Earnings Transcript for CRERF - Q4 Fiscal Year 2017

Executives: Alexandre Bompard - Chairman and Chief Executive Officer Matthieu Malige - Chief Financial Officer

Analysts: Arnaud Joly - Societe Generale Cedric Lecasble - Raymond James Maxime Mallet - Deutsche Bank Fabienne Caron - Kepler Cheuvreux Bruno Monteyne - Bernstein Andrew Gwynn - Exane Xavier Le Mene - Bank of America Merrill Lynch Ladies and gentlemen, welcome to the Carrefour 2017 Full-Year Results Conference Call. And I’ll hand over to Mr. Alexandre Bompard, Chairman and Chief Executive Officer. Sir, please go ahead.

Alexandre Bompard: Good evening, everyone. I’m very pleased to be with you today. I’ll share a few thoughts as an introduction to this call and then will let Matthieu Malige present the group’s 2017 numbers. Let me start with a brief overview of this past year. 2017 saw like-for-like sales increasing by 1.6% versus 3% in 2016, reflecting a slowdown of food sales due to a number of factors, including food deflation in Brazil and tough competition, notably in France and Southern Europe. As announced in January, recurring operating income is down 14.7% at current exchange rates. Overall, 2017 operating performance has been penalized by pressure on gross margin, increasing operating costs and higher depreciation expenses. Lastly, free cash flow from continuing operations, excluding exceptional items is down €90 million year-on-year. These results reflect the group situation I shared with you on January the 23rd. It confirms the urgent need to implement a broad and powerful Transformation Plan to lower our cost base and improve our competitiveness in order to respond to the disruptions affecting our industry. This is the aim of our Carrefour 2022 plan. After the announcement of the plan on January 23, we have gone on the road for a two-week roadshow. I’m very satisfied by the quality of the dialogue we have engaged in with investors and analysts. We discussed very openly the group situation, the main levers of our plan and the execution of this plan. Let me say again how important it is for us to keep this free dialogue with you throughout the implementation of the plan so as to make sure we answer all of your questions. 2018 is the first year of our five-year plan and the pivotal year in the transformation we are initiating. My attention is now 100% devoted to executing our Transformation Plan. As you know, since we had the opportunity to share our plan, I’m focused on delivering our ambition The execution will be measured, monitored and will follow a precise timeline. I’m well aware that you will assess our ability to deliver. That’s why over the past months, the teams have already been hard at work implementing the first steps of the Transformation Plan in each of its pillars. On our first pillar, a simplified and open organization, the plan has been deployed and is being tailored to each individual country. We aim to finalize by the end of the year the departure plans that have been announced. Concerning the 273 ex-DIA stores that the group plans to divest, the search for buyers has been initiated. We aim to have removed these stores from our scope by year-end. This requires, of course, pedagogy and dialogue, and our discussions with trade unions have been thorough and constructive since and constructive since January the 23rd. We will maintain an open and regular interaction to transform the company responsibly. This is key to the success of the Transformation Plan. Productivity and competitiveness gains are our second pillar. I want to stress that our €2 billion cost savings, our strong commitment for the team and that I’m very confident in our capacity to deliver this objective. We have already started the rationalization of indirect purchasing, strict management of expenditure and the renegotiation of historical contracts. A new approach to CapEx control is now in place As for direct purchasing, the negotiations for 2018 that are ending in France are just the first step that reconfirms Carrefour’s attractiveness including for suppliers. Our third pillar creating an omni-channel universe of reference has been launched. We have been working on our store formats. We now have a clear view on how we are going to better adapt our hypermarket to the catchment area, including by reducing sales area by at least 100,000 square meters by 2020. Our cash and carry format, Atacadao, is expanding at a fast pace in Brazil with 20 openings this year as well as Maxi in Argentina with 16 openings in 2018. In order to create an omni-channel universe of reference, we need to catch up on Drive openings in France, and that’s what we are doing with the coming openings of 170 Drives this year. We are implementing for our Drives an industrialized preparation platform in order to finally offer a high quality of service to our customers. This has already delivered very promising results. In order to lead the battle of home delivery, we will deploy our +1 delivery to 10 new cities and D+1 delivery to 14 new cities by the end of 2018 in France. In addition to this massive expansion of our delivery services, we are working hard to implement an attractive value proposition for our customers in Paris. Thanks to our network of warehouses around Paris and our strong store density within the city. Still on the creation of an omni-channel universe of reference, we are also taking the lead by developing high-return partnerships with specialists and sector leaders upstream, such as Sapient for our online architecture and downstream, such as Showroomprive for the fashion offer and La Poste for our delivery services. Lastly, regarding our fourth pillar aiming to overhaul the offer to promote food quality, I’m convinced that pushing this objective is not about communication, it’s about evidence. Laurent Vallee, Group Secretary General, is in charge of the implementation of this ambition, reporting directly to me. He is working on it with our merchandising, quality, marketing and private label teams in order to identify how to quickly improve our product quality and traceability. It is a long-term ambition that needs to grow through frequent actions. Our decision to suspend wild bass sales in February and March during the breeding period in order to replenish stocks is just one example of our renewed mindset. I can guarantee that many more commitments will be implemented in 2018. To conclude, I would say that the group is in motion and the teams are very committed to this transformation. I’m impressed by the high level of energy and engagement, which reinforces my confidence in our collective ability to successfully deliver on this plan. I thank you for your attention. I will now leave the floor to Matthieu Malige, who will walk you through the 2018 figures.

Matthieu Malige: Thank you, Alexandre. Good afternoon to all of you. Let me begin on Page 5 of the presentation with the key figures for 2017. Our net sales at about €78.9 billion were up 1.6% like-for-like compared to 3% in 2016. This reflected a slowdown in food sales, notably due to sharp food deflation in Brazil. EBITDA stood at €3.6 billion, down 6.4% versus 2016. Recurring operating income at €2.006 billion is in line with our expectation communicated during our Q4 sales announcement, down 14.7% year-on-year. Our adjusted net income group share fell by 25% to €773 million. Free cash flow, excluding exceptional items at €950 million was down €90 million year-on-year. Net debts improved by €788 million and stood at €3.7 billion at year-end. We’ll take more detailed look at these different aggregates in the coming slide, starting on Slide 6 with our sales performance. Carrefour posted net sales of €78.9 billion in the period, up 2.9% in total and up 2.6% at constant exchange rates. On the like-for-like basis, sales were up 1.6%, marketing slowing sales momentum, particularly on food, which was impacted by a slowdown in inflation notably in Brazil. Adding in 0.6% of sales resulting from expansion, our organic growth ex-petrol and ex-calendar was 2.2% in the year. Acquisitions added another 0.8%. Positive petrol and foreign exchange impacts of respectively 0.2% and 0.3% were offset by an unfavorable 0.5% calendar effect. Moving on to Slide 7. We focus on our gross margin from recurring operations, which was down 38 basis point to 23.1%. This reflects a tough competitive environment, notably in France and in Europe. It also reflects a relative underperformance of our purchasing conditions. At the same time, our operating costs were up €575 million to 20.5% of net sales, a 15 basis point increase versus 2016. This is due in part to cost increases, notably in Latin America, where wage increases reflected past or general inflations, but were well above food inflation levels. Our depreciation and amortization increased by €95 million in 2017. This is due to the above average level of investments over the past few years. On Slide 8, we look at the currency impact for the year, which was a positive €58 million on recurring operating income. This impact is mainly due to the Brazilian real. As you can see on the graph, on the right-hand side of the slide, the average rate for the real in 2017 was 3.61 versus the average rate for 2016 of 3.86, leading to a ForEx variation of around plus 6.5% in 2017. This resulted in €44 million positive impact on recurring operating income, which is spread between a highly positive impact in H1 and negative impact in H2. As you can also see on the chart, the spot rate on February 27, 2018 stood at 3.98, whereas the average rate for 2017 was 3.61, which illustrates that so far in 2018, we have a significant negative ForEx effect with the real. Let’s now turn to our performance by region, starting with France on Slide 9. Sales in France amounted to €35.8 billion, broadly stable. On a like-for-like basis, sales were up 0.8%, reflecting tough commercial momentum throughout the year persistently challenging competitive environment. Recurring operating income amounted to €692 million, down 32.9%. Operating margin stood at 1.9%, down 94 basis points year-on-year. This reflects both the environment I have just described and the fact that losses of €150 million from ex-DIA stores continued to weigh on profitability. On Slide 10, we look at other European countries, where operating margin is slightly down, reflecting contrasting performances by region. Net sales stood at €21.1 billion, up 1.3% like-for-like and 5.1% at constant exchange rates. Thanks to the Eroski and Billa acquisitions. Recurring operating income was down 4.9% on a reported basis to €677 million. This represents a margin of 3.2%, down 34 basis points, reflecting differing performance from country to country. Margins in Northern Europe held up well, while Southern Europe was notably affected by a highly competitive environment. Let’s now turn to Latin America on Slide 11. Net sales for the year reached €16 billion, an 8.3% rise at constant exchange rates. This represents a solid performance, given the strongly deflationary environments we saw in food in Brazil in the second-half of the year, like-for-like sales were up 6.1% Recurring operating income of €715 million rose 0.6% at current exchange rates, but was down 7% at constant rates. Recurring operating income margin was down 44 basis points to 4.5%. This performance reflects operating losses in Argentina linked to a difficult economic situation in the country. Brazil posted a solid performance despite a strong food deflation. Its profitability growth notably reflects continued improvements at Atacadao. Atacadao’s performance this year demonstrates the strength of the format in Brazil, in particular in the challenging economic environment. As you know, we plan to accelerate the opening of Atacadão stores with 20 new openings this year. Another important element 2017 in Brazil was the successful announce of the Atacadão credit card, whose startup cost temporarily impacted the profitability of financial services, but which is very promising with close to 1 million cards issued already. Let’s complete our geographical roundup with Asia on Slide 12. The region returned to profitability in 2017, with H2 confirming the turnaround we started to see in the first-half. Recurring operating income was a positive €4 million versus a negative €58 million in 2016, and recurring operating income margin was up 101 basis points. This performance came despite a 3.2% drop in sales at constant exchange rates and 3.7% drop like-for-like. This performance shows that our action plans in China are beginning to bear fruits, in particular, through significant cost reduction at a time when consumer habits are evolving rapidly. Taiwan for its part continued to perform well and improved its profitability. Let’s now turn to our adjusted net income group share on Slide 13, which was impacted by non-recurring charges in 2017. Net income from continuing operations group share amounted to a negative €531 million. This loss is mainly attributable to €1.3 billion non-recurring charge, which I will explain in detail on the next slide. Net financial expenses improved by €70 million, reflecting the group’s deleveraging and decreasing interest rates. Tax expenses stood at €618 million versus €494 million last year. This increase notably reflects write-offs of deferred tax assets, whose recovery is not probable notably related to the ex-DIA scope and also in Argentina. Adjusted for these exceptional items, the normative tax rate is 39%. Adjusted net income group share restated for exceptional items amounts to €773 million. On Slide 14, we detailed the €1.3 billion nonrecurring income and expenses that I just mentioned. Restructuring cost amounted to a negative €279 million as a result of continued transformation actions announced in 2017 in several countries. Nonrecurring items this year also includes a €700 million non-cash impairments on our Italian goodwill, as well as €333 million charge, mainly reflecting the depreciation of assets related to the ex-DIA network. This leads us to our 2017 free cash flow on Slide 15. Excluding exceptional items free cash flow stood at €950 million versus €1,039 million in 2016. Gross cash flow stood at €2.653 million, down about €300 million versus last year, reflecting lower profitability. Change in working capital requirements amounted to a positive €189 million, resulting notably from a strict inventory management. Investments stood at €2.145 billion, excluding Cargo. This represents a significant decrease versus the €2.5 billion in 2016. Investments in 2017 whereas move towards the normative level of €2 billion that we announced on January 23. Free cash flow stood at €503 million after taking into account the other effects detailed on the slide. Adjusted for €207 million linked to Cargo and €240 million of exceptional items, free cash flow excluding exceptionals reached €950 million. As you see on Slide 16, our net debt in 2017 stood at €3.7 billion at year-end. This slide is self-explanatory as you can see the net debt improved by €788 million. In summary the Group’s financial structure at December 2017 improved and remained solid. On Slide 17, we looked at our debt repayment schedule and credit rating. In 2017 we redeemed €1.25 billion in bonds and on June 14 we issued $500 million in non-dilutive cash-settled convertible bonds swapped in euros with a maturity of six years and a zero coupon. Our debt maturity now stands at 3.9 years and our credit rating is unchanged at BBB+. On Slide 18 we look at our proposed dividend for 2017. We’ll propose to the general shareholders assembly that will take place on June 15 to pay a dividend of $0.46 of euro per share, down 34% versus the $0.70 paid out last year. Once again, we will offer our shoulders a choice of receiving their dividend in shares or in cash. Based on the Group’s adjusted net income, the payout ratio is 45% in line with our distribution policy. Let’s conclude on Slide 19 with our outlook for 2018. This year is a pivotal year for transformation plan. 2018 will be marked by the first advances in each of our four pillars of the Carrefour 2022 transformation plan that Alexandre described a minutes ago. On a more financial level, the Group’s results re-reflect two key elements. First of all the evolution of exchange rates and notably that of the Brazilian real. The real’s spot rate yesterday stood at 3.98 compared to an average rate in 2017 of 3.61 reals to the euro. Therefore Carrefour starts 2018 with a very negative Forex effect. This is a factor that must be taken into account when considering 2018 profitability. Secondly, our above-average investments of the past years will lead to a further increase in depreciation despite the financial discipline of Carrefour 2022 with CapEx at €2 billion as of 2018. Well, I thank you very much for your attention and I’m now ready to take your questions.

Operator: [Operation Instructions] The first question comes from Arnaud Joly, Societe Generale. Please go ahead.

Operator: Thank you. The next question comes from Cedric Lecasble, Raymond James. Please go ahead.

Operator: Thank you. The next question comes from Maxime Mallet, Deutsche Bank. Please go ahead.

Operator: Thank you. The next question comes from Fabienne Caron, Kepler Cheuvreux. Please go ahead.

Operator: Thank you. The next question comes from Bruno Monteyne, Bernstein. Please go ahead.

Operator: Thank you. The next question comes from Andrew Gwynn, Exane. Please go ahead.

Operator: The next question comes from Xavier Le Mene, Bank of America Merrill Lynch. Please go ahead.

Alexandre Bompard: Well, let me all thank you for your questions and for taking part in this call. We look forward to further exchanges with you through the year. And for today, I wish you a very good evening. Thank you.

Operator: Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.