U.S. Markets close in 1 hr 59 mins

Edited Transcript of JMT.EP earnings conference call or presentation 21-Apr-17 8:00am GMT

Thomson Reuters StreetEvents

Q1 2017 Jeronimo Martins SGPS SA Earnings Call

Lisboa May 21, 2017 (Thomson StreetEvents) -- Edited Transcript of Jeronimo Martins SGPS SA earnings conference call or presentation Friday, April 21, 2017 at 8:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Ana Luísa Abreu Coelho Virgínia

Jerónimo Martins, SGPS, S.A. - Company Secretary

================================================================================

Conference Call Participants

================================================================================

* Andrew Gwynn

Exane BNP Paribas, Research Division - Research Analyst

* Cedric Lecasble

Raymond James Euro Equities - Financial Analyst

* Edouard Jean Laurent Aubin

Morgan Stanley, Research Division - Equity Analyst

* Filipe Rosa

Haitong Bank S.A., Research Division - Head of Research for Portugal

* James Grzinic

Jefferies LLC, Research Division - Equity Analyst

* James Tracey

Redburn (Europe) Limited, Research Division - Research Analyst

* Jérôme Samuel

HSBC, Research Division - Analyst

* José Manuel Rito

Banco Português de Investimento, S.A., Research Division - Analyst

* Kiranjot Kaur Grewal

BofA Merrill Lynch, Research Division - Associate and Analyst

* Maxime Mallet

Deutsche Bank AG, Research Division - Research Analyst

* Nick Coulter

Citigroup Inc, Research Division - Director

* Robert Joyce

Goldman Sachs Group Inc., Research Division - Equity Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Jerónimo Martins First Quarter Results 2017 Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Ana Luisa Virgínia, Chief Corporate Center Officer of Jerónimo Martins Group. Please go ahead.

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [2]

--------------------------------------------------------------------------------

Thank you. Good morning, ladies and gentlemen, and thank you for joining this call to present Jerónimo Martins' 2017 first quarter results.

We started 2017 really determined to leverage on the strong sales dynamics built during 2016. In Poland, the positive consumer environment persists, supported by the households that increased income. The consumer is trading up and continues to be very receptive to promotional campaigns. As such, the main players maintained an intense and innovative approach to commercial action. In Portugal, the food consumption landscape remained very competitive and promotions driven. Finally, in Colombia, food inflation; and increasing taxes, especially on VAT, have affected the families' purchasing power and led to an important drop in consumer confidence.

In the 3 markets where we operate, competition is intense, with the proximity format being the most dynamic and the one in which the main players are adding capacity. In this context, all our banners maintain their strategic focus on sales to continue delivering a strong performance. Despite the negative calendar impact due to leap year in 2016 and the absence of Easter in Q1 2017 and the expected increase in losses, net earnings were in line with previous year, up by 4.6% in a comparable basis, excluding Monterroio contribution in Q1 '16. All in all, we'll see this as a very good start to the year.

Looking now at the key performance figures.

Group sales grew 9% to EUR 3.7 billion, 7.9% up on previous year at constant exchange rate. Group EBITDA was EUR 192 million, 4.6% above the same period last year. The respective margin was 5.2% of sales, which compares to 5.4% in Q1 2016. If we consider the established businesses, EBITDA grew 9.3%, the respective margin slightly up on Q1 '16. Net attributable result was EUR 78 million, in line with previous year. Top line performance was the 3 -- the key driver for earnings, and therefore we keep our focus on sales growth as our main strategic priority.

Regarding the income statement for these first 3 months, I draw your attention to a couple of headings below the sales line. The increased weight of costs over sales reflect on one hand the step-up in the losses of Ara that started in Q3 2016; and on the other hand, the remunerations inflation, particularly in Poland. The financial charges were 0 due to EUR 3 million of positive exchange differences registered in the quarter. And the effective tax rate for the group was close to 26%, higher than what we anticipate for the full year as a result of the expected increased weights of Ara losses in H1, particularly with stronger comp, and the seasonality of the businesses.

Cash flow generation was negative in EUR 200 million, reflecting the normal seasonality registered in the working capital with higher payments to suppliers following the Christmas season and the higher level of stocks in preparation for Easter. At a balance sheet level, I just like the positive net cash position of EUR 135 million preceding the EUR 380.2 million of dividends to be paid on May 4. In line with plans, we invested EUR 100 million in the first 3 months of the year, Biedronka absorbing close to 50% of the total amount and Ara close to 20%.

In an expectable manner, Biedronka was the main contributor to the strong performance registered in the period, driving group's like-for-like growth to reach 5.8% and offsetting the negative calendar effects in the quarter. As anticipated, in Poland the consumption environment remains positive. Food inflation in the country increased to 3.4% in Q1, while Biedronka posted flattish inflation in its baskets. By bringing novelties and creating opportunities for the consumer, Biedronka reached an 8.4% like-for-like growth in the 3 months, driving total sales to go up by 9.7% in local currency. In euro, sales grew 10.8% to reach EUR 2.5 billion. In line with its plans, Biedronka opened 11 stores and refurbished 40 locations in the quarter. Market share grew strongly up to February. That is the most recent month for which there is available data.

On its own and with an improved model and 24 more stores than in Q1 '16, Hebe grew sales by 32.6% in local currency. In euros, sales were up by 33.9%. In Portugal, the consumption environment remains very price sensitive and promotions oriented, with players reinforcing presence in the proximity segments. Pingo Doce kept its strong promotional activity while improving the overall shopping experience. Nevertheless, impacted by the negative calendar effects, like-for-like growth reached minus 1.4%, excluding fuel. Total sales grew 0.8%, benefiting from the 3 more -- 13 more stores than in Q1 '16.

At Recheio, sales increased EUR 201 million, 7.2% ahead of previous year's. The strong like-for-like growth at 5.2% was supported by a favorable HoReCa environment and the good performance of export activities, this on top of 1 more store compared to the same period last year which was opened in June 2016. In Colombia, Ara continues to test improvements with offer and commercial actions in the more recent regions while reinforcing the focus on expansion. The preparation of the pipeline for expansion in Bogotá and the planning and construction of its logistic infrastructure are at the center of the company's priorities. Ara opened 23 stores in Q1 2017, including a cash-and-carry store pilot, ending the quarter with a network of 244 stores. Sales were at EUR 87 million, 81.8% up on the same quarter in the previous year. In local currency, sales grew -- growth reached 57.9%.

Turning now to the results.

Group EBITDA reached EUR 192 million, growing 4.6% over the previous year, plus 5.1% at constant exchange rates. The growth of 13% registered at Biedronka's EBITDA, together with Pingo Doce and Recheio's solid delivery, more than compensated for the higher startup losses from Ara and Hebe. Taking to account the step-up in investment in Ara to accelerate growth, losses reached EUR 23 million in the first quarter comparing to the EUR 13 million registered in the same period last year. Of this increase, EUR 2.5 million were related to stronger peso and zloty.

Group EBITDA margin was at 5.2%, down from the 5.4% registered in Q1 2016 and impacted in 83 basis points by the losses from Ara and Hebe. Biedronka posted an EBITDA margin of 6.8%, ahead of the 6.6% registered in Q1 2016. This positive evolution is the result of the strong like-for-like performance, cost discipline and better mix, allowing to compensate inflation in some costs, mainly labor and fuel related. The EBITDA margin of distribution in Portugal was stable at 5%, reflecting strong investment in promotions and in the overall value proposition.

We had a good start to the year, and we remain positive about the market environment in our main market Poland. We believe we have strong reasons to also be confident on the rightness of the strategies under execution in all our 3 markets. Biedronka will remain focused in driving like-for-like growth despite facing more challenging comparisons in the coming quarters. Pingo Doce, supported by a differentiated value proposition, will strive to continue to post positive like-for-likes. Recheio, as proven, is well prepared to keep performing positively. In Colombia, the focus on expansion will be at the core of the work to be developed this year. The organic growth program is on the go. And as we always said, we don't exclude acquisitions with a clear fit to the model.

We will keep as priorities both sales mix management and cost efficiencies in order to continue growing sales in a profitable way. To capture the growth opportunities we see in the markets where we operate, we confirm our intention to invest up to EUR 700 million in the year that will contemplate more than 100 Biedronka net new stores and at least 150 new Ara stores in Colombia. Biedronka and Pingo Doce expect to open 1 new distribution center each, while Ara will move forwards with the construction of 3 new DCs. Reflecting our Colombian expansion plans, EBITDA losses for Ara are expected to increase in 2017 versus last year.

All in all, we confirm the guidance given in February, by the time we disclosed 2016 full year results. And despite the challenging quarters ahead, our performance in this first quarter definitely validates our positive view for the current year.

Thank you for your attention.

Operator, I am now ready to take questions. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We will take our first question from Edouard Aubin of Morgan Stanley.

--------------------------------------------------------------------------------

Edouard Jean Laurent Aubin, Morgan Stanley, Research Division - Equity Analyst [2]

--------------------------------------------------------------------------------

Just 2 quick questions on Poland, and the first one is on top line. Can you just provide some color as to how much of a boost the loyalty card was in the quarter, if you had any -- for example, any promotions tied to the card as you did in the fourth quarter? And what percentage of your sales were going -- was already going through your card? And the second question is on your margin expansion in Poland, 15 basis points. If I remember correctly, I think you had guided previously for a relatively flattish EBITDA margin for the year in '17 in Poland, so should we assume margins to be flat to slightly down for the remaining 9 months of the year? Or should we expect some carryforward impacts of this margin boost?

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [3]

--------------------------------------------------------------------------------

Edouard, on top line, basically, of course, I can tell you that the loyalty cards were around -- almost 50% of our sales are already done with the loyalty cards, but I think that the loyalty card is more of a tool to enhance sales. But the way that we see the progression in terms of top line for Biedronka is basically the actions that the company is doing, taking of course advantage now of these new dynamics from the -- from its commercial actions, so basically not only the improved offer but the fact that with the consumer having more available income, having done all the campaigns to take advantage of the trade-up that is happening in the market. So -- and this is, of course, to continue into the future quarters. Of course, the loyalty cards helped with -- also with this dynamic because it allows you to have information on how the consumer reacts, and you can adjust those campaigns faster than previously or at least have an idea. But basically, I would say that we are in line with our plans by having these campaigns and these -- and the offer really boosting the average ticket in the company. In terms of margins, so it's true that the margin increased, but of course, we keep a cautious approach to the EBITDA. I don't think that we will have a decrease in terms of EBITDA margins, but as we always said, the idea really is to go for sales and through that really have an asset turnover that even compensates in the case that if we have lower margins. We have the pressure on costs, as you know, particularly on labor. We are also -- we don't mind even, of course, there's a cost increase provided that they are compensated by our sales. And as I said, as we have a better mix in terms of sales, that also reflects in our gross margin mix. So I would say that on that particular -- or on that in particular we will -- won't guide for a decrease, but we would be cautious also to consider that this increase in the first quarter will be maintained for the next quarter.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

We will take our next questions from Andrew Gwynn of Exane.

--------------------------------------------------------------------------------

Andrew Gwynn, Exane BNP Paribas, Research Division - Research Analyst [5]

--------------------------------------------------------------------------------

Just sort of pricked up my ears here. Just on the cash-and-carry store in Ara, early days for it but a bit of a change of tack on that front. And then just sort of rowing back to the Polish market, clearly obviously a big support coming through into income from minimum wage and so forth. As we look through the rest of the year, as well as we look at the market, do you see any particular change happening? We hear comments from the likes of Tesco that they are trying to get themselves back in the game, but as we stand at the moment, is there any real evidence of a change in competitive dynamic or indeed in the consumption behavior that we're seeing?

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [6]

--------------------------------------------------------------------------------

Thank you, Andrew. And so as I said, this cash-and-carry is just really a pilot to test the market and, of course, taking advantage of this. So as we are testing and do some trial and error in Colombia, we wanted to confirm if -- by having a format that is even lower in terms of -- or lighter in terms of CapEx and it has a different approach to the market, if that can be successful or not. So -- but at this stage, we are not considering changing and opening a cash-and-carry business or anything of that sort, at this stage. The idea is really to test it. And of course, it's done within Ara, but it's not really a change in the strategy or in the formats that we want for the companies. And so even we are using for the store, although it's, let's say, powered by Ara and it's supported by Ara, it even has a different brand and a different name for the store. In what concerns the Polish market, so as we said, it remains very competitive. And of course, I would assume that that's the reason why Tesco is flagging they probably will close some more stores. And -- but we also see other players coming in quite strongly and others reacting very strongly, particularly, as we said, on the proximity format. So I would say that Tesco is driving more on the -- again, on the bigger stores where most of the investments have been done, but this is that -- this is no change, in fact, on the market. Nevertheless, we continue to be quite positive, as I said, on the economic outlook for Poland. We don't see any reasons at this point for the consumer to start changing or have an inflection point in their consumer patterns considering that they really are trading up. They are willing to test and to try products that are a little bit more value added, putting a little bit more the quality and the improved -- a certain upgrade in their purchases. So I think that Biedronka continues to have these actions. We will have the opportunities to take all the advantages from this backdrop. This being said, of course, we have to consider that this increase in income, particularly the ones coming from the allowances to the families, is going to be fully comparable on the second half of the year, so starting to be comparable in April. And this is something that we have to take into consideration, but nevertheless it doesn't take the favorable or the positive consumptions environment in Poland. And it's -- that, we assume that it will be maintained.

--------------------------------------------------------------------------------

Andrew Gwynn, Exane BNP Paribas, Research Division - Research Analyst [7]

--------------------------------------------------------------------------------

And sorry. Just last one on the subject: Any indication on the difference in basket and traffic for the first period. You also mentioned that trading-up component.

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [8]

--------------------------------------------------------------------------------

In Biedronka?

--------------------------------------------------------------------------------

Andrew Gwynn, Exane BNP Paribas, Research Division - Research Analyst [9]

--------------------------------------------------------------------------------

Yes. Sorry -- yes...

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [10]

--------------------------------------------------------------------------------

And so -- Andrew, so basically I can tell you that the growth in like-for-like came fully from the baskets. We had a flat number of tickets on the like-for-like, and all the growth was basically coming from the average ticket increase.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

We will take our next question from Filipe Rosa of Haitong Bank.

--------------------------------------------------------------------------------

Filipe Rosa, Haitong Bank S.A., Research Division - Head of Research for Portugal [12]

--------------------------------------------------------------------------------

So two for me. The first one, on Poland. So you talked about this flattish basket inflation. The overall food inflation in the market has been above 2%. Could you confirm as to whether you have been able to increase your price gap to your main competitors during the quarter? And connected with this, your gross margins for the group have increased by 10 basis points, and you talked about the positive mix effect. So although you have had a quite aggressive pricing policy, apparently you have been able to expand your gross margin in Biedronka. Could you explain us the -- how did you manage to do this? So this will be my first question. And the second question, on Portugal: You talked several times and you wrote about the increased pressure in proximity. Have this been one of the drivers for the weakness in terms of like-for-like for Pingo Doce? Or do you think that this has been solely driven by the negative calendar effect?

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [13]

--------------------------------------------------------------------------------

Thanks, Filipe. So for Poland, it's true. So in the country, what we saw in terms of food inflation was an increase, particularly on the fresh products. So there were some scarcities, and that really made or pushed the inflation in food. In Biedronka we prefer to continue, of course, to try to be the most competitive. I will say that, as our main competitors, particularly in proximity, so the other discounters, are also trying to be very competitive, I don't see that the market is becoming very different on that format. So basically, I will say that we maintained the price gap for our main competitors in proximity because, as I always say, I think that we should not -- even if there is this opportunity to increase prices because inflation is already in the market, I think that we don't have any interest in giving opportunity for our consumer and our clients to hope for better prices or for other opportunities elsewhere if it is in the assortments that we carry for them to buy. So in terms of price gap, I would say that the situation is more or less in line with the end of the year. So 5% to 6%, more or less, on average, price difference for our main competitors, so the discounters. On the gross margins: So the group posted a higher gross margin, as you said. That, of course, has to do with several of the businesses, but I will say that comes particularly from Portugal and Poland, so the 2, but that has all to do with the mix of sales and the mix of margins. So basically, if we look, for instance, and we take the example that you gave from Biedronka, the fact that we carry promotional campaigns, of course, this -- on average, that -- as we are talking about products that, as I said, comes from the trade-ups, of course, that also impacts positively on the margin mix. And on Portugal, as I said, last year, there was a big increase in capacity in the market on proximity. And of course, we don't exclude that, that also has an impact on the negative like-for-likes. But I can tell you that mostly the like-for-like impact was really the calendar effects for Pingo Doce that we estimate to be around 2 percentage points.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

We will take our next question from Jérôme Samuel of HSBC.

--------------------------------------------------------------------------------

Jérôme Samuel, HSBC, Research Division - Analyst [15]

--------------------------------------------------------------------------------

So first question, on Poland and the average basket. You said that most of the like-for-like increase was due to the average basket increase. Can you specify, what's the level of the basket now? And the second question is on the startup losses for full year '17. With the startup losses after Q1, are you still in budget to not exceed the 15% increase versus the 2016 losses? And would the split be roughly the same as in Q1 between Poland and Colombia?

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [16]

--------------------------------------------------------------------------------

Thank you, Jérôme. So on Poland, as I said, all the -- with flattish number of tickets, all the like-for-like came from the average ticket, which is now around PLN 33 per ticket. And on the startup losses, we think that, of course, as we guided, we -- at constant exchange rates we feel that we are on our plan with the startup losses. Of course, this will also depends on how the Colombian COP evolves, as we do not expect -- or most -- or the whole increase will be the contribution from Ara and not from Hebe, in fact. So basically, in terms of the percentage, the contribution for losses will come totally from -- the increase will come totally from Ara.

--------------------------------------------------------------------------------

Jérôme Samuel, HSBC, Research Division - Analyst [17]

--------------------------------------------------------------------------------

So we should think 85% from Colombia, yes?

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [18]

--------------------------------------------------------------------------------

Well, it depends on the currency, but on -- at constant exchange rates, probably...

--------------------------------------------------------------------------------

Jérôme Samuel, HSBC, Research Division - Analyst [19]

--------------------------------------------------------------------------------

You're averaging the (inaudible), yes.

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [20]

--------------------------------------------------------------------------------

Yes, 85% would be a reasonable number.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

We will take our next question from James Grzinic of Jefferies.

--------------------------------------------------------------------------------

James Grzinic, Jefferies LLC, Research Division - Equity Analyst [22]

--------------------------------------------------------------------------------

Ana, Cláudia and Hugo, I've just had a couple on Colombia. The first one is can you perhaps map out for us the timing of the 3 DC openings and for this year? That would be helpful. Have you opened 1 already, or is that coming in Q2? And the second one is you flagged acquisitions remaining on the cards for Colombia. And can you perhaps remind me what that would add that you cannot achieve organically? Do you think you would really need a leap in faster growth in volumes in Colombia and scale?

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [23]

--------------------------------------------------------------------------------

Thank you, James. So for the timing of the openings, basically we are -- in our plans, we have it by the year-end. So it's basically all the CapEx and [seals] no advantage from the DCs, but -- so the calendar for the openings is basically the 3 DCs to be ready to open on the fourth quarter. On the acquisitions, when we say -- of course, we don't see on the main organized players obvious targets in Colombia. We said that in the past, but we see it in the smaller chains that we have. Or we see there an opportunity to accelerate the growth also. So the 150 stores that we said that will be opened, at least in Colombia, are all organic, but we don't exclude, of course, to do some acquisitions of these smaller chains because we feel that the scales and the growth will be key, as you said, to really push for profitability in Colombia. We are more than aware of that. We feel that this is the market that, of course, we'll value; and will give you more importance in terms of bargaining power, in terms of the efficiency of your suppliers at private labels. And for that, it is seen to grow faster. And that's one of the reasons why we want to grow faster, basically.

--------------------------------------------------------------------------------

James Grzinic, Jefferies LLC, Research Division - Equity Analyst [24]

--------------------------------------------------------------------------------

Ana, can I just ask you a follow-up, I guess...

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [25]

--------------------------------------------------------------------------------

Yes, of course.

--------------------------------------------------------------------------------

James Grzinic, Jefferies LLC, Research Division - Equity Analyst [26]

--------------------------------------------------------------------------------

Can you perhaps clarify where we are in terms of own label penetration now in Colombia, perhaps in the -- in (inaudible) Cafeteria I guess, and Atlántico; and how that is developing in both the (inaudible) from Bogota?

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [27]

--------------------------------------------------------------------------------

Okay, so as I said, in terms of own label, for the average company, and I will say that it doesn't differ much between regions, of course, (inaudible) is a little bit higher because people have already tried the private labeled products and so feel much more comfortable with it. So no issues with the trials of the products in doing a mistake when they buy it. But this is around 38% now in terms of average for the company, so slightly higher or almost 40% in the coffee-growing regions and slightly less than that on the other 2, a little bit lower in Bogota. But this is really -- and I have to say that, for us, the coast and Bogota, we really anticipate some trial and error in the assortments; still a lot of tests to be done, and that will of course impact sales, because we have this -- this already happened in the coffee-growing region in fact. So having to adjust the assortments to the local consumers, that, as we said, is quite different in some of the way they approach the different stores; and the way that they see the assortments in a new, let's say, format coming into the market.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

We will take our next question from José Rito of BPI.

--------------------------------------------------------------------------------

José Manuel Rito, Banco Português de Investimento, S.A., Research Division - Analyst [29]

--------------------------------------------------------------------------------

I have 2 questions. So my first question, on the cash flow evolution in the quarter. I think that you mentioned that the working capital evolution was due to stocks and this related to Easter, but the fact is that the Easter in 2015 was also in April and the evolution on the working capital was not so strong. So I think we're trying to understands Easter if -- specific evolution on this because this EUR 200 million cash evolution compares with an average of EUR 30 million over the last 6 years. So that will be my first question, trying to understand actually the dynamics in terms of cash flow in Q1. The second question is on a kind of a follow-up on the margin side. You mentioned that we have trading-up in Poland and that sales mix has been improving for Biedronka. Shouldn't these be positive for margins ahead? And related to this, you mentioned that we should be cautious in terms of labor costs. Last year, Biedronka had 2 increases on salaries. Do you expect a new increase post the one that was announced for April?

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [30]

--------------------------------------------------------------------------------

Thank you, José. So on the cash flow, it is really a question of seasonality. If you remember, José, everybody was more or less very pleased with the working capital at year-end because, of course, all suppliers had increased with a very good sales performance. So now we have to pay them, of course. And so basically that -- there is this contribution obviously of having to pay for the purchases we did for the Christmas season, which was very good, as you know, last year. And on the other hand, with this level of sales, particularly in Biedronka, but also what we expected for Pingo Doce, the stores were full of stock to prepare for the Easter season. And so this dynamic and this seasonality really has an impact from the cash point of view. If we -- for instance, even if we consider as days of sales, there isn't much of an evolution in fact, although sales for the quarter do not still have the Easter sales. So basically, we don't see any issue here. And this is really coming from the fact that we performed very well last year and, of course, are paying for the suppliers. And we have to stock also for the -- in preparation of the Easter season that we hope and we won't say but we were expecting to be very good. So the idea was really to be prepared for it. On the margins: So I think that, as I said, this is done of a lot of moving parts. We have a sales mix that has an impact on the gross margin mix. And then as you said, we have some impact on costs because, of course, we cannot continue to sustain this level of sales, particularly in Biedronka, without having the people, without having the logistic costs. And we know that there is inflation also on fuel, not significant but there is. And of course, I can tell you that we even increased some of our advertising costs in Poland, considering the loyalty card and all these kind of dynamic. But so I -- the idea, as I said, was really -- and irregardless of any of the, let's say, remuneration increases that we did, because it was not really just salaries that affected the labor costs. We have the bonus. We have the benefits that we give to the employees. We have the number of people in the stores. So these, we think that we can compensate really by having more sales. So in fact -- so we are not guiding for any decrease in the EBITDA margins but also, as I said in the beginning, being very cautious on -- or being prepared to have to invest more in our prices and in our assortment if we have to react to any competition moves.

--------------------------------------------------------------------------------

José Manuel Rito, Banco Português de Investimento, S.A., Research Division - Analyst [31]

--------------------------------------------------------------------------------

Okay, but just to follow up, have you noticed any...

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [32]

--------------------------------------------------------------------------------

José, sorry -- yes, sorry. You asked if we were expecting a further increase in salaries, right, besides the April 1.

--------------------------------------------------------------------------------

José Manuel Rito, Banco Português de Investimento, S.A., Research Division - Analyst [33]

--------------------------------------------------------------------------------

Yes, yes.

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [34]

--------------------------------------------------------------------------------

Okay. So the April is the usual that we do. So at this point, we don't -- as I said, we will continue to do some adjustments in the remuneration policies in Biedronka, but in terms of salaries increase, we expect it to be this, the one for this year. Of course, if we have to adapt, we will, but this will be to justify having more also a better performance in the stores.

--------------------------------------------------------------------------------

José Manuel Rito, Banco Português de Investimento, S.A., Research Division - Analyst [35]

--------------------------------------------------------------------------------

Okay. And just to follow up: You mentioned that you want to be prepared in terms of if the competition reacts and eventually you effect margin, prices, but have you noticed any increase on competition in Poland recently?

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [36]

--------------------------------------------------------------------------------

The question, José, is that we don't see any major change, but the market was already very competitive. So what we see really is the discounts being very competitive, particularly Lidl's, following a lot of the actions that we do and trying to anticipate them. And of course, we have other players, even Dino, that have now been listed. So this is a market that we don't expect that really to even in terms of that competitive pressure for the future. And so we have to, as I said, be prepared for it and try to anticipate to really avoid to lose any of our competitiveness to others.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

We will take our next question from Rob Joyce of Goldman Sachs.

--------------------------------------------------------------------------------

Robert Joyce, Goldman Sachs Group Inc., Research Division - Equity Analyst [38]

--------------------------------------------------------------------------------

Just a couple from me really, again on Poland, to go back on those, the wages. Just if you were able to quantify what the increase in wages was in the first quarter, although just the remuneration line; and how we should -- and what you think that will be for the remaining 3 quarters, that would be helpful. And then just in -- I've seen some press talking about potential strikes in Poland. I'm not sure if you can just help us understand. It seems wages are going up quite consistently. Are you able to help us understand what the potential -- what the issues the unions may have with those wage increases are? And then the final one, just on Colombia. You mentioned bolt-on acquisitions. Should we think of those as included in that EUR 700 million CapEx guidance?

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [39]

--------------------------------------------------------------------------------

Thank you, Rob. So on Poland, as I said, we have increased the -- and mostly of the increase in the costs -- besides the Ara losses that we mentioned, I can tell you that mostly of the increase is on salaries on all the geographies, so not only in Poland. And of course, the Polish one is the one that has a higher weight. And we don't disclose, of course, the cost structure per banner, but -- so -- but this is really in line and fully anticipated by us, so we don't see it as an issue. We see it as something that we anticipated and we flagged when we said that we would have to increase our labor costs. And of course, also when we said that the pressure on costs would continue, of course we were also talking about the role that the unions have that I don't think that they are never satisfied. So I don't think we should elaborate a lot about that, but -- so what we knew was from the press. So we continue to have negotiations with the unions, as always, in Poland. In the press, they mentioned that strike, but we don't see it as a change, so in terms of the -- really the labor pressure, it's part of the usual and of the normal situation. We don't see it as a -- very different from what we anticipated, and we don't expect to have a major impact from that. On the acquisitions in Colombia: So it's not -- as I said, we know -- we -- in principle, we don't include -- the more than 150 stores are the ones that are included in the EUR 700 million, but also I would -- as we are talking about acquisitions of smaller chains, I don't think this will change the needle -- even if we go forward with acquisitions, would change the needle in the CapEx. So I think you should continue to assume the level of CapEx that we provided as guidance.

--------------------------------------------------------------------------------

Robert Joyce, Goldman Sachs Group Inc., Research Division - Equity Analyst [40]

--------------------------------------------------------------------------------

Okay. And just a quick one just to follow up on the wage increases. In terms of that, looking at the 9 months going forward, do we think of that as being a higher increase versus the first quarter? Or was the first quarter where we saw a bigger increase?

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [41]

--------------------------------------------------------------------------------

Of course, you have to consider the normal increase that we'll still have to do. But of course, the bigger impact, particularly considering that you have less sales usually in the first quarter, it also has a meaning in terms of percentage of sales, but I would assume that this will be a normal impact now. The last impact will come on the fourth quarter, when we will all already have the -- incorporated the impact of the 2 wage increases or remuneration increases that we did last year.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

We will take our next question from Cedric Lecasble of Raymond James.

--------------------------------------------------------------------------------

Cedric Lecasble, Raymond James Euro Equities - Financial Analyst [43]

--------------------------------------------------------------------------------

I have 2 follow-ups, if I may. So the first one, on Colombia, can you help us understand the extra costs you had this year from the 3 DCs and the impacts of the losses? In other terms, in the increase of the total loss in Colombia, what the share of also investments in logistics and what the share of the losses operational from the stores. And does it make sense to expect '18, 2018, to be the top in terms of losses and a potential breakeven? I know it's early, but a potential breakeven in 2020. And the second question is related to Poland. Just on the maths of the needed like-for-likes to maintain margin, could you just help us with the maths? What kind of like-for-likes do you need to stabilize margin, all else being equal?

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [44]

--------------------------------------------------------------------------------

Thank you, Cedric. So on Colombia, basically I will not divide that, but I will say that most mostly comes really from, as we said, the preparing to accelerate the expansions. So when you open -- even if we assume the 150 stores as floor, if you have to open these kind of stores, you have to prepare the team, so you have to have the resources. You have to have the training for the human resources. And you have to prepare also the teams for the DCs. So we -- even if we just open DCs on the fourth quarter, part of the costs, so the OpEx, that we have to build on this capacity or to create this capacity will be incorporated already in the company without having the sales or the efficiency provided by these infrastructures. So mostly really it's preparing not only the operations but even all the companies to grow faster. And this includes even all the supply chain prepare things and develop the own brands, the assortments. So it's really a contribution of several parts to this OpEx. On the top of the losses, so as we mentioned, 3Q will increase. I -- last time we spoke in our conference call, I said that it will depend the 2018 being the same level. Or to increase, it will depend on the dynamic and on the decisions made to continue accelerate and to continue considering open other regions. So that's we would only be able to provide a little bit more of light on the losses a little bit ahead during this year. On the potential breakeven: So of course, we are the ones that are interested in accelerating the breakeven, but we won't jeopardize the long-term opportunities. So we are not building the capacity in Colombia to really do just -- or to be there just for the short term. We are -- we said that it was no longer a startup. We are there to remain in Colombia. So in order to build this, of course, we prefer to be, for break-even to be sooner than later, but I won't give you now a precise date on that. It may be the 2020 or slightly more than that, but at this stage, I wouldn't elaborate much on that because, as I said, it will depend on the rhythm that we imprint and on the way that we accelerate expansions because it's -- as I said, it will be much upfront costs just to build the capacity to be more profitable in future. For Poland, the like-for-like needed to sustain the margins: And I wouldn't give you a number really because this again has a lot of moving parts. Even if we decrease like-for-like but the like-for-like comes from a mix of sales with higher margins, this will sustain margins. So at this stage, I would say that the only thing that I can tell you is that we are confident on what the teams in Poland is doing; and this new mindset very much focused on the actions that they are doing, on the reaction on the market to really imprint the different dynamic. So we think that we will continue to post like-for-likes that will come. Or with the promotional campaigns we did announce, with the changes that we continuously do in the assortments, we will be able to sustain margins.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

We will take our next question from James Tracey of Redburn.

--------------------------------------------------------------------------------

James Tracey, Redburn (Europe) Limited, Research Division - Research Analyst [46]

--------------------------------------------------------------------------------

Ana Luisa, 2 questions from me, please. You mentioned -- the first one is on acquisitions. You mentioned potential acquisitions in Colombia. Are you also looking at acquisitions in Europe? And the second question is on the startup losses that you've given with that guidance of 15% constant currency increase in the Colombia and Hebe startup losses. The increase was much bigger in Q1, so does that mean the second half losses will be lower? And then how does that fit in with your comments before which suggested potential breakeven in 2020 or later for Colombia?

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [47]

--------------------------------------------------------------------------------

Thank you, James. So in terms of acquisitions in Europe, I will say that we are now very focused. As our Chairman said in the full year results, we are very focused on the current countries where we operate. I think that we have -- feels -- although performing well and being very happy with the performance that we post for this first quarter, we think that we have a lot to do and a lot to take care of in the current countries where we operate. What I continue to say is that, of course, we don't exclude any other acquisitions, but that will really depend. And we will not make a harsh move just because we have excess cash or just because the market would like us to. So this will be an internal decisions. We continue to monitor the -- I -- as we said, the outsourced countries of Poland, as we see it as potential markets to supply for Poland, but we maintain the view that we should for the moment focus on the current countries where we operate. As for the startup losses: So we are maintaining the guidance because, of course, the first quarter is usually the harder one because we don't have -- it's the weaker quarter in terms -- as you know, in terms of the -- in terms of sales. And that, of course, also has an impact on the losses. So we are coming from a quite important increase in losses in the fourth quarter of 2016, and this comes naturally as an increase from that period. So I would say that, for now, we don't see any reasons to change the guidance in terms of losses for Colombia.

--------------------------------------------------------------------------------

James Tracey, Redburn (Europe) Limited, Research Division - Research Analyst [48]

--------------------------------------------------------------------------------

Okay. And just to follow up to that first question: Would you be ruling out even countries like Romania or in the Ukraine? Because I know that you did go into the Ukraine briefly in the past.

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [49]

--------------------------------------------------------------------------------

Well, when -- if and when we do it, we'll let you know.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

We will take our next question from Maxime Mallet of Deutsche Bank.

--------------------------------------------------------------------------------

Maxime Mallet, Deutsche Bank AG, Research Division - Research Analyst [51]

--------------------------------------------------------------------------------

I have two remaining actually. The first one is regarding -- it's the guidance on CapEx which implied a very strong acceleration in coming quarters. So I'm just wondering whether you expect it as soon already as Q2 or it will be a bit more back-end loaded and the acceleration will takes place whether in H2 of this year. And the second question was with regard to the Sunday trading ban, if you can give us an update on, well, developments on this particular matter in Poland.

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [52]

--------------------------------------------------------------------------------

So thank you, Maxime. And on the CapEx: So of course, the calendar in terms of CapEx is important here. As I said, most of the -- or all of our DCs will be opened starting on the second quarter. In Portugal we are assuming that we will -- that we are already investing, that we will open in this second quarter. And the other ones are estimated for the second half of the year. Also, the refurbishments and the openings in Poland particularly and in Colombia will happened from now, so after Easter. And this means that in terms of calendar I would assume that it will tend to accelerate until year-end. So we maintain the CapEx guidance. For us, again, it's very important not only to build the logistic infrastructure but to keep the stores in shape, and this is quite important. So expansion and refurbishment will deserve all our attention this year because, of course, without doing this kind of investments, I don't think we can take the most out of our stores and really sustain the growth for the future either in Poland or in Portugal. On the Sunday ban: So no novelties on that side. The government is still discussing the terms on which it should consider it. It has been a little bit back-and-forth. It continues to -- in some cases it continues to say that they will only close in some of the Sundays. The consumer continues to say that they would prefer not to have a Sunday ban, so -- but again, I wouldn't say. Well, I do -- I don't see this -- if it affects all, I don't see it as critical for (inaudible).

--------------------------------------------------------------------------------

Operator [53]

--------------------------------------------------------------------------------

We will take our next question from Kiranjot Grewal of Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Kiranjot Kaur Grewal, BofA Merrill Lynch, Research Division - Associate and Analyst [54]

--------------------------------------------------------------------------------

I've got 2 questions. I mean, firstly, are you able to comment on market share development in Poland and Portugal? And then secondly, I know labor is a key component of your cost inflation. And last then, I -- you've talked to already. Is there anything else we should be aware of in terms of cost inflation development in Poland?

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [55]

--------------------------------------------------------------------------------

Thank you, Kira. On the market share development: So with the data that we have available in Portugal, it was flattish. And in Poland, from the data that we have, we are talking about 2 percentage points market share increase versus the same period last year. So for the -- these 2 first months. And in terms of the cost inflation, so where we see -- basically most of the inflation will come from -- as we flagged, from labor, in our -- if we look at our cost structure. And the other headings where we see some pressure in terms of inflation is on fuel and also on advertising, but that again is really to push up for sales, so we don't worry with that part. But of course, from external pressures, I would say that the ones that we are anticipated and dealing with is basically labor and fuel.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

We will take our next question from Nick Coulter of Citi.

--------------------------------------------------------------------------------

Nick Coulter, Citigroup Inc, Research Division - Director [57]

--------------------------------------------------------------------------------

I will be very, very fast. Firstly, just to follow up on wages in Poland. Are you saying that labor has broadly remained flat as a percentage of sales? Just so that we can get a handle on that. Then secondly, could you say how much of the EUR 200 million working capital outflow was due to inventory filled? And then thirdly, a technical question, could I just ask whether you're booking the loyalty card promotional or marketing expense in Poland above or below gross margin, just given the comments around mix?

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [58]

--------------------------------------------------------------------------------

Thank you, Nick. So I don't think I said that we would have the same percentage of sales. Of course, this will depend on sales, but I can tell you that we will strive to do that, to not have -- being with such an increase in terms of cost inflation in Poland. We will try at least to not having -- or not hampering the EBITDA margins, but that really will depend also on the -- on our level of sales growth. What I said is that we will be able -- we think that we will be able to compensate with the kind of sales that we do, so the sales mix and the gross margin mix that results from that. We will be able to compensate for the cost inflations in Poland. On the working capital, so as I said, basically the 2 headings that are changing the needle this quarter are the usual ones. It's the supplier payment. And then I said -- as I said on that, it depended a lot on the Christmas performance; and because, of course, with sales we had to do our purchases and now we are paying to the suppliers, considering the payment terms. And of course, it's important to consider these as we were preparing for Easter. And these are quite important. This is a quite important season, particularly in Poland but also in Portugal and in Colombia. Of course, we have to increase our level of stock, but we are talking about 1, 2 days of sales. But of course, with the kind of sales that we have at this point, in cash terms we have that significant increase that was posted this quarter. And...

--------------------------------------------------------------------------------

Nick Coulter, Citigroup Inc, Research Division - Director [59]

--------------------------------------------------------------------------------

Okay, but should we expect that to reverse next quarter then? If -- so if we can't get a handle on the moving parts. It should -- if that's just timing and inventory build on calendar, presumably that will back out next quarter.

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [60]

--------------------------------------------------------------------------------

Well, what we will assume, first of all, is that of course we will have some of this -- if the -- if Easter season goes according to plan, of course, we will have to pay also the suppliers, but this will be much diluted. So usually, of course, the lower peak of working capital is year-end, as normal, but I would assume that, so first half, we will still hit peak but it's not the same level usually as the first quarter because this is the weaker one in terms of sales. And so the impact in cash terms is a little bit higher.

--------------------------------------------------------------------------------

Nick Coulter, Citigroup Inc, Research Division - Director [61]

--------------------------------------------------------------------------------

Right, then just the loyalty card, promotional, marketing expense given the slight margin on the promotional mix.

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [62]

--------------------------------------------------------------------------------

Yes. Okay, so basically you have 2 different inputs there. So the loyalty card costs, which are a little bit more marginal, will be accounted of course below gross margin, but the actions that we will do using the loyalty cards, of course, those are accounted for in the total margin of the company.

--------------------------------------------------------------------------------

Nick Coulter, Citigroup Inc, Research Division - Director [63]

--------------------------------------------------------------------------------

Could you talk a little bit more about the type of promotions you're running next? I mean it appears they're very high ROI and therefore quite strong achieved gross margin relative to the overall mix. Please.

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [64]

--------------------------------------------------------------------------------

So basically what you do with the loyalty card is trying to -- we -- so you can see how the consumer reacts. And you basically give them some kind of prize if they buy certain products for certain campaigns. And that -- of course, it has really an impacts on the way that we deal for -- or we deal with that, but -- so by having now 50% -- or around almost 50% of the sales through the loyalty card, we see it as normal, as people has of use to it. And they will buy, but we use it basically with the -- with our promotional campaigns.

--------------------------------------------------------------------------------

Operator [65]

--------------------------------------------------------------------------------

(Operator Instructions)

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [66]

--------------------------------------------------------------------------------

Operator, no further questions?

--------------------------------------------------------------------------------

Operator [67]

--------------------------------------------------------------------------------

We have no further audio questions in the queue.

--------------------------------------------------------------------------------

Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [68]

--------------------------------------------------------------------------------

So thank you once again for attending this conference call. And I wish you all a very good day and a great weekend.

Thank you.

--------------------------------------------------------------------------------

Operator [69]

--------------------------------------------------------------------------------

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.