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Edited Transcript of BIMAS.IS earnings conference call or presentation 7-Aug-19 1:00pm GMT

Q2 2019 BIM Birlesik Magazalar AS Earnings Call

Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of BIM Birlesik Magazalar AS earnings conference call or presentation Wednesday, August 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Serkan Savas

BIM Birlesik Magazalar A.S. - Reporting & IR Manager

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Conference Call Participants

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* Berna Kurbay

BGC Partners, Inc., Research Division - Director

* Cemal Demirtas

Ata Invest Co., Research Division - Head of Research

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to BIM Second Quarter 2019 Financial Results Conference Call. I will now hand you over to Mr. Serkan Savas, Head of Investor Relations, who will take you through the presentation. Dear Mr. Savas, please go ahead.

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Serkan Savas, BIM Birlesik Magazalar A.S. - Reporting & IR Manager [2]

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Thank you. Dear analysts and investors, welcome to our second quarter results call. I am Serkan Savas; and today, it's my pleasure as of Investor Relations to present the results as Aykaç is on a location this week.

I hope you have download our presentation from our website. And so let's have a look at our results. In the Page 3, before I start, let me just remind you that from January 2019, we had to start reporting with IFRS 16 standards, which makes comparing numbers to last year's incomparable due to the fact that we have added few more comparison info on slides to help you understand the impact of IFRS 16, and this will continue till year-end.

Now let's look at our second quarter 2019 headlines. In second quarter, sales are TRY 10.245 billion, which is 31% up from the second quarter last year. As you see, the sales are better than the first quarter sales growth and sales and up from the last year as consumers have begun taking the benefits of inflation on to their baskets. And store traffic has also slightly increased from first quarter.

In EBITDA terms, we reached EBITDA margin of 8.3%, which means 92% growth compared to last year. If we exclude the impact of IFRS 16 standards, then the EBITDA margin would be 5.8% for quarterly basis. And regarding the headline, one important highlight in this quarter is that there has been a positive EBITDA contribution from overseas in total. In the later slides, we will show the details about the contribution from foreign operations in EBITDA terms and sales target. This quarter, we are on positive EBITDA levels in foreign operations.

CapEx was TRY 270 million this quarter, which corresponds 2.6% of sales. In terms of new store openings, we continued new store openings with 492 stores, new stores in the first half, and we ended the half 7,970 stores in total. Of course, 4 seasonal stores we opened in this quarter. So 4 seasonal store openings also included in these numbers. So those seasonal stores will be closed in October.

Net income was TRY 347 million, which is 18% higher than last year. Just for comparison point, without IFRS 16, net income is TRY 402 million with 37% increase year-on-year. Again, we will look at the detailed impacts of IFRS 16 in more detail shortly.

Next page is the reminder about IFRS 16 but as you are quite familiar that we started to understand that and you also -- and we became experts since first quarter. So this standard had some impact on EBIT, income and other main indicators, how our business is growing. But please note that, just I want to remind that even though there are some impacts on financials, I'll also highlight that there is not any cash flow impact. And there is no change in our operational structure of rental process. Our rent -- operational rental process is as is, we are still signing long-term contracts. We didn't change anything because of this IFRS 16 standard, so this standard just an accounting, no cash flow impact.

And next slide is about the sales and gross profit dynamics in this quarter. In the second quarter sales are slightly better than the first quarter, thanks to the improving baskets as well as store traffic. Second quarter, we had TRY 10.245 billion sales and represented 31% growth year-on-year.

With regards to inflationary environment, food inflation still remains higher than the headline inflation. Meaning, while the average internal inflation reached 27% year-on-year, of course, and the headline inflation -- versus headline inflation is at 16%. Even though we are ahead of our sales goal target in the first half, as you know that we set our target 25% plus/minus 2% at the beginning of the year, we are now above this target, but we plan to keep this target as is, as announced at the beginning of the year, for the time being. We will continue to observe the sales dynamics in the coming months as the base will be getting stronger. Actually, it's our belief we will finish the year above our target in sales growth, but it's better to be in conservative side because in the coming months, in September and October, we will be facing strong base. So at least few months we want to see extendible sites revision or not.

With regards to gross margin structure, we also improved our gross margin to 17.6% after first quarter. The main reasons are like that, for some, we have more flexibility to pass inflationary pressures on prices in the second quarter. And second, as you know that in the first quarter, there were transient sales in government-led fruits and vegetable organization in the first quarter, we incurred some losses. But in the second quarter, it's bullish in second quarter. And third reason is Turkish lira is a little bit strong. It's not depreciating anymore, and we are facing less pressure on traffic. So because of these reasons, our gross margin improved since the first quarter.

And for the remaining of the year, we expect the same gross margin to just continue in the coming quarters. What does it mean? I think the gross margin in the second half, hopefully, almost in line with the first half. First half would be indicative for the second half gross margin.

And next slide, Page 6, is about quarterly EBITDA and EBIT figures. Our EBITDA in the second quarter was TRY 747 million, which reflects 92% increase compared to same quarter last year. And EBITDA margin stood at 8.3%, which indicates an increase since first quarter. The main reasons, the first reason of EBITDA improvement is gross margin improvement, as I told in the previous slide, our gross margin improved 60 bps. The second, we are connecting more from the operating leverage in the second quarter. And the third one, the positive contribution from the overseas in second quarter. Because of 3 reasons, our EBITDA margin improved, and it's in line with our charts.

Actually, when we take new IFRS 16 standard out, then EBITDA margin would be 5.8% in this quarter. So it represents 10 bps increase from the same quarter last year. Actually, this 10 pbs is meaningful because this 10 bps increase is achieved in highest staff cost environment. As you know that staff costs increased -- minimum wage increased at the beginning of the year by 36%, and our staff costs increased by 20 bps as of the second quarter. So at this environment, we improved our EBITDA margin by 10 bps year-on-year.

In EBIT terms, EBIT increased 60% year-on-year in second quarter to TRY 575 million with an EBIT margin of 5.6%. Again, in case without IFRS 16 impact, to make it comparable, EBIT margin would be 4.7% again, which is 10 bps better than the same quarter last year.

Now let's look at semiannual, 6-month period EBITDA and EBIT figures at the next slide, Page 7. On semiannual basis, our first half EBITDA was TRY 1.5 billion, which is 86% growth from the first quarter -- first half last year. Without IFRS 16 standard, first 6 months EBITDA margin was 5.3%, corresponding to 26% year-on-year increase. As you see, 5.3% is in line with our full year target range and the EBITDA is close to our kind of a target change. So we are happy with that with this EBITDA margin provision.

And semi-annual EBIT was TRY 977 million, corresponding to margin of 5.1%, which is 52% year-on-year increase. Again, to make it comparable without IFRS 16 standards, first 6 months EBIT was TRY 804 million with a margin of 4.2%.

Net income. Net income in this quarter is showing the signs of recovery as well like other EBITDA and EBIT figures. In the quarter the numbers represent that net income was TRY 347 million in second quarter, which corresponds to 3.4% net income margin and 18% growth year-on-year. For a quick comparison, I also want to give without IFRS 16 figures. Without IFRS 16, net income was TRY 402 million, with a margin of 3.9% and 37% increase year-on-year.

On semiannual basis, net income was TRY 562 million, with a margin of 2.9% and almost 7% year-on-year increase. Again, without IFRS 16, net income in the first half was TRY 667 million with a margin of 3.5% of net income margin.

Looking at the like-for-like sales slide. Like-for-like sales increased by 20.4% from previous years. On semiannual basis, increase was 19.7%. Like-for-like basket size increased by 18.9% in the second quarter and 18.4% in the first half.

Customer traffic growth sales increased to 1.2% in second quarter and 1% in first half, respectively, as you see in this slide. And on average 697 customers per store per day in second quarter. As you see, there is slight improvement since last quarter in customer traffic growth.

As a note for you, I think you are wondering BIM internal inflation and processed food inflation. The processed food inflation is in Turkish to date 22% in Q2. And yesterday, July numbers up by 24%, still high processed food inflation. And in second quarter, our internal inflation is 27%.

Now we are in CapEx page. Our capital expenditures in the second quarter was TRY 270 million, corresponding with 2.6% of our sales. And what we did in this quarter in terms of CapEx, we have opened 2 new warehouses in Eastern Turkey this quarter, in Batman and others we opened 2. As of today, we total -- in total, combined 64 warehouses, 57 BIM, 2 FILE warehouses, we have plus 2 -- 3 Morocco and 2 Egypt. In total, 64 warehouses. And additional 3 warehouses -- construction of 3 warehouses are underway and slated to open by the end of 2019 or early 2020. They are under construction.

And looking at the first half of 2019. CapEx stood at TRY 538 million corresponding to 2.8% of our sales, which is in line with our full year target. As you know, our full year target for CapEx is TRY 1.1 billion. And I also emphasize that this first half, in the first 6-month period, TRY 45 million CapEx is coming from the store acquisitions in the first half. As you know that we are -- sometimes we are buying some stores, but this is not a strategical change, just for proper locations sometimes we are buying some stores. So in the first half, we spent TRY 45 million and likely to continue at the same pace in the second half.

And next slide is about store growth, new store openings. As you might remember, at the beginning of the year, we have set our annual target to 700 new stores in Turkey, and now we are in line with our target in the first half of the year. We have around 11% store growth from the same quarter last year. We have opened 257 new stores in second quarter, which brings the total number of BIM stores to 7,970 in total consolidated at the end of the second quarter. And in the first 6 months period, we had 492 new store openings and including 40 seasonal stores, these seasonal stores will be closed in September or October.

And 771 of our stores are coming from the overseas operations. We are confident that we will be reaching or slightly exiting our new store opening profits this year. Just in Egypt, store opening is slower than our initial expectation since we prefer to keep at a slower pace because of market conditions, and we prefer to open in better locations, slow but in better locations for Egypt.

Next slide is about our freight operations and freight highlights. Looking at our freight operations. In Morocco, we have opened 11 new stores in the second quarter and reaching 467 stores. In total, we are well on track to reach our targets for the year. It is important to note for Morocco, as you know, Morocco operation has already been EBITDA positive since last year. And first time this quarter, it reached net income breakeven. Of course, the Ramadan period in the second part is the major driver for this positive net income. But for the full year, actually, we expect this Morocco operation will be close to net income breakeven so there's a good progression in Moroccan operation in net income level.

In Egypt, the progress is slower than our set targets since we preferred to open fewer stores but in better locations. In second quarter, we have opened 3 new stores, and we have 304 stores in total to date. And FILE -- in terms of FILE gross EBITDA positive as you know that, by the end of second quarter, we had a total of 77 stores. It means that we have opened 6 new stores in this quarter. Store openings in FILE are progressing almost on track, and we have opened 13 stores in the first half, and we are confident to reach our target for the year of a total of 30 store openings.

And last slide of our presentation is foreign operation contribution. As you know, that we are giving foreign operation contribution in semiannual basis in 6 months period, let's say, our second quarter and fourth quarters. There was around TRY 1.1 billion contribution to consolidated sales in first half compared to TRY 689 million same period last year. It means that 6% of our total sales are coming from overseas.

With regard to EBITDA contribution. Also, we have a good news. Thanks to market driving growth, foreign operations totaled EBITDA before IFRS 16, of course, before IFRS 16, reached positive levels for the first time, and this is TRY 9 million, positive TRY 9 million in the first half. Last year, it was minus TRY 7 million this half. This year it's positive TRY 9 million. So it starts to contribute to our EBITDA figures, EBITDA levels. This trend is expected to continue going forward.

So this is end of my presentation, and thank you for listening. And now I'd like to open the discussion for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from (inaudible) from Yapi Kredi Yatirim.

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Unidentified Analyst, [2]

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I have a quick question about -- on the CapEx front. You talked about store acquisitions amounting to TRY 45 million. Could you please provide details how many stores did you acquire and were they in FILE format or your core operations?

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Serkan Savas, BIM Birlesik Magazalar A.S. - Reporting & IR Manager [3]

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Mostly. Thank you (inaudible). Mostly core operations, new operations, just 1 or 2 FILE format. We acquired just 1 or 2. But most of them are coming from BIM operations. In total, around 15 to 20 stores we acquired. So we have around today -- around 57 regions in Turkey. So for the full year, you can consider that 1 store acquisition per region for the full year, of course.

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Operator [4]

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(Operator Instructions) Our next question comes from Cemal Demirtas from Ata Invest.

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Cemal Demirtas, Ata Invest Co., Research Division - Head of Research [5]

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My question is about personnel expense. Compared to first quarter, we still see high personnel expense. How should we expect for the rest of the year the trends in the personnel expense side? And during the presentation, you mentioned BIM inflation around 27% I guess, the line was not clear, so I just want to confirm that.

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Serkan Savas, BIM Birlesik Magazalar A.S. - Reporting & IR Manager [6]

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Yes, you are right, 27%.

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Cemal Demirtas, Ata Invest Co., Research Division - Head of Research [7]

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And what will be the trends in third quarter so far.

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Serkan Savas, BIM Birlesik Magazalar A.S. - Reporting & IR Manager [8]

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Thank you. Yes, you are right. BIM internal inflation is 27% in the second quarter, and July also it is 27%. But in August and September, we expect to be slowed down because in August and September, we will be -- we will have strong base in inflation terms. All inflation types will be coming down starting from August and September. So I think it will be coming down in the third and fourth quarter, our BIM internal inflation. But as I told you there is decoupling between the fourth inflation and headline inflation. And again, our internal inflation and headline inflation, I think this decoupling will continue going forward, but all types of inflation will be coming down because of the strong base in the coming quarters.

And in terms of personnel expense, yes, you are right. In the first quarter, we had higher cost. But in the first quarter, we benefited only 2 months minimum wage support from the government. This quarter, 3 months, we had minimum wage support. And additionally, we benefit from operating leverage, more operating leverage in this quarter. So this led our staff costs came down. And also, of course, other than the minimum wage supports, there are many other supports, new recruitment support, of course, benefits from the government side just to decrease the unemployment rate. Government is gearing probably for many benefits and supports. We are trying to do our best in the second quarter as well. We are trying to benefit from all types of governmental supports in terms of personnel costs.

So this is the main reason. And in the second half, I think -- the first half will be a reference for you for the second half.

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Operator [9]

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(Operator Instructions) And our next question from Berna Kurbay from BGC Partners.

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Berna Kurbay, BGC Partners, Inc., Research Division - Director [10]

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I have 2 questions. The first one is about July. So would it be fair to assume that July trends in terms of top line growth were similar to what was observed in the second quarter? In general, around 31% top line growth, but you are cautious about August and September because of the high base. Is that a fair assessment of the third quarter so far? That's my first question. And my second question is, you already mentioned that it would be fair at the moment to take the first half gross margin as an indication for the second half. And I guess that would hold for the EBITDA margin as well. Can you please elaborate on that?

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Serkan Savas, BIM Birlesik Magazalar A.S. - Reporting & IR Manager [11]

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Yes. Thank you. Yes, July trend is almost in line with the first half sales dynamics, the first half. So in August also, early August figures almost in line with the first half sales trend. So it's quite fine, in line -- better than our expectations, 25%. But at this point, it's better to be in conservative side because in September -- maybe September, we will have a high base. But it's likely we will have better sales growth, actually, for the full year target. But today, we don't -- do not have any official revision in our sales growth targets.

And in gross margin side, yes, gross margin, the first half is reference for the second half. And in EBITDA terms also, you can take the reference. We don't expect any cost pressures, operational expense pressure in the -- more operational expense pressure in second half. So in the second half also, it's expected in the same trend. The first half trend will continue in the second half in terms of EBITDA margin as well.

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Operator [12]

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(Operator Instructions) We have no more questions for the moment. Mr. Serkan Savas, back to you for the conclusion.

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Serkan Savas, BIM Birlesik Magazalar A.S. - Reporting & IR Manager [13]

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Hi, everybody. Sorry, there's a little bit connection error here. So I think there's no question. And I would like to thank you, just for closing speech, I would like to thank you for your participation, and we also wish you a happy Eid al-Adha next week. Thank you for everybody. And if anyone would like to ask question, you can call me after the call. Thank you.

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Operator [14]

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Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.