Wal-Mart de México, S.A.B. de C.V. (WALMEX) Earnings Call Transcript & Summary

Good morning, everyone. I'm Salvador Villasenor, responsible for Investor Relations at Walmex. And I want to thank you for joining in our live Q&A session following our second quarter earnings results published yesterday evening. Today with me is Ignacio Caride, President and CEO of Walmex; Raul Quintana, our COO; Paulo Garcia, our CFO. We will have 1 hour to go through your questions, having a hard stop at 8:15. And now I will pass over to Ignacio for his initial remarks. Thanks, Ignacio.

Thank you, Salvador. Welcome and thanks for joining us today. Before starting this Q&A, I'd like to briefly mention that our vision remains the same. It remains relevant for our customers, both in Mexico and Central America. Our goal is to maintain our leadership in Mexico and Central America as a preferred omni ecosystem to help customers save money and live better, while basing a higher emphasis on strengthening automation, digitalization and simplification. To deliver on this vision, we have a strategy rooted in 3 key pillars; winning discount, leading omni, and become the ecosystem of choice. And 4 enablers; customer centricity, best talent, technology, and supply chain. All of these empowered by our purpose, culture, and values. Today we are excited -- we have an excited opportunity in the horizon to double the business even faster than before. I'm positive about this business and what we can achieve. Thank you again for all of your continued support and interest in our business. Now let's open to questions.

[Operator Instructions] The first question is from Rodrigo Alcantara from UBS.

Hello, Ignacio, Paulo, Salvador, good to see you again. A very simple one. I mean just curious on your initial requirements about business simplification. If you can explain to us what did you mean by that? And precisely what are the areas of opportunities for Walmex that you spotted here, Ignacio? That would be it.

Simplification basically is how we feel about our businesses. We want to do things as simple as possible, as fast as possible. And our feeling is our complexity is the enemy of efficiency. So simplifying all our internal and external processes, it's not only make our operations smoother, but improve the experience for our customers, for our suppliers, and associates. And the way to simplify the way we operate is using more technology, more automation, and eliminating processes that are not needed anymore. The worst thing we can do is try to improve a process that is actually not needed. So we're putting a lot of focus on reviewing the way we do things, in order to simplify as much as possible, so we can move faster.

And as we make progress on this front, I mean, can we expect profitability to improve on the margin side, or would be more like on the approach to commercial side with customers, just to understand the benefits of this?

I think it will have an impact on the way we work. It's a cultural change, so it will allow us to have a slimmer operation, faster, and more efficient. Basically, what we're trying to do is operate with less and run our business with less and in a more simple way. So you can expect benefits all across the business.

Our next question is from Mr. Antonio Hernandez from Actinver.

Congrats on your results. My question is regarding the new businesses. You mentioned that you could post some expansion because of that. And congrats on that. As you are aware of, I'm quite confident in some of these businesses. Could you please give some light into, which of these businesses are you more upbeat in the very short-term? And maybe what do you expect going forward?

Yes. Thank you. So we are very happy with the pace. Our new businesses are growing, mainly BAIT, with 13.7 million customers, and again beating the market on new customers. Our Walmart Connect as well performing very well and contributing to our bottom line in our P&L and our health membership. And regarding all of that, we also launched our Walmart Beneficios and Bodega Aurrera Beneficios that will help us integrate the whole ecosystem and give us much more information about how our customers are interacting with our ecosystem, how each one of our new businesses are generating this interaction with our stores, and bringing more traffic to our stores. So we are starting to see a lot of positive results in how these new businesses have impact in our P&L. So we are happy with the strategy, how it's unfolding. Launching Beneficios in Walmart and Bodega is a key milestone for us, because it will generate a lot of information of a lot of customers that in the past we knew nothing about it because they were paying in cash. And that information will allow us and give us the opportunity to generate better insights. With those insights, we will be able to fuel again our business. And we can contribute with that information to our suppliers, so that together we can have a positive impact on how we build our business. I don't know if Paulo wants to…

No, I think maybe, Ignacio, just to clarify to the people when you talked about Beneficios, also we've been talking about digital connection program. It's the same thing, so that you just don't get confused. But nothing to what Ignacio said.

So this was more than a one-off, you are expecting this type of benefit going forward, I guess?

As our ecosystems unfold and with all the launches we're doing and the improvements we're doing, yes, we expect the ecosystem to keep contributing to our business.

Our next question is from Mr. Andrew Ruben from Morgan Stanley.

Ignacio, congratulations again. I was hoping you could dig in a bit more on the performance by Banner. We see Walmart express exceeding the company average for the first time in a while. On the other hand, Walmart below average. So is that an issue of geographic location, exposure to, you mentioned some of the government benefits, just trying to disaggregate the relative trends between the Banners?

Thank you. I will let Raul answer your question.

Sure. Thank you, Andrew. I think from a portfolio standpoint, we remain very focused on our customer value proposition, Andrew, for each format. So let me start with Bodega and then I'll jump into Walmart Express and Walmart Supercenter. So in Bodega, we continue to focus on our price leadership and our expansion model, so that we can continue to bring the value of Bodega to more customers and more [indiscernible] across Mexico. On the case of Walmart Express and Walmart Supercenter, like we've mentioned in the past, we're in a cluster strategy to better shape our performance for our AB customers. And we're very happy with some of the progress that we're making. We've improved assortment in some of our stores in this cluster, premium stores for Walmart Express and Supercenters. We've improved as well our quality and our fresh products. And we're also revamping our service model, so that we can better tailor to our customers what they need. And we've seen some good uptake as well on our fresh. We've also changed some of our look and feel for our customers. And we've seen some good progress and some early signs. And I think that's also translating into the results that you see in Walmart Express. Walmart Supercenters, we continue to focus as well on the breadth of our assortment and bringing the value that the customers need. And as well, improving the service that we want our customers to receive in Supercenters. And we feel good about the progress that we're making as well there. And in Sam's Club, the treasure hunt items and the innovation and the value the members see in the membership is also paying off. So I think the focus that we're putting on, the customer value proposition on each format and making sure that we have a clear direction is helping us achieve the results.

Our next question is from Mr. Alvaro Garcia from BTG Pactual.

My question is on gross margin in Mexico specifically. You mentioned that for the expansion was not at the expense of price perception or competitiveness in the market. But your commercial margin did inch 40 basis points higher in that breakdown you gave. And thanks for that breakdown, by the way. So I was wondering if you can maybe talk about pricing into the second half of the year. We're obviously in a much more favorable environment. Your suppliers are clearly not passing price year-to-date. So any commentary on that, competitiveness would be great.

Yes, thanks, Alvaro. Thanks for your question. Indeed. So first, I'd like you to reassure on that fact that we are increasing gross margin without jeopardizing our competitiveness, and believe us that is our mantra and it's our everyday what we're trying to achieve. Indeed, to the composition of the gross margin improvement, let me first talk about the other elements, and then I will come back directly to your question. I think it's important to understand the contribution that the new businesses are already giving to the gross margin progression. So you see this quarter another 20 basis points, as well as with improvements that we've been doing in efficiencies and e-commerce giving another ones. So that is a significant chunk of a gross margin improvement that you see versus what we have done in the past. In particular, the former is something that our competitors don't have in order to help their profitability in their shape of their P&L, as you can see it. There are of course always efficiencies on the supply chain. I will not spend much time there. I will go directly to your question around the 40 basis points around the commercial margin. First thing to say and then Raul can elaborate a bit more on that if needed. Actually, we're maintaining our price gap and improving our price perception. So that's constantly our focus. We've been talking about to you in the past that our need to improve our price perception, because our equation in terms of what we were investing in the market, so to speak, and the perception from our customers was not the right one. In the last 18 months to 2 years, we have put a lot of effort on that by working on levers that we've always talked about. Here of course, depending on the Banner, they might be different, but they will range from, of course, the price gap or the KVIs. They will range with the communication, the penetration private brands, quality of risk. They're all important elements for the price perception. In this particular case, in the quarter, and as we alluded to, we actually did just a much better management of the catalog, particularly in the general merchandise. Better management of catalog means in terms of actually, how we buy, what we buy, but also as well what we liquidate. And therefore, that actually we don't have necessarily so much assortment that we actually then need to liquidate. If you look at it from that perspective, it can generate inefficiencies and we are not putting at all our competitiveness at risk. And I think you could expect that going forward to the outlook for the H2. I don't know if you want to add anything, Raul.

I think you covered it. I think our baseline and our core business maintains no strong, and we feel good about our commercial margins on what we're delivering to the customers. And like Paulo mentioned, I think you're starting to see the benefits of the ecosystem and what that's contributing to the gross margin effect.

Our next question is from Felipe Cassimiro from Bradesco.

I wanted to explore just the launch of the Glass platform. My curiosity is on how much this new front end platform could unlock e-commerce growth and what categories are you particularly seeing that you could see a stronger growth? And still on this, do you anticipate any stronger marketing efforts to bring more traffic to your e-commerce platform? That's it.

Yes, thank you. So as we told everyone, we've been telling in the past, we are in the process of changing the whole structure of our -- and the whole technology of our e-commerce platforms, and the technology that we use to serve our customers in e-commerce. Mainly migrating into what we call WCP, Walmart Commerce Platform, is our own platform that was built in the U.S. And we're bringing that into different countries like Canada and Mexico, Central America and eventually Chile as well. Glass is part of that. Glass is the front end, WCP is the back end, and we're in the process of migrating all of that. What you can expect with all of this is that eventually in the midterm, we're going to be exactly on the same technology platform in the U.S. So that will allow us to have the same usability, and the same site as them that is much more advanced than the ones that we have now. We already started the process of migrating that. Glass was the first part that is the front end, that it helps the customer navigate easily our sites. And now we are also in the process of migrating the back end with WCP. Actually, this week we turned on already traffic to 1% to start doing the first test. This will put us into parity with the rest of our competitors regarding e-commerce. There's no secret sauce there. You can use our site in the U.S. That's exactly what you can expect here in Mexico in terms of technology. It's a big effort from our part, but we believe it is the right choice. And that also, once we are connected with this technology, it will allow us to offer to the Mexican and Central American customers, all the, or most of the assortment that we have available in the U.S. That's more than 400,000, sorry, 400 million items listed in the marketplace in the U.S. So we'll unlock the cross border business for us. So that's what we're in the process of and starting to see the benefits of that.

And just to complement, we just finished the glass migration, Ignacio, in Bodega. And as you know, we already had it in Walmart Express and Walmart Supercenters. Bodega, we just finished in this quarter. And we're starting to see early signs of good progress and good customer adaptation on that.

Our next question is from Mr. Bob Ford from Bank of America.

Are you there?

Our next question is from Ms. Renata Cabral from Citi.

And congrats Ignacio on your new position. So my question is related to the financial solutions. During the Walmex Day, a company mentioned a series of initiatives. I wonder if you can give us some color, especially about the development of credit score system and the open platform. And more than that, if you can share with us the ambition in this light in the financial solutions, if you intend to make further partnership with other banks or to become a bank in the future. Just to understand where Walmex wants to achieve?

Thank you, Renata. Yes, so we are very confident that, that cash that it will represent our turning point for cash and the whole ecosystem once we open -- we migrate to open loop. Regarding the launch of open loop, we are targeting now Q4 to release the initial open loop capabilities. Unfortunately, the launch has been postponed due to a combination of unexpected requests from regulators and some delays from the development part. We are very careful on what we are building and what we are launching, because it's very sensitive. We are going to be handling other people's money, so we don't want to take any risk here. So we're being very thoughtful on this. Unfortunately, we've been having some delays, but we are targeting now to launch sometime around Q4. Hopefully, we won't have any more delays on this. But we are still very confident that this will change for the positive for our customers in the whole ecosystem.

Maybe just to build to another question you were talking about, what's the credit scoring? We will continue working on that, which is an element that we said in the past, Renata, which is important as additional information that will help the people that will work with us, the third-parties, normally a bank or actually a fintech company that will want to put their balance sheet to work in order to facilitate credit to our customers. That's an important element. What we've talked about, what Ignacio was talking about, about Walmart Beneficio, Bodega Beneficio, or the digital connection program that we just started, where we're getting the phone number of the customer. Is this something that in the future periods will give us increased data about the customer, the behavior, what do they shop, how much do they actually spend on a weekly basis that will be able to strengthen the credit scoring that we are building. This doesn't happen, as you can imagine, Renata, one day to another. So this is a couple of months investing on this one, but it's something that we are quite positive about that can unlock potential in our ability to provide credit to -- our entrants that buy on us on a daily basis.

Our next question is from Mr. Ben Theurer from Barclays.

Just wanted to follow-up a little bit on some of the investments you're doing, and as we look at the general expense line, and obviously the sequential increase here, but also the year-over-year increase was quite meaningful in the quarter. It is more meaningful even as in first quarter. So just wanted to understand from like these investment needs, the initiatives you're boosting, how much should, we expect going forward as a boost to the general expense, just as a percentage of sales, because it kind of went up from 1Q into 2Q, and clearly the absolute [ PIS ] amount that you're spending seems to be significantly more elevated. So just wanted to understand what the run rate of that is for the next couple of quarters.

Ben. Thanks for your question. So I think when you look at the expenses, and as we've been talking in the past, I think in particular, the biggest expenses that you're seeing in our P&L and you continue to see this year, less so in the future, will be the labor costs, and the labor costs, because of the increases that you all know that we have had in the last couple of years, we're at 20% average rate of minimum wages. We've always said to you, it's not that we have a lot of people actually paying minimum wages, because that's not the fact. But as you can imagine, across the organization, in the operations, you have lots of levels. And as you push minimum wages, you have to push all the levels and the salary bands. And of course, that tends to impact all the population that we have. That said, we had also specifically said on purpose and intentional that we wanted to make an investment in our people, catching up in terms of our position versus the market, and to pay the people the right money, which actually allows us to reduce the turnover and rotation that actually we used to have levels above 70%. As you know, now we've been public about that around 35%. On top, additional to that, we always have investments to run the business, re-modelling, cost of doing business, like electricity that is higher than it was in the past, because also the -- even the renewable energy has not been able to have the cost that we have seen in the past, and our investments, and we have to balance all that. As a result of that, we've been explicitly talking about the fact that temporary reshaping of the P&L between the gross margin and SG&A. I want to say, I already said it to Alvaro, but I wanted to say it again, we do so, but not at the expenses of competitors. We do so not at the expenses of our price cap, or our price perception, believe us on that one. And therefore, what we've been building with the ecosystem that we've been building, with the verticals contribution, with Connect, with BAIT, also the financial services to some extent start also contributing to that. And efficiency that we generate, sometimes the way we buy, sometimes in the supply chain efficiencies are helping that. Looking forward to your question, I think looking forward and where we see that the minimum wage is going the next couple of years, Claudia has been, [indiscernible] has been, the new President has been open about that. She wants to make the 2.5x the basic basket, which is roughly up to 10%. I think with that, and all the initiatives that we are taking into drive automation in the business, we believe that therefore then we'll be able to see more leverage in the expenses. I think in the short-term, we've been open short-term, so meaning 18 months period or so. We have been open that you might not see all this leverage in our expenses, because delivering efficiency is on top to offset this, whilst also investing to grow well ahead of the market. Sometimes it's -- not difficult both to land in the short-term.

Our next question is from Ms. Irma Sgarz from Goldman Sachs.

Just 2 quick questions. On the expense front, I think you answered it very clearly. I was just curious that as you roll out the benefits program, is there a cost attached to that initially in the startup phase? I mean, over time, I would imagine that you get benefits out of it as you continue to learn more about the customer and you even monetize it to some extent through the Luminate program. But I was just curious if you initially sort of see an expense attached to that, that we should just work into our numbers. And then I was also curious if you could share anything about -- it's obviously very exciting for you to be able to have that, I guess, single customer view of this unique customer view across the different channels. What's your starting point, just in terms of you mentioned that you often -- you don't have identified sales in the offline channel. What's your starting point and where do you think you could get to over time in terms of identifying customers? And then, sorry, final question, but hopefully one to the benefit of everyone. Just if you could make any comments about consumption outlook into the back half as we're coming out of the sort of election period, et cetera, would be super helpful.

Yes. So let me just answer very briefly to the first one, Irma. Now it's minor investment that we're making to the people that are working on it. So we actually -- in any of margin, we're actually not giving a lot of benefits that people can cash back. It's not about, so that one. So minimal investment. Talking about the program itself and the question, do you connect an unique customer? I will pass the batten to Ignacio to talk about that and I will come back to the question on the outlook.

Yes. And important here to understand what we built with Beneficios is a set of benefits that are given by third parties to our customers. We identify that our customers are very valuable for other companies that want to attract them. So in order not to break our EDLP philosophy inside our stores, all the benefits are inside our ecosystem or with benefits from other companies like cinema tickets or discounts in coffee shops or with other brands. So it won't add up any cost. It will give usable and requested benefit for our customers that they can use and the type of benefits we are offering, will keep rotating. So something is not working, we will just change it for something else. And let me say that our first initial numbers on this were very, very good. We are happily surprised with how this is unfolding. So yes, it would help unfold and connect the whole ecosystem and give us much more information that we will use for credit scoring for relationship with suppliers, for advertising or to understand better our customers, to give them a better service. And regarding second half, Paulo, do you want to take it?

Yes, I can talk about the second half, even the way I'd like to answer that question, which we get it often is in 2 ways. One is around the long term and the other one is in the short term, right? I think on the long term, we remain very positive about Mexico and its potential. And you -- some of you knows that they have been in contact with me sometimes on the road that I keep saying since I've been here in Mexico to keep -- seeing that, that surprised me the most is actually Mexico. And I think the potential continues to be out there. What do you look at from what Mexico has been growing? And in the past, the prospects of nearshoring, the fact that it is now the biggest exporter to the U.S. Sometimes the relationship between U.S. and China and the space that it gives to the Mexico, investment have been made in Mexico and infrastructure most recently. So I think that you will continue to see the positive. I'm sure when you asked that question, you're looking more to the short term and what is going to happen in H2 and H1 next year. Yes, what -- typically, let me say 2 things here. One, we have seen in the past typical, in the elections, the last 2 elections, there have been a slowdown in H2 versus H1. But it's important to say the last 2 elections that were done, actually, there was a change of government and in a part, which is not the case this time around. So therefore, I'm not sure if we can look really to the past to infer the future. It's true though that we actually start seeing some of the economic factors that you will see, be it an employment, be it actually the gross, be it actually the, in this case, reflecting in the traffic in our store and new consumption. We saw a little bit at the end of June, in early July, a little bit of a slowdown in traffic. How these will unfold? we'll have to see, Irma. It's just too early to say. You know that it has been a bit erratic this H1 because with a lot of incentives pulled to the quarter 1 and therefore, driving a lot of the consumption in the quarter 2 you didn't have the incentives. So people tended to spend most of that in quarter 1. The incentives or the subsidies from the government started now in July. So the first bimester was already given to the population up to the 19th of July. So let's see how that also helps driving consumption in the -- amongst our consumers.