenses such as switching to natural gas and your growth in in-house brands. If you could give us a breakdown of the impact on the profitability margin?

Well, when it comes to these margin initiatives such as in-house brands or exclusive brands, we're looking at about -- in terms of margins, we have a [ 0.5 point or 75 basis points ] in margin because these products that have a 14% share can now have a margin differential between 4 and 6 points. This is closely related to the company level margin in the case of in-house brands. Now in the case of initiatives to reduce expenses and operational efficiencies that are also related, we want to bring it to 1.5 points of expenses, but we do believe it is possible this year. We started several initiatives to make it happen.

That was the last question in Spanish. Now let's listen to the questions in English. [Operator Instructions] That was the last question. With this, we conclude our Q&A session today. Now I would like to give the floor to Ricardo Martin Bringas for closing remarks. Please go ahead.

I just want to thank you for being here today. We are here at your service for any questions. You can reach our communications team. Thank you very much.

Organización Soriana would like to thank you for participating in this phone conference. You can now log off. All conference hosts have hung up. This conference is over. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]