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Edited Transcript of JMT.EP earnings conference call or presentation 26-Jul-19 8:30am GMT

Half Year 2019 Jeronimo Martins SGPS SA Earnings Call

Lisboa Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Jeronimo Martins SGPS SA earnings conference call or presentation Friday, July 26, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ana Luísa Abreu Coelho Virgínia

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

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Conference Call Participants

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* Artur Amaro

Caixa - Banco de Investimento, SA, Research Division - Analyst

* Carole Gladys Madjo

Exane BNP Paribas, Research Division - Research Analyst

* Cedric Lecasble

MainFirst Bank AG, Research Division - Research Analyst

* João Filipe Pinto

JB Capital Markets, Sociedad de Valores, S.A., Research Division - Associate of Equities Research Portugal

* 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

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Jerónimo Martins H1 2019 Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Friday, the 26th of July 2019.

I would now like to hand the conference over to your speaker today, Ana Luísa Virgínia, Chief Financial Officer for the Jerónimo Martins Group. Please go ahead.

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

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Good morning, ladies and gentlemen, and thank you for joining this call to present Jerónimo Martins first half 2019 results. As a reminder, materials include the release and a slide presentation, both available in our corporate website.

Before I take you through the presentation, let me stress that the analysis of the performance will be made without the effect of the IFRS 16 adoption. Although, in the appendix, you can find our financial statements under this accounting standard.

In the first 6 months of the year, consumer demand was positive in the markets where we operate, but we see no signs of softening when it comes to the competitive landscape and promotional activities to drive sales. Food inflation remained close to 0 in Portugal and accelerated strongly in Poland throughout Q2. During this period, we continued focusing on consumer preferences and sales growth without compromising on efficiency to ensure profitability. The work done paid off, and in H1, we posted strong growth at both sales and EBITDA, despite 8 fewer trading days in Poland due to the Sunday ban. Most -- more importantly, all our banners reinforced their market positions.

Looking at the key performance figures, consolidated sales grew 5.7% to reach EUR 8.9 billion. At constant exchange rates, sales growth was 7.1%. Group EBITDA reached EUR 471 million, 5.6% ahead of H1 '18, or a growth of 6.8% at constant exchange rates. The respective margin was 5.3%, broadly stable year-on-year. Net profitable attributable to Jerónimo Martins was at EUR 181 million, showing an increase of 0.7% on H1 '18, despite the 8 fewer trading days in Poland. Net debt stood at EUR 158 million, with gearing at 7.9%, reflecting a strong cash flow generation of EUR 152 million in H1 and a payment of EUR 204 million of dividends in May 2019, EUR 219 million if including payments to partners.

Looking now at our Q2 P&L, we had a sales increase of 10.3%, reflecting a solid underlying growth trend that also benefited from the swing of Easter from Q1 last year to Q2 this year. This Easter season was particularly successful in Biedronka, boosted by the company's commercial actions, enhancing growth, where it generated a positive margin mix effect. The stable gross margin reflects the strict management of the margin mix and some trading up, which ended up mitigating the price investments over the period.

Sound delivery drove EBITDA in the quarter, which was up 11.3%, with the respective margin coming at 5.5%. I would also like to flag that in this quarter, we have already booked at EBITDA level, EUR 8 million related to our employees' long-term compensation plan.

Pingo Doce's sales growth impacted noncontrolling interest that were at EUR 7 million compared to EUR 4 million in Q2 '18. In the quarter, the tax rate for the group was particularly low, as some adjustments were made following the final computation of last year's corporate income tax in Portugal and Poland. Net profit attributable amounted to EUR 109 million, 14.2% ahead of Q2 '18.

The first half year gives a clearer picture of the overall performance, as it removes the impact of the Easter timing. There are a few things I would like to point out. Gross margin evolution from 21.5% in H1 '18 to 21.7% in H1 '19 is mainly the combined result of better margin mix management and trading up. Cost inflation continued to be driven by labor and energy. In what regards labor, the inflation reflects the specific conditions of the labor markets in the countries where we operate and also our own decision to improve remuneration packages across the 3 geographies. All in all, our businesses have been able to capture top line opportunities and gain market share while preserving the profitability drivers, consequently, delivering a sound first half in 2019.

Cash flow generated in the period reached EUR 152 million, compared with negative EUR 137 million registered in H1 '18. This improvement comes mainly from the funds generated by the working capital that in 2018, had a challenging start to the year following 2017's strong Christmas and related high trade payables. Better EBITDA generation and lower CapEx payments have also contributed to the performance.

The balance sheet remains very sound, with net debt at EUR 158 million and gearing at 7.9%. Jerónimo Martins' dividends in the amount of EUR 204 million were paid in May and are already reflected in the debt value. Group CapEx in the first 6 months of the year reached EUR 238 million, of which 48% were invested in Biedronka. Refurbishments continue to absorb a relevant part of the investment program. Overall, the CapEx for the year is expected to be in the EUR 700 million and EUR 750 million range, and logistics will gain weight with the 2 DCs being built in Colombia.

I will now focus on the operating performance in a bit more detail, starting with sales. All businesses delivered strongly in the first 6 months of the year, driving group sales up by 5.7% to reach EUR 8.9 billion in H1 '19. In Biedronka, sales grew 7% in zloty and 5.2% in euros to EUR 6.1 billion. Like-for-like performance was at a sound 3.7% in H1 19, already incorporating the impact of 8 fewer trading days due to the Sunday ban. The like-for-like swing from Q1 into Q2, reflects mainly the calendar impact of Easter and the additional trading days lost due to the Sunday ban, more specifically, 7 in Q1 '19, plus 1 in Q2. Throughout these 6 months, Biedronka remained focused on sales and on crafting its campaigns to maximize top line delivery through volumes and mix. Easter was particularly dynamic in this respect and contributed with an estimate of 3.5 percentage points to the second quarter like-for-like performance. Also the month of June was particularly strong, registering unusual warm temperatures and that drove strong sales growth in certain categories. I would also like to mention food inflation in the country, which peaked in May and June to more than 5%. In our basket, inflation in the 6 months was 2%, having been 3.3% in Q2. We believe that this inflation has, to a certain extent, a seasonal nature and therefore, we may see some softening on prices evolution ahead. New space contribution, at slightly more than 3 percentage points, remained an important driver of sales growth.

In the execution of its investment program, Biedronka opened 27 stores in H1, 16 net additions, and remodeled 67. Up to May, market share increased by 0.2 percentage points year-on-year.

Hebe grew sales in zloty by 26.4%, with a like-for-like of 8% in the period, despite the impacts resulting from the loss of 8 trading days. The banner opened 17 stores and gave decisive steps in its omni-channel approach to the Polish health and beauty market, having just gone live with its e-commerce platform. Pingo Doce's total sales were up 4.1% to EUR 1.9 billion, with like-for-like, excluding fuel, coming at 3.4%. The banner remains very active and assertive in what regards to promotions and commercial actions, which, together with the strength of its overall value proposition, continues to drive growth and market share gains. Pingo Doce opened 4 stores and remodeled 19, of which 6 were lifting.

Recheio registered a like-for-like of 3.4%, and although exports continue to pressure growth, total sales increased by 2%. In Colombia, considering the relevance of sales density as main drivers towards profitability, Ara gave priority to sharply accelerate like-for-like sales growth by improving its commercial dynamics and increasing price competitiveness. Growth on same-store sales increased significantly in the recent months, and the banner ended the first half with double-digit like-for-like. Ara opened 25 stores and grew sales in local currency by 31.6%.

Moving on to operating results, group EBITDA reached EUR 471 million, a 5.6% growth or 6.8% at constant exchange rate. A strong performance in our view, which reflects a sales-driven strategy. This allowed to fuel a positive margin dynamic and to create the flexibility needed to address cost pressures. Losses generated by Ara and Hebe were at EUR 41 million from EUR 45 million in H1 '18. This reduction reflects Hebe losses decline and the devaluation of both currencies. Ara stabilized losses in local currency.

Group EBITDA margin was 5.3%, broadly in line with H1 '18. If we exclude the impact from Ara and Hebe losses, EBITDA margin was 6.1%. The effective margin mix management in Biedronka supported the strong commercial dynamics and the maintenance of its EBITDA margin. In the case of Pingo Doce, I would like to flag that the good like-for-like momentum, combined with positive margin mix in Easter boosted, EBITDA margin in Q2, partially as a seasonal effect.

All in all, we had a strong first half with the results from the second quarter confirming and reinforcing the already good start we made to the year. In this context, we feel confident to confirm the guidance provided last February 27 with the full year results release.

Top line growth will remain our main priority. To guarantee it in very competitive landscape, we will keep strengthening our operations and commercial propositions. We are aware that there is still a lot to be done until the end of the year to deliver on our ambition, and we do acknowledge the uncertainty around regulation and food inflation, particularly in Poland. This became louder with the recent news on the retail tax. Notwithstanding, we will continue to focus on competitiveness and efficiency as ways to preserve profitability while outperforming the markets where we operate for the remainder of 2019.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from the line of José Rito.

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José Manuel Rito, Banco Português de Investimento, S.A., Research Division - Analyst [2]

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Regarding the gross margin, it was flat in Q2. You mentioned that Biedronka was kind of more aggressive in terms of promotions in the quarter. And so my question is, why the company decided to be more aggressive? Was this a reaction to the markets or was Biedronka's own decision to accelerate promotions? And if you can update what is the percentage of sales in the promotion? And so that will be my first question. Then regarding Ara, you mentioned that same-store sales accelerated over the recent months. What has been driving this acceleration? Anything that you have changed recently that led to this acceleration on sales? If you could provide a little bit more color would be positive for us. And finally, regarding this retail tax, if you -- in Poland, if you can make any view on this, namely, if this possible retail tax is applied, if this should be supported by the final clients? I'm not sure if you can comment anything on this.

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

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Okay. Thank you, José. So gross margin at the consolidated level being flat. So yes, it's true that Biedronka continues to be very active in commercial actions during the Easter time. But that didn't mean really to increase promotions. In fact, there was a slight slowdown in the promotional activity, and we ended up the first half with around 38% of sales within seen promotions and in&outs. This has really to do much more with price investments even in the regular assortment. So it had to do with the overall dynamic during the period. And as you may recall, last year, during the Easter time, and after that, we were facing the beginning of the Sunday ban. So I can say that, that meant more aggressiveness on the promotional side. This doesn't mean that we were not more competitive. But of course, it softened slightly the gross margin in the first -- in the second quarter. Nevertheless, if we look at the first half, which I think it's the performance that we should be looking at to take out the effect of the Easter shift, we are still slightly increasing the gross margin. And this came from all businesses, in fact, and has to do really with the margin mix management at all business levels, and particularly at Biedronka, it has to do, of course, with the kinds of trading up that we saw also. And of course, the way that we crafted the commercial actions. So this one's on Biedronka. On Ara...

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José Manuel Rito, Banco Português de Investimento, S.A., Research Division - Analyst [4]

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Yes. So basically, no major changes in terms of, let's say, pricing inflation in H1, let's focus in H1. The difference -- and the increase for H1 was related with the mix, so you aren't seeing a major change in terms of competition in the country? We can assume that -- in Poland?

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Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [5]

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No, no. And as I said, at consolidated level, the margins was -- or the margin contributions is positive from all businesses, in fact. So from Ara, as I mentioned in my introductions, Ara increased its price competitiveness and was, let's say, in this case, more aggressive when it came to the kind of commercial actions it did in the country and in the several regions, and that is paying off. So basically, the company is really focusing on giving priority to the same-stores sales increase. And as I mentioned, it was basically that, that drove the like-for-like sales growth, which accelerated in the second quarter. On the retail tax, so I cannot elaborate much about that. So as you know, there are -- and it seems to be the case, the European courts will receive an appeal from the European Commission on the retail tax, mean that -- meanwhile, the government has posted a draft bill that may mean to implement the tax declarations from September. But at this point, it's still a draft, we don't know if it will go ahead or not. What I can tell you is, if applicable, I think that, let's say, this -- as the Sunday ban, this will have a reflection in the whole economy. So it will, for certain, have a systemic effect in the economy, and all economic agents will have to adjust to this new regulation. So on that part, I think it's very early to say, but as I think it's all -- as I said, as for the Sunday ban, all agents will have to adjust and the sector, of course, will have also to adjust its cost structure and investments to cope with it as we'll have to.

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José Manuel Rito, Banco Português de Investimento, S.A., Research Division - Analyst [6]

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Okay. So on Ara, as you were mentioning, so you were more aggressive, and this is paying off. But despite being more aggressive, the gross margin has increased. So basically, the scale benefits are starting to giving a positive contribution despite you are being more aggressive?

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Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [7]

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Yes. So we are increasing gross margins. Probably, we could have been increasing more gross margin, but we prefer to go for sales as usual.

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Operator [8]

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Next question comes from the line of Maxime Mallet.

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Maxime Mallet, Deutsche Bank AG, Research Division - Research Analyst [9]

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The first one would be related to Biedronka. You mentioned that you expect inflation to soften going forward. I was just wondering whether you could give us a bit of color with regard to what you expect there? Do you believe that going forward, you could still have for the rest of the year inflation close to what you had in H1, meaning 2%? Or you think it could soften further? The second one about the retail tax, there were a few headlines in the past few days saying that actually the European Commission is appealing the court decision. Could you maybe confirm though whether you have any views on this specifically or any information on this specifically? Then I had a question with regard to Ara, so you have this target of reducing significantly your losses in 2019. Yet, in H1, we haven't seen that. So just wondering whether this was behaving in line with your expectation or maybe taking a bit longer than what you initially expected with regard to the margin ramp up? And maybe one last one for me, which would be related to Mercadona, which has opened its first stores in Portugal. Could you maybe give us a bit of information regards to the price positioning of these stores, the impact it might have on the nearby stores that you have in the country?

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

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So on inflation, what I mentioned is that part of the inflation that is increasing in the country in the food inflation may be seasonal. So at this point, we think that there are parts that are drive -- there are drivers in the inflation that may cope with still maintaining a high level. But the part that refers to fresh, and particularly to meat and some of the commodities like sugar may be seasonal. And that, of course, will have an impact, considering the different mix of sales in a discount model like Biedronka. So that is the only thing. Of course, other elements are pushing inflation up and from the labor cost pressures that, of course, puts that in more pressure. The -- even the monetary policy of the country. So that is something that is not dependable on us. The only thing is that, as I mentioned, part, it may be nonstructural. And that's why we think that we should flag that there may be a softening in the second semester, depending on how it evolves in what refers commodities, so with impact on groceries and the fresh, namely meat, fruits and vegetables. On the retail tax, so from the informations and from the sources we have, there will be an appeal to the European court, as I mentioned. So apparently, the government will not, of course, put into force the payment of the tax unless it has a final decision from the European court. It's the information that we got from even the government's portal of information. But nevertheless, there are -- there is also, as I mentioned, a proposal, a draft law that mentions that the government may apply from 1st September, the law in the sense of having to file for declarations on the monthly sales. And this, of course, will mean that the company will have to adjust and then we'll comply, of course. But what I think, and as I mentioned earlier, is that this will, like the Sunday ban, have an impact on the whole economy. And that, in fact, all players will have to adjust even their cost structure to cope with it. On Ara, yes, so we are keeping the guidance for the losses. It will be challenging. We were forecasting already, as I said, basically, an increase in sales density and increase in gross margin as main drivers of profitability and on the inflections of the losses. I would say that we are probably investing a little bit more, but it's because we are seeing the price elasticity paying off at sales levels. This being said, it's going to be challenging, but we still think that we can attain the guidance for the losses at this stage. On Mercadona. So yes, they opened already 4 stores in the north, as it was their plan. We -- according to the press and according to our own shopping, from the prices, it seems that the majority of the prices or there is no price decrease versus the local competitors. So at this point, we don't see, to be very honest, a very big impact on the surrounding stores in our particular stores. But this probably also has to do even with the economic and favorable consumer demands at this stage. So we don't underestimate a competitor like Mercadona, but we are definitely prepared to cope with further competition.

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Operator [11]

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Next question comes from the line of João Pinto.

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João Filipe Pinto, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Associate of Equities Research Portugal [12]

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Just 2 quick ones, if I may. The first one regarding Biedronka store expansion, there were like 16 net openings during the first half. Could you please provide us some color on how net openings will be distributed during the next 2 quarters? And the other one is a follow-up on Biedronka's like-for-like. Just to confirm, you attributed 3.5% to Easter effect and 3.3% it was inflation, right?

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

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So on Biedronka expansion, so probably and in terms of timing, so we are maintaining all the guidance for expansions. In the last years, we have been basically putting all our investments in terms of expansions and refurbishments after Easter time. So there is a -- there may be a slight later timing compared with last year. And usually, most of the openings and refurbishments take place in the second half. Of course, the distribution will depend on it, but I think that's ultimately -- I think if you can see they are half, half probably it's okay, but I don't think it will have a big impact overall on the guideline that we are giving. On the like-for-like, yes. So 3.5 percentage points is our estimate of the Easter effect and 2% was the first half inflation in Biedronka.

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João Filipe Pinto, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Associate of Equities Research Portugal [14]

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Sorry, for the Q2?

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Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [15]

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Q2, it was 3.3%.

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João Filipe Pinto, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Associate of Equities Research Portugal [16]

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3.3%, okay.

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Operator [17]

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Next question comes from the line of Cedric Lecasble.

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Cedric Lecasble, MainFirst Bank AG, Research Division - Research Analyst [18]

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Actually, it's mainly follow-ups on the 2 important issues, the sales tax and Ara business plan. On the sales tax, I imagine, internally, you are working on some plans, this has been public for quite a long time. Tough to know if it would be suspensive or not? You are saying you have to file, but it would be suspensive. So I just want to check that I understood it correctly. You might be retroactively concerned if they lose, but you won't pay from September. Is it -- do I understand it correctly? So that's the first thing. And what are the internal plans? Everybody would probably raise prices. What would be your view? Your focus would be on profitability or market share? Can you elaborate a little more on that because you must have worked internally a lot on that. And the second point is on Ara and the like-for-like. How should we understand it can potentially affect the whole mid-term business plan and breakeven timing, you seem to have nice development on like-for-likes, were they in line with budget? Were you expecting such developments? Or it is a result of more commercial activity and aggressiveness because like-for-likes were a little weak or soft? Maybe you can help us, should we need to move the needle in terms of breakeven, that's the main consequence of the question. And maybe just to be sure, so 3.3% basket inflation in Q2, you said you had 200 basis points for the first half. So it was like 70 basis points in Q1. Should we see it like that?

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Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [19]

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So thank you, Cedric. On the sales tax, yes, this is the subject that has been -- it's written to be enforcing as you know, in September 2016, then it was suspended when the European Commission moved to court to challenging it as a discriminatory tax. Then, of course, there were some changes in the food retail sector in Poland, with the introduction of the Sunday ban. Currently, what happens is that is -- and this is very recent. The government put its address bills, considering that it may going forth with the declarations effect of these retail tax from September, and this is just a draft still, saying that we should declare it, but it -- then it suspend its payments. Meaning that, if and when the European court rules on the retail tax, if it maintains its positions of saying that the tax is nondiscriminatory and can go ahead, they will collect the whole amount in September 2019. This is the draft bill that may or not be approved formally by the Polish government, but it's the one that we have noticed of, and it's -- as I said, it's very recent. So yes, of course, we've been working, although, of course, we know also, as I mentioned, that the reaction and the way that the economy will have to incorporate and adjust to this retail tax will also be dependent. But the way that I see it, if we are going to see extra raises in prices and in inflation derived from the retail tax, probably, the only thing I know is that Biedronka will want to keep its competitiveness and its price against the other competitors. So in this, I would say that we'll have to work, of course. And we will certainly have to adjust even our -- the way that we manage the margin mix in a way that [it grabs interest and] the conditions that we have, and affords our own price structure to cope with this extra pressure at our P&L level if it comes into force, and if we have to pay for it or account it for.

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Cedric Lecasble, MainFirst Bank AG, Research Division - Research Analyst [20]

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If I may, did you already discuss with suppliers about that? Have you worked already on some assumptions and scenarios with suppliers?

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Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [21]

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I think that this doesn't work like that, Cedric, to be very honest. So we continue, of course, to negotiate with our suppliers to have the best price cost in our merchandises and to be able to pass and to be the most competitive, but it's not something that we don't say to our suppliers that they will have to support the retail tax, of course. I think that we have to craft our commercial actions to have win-win situations and for them also to gain in the market. So this is something that really doesn't work like that. The same with the price increases. Yes, there may be some pressure for price inflation because, of course, all players will have to adjust. And some -- and for some, it may be easier than for others. Particularly for the less profitable ones, let's say. And -- but that doesn't mean that you'll see a price increase in the amount of the retail tax, it wouldn't make any sense in this case. So as I said, it's going to be -- if applied, it's going to be a mixed effect all over in the economy. On -- is that okay, Cedric, sorry?

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Cedric Lecasble, MainFirst Bank AG, Research Division - Research Analyst [22]

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Yes, absolutely, Ana.

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

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Yes. So on Ara business plans, in -- so the like-for-like. Yes, we were assuming that we would be able to increase our like-for-like. What I said was that we were probably -- and we were expecting not only increasing like-for-like, but increasing our gross margin and being able to get better cost of goods sold with that increase in sales density and with the kind of negotiations and new plans that we are negotiating and sharing with our suppliers, particularly on private label. So this was something in line. What we did was, we really are going a little bit further on the price investments because we are seeing a strong reaction in terms of price elasticity in the Colombian consumer. And -- but for the rest, I would say that it's more or less in line with what we expect. At this point, I see no reason to change the timing in terms of the breakeven at the EBITDA level, as we are seeing it after 2020. And apologies, but you have a third question.

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Cedric Lecasble, MainFirst Bank AG, Research Division - Research Analyst [24]

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No, it was just to double check a number. It's 330 basis points in the quarter, the price basket at Biedronka and 200 basis points on the -- and 200 basis points was for the half year, correct?

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

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Yes. Yes. Okay. Correct.

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Operator [26]

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Next question comes from the line of Carole Madjo.

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Carole Gladys Madjo, Exane BNP Paribas, Research Division - Research Analyst [27]

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Carole from Exane BNP Paribas. A few questions from me. In terms of Poland, on current trading, I think that the government has now launched in the past month some measures of the stimulus plan, maybe it's still a bit of early stage, but have you seen any improvement in terms of, traffic, sorry, or some changes in your stores following that? So if basically, July month's as good as or even better than what you have seen in Q2? And then maybe on Portugal, do you feel confident that you'll be able to deliver a similar or even better margin boost in H2? And then maybe last question on Hebe, you have launched an e-commerce website just recently, again, it still may be a bit early stage, but can you give any feedback? And just maybe remind us what is your online strategy for Biedronka in the future?

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Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [28]

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Okay, Carole. So on Poland, I would say that, of course, with households, considering that there would be a gain from the stimulus, this is affecting positively consumer demand. But at this point, I would say that we cannot or are not able to segregate and to identify which parts of the growth in our like-for-like means or comes from the stimulus. I think that one thing is for sure, we have been increasing our basket, not only because, of course, people concentrate the sales of Sunday on other days of the week, but also because we are increasing the number of items in the basket and more value-added products seen in the basket. So this kind of trading up is probably justified by the fact that people feel that they have more available income and can cope with more value-added products. On Portugal, as I said, part of the margin impact had to do with the strong sales and the like-for-like momentum of Easter and -- of this first half. I think it's going to be a little bit more challenging in the second half. So we may not been able to maintain this level of increase in the margin. Nevertheless, we still think it's going to be better than last year. As the company has been able to accommodate the remuneration packages review that was done in 2017 and is really being able to increase its EBITDA margin. On Hebe. Yes, so we launched the e-commerce around 1 week ago. It's -- of course, it's still too early to take conclusions from 1 week. It's being -- we have a lot of, of course, orders in these first weeks. But as you said, it's quite early to take conclusions. We think that is going to -- it's a sector and a part where it will pay off, of course, to have the e-commerce. In Biedronka, as we have been mentioning, Biedronka has, let's say, a natural hedge when it comes to e-commerce due to its proximity format. So -- and of course, food is always a more challenging sector to put online, but we have been monitoring that and even giving the facility to people to collect products in the stores of Biedronka, to be able to prepare, if we want to go ahead with anything. But at this point, the only presence in an e-commerce platform in Poland is from Hebe.

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Operator [29]

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Next question comes from the line of Nick Coulter.

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Nick Coulter, Citigroup Inc, Research Division - Director [30]

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Three, if I may, please. Firstly, in Poland, please, can I ask if you're beginning to shift your focus from in&out to a slightly greater focus on EDLP priced investments, as you work through the Sunday opening headwinds? And then secondly an ally to that, if you're able, please, could you update on the traffic and basket trends at Biedronka. And I guess, for the half, if that's more meaningful than Q2? And then lastly, just on the definition, please. For the inflation numbers that you're currently quoting. Is that like-for-like inflation or does that include an element of mix?

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Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [31]

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So the shift from promotions to everyday low price. Again, it's -- we manage the sales mix and the margin mix in a very dynamic way. So it's quite challenging as you may imagine. So yes, we have to maintain our competitiveness when it comes to our regular assortment and particularly in terms of some products that are -- where the prices are a must. And if that means an everyday low price or lower price, yes, we will keep it, but of course, we will keep being also very active in pressing all our commercial actions, including the promotions and the in&outs as a way, of course, to continue increasing our sales baskets and the number of clients. So I would say that it's both the dynamic from the price investments and the everyday low strategy from Biedronka, but on top of that, with also the promotion and in&outs continue to play a very strong role to the company.

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Nick Coulter, Citigroup Inc, Research Division - Director [32]

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But is that changing at all as you work through the phased introduction of the Sunday trading ban. So I guess, in&outs were as you say, to encourage behavior to build the basket away from the Sunday. So I guess my question is, are you beginning to change your emphasis ever so slightly?

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Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [33]

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Of course, it may have also an impact on that, but all the dynamics and the sales dynamics really depends, firstly, on the reactions of the consumer. And of course, if we manage to deliver what the consumer aims for without hurting our efficiency and of course, we know that promotions and the way that they are pressed also effect and put some pressure on the operations. Of course, if we can do that, we will continue to do that. It's something that we have been doing even in Portugal, with -- when deciding that part of our categories will be in promotion the whole month. And this pays off because it makes much more stable all the forecasting and replenishments. But this is a dynamic that is evolving. So we -- I cannot conclude if we are going to decrease promotions or not. We will not definitely lose competitiveness to our players and Biedronka will make sure of that for certain. On the second question, Nicole (sic) [Nick], can I ask you to repeat it? Because I didn't listen very well.

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Nick Coulter, Citigroup Inc, Research Division - Director [34]

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So it's just the Biedronka, could you update, if you're able, on the traffic and basket trends at Biedronka. And I guess, it might be more meaningful to talk about the traffic, year-over-year change in the basket, year-over-year change for the first half, given the Easter distortion and the size of the Easter distortion?

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Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [35]

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So basically, the like-for-like comes from the number of tickets, so the number of visits. But from our own numbers, what we can conclude is that the decrease in the -- sorry, the increase comes from the average basket, the increase comes from the average basket, there is a decrease in the number of tickets, but this is -- the whole number is explained by the Sunday ban. So we are not losing customers, on the contrary. And on the increase in the average basket, as I said, partly it has to do with the increase in the number of items in the basket, partly with more value-added products also.

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Nick Coulter, Citigroup Inc, Research Division - Director [36]

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Okay. So your traffic trends are broadly mirroring the impact of the incremental Sunday trading?

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Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [37]

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Exactly. So we're having 1 less -- less week of sales impact in the period, we have 8 days, so it's 1 week less and that, of course, affects when we compute the number of visits.

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Nick Coulter, Citigroup Inc, Research Division - Director [38]

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Great. That's encouraging. I think in previous quarters, you've had traffic figures that there were a greater impact than the Sunday trading. So that sounds like it has improved.

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

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Yes. Okay. On the definition of inflation, so it's basically like-for-like because we consider the weight, of course, of the products when we compute it also. So the quantity and the weight considering the difference in price. So I would assume that, on that, we are talking about a kind of a like-for-like inflation that can be applied to this variable.

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Operator [40]

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Next question comes from the line of Kiranjot Grewal.

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Kiranjot Kaur Grewal, BofA Merrill Lynch, Research Division - Associate and Analyst [41]

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Just 2 questions from me. Firstly, could you comment a little bit on labor cost inflation in Poland. I know Poland, we're seeing a lot of inflation there. How are you seeing that develop for the rest of the year? And secondly, given the sort of changes to your plan in -- or not your plan, but your performance in Colombia. Could you sort of give us an update on maybe a 3-year view, how are you considering that rollout?

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Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [42]

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Okay, Kiranjot. So the level of cost inflations, as I said, basically, when it comes to our P&L, the only increase so the only inflation that we are seeing really is on labor and energy. And as you may imagine. So with the minimum salary and the pressure on to increase the other salaries also in the country, Biedronka, of course, will keep its competitiveness, also in the salaries. And so there has been an increase and there is a higher weight of this labor and energy in the P&L that is basically compensated almost by the dilution of the other cost headings at ultimately, considering the increase in sales. In Ara, so there is not really a change in plan. I think that we do not conclude that. What we, of course, have to go and seeing as the reactions of the consumer to our own actions to have -- to see if we have to inflect any intensity or not. But for the reminder, I don't think that there is a big shift in our plan. Our plan is really to increase sales density. This is paramount, as you know, in this sector, to drive profitability, and this is our aim is to make money in Colombia in the next 3 years. I would say that it's the part of the plan that I can share with you.

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Kiranjot Kaur Grewal, BofA Merrill Lynch, Research Division - Associate and Analyst [43]

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And you have been guiding to, I think a lot of people mentioned it, the losses being down year-on-year this year. The losses in H1 were only down slightly. Should we consider H1 as a good guide for H2? Or do you think there will be an acceleration in H2?

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

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So we are expecting that decrease will accelerate at this point. Of course, there is always we have to see how the market reacts and how the sales go because this is any change in Ara will be magnified because of the size of the company. But nevertheless, at this point and considering our guidance, we are assuming the losses will decrease more or further in the second half of the year.

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Kiranjot Kaur Grewal, BofA Merrill Lynch, Research Division - Associate and Analyst [45]

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And in terms of the wage cost inflation, was there a point of time this year, where you saw them ramp-up as in, was it in Q2? Or are you sort of managing it more slowly across the year?

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Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [46]

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I think that we can assume that we do -- the impacts of -- it's not wage inflation. I think that we have to consider that we have a whole remuneration package that even considers the bonus for productivity, for lower absences. And so this -- and for the productivity in the store. So the flow can vary, and throughout the year. This in Poland as well as in Portugal. And so as we adjust our bonus systems or the other remunerations headings, this will depend. But in the case of Biedronka, we have been doing some adjustments in the first half. But as I said, if everything goes according to plan, you will see more or less the same kind of inflation for the second half also.

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Operator [47]

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Next question comes from the line of Cedric Lecasble.

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Cedric Lecasble, MainFirst Bank AG, Research Division - Research Analyst [48]

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Just a very small follow-up. What's your best guess in terms of delays for a potential appeal to take place? When do you think will be the next court decision? Tough one, but short one.

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

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Okay. There is no issue. So of course, we cannot put pressure on the European court. But as of today, the official -- from unofficial sources, we were informed that there will be an appeal. But then the decision of the court may take its time. So I don't know it could be 1 to 2 years in some impact, I would say, but it really depends. I don't know if there is any timing to issue a decision when it comes to European court, to be very honest.

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Operator [50]

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Next question comes from the line of José Rito.

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José Manuel Rito, Banco Português de Investimento, S.A., Research Division - Analyst [51]

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Yes. Just a very quick one regarding Ara, you plan to open 2 DCs until the year-end. I think it will be in the second half. Can you mention if you have already in your OpEx costs, any cost related to -- with these DCs in Q2, namely training . And also in Poland, I'm not sure if you mentioned in the presentation, how much was the market share evolution in H1.

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

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So José, on the DCs, of course, there is parts that has to do with the construction and the operations that have to follow-up on the DCs construction, but it's quite marginal. So these DCs are under construction, but we would assume that they will have a marginal impact because we are talking about DCs that will open really -- of course, if there aren't any issues, will open at year-end. And on the market share, yes, we mentioned 0.2 percentage points in -- up to May.

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José Manuel Rito, Banco Português de Investimento, S.A., Research Division - Analyst [53]

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Sorry, 2 percentile points?

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Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [54]

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0.2 percentage points. 2 percentage points, we would like but...

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Operator [55]

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Next question comes from the line of Artur Amaro.

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Artur Amaro, Caixa - Banco de Investimento, SA, Research Division - Analyst [56]

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I just have a quick question. I'm looking at the free cash flow, and I see there is a major difference in the change in working capital between first half of 2019 compared to the first half of '18. Is there any big explanation for such a difference between figures?

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Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [57]

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Thank you, Artur. So as we flagged, this change in working capital has all to do with the business and the seasonality of the business. Of course, if we grow more on sales, usually, we have a higher impact. But as I also mentioned in my introduction, year-on-year, on comparing with last year, the fact is that last year was affected by the end year position in 2017 being quite low due to remarkable Christmastime in that year that's led to end the year in a weekend with a very high level of trade payables. But nevertheless, it's usual -- so yes, but there is a shift and to the positive or positive contributing to this change of working capital is also the dynamic of the business and the increase in top line.

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Operator [58]

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There are no more questions at this time. Please continue.

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Ana Luísa Abreu Coelho Virgínia, Jerónimo Martins, SGPS, S.A. - Company Secretary [59]

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Okay. Thank you all for your questions, and for attending this conference call to on our first half year results. Considering the performance delivered in these first 6 months of 2019, the guidance we provided at the beginning of the year remains unchanged. Our ambition to always deliver profitable growth and our top line strategic focus are also to be kept unchanged. Thank you, once again, and I wish you all a nice day.

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Operator [60]

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That does conclude our conference for today. Thank you for participating. You may all disconnect.