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Edited Transcript of EUR.WA earnings conference call or presentation 28-Aug-19 12:00pm GMT

Half Year 2019 Eurocash SA Earnings Call

Sep 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Eurocash SA earnings conference call or presentation Wednesday, August 28, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cezary Giza

Eurocash S.A. - IR Director

* Jacek Owczarek

Eurocash S.A. - Financial Director & Member of the Management Board

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Conference Call Participants

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* Lukasz Wachelko

Wood & Company Financial Services, a.s., Research Division - Head of Consumer and Industrials

* Nikolay Kovalev

VTB Capital, Research Division - Equities Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Eurocash Q2 2019 Results Presentation Conference Call. I will now hand over to your host, Jacek Owczarek, Chief Financial Officer; and Cezary Giza, Investor Relations Director. Sir, please go ahead.

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Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [2]

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Good afternoon, everybody. Welcome on Eurocash first half 2019 results presentation. First of all, I'd like to apologize for Luis Amaral, our CEO. Unfortunately, he couldn't do it today. So we will do our best together with Cezary to present you our results, and then we'll go into Q&A as usual.

Generally speaking, let me summarize the quarter. So generally speaking, the quarter was really good. And the performance in both segments, in Wholesale and Retail, is satisfactory from our perspective. In Wholesale division, we are quite happy with the continued growth of sales through the franchisees, especially in the supermarket segment. And from Retail side, which probably is making right now much more question mark though was making question mark in the past.

The quarter was showing some stabilization of performance. And I think the best news is really the fact that although we are making quite a lot of changes due to still process of integration, the fact is that we really recorded very good like-for-like from the consumer perspective, which is again the most important. We still have them in the store. So I think that's probably one of the biggest good surprises from our perspective.

If you are talking about integration, we'll go in detail with Cezary's presentation, but the fact is that we are on good track with what we planned and we announced. Right now, we are in the phase of rolling out IT platform on stores level and also remodeling the stores, but we are not lagging any behind of original schedule facing some fundamental problems. Rather, you know we had quite a lot of work on daily basis.

In summary, if we are talking about cash flow and net debt levels, all of this is in control and at satisfactory level. So generally speaking, the quarter from our perspective was really quite nice and stable performance in both in Wholesale and Retail.

So let us present now details, and it will be done by Cezary Giza, our IR Director. And after, we open for Q&A session as usual. Thank you.

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Cezary Giza, Eurocash S.A. - IR Director [3]

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Hello. Thank you, Jacek. And let's start the presentation. First of all, let's look on the Page 3, where we can see the development of food market in Poland for the last 12 months. And here, you may see that small-format stores increased its sales by 6%. Meanwhile, discounters increased sales by 9.5%. While on the other hand, we have large-format stores, supermarkets and hypermarkets, that were flat or declining.

Coming back to small-format stores. You may see convenience stores between 40 and 100 square meter, they noted nice growth, 11% in the last 12 months as well as specialized and others, where we have gas stations, that amounted 10% sales growth. Somehow, both these segments were beneficiary of last year's Sunday ban in production, so that's why we see, especially in the last segment, we see a little bit of deterioration of the dynamics because Sunday ban is -- it is already in the bases. We may see also small grocers where that are flat, slightly declining by 1% and small supermarkets, which is a very interesting segment for us, that accelerated with the growth from 2.3% to 2.8%. Basically, summarizing, small-format stores are growing faster than total market. They are growing by 6% comparing to 5.6% for total market.

Let's look at the inflation. This is very important, especially when we compare our sales growth. Here, you may see that food inflation accelerated to 4.7% in second quarter and to 6.8% in July this year. Meanwhile, alcoholic beverages and tobacco noted around 1.2%, 1.3% inflation, which is the stable level, more or less the same like for a long-term trend. When we look deeper, you may see that vegetables drive inflation right now as well as bread and food. This inflation is accelerating, especially in last couple of months. But when we look at the fat and dairy that last year were with the biggest inflation, this year are rather flat. Our categories, beverages, alcohol, are at a stable level, as I mentioned before, below 2%.

Let's look at our results on Page #5. You may see performance of our Wholesale segment has increased sales by 5%, which means PLN 433 million. Nowadays, this business in first half of the year has PLN 9 billion of revenue. On the other hand, we have much faster growth of our EBITDA results. This amounted to 14.2%, which means PLN 22 million. It's just impressive from our point of view because this is higher than previous year, which in our view was also very good. After IFRS 16, EBITDA amounted to PLN 280 million.

Coming back to the sales revenue on Page #6. You may see that this 5% Wholesale sales growth was driven mainly by tobacco business. That increased by almost PLN 300 million, which means 10% sales growth. Please keep in mind that in terms of sales revenues, tobacco is our biggest distribution format. So 10% is, in our view, very good result. On the other hand, we have growing Cash & Carry and distribution by 2%, both of them. Cash & Carry, again, please note that Cash & Carry are supporting small stores that were beneficiary of Sunday trading ban. So last year, great results are in the bases. This 2 percentage growth allows us to improve our efficiency and increase our EBITDA in Cash & Carry business.

Distribution, it is worth to notice that 2% includes alcohol distribution business. Excluding alcohol distribution, the business increased sales by 9%, and sales to our franchises like Lewiatan and Groszek increased by 11%. It is worth to notice that sales to these franchises increased in second quarter by 15% year-on-year.

Coming back to alcohol business. Please note that we have changed strategy for this business. We have discontinued sales to some wholesaler and discontinued this specially that are basically at the low margin. Moreover, alcohol is under integration with Eurocash Distribution. So we will be able to capture some synergies and decrease costs in the following year, thanks to this synergy effect of this integration.

Let's look at the Retail business on Page #7. Sales revenues increased by PLN 740 million, which means 35.5% growth. Our EBITDA at that time was 5% higher than previous year. It means that in Retail, we achieved PLN 53 million before IFRS 16 and PLN 130 million after IFRS 16. It is a good result, as Jacek has mentioned at the beginning, because we have to be aware that we are in the phase of integration of all retail businesses. That is very complex, and we put a lot of effort into this integration.

Nowadays, we are after the strategy revision, operational model revision, new design of organizational structure, and we are in the phase of common IT solution rollout.

Coming back to the sales performance of Retail business. On Page #8, you may see that sales were driven by own supermarkets, mainly acquisitions of Mila and 25 supermarkets under Lewiatan brand. But those who cares about details, it is worth to look at Delikatesy Centrum franchise performance and Inmedio stores. Both noted 5% and 9% sales growth, respectively, which is in our view, a strong performance showing that consumer is with us.

When we look at Delikatesy Centrum like-for-like, especially retail like-for-like part of the chain, we noted 8% like-for-like sales growth in second quarter. In first half of the year, we noted -- amounted -- our sales growth amounted 3.35% for like-for-like. It is worth to notice that this like-for-like was driven by the volume because basket inflation amounted to 0.7% in first half of the year. Just some comments to our like-for-like. This was the result, one of the best, in last couple of years.

Projects, on Page #9. Projects increased sales by 60%, means PLN 15 million and PLN 10 million was driven by Duzy Ben. Project EBITDA amounted to PLN 22 million, which means decreased by PLN 2 million comparing to previous year. Please note that we are in the phase of acceleration of expansion for this project, especially Duzy Ben. Now we are with 50 stores, and we need around 120 stores to reach breakeven. So it means that next year, we should be around breakeven for Duzy Ben. So basically, we want to expand faster than -- as much -- as fast as it's possible.

Looking at the -- our consolidated results. Let's see under sales revenue that grew by 11% this period of time. Gross profit increased from 12% to 13%. EBITDA increased by 2% from PLN 156 million to PLN 160 million. Meanwhile, our net profit was at the level of around PLN 16 million comparing to PLN 17.5 million. EBITDA after IFRS 16 standard amounted to almost PLN 340 million.

Second quarter was again pretty strong. We noted 12% sales growth with gross margin improvement from 12.3% to 3.1% (sic) [13.1%]. Gross margin was driven by consolidation of retail companies. But also, we noted slight margin improvement in Wholesale business. Our EBITDA meanwhile increased by 8% to PLN 126.5 million. Our net profit increased by 40% to almost PLN 50 million.

When we look at the EBITDA evolution by segment, you might see that Wholesale gave us 14% EBITDA growth, while the Retail, 5%. Projects deteriorated its EBITDA by PLN 2.2 million, while others deteriorated its EBITDA by PLN 19 million. Please note that this cost is driven by provision for employees' bonus due to good performance comparing to last year.

Cash flow on Page #13. Cash flow was driven by IFRS 16. Net operating cash flow amounted to PLN 265 million. When we exclude this impact, you may see that our last 12 months' operating cash flow amounted to 0.7x EBITDA. It means that our net operating cash flow in first half of the year amounted to PLN 83 million, mainly driven by cash profit while comparing our change in working capital, we noted slight decrease comparing to previous year.

Please note that last year was very good, very strong. When we look at the second quarter results, our cash flow generation accelerated very fast, and we are pretty confident with our current situation, especially when we look at the next coming quarter.

The most important for us is that our net working capital rotation remains at the stable level of 25 days. It's also worth to notice -- coming back to the working capital, it is worth to notice that our mix of sales have changed, especially in our tobacco business. Please keep in mind that we were trying to prepare ourselves for the strong season in tobacco business. That's why somehow, we see our -- an increase at inventory level from tobacco category.

Net debt. Net debt amounted to PLN 630 million, which means 1.5x EBITDA. Please note again that we paid PLN 140 million of dividend in June 2019. So our net debt decreased by PLN 100 million, but actually, we paid additional -- we paid quite high dividend. Our net debt EBITDA after IFRS 16 amounted to 3.2% -- 3.2x. This is the level where we are satisfied. And this level of the net debt does not impact anyway our operational and business perspective.

Just summarizing at the end. It is worth to notice that it was a stable quarter and stable half of the year. Wholesale, again, showed its strength, especially when we look at the EBITDA growth that accelerated. Retail shows improving like-for-like despite ongoing integration. Cash flow generation was pretty strong, especially in second quarter, and it was accelerating especially at the end of the quarter. Net working capital was at the optimum levels. Basically, just summarizing, our long-term strategy to expand in total food distribution in Poland is on schedule, no matter if we discuss Wholesale or Retail.

Thank you for your attention. And now we are opening the lines. So we are ready for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Nikolay Kovalev, VTB Capital.

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Nikolay Kovalev, VTB Capital, Research Division - Equities Analyst [2]

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I have 2 questions. My first question is on your Retail business. Can you update us on the status of your Retail integration? And at what stages the different chains are? And possibly, if you can comment, when should we really see improvements in your operational costs and margins for the Retail business, on what kind of like time horizon?

And my second question is, if you can guide us for your, this year, capital expenditure and comment how active is your M&A pipeline. And when we should expect you to return back to your, like, aggressive M&A acquisition strategy?

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Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [3]

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Okay. So let me answer one by one, Retail integration. So as maybe part of you remember, we are showing the general plan, which was at the beginning of the year which was telling that we are in the process of -- generally, we are aiming to end process of integration in between Q2 -- Q3 and Q4.

In reality, what we said as well that you know that the number of activities inside of this integration project, and the most important, which we are right now in the middle of, is connected with the fact that right now we are putting all stores on the final IT setup. By IT setup, I mean unified POS IT system, so you know front-end system from the store perspective, and then everything right now is over the SAP Retail back office system. So we are in the middle of rollout here. So I don't have here really nothing to mention about the obstacle. Of course, we have on daily basis number of issues with the quantities, with the ARM codes, but it is more or less about cleaning database rather than really about the IT setup. I think it's really fixed as of now.

And then the second discussion, which we had already in past, was connected with the fact what we mean by remodeling or rebranding. And I think here maybe I should give a little bit more color because sometimes it's a little bit -- we are mixing also on our side 2 statements at the same time. So by remodeling, we are meaning whatever we are doing inside of the store.

So generally speaking, we are almost at the end of remodeling in a sense that all stores are looking very similarly inside. So for example, if you are going inside of the store, you have -- you are sure that on the right-hand side you will have, I don't know, fruit there. So that happens or we know that the pricing policy is unified. We know that everywhere, in all stores, we have the same promo strategy. For example, for those of you who are from Poland, you know that right now when we are running TV campaigns, it's already in the TV campaign for quite long time. We are telling you that you know these promotions found in Delikatesy Centrum meaning ex-EKO and some franchise stores and some Mila stores. So generally speaking, it's unified as well.

When we are talking about rebranding, so when the brands of Delikatesy Centrum is going to appear on stores of Delikatesy Centrum -- on stores of Mila, which is still under the brand of Mila, there's internal discussion right now because, really, the discussion is about the risk integration at year-end because, as you know, in December, you have the peak of price, so we have debate internally whether it's right to change the colors of the store and the brands of the store right before the Christmas. But that's really -- I don't think that in the magnitude of changes we are doing is the most important.

On the legal side, in the few weeks, you will see on our website and in public register court that we started the process of merging of legal entities. So in reality, we are really on the track here. So that's in quite detail indicates where we are with the integration. Of course, as we said, few aspects are not so important for us this year. For example, opening of the new stores, that's something which we are repeating right now. And we are telling that there's much more opportunities this year.

So it leads us to the discussion about CapEx. Generally speaking, the CapEx itself, I think it's at very similar level like last year. So around PLN 180 million per year, that's our guidance. For launch, if you are talking about M&A, excluding the possibility of buying very small local chains here or there, it's not right now main priority. So I think when we will be hopefully talking to each other at the year-end, probably when we'll be able to tell you, but you know the process of integration in all points -- all general -- in all big policies behind us, I think then we need to start again discussion about that even the type of the expansion of the new stores, including M&A. But as of now, I think it's also not the biggest priority for the company. I hope I answered you, your questions.

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Nikolay Kovalev, VTB Capital, Research Division - Equities Analyst [4]

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Yes. Just wanted to clarify because when you said the number PLN 180 million, as I see, you already spent PLN 180 million in the first half, so you were mentioning the first half? Or it's like somewhat a different estimation?

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Cezary Giza, Eurocash S.A. - IR Director [5]

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Nikolay, please note that PLN 180 million includes our M&A of 25 stores. We paid around PLN 70 million in March. So actually, we are -- we have PLN 100 million to PLN 110 million standard CapEx that we already spent. This gives us more or less the same CapEx last -- like we had previous year in terms of annualized CapEx.

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Operator [6]

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Our next question comes from Wood & Co.

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Lukasz Wachelko, Wood & Company Financial Services, a.s., Research Division - Head of Consumer and Industrials [7]

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It's Lukasz Wachelko, Wood & Co. First of all, congrats on the good set of numbers. I have actually one question as a follow-up of the previous conference call after the results. I want to update myself on the situation with PKN ORLEN and what's the -- how was the case in there. Are they staying with you? Or they are continuing with this -- the decision to take part of business from Eurocash or they are going deeper? Where do you stand there?

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Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [8]

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Okay. So regarding the plans of ORLEN, you'll need to ask ORLEN, honestly speaking. But I can update what is happening on our side. So generally speaking, in Q2, we didn't have any further discussion with ORLEN. So as they said, they are considering to open their own network for the distribution. So it may happen, and it's happening based on the contract we signed.

Generally speaking, from my perspective, the number of contracts, or part of them, they want to move, part of them not. As we said, the magnitude of our cooperation with ORLEN right now, which potentially they can move over the few months as they have is somewhere between around 3% to 4% of total turnover for the Eurocash Group. So generally speaking, it's not our biggest worry, honestly speaking, especially in the context, how the Wholesale division is right now performing and even from my perspective, probably the story says well that in reality, it means that we'll open another distribution center a little bit later than sooner because in reality, during the summer when you know it's our peak of price and especially peak of price in the few categories like beef, for example, we are utilizing capacity right now fully. So generally speaking, there are no new developments, honestly speaking, regarding whether -- what they speak on the ORLEN side, I'm really sorry, but I don't know.

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Lukasz Wachelko, Wood & Company Financial Services, a.s., Research Division - Head of Consumer and Industrials [9]

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Okay. So the basis is that part of the ORLEN business goes away in September and being fairly close to that if you don't know whether that's actually happening or they delay it.

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Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [10]

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Yes. And they do also in clusters for them to be reasonable and for us to be reasonable, so they are not moving, I don't know, 1 petrol station in Gdansk and 1 petrol station in [Brodnica], 1 petrol station in Warsaw but rather 3 petrol stations in one place. So we have some (inaudible) system, but then also in this contract, we agreed with them that if it takes longer, we support them till last date. It's not big issue.

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Operator [11]

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(Operator Instructions) We have a follow-up question from Lukasz Wachelko, Wood & Co.

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Lukasz Wachelko, Wood & Company Financial Services, a.s., Research Division - Head of Consumer and Industrials [12]

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Actually, I have another question to you, if I may. You mentioned that the growth of the central cost was related to reserves for bonuses to employees for the strong results. Can you quantify that? Whatever number was there?

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Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [13]

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I'm sorry. We will need to come back to you, but generally speaking, as you see also in our results, so our business has been performing -- except probably alcohol, performing exactly like on budgeted level. So we don't have any reason to release this provision. So I'm so sorry for all of those of you who are interested, we can provide this number. It's not big issue, but I don't have it on the spot right now.

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Cezary Giza, Eurocash S.A. - IR Director [14]

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Basically, it was majority of the change of others segment's performance. So if we talk about PLN 19 million deterioration of others segment in first half of the year, it was really about 70%, 90% of this.

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Lukasz Wachelko, Wood & Company Financial Services, a.s., Research Division - Head of Consumer and Industrials [15]

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Okay. But actually, you may account that the costs related to the Wholesale business, which will mean actual results of quarter was weaker?

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Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [16]

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No, no, no. Lukasz, remember because -- Lukasz, remember that there's another aspect that we started to consolidate Mila. We took over Mila in June only last year. So in reality, they are entitled for the full year bonus only this year.

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Lukasz Wachelko, Wood & Company Financial Services, a.s., Research Division - Head of Consumer and Industrials [17]

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Okay. But in fact we should deploy most of the growth of the quarter to the Wholesale individual operation?

(technical difficulty)

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Operator [18]

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We have one more question from Mr. Krzysztof. We don't have any further questions. Dear speaker, back to you for the conclusion.

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Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [19]

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We are (inaudible) because for a second, we lost the connection. We have a very bad line, but it seems like we don't have any further questions, so let us summarize. We do believe it was a quite solid quarter without big surprises. As mentioned at the beginning of the year, we don't see any trends, which would let us believe that Wholesale is not going to perform well.

On the other hand, we are on track with the integration of Retail, which is also making us quite happy especially in this context of consumer, which we're trying to show you. So generally speaking, all of you are really welcome on our next conference call in Q3 at the beginning of November. So thank you very much for your time. At any time if you have any further questions, please contact Cezary or myself, and we are very open to discuss it further. So thank you very much.

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Cezary Giza, Eurocash S.A. - IR Director [20]

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Thank you.

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Operator [21]

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Ladies and gentlemen, this concludes our conference call. Thank you for participating. You may now disconnect.