Metro AG

XETRA:B4B

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Q2 2021 results presentation. [Operator Instructions] I would now like to turn the conference over to Christian Baier, CFO. Please go ahead.

[Christian Baier, CFO & Member of the Management Board]

Yes. Good morning all, and welcome to the 2021 Q2 call. This morning, Rafa and I will present the Q2 results. We are also joined by our new CEO, Steffen Greubel, whom I'd like to briefly introduce before we start with the normal results call. Steffen is an experienced executive who spent 2 decades in B2B, retail and the consumer sector. In his last position, he was a member of the Central Management Board of Würth Group, a world market leader that offers its products and services to B2B customers. Steffen was responsible there for the core business internationally. Prior to that, he was the lead partner of the European retail and consumer goods practice at McKinsey. Steffen, we're very excited to have you onboard. And I know you wanted to say also a few words.

[Steffen Greubel, CEO & Chairman of Management Board]

Yes. Thank you very much, Christian. Good morning, everyone. It's really great to be here and to meet you virtually. While I've only been around now for a few days, actually my third day now in the company, I've had already the pleasure to meet many colleagues, visit several stores and delivery depots and talk to customers. I have to say the energy and the team spirits are infectious and I really can't wait to dive in. I'm convinced of the tremendous growth potential of our business, and I will substantiate that view over the coming weeks and months. One of my focus area at Würth was the digitization of the business -- digitalization of the business. And I see similar potential at METRO as well. I also see significant potential in our professional FSD business. I now aim to get to know the company, the people and the customers, sustaining the business, and together with the other Board members, developing the plan for the next chapter of METRO. Throughout this process, I look very much forward to meeting you and understand the capital market view on METRO. I would also like to use this opportunity to thank Christian and Rafa for the great job as co-CEOs over the last 4 months. So thank you very much. And let me hand over back to Christian, who will kick off today's results call. Thank you very much.

[Christian Baier, CFO & Member of the Management Board]

Yes. Thank you, Steffen, and let's now go into our overall perspective on Q2, which was overall from a market condition point of view quite comparable to the Q1 situation. But it was certainly worse than originally anticipated by us from a restriction point of view, not from a performance point of view. The strict HoReCa restrictions with only few and mostly temporary openings of HoReCa businesses across our country portfolio were certainly remarkable and a heavy toll. Nonetheless, the financial performance is really well in line with our expectations. This is due to a combination of further fine-tuning of our pandemic management, seizing business opportunities and also preparing for the reopening, which is so critical at this very stage for us. As a result, we again outperformed the hospitality market in most countries, doing this from a position of financial strength, making us nimble and decisive to take business opportunities. Despite this good performance, we updated our guidance 2 weeks ago due to the purely exogenous prolongation and high volatility of COVID-19 restrictions. Throughout this pandemic, we focused on what we can influence. And that is a strong and robust long-term positioning. Looking into the numbers from a sales perspective. The sales development was stable on Q1 level with minus 11.9% decline in local currency. This has again been driven by the governmental restrictions for the hospitality sector. There was no calendar impact as additional trading day in the last year, the 29th of Feb, was compensated basically by an earlier Easter this year. On the EBITDA side, it decreased by EUR 5 million at constant currency. And the COVID-related volume reduction was partially really compensated by further efficiency gains across countries. All countries continue to operate under stringent cost control measures. We are making use of government schemes like short-term work while also optimizing our digital processes like online ordering. We also expect some of these savings to persist post COVID. Adjusted EBITDA further benefited from several positive one-off effects amounting to roughly EUR 30 million in total as well as recurring savings from last year's headquarter restructuring. The reported EBITDA increased by EUR 33 million as we booked significantly less transformation costs and we also realized EUR 17 million of real estate gains. Let me now zoom into the drivers for this development on the following pages. For more than a year, we have now followed a simple but effective recipe for management of the pandemic. It is protect, preserve and grow. With this recipe, we've been able to grow SCO and Trader sales while, at the same time, staying close to our hospitality customers. As a result of this proximity and the attractiveness of our offering, we continue to outperform the market. This is visualized on this slide with the example of Spain, where you see our recurring market outperformance, which is particularly visible in the market recovery period. If you then zoom further into the respective weeks when the restrictions were loosened, you see the quick sales rebound. In the specific case of Spain, as per mid of January, restaurants have been allowed to operate in most regions with capacity limits. Despite these limitations, our hospitality sales steadily grew back to the pre-COVID and precrisis levels of fiscal '18/'19. This gives you a flavor of the pent-up demand from a consumer perspective and the growth potential once restrictions are fully lifted. This market outperformance continues to be visible also in other countries. And let's, therefore, take a closer look at the very similar patterns that we can see there. When lockdowns begin and volumes decline, we only have a marginal advantage versus the market. Our more visible outperformance begins at the trough of the market and accelerate significantly as restrictions are loosened or lifted. This outperformance is visible in all countries shown here. But particularly in Russia, where restaurants have been largely open since Jan-Feb, you can see that pattern unfolding. So why is this the case? As we discussed on the last call, during lockdown, we keep regular customer contact and high product availability, which is really strongly appreciated by our customers also in a tough period. The flexibility of our model, which is a combination between FSDs and store but also on the digital side is a big advantage for our customers in times of lower volumes and lower predictability of their demand. During recovery, we then add dedicated restart support programs, like MAKRO Plus in Spain, and support with digital tools to enable cost efficiency for the restaurant. This development versus market is helpful to understand the current resilience. From our perspective, it is even more important as a predictor for the coming months. So with these 3 factors, talking about resilient sales, market outperformance and also the efficiency gains mentioned before, let's keep that in mind and let's look into the regional development. Before we look at the numbers specifically, let me remind you of the explanation for the higher spread in performance across the regions than in pre-COVID times. In general, the 3 customer groups are impacted differently, whereby HoReCa significantly suffers, while Trader and SCO continue to perform well against the high comparison base last year. These customer groups are then represented to a different extent across our regions, whereby Russia has the smallest and Western Europe, the largest hospitality share. Lastly, the restrictions have meanwhile roughly annualized, impacting also the comparison base. The exact starting point, however, differed across countries as you can see on the chart. In summary, it still holds true that the higher the Trader and SCO sales share, the less vulnerable to the current HoReCa restrictions a region or a country is. With that in mind, let's now move into the regional performance. In Germany, sales declined by only minus 10%. This has been possible as the hospitality decline was partially compensated by SCO sales. The hard lockdown with retail closures has been supportive of customers rediscovering METRO. EBITDA increased by EUR 13 million compared to the prior year due to positive gross margin mix and also continuous cost consciousness. In Western Europe, the sales declined by 21.5% and EBITDA declined by EUR 35 million as the hospitality business suffered from lockdowns across France, Italy, Portugal and Spain. In Russia, again another quarter of growth, where sales grew by 1.1% in local currency. While January and February grew on a significantly higher level, March was impacted by very high comparison base from the previous year of plus 20%. Sales growth continues to be driven by strong B2B2C sales as well as by a positive hospitality and Trader development. We continue to invest into margin. And this, coupled with high COVID safety measures that we always keep as a precondition for our customers' safety, this resulted in EBITDA slightly above the prior year. In Eastern Europe, sales declined by 7% in local currency, driven by governmental restrictions. EBITDA declined only by EUR 4 million. This is also supported by a one-time gain. In Asia, the sales development was roughly flat, whereby India and Pakistan largely compensate negative sales development in Japan. The slight growth in EBITDA, amongst others, is also due to an at-equity result of our minority stake in China, which wasn't included in last year's EBITDA. So let's now move back to the group view, where we start with a bridge from reported EBITDA to EPS. The D&A was really flat year-on-year if you adjust for the CFF impairment that we did have in the prior year. On the net financial result, the interest and investment result improved due to lower interest from finance leases, which is really a function of contracts being prolonged with reduced interest rates and the annuity character of these liabilities. Other financial results benefited from a more stable currency development. On the tax expense, just to avoid distortion in the current COVID-19 situation, reported taxes are calculated based on expected tax expense for the full year and not unexpected tax rate. The EPS for Q2 came in at minus EUR 0.36 and therefore slightly below prior year level. This is certainly driven by the reduced sales volumes that was still only translated partially into the EBITDA that showed quite resilient and also higher real estate gains and a better net financial result. On the free cash flow side, some of the underlying developments from the previous quarters do continue. On the leases, the improvement there is driven by subleases from Real, which are now basically an external company and therefore being accounted for here, as well as lower lease payouts from expired contracts. On the net working capital, this compared to prior year, net working capital in Q2 showed a clearly positive development despite the effects of COVID-19. In the previous year Q2, this has been significantly impacted by COVID-driven ordering behavior, which influenced trade payables, especially at the end of the quarter. This year, driven by better planning, trade receivables are, therefore, less volatile. As I mentioned last time, this is only really a snapshot view and there is no change to our fundamentally very strong working capital position and also dynamics. Net working capital always follows the sales trajectory. Hence, we really expect in the quarters to come a strong rebound driven by increased sales. On the cash investment side, you see further savings that are driven by the cash consciousness and also our restrictive CapEx management due to COVID-19. On the free cash flow, in this adjusted definition at minus EUR 412 million, this is roughly EUR 280 million above prior year as a result of less negative change in net working capital and also the CapEx savings. The net debt eventually came in at EUR 4.5 billion, a significant improvement versus prior year, which is also driven by the disposal of the hypermarket business and the majority stake in METRO China. In summary, as you have seen, the first half has been quite resilient in light of the market backdrop. However, as mentioned a few times on this call already, the longer HoReCa restrictions than originally anticipated were there. And hence, we had to update our outlook. This updated outlook assumes hospitality reopening between June and August. And hence, we are expecting sales in local currency and in like-for-like to be in the range of minus 3% to minus 6% versus prior year and our adjusted EBITDA to decline by EUR 50 million to EUR 175 million versus prior year. We continue to expect the highest negative impact on the HoReCa-driven regions while Russia and Asia are expected to perform better than the group. With regards to further P&L expectations, we confirm our previous comments but have updated the net financial result expectations to minus EUR 200 million. This concludes the financial part. Let me now hand over to Rafa for additional commercial perspectives.

[Rafael Gasset]

Thank you, Christian, and good morning, everyone, from my side. In METRO, we focus on transforming our business for a strong and robust long-term position. In our countries, we continue to follow our simple yet effective recipe of protect, preserve and grow. Let me share some few examples for the last months. In France, we launched a campaign, Place aux Restos, which stands for Room for Restaurants. We engage with city officials to represent the interest of the hospitality sector. The campaign aim to make a space for restaurants on local open markets and to increase their visibility and boost their takeaway activities. More than 80 cities all over France participated in this project. Today, we have more than 200 markets in France which made a space for more than 750 local restaurateurs serving around 28,000 meals every week. As I have shared with you last time, MAKRO Spain has launched a customer loyalty program called MAKRO Plus. As the customer switch over from a struggling regional competitors, we wanted to give them a reason to stay and don't switch back post COVID. So MAKRO Spain launched MAKRO Plus. With MAKRO Plus, we signed a contract with the customer for sales uplift commitment, which in return will grant the customer better conditions and services. MAKRO Plus' value proposition includes individual pricing, service-level commitment, credit and digital services. Customers eligible to join the program are identified based on their overall potential and our ability to grow our share of wallet with them, hence developing them from B or C into an A customer. Looking into the numbers, we see that our sales with MAKRO Plus to customers are significantly above market and country average. And these customers already represent 25% of MAKRO Spain total sales. This program is especially successful because we were able to provide the right assortment at the right price for our key HoReCa customer with highest potential. Of course, Spain is not the only country that is locking in customers with sales commitments. Similar programs are currently being developed in other countries such as Italy, France and Portugal. These programs are one of the reasons why our HoReCa NPS, or Net Promoter Score, increased by 11 percentage points in Q2. Another example is our soft franchising concept in Romania. In Romania, the modern proximity of stores represent the fastest-growing segment in the grocery market. Therefore, the acceleration of the small model format expansion is pushing -- or is putting pressure on the traditional trader. Therefore, for us, it's very important to provide our traditional trader customers with a solution to compete with some of the national competitors. We created the La Doi Pasi in Romania, Fasol in Russia, ODIDO in Poland and further brands across a total of 9 countries. And today, I'm very happy to announce that right now, in Romania, we have more than 1,500 franchise partners operating 1,640 stores. And I'm proud also to say that we are now the largest Romanian community of entrepreneurs and the fastest-growing convenience chain in the market. Of course, we will not stop at this. We will continue to strengthen our position in the market. And by 2023, we aim to have 2,000 franchise partners under the umbrella of La Doi Pasi. We will achieve this by providing all the necessary solutions for our partners, digital resources, consultancy, product range and marketing tools to increase their visibility. La Doi Pasi already represents 13% of the total sales of Romania. And needless to say, we'll always try to keep our leading position in the market in terms of scale and reach. These programs is one of the reasons why our Trader NPS, or Net Promoter Score, increased by 4 percentage points in Q2. Also, with a long-term view is our environmental, social and governance agenda. In METRO, we always aim to be a partner like no other for HoReCa and Trader customers. This is not only apply of being a partner of goods, products, services but also being a partner of making a positive change. So today, I'll share 3 examples on how we make this change. First, conscious proteins. The world is changing and food industry is one of the biggest impactors on food chain. There is a big push into reinvention of food systems and food supply. In order to reduce animal suffering and reduce biodiversity loss, we make a conscious effort to support the shift away from animal protein. We have NX-Food, our food innovation hub. We have invested into Next Gen. The company is based in Singapore and is a pioneer when it comes to plant-based foods. The funding will be used to launch a plant-based chicken and Classic Fine Foods, so our FSD company operating in Asia will be an official distributor partner for the products. The plant-based chicken will be offered exclusively to METRO customers in 6 countries of Southeast Asia. We see business potential for the sector of alternative proteins and aim to participate and benefit for this boom while having a positive impact on the environment. Secondly, sustainable raw materials and organic and responsible products. Soya is one of the biggest drivers of deforestation driving climate change. The biggest driver for soya production is animal feed. Almost 80% is used to feed animals. For us, salmon is one of the key products where soya is used. We are continuously stepping up our sustainability efforts and implementing relevant policies when it comes to our supply chain. We can confidently say that we have 100% deforestation-free soya in our own brand salmon products. This result is a great step into implementation of the soya policy. Our third one, investing into the circular economy. More than 90% of the plastic produced worldwide is currently not recycled. Food trade is a relevant contributor to the plastic use worldwide as plastic is used to protect the food from premature deterioration. METRO has been making a conscious effort to reduce our plastic packaging for own brand products. And we have achieved a reduction by almost 500 tonnes between 2018 and 2020 alone. METRO France has entered into a partnership with Loop. Via this partnership, we aim to reduce single use of plastic packaging. The concept is rather simple. Customer buys and use the products, but the manufacturer owns the packaging. We are offering professional customers a range of products in reusable packaging, whereby the packaging can go through the reuse cycle several hundreds of times before they are being disposed or recycled. Therefore, we are not only saving fees, but also, it has a positive impact on the image, which in turns bring new guests and promotes economic success. In addition, more and more countries have a strict legal guidelines of use of disposable plastics, which are thus complied with. Let me also give you a view on 2 strategic elements on the Wholesale 360 approach: products and digital tools. On the product side, I'd like to share how we design our own brand products around customer needs. Own brands represent around 16% of the total sales and around 22% of the sales of the HoReCa customers. This year, especially go up through the FSD channel in which the own brand sales represent approximately 40% of the total. Focus on HoReCa customer needs, we have the own brands of METRO Chef and METRO Professional as the flagship brands. We have continuously enhanced the assortment and only -- I will only highlight today 2 important ranges that we have further developed in the past months. The first one is the range of compostable disposables: paper straws and wooden cutlery. Meanwhile, more than 50 SKUs, however, of this range, which has seen an important demand during COVID. The second one is the range of organic products, meat alternatives. As pointed out earlier, there is a growing demand across the world. And we have already delivered the international range to 12 countries. Additionally, obviously, the countries are also developing their own local products independently both cater to general public's concern for the climate but also for the individual dietary requirements. Already in 2019, more than 55% of our customers have stated a healthy product is on the top of their list. Just to finalize, I wanted to also to give an update on DISH Order. DISH Order is an online ordering tool which restaurants can easily integrate into their website to allow customers to order directly from them. With the extension of the lockdown, restaurateurs needed alternatives that enable them to generate sales independently of delivery services as a lot of revenues are lost with the usage of third-party delivery services. We launched this tool in January in France, Germany, Spain, Italy and Poland. Already 90% of the restaurants -- of the restaurateurs we have approached have become DISH Order customers. For the restaurants that are already connected, we have processed more than 30,000 orders since January 2021, and we are currently preparing the launch of this order in other METRO countries. This is for today. And let me hand over to Christian for the closing remarks.

[Christian Baier, CFO & Member of the Management Board]

Yes. Thank you, Rafa, and let me summarize today's update. So despite the short-term challenges posed by the pandemic, we stay focused on improving our long-term position in the market. Thanks to our focused management of the pandemic and preparation for reopening windows, we achieved resilient sales and continued to improve efficiency of our operations. We further actively participated in the market consolidation and have closed 2 bolt-on FSD acquisitions in the last quarter. Through loyalty programs, Trader franchise and digital tools, we grow customer loyalty and especially recurring sales. All in all, our positive long-term view on the sector is unchanged. Already today, there are many countries with gastronomy operating again. And as the vaccination progresses, we will see more and more showcases of resilience but most importantly growth and continued growth of our sales. With that, let us start the Q&A. And please note that Steffen will not take any questions just yet, but he is very eager getting to know all of you. And our Investor Relations team will reach out to set up introductory meetings in a few weeks.

[Operator]

[Operator Instructions] First question is from the line of Alyssa Gammoudy from ING.

[Alyssa Ouled Gammoudy, Credit Analyst of Consumer]

I have a question about how important it will be for the holiday season that hospitality will reopen and allow -- and borders will reopen and allow traveling. Or will it be also sufficient for METRO to have hospitality opened but no traveling between the different countries? I also have a question about what is the -- is there already a plan for the remaining businesses in Asia? And I wonder, because Russia, yes, again performed pretty well. Perhaps you can elaborate a little bit more on the current dynamics and the dynamics going forward in Russia, especially because they're highly exposed to the SCO and less to hospitality sector for as far as I understand, hence whether the hospitality sector is open or closed would not really matter to the Russian region. And yes, let's leave it with that for now, please.

[Christian Baier, CFO & Member of the Management Board]

Okay. Thank you. I will start with the first two and will hand over to Rafa on Russia. With respect to the importance of the hospitality openings, I think we have stated that basically by June to August at some point, we would expect a very broad reopening of the restaurants. And I think that is the key element that we would expect. It is a somewhat broad range because all the country setups will be very heterogeneous. Therefore, yes, it is important that gastronomy does open again. With respect to that traveling point, let's just look back to the last year where I think we have seen in most of the countries also that the domestic demand for hospitality has been great, even in periods where traveling has been somewhat restricted. So when we just look closer to home here, tourism in Germany just around the corner or hospitality has been very strong. The same in France and in a number of other places. So therefore, we are, yes, dependent on hospitality opening from a restaurant perspective. Traveling also plays a role but lesser so from that perspective. But we certainly not only personally do hope but also for the business that they will be picking up travel also over the next couple of months going to happen. With respect to our footprint in Asia, certainly this is quite a heterogeneous picture. But we see strong performance, especially despite the tough situation that we have in India but also in Pakistan just from a pandemic perspective. The teams over there are doing a really, really good job in sustaining and making the business resilient. So therefore, we are quite confident with the setup that we have over there also during current conditions.

[Rafael Gasset]

Yes. In regards of Russia, our transformation journey started already a couple of years ago in which we have implemented the wholesale efficient model based on quality at low prices is proving to be a very good model for all customer groups. And we benefit not only of appreciation of the customer, of the SCO customers coming to the stores to look for these quality products and the own brands, but also our Trader business, especially with Fasol, with the franchising, is proving a very good model for the Russian market. Nonetheless, the HoReCa market, although small on the share, is less than 15%, is representing a big opportunity in Russia in which we have only 7% of market share and already demonstrating a more than double-digit growth on the last month. And together with the FSD business, it is going to be, for sure, one of the key levers for growth for the future of METRO Russia.

[Alyssa Ouled Gammoudy, Credit Analyst of Consumer]

And perhaps a last follow-up question and perhaps also, yes, too early days, given the management transition, et cetera, but yes, what, yes, expansion or M&A opportunities do we already see here and perhaps more in the sense of which regions offer more opportunity than other regions? Or is it something that METRO is looking at the moment? I wonder if you could share a little bit more on M&A opportunities.

[Christian Baier, CFO & Member of the Management Board]

Yes. I think it's fair to say that the activity that we have seen on the M&A side over the recent quarters is a pretty good predictor of what we are basically looking into. So the acquisitions that we have done in Portugal, really in the hallmark of FSD are very important, the same that we have done in Spain. So I think these are a couple of things where we certainly will continue looking in, in order to further build market share, to build customer access in the places where we also have a strong footprint. I think that's what you should be expecting in terms of where we are already. And it will not be too far out in the adjacencies in that overall setup but also ensuring that we basically have a very good footprint overall, but also the penetration to us is a very critical point. And that's true for the hospitality side. But also for the countries that might be a bit more focused on Trader, we would also expect opportunities over time there.

[Alyssa Ouled Gammoudy, Credit Analyst of Consumer]

And Steffen, best of luck in your first weeks, and hope to speak soon.

[Steffen Greubel, CEO & Chairman of Management Board]

Thank you very much.

[Operator]

[Operator Instructions] There are no further questions at this time, and I would like to hand back to Christian Baier for closing comments. Please go ahead.

[Christian Baier, CFO & Member of the Management Board]

Yes. Well, thank you for your interest in our call today. We wish you all to stay well and healthy, and have a great day. Take care.

[Operator]

Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.