Grupo Comercial Ched Ord

Good morning to all participants and welcome to Grupo Comercial Chedrawa's 4th Quarter 2024 Conference Call. Participating in the conference call today is Mr. Jose Antonio Chedrawa, CEO of Grupo Comercial Chedrawa, Mr. Carlos Smith, CEO of the company Humberto Tafollé, CFO, and Arturo Velasquez, IRO for the company. We will begin the call with initial comments on Grupo Comercial Chedrawa 4th Quarter Financial Results by the company's CEO, Mr. Jose Antonio

Chedrawa.

Thank

you, you may begin.

Good morning to all and welcome to our presentation of Grupo Comercial Chedrawa's 4th Quarter 2024 Results. I will begin by proudly thanking all of our employees for their exceptional work, unwavering dedication and passion for successfully driving our three core strategic pillars, lowest price, best assortment by store, and best customer experience. Their relentless commitment has been instrumental in continuing to grow market share in Mexico and the El Super and Fiesta Mart brands in the US. In 2024, our same store sales in Mexico outperformed the entire, which clearly reflects the hard work and determination of our entire team. At Smart and Final, we launched a new pricing strategy for perishables, which combined with our impactful marketing campaign launched in 2nd Quarter 2024, are designed to strengthen the banner's position as a primary shopping destination for our customers and increase our customer base. This approach led to a 2% increase in customer count in the 4th Quarter of 2024. Our CAPEX investment in 2024, which represented .1% of sales, showcases our unwavering commitment to long-term organic growth both in Mexico and the US. At the same time, we were actively seeking accretive growth opportunities through strategic M&A initiatives. Furthermore, as shared in our financial release, we are excited to announce that for the second consecutive year, our Board of Directors will consider approving an extraordinary dividend to our stockholders in 2025. This reflects our strong cash generation during 2024 and underscores our strong financial foundation. Now, to start our presentation, please turn to Slide 4, where I will highlight key achievements of the 4th Quarter. Consolidated sales saw double-digit growth driven by positive trends across all businesses. Retail Mexico same-store sales growth of .9% for the 4th Quarter of 2024 surpassed and taxed results for the 18th consecutive quarter. Chedrawi USA same-store sales in the 4th Quarter of 2024 posted an increase of .8% in dollar terms. Net

debt cash

to EBITDA stood at minus 0.18 times with a net cash position of 4,313 million pesos in 2024. Capex in 2024 reached 11,454 million pesos representing .1% of consolidated sales. We continue with our organic growth strategy as 57 stores opened in the 4th Quarter of 2024 in Mexico and two in the US. In the following slides, I will comment in more detail on these key highlights. Turn to Slide 5, please. In the 4th Quarter of 2024, consolidated sales grew by .2% in Mexican pesos reflecting positive performance across all business segments and a favorable currency impact on Chedrawi USA sales. The positive currency translation resulted in a .5% depreciation of the Mexican peso compared to the US dollar in the 4th Quarter of 2023. Consolidated EBITDA for the quarter reached 5,921 million pesos with an EBITDA margin of 7.6%. This result was impacted by transition costs related to our new distribution center in Rancho Cucamonga, California and Smart Final's Perishables Pricing Strategy. We will refer to this facility as RCDC. Excluding transition costs, consolidated EBITDA would have totaled 6,179 million pesos with an 8% EBITDA margin. On Slide 6, consolidated net income continues to upward trajectory despite the consideration of transition costs in the second half of 2024. Over the past 4 years, we have achieved a compound annual growth rate of 26.4%. When excluding transition costs and expenses, net income growth in an extraordinary 31.3%. Our return on equity in the second half of 2024 was influenced by RCDC transition costs and Smart Final's pricing strategy. However, even when accounting for these transition costs and expenses, our long-term strategic focus has driven ROE improvement, rising from single-digit figures in 2020 to consistent net team levels. This positive trend highlights our ongoing commitment to creating long-term value for our stakeholders. In the following slides, we will review the main highlights of our businesses in Mexico and the US. On Slide 7, same-store sales growth slowed in the fourth quarter of 2024, in line with softer economic activity for this period. Despite this, we continued to gain market share. As for the 18th consecutive quarter, same-store sales exceeded on tax results, growing by .9% compared to 1.9%. Our Michedrawi 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 Buen Fin and Christmas periods. We continued to increase customer participation in our Michedrawi loyalty program, as evidenced by the .7% customer growth in the last 12 months to 13 million members. This allowed us to recognize 74% of our sales from loyalty program customers, a record level for the company. Please turn to Slide 8. Positive same-store sales and a .4% increase in sales floor area drove consolidated sales growth of .6% compared to the fourth quarter of 2023. It is important to highlight that the fourth quarter-based comparison includes sales of basic food product baskets to the government, supporting emergency programs implemented in Acapulco Guerrero. EBITDA for the quarter reached 2,826 million pesos, slightly lower than the fourth quarter of 2023 with a .9% margin, down 47 basis points due to operating deleverage and higher expenses from accelerated store openings. Finally, on Slide 9, we will review the highlights of our real estate division. The occupancy rate increased to .4% from .3% in the fourth quarter of 2023. Sales continued to show positive trends with an .2% increase compared to the same quarter of 2023. Amounting to 391 million pesos. Over the last 12 months, 14,443 square meters of leasable area were incorporated, representing a .3% annual growth. EBITDA increased .1% compared to the fourth quarter of 2023 and represented .9% of sales. I will now turn the meeting over to Carlos Smith, CEO of Chedraui USA, for his comments on our US operation. Carlos, please go ahead.

Thank you, Antonio. Good morning, everyone. I'd like to start by providing an update on the status of our distribution center in Rancho Cucamonga, California, also known as RCDC. As of the fourth quarter of 2024, we have successfully closed two of the five legacy distribution centers, and we are on track to complete the transition process by the end of the second quarter of 2025, as previously discussed. Drive products at our legacy distribution centers are now distributed by the new RCDC, and we are in the process of completing the transition of chilled and frozen products, which will be complete by the end of Q2. As mentioned in prior meetings, the total capital investment in our RCDC will be approximately $120 million, of which $96 million has already been deployed. In addition, I would like to comment that during this quarter, we launched a new perishable pricing strategy in all Smart & Final stores, designed to increase customer traffic and position Smart & Final as a primary shopping destination for our customers. This strategy is also supported by the marketing campaign with the tagline, Smart & Final, where else? That kicked off in the second quarter of 2024. The strategy primarily involves offering key perishable products at everyday low prices. In Q4, the pricing strategy resulted in a 2% increase in customer count at Smart & Final stores, and we expect traffic to continue to grow in the coming months. While we are currently subsidizing these lower prices, which impacts gross margin and our average retail price, we believe this is the right strategy for Smart & Final for the long term, which will be supported by lower cost of goods through our optimized and more efficient supply chain. Please turn to slide 10. Chedrawa USA's same-store sales in the quarter increased .8% versus a prior comparative quarter. This growth was driven by low single-digit increases at El Super and Fiesta, which helped offset a slight decline in same-store sales at Smart & Final. It is important to note that our sales performance was impacted by a negative calendar effect caused by Chedrawa USA's use of a weekly -4-5 fiscal calendar. Fiscal year 2024 excludes the last two days of December, which are strong sales days. Chedrawa USA sales increased by .2% in U.S. dollar terms, supported by both same-store sales growth and a .5% sales floor expansion over the past 12 months. Due to the depreciation of the Mexican currency against the U.S. dollar by 16.5%, total sales increased by 18.7%. Our organic growth strategy remains on track, with the opening of two El Super stores during quarter bringing the total to six new stores in 2024. As previously mentioned, same-store sales growth at El Super and Fiesta was in the low single digits, driven by a solid increase in customer count. While Smart & Final sales have been impacted by a lower average transaction size, particularly among business customers, we remain focused on enhancing pricing strategies and expanding our perishable offerings to strengthen Smart & Final's position as a primary destination for customers. Please turn to slide 11. The pricing strategy at Smart & Final, coupled with transition costs and operating expenses related to RCDC, impacted operating leverage at Smart & Final. This resulted in a decrease in EBITDA for Chedrawa USA in dollar terms, as well as a .2% decline in Mexican pesos. EBITDA margin for the period represented .8% of sales. When adjusted for transition supply chain costs and expenses, EBITDA decreased by .3% in Mexican pesos, representing .4% of sales. Similarly, when excluding transition costs, the combined EBITDA margin for El Super and Chedrawa USA was 5.7%, with the primary impact stemming from the ongoing pricing strategy initiatives. We remain focused on refining our strategies to optimize operational efficiencies and drive sustained growth in the market. This concludes our report on the U.S. operation.

Thank you, Carlos. We now turn to the consolidated financial results on slide 12. Consolidated sales amounted to 77,582 million pesos, an .2% increase year over year, driven by positive growth in the U.S. The U.S. dollar rose by a positive sales trend in all businesses and a positive foreign currency translation due to the .5% depreciation of the Mexican peso compared to the U.S. dollar. Gross profit rose .8% and .2% without the supply chain transition costs and expenses. This result is impacted mainly by the increase in the U.S. dollar and the U.S. dollar. The U.S. dollar is also impacted by smart and final pricing strategy. Consolidated operating expenses, excluding depreciation and amortization, increased by .2% and .9% without the transition supply chain expenses. This increase was mainly due to higher labor costs in Mexico and the U.S. and an acceleration in store openings in both countries. Consolidated EBITDA declined 7.2%, representing .6% of sales and a .1% decline after adjusting for transition supply chain costs and expenses. The EBITDA margin excluding these transition expenses represented 8% of sales. Financial expenses increased by .1% to 1,607 million pesos, explained mainly by higher interest expense due to the capitalization of new property rents and the new distribution center in accordance with IFRS 16. When excluding this impact, financial costs would have increased by 11%. Consolidated net income totaled 1,363 million pesos and represented .8% of sales. This decline is once again explained by the different effects regarding the operation of RCDC. When eliminating this impact, net income totaled 1,876 million pesos and represented .4% of sales. Finally,

please

move to slide 13. We closed the year with a net cash position of 4,330 million and our financial leverage was minus 0.18 times compared to the minus 0.24 times in the same period last year. Fiscal year to date, CAPEX invested reached 11,454 million pesos, equivalent to .1% of sales and is 53% 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 the cash generated by our operation allowed us to fund this higher CAPEX and improve our cash position versus previous year. Now, please allow us to 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 Antonia

Fernandez with Oppenheimer. Please proceed with your question. Antonio, you're live with the speakers. Are you muted? Hi, my name is Antonio Fernandez from

Actimber. Two quick ones. What do we expect going forward for Smart and Final in terms of revenue growth, same-store sales and then I have a quick follow

-up. Are our speakers muted? Can you hear me? Yes, we can.

Okay, let's try that again. As I was mentioning, we've made quite a bit of progress at Smart and Final since Q3. As you've seen, sales improved versus previous quarters. We don't have sales where we want them to be just yet, but customer traffic was positive. We grew 2%. And another very important indicator of a very positive trend is that our unit volume grew by over 5% during the quarter. So the environment that we've got right now is one of increasing traffic, increasing unit volume, but we've got internal deflation that we've created by implementing a very, very aggressive pricing strategy focused on perishables, which we believe is a key component of driving more frequency, more traffic through produce and meat. And we've complemented that with key items in the grocery department, which have created an environment where we've got deflation at about 6%. When you see an environment of food at home, inflation of about 1.8. As many of you know, implementing an aggressive pricing strategy takes time. We have an example of that. If you go back to the initial stages of when we purchased Fiesta, we did something very similar. It takes time to grab hold, but you can see where the Fiesta banner is today. Regardless, in Q1 of 25, we are seeing positive comps at Smart and Final. Customer count is better than it was in Q4, and unit volume is even better than it was in Q4. So we firmly believe that we're on the right track. We understand that there's a little bit of pain as we implement a very aggressive strategy, but it's important. We need to convert Smart and Final into a primary shop instead of a fill-in shop and grow the customer base, which is what we're seeing

is happening today. Perfect. Thanks for the call,

Larran. Just a quick one regarding the performance in the southern part of the country. Is that because of competition as well being tougher or is the lower economic activity the main driver of this performance? What was also the effect of sales

in this region? Thanks. Good morning, Antonio. Well,

yes, we have a very big compression base in the southern region due to the government investments in the past years. Therefore, we have seen a weaker speed rate of growth and well, it's clearly affecting us in Quintana Roo, Tabasco, and in the areas that are close to Campeche, for example. So, yes, even though we're seeing that trend, we are being able to grow more than that and to grow more than our competition in that particular region. But that is correct. It's another speed rate

of growth than what we were used to in the past. Thanks. Appreciate the call. Have a great day. Our next question comes from Ben Thor with Barclays. Please

proceed with your question.

Good morning and thanks for taking my question. I also have two quick ones. So first, really just associated around your expectations in the US and maybe some of the traffic that you're seeing in stores. I was just wondering if you have more recently any issues with some of the policy-driven crackdowns on illegal immigration to a degree somehow impacting your operations in the US as it tends to be in a more Hispanic area, a neighborhood where you have your stores. So, Carlos, that would be my first question and I have one just on the DC integration.

Yes, absolutely. Good morning, Ben. Interestingly, our Hispanic banners have been doing very, very well in Q1. We experienced a similar situation back in 2017. It seems that this particular event is a little different, I would say. Obviously, we're not involved in policy, but it seems to be a little bit more targeted rather than broader. But overall, from our perspective, our banners are doing very well in the quarter with improved customer counts versus previous quarter. Perfect. That's good

to hear. Thanks for that, Carlos. And then, second question also on the US operations. If we take a look, obviously, I mean, right now there's disruption because of the double work and the double DCs, but as that flows through and improves over time, is it fair to assume that the vast majority of what you've been guiding for about a month ago in terms of like the Bidon margin expansion probably going to be driven three and four Q just given what the relative comparison is? And then as you kind of like phase out the integration obviously over time, and we look into a more medium-term potential from the new DC, just wanted to understand what the capacity of that is. Like how much of like growth can you deliver in the US with that DC being like the one in charge to fulfill

the stores?

Yeah,

well, let me

start by saying that similar to what's happening at Smart and Final, we're making a tremendous amount of progress on the RCDC. As of right now, three of the five DCs are closed. The remaining two were closed by the end of Q2, which means that we're slowly beginning to shed duplicate occupancy costs. And you're going to start seeing lower RCDC operating expenses in Q1 that you saw in Q4 and so forth in subsequent quarters. Our labor productivity is improving. Our transportation efficiencies are improving. So we believe that we're going to start getting into a normalized operation during the second half of this year. But as I've said before, and we've commented, our objective is to deliver an extra 50 basis point improvement from 2023 levels at both the L Super as well as the Smart and Final banner. However, we also see that there's a lot more that we can do. I think that there are tremendous amounts of opportunities related to improving assortment at the L Super banner. As you know, it's a limited assortment banner. Private label penetration at L Super is going to improve. It's one of the strengths that we have at Smart and Final representing about 30% of our sales with a very, very well known, great quality brand called First Street. So apart from that 50 basis point improvement, I think that there are other additional improvements

that will materialize over time. Thank you very much. Our

next question comes from Ara Melanato with Santana. Please proceed with your question.

Hi, good morning. Thank you for taking my question. Could you please give us more color about the increase in inventory? Is this increase related to the distribution center only or also Mexico operations? And if that is the case, which categories have the biggest increases? Thank you.

Hi there. I think I caught most of your question. I'm sorry. It was related to the increase in inventory levels on a group level, right? I think the primary reason for that is related

to the foreign exchange.

Okay, thank you.

Our next question comes from Bob Ford with Bank of

America. Please proceed with your question.

Hey, thank you. Good morning, everybody. Until you're given the tough compares in the solar consumption environment in Mexico. How should we think about market share opportunities and the implications of, if any, from the complex of ruling on Wal-Mix? And then Carlos, I think you mentioned something in your opening comments with respect to the role of the RCDC at smart and finals and ramps. But maybe you could talk a little bit more specifically about the RCDC and maybe lowering costs, improving freshness, reducing the shrink, improving in stocks and other things. And then when you reflect on the experience that you have right now in smart and final in Southern Cal, what are the similarities and differences between smart and final and the experience at Fiesta in terms of the responsiveness to the changes that you're making?

Thank you. Thank you, Bob. I think that

Carlos will answer the US questions. And then after after he's finished, I'll give you what I think about the growth opportunities,

consolidation opportunities in Mexico.

Hey, Bob. Good morning. Yeah, I think you mentioned some of those additional benefits that that we're going to be experiencing from the RCDC. I think the the. The starting point for our investment in the RCDC is the fact that we had a supply chain that was at full capacity, five distribution centers, servicing, health super and smart and final that did not allow us for any future growth. From the standpoint of additional stores or from the standpoint of additional categories into centralized distribution, which helps you with lower cost of goods. Right? So now that we've set the table to be able to do that, the assessment of new store openings is much different. Not only that, but the assessment of more regional M&A becomes a little easier to evaluate. So, putting those things aside, having this facility, we're going to get benefits from an efficient transportation network. We're going to get more efficiencies inside the facility. But we're also going to get efficiencies in store and you touched on some of those. Our on time deliveries to stores are improving dramatically, and that improves freshness. Our in stock position is improving every day, and that's going to reflect in better sales. So those are all ancillary benefits from the DC comparing smart and final to to Fiesta. Two different scenarios smart and final is an incredibly well managed company. The executive team that's smart and final is exceptional. We did not have that type of bench. When we when we acquired Fiesta, we did not have the. The fleet of stores are well maintained with proper equipment. So we had a tremendous amount of capex that was necessary to bring that fleet up to standard. None of that has been the case at smart and final. And right now it's really positioning the concept slightly different. You know that we as group which are that we we lead with a value proposition directed to price. We want to do the same thing at smart and final and we are very, very aggressive when it comes to perishables. You see that at super you're seeing that at smart at Fiesta and you're going to see that at smart and final. It just takes a little bit of time.

And then you gave a little teaser and super saying that it's it's an edited or limited assortment, but there's a big role in super for private label. How do you see the potential to expand that offering with with the improvement in the infrastructure?

You know, it's it's

it's it's it's phenomenal. The opportunity we've we've set the table for super because super is pulling product from the RCDC, which is common inventory for both banners. All of the work that's been done over, I don't know. I mean, as you know, it's smart and final has been around 150 years. There's a tremendous asset in the R&D related to our private label that super is going to be able to benefit. The catalog is 100 percent open for super to pull from. And not only that, if there is an item that we're not exactly happy with the price point, we've got different brands. We've got Sun Harvest. We've got Simply Value that meets different price points. And we've got an incredible team within private label that is capable of bringing in new items that fit a particular assortment or pricing strategy at super tip of the iceberg

in

private label.

Exciting. Our next question. Oh, I'm

sorry. No, no, don't worry. Don't worry. I think that just about Mexico. Well, as we have already said, we're seeing some difficulties in certain regions because of the base created by the investment of the government in the recent years. But besides that, we're being able to grow better competition, even in those particular areas. And while we are very bullish about sustaining that same store sales growth that we have been able to achieve in the past two years and with the store openings that we have put in place. Consolidation opportunities. Well, it's difficult to say whether there will be opportunities or not in the near future, but we're open for that. We've been we've proven that we have to the capabilities to acquire companies successfully and integrate them successfully and reduce value to our stakeholders. So we're open to that

as well. It's interesting to hear and then don't know any any thoughts on the confessive settlement, because it does seem to prohibit certain certain practices.

Well, no comments about it. I, they, they have not revealed much information about it. So I think that's that's a matter that between all next and the, and the, and the.

Thank

you

so

much. Thank you, Bob. Our next question comes from Renata Cabral with Citibank.

Please proceed with your question.

Hi, everyone. Good morning. Thank you so much for for taking my question. I have two quick ones here. One is a follow up regarding and kept qualification. Especially in Mexico. The company had a really bad time. The the control down next is happening and now has the company before 40, but we understand there's a lot of growth opportunities. So if you could give us some call in terms of for now, if there's something in terms of growth in Mexico, I mean, in terms of reading, so focus on in terms of In format, you know, company was more on the smaller formats or We will probably later that you already come here in the call and for the call. It would really be helpful. And my second question is regarding the comments and strategy. I noted some interesting comments on the news regarding the growth in 2024. In terms of user base and customer recurrency. So if you also could give some call in terms of where the company are in terms of the commerce in the work would be the further development in terms of partnerships and investments in the business.

We're not that we

are so, so sorry, but we were completely unable to Listen clearly to your question because the microphone was muffled. So, I don't know if you can get another microphone or maybe send in your written question to our team. And we'll get back to you, but we were unfortunately unable to hear your questions clearly.

Absolutely.

I'll try. Our next question comes from for all in Mendez with JP Morgan. Please proceed with your question. Hello, guys, can you hear me? Yes, we can

very

clear. We hear

you. Excellent. Thank you so much. I have a question on margins. We saw 30 basis points, the marketing dilution because of the CDC double cost during the quarter. What should we expect for the first half of 2025? Should this impact be a little bit lower versus what we have seen in the so far in 2024? Or should be a similar impact of around 30 basis points throughout the first half of 2025? And my second question, and trying to connect the dots between the comments on on on those 50 basis points that you can see improving smart and final and super at some point. When do you expect for the margins to reach 2023

levels again? Thank you. Okay, yes.

Yes. Good morning. Look, I think that, as I mentioned earlier, the heaviest portion of additional expenses, I think, fortunately, are behind us. Q4 was a little bit better than Q3. We expect Q1 to be better than Q4 and Q2 to be a little bit better than Q1. We're going to be normalized operating levels in during the second half. But what I can tell you is that we're comfortable with our projections that we've outlined for for the market. And with regards to the fifth with our guidance, I'm sorry. And with regards to our 50 basis point improvement, we expect to see that materialize in 2026.

Probably 2026 could see similar levels of EBITDA margins as the one that we saw in 2023, if I understand correctly, like around 9 percent.

Correct.

Excellent. And if I may just follow up, since you mentioned that these new CDC opens the possibility for new for new stores, for new SKUs. Does this also increase how you look at M&A? I mean, are we closer to see something happening, especially in the US, we're seeing a lot of consolidation or a lot of transactions in the market happening. Does opening or have the full operation of the CDC also increases

the

chances of you doing some

M&A in the US? As we've

said many times before, we are fortunate to be in a position where we are always open to listen and to evaluate for opportunities that may come up in the market. The market, both in Texas and in the West Coast, sometimes has a little bit different dynamic. But we're open to both and we believe we have a solid foundation with which to absorb some of these acquisitions.

Very clear. Thank you so much for taking my questions.

As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment, please while we poll for

additional questions. Our next question comes from Miguel Ola with BVA. Please proceed with your question.

Hi, good morning. Thanks for taking my question. The first one would be regarding margins in Mexico. Do you expect something to change in the first half regarding margins, gross margins specifically? And if these results change your guidelines for the full year for 2025? Thank you very much.

Good morning, Miguel. Well,

we don't have any plan to change the guidance. We believe that in Mexico, we'll be able to gain 10 basis points compared to the EBITDA margin that we delivered in 2024. Clearly, we have a difficult first quarter of the year due to the pace created. We have calendar effects with the Easter week and one day less in the month of February. As well as we still have some sales of that basic product basket sold to the government in the face of last year. So due to that, we expect a difficult first queue. But then we are pretty sure that we'll be able to deliver the same store sales growth that we projected as well as the margin gains that we have

already projected as well.

OK, just to clarify the 10 basis is over 2024 results. Is that right?

Exactly. Over the base of 2024

results. Thank you very much. Thank you, Miguel.

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

Well, I want to thank everyone

for joining this meeting. I hope to be talking to you soon about the first quarter

results. Thank you. This

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