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Greetings, and welcome to the Grupo Chedraui's Q2 FY '22 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Antonio Chedraui. Sir, Please go ahead.
Good morning. It is my pleasure to be with you today for this conference call regarding Grupo Chedraui's second quarter 2022 results. In this second quarter of the year, we achieved excellent results in an inflationary environment that has not been experienced in decades. Customers continue to recognize Grupo Chedraui's formats for the differentiated and attractive value proposition that has allowed us to grow while expanding profitability. We have sustained a growth rate above the market and above inflation. For our operational and financial [ leader ], we have been able to expand both the EBITDA margin and net income. Due to this, we approach the second half of the year with the commitment to continue to create value for Chedraui and its shareholders. If you allow me, now we will review the results for the second quarter of 2022, starting with the relevant events of the period, followed by a review of regional performance and consolidated financial results. In this call, I will be mentioning reported and comparable figures. The latter referred to figures that exclude the consolidation effect of Smart & Final within the group numbers. Please turn to Slide #4. In the quarter, we achieved same-store sales growth of 16.2% in Mexico, far exceeding the 10.5% growth reported by NPAT in the same period. This growth is due to our differentiated and winning value proposition. Regarding profitability, Mexico achieved an expansion of 70 basis points, reaching an EBITDA margin of 8% in the quarter. Moving on to the U.S. operation. On the next slide, you can see that we achieved extraordinary results. The Hispanic division grew same-store sales by 12% in dollar terms. With regards to profitability, total EBITDA, which includes the consolidation of Smart & Final through 190% and increased 51 basis points to 8.2% of sales. Moving on to Slide 6. In terms of consolidated results, which includes Smart & Final, sales grew 78.5%. On a comparable basis, sales grew 15.4% due to solid organic performance. Regarding profitability, EBITDA increased 91%, increasing from a margin of 7.8% a year ago to 8.4% this quarter, which is equivalent to an expansion of 54 basis points. On the next slide, on Page 7, you will see that net income grew 78.9% this quarter, thanks to the consolidation of last year's acquisition and through strong organic performance. Regarding leverage due to our ability to generate strong cash flows, we managed to close the quarter with a net debt-to-EBITDA ratio of 0.54x, which is close to preacquisition levels. Now we will continue with the performance of each region. Turning to Slide 8. For the retail Mexico operation, we achieved same-store sales growth of 16.2% in the quarter, which widely exceeds the result reported by ANTAD of 10.5% for the same period. Sales for this division reached MXN 25,005 million, equivalent to 16.9% growth at a total level, with an accelerated pace in the south and southeast of the country, which reflects stronger consumer demand in the tourist areas where we operate. We also experienced a significant increase in the central and the metropolitan region of Mexico City. Likewise, this quarter, we [ announced the 14 ] promotional campaign in Mexico as a specific Chedraui promotion for this summer season. In this quarter, we added 2 stores, increasing net openings to 13 in the last 12 months, equivalent to a 0.2% increase in sales growth. Regarding our omnichannel operation, this quarter, we achieved a share of sales of around 4%, despite the return of customers to physical stores after the pandemic. On one side, starting with our own platform, I would like to point out that this quarter, we began the integration of the Supercito format into our digital channel through the launch of the Chedraui Super veloz program, a service through which we will serve our customers in 15 minutes with the support of a third party. This project started in Mexico City and has the potential to expand to other regions where we operate. I also want to highlight that a few weeks ago, we launched the new version of our online store. improving the shopping experience for our customers and at the same time, enabling the possibility of having a marketplace in the future. In the quarter, we also announced a new partnership with Mercado Libre, in which our dry and provisional catalog is featured on their platform. The operation began in a store Mexico City with the objective of covering the entire city by the end of the year and with the potential to expand this collaboration to other regions of the country. In this way, we continue to provide a variety of e-commerce options for customers with a commitment to guarantee the same prices on all platforms and at the same time, enabling the possibility of identifying our clients through the new Chedraui program. With that said, we reiterate our belief in the potential that the digital channel has in the short, medium and long term as a source of growth for Chedraui. Please turn to Slide 9. You will see that the EBITDA of the Mexico operation increased by 28.1% in the quarter, reaching MXN 1,999 million due to the accelerated growth in sales as well as operational and financial discipline, we achieved EBITDA expansion of 70 basis points, which is above the annual expansion target of 10 to 15 basis points. Regarding the Real Estate division, we exceeded pre-pandemic sales levels by growing 31% to MXN 281 million. EBITDA in this segment grew 23.6%. Next, Carlos will comment on the performance of Chedraui USA. Carlos, please go ahead.
Thank you, Antonio. If you may, please turn to Slide 10. During this quarter, total sales of the U.S. operation grew 172.3% reaching MXN 38,531 million after the consolidation of Smart & Final. Same-store sales remained strong in the quarter, growing 12% in dollar terms, reflecting the ability of our business model to deliver strong results in a variety of economic conditions. Despite the high inflationary environment, we continue to deliver an attractive value proposition for our customers across the 3 Chedraui USA formats. I am pleased to report that our real estate development activity has fully resumed as we aggressively search for new locations to open new stores across all 3 of our banners. We are planning to open a new Smart & Final store in Q4 of this year. Moving to Slide 11. Regarding EBITDA, the division's results grew 190.3% after the consolidation of Smart & Final, reaching MXN 3,158 million in the quarter, representing 8.2% of sales. By format, our Super continues to demonstrate the strength of its value proposition by achieving a margin expansion of 30 basis points in the period, an increase of 9.1%. On the Fiesta side, the EBITDA margin increased 20 basis points year-on-year to 6.4% over sales. With this result, we remain in line with our profitability targets of reaching a margin of 7% of sales by 2023. During the quarter, Smart & Final reached MXN 1,887 million in EBITDA with a margin on sales of 8.4%. We continue to identify and realize synergies at Smart & Final and our other banners as we begin year 2 of our integration process. As mentioned before, our operating foundation in the U.S. operation remains strong, and we are eager to leverage our healthy performance into new growth opportunities. That would be it for the U.S. operation.
Thank you, Carlos. We turn to the consolidated financial results on Slide 12. In the second quarter of the year, we recorded consolidated sales of MXN 63,817 million, equivalent to 78.5% growth year-over-year. Excluding the consolidation of Smart & Final, we achieved comparable growth of 15.4%. Gross profit increased 81.7% reaching MXN 14,655 million in the quarter. This represented a gross margin of 23% and an expansion of 41 basis points year-over-year. With respect to operating expenses, we continue to strictly control all business lines. With this, in the quarter, we recorded expenses of MXN 9,308 million, equivalent to 14.6% of sales. The company's consolidated EBITDA increased [ 90.8% ], reaching an amount of MXN 5,347 million in the period. Thanks to the excellent performance across all regions. This led to an expansion of 54 basis points in the sales margin to a level of 8.4%. During the second quarter of 2022, financial costs reached an amount of MXN 1,257 million, an increase of 84.9% compared to the same period of the previous year. This is explained by the increase in debt after the incorporation of Smart & Final and the cost of operating leases recorded in this term under the IFRS 16 standard after the consolidation of this operation. Moving on to the consolidated net income for the quarter. The result grew 78.9% compared to that achieved in the same period of 2021, reaching an amount of MXN 1,510 million with a margin on sales of 2.4%. This result also implies a growth in the last 2 years of 113% for the quarter, demonstrating the company's capacity to improve its profitability. Moving on to the slide on Page 13. We decreased our reported leverage from 1.26x at the time of the acquisition of Smart & Final to 0.54x at the end of June 2022, demonstrating our cash flow generating capacity. Finally, the accumulated CapEx invested in the first half of the year amounted to MXN 1,805 million, equivalent to 2.8% of sales. On Slide 14, you may see the composition of debt at the end of June 2022. The company recorded a net debt of MXN 10,051 million. All debt is in the United States in dollar terms and mainly associated with the acquisition we made last year. In these first 6 months of the year, we have prepaid part of that debt, making use of the cash we have generated. Moving on to the next slide. I'd like to highlight a few aspects on sustainability. Grupo Chedraui was recognized as a company committed to gender equality by being included in the Bloomberg Gender-Equality Index as one of the only 10 selected Mexican companies. Also, this quarter, we published our annual sustainability report with relevant information concerning the operations, both in Mexico and the U.S. as part of our grading commitment to transparency. This document can be found on our corporate website in both English and Spanish. Now if you allow me, we will move on to the question-and-answer section.
[Operator Instructions] We have a first question from the line of Luis Willard with GBM.
Congratulations on the results. First of all, thank you for putting together to this presentation. I think it's in the future to follow the remarks. So I just have a couple of questions. The first, I mean, you've been able to grow same-store sales in Mexico without compromising gross margins actually. So -- and at the same time, we appear to be gaining market share in a consistent way. So can you share with us how are you achieving this performance? How sustainable do you see it in the future? And more specifically, I mean, things are going well right now. But how are you preparing your company for a potential normalization of growth eventually in the coming quarters. [ That will be it ].
Well, same-store sales have been really strong for us, but not only in a particular region, of course, we have a big difference in the tourist areas. But at the end, we're being able to grow same-store sales over and part in every region where we participate. So we think that the value proposal to our customer, the focus in our customer taking care of the assortment the service that we offer at the store level and the ambience that we produce has been very successful. And with the most important factor that we focus at every store, which is the pricing strategy that really that's what differentiates Chedraui from everybody else. So we think, yes, we think that it is sustainable to be able to keep growing above our competition. On the other hand, what we are preparing for a potential recession if it comes. First, let me say that we are very resilient to any type of recessions because we mostly sell food and basic products, CPG, that's our business. That's what we do. So usually, we suffer less than any other industries. On the other hand, particularly Chedraui, with the cost structure that we operate, it allows us to be even in a difficult environment to be efficient and to be profitable. So we are focused and keep doing what we're doing to take advantage of the market share we are being able to achieve and to focus on the strategies to come to make sure that we focus not only in the next coming months, but also years. We're very focused on the e-commerce strategy, the development of Supercitos to other regions of the country. And [ in Chedraui strategy ] where we know our customer by name and address and what they buy, how they buy and what they like and what they don't. So we're focusing on those 3 strategic columns that we think are going to allow us to sustain our position in the future.
We have next question from the line of Antonio Hernandez with Barclays.
Can you please provide a little bit more light on the real estate business? Or what are you expecting for the rest of the year in terms of also traffic and then sales and profitability. Are you seeing for the recovery just as it has been the case and also whether to give more light on your occupancy rates and compare that to pre-pandemic.
I'm really sorry, Antonio, I was not able to hear well your question. Can you please repeat it for me? I don't know maybe it's the line or something, but the sound doesn't come out clearly. Can you do it again, please?
Sure. Sure. Of course. Congrats on your results. And just wanted to get more light on the real estate business in terms of occupancy rates, what are the current levels and how do they compare to pre-pandemic levels? And also what are your expectations for the remainder of the year because in terms of profitability and also in terms of traffic we see in the real estate business.
Well, on the real estate division, we're happy to announce that we are now at 94% occupancy rate. We are still under the occupancy rate pre-pandemic, which we were at 97%. But it's -- we're getting there. We're getting there. In terms of traffic, we don't -- we still have not been able to achieve the traffic that we had. So on the parking side, we're losing still pesos against 2019 pre-pandemic. But on the other hand, we have been able to increase the pesos per square meter, per rented square meter by 10%. So we're being able to achieve on the rent, the same pesos a little lower the pesos that we were achieving in 2019. So we are very happy with the real estate business. At the moment, we were very worried, but it's coming back. It's getting there.
We have next question from the line of Bob Ford with Bank of America.
And congratulations on the quarter and a very impressive same-store sales performances. Antonio, can you be a little bit more explicit in terms of prices and how you see your value propositions in Mexico? And then when it comes to the [ MeLi ] deal, right, forgive me, but I had a few questions, right? I was curious about the economics, the incremental order volume you're beginning to see in the locations that you're going live in, how the data is being shared. You mentioned, I think [ Chedraui ] and the ability to identify clients, I wasn't sure how that was working. But I'm very interested in the data and how that's being shared, how you're being branded on that site and then picking in last mile on those types of things. And then lastly, I'm really excited about what you can do with Smart & Final, especially in Mexico, right? And I was curious in terms of how you're thinking about growing the concept in Mexico as well as leveraging private label and some of the other potential synergies.
Well, I'll start with the pricing strategy. We -- every particular store can have a different pricing strategy, adjusting the different departments to the particular competition that we have around that particular store. It's very sophisticated because we do not just compete against the prices of a typical supermarket competitor. We might have a specialized retailer that we compete in a certain particular category. So that price regulation is very complex. We do it centrally and then at the strong level with a different number and importance of items. So this pricing strategy with the focus in assortment that we do at store level the same way and the ambient that we are being able to offer a particular customer, we think that's the value proposition that is allowing us to gain market share and to grow above our competition. On the Mercado Libre side, we are very enthusiastic about. At the moment, we only have 1 store in Mexico City that we're operating. We believe that we will be covering the whole Mexico City by the end of this year and then by next year, probably expand to other regions of the country. As we have always said, we decided on our e-commerce strategy where we would develop our own platform for as well where we saw the possible potential third parties than acceptable conditions, which are basically that they respect the prices that Chedraui offers to the customers. So there is not an extra charge on the price side. They could charge their service, but that's different, but not the prices. The second, it would be that we are able to maintain the customer information. We told that the data that allows us to have freedom in Chedraui program. And the last one that they don't ask us for any particular exclusivity. So we will keep working opening doors for our customers so that they decide which though they use to come into a particular Chedraui store. So we are very enthusiastic about this Mercado Libre project, and we think it's going to grow quite fast. At the moment, in this particular store, we are doing the picking, and they are doing the final mile and the delivery to the final customer. The customer goes in through the platform, where they -- we are the option of a supermarket. And then the customers buy it in the platform and we pick and then deliver. On the opportunity of the Smart & Final format in Mexico, we're also very enthusiastic about it. We think that there are many cities that where we could have a Smart & Final format. We are very eager to prove it in different cities than what we have at the moment in our joint venture in the northwest of Mexico, where they operate very successfully. So we think that at least we could open probably around 100 Smart & Final stores in Mexico.
We have next question from the line of Vanessa Quiroga with Credit Suisse.
Congrats on the results. My first question is about the U.S. If you consider to be gaining market share in your locations in the U.S. And the second one, the second question that I have is regarding gross margins. If you can share with us in Mexico and the U.S. is gross margin improvement was a bigger contributor to EBITDA margin expansion or it was the operating expenses, a positive leverage.
Maybe Carlos can help us with the U.S. questions, and then I'll end up with a gross margin in Mexico. If it's okay with you, Carlos.
Absolutely. Yes. Look, it's one of the key indicators that we're focused on, on a monthly basis, we're tracking that through our partnership with Nielsen. And happy to report that over the last several months, we've tracked things on a 4-week, last 4 weeks, last 13 weeks and last 52 weeks. And all 3 of our banners consistently have been showing share gains versus rest of market, both the dollar terms as well as in unit volume. So we're very happy about that. And in particular, the format that has really stood out recently has been the market share gains that we've had at Fiesta. And that's a tall order given that the rest of market includes very aggressive players such as H-E-B, Walmart and Kroger in both the Houston and Dallas market, not H-E-B in Dallas, but overall, some very aggressive competitors. Now with respect to gross margins in the U.S., our margins have been relatively stable. They're stable versus last year. So a lot of the EBITDA margin expansion has been through our sales gains and our efficient operational expense management that has allowed some of that expansion to flow to the bottom line.
About gross margin in Mexico. Well, this gross margin benefits that we're seeing, they don't come from increasing prices. They come from very -- from a better inventory management. And that's what we do. We are taking a lot less markdowns [ that what we ] did in the past with the obsolete inventory. We are gaining a better sales mix, selling more bread, prepared food, apparel. And this gives us margin benefits that in combination with a pricing strategy where we try to be efficient, reducing waste, give onshore producers those margin gains that we think we are going to be able to sustain in the future.
We have next question from the line of Joaquin Ley with Itau.
Congrats on the results. My question goes in regards to the EBITDA margin of Smart & Final in the U.S. I was positively surprised by that. I understand that second quarter is seasonally strong, but still 8.4% looks kind of high for a cash-and-carry operation. So Carlos, I mean, do you feel comfortable with that kind of margin going forward? Or do you think that you could aim maybe for the lower margin and try to maximize even more the sales density and ultimately and with a higher EBITDA in dollars in that operation.
Yes, there's a little bit of seasonality effect as you well mentioned, but I think that we need to strive to continue to stay at these levels. I think we're driving sales well. Our gross margin management is -- we're very aggressive and very detailed on that as we price compare against very aggressive players, sometimes including Costco in many instances. But we feel that there's opportunities in our cost structures that will allow us to continue to reach for those types of EBITDA levels.
We have next question from the line of Rodrigo Alcantara with UBS.
Antonio, I just want to pick your brain on how do you see the -- that competitive dynamics within the premium segments? Particularly, let's talk about Chedraui Select perhaps with La Comer and the transition of -- from Walmart Express -- from Superama to Walmart Express. And then just curious if you have seen any externality, benefiting your premium stores there as a result of, let's say, for example, this transition from Superama to Walmart Express? And how do you see the company growing within this premium or at least within the higher segments. That will be helpful. And also just a follow-up on Bob's question on the e-commerce and [ MeLi ] deal. Just curious if you can also explain the economics of the other programs that you have with Cornershop with the Chedraui Super veloz. Are you using kind of dark stores there or are they using your stores? If you can comment on that, that would be helpful.
Well, about the high-end consumer in Mexico, I think that at the moment, there are regional players, but on a national level, I would say that probably La Comer and our sales have been able to focus with particular formats to serve this customer in a proper way. And we think that La Comer and our sales have been very successful, and we think we can continue that in the future. Probably not -- it's the kind of consumer that needs a very particular different assortment with our correct pricing strategy because they are always conscious about prices as well. They have ways and different products to compare. So I think the value proposition, the same has to be very focused on this customer, and we have been able to do it correctly. On the other hand, about the economics of our project or -- yes, I would say, a project with Cornershop, I would say that with each third party, we have a different agreement because the type of service that they offer in the value chain might be different with each particular player. And even with each particular player, for example, at the moment, we are doing an extra fast delivery in less than 15 minutes in one store with Cornershop. And that has different economics than the typical agreement that we have with them. The only thing that I would like to highlight is that with each platform they do when we do different things. And we pay them different commissions in each agreement depending on what they do.
But we are very sure that we ask them about 3 things that I would mention them again. But they respect our prices so that our customers know that any door that they choose to go through into Chedraui format that they would find that same value proposition from Chedraui that they allow us to share the complete customer information through the program with Chedraui and that none of them are exclusive so that we can use Rappi, Cornershop, Mercado Libre and any other player that comes to the market.
I mean, just let me rephrase the first one. So we have seen the same store sales of Superama decelerate sort of this transition to Walmart Express. I guess the point -- my [ pull through ] question would be is that if you have seen any benefit on your stores that are nearby those? Or is it just early to say or -- we don't have any [ evidence on that ]? Just curious on that specific dynamics.
I don't have hard information that I would be able to share. I think that in the end, we're gaining market share against the market, who that market is, depends on every particular store, particular region. What I can tell you is that, yes, we are gaining market share in the high-end formats of Selecto. Wherever that comes from, I'm not sure that could be specialty retailers, could be a particular market, could be sometimes a high end Soriana, sometimes a serial market store or sometimes a Walmart Express. But -- but the truth is that we've been able to capture more customers with our value proposition in the high-end consumer [ trend ].
[Operator Instructions] We have a next question from the line of Sergio Matsumoto with Citigroup.
I wanted to ask about the Walmart in the U.S., there was some weakness in terms of general merchandise and discretionary categories. And I know there's very little overlap in terms of merchandise with what you're selling the 3 banners in the U.S. But there might be some overlap in terms of customer segments. So since they mentioned that not only the lowest income tiers, but also a slightly higher income tier customers might be feeling the pinch of the inflation. And you also overlap perhaps to the value proposition with everyday low price. So how do you see this? Is it a threat or an opportunity given your value proposition in the U.S.? I would like just to hear your thoughts.
Carlos, for sure, can answer this one.
Sure. Well, the -- yes, the reports that Walmart came out which shows some weakness in some of their, let's call it, nonfood categories. But we've been competing -- on the food side, we have been competing with Walmart for a very, very long time. And the way we differentiate ourselves against Walmart is really through our perishable assortment and the breadth of our perishable assortment bakeries, our meat departments, fish departments, et cetera. And we tend to have significant price gaps in those categories with them, which tend to be very important to our consumer. Household budgets across the board are getting tight.
Folks are shedding what I would call nonessential spend, such as entertainment and food away from home. And they're going to be looking for a best price option for these essentials. And that's really us. That's where all 3 of our banners are positioned. And we feel we're in a very, very good spot. We continue to see labor shortages, wage pressures, out-of-stocks, fuel costs, different waves of price increases from our vendors, but we feel that we are very well positioned to address the needs of our consumer that the needs that they have in this new environment. So we've been competing with Walmart for a very, very long time, and we know the strengths that we have, and they've been successful.
Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Antonio Chedraui for closing remarks. Over to you, sir.
Well, I want to thank you all for joining. We're very enthusiastic for the coming months. We think we're going to be able to close a great year of results. So thank you, and stay safe and hope to be speaking to all of you next October with the closure of the third quarter. Thank you so much.
Thank you very much. Ladies and gentlemen, this concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.