Earnings Transcript for CA.PA - Q4 Fiscal Year 2019

Alexandre Bompard: [Interpreted] Ladies and gentlemen, good morning. I’m delighted to have you this morning for our annual results. This morning, we will be discussing on the – moving on, the fast, of our progress, of our transformation plan, and it will take place as follows, following the video, which was just shown. I would like to take a brief glance at the group’s current situation and prospects, because they have been established on solid foundations two years into the plan. I’ll then take a few moments to shed more light on a topic on which we’ll focus our energy in 2020, which is customer satisfaction. This is a battle we want to win across the group. Matthieu Malige will then present the details of our performance over the year, and then together, we shall answer your questions. A few words on the group’s current situation to start with. There is what you already know, and which I already had the opportunity to tell you one month ago, when I made a summary assessment of the first two years of our transformation plan. We have methodically corrected the weaknesses identified in January 2018. We’ve showed up our structure, we put the price competitiveness back at the heart of our commercial policy, and we revitalized our offer. These are all decisive issues to restore the group’s ambition and capacity for action. But I shall not dwell on this today. I would like to focus on what some people do not know or do no longer see. There is growth in our sector and there is growth in our models. But in an incredibly competitive sector, you have to go and win this growth, you need to seize it, capture it, and this is what we are doing right now. We have taken strong decisions in the past 2 years. We tore down some of our barriers and we set the right priorities to build Carrefour 2022. We’ve activated the engines and unfold ourselves to capture all the growth opportunities. First, we are expanding at a rate that has no equal in our key geographies. In convenience stores, we have a growing and profitable model, and we have moved with greater velocity than the market. We are regularly gaining market share. The major example is France, where our overall market share has gained 10 basis points every month for the past 6 months. We are attracting franchisees from other banners, especially in France and Italy also, where we have changed scale with the joining of 2 master franchisees, and this is a sign that we are a partner creating value. And the momentum will continue as we are well on track to achieving our ambitious target for opening 2,700 convenience stores by 2022 across all the countries in which we operate. In Cash & Carry, we – with Atacadão, we have a model, which is running at full speed. In this huge market, that is Brazil, we are already a leader, and we are widening the gap with competition. For the past two years, we have maintained a sustained pace of expansion with 20 Atacadão openings per year. And we have just accelerated this nicely with the acquisition of 30 Makro stores. In other words, 18 months of expansion, one move at an attractive valuation for us. But beyond Atacadão, it is the whole of Brazil, which is more than ever a territory of conquest for Carrefour. Second point, we are building our leadership in food e-commerce online with our target 2022. We have recorded growth of more than 30% per year for two years, and we are outperforming the market in most of our geographies. In terms of e-commerce, we have the logistics infrastructure. We have the expertise. We have the partners. In fact, we’ve been very active since the start of the year through our alliance with Google and our acquisitions such as Dejbox and Potager City. We will carry on devoting significant financial and human resources to e-commerce to maintain high growth rates. And we shall focus on operational excellence to improve profitability. Third, with the food transition for all, we have preempted a promising positioning, which energizes our entire offer. We are moving faster than the competition on organic in our key geographies with growth exceeding 25% a year, and this for the past two years. The share of our private label has gained 2 points in our sales last year. And in France, it has grown at least 3 times faster than our competitors. On organic as well as on Carrefour branded products, we are moving at the right pace to reach the ambitious targets that we have set for 2022. Success of our initiatives allowed us to approach the rest of the plan with great confidence. Here again, I will only cite a few highlights. First highlight, countries that faced major challenges two years ago have now reached a winning position, notably Latin America countries, Eastern Europe, Spain and Taiwan. The other European countries, which have started even further behind, are in an accelerated catch-up phase, and are following a course, which is extremely clearly set. France illustrates all these dynamics by itself, that of re-conquest and that of catching up. I’ll let Pascal Clouzard, CEO for Carrefour France, share…

Pascal Clouzard: [Foreign Language]

Alexandre Bompard: [Interpreted] Well, thank you, Pascal. This brings me to the second highlight for the future of our plan. The advances made in all our geographies were funded by strict financial discipline. Cost control, selectivity and productivity of investments have become second nature to Carrefour. We achieved €1 billion in savings in 2019. And today, I am announcing that the objective of achieving €2.6 billion in saving in the full year by 2020, it will not only be achieved but exceeded, because we are raising this to €2.8 billion, and we have enough to fuel the savings momentum in the coming years. Our goal of selling €500 million in non-strategic real estate assets having been reached a year ahead of plan, I am also announcing that we are extending it with a target of €300 million in additional disposals by 2022. Third highlight. A consequence of the previous 2, we now have a profitable growth model. Our like-for-like sales grew by 3.1% in 2019 versus 1.6% in 2017. And our ROI is up sharply with an increase of €145 million in 2019, i.e., plus 7.4% in 1 year. France is making a significant contribution with a 2019 ROI up by 15.6%. Net income, Group share reached more than €1.3 billion whereas it was negative by more than €580 million last year. Free cash flow also increased by sort of 17%, thanks to growing results and a more productive CapEx policy. It stood at €1.3 billion, excluding exceptional items. The group’s current situation is thus that of a growing company, whose economic model is under control with a solid balance sheet, one of the strongest in the industry, capable of supporting our M&A strategy with renewed self-confidence and with a clearly established roadmap. More dynamic, more creative, more ambitious, Carrefour is no longer the same company it was about 2 years ago. If Carrefour was a company that has managed to challenge itself and change, it is also because we are a deeply committed company. The half of these commitments, as you know, is a conviction so strong that we wrote it into our bylaws. It is to be the leader of the food transition for all. 2 years ago, we went on a mission to ensure that everyone consumes better, better for themselves, better for those who produce, better for the planet. With the worldwide launch of Act for Food, we raised awareness. We have since been imitated by most of our competitors, which I welcome not only because it is the vacation of a leader to be followed, but above all, because the challenges to be met are so immense, so impactful that they are necessarily collective. But at a time when the word commitment is more often repeated than achieved, I would like to tell you the deep meaning we attached to it within our group to commit, to really commit, means to accept to be accountable, accountable for the commitments made and the results of the actions carried out, be concrete, precise, auditable. The first of these commitments, without the others – without which the others have no meaning is, therefore, this to be sincere and transparent. It starts with acknowledging that we, Carrefour, have not always been exemplary, no one has been. That is the problem that leads us today to an ecological dead-end, but we are the first among our peers to have chose not to shuck our responsibility then to act transparently. Our progress can be scrutinized by everyone through our CSR and Food Transition for all index. 17 annual and long-term objectives, quantified, audited and integrated into the compensation scheme for managers. We accept to submit to the judgment of third-party organizations, which welcome our progress in their ratings. The third successive year, we have been included in the Dow Jones Sustainability Index among the global top 5 in the sector. The CDP climate change gave us the maximum score of A in 2019, which places us among the top 2% of companies in the fight against climate change in the world. This requires a lot of determination and discipline, and we invite our competitors and partners to do the same. That is the meaning of the food transition pack that we are launching. We want to make our suppliers – we want to take our suppliers with us by offering to engage with us on responsible products, the reduction of packaging, biodiversity and climate. The topics involved are incredibly complex, and we continue to make mistakes, of course. But 360,000 committed people make a difference. And in 2 years’ time, we have built legitimacy and expertise. It is in the spirit of transparency and collaboration with all players in the food chain that we wish to go even further in our commitment. Here again, my past today is not to list them, but to highlight some of those that take a whole – makes our whole model evolve. There are other commitments of our products, which directly transformed the content of our plate. For the years, after having been a pioneer on GMOs, Carrefour is leading the fight against endocrine disruptors from 2020. Products for babies and pregnant one will be guaranteed without endocrine disruptors. And by 2022, this will be the case for all Carrefour branded products. Then there are the commitments that involve each of our stores. We’ve launched major projects to remove plastic from fruit and vegetables by 2022 and to reduce food waste by half by 2025. Finally, there are the commitments, which are challenges launched to all sectors of our economy, and in which we play our part. I finally decided to take the leadership within the Consumer Goods Forum, which bring together the major global retailers and the main manufacturers of consumer products in this fight against deforestation. An issue that is decisive both for climate and biodiversity. Through Carrefour 2022, we are thus combining short-term requirements and a long-term horizon, the very one that are – has all that aims for. Our transformation is visible in our financial results with the like-for-like growth, which has almost doubled in 2 years. And at the same time, our extra financial results exceed our objectives with a score of 114% achieved by CSR and Food Transition index in 2019. This is how we want to keep moving ahead. We are aggressive in all our geographies to promote our products and our values, and we shall continue to be – and I confirm to you today all the targets of Carrefour 2022. Before concluding, I would like to put the spotlight on a great battle to be won on the way to Carrefour 2022. It is fought in all our geographies, in all our formats, in all our stores, and in fact, all the way into all our head offices. It is that of customer satisfaction, and we will devote a lot of energy to it in 2020, because we are ambitious for the future. And the customer satisfaction is what will allow us to achieve our ambitions. We want to make our customers the center of our world, the obsession of our daily jobs, the patterns of all our actions. For Carrefour, believe in me, this is a cultural revolution. This cultural revolution is not just wishful thinking, it is an extremely concrete reality. The one behind the 555, I suggest you let Rami Baitieh, our CEO in Spain, tell you about it.

Rami Baitieh: [Foreign Language] [Interpreted] I took away several key learnings from 555. Most important, it’s a system that works in countries as diverse as Argentina, Spain, Poland or Taiwan, where we have already had the benefit of some insights in implementation when NPS increases traffic increase and sales increase. It is a very concrete, very complete system, which innovates and transforms the whole organization, it’s an open and pragmatic system, which has no dogma or imposed tool like one objective to conquer customers locally and build a winning formula in each store square meter by square meter, brick by brick. We will focus our energy in 2020 on the deployment of 555 across the group, whether it’s taking – talking about the organization, process management, we will draw the implications for each group business unit, for each format, for each business from e-commerce and IT to merchandise organization is a project on which we have already advanced to gain agility, but we will do more to bring it into line with customers with a structure closer to ground level, more fluid, more reactive with a shorter chain of command, and overall, a simplified organization aligned from the front office to the back office stores, serving customers and headquarters serving stores. I’m setting an ambitious goal for our efforts. I, therefore, announced that we are making NPS and additional Carrefour 2022, excuse me, KPI and that will set [Foreign Language].

Alexandre Bompard: [Interpreted] He is in great shape, and he has lost about 15 years for the last 2 years, it’s very impressive, as Noël said. For Brazil, we have a schedule of 3 meetings this year to give you more granularity on what we are doing. These meetings will start by Brazil. Brazil will start. He has invited us to attend this Brazilian meeting then we’ll have a customer satisfaction meeting in June. In Spain, where we will gather group mergers that will present the deployment of 555 and on e-commerce and all other formats in France, later we will have a meeting during the second semester. In Brazil, France, Spain, single channel, food transition across the group 2 years after the launch of Carrefour 2020 groups, and we have those results. They are visible through all our strategic priorities, expansion on organic under strength. They are visible in our geographies, which are gaining competitiveness and leadership. They are visible to our customers through a dynamic of satisfaction that is well underway and which we will continue with determination. And they are, of course, visible in our performance growth. It’s almost doubled in 2 years. Our profitability is sharply increasing and our extra financial objectives have been exceeded. Of course, there is still a lot to do to achieve our ambitions. We have momentum, and we are going in the right direction. Thank you for your attention. And I now hand over to Matthieu Malige.

Matthieu Malige: [Interpreted] Thank you, Alexandre. Good morning to all of you, and thank you for being with us. Today I hope to be as interesting as guacamole with my figure slides. Before I walk you through the key financial highlights of the full year, I would like to step back for a second to remind you how much has been achieved across the group in the past 3 years. As you will see, the successes of transformation already translated in our 2019 numbers, I would like to do this by focusing on 3 key metrics that speak for themselves. Like-for-like sales, to begin with, have accelerated through our stores from 1.6% growth in 2017; Carrefour grew in 2019 by 3.1%. This growing momentum reflects the efficiency of commercial initiatives that have been implemented. Second, recurring operating income. The group’s ROI dropped by €400 million at constant exchange rates in 2017. In 2019, it increased by €145 million. This reflects our improved sales dynamic, the relevance of our strategic choices, our sharply improved cost structure and our strict financial discipline. Third, aggregate. The net financial debt, it has decreased by almost €1 billion in 2019, combined with EBITDA growth. This resulted in a significant improvement in our indebtedness ratio. These numbers illustrate a more competitive commercial model, control over the economic model and healthy financial situation. Let’s turn now to take you through the key financial highlights of 2019 for the sake of comparison with 2018, unless otherwise indicated, I will comment figures as pre-IAS 29 and pre-IFRS 16 basis. Carrefour FY gross sales in total reached €80.7 billion in 2019, up 3.1% on the like-for-like basis, which represents a sharp acceleration from 1.8% in 2018. This is Carrefour’s strongest full year performance in several years. Sequential acceleration in LFL growth can be observed in most geographies. Like-for-like growth accelerated through Latin America where commercial investments are bearing fruit in all formats in Europe, Spain, Eastern Europe; accelerated with a good level of competitiveness in France, Belgium; and Italy, where markets were difficult and showed declines at year-end. Carrefour is investing, and will continue to invest in its competitiveness. Let’s now look in greater details at the various currency impacts in the year. The currency effect of sales – on sales was negative in 2019 at minus 2.4% is negative. ForEx impact is mainly due to the depreciation of the Brazilian real and the Argentine peso versus the euro. This translates into negative impact of €36 million in financial year. Recurring operating income reported recurring operating income standards at €2.88 million as announced on January 24. At constant exchange rate and comparable accounting standards, it increased by €145 million or 7.4% versus 2018. Recurring operating margin is up by 16 basis points to 2.9%. Price investments in 2019 weighed on gross margin. This effect was largely offset by purchasing gains, lower logistic costs and better performance of financial services. Overall gross margin slightly decreased by 9 basis points to 22.3%. In parallel, Carrefour continued its financial discipline in all geographies with distribution costs at 17.5% of net sales, saw an improvement of 21 basis points. They benefited from the cost reduction plan and including costs related to new stores and customer services, notably in digital. As you can see, Carrefour is strongly investing in its future growth, while maintaining strict financial discipline. Let’s now concentrate on the cost reduction plan. The group maintained a strong pace of cost reduction in 2019 and has generated €1,030 million in growth savings coming on top of this €930 million already delivered in 2019. Momentum is strong with almost €2 billion in cost cuts to date. The group is ahead of our initial plan. Carrefour has pulled its purchasing between countries and also benefited from gains from purchasing alliances, notably with Tesco internationally and with Système U in France. The group has developed real know-how with the recruitment of experts in purchasing protocols and process simplification. It has put in place a network within the countries, which makes it possible to pull and sustain an industrialized approach to cost management. As you can see, reducing costs, being more efficient, while improving the customer experience is now part of the daily life of Carrefour teams in all countries. It’s one of the today’s announcements. Given the strong cost reduction momentum, the cost reduction target is being raised by €2.8 billion by 2020 and we are confident that the cost savings dynamic will continue beyond 2020. Let’s now turn to our performance by geography, starting with France. With recurring operations income, operating income in 2019 of €539 million, growing by a very strong 15.6% and a margin up to 24 basis points, Carrefour France has reversed the trend of the past years. In detail, this ROI improvement reflects strong momentum in cost reduction, allowing us to finance investments in price competitiveness and in the attractiveness of Carrefour’s offer of new services and more digital. Carrefour France has improved its commercial competitiveness in 2019 through the launch in February 2019 of the loyalty premium strengthened in January 2020 by the new market loyalty premium in supermarkets and the launch of unbeatable prices since June 2019. Turning to other European countries, the region’s recurring operating income amounting of €647 million in 2019 compared with €664 million in 2018. This reflected a strong performance in Spain and Eastern Europe, where the model’s attractiveness is confirmed significant investments in competitiveness, particularly in Italy and Belgium. Investments that were offset by more significant cost reductions in the second half, including the completion of voluntary departure plans in these 2 countries. In Latin America, 2019 ROI increased by plus €44 million or plus 10% at constant exchange rates. This profitability increase was driven by very strong sales growth and successful commercial initiatives in Brazil. The successful commercial initiatives, translating into a strong acceleration in like-for-like sales growth and improvement of ROI in all store formats. 2019 proved again that Brazil is a strong engine for Carrefour sales and results. Carrefour retail and Atacadão, very strong commercial momentum continues, while financial services are rolled out at a brisk pace. The recently announced acquisition of 30 Makro stores allow for further acceleration in Cash & Carry and value creation. In Argentina, the successful implementation of the transformation and commercial recovery plan continues to bear fruit and the country now contributes positively to the group ROI. The Asia zone now corresponds to Carrefour Taiwan’s activity. Recurring operation income was up 8% at constant exchange rate to reach €85 million, reflecting an improvement of plus 19 basis points in operating margin at 4.3%, thanks to good growth momentum and tight cost control. After this geographic review, let’s now move down to consolidated P&L. Net income from continuing operations group share grew strongly and returned to positive territory at €193 million in 2019 versus a negative €208 million in 2018. Adjusted net income, group share, adjusted for exceptional items increased by 13% to €905 million. This year was marked by non-recurring charges of €920 million. This one also reflects the costs related to our organization transformation plan in various countries for an amount of €550 million. It also includes €308 million of other nonrecurring items, mainly related provisions for tax litigation Brazil already booked in the first half. Carrefour net financial expenses decreased by €43 million and include a capital gain from the sale of Argan shares. The normalized tax rate is broadly stable. Net income from discontinued operations reached €1.1 billion, mainly reflecting capital gain from the sale of our operation in China. Let’s now look at the free cash flow. In 2019, the group posted a growth of €186 million in free cash flow adjusted for exceptional items or plus 17%. Before adjustments, free cash flow fell slightly by €53 million, taking into consideration very significant cash-outs related to organizational transformation projects in 2019. They represent €719 million compared to €478 million in 2018. Free cash flow benefited from an improvement of €69 million in EBITDA, an increase in trade payables, given a higher volume of activity. Conversely, social debt has followed as a result by decrease in the workforce, while stocks rose temporarily in December linked to more difficult activities than expected. On average, again, they fell in 2019 as a whole. Finally, CapEx increased by plus €160 million compared to the low point in 2018 at €1,725 million. These investments not only reflect the launch of new strategic projects, in particular, new commercial concept, digital and the expansion of format – growth formats, they continue to benefit from selectivity and productivity measures. The increase in CapEx is cash neutral and is offset by the favorable evolution of fixed assets, working capital requirements. Net financial debt benefited from better results in 2019 and was positively impacted by the cashing, from the closing of disposals of Cargo and Carrefour activities in China. Excluding the foreign exchange impact of €70 million, net financial debt decreased by almost €1 billion to €2.6 billion at yearend in 2019. I would like now to concentrate on Carrefour’s solid balance sheet and enhanced liquidity. In 2019, Carrefour continued its management of liquidity and refinancing operations were very successful. In June 2019, Carrefour amended and extended, until 2026, two credit facilities for a total amount of €3.9 billion, incorporating an innovative Corporate Social Responsibility component, CSR. This is the first operation in European retail sector. The group ambitions to be the leader in the food transition, for all this, this is also reflecting in the financing policy. Carrefour Group does benefit from a solid balance sheet. This is an important asset in the context of fast-changing food retail sector. Let’s move to the dividend. The Board of Directors decided to propose a stable dividend for 2019 at 46% share – €0.46 per share. It will be offered in cash or shares at the shareholders’ choice, and this will be submitted to the approval of the general meeting, May 29. The proposed discount on dividend paid in shares would be 5% versus 10% as in conclusion. Carrefour posted a solid performance in 2019, with growth in like-for-like, ROI and free cash flow. These figures reflect the good execution of the Carrefour 2022 plan. On the back of these results, the objectives of our plan have been all confirmed or revised upwards. The group is notably targeting €2.8 billion in cost reduction on an annual basis by the end 2020, which compares to €2.6 billion previously. It also plans new disposals of non-strategic real estate assets for an amount of €300 million by 2022. For 2020, customers will be even more at the heart of group’s priorities. The teams will work constantly to increase their satisfaction to make these commitments very concrete. We have set a target of improving NPIs by 15 points over 2020 to 2022 period. This current and comprising attention to the customer, we will now foreshadows an improvement in like-for-like growth. We have seen it, particularly in Poland, Argentina, Brazil and Italy. We will now be happy to answer all your questions. It works.

A - Matthieu Malige: [Interpreted] Who would like to raise the first question at this point? This is the Q&A session. We are all in great shape. Thank you.

Alexandre Bompard: [Interpreted] Thank you very much. Thank you very much, everybody. We will have a lot of further appointments. We’re going to start on a road-show with Matthieu and come to see you. You are kindly invited to visit Noël Prioux. He is in great shape. It’s quite interesting to meet. We will talk about formats during the second semester and we will have our traditional publications that will be kept. Thank you very much, everyone, and have a good afternoon.