Eurocash SA

WSE:EUR

Q3-2024 Earnings Call

[Jan Domanski, executive]

Good morning. Welcome, everybody, to Eurocash Group Third Quarter 2024 Results Conference. With us, we have today Pawel Surowka, our CEO; Jacek Owczarek, our CFO; and also, we have Piotr Nowjalis, our new CFO to start tomorrow. So let me hand over to Pawel, who will guide you today through our results.

[Pawel Surowka, executive]

Thank you very much, Jan. And yes, hello, ladies and gentlemen. So as you have -- as Jan has already said, today is a special day because it is the last day of -- in the management board of Jacek Owczarek, our CFO, and starting tomorrow, Piotr Nowjalis will take over the role from Jacek in the Management Board as our new CFO. That's why I'm glad that both of the gentlemen could come today for a kind of symbolic passing of the keys. I will ask Jacek and Piotr to say something at the end, but just wanted to mark the fact that today, we have this very special situation that we have both our current and our future CFO with us today. But more on this at the end.

Please allow me to first start with the results of our group for the third quarter. Obviously, it needs to be said that the third quarter results are disappointing for us. We have shown a negative dynamic in sales quarter-to-quarter of 0.9 percentage points and also a lower EBITDA margin of 0.7%. And albeit the positive net profit, then still a lower net profit by 0.3 percentage points. Overall, the third quarter was marked by headwinds, most of which were linked to the consumer behavior that were weaker than we anticipated. I think most people anticipated that in the second half of 2024 on the back of real wage growth, there will be an uptick on the consumer behavior, as we have seen in the data from consumer sales in Poland for September. This has not really materialized. And so we are experiencing still weak consumer behavior, deflation on the top line, inflation on the cost side, and then also a strong pressure on our margins, being given there's still very high pressure on prices driven particularly by the discounters in our market.

As such, again, sales, unfortunately, below last year, in line with also a drop of the market that we are operating in. So our wholesale relevant market down by 4 percentage points. The EBITDA margin, as I mentioned, lower, albeit strongly offset by a cost optimization impact that we have implemented over the last quarters, and a stable debt-to-EBITDA level of below 1. Again, to the market dynamics, we have what I would consider to be a special year in 2024, where we have a conflation of 3 elements working against us. On the 1 hand side, we have still very high inflation in our costs that obviously mostly through minimum wages that have grown by 20 percentage points this year. On the other hand, we have rents that are indexed to the inflation of last year. So we have the remainder of the inflation of the last 2 years still present this year.

On the other side, CPI obviously, has come down, and this is particularly visible in our sales and where we still have deflation, for example, a negative basket in our retail sales. Food market dynamics, low. And on the other hand, we have this pressure on margins that all of our competitors are currently experiencing. Altogether, those elements created a market surrounding that has not been favorable for us and that we have not been able to offset with the measures that we have done so far.

As mentioned, the market has also reacted in line. Obviously, we see discounters being positive, even though still at a lower level than last year. And we have also seen negative like-for-like in some of the discounters. On the other side, however, the small format stores that we are mostly exposed to have shown a negative dynamic, particularly the small grocery stores with a very strong negative dynamic.

In terms of net of EBITDA, we are stable. Jacek, maybe you would like to say a couple of words about this.

[Jacek Palec, executive]

The fact is, as you can see that we keep generating cash flow as in normal times. So the impact of the result is not visible here because we're on the next slide, you will see as well the profile of working capital, so we improved cycle of cash conversions in reality, which is helping us really to generate cash, which is supporting decrease of that and keeping them below 1x, which give us comfort in terms of liquidity and financial stability of the company.

[Pawel Surowka, executive]

Thank you very much. One of the 2 slides about what we have done in terms of the cost. I mentioned we were under a huge pressure on cost inflation like everybody, particularly through salaries and rents. Nevertheless, we have been able to keep increase of our cost base pretty much in check. When you look at total costs, they were up by 2.1 percentage points. Without depreciation, that's 2.8. Particularly on salaries and social security, we're up by 2.2. That, I think, when set together with the wage growth that we have had, showed the effort that the company has been going through in terms of restructuring and reducing costs.

You can also see the work that has been done on materials and energy. The third-party services are mostly the rents and part-time workers that still are very strongly impacted, particularly by the indexation of cost to last year's inflation. And this picture looks even stronger when we take out the costs of Duzy Ben and Frisco related to their expansion. Obviously, they are growing. And so their costs are expanding when we just take a like-for-like approach to costs.

Our total cost has increased by 0.5%. Excluding depreciation, that's plus 1.4. I think that shows that we are very close to keeping our costs pretty much flat year-on-year, which I would say is quite an achievement being given the strong cost pressures that we are under. And you can expect that as a management, we will continue those efforts to keep costs at bay. This is thanks to obviously a high cost discipline in the entire company, but also a consequence of our strategy, which integrates the wholesale units and digitizes our processes, and that's on the back of those investments and on those processes and projects that we were able to achieve those kind of savings.

So going more into the normal narrative and the executive summary of our business units, diving now into the business units. So on the wholesale side, we had a negative sales impact of 0.9%. Again, linked to the tough market, particularly in the small stores and negative market dynamic as mentioned of minus 4. In consequence, we have a negative margin impact and then margin compression on the EBITDA level of 0.6 percentage points lower than last year. On retail, we have a negative like-for-like of 4.3% and a margin compression of 1.2 percentage points.

Two words on this, on the 1 hand side, on the like-for-like sales, here, it needs to be said that in the -- on the side of the franchise stores, we still have in the base of some stores, opening our stores that were opened on Sunday last year. And therefore, that is probably the last quarter where we had a relatively high basis, still based on the fact that the stores this year were not opened on Sundays, and this is keeping our like-for-like lower than compare -- than would be normally like-for-like comparable. And so for example, when we exclude the stores that were open on Sunday and just look at our own stores, the like-for-likes here were minus 1.8, which is very much in line with what we have seen in other competitors. So again, here, there is a base effect linked to the Sunday openings of last year.

On the side of the margin -- EBITDA margin, it is true that in the third quarter, Delikatesy Centrum has invested quite heavily in prices and promotions. And this has led to a stronger compression of margins than we anticipated. We are now working also towards increasing the efficiency of those promotions and particularly negotiating with suppliers to get a better sponsorship of those promotions. So working also to improve the margins in the retail market, which indeed were quite under pressure in the third quarter.

When it comes down to our core growth platforms, Frisco and Duzy Ben, they are experiencing very healthy growth numbers, particularly being given the overall macro dynamics, so Duzy Ben growing by 10%, Frisco growing by 27% and in line with what we were expecting. So again, a deep dive on the wholesale segment. Overall, as mentioned, sales are down about 0.9. This is mostly driven by lower sales in the Cash & Carry segment and in the active distribution segment, however, offset by positive sales in the Eurocash Service or tobacco, mostly tobacco and impulse distributor and to a smaller extent on the other business units. EBITDA margin down by 0.6. Again, being given the price pressure that we see in the retail side. Obviously, that's also present and visible on the wholesale side, and there has been investment in price to stimulate this growth that has been still better than the overall market dynamic.

On the retail side, as mentioned, a stronger investment in margin and strong investments in price, which led to a stronger compression than overall margins. So we see EBITDA margin coming down from 5.4% to 4.2%. Delikatesy Centrum franchise down by 2.2, the owned and JV stores, minus 4.6. But again, here, particularly on the JV stores, we have a strong contribution of Sunday sales. That's why this is a little bit not comparable. There is an element of the base to this year, and we have Inmedio, plus 4.9.

A short breakdown on overall like-for-like for Delikatesy Centrum this year. It is true, there has been a certain disproportion between this first and the second quarter this year based also on the eastern effect. So if normalized over the last 3 quarters year-to-date, the overall like-for-like of Delikatesy Centrum is minus 1.7 this year. And that is also linked to deflation on the average basket. So Delikatesy Centrum has, also compared to its market competitors, very strongly invested in prices. And so we see this negative 1 percentage point inflation on the basket.

The growth platforms, as mentioned, growing steadily. Duzy Ben, plus PLN 11 million; Frisco, plus PLN 26 million overall sales this quarter. However, on the EBITDA side, the EBITDA below the one last year. However, this is solely linked to the fact that we have now a new warehouse in Frisco that is increasing the cost side on Frisco this year, and we expect this to be offset by increasing sales of Frisco over each quarter. And as you can see, Frisco is progressing nicely. So we expect the dilution of this element of increased fixed costs and overall cost on the new warehouse being diluted over time.

So as already mentioned, the overall basket here, up 10 percentage points year-on-year. So we see that Frisco has been able also to build the basket to PLN 351 per order, which for Polish conditions, is quite remarkable also in the deflationary time that we can see. And we see Duzy Ben with a healthy like-for-like of plus 4 and overall sales increase of plus 10.

A short recap on the overall financials. So as already mentioned, we have a negative dynamics on the sales side of 0.9. The gross profit down by 4.5, particularly linked to the overall profitability and margin on our sales reduced by 0.5. And overall EBITDA down by 0.7. As already mentioned, net profit down by 0.3. So a positive result compared to the last 2 quarters, PLN 14 million, however, lower by some PLN 30 million compared to last year. So that's the overall part of this quarter.

I will maybe just end with one last point that most of you, I assume, have already seen from our current report and from our publication. We have -- we are now in the budgeting phase for the next year. And we have considered that it is time that we inform the markets about the fact that being given those headwinds in the market that I just mentioned, such as the inflationary and deflationary effects on top line and cost, but particularly the ongoing price war coming from the discount segment and a relatively weak consumer behavior that most observers of the market have anticipated would reverse somehow in the second quarter of this year, particularly driven by positive real wage growth, has not materialized.

And so we see much more unknowns for the next year and uncertainty about how the market context is going to evolve in 2025. And being given those macro headwinds that we currently have no visibility on, we have decided to call off the guidance of PLN 1 billion for next year. We see it as possible that even though we are executing on the strategy that we have announced and we are progressing on it, we still might not be able to achieve those results that have been forecast in 2022 with a different macroeconomic environment in mind. And those elements, particularly the weak consumer behavior on the back of inflation and the price war, have not been anticipated by us, and therefore create a risk that we wanted to share with the market.

Two other things that I would like to add is that on the 1 hand side, we are executing. The fact that we have called off our guidance does not mean that we are not executing on our strategy. We are very much attached to our strategy, consider that it is the right direction. And we are progressing on it and the main pillars of our strategy such as -- just to remind, cost efficiency through the integration of our wholesale units and a streamlining of overall processes on the wholesale units. Transformation of our retail business, right now, particularly driven through a stronger cooperation with our franchise partners. And the runout of our DC 20 project that are currently already implemented in 60 DC Delikatesy stores, owned stores, and we see from the implementation of those 60 stores that those stores experienced an average 7 percentage point like-for-like uptick compared to other stores.

That's why we see that next year, we are going to roll out the DC 20 concept as we have planned. And so transformation of retail, investment in digitalization and particularly our POS network, further growth of Frisco and Duzy Ben. All those pillars are staying very much active, and we are executing on this strategy.

We also see that this strategy is showing its effects. As already mentioned, we would not have been able to implement such cost measures that contributes to our higher competitiveness if it wasn't for the strategy. Nevertheless, we don't -- we cannot today for certainty say that implementing this strategy 2025 will definitely lead to the PLN 1 billion EBITDA result that we were aiming for. And that's why we prefer to tell the market that there is this risk. We also do not want to give any new guidance at this point being given that the market uncertainty that I mentioned persists. We will probably in the course of 2025 come out with some new communication on that. But for the time being, we just wanted to let you know and let the market know that there is this risk and we see those market risks that I just mentioned. So this is it from my side on Q3 and general announcements. And if there are now questions, then happy to answer them.

[Jan Domanski, executive]

Yes, we have a few questions so far. Please, if anybody would like to ask a question, there is a chat panel to send it directly to us. So the first one concerning the fourth quarter and next year, how do you see the consumer in fourth quarter and next year, how long the price would last, in your view? Is it more permanent or rather temporary development? So directly to that.

[Pawel Surowka, executive]

Yes. So I don't -- I don't think that this is a permanent development. As mentioned, I think that 2024 is a special year. I see 2024 as somehow the curve coming down from the inflation of -- the inflationary period that we had starting 2022. And so as we were going into 2022, we had the inflation on sales and still a lag effect on the inflation of costs that then kind of material -- or stabilized in 2023.

In 2024, we have this lag effect on the inverse in the sense that sales are experiencing deflation, costs are experiencing inflation. And this kind of widening of this gap between cost and sales, I don't think we will see a rerun. Next year, we already know what the minimum wage increase will be next year. We also know that the rent increase is going to be much lower based on the inflation of this year. And we have some projections of inflation from the National Bank of Poland for the next year. If they materialize, then this gap will be much lower than it was in 2024. That's why I would expect that 2025 will not be a rerun of 2024.

Having said that -- and I also believe that the same is true for price wars as a matter of principle. In general, price wars normally end at some point. Particularly at some point, they start to be less efficient. Consumers react less to more and more promotions, more and more price incentives, and they start to be less and less efficient, and this is how normally price works. And having said that, at this point, I cannot give any guidance and wouldn't want to give any projections as to when this is going to be. It doesn't depend on us. And it depends on outside factors that for us currently are difficult to anticipate.

Same for the consumer behavior. As already mentioned, a lot of people have already anticipated at some point in 2024 that the consumer behavior will reverse. I do not see currently where I could pinpoint a reversal of the consumer behavior at this point.

[Jan Domanski, executive]

So do we have a group of questions regarding to retail. First one, can you elaborate on the DC 20 strategy? What are the main changes and expectations of this program?

[Pawel Surowka, executive]

Yes. And on the back of the full year results, we will also make a recap of the strategy, where we will explain more in detail all those elements. So the DC 20 project, we have outlined this, I believe, in the last quarter, is a new approach to the Delikatesy Centrum supermarket format. It is a project that we have done within the group, but also with an outside consultant, the ideas to, on the 1 hand side, improve assortment and make it more visible, more appealing, more in line with consumer expectations. Improve also the layout of the overall store, the positioning, particularly on fresh and ultra fresh produce.

And the overall cost intensivity of those stores because through a better layout and particularly a use of shelf-ready packaging in those stores, we are achieving a better operational efficiency on those stores because workers can be more efficient. Particularly, the shelf-ready packaging on the shelf allows us to do the packing and unpacking quicker, which should normally allow us to reduce workforce per store and increase sales per FTE.

So we have elaborated this concept last year. This year was the phase of testing it. As mentioned, we have already rolled it out to 60 stores around Poland. And for the time being, what we can see and we are monitoring those results very closely is, in average, an uptick of 7 percentage points like-for-like on the DC 20 stores, which we find very encouraging, and we will further monitor this. But at present, we are planning to roll out the DC 20 project further to enhance like-for-likes of Delikatesy going forward. So I assume that on the back of Delikatesy Centrum and at the very -- at the very least on the announcement of the full year results, we will present a recap of the strategy, including Delikatesy Centrum. But I can only say that this has been probably 1 of the key drivers of what we -- was our pillar in Delikatesy, which is a transformation of Delikatesy Centrum to be really the flagship supermarket concept that we are working on.

[Jan Domanski, executive]

Also regarding the, let's say, future outlook, when would you expect Frisco and Duzy Ben to be EBITDA profitable?

[Pawel Surowka, executive]

So Duzy Ben's ambition is to be breakeven. So we are currently fighting to become breakeven on Duzy Ben. Next year, that will -- that would necessarily imply a work on the current base of stores and an improvement of some of the base of the stores, particularly a maturing of the stores that have been opened in the last 2 years and an increase in sales on the overall store-by-store sales. There is also some work that we are currently doing in terms of driving traffic.

There have been measures implemented. For example, in quicker or earlier opening hours, adding new traffic drivers such as lock boxes to recuperate your parcels, coffee machines, et cetera. So the current initiatives of Duzy Ben is to improve store contribution, sales by stores through maturing of the stores, additional traffic drivers and other profitability measures such as a better use of retail media and a better use of investments of margin. And our goal for next year, for 2025 is to get Duzy Ben to EBITDA breakeven.

For Frisco, we will probably need to wait another 2 years to -- for this to be able -- because as mentioned, the warehouse that we have opened has added quite a lot of fixed costs that are going to be offset over the next year, and we expect that the negative EBITDA contribution of Frisco will be much less next year just out of the sales dynamic. But we probably will not be able to bring Frisco to full 0 next year.

[Jan Domanski, executive]

Coming back to retail. Could you please provide information on the level of the basket inflation in quarter 3? Does the company agree with the view that the deeper price investments did not yield the expected volume improvement in the third quarter? And what is the management diagnosis of this situation?

[Pawel Surowka, executive]

So the average price basket was minus 1. That is what we have shown in the presentation. We have seen on -- as again mentioned, on the stores that have not been impacted by the Sunday effect. We have seen that they are performing much better than the overall franchise network. And so we have seen impact of the promotions that have been driving traffic.

Having said that, being given that the overall pressure on prices is very high and the market dynamics are such that we are not able to generate higher like-for-like through those investments, we will probably revise in the coming quarters of how much investment we really want to put in, particularly in our promotional activities. So we do see, on the 1 hand side, that those promotions are generating additional transactions, particularly in the owned stores. And the owned stores are performing better than we expected. Having said that, we are revising the level of margin investment that has been going on, particularly in Q3. And we are probably going to revise this Q4 and going further.

[Jan Domanski, executive]

Okay. And the final group of questions regarding gross margin. The gross margin deteriorated in the third quarter. And the question, follow-up on that is how long it will take up -- take for the organized centralized procurement project, how long it will take to be fully implemented? And how it is expected to affect the group in terms of the sales and the gross margin?

[Pawel Surowka, executive]

Yes. So on the -- there are 2 levels of buying. On the 1 hand side, as you have noted, we have a new management board member responsible for buying, Marcin Celejowski, who is now with us, and he's working very strongly on reviewing all of our buying processes, the integrated buying process that we have -- that we have set forth. And he's now also working to implement a newly appointed revenue management function that is going to really look at the efficiency of our margin investments and in our overall sales processes. So I know that Marcin is reviewing this very strongly. And the goal is obviously to improve our buying power and our overall conditions to offset the erosion of margins that we have seen.

I cannot give any guidance today on when this is going to materialize, but I can tell you that we are very strongly engaged and working together with our partners on the producer side to generate as much investment as possible into stimulating the sales that we want to see in the market and to be more deliberate and more efficient in investing our own margin. And this is something that we are looking at very closely currently, particularly with the new revenue management function in place. That is now a central function overseeing the overall integrated buying function. And this work together on the producers shall be also facilitated through the emergence of our newly announced integrated buying group.

Some of you might have noticed that we have announced that we have set up a buying group which compromises all of our franchise banners. That is 15,000 stores. And our expectation is that through the existence of this group, we will be able to negotiate better terms for all the participants of those stores. And this will further help the competitiveness, particularly of our franchise clients here. The most important element is to work in the direction of what we have announced in the presentation in 2022 for the strategy, which is closing the price gap between the traditional market and the organized market. And we believe that the existing of such a buying group should improve and help us to facilitate this task.

[Jan Domanski, executive]

We have also 1 other question regarding cash flow and net debt-to-EBITDA ratio. How do you see it going forward? It's, right now, below 1. What are the expectations on this front?

[Pawel Surowka, executive]

Can I give this to you?

[Jacek Palec, executive]

So from the cash flow perspective, as I said during the presentation, I think we are performing very well. And I'm expecting still to keep going like this. So the company's -- with the sales growth, we're generating cash flow, not only from EBITDA, but also from negative working capital. So what I would expect is really, as you can see, to keep the ratio below 1, except maybe quarter 1, depending on the deals the company will decide to do. As you know, we have the excise tax increase this year. Not different than last year. But as you know, last year, we did some deals, so all of this is putting excessive payments on Q1. So except Q1, we're being close to 1, but maybe a little bit higher. I don't expect that this ratio will change next year.

[Jan Domanski, executive]

Okay. So thank you very much. That ends our Q&A session.

[Pawel Surowka, executive]

And thank you very much. And then so last point, as already mentioned today is a special day. It is formally the last day of Jacek's presence in our management board. And with -- tomorrow, Piotr Nowjalis takes over. So I would like to take this occasion, this last investment conference that we do together. So thank you very much, Jacek, for our time together and all the work that you have dedicated and given to Eurocash. Thank you for your professionalism and for everything you've done in my name, but also in the name of the entire management board, and we wish you obviously all the best for anything you will be doing going forward.

And I would also like to welcome Piotr. We are very much excited to have you on board, very much looking forward to our future work and our adventures. We have been looking for some time for a replacement that would be worthy. And I believe that you are the best candidate that we could have found. So I'm very happy that you joined us. And maybe I would love to ask Jacek and then Piotr to say a couple of words.

[Jacek Palec, executive]

Okay. Thank you, Pawel. As many of you know, this was the company for me, not a job for many years. So of course, the time has come after 16 years and 64 quarters. I think I will try to do something different. But on the other hand, I also think this company needs also refreshment and new blood, and I do believe Piotr is bringing all of this. Of course, I'd like to be leaving a deal when the external market forces are helping us to deliver the results. But let me tell you that I strongly believe that this company is in better shape that probably is visible right now in current performance, not only from the perspective, as I said a few times on the side of cash flow because it's fully funded and very secure in terms of the financial stability, but also from the perspective that in reality, our segment is struggling.

And of course, we need to react on what is happening on the discount side and with the consumer in Poland all in all, but we are really the best -- in the best place to recover quite fast in the time when the new environment stabilize and consumer will again split more evenly between segments and come back also to the independent guys which we are cooperating with.

I think we proved over the years that we are really having very strong and very unique know-how regarding the how to cooperate with independent trade in Poland, not only through the franchise system, but preliminary through the franchise systems, but also with the independent ones. So all of this, it's really about how to integrate further the segment to improve its profitability, not only us but us plus stores against other segments, which should allow us to have as competitive offer for the consumer as we can.

So all in all, I think I'm leaving this company in good hands, not only Pawel, but right now, Piotr. I do believe that -- we know each other. So the choice is best you could imagine. And I really wish Piotr 16 years at least in the role and good luck. Of course, I'm staying in the environment of Eurocash with [indiscernible] and Eurocash itself. So whatever that you always come. Thank you very much.

[Piotr Nowjalis, executive]

Pawel, Jacek, thank you very much for your warm words and warm interaction. I now address my remarks to investors community. I know how high you rank Jacek among also stock exchange CFOs, and I know how reputable person he is. So I know, given the complexity and challenges that face me, complexity of Eurocash and challenges facing me next year, I know how hard it will be to catch up with Jacek's legacy. And I may assure you, I will work very hard to catch up with his industry expertise and his skills and professionalism.

For those of you who know me from my previous employments, well, the last 20 years of my professional career are marked by 3 serious milestones. It was the largest IT distributor in Central Europe. It was the largest footwear retailer. Not giving names, but of course, you know all of these guys. And 4 years spent at e-commerce technology startup. I hope that all those experiences combined, wholesale, retail and e-commerce, may contribute heavily to the future of Eurocash.

And 1 more personal remark. We have -- we've been having a lot of conversations in terms of investor relations in the past. And I may assure you, nothing changed. I may assure you that I will bring open and fair dialogue between us. And all my answers in regards of investor relations and financial standing of the company will be thorough, fair and accurate. And keep your fingers crossed, guys.

[Pawel Surowka, executive]

Thank you very much, Piotr. And so next time, we will see each other, it will be together with Piotr. And I will also expect that you will have much more interactions with Piotr going forward. So thank you very much. Thank you for your questions, and have a good day. Thank you.