Atacadao SA

BOVESPA:CRFB3

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to Grupo Carrefour Brasil's First Quarter Of 2018 Conference Call. [Operator Instructions]

I would like to remind you that this conference is being recorded and broadcast live on the Internet at www.grupocarrefourbrasil.com.br where the slide presentation is also available. The slide selection will be managed by you. Before proceeding, we would like to mention that forward-looking statements that might be made during this call are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from those anticipated in such forward-looking comments due to macroeconomic conditions, market risks and other factors as they are subject to change. Today with us, we have Mr. Noël Prioux, Chief Executive Officer; Sébastien Durchon, CFO; Roberto Müssnich, CEO of Atacadão, José Luis Gutierrez, CEO of Carrefour Retail; Paula Cardoso, CEO of Carrefour Soluções Financeiras and Executive Director of Clients, Services and Digital Transformation; and Daniela Bretthauer, Investor Relations Officer.

First, Mr. Noël Prioux and Mr. Sébastien Durchon will comment on the 2018 first quarter results, and later, we will provide -- they will provide the closing remarks.

Now, we would like to turn the floor over to Mr. Noël Prioux to start the presentation. Mr. Prioux, you have the floor.

[Noël Prioux, executive]

Thank you. Good morning, everybody and thank you for joining us on this conference call to present the Grupo Carrefour Brasil's first quarter results. I'm joined on the call by Roberto Müssnich, CEO of Atacadão; José Luis Gutierrez, CEO of Carrefour Retail; Paula Cardoso, CEO of Carrefour Soluções Financeiras and Executive Director of Clients, Services and Digital Transformation; and Sébastien Durchon, our CFO; Daniela Bretthauer, our head of Investor Relations is also with us.

I would like to start with a brief overview of our key highlights of our first quarter and then Sébastien will detail our financials, and afterwards Roberto, José Luis, and Paula will present very quickly the key performance highlights of their respective businesses. And then I will conclude with our priorities for 2018 and we will then open the floor for your questions.

Throughout this call, we will refer to the presentation that is available for download on our website of Investor Relations.

So let us begin on Slide #3, with the key headline numbers of Q1. We continue to be the leaders of the Brazilian market with continued sales growth and very solid growth in profitability, driven all 3 of our businesses. Our sales, including petrol, rose 60% in the comparisons with the first quarter of 2017, going to BRL 13 billion. Adjusted EBITDA increased by 16.3% to BRL 843 million, which translates into a 16 -- 66 basis point improvement in the adjusted EBITDA margin, which was 7.1%. We also posted very strong growth in our net income, which was up by 74% to BRL 280 million, equivalent to a net margin of 2.4%. And we strengthened our balance sheet with our net debt, standing at BRL 2.1 billion at the end of the quarter. Our net debt-to-EBITDA ratio stood at 0.6x, whereas our leverage was 0.2x.

Slide #4, this solid performance takes place within the framework of the Carrefour Group transformation plan, which was unveiled to the market in January. In March, when we held our Investor Day, we presented the outline of our actions that we intended to implement in Brazil as part of this plan. And on Slide #4, you can see that we have already made rapid advances on all 4 of the transformation plan pillars. The first pillar is to deploy a simplified and open organization, and the new 8-person executive committee that I appointed in December is up and running and hard at work on a number of initiatives to accelerate our growth. And let me highlight in particular, that we have put in place a dedicated organization to accelerate our digital transformation under Paula's supervision. This is already producing results as we will see later on. Our second pillar is achieving productivity and competitiveness gains, and our Q1 numbers already reflect excellent progress in this area. Our SG&A expenses at Carrefour Retail in the quarter were down when we compared to the same period of the previous year in spite of the expansion, and we started rolling out self-checkout in our gas stations, with 12 already deployed in Q1, and we continue to digitize our financial solutions and SG&A expenses on the Carrefour Card were down by 12% year-on-year, and we are ahead of plan on the rollout of the Atacadão Card, with 1.2 million cardholders at the end of March, 1.2 million cardholders. Our third pillar is creating an omnichannel universal reference and hereto, Q1, showed the number of significant advances. In terms of our store network, we continued to rapidly expand Atacadão with 4 openings in Q1 alone, and with 6 planned openings for the second quarter. And with that, we will have opened in the first half of 2018 almost as many Atacadão stores as we opened overall in 2017. Our e-commerce activities are growing rapidly as well, with the doubling of our GMV in the quarter and in a comparison with the same quarter last year. Marketplace already represents 11% of GMV with ongoing growth and we've recorded a tenfold increase in orders of online food sales, and we expanded the coverage of our food e-commerce to new municipalities in the greater São Paulo area. As part of our omnichannel strategy, we are also working on greater integration between the online and physical worlds with the rollout of click-and-collect in 12 Hypermarkets in Q1, and a pilot test of the drive concept at our Marginal Pinheiros hypermarket in São Paulo, and we are levering data to better target our customers with our offerings.

In a few months, we reached 6.3 million registered clients for our Meu Carrefour CRM program, and there have been almost 1.1 million downloads of our Meu Carrefour app for mobile phones. And finally, our fourth pillar is the overhauling of the offer to promote food quality. We launch the rollout in our stores of our full healthy food offer with 1,500 SKUs, and we have accelerated development of our own brand products -- private label products. As you can see, Grupo Carrefour Brasil has wasted no time in actively implementing the transformation plan with positive impact on our sales, as Sébastien will tell you.

[Sébastien Durchon, executive]

Thank you, Noël. Good morning, everybody. I would like to start with Slide #6, the overview of the first quarter. Like-for-like -- on a like-for-like basis, our sales went up 2.3% on an organic base, excluding petrol, despite persistent food deflation. As you can see, on the upper hand side, food deflation in the quarter was 4%, and this remains a high rate, which represents a slight sequential slowdown vis-à-vis the previous quarter. It is worth mentioning that monthly food at home inflation was a slightly positive 0.27% in April, and most economists foresee a more positive trend for the coming months. Our sales were boosted in the quarter by a favorable 1.9% calendar effect, largely due to an earlier Easter this year. Stripping out that effect, like-for-like growth was still 0.4%. In the deflationary environment that I have just described, our sales growth was notably driven by double-digit growth in nonfood, and by a strong rise in e-commerce sales. Our continued expansion in all formats contributed an additional 3.7% to our growth, which totaled 6% in the quarter. We opened stores in all formats over the last 12 months, including 12 Atacadão stores, of which, 4 in Q1, the reopening of the Pamplona Hypermarket in São Paulo, our first market supermarket, and 42 convenience stores under the Express banner, as well as 2 drug stores and 2 gas stations. This increased sales area growth by 5% in total, and 8.4 -- 8.5% in Atacadão.

Now let's go to Slide #7, where you see a significant improvement of profitability in the quarter, thanks to improved efficiency and lower financial expenses. Our gross profit reached BRL 2.7 billion, up 7.4%, and our gross margin approved by 37 basis points to 21.5%, driven largely by Atacadão's better performance, which Roberto will detail shortly, and also by Carrefour Soluções Financeiras, whose income increased 8.7% in spite of lower interest rates. Adjusted consolidated EBITDA grows by an even stronger 16.3%, underscoring solid efficiency gains in the quarter, and adjusted EBITDA margins grows by 66 basis points to 7.1%, and our 3 businesses posted an increase in EBITDA and margin as well. Through our strong reduction in net debt as through the improved interest rate environment, our financial expenses were down by 61%, and I will return to that on the next slide. As a result of a sound increase of EBITDA and our much lower financial expenses, net income group share was up by a very strong 74%, going to BRL 280 million.

Let me conclude this overview with our consolidated performance on Slide 8, with a look at our debt and our financial expenses. On the left-hand side of the slide, you see our gross debt. Unlike some of our competitors, we included discounted receivables, which gives you a full picture of our total debt beyond what is on the balance sheet. We reduced our net debt significantly between Q1 2017 and Q1 2018 from BRL 5.2 billion to BRL 2.1 billion at the end of this quarter. Over the last 9 months, we have completely restructured our debt. We used the proceeds of the IPO to pay off all of our intercompany loans with Carrefour Group, and we are now fully financed locally, eliminating all foreign exchange risk. In addition, we increased the average maturity of our debt to about 3 years from less than 1 year, previously by issuing last month, BRL 1.5 billion in local debentures with maturities from 3 and 5 years at a very competitive cost. The average cost of our debt also came down significantly, in part, thanks to the sharp drop in interest rates in Brazil. The [indiscernible] average rate reached 6.73% vis-à-vis 12.7% in Q1 2017. In April, we also obtained from Standard & Poor's a Brazilian national scale corporate rating of brAAA with stable outlook for Atacadão S.A., the parent company of Grupo Carrefour Brasil, and brAA-, with a stable outlook for Banco CSF. This is the maximum possible rating for both of these activities. With that, have a very strong balance sheet, which gives us the capacity to seize opportunities in the Brazilian market. On the right-hand side of the slide, you can see that our net financial expenses fell by 61%, going to BRL 83 million from BRL 211 million in the comparable period last year. This reflects both our lower debt and the reduced cost of our debt.

These were my remarks, and now, we would like to talk about the financial performance by business with the 3 CEOs. And now, I will hand over to Roberto, who will talk about the Atacadão performance.

[José Müssnich, executive]

Good morning, everyone. Thank you, Sébastien. Let's go to Slide #10, where we can see that Atacadão in this quarter posted solid sales and profit growth despite the challenging comparable base and that persistently deflationary environment for food and commodities as well. The chart on the left-hand side of the slide shows the gross sales that rose 5.7% in the quarter, growing to almost BRL 8.4 billion. This reflects the effect of expansion from stores, which were open for more than 12 months, and we also posted like-for-like growth in the quarter of 0.5% in the quarter compared to the first quarter of 2017. This growth was achieved by an increase in sales volumes, which is positive, that allowed us to more than offset the sharp deflation that we have already described, and which was particularly pronounced in commodities that are so important for sales, such as beans, whose prices fell by 38.5%; sugar, in the quarter down 14.5% and rice falling by 11% through the quarter. In the middle of the chart, you can see a growth of 11.9%, to the gross profit of the quarter, totaling BRL 1.1 billion, and our gross margin rose 85 basis points to 14.7%. We continued to benefit from tax credit book as of the second quarter of last year, but this improvement in this quarter is also due to the operational efficiency and scale gains that we achieved as well. Our adjusted EBITDA rose by a strong 15.9%, going to BRL 467 million. EBITDA margin improved by 56 basis points going to 6.1%. And this improvement comes despite expansion-related costs, which accounted for about 30 basis points in the quarter. And without these factors, our distribution cost would be broadly similar to last year's same quarter. In talking about expansion, we are strongly accelerating our expansion and we opened 4 new stores in the first quarter, and we plan to open 6 new stores in the second quarter, which means that we are laying the foundations for strong growth. With 10 openings in the first half, we are about to open in 6 months almost as many stores as we opened in 2017, and we plan to open 20 stores this year.

So these were the highlights and now I would like to give the floor to my friend, Mr. José Louis Gutierrez. [ Gutie ]?

[José Luis Gutierrez, executive]

Thank you, Roberto. Good morning, everybody. Let's turn to Slide 11 where you can see Carrefour retail's main performance indicators for the first quarter. Our gross sales went up 6.6% in Q1 to BRL 4.6 billion. As you can see on the chart on the upper left of the slide, we increased the share of e-commerce in our total sales, and online sales and now account for 6.3% of our total sales, doubling vis-à-vis the same quarter last year and Paula will be talking about that in greater detail very shortly. We continue to see double-digit growth in nonfood in our stores -- in our brick-and-mortar stores. Growth was also driven by expansion notably of our Express convenience stores, and our new compact market format, which now counts 2 stores, whose initial results are very encouraging. We are also seeing strong sales in our reopened flagship Pamplona hypermarket and on a like-for-like basis, our sales were broadly stable. We posted market share gains overall in Q1, notably in hypermarkets, whose performance demonstrated resilience in the quarter and our gross profit in the quarter was stable. On a year-on-year basis, reaching over BRL 1 billion. Gross margin, on the other hand, was 136 basis points lower as a result of the greater share of e-commerce, and which have growing double-digits but carries lower-margin as we have already mentioned in the previous quarters. As shown on the chart on the right, we would like to mention significant efficiency gains in the quarter. As we had said, would be the case in previous quarters. In the absolute terms, distribution costs fell by 1.4%, going to BRL 851 million, falling to 20% of net sales from 21.4% in the same quarter last year in spite of expansion costs. This is the result of a very strong focus on cost reduction, that included several initiatives to optimize our store processes -- in-store processes, very close scrutiny of third-party costs and an adjustment in the headcount in our retail activities.

Now talking about profitability. Q1 marked a reversal of trend for Carrefour retail. Our adjusted EBITDA rose 7% in the quarter to BRL 184 million and our EBITDA margin was broadly stable, up by 4.3% and we made headway through the past quarter in our omnichannel strategy.

And now, I will hand over to Paula.

[Paula Magalhães Cardoso Florez Chaves, executive]

Good morning, everybody. Thank you, [ Gutie ]. Let's go to Slide 12 where we focus on the growth of our e-commerce activities and the rollout of our omnichannel initiatives, in which we are seeing a clear and fast ramp up. As you can see on the chart on the left of the slide, our GMV doubled year-on-year in Q1, growing by 103%, while the market group grew by 11% according to EBIT. It's important to highlight that the fourth quarter always has a seasonal peak as it includes Black Friday and Christmas. Our marketplace represented 11% of the total GMV, and the number of vendors in the marketplace has grown to 134, vis-à-vis 75 at the end of the previous quarter, in line with our target of 600 sellers that we want to reach by year-end. This slide also shows a few indicators that demonstrate our rapid growth year-on-year.

Orders growing by 90%. The number of visits up to -- by 58%. Average ticket posted solid 13% growth. And the number of SKUs, 208,000. As you know, we launched our food e-commerce activities in Q4 through our app. In October, we extended the option to online orders for food through our website and, we have seen a twenty-fold increase in the volume of orders. We can say that we are advancing in food e-commerce.

Now let's talk about Carrefour Soluções Financeiras. As you can see on Slide 13, Carrefour Soluções Financeiras has posted another strong performance in Q1, with growth in billings, efficiency gains, increase in adjusted EBITDA and improvement to the quality of our loan portfolio. Total billings in Q1, almost BRL 5.8 billion, up by a strong 37.5%. Of these, the Atacadão Credit Card accounts for 20% of the total, with the lease of nearly BRL 1.2 billion, exceeding our plans.

Billings of the Carrefour Card, a mature operation, also showed very solid growth, 11.3%. Our loan portfolio rose by 20%, BRL 6.4 billion, and the quality of the loan portfolio continues to improve through the balance of loans overdue more than 90 days, representing 9.4% of the portfolio vis-à-vis 12.9% at the same period last year, or an improvement of 350 basis points. While the balance of loans overdue more than 30 days falling by 4 percentage points, growing to 13.1%, the best performance in 4 years.

It is important to highlight that the new IFRS norm, known as IFRS 9/CPC 48 came into force in January 2018, and in practical terms, IFRS 9 implies an earlier recognition of credit losses for a longer period of time. And as a result, Q1 2018 credit position is not comparable to Q1 2017. As you can see, there is no significant mature effect on results from this new norm, and the quality of the portfolio continues to improve regardless of changes in the norms.

Adjusted EBITDA reached BRL 219 million in Q1, a 25% rise, despite the drop in interest rate and continued investments in the Atacadão Card, and the new regulations on credit cards implemented last year. And this very solid growth confirms what we said last year, that we gradually would offset the impact of the new regulations by the increase of our credit activity and in health and efficiency. I would like to mention that we continue to expect the Atacadão credit card to breakeven before the end of the year.

Now I give the floor back to Noël to conclude the presentation.

[Noël Prioux, executive]

Thank you very much. Paula, Sébastien, Roberto, [ Gutie ]. I would like to conclude the presentation with Slide 15 with our priorities for 2018.

First, we would continue rolling out our omnichannel strategy. We have launched in this quarter a pilot test of our Drive pick-up concept in São Paulo, and we plan to extend it to other selected areas -- stores in São Paulo this year. We have deployed click-and-collect in 12 Hypermarkets to date, and we intend to relate out to all our Hypermarkets by the end of this year. [Audio Gap] And we have a fully dedicated team here in this business. So facilitating the process and paperless, totally [ visit ] the relationship, and also, we have to monitor the quality of the services that the sellers are giving the Carrefour clients. We monitor each other the number of complaints, so it's fully controlled, not only from the seller perspective, but also the end-customer of Carrefour.

[Operator]

Franco Abelardo from Morgan Stanley.

[Franco Abelardo, analyst]

I have a question to Sébastien about working capital. There was a relative improvement in working capital, mainly in the supplier line. Is this recurring? Or is it because of Easter, was it just seasonal? And now the question about other operating expenses, we see BRL 48 million in Cash & Carry in the quarter. So can you give us some details about this write-off? And could we expect more expenses of this kind? Or other nonrecurrent expenses because of store conversion until the end of this year?

[Sébastien Durchon, executive]

About working capital. The working improvement in working capital, a sustainable improvement in the last few months. We have already worked with extension of terms -- payment terms, improving debt at suppliers, and there was improvement as well -- or there was an impact on the part of the calendar, as you've said, but there is a sustainable improvement in this figure. About the write-offs, it is true that, in the case of Atacadão, a lot is said about new store openings, but we are remodeling also other stores in the case of Atacadão. And in this case, placing new assets, and -- but we have some write-offs in the first quarter. We had more of that, we are not planning any additional write-offs for the next few quarters. In case we do have conversions, of course, this will bring about some write-offs, but not something very big.

[Operator]

Alana Imaizumi with Citi.

[Alana Imaizumi, analyst]

I would like to ask about the gross margin of Retail operations. What was the impact in the quarter? Could we consider that it was similar to Atacadão?

[Unknown Executive]

No, no. It was much lower than Atacadão in Retail. And in the case of Retail.

[Operator]

[Operator Instructions] The question-and-answer session is closed. We would like to turn the floor back to Mr. Noël Prioux. You may proceed, Mr. Prioux.

[Noël Prioux, executive]

Thank you very much, everybody. I think we had a good discussion about Carrefour results. We thank you very much for your presence and hope to see you all in the next quarter. Thank you very much.

[Operator]

Grupo Carrefour Brasil's conference call is closed. We thank you for participating, and we wish you all a very good day. Thank you for using Chorus Call.