JRONF - Jerónimo Martins SGPS S.A. (JRONF) Q1 2023 Earnings Call Transcript
2023-04-29 16:34:08 ET
Jerónimo Martins, SGPS, S.A. (JRONF)
Q1 2023 Results Conference Call
April 27, 2023 04:00 AM ET
Company Participants
Ana Luisa Virginia - CFO
Conference Call Participants
Joao Pinto - JB Capital
William Woods - Bernstein
Jose Rito - CaixaBank
Nick Coulter - Citi
Nicolas Champ - Barclays
Presentation
Ana Luisa Virginia
Good morning, ladies and gentlemen and thank you for joining this call to Present First Quarter 2023 Results. In our corporate website assessed materials is available. Comprising the release, a slide presentation and effect sheet.
Q1 figures indeed reflect a good start to the year. All banners leveraged the strong competitive positions held at year-end to continue fueling growth in a quarter when food inflation remains a key feature of the performance. With consumers progressively more pressured, our strategic focus remains unchanged with price competitiveness as the critical tool to drive growth, protect volumes and mitigate as much as possible trading down effects.
The outcome of this strategic option was particularly remarkable in Poland, where despite the challenges Biedronka delivered an outstanding performance. Group sales grew by 23.4% to reach €6.8 billion. And it is important to flag that currency devaluation was a headwind to growth. At constant exchange rates, group sales grew by 26.5%. The strong sales performance led EBITDA to grow by 20.1% to reach €446 million. EBITDA margin declined 18 basis points to 6.6%. Cash flow generation was negative in €226 million, reflects seasonal working capital outflow of the business in the first quarter.
Our financial situation remains extremely solid. By the end of March, net cash position excluding capitalized operating leases, was at €1 billion. We entered 2023 with persistent high food inflation also reflecting the comps as inflation accelerated in Poland and Portugal from Q2 2022 onwards, when the war exacerbated the pressure on food and energy prices.
In face of rising prices and higher interest rates, consumers have become progressively more cautious despite the support to household income in each of our three countries from the national minimum wage increases in January. In Portugal and Colombia, the trading down in food continued to gain momentum. The first quarter P&L reflects a sales-driven performance.
Price investment by all retail banners and the effects of trading down, particularly in Portugal and Colombia pressured gross margin which declined from 21.5% to 20.8%. Our reinforced price competitiveness led to a good sales performance across the banners and improved operational leverage, limiting the impact of cost inflation.
All in all, EBITDA margin was down while the good sales progression led EBITDA in absolute terms to grow by 20.1% and reached €446 million. As previously said, cash flow was negative in €226 million with Q1 being as usual, impacted by payments to trade suppliers particularly when following a successful Christmas season.
Our balance sheet remains very robust with a net cash position of €1 billion, excluding capitalized operating leases at 31st March. As a reminder, the AGM held in April 20 approved dividends in the amount of €345.6 million to be paid by next May '17. I will now guide you through sales performance in a bit more detail.
This was a very strong quarter with all banners contributing to group sales growth. Biedronka's remarkable performance translated into €1 billion of additional sales in Q1 '23 versus Q1 '22. Currencies devaluation impacted group sales by more than €170 million.
With the positive contribution from all banners, group like-for-like reached 21.2% in Q1. In the like-for-like graphs, on the right-hand side you can clearly see that comp will be even more challenging from Q2 onwards. Biedronka invested strongly to drive sales growth, protect volumes and minimize trading down trends in the context of softer consumer demand.
Over the period, the Company widened the gap of its own basket inflation to the market's food inflation and clearly earned further consumer preference. In the like-for-like, volumes were positive in every month of the period despite the slowdown registered throughout the quarter.
I would also like to flag that the early Easter period in 2023 versus 2022 is estimated to have contributed to the performance with one percentage point. Sales grew 28.3% in local currency and market share in the first two months of the year increased by 1.6 percentage points according to JFK on fast-moving consumer goods.
Hebe continued to perform well with sales growth at 31.9%. The online operations posted a 43% increase and represented 17% of the total top line despite the still marginal contribution of Czech and Slovakia. In Portugal, we saw an acceleration of trading down trends as the purchasing power of consumers deteriorated.
Being those kept investing in price and promotions to protect sales and deliver the growth of 9.4%, with like-for-like at 8.4%, excluding fuel. Recheio continued to benefit from an improving area sector and delivered strong sales growth of 29.2%, including a 27.1% like-for-like. In Colombia, we saw already early signs of food disinflation, though inflation remained high at 24% and contributed to a very difficult market context.
Continuing to focus on its price competitiveness and promotional dynamics, Ara do sales in local currency by 50.8% with like-for-like standing at 18.9%. The expansion program remains a top priority and the banner opened 64 new stores in the period. Driven by the strong top line delivery, EBITDA grew 20.1%, 22.7% at constant exchange rates.
Following price investments and also pronounced trading down in the cases of Pingo Doce, all our retail banners registered gross margin reduction versus the same period of 2022. The strong sales delivery, however, allowed for operational leverage to mitigate this pressure on EBITDA margin that decreased 18 basis points in the period.
Biedronka's EBITDA margin was 22 basis points down with a strong like-for-like sales growth, limiting the impact of inflation in labor costs registered in the period. It is worth highlighting that despite remaining volatile, cost pressure from energy and fuel eased in Q1 '23.
In Portugal, EBITDA margin at Pingo Doce was down by 13 basis points, pressured by price investments while showing sustained recovery allowed its margin to improve. At Hebe, margin decreased 16 basis points, reflecting the investment to launch its international operations.
Ara EBITDA margin was 25 basis points down in Q1 '23 as a result of the combination of price investment to drive sales and a large number of stores with very low maturity. Wrapping up, all banners continue to deliver well despite the deteriorating consumer environment.
The context is still uncertain with regards to the evolution of the price of the food, energy and fuel and the progression of interest rates. All these factors will determine the level of pressure on consumer demand. We know that the base of comparison will challenge us even more from now on, but we are confident in the ability of our banners to navigate challenging times and keep delivering on ambitious goals.
Adding to this, we preserve a very solid financial position. As such, we will remain focused on guaranteeing price competitiveness to drive sales. At the same time, we will continue to execute our CapEx program as planned, expanding and improving our store networks in the three countries where we operate, not losing sight of our long-term vision. Thank you for your attention. Operator, I am now ready to take questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We are now going to proceed with our first question. The questions come from the line of Joao Pinto from JB Capital.
Joao Pinto
I have three, if I may. The first one, can you please quantify the Easter effect on Biedronka like-for-like? The second one, food PPI has decelerated materially in March, are you already seeing or can you anticipate some lower pressure from COGS inflation for the next few quarters? And last one on Slovakia. Can you give us some color on your plans there? When do you expect to enter and we'll do it organically or how many stores can you source using the current logistics structure that you have in Poland?
Ana Luisa Virginia
Good morning, Joao. So regarding Easter and as I referred, we estimate the contribution of early Easter to have been one percentage point in our like-for-like. As for food CPI and the cost inflation, we have seen some reduction in the inflation.
But we -- I believe it's still premature to really give a lot of color or estimates on this because, of course, we know that several drivers can change or make it different from now on. So you will have -- it will also depend on the costs of our own suppliers. As you know, salaries have been increasing, the minimum wages in all the countries and this also affects the suppliers.
So it's not just a question of commodities that we have seen whose prices have going down, but it's also the other costs that have to be taken into consideration that we think it will reflect still and it will still pressure the cost of our suppliers.
Then on the fresh products, which accounts a quite big waste on our sales, this is also a question mark because it will depend. We have seen some reduction on inflation in March and even in April now. But we also know that this will depend on the harvest and on the weather in fact. So, it's still a question mark. Our expectation, as we mentioned in our outlook is that inflation will reduce and this is the scenario under which we are working and the Company has planned directions from now on.
On Slovakia, so I think it's still early, but the idea, Joao as you mentioned is to grow from Poland. So to take advantage on the first basis. This is a country that, of course, is much smaller than Poland. But where we think that there is an opportunity. I think it's a little bit early to give a lot of color on this.
But the idea is to use the infrastructure and the sourcing and procurement capacity from Poland to go into Slovakia. And -- but in principle, to open and opening organically, it will not be this year still. This would be to prepare any entry in the country.
Operator
We are now going to proceed with our next question. The questions come from the line of William Woods from Bernstein.
William Woods
My question is on volumes in Poland. It looks like if you take your 24% like-for-like and you subtract inflation and your lower basket inflation and then you look at the volumes in the market being down negative 5% towards the end of the quarter, it appears that you gained significant volume share.
Do you see significant volume share and volume growth? And if so, who are you taking that share from? And then the second one is just a follow-up on that. Could you just give some context on your basket inflation? How much do you think you are underinflating the market or how do you see that delta changing.
Ana Luisa Virginia
So on volumes, as I mentioned they were positive in the three months for Biedronka. According to our estimates, we have grown 3% in the quarter in terms of volumes. And what we believe is that we are gaining clients from other formats. And so I believe that this volume has come basically from other banners that have a different value proposition.
I would say that from mainly the usual, the hypermarkets and the other part, other supermarkets that have -- that are not so price competitive. And that considering all the evolution that Biedronka has done remarkably in terms of assortment and in terms of quality of that assortment, I believe that currently people when they start buying in Biedronka they like the format, they like the banner and continue to do so.
So I think that some of the clients get used to buy or shop in other banners are now shopping in Biedronka and increasing their basket in Biedronka. And that's why we are gaining share in terms of volume. As to basket inflation currently or in this quarter, we have widened the gap as I also mentioned. So it used to be on average in 2022 around two percentage points. It's now close to 3% in the total quarter and it was slightly higher in March in fact.
Operator
We are now going to proceed with our next question. And the questions come from Jose Rito from CaixaBank.
Jose Rito
So I have two questions. So the [indiscernible] impact, apart from the like-for-like, how much it helped in terms of profitability in Poland if it had any impact? And also related to profitability in Poland, apart from Easter what other factors have helped in Q1? You mentioned energy. How do you see the moving part evolving? Because I think that if Q1 run rate is maintained in terms of margin evolution, margins actually could go up over the next quarters. Can you confirm this?
Ana Luisa Virginia
So as for the Easter effect, I think that's and the impact on profitability which I believe it was the question. So as I mentioned, we think that it was -- this one percentage point. But in profitability, what is really important for us and what will continue to be important as I also repeated is to continue to gain momentum with sales and continue to improve sales because this is the main driver of profitability.
So I don't hide that, yes, we were helped by a lower price in energy. But if we haven't grown sales, we could not dilute our costs in energy or our cost in fuel. So it's quite important to us that sales continue to deliver. And that's why we repeat like almost a month or that we will have to keep our competitiveness and our relevance for the consumer.
So Easter effect should have helped, but I would say that the main driver of profitability was really the fact that Biedronka continue to offer to the Polish, the best value proposition in the market. So not really being just pleased with the current situation and really making itself relevant by keeping this gap to the inflation in the country and by strongly investing in price.
As to Energy, it was one -- it was diluted and we don't hide that there was a help there. But for the future as you say, it's always difficult to say. It's true that the prices continue to go up in 2022. So this -- we have this tailwind in our profitability, but it really will depend on how things evolve.
So it's still a little bit early to say. We think that it may help and we don't hide that we are counting a little bit on that. But in what we count really to protect our profitability is really continue to drive strong sales and having a strong top line growth.
Jose Rito
Okay. Understood. But looking at the profitability delivery in Q1, but I think it was very good considering the run rate that we saw in Q3 and Q4 last year. My question is, was this also a surprise for you? And if you think this is sustainable because if it is eventually margins can actually trade that over the next quarter.
Ana Luisa Virginia
Jose, I think that we also in the outlet mentioned this. We know that it will be under pressure because if the inflation volumes and the mix is our drivers of our current performance. So we know that consumers are more price sensitive that they are -- the trends of trading down are also happening in Poland as the market performance shows.
So Biedronka has been able and I think that is really remarkable, the team to be able to basically being performing against a negative market growth in real terms. But the question now is if there is, of course, if the consumer react much more strongly and if this inflation is very fast, et cetera, these are all drivers that we have to take into consideration.
As I said, some of the costs and depending on the level of dilution may also help. But others, we know that they've already increased like the personnel costs and this is something that we can only dilute if we have sales. So it's keeping the best value proposition as I said to the market, to really make sure that Biedronka is the one that the Polish families choose as a safe harbor for them in still a high inflation context because even if inflation reduces, it is on the basis that had a very high food inflation.
Operator
We are now going to proceed with our next question. And the questions come from the line of Nick Coulter from Citi.
Nick Coulter
I don't often say, but congratulations on the quarter. So if I may, firstly, can I ask how you're shifting the mix in this environment? I guess, I'm trying to understand the limited impact to gross margin given the scale of the inflation gap that you're pushing through or is that just the benefit of the format cost structure? Just trying to get the math to work.
And then secondly for Ara, we it be possible to get a sense of the store maturity impact on margins and if we should expect this to persist as you continue to open stores?
Ana Luisa Virginia
Thank you for your kind words. I think that really the team has really performed and they earned all the congratulations from our part. As to the shift in mix and I'm assuming because you spoke about the gap that we are talking about Biedronka.
Nick Coulter
I think [indiscernible] but clearly it's a limited impact.
Ana Luisa Virginia
What we think is that -- and as you know, when the consolidated gross margin decreases, of course, we know that the big part has to be a contribution from Biedronka. So there is really a very strong not -- so the basic or the most important is really, of course, the price investments, but there is some mix effect, although this mix effects started to be seen in February last year.
So we know that people are buying more of the basics, but it's not the most important feature in the -- or that explains the reduction in gross margin in Biedronka is really the price investments. Although as I said we are seeing some mix, but it's not -- so we see a slight increase in private brands. It's not so significant, for instance as it happens in Portugal.
So in Portugal, just in the quarter was more than two percentage points in the waste on sales. In the case of Biedronka, it's slightly less than 1%. And then, of course, you have probably a higher weight of also the fresh products where we are staying quite competitive. But I would say that currently price investment is the one pressure in gross margins the most to really make sure that we, as I said, maintain or even increase the gap to be more relevant for the consumers.
As for Ara and the store maturity, of course, we opened a lot of stores this quarter also. As I mentioned, we opened 64 stores. Last year in the last weeks of the year, we opened more than 140 stores. So I think in the quarter, the last quarter it was even more than that. They have -- so it takes a while to build the sales density that we want in the stores.
And of course, we know that we are against an environment that is very difficult for the Colombian families. Most of these families are low income. We are, for the second year with food inflation above 20%. So accumulated probably in 2.5 years, we are talking about almost 60% increase in the prices of food that accounts for the main budget of the family.
So I think that's more than the maturity. We are facing a consumer that is not more than price sensitive. It really has its budget with a lot of constraints to buy more even if they want it. This being said, we think that we are building really a very good price perception and are building our future in Colombia because in fact -- and that's why we think that it's a good opportunity to invest now to then when the country picks up and we know that these cycles are usual in Latin America.
When the country picks up, I think that the consumer will remember we maintain prices low in foods and we will pick up all the leverage from this because, of course, any change in household income will go to foods and we think that it will go to the store that has the best price and the best quality, so the best value proposition for the Colombian family.
So yes, it's a waste. But I think that's what this is here more than a cost increase is really the fact that we are facing a difficult context for the families that even if they want it, they could not buy more than they are doing at the moment.
Operator
[Operator Instructions] We are now going to proceed with our next question. The next questions come from the line of Nicolas Champ from Barclays.
Nicolas Champ
I have three. The first one is about Poland. Could you please quantify your market share gain in this country in Q1? And how did this market share gain evolved versus compared with the previous quarters? Second question also regarding Poland. You talked about lower energy costs this quarter, but could you clarify about the other cost increase in Poland?
I mean, minimum wage, wage are expected to increase significantly this year. How much did your staff cost increase in Q1. Similarly, the lease charges are also expected to increase quite significantly in Poland this year. Again, what is already included in your cost structure in Q1, should we expect additional lease increase over the coming quarters?
And the third and last question is about Colombia. So you said CPI was 24%. Could you let us know your basket inflation in this country also in Q1? And how has the price differential versus CPI evolve also in Q1 versus previous quarters?
Ana Luisa Virginia
As for Poland in the market share, so the numbers that we have from JFK and of course, we mentioned the source because, of course, it can be slightly different. But using the same basis, we mentioned that February year-to-date we gained 1.6 percentage points in market share.
To be very straightforward, I believe that with the numbers that we saw from the markets still this week for March, I would say that we have further increased market share with the kind of performance that we are delivering and being able to gain even in volumes. So as for -- as we have been growing on top of the last year growth, I think that even if we are going on the line, so we grew slightly below two percentage points in last year in terms of market share.
And so I think that's -- in this case, we are continuing to prove or Biedronka is proving that it continues to be relevant for the consumer. As for the cost increases, so, yes, we have -- in January, we -- or basically all our costs have incorporated the salary increases, the wage increases that we make. There were not only the -- along the lines of minimum wage, but we increased the salaries to maintain competitiveness also on that because the labor market in Poland continues to be quite tight. The unemployment rate is quite low.
And so we think that we should maintain competitiveness in this and we have already done that. So it's already incorporated in the quarter numbers and the lease charges also. So in terms of rent, most of the CPI is the proxy for the rent increase in the case of Poland this year. And most of it is already reflected in our cash position because, of course, according to IFRS 16, you don't see really this increase.
So what we are seeing basically is an increase in our operating expenses along the lines of 20%. These rents are slightly lower because it's according to the general CPI, not the food CPI as for the future. So I think that we maintain or we think that, of course, this will effect versus last year along this kind of line. But it will depend, of course, the weight on sales, it will depend on profitability. As I already mentioned, it will depend on how the top line will evolve. And that's why it's so important that we keep focused on our relevance for the consumer.
As for the -- for Colombia, so our basket inflation is also below the 24%. We've maintained more or less than along the lines of last year around or near two percentage points difference.
Operator
We have no further questions at this time. I will now hand back to Ms. Ana Luisa Virginia for closing remarks. Thank you.
Ana Luisa Virginia
Thank you all for your questions and for attending this conference call. Despite the challenges we had a good start to 2023 and we'll continue to work hard to sustain consumer's preference while we reinforce our market positions going forward. The context will certainly remain challenging, but we have our strategy and priority is clear and our formats are in good shape to deliver. Thank you once again and I wish you all a nice time.
Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.
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Jerónimo Martins, SGPS, S.A. (JRONF) Q1 2023 Earnings Call Transcript