Grupo Comercial Ched Ord

Good morning to all participants, and welcome to Grupo Comercial Cheddaray, third quarter 2024 conference call. Participating in the conference call today will be Mr. Jose Antonio Cheddaray, CEO of Grupo Comercial Cheddaray, Mr. Carlos Smith, CEO of Cheddaray USA, Umberto Tafu, CFO, and Arturo Valesquez, IRO for the company. We will begin the call with initial comments on Grupo Comercial Cheddaray, Third quarter financial results by the company's CEO, Mr. Jose Antonio Chedera. Thank you. You may begin.

Good morning to all.

and welcome to our presentation of Grupo Comercial Chedraui's third quarter 2024 results. I want to recognize the continued dedication of our employees to effectively execute the three main pillars of our strategy, providing our customers with the products they want, offering the lowest price, and delivering an exceptional customer experience. The commitment to these pillars has been the key driver of our market share gain during the third quarter. In Mexico, our customers continue to prefer shopping at our stores, as evidenced by our same-store sales performance, which has exceeded Antat's results for the 17th consecutive quarter. In the U.S., El Super and Fiesta Mart continue to drive same store sales growth for Chedraui USA. These formats achieved combined mid single digit growth compared to the previous year. For Chedraui USA, we're pleased to announce that in July, we began operations of our new distribution center located in Rancho Cucamonga, California. We're currently in the process of migrating five legacy distribution centers into the state-of-the-art 1.4 million square foot facility. This new facility will provide a critical long-term foundation for Chedraui USA as it will allow us to grow El Super and Smart & Final in the medium and long term while making our supply chain more efficient. To start our presentation, please turn to slide four, where I will highlight key achievements of the third quarter. Consolidated sales growth was driven by positive trends in all business segments. Same-store sales in Mexico grew by 4.9%, outperforming in TADS 3%. Chedraui USA's same-store sales increased 0.5% in dollar terms. maintaining a positive trend. Consolidated EBITDA, excluding one-time costs associated with our new DC, was in line with Q3 of 2023. EBITDA margin in Mexico continues to expand, benefiting from operating leverage and cost efficiency strategies. Net debt to EBITDA ratio stood at 0.02 times. CapEx for the first nine months of 2024 totaled 7,293 million and represented 3.6% of consolidated sales. In the following slides, I will comment with more detail on these key highlights. Please turn to slide five. All businesses had positive sales trends in the quarter, which translated into an 11.8% consolidated sales increase compared to the third quarter of 2023. The currency impact on Chedraui USA's sales was positive 13.1% when translating into Mexican pesos. Our consolidated EBITDA increased by 3.5%. and our EBITDA margin stood at 8.2%. And this result was impacted by duplicate distribution center costs at Chedraui USA. If we exclude these duplicate costs, consolidated EBITDA would have increased by 11.1%, while EBITDA margin would have been 8.8% of sales, which is in line with the third quarter of 2023. On slide six, consolidated net income continued to show a positive long-term growth trend, even when considering duplicate costs in the quarter. The compound annual growth rate over the last four years is 22.8%. And if we exclude supply chain duplicate costs, growth is 34%. We are committed to improving our profitability levels and at the same time, investing in the capex needed for medium and long-term growth. In the quarter, ROV was impacted by these duplicate supply chain costs. We're very confident that our profitability will return to normalized levels in the second half of 2025 as our new Rancho Cucamonga distribution center reaches full operations. In the following slides, we will review the main highlights of our businesses in Mexico and the US. On slide seven, in Mexico, Same-store sales exceeded Antat's results for the 17th consecutive quarter, growing by 4.9% compared to Antat's 3%. Our Michedraui loyalty program is an essential element of our value proposition by delivering our customers tailored promotions in our various store formats, especially during the highly competitive summer period. We continue to focus on increasing the penetration of our customers in our Miche Draui loyalty program, as evidenced by the 6% customer growth in the last 12 months to 12.6 million members. This allowed us to recognize 74% of our sales from loyalty program customers, which is a record level for the company. Please turn to slide eight. Positive same-store sales and a 2.5% increase in sales floor area drove consolidated sales growth by 7.8% compared to the third quarter of 2023. EBITDA grew 9.8% compared to the same period last year. This increase is explained by improved inventory management and better promotions to customers. which offset higher labor costs. EBITDA margin ended at 9.1%, a 17 basis point improvement versus the prior comparative quarter. Finally, on slide nine, we will review the highlights of our real estate division. The occupancy rate increased to 98.3% from 97.3% in the third quarter of 2023. Sales continue to show positive trends with a 13.1% increase compared to the same quarter of 2023, amounting to 381 million pesos. Over the last 12 months, 8,102 square meters of leaseable area were incorporated, representing 1.9% annual growth. EBITDA increased 9% and represented 62.9% of sales. I will now turn the meeting over to Carlos Smith, CEO of Chedraui USA, for his comments on our operation in the US. Carlos, please go ahead.

Thank you, Antonio. As Antonio commented, this is a transformational year for Chedraui USA. We started operations in our new distribution center in Rancho Cucamonga, California, which will replace five existing distribution centers in Southern California. This investment will lay the foundation for future growth opportunities for El Super and Smart & Final. Such a big project comes with challenges. However, I'm very confident that our employees' dedication and commitment will allow us to successfully complete this transition process. and begin the implementation of operational efficiencies in our supply chain. Please turn to slide 10. As shown in this slide, the total investment will be approximately $120 million, of which nearly $80 million has already been deployed. The total size of the new facility is 1.4 million square feet, and from it, we will source dry, chill, and frozen products for El Super and Spartan Final stores. Currently, We are sourcing dry products for the stores, and we are under construction for the chill and frozen spaces. Please turn to slide 12. Chedrao USA same-store sales in the quarter remained in positive territory, growing 0.5%, as mid-single-digit growth at El Super and Fiesta Mart continue to compensate for lower-than-expected same-store sales at Smart and Final. Total sales increased 1.9%, driven by same store sales growth and sales floor expansion of 1.4% over the last 12 months. In Mexican pesos, due to the 13.1% Mexican currency depreciation, Chihuahua USA's total sales increased by 15.3%. We continued with our organic growth program by opening 1L Superstore in the quarter for a total of four stores in the first nine months of 2024. As commented combined all super and Fiesta same store sales grew mid single digit fueled by an increase in customer count and above expectations. Smart final sales continue to be affected by lower average transaction size, particularly with our business customers. We continue to work on value added strategies to turn around sales in the coming quarters, focusing on pricing and our perishable offering to position the smart and final brand as a primary store for the consumer. This initiative is supported by our marketing strategy, which was launched in Q2 with the tagline of smart and final, where else? Please turn to slide 13. In this third quarter, EBITDA was affected by duplicate occupancy costs and operating expenses within our supply chain operations, which impacted operating leverage at smart and final, resulting in lower EBITDA in dollar terms and a 2.8% decline in Mexican pesos. EBITDA margin represented 7% of sales in the period, but when adjusted for duplicate supply chain costs, EBITDA increased 12.5% in Mexican pesos and represented 8.1% of sales. Similarly, without the duplicate costs, El Super and Fiestamart reached a combined EBITDA margin of 8.9%, a 26 basis point increase compared to the same quarter of 2023, explained by continued operational efficiencies and expense control. Excluding duplicate supply chain costs, Smart and Final's EBITDA margins stood at 7.3%, impacted by diminished operating leverage due to lower sales. This concludes our report on the U.S. operation.

We now turn to the consolidated financial results on slide 14. Consolidated sales amounted to 71,886 million pesos. an 11.8% increase year over year, driven by positive sales trends in all our businesses. Gross profit rose 9% and 11.6% without the duplicate supply chain expenses. Gross margin benefited from effective inventory and promotion management in Mexico. Consolidated operating expenses excluding depreciation and amortization, increased 12.2% and 11.9% without the duplicate supply chain expenses. This increase was mainly due to higher labor costs in Mexico and the US. Consolidated EBITDA grew 3.5%, representing 8.2% of sales. and 11.1% growth after adjusting for duplicate supply chain expenses. EBITDA margin, excluding these one-time costs, represented 8.8% of sales, which is in line with the third quarter of 2023. Financial expenses increased by 30.4%. to 1,458 million pesos, explained mainly by higher interest expense due to the capitalization of new property rents and the new distribution center in accordance with the IFRS 16. When excluding the impact of duplicate costs, the financial cost would have increased by 5.8%. Consolidated net income posted a 24.8% decline to 1,456 million pesos and represented 2% of sales. This decline is once again explained by duplicate supply chain costs. When eliminating this impact, net income grew by 6.6%. to 2,063 million and represented 2.9% of sales. Finally, please move to slide 15. Our financial leverage in the quarter was 0.02 times compared to the 0.09 times in the same period last year. Fiscal year-to-date CAPEX investment reached 7,293 million pesos, equivalent to 3.6% of sales and 37.7% higher than the previous year. This is explained by an increase in the opening stores in Mexico and the United States, as well as the investment made in the new distribution center. It is important to highlight that cash generated by our operation allowed us to fund this higher CapEx and improve our cash position versus the previous year. Now, if you allow me, we will move on to the question and answer section.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from Ben Thura with Barclays. Please proceed with your question.

Yeah, good morning, and thank you very much for taking my question. Just a couple ones, quick ones. So on the U.S., on the replacement of the DCs and with the new one, you laid out the capex and the impact as it relates to the subsequent quarters. So just wanted to understand a little bit when you kind of like roll down these, these other five DCs, how should we think about it from a, from a timing perspective and what the impact is going to look like for the fourth quarter and then maybe one and two Q. So that would, that would be like really my first question to kind of understand the rollout at the new DC.

Good morning, Ben. This is Carlos.

Yes. So at, at, In our current state, we are operating with our five legacy DCs in addition to the Rancho Cucamonga 1.4 million square foot DC. We're currently about to finalize the full integration of our dry operation here in the next several weeks, and that portion will be complete. As we begin to shed legacy DCs, we expect that to go through Q2 of 2025. So what we should expect to see in Q4 and then Q1 and subsequently in Q2 is a diminishing rate of impact from these transition costs that you're seeing here in Q3.

Okay, perfect. And then just on the performance in Mexico and the outperformance that you guys were able to achieve against Antat, can you maybe share a little bit more insights as to what's been driving it? Is it across the different sub-segments that you're having in Mexico? Is there something in particular you would highlight from a former perspective? just given the strength and the consistency over so many quarters, and if there are any regional differences as well that you would potentially highlight.

Good morning, Ben. Thank you for your question.

Well, I think we've always said that there are basically two three important pillars of what we do. One is our pricing strategy, which we do store by store, and it's very efficient. Then it's the assortment, which is also done store by store. And finally, the ambience and the comfort that we create the image as well for every segment that we try to serve in every region. And those particular adjustments done store by store, I think, have been working successfully and has allowed us to keep gaining market share. But most of all, customers. We keep seeing our customer growth in every region in Mexico. And now it's pretty much, I would say, leveled in all regions. We had experience in the past. a very important growth in the touristic areas of Mexico. Now it's pretty much leveled in all regions. There's not any particular peak that we're seeing at the moment.

Okay, perfect. Thank you very much.

Our next question comes from Antonio Fernandez with Acnover. Please proceed with your question.

Hey, good morning. Thanks for taking my question. On smart and final, regarding your performance, I mean, it was expected, at least on the performance, but what are you expecting going forward? I mean, your marketing strategy and all of that, you've been implementing that for a couple of quarters as of today, but what are your expectations for next year?

And then I have a quick follow-up. Thanks.

Yes, thank you, and good morning, Antonio. So let me take this opportunity to talk a little bit about our sales in the U.S. in general terms, if I may. I think we're very encouraged, obviously, with the continued sales strength at our Hispanic banners, driven primarily by solid customer count growth. Smart and final sales stayed on trend in Q3, which was a bit disappointing. given we expected a stronger second half of the quarter. The market has gotten very promotional, so we've had to make some adjustments to our strategy. Favorably, I think that October trends look much better with strengthening customer counts, which is promising. So we think we're on the right track to show some sales improvements in Q4. and forward into fiscal year 25.

Perfect.

That's very helpful. Just a quick follow-up regarding Michedraui. I mean, that's quite solid, and I've been following that growth trend. Quite impressive. What's next for this program? Is there something else that you're planning there?

Well, yes, Antonio.

Well, Chedraui has become an extraordinary tool that is helping us know our customers better. And we are, at this moment, being able to offer specific promotions to groups of customers. And we keep developing the tool so that will allow us to offer particular promotions to every particular customer that we have currently in our stores or buying online from us. So there's a very optimistic future for this program. NOW WE HAVE 12.6 MILLION CUSTOMERS AND IT KEEPS GROWING. I THINK IT'S A VERY HELPFUL TOOL AND STRATEGICALLY IT WILL ALLOW US TO CONNECT WITH THESE CUSTOMERS PROBABLY GIVING US THE CAPABILITY TO INCREASE SALES BY CUSTOMER TO INCREASE THE BASKET BUT AS WELL to increase our gross margin because we are saving waste of certain promotions that are not required for some customers. And on the other hand, probably save expenses, advertising expenses, since we're being able to connect directly with these customers.

So there's a lot of future for our programs.

Our next question comes from Melissa with Bank of America. Please proceed with your question.

Hi. Hi, Antonio, Carlos. Thanks for taking my question. Carlos, when it comes to the new distribution center, was the impact only on the cost side or was there any disruption to sales or in stock levels? What are the benefits that you expect once the transition process is complete?

Yes, so the impact's really on two fronts.

The majority of the impact is on additional occupancy costs, but there is some portion of additional labor costs. in the startup as well as some transportation costs as well. So, as I mentioned earlier, we're very excited about continuing the integration in the first part of 2025. We'll continue with integrating our frozen operations, then into our, what we call our chill operations, which is produce and meat, which are very important categories for us. The idea of having common inventory for both banners at the DC moving forward is a tremendous benefit from a cost of goods side. But the idea primarily comes from establishing a foundation for growing new stores, improving service levels to the stores, and lowering transportation costs. Our estimates right now project about a 50 basis point improvement to where we've been trending prior to Q3. So we'll have a little bit of disruption here, as you're seeing in Q3. It's going to be less disruption in Q4, less in Q1, followed by less in Q2, and we'll start ramping up again in Q3 and Q4 of 2025, getting to materialize this benefit of 50 basis points that we've we're targeting.

Thanks. And that 50 basis point benefit, will that be for the entire U.S. operations? And then how do you expect that to be maybe impacting Smart Vinyl versus remote?

Right. So great point. For clarity purposes, what we call the RCDC, which is Rancho Cucamonga Distribution Center, is really focused on Smart and Final and L-Super. And the breakout is approximately 70% Smart and Final, 30% L-Super. So that 50 basis point improvement is allocated to these two banners.

Great. Thank you so much.

Our next question comes from Renata Cabrio with Citigroup. Please proceed with your question.

Hi, everyone. Good morning. Thank you so much for taking my question. I have two here. The first one is a follow-up about the store formats in Mexico, specifically the performance. If you can give us some color about which format is doing the best job, let's say, in terms of semi-store sales, if you can rank or give any color on that, that would be great. And my second question is related to the potential reform that can pass next year towards the change in the number of working hours per week and the plans that the company has to mitigate those impacts.

Thanks. I'll try to answer the first question

Well, on the store format side, we are experiencing a very strong same-store sales growth, basically in tiendas chedraui, the big format, particularly on the lower-income customers, the CD, what we call the CD customers. that would be our stronger format, as well as the , which is the proximity format that I have already explained. In all of the formats we are growing, but particularly we see some peaks of growth in these two formats. And could you help us repeating, please, the second question, Renata?

Sure. It's related to the potential change in the number of hours that the workers can do that currently is 48. And there is a proposal to reduce to 40 hours per week. My question is, if the company thinks that it can pass in 2025, and if you can share the plans that the company has to try to mitigate those impacts.

Thank you for your question again.

Well, we have the lowest operating cost structure of the food retailers in Mexico, and that has allowed us to support all the labor increases that we have been seeing in Mexico. We, I personally do not think that the new labor, how do you say, labor week is not, we don't believe it's not going, probably is not going to happen. But anyway, if that would be the case, we, as a company, we would be probably the most prepared food retailer in Mexico to support that. Our sales and expenses are close to the 14% of sales in Mexico, a little bit under that, and that will allow us to support any of these increases, even though we don't think it's going to happen.

Super. Thanks so much for the call.

Our next question comes from Danella Bretthauer, HSBC. Please proceed with your question.

Good morning, everyone. Thanks so much for taking my question. The first one is actually a follow up on Melissa's question on the 50 bps improvement. Is that a full year figure? And when exactly should we expect that? Is it like second half of 2025 or only like full year 2026? And then I have two more questions.

Yes.

Well, I think it's important to clarify that the 50 basis point improvement is our target, and there's obviously a ramp-up period as we get to that number. It implies a lot of work related to transportation efficiencies and moving forward with a new way of sourcing product on a common basis for both banners. So we understand that there is a tremendous amount of urgency on our part to get there, but we're going to do it in a very thoughtful fashion, and we expect it to ramp up over a few quarters.

That's very clear. Thank you so much. And my two questions are, the first one is on supersitos. You mentioned earlier this year that your plan was to open 100 new stores in 2025, but so far you've opened, I believe, 22. So is there a change or an update on the Supercito store opening strategy that you can share with us at this point? And the second question is on the holiday outlook. sales. Your competitor mentioned a soft consumer environment in Mexico, so I just wanted to hear your thoughts there because you just mentioned that the low-income customers are performing well with Tiendas Chedraui and Supercito.

Thank you, Daniela, for your question.

Yes, we projected 100 supersitos. We'll be close to 70 supersitos instead of 100. We have not been able to get all the permits, I think. The elections and the change of government has affected some areas where we want to open the supercitos because they wait usually for the new administration and that has delayed our growth. Even though we have the plan, we have the places, we know where the supercitos are going to be and which ones, it has delayed our speed of opening. So we'll probably end up on the low 70s by the end of the year in the number of supercitos. About the holiday outlets, yes, we have seen a slow rate of growth on the consumption side. We see that in Antalya. We have seen it ourselves. We will be, by year end, hitting our Same-store sales target growth in Mexico offered in the guidance at the beginning of the year will hit that number, but yes, we're seeing a slowing on the consumption side in Mexico.

That's very helpful.

Thank you so much, and happy holidays.

As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment while we poll for questions. Our next question comes from Irma Garz with Goldman Sachs. Please proceed with your question.

Yes, hi. The majority of my questions were addressed, but I just had two quick other questions. On the traffic side, could you just sort of... characterize what you're seeing in terms of when you decompose the sales between traffic and ticket and how you're thinking about this into a year end perhaps. And then into 2025, how should we think about expense? I know it's maybe early to think about guidance and budgeting, but just generally what's on your radar in terms of when you think about expenses, operating expenses for 2025? Thank you.

About the traffic and sales in Mexico, well, as we already mentioned, we were able to grow 4.9% same-store sales in Mexico, and close to 1% comes from traffic, and the rest is ticket, which is the value of ticket. Can you help me with a second question, please? Can you repeat that again, please?

Thanks. For the second question, I was thinking just generally operating expenses when you think about, I heard your earlier comments about labor and labor week, and I know you're a very efficient operator, but when you think about 2025, do you think there's scope for operating leverage, or are there certain potential sources of expense pressure that are on your horizon?

Thank you.

At the moment, we're not expecting that... the reduction of labor hours on the weekly labor hours will happen. If that doesn't happen, we're projecting an increase in labor that we'll be able to support with the efficiencies that we have already put in place. And we don't believe we're going to see any negative effects on the EBITDA margin for next year. We don't know exactly. what will be the minimum labor increase for next year. But from what we hear, if it's close to that 12% that they are mentioning, we would be prepared to support that and end up, if not being able to gain EBITDA margin, at least to sustain what we already achieved this year.

Thank you.

Our next question comes from Daniella Bretthauer with HSBC. Please proceed with your question.

Thank you so much for taking my follow-up question. I just wanted to also clarify, you mentioned that there is an impact on the ramp-up of the new CD, but Can you share the figure? Because it was like 22 million in this Q3. And you mentioned that there will be an impact in Q4, Q1, Q2. Do you have a figure in mind? And how do you split that between the three quarters, upcoming quarters? That would be very helpful.

Yeah. Thanks, Daniela. Yeah, I don't have specific figures. specific figures for you as we move forward, but what you can account for is that this is a diminishing number moving forward, and I think the worst quarters behind us from this perspective.

Okay, got it. Thanks.

We have reached the end of the question and answer session. I'd now like to turn the call back over to management for closing comments. Does management have any closing comments?

No, I just want to thank everyone for joining, and happy holidays, and I hope to be talking to you again next year. Thank you so much.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.