Metro AG (MTTWF) Q3 2024 Earnings Call Transcript

Metro AG (OTCPK:MTTWF) Q3 2024 Earnings Call Transcript August 15, 2024 2:45 AM ET

Company Participants

Steffen Greubel – CEO
Eric Riegger – CFO

Conference Call Participants

Christian Bruns – Montega AG

Operator

A wonderful good morning, ladies and gentlemen. Welcome and thank you for joining the Analyst and Press Call Q3 2024 Results Presentation. Throughout today’s recorded conference, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. (Operator Instructions) At this time, it is my pleasure to hand over to Dr. Steffen Greubel, CEO, Metro AG. Please go ahead, sir.

Steffen Greubel

Yeah, thank you very much and good morning everyone. Welcome to our Q3 ’23-’24 Results Call. I’m very happy to present you the most recent business updates together with our CFO who’s sitting next to me here, Eric Riegger. And as usual, we’re going to start with a strategic update followed then by Eric who is going to present the financials. Like always, there’s written and verbal Q&A options. And to just reiterate, we are offering (Foreign Language)

So then let’s directly go into the content, I would propose, because we want to focus now on four topics. First of all, we want to focus on the Q3 sales and the earnings development which are very much in line with our guidance. Second, we want to do a deeper look into the growth of our different channels and specifically the Food Service Delivery, the FSD business, as the growth — as the key growth contributor in this very moment. Third, we want to give an update on our financial KPIs, as well as outline how the sCore strategy drives our productivity, as productivity is the key factor for improving our EBITDA and cash flow. And last but not least, we confirm our financial year guidance and the ambitions.

So let’s directly go into the content. We start with the operated business results for the Q3. Sales grew, portfolio adjusted, in local currency by 4% versus the previous year, which shows that we are able to continue growth and despite a decreasing inflation in the late summer start in some countries. And in the nine-month perspective, we accordingly reached roughly 7%, not 77 — 7% growth, fully in line with our guidance. The adjusted EBITDA in Q3 is EUR327 million and roughly on previous year level and in line with our expectations. This includes also negative effects from the expiration of the license fees related to China for the last time.

Let’s look in our channels and the growth composition. Everybody’s aware of our sCore visual with the three channels, we are rolling out a multichannel strategy, combining store sales, FSD and digital. So let’s look how growth is composed. We see that the stores are growing with 1%, FSD operations is growing 16%, continuing the double-digit growth path since the launch of our sCore strategy. And in digital, on a smaller level, we are growing 43% sales growth of our online marketplace, METRO MARKETS. Plus, we won 8,000 — 8,000 new subscribers for our digital solutions. So overall a very healthy growth composition and very much in line with our sCore strategy.

And as announced, we want to do a deep dive now on the important FSD, the food service distribution business. We have mainly to set a little bit the scene, three reasons why FSD matters so much for us. Number one, it is a huge market. When you look at the market for HoReCa in most of the — or almost in all the countries, it’s sitting between 70%, 80% of the market share is distribution and delivery. And to address the full market potential, we got to tackle that channel very much. And that’s what we are doing. Number two, profit. We are in the moment having a cash profit which is described as the profit after all direct associated costs of nearly 7%. So that means as fast as we’re growing in FSD is better the overall profitability gets. And that’s the second reason. And the third reason, because we are also adding specialists, or have also added specialist FSD pure player to our portfolio, that means also we learn a lot from — for the existing operation, the delivery, basically, out of the METRO/Makro wholesale environment, and mainly the stores. So that’s the reason, huge market, profitable, and we do see a lot of fertilization effects within the company with our FSD specialists, why we are focusing there.

To explain a little bit how we would look at the business, we look at it in three pillars. One, starting from the left, it’s casual dining, and that corresponds very much with the classic owner-driven independent restaurants, which is the key target group for our METRO/Makro delivery service and our largest customer segment, basically characterized by many small to medium sized businesses and a dedicated assortment need. In many cases, the restaurateurs are typically cash and carry customers. Not all of them are delivered by METRO, but everybody is delivered. And to tackle them, we are going to develop them now to true multichannel customers. We have all the information at hand and we try then to offer on top and that’s also on top revenue, our FSD assortment and our FSD services. In addition to this own METRO/Makro delivery service, we have in Portugal a strong HoReCa market, independent restaurant and hotel business, or FSD business that is called Aviludo, which belongs to the METRO family since ’21. And they are supplying more than 13,000 professional customers across the country.

Look at the second pillar in the middle, that’s very much fine dining. So here we are talking about the Michelin stars and the gourmet restaurants of that world. It’s premium assortment and also exclusive brand products. We are basically commanding three core operations. One is classic fine foods CFF, which is part of the METRO family since 2015. We’re supplying over 12,000 HoReCa customers in the UK, in Asia, and in the United Arab Emirates, with delicacies and also novel food on the highest culinary levels. R Express, formerly known as RUNGIS Express, headquartered in Meckenheim, Germany, is under the METRO umbrella since 2016. And we are serving all three-star Michelin star restaurants, for instance, in Germany. So very dedicated to the high-level restaurants and hotels in Germany, but also in Austria and in Switzerland. Moreover, our newly acquired Swedish delivery specialist, Johan i Hallen & Bergfalk supplies more than 4,000 commercial customers across Sweden and Finland with premium meat and seafood products. So they are true specialists of protein. And the further acquisitions like Fisk i dag or Donier are fueling JHB’s further growth in the Nordics.

Number three, and that’s on the right-hand side, the so-called organized HoReCa pillar which covers company canteens, institutional kitchens, social sector, bigger restaurant chains, so organized business that is characterized by highly standardized full assortments and high volumes, which we address specifically by our subsidiary Pro a Pro in France and in Spain. We acquired Pro a Pro France in 2017. It’s the largest — by far largest FSD specialist under the METRO umbrella and the leading delivery company in France, operating in 22 logistic warehouses and known for the logistics excellence they are providing to their customers. Pro a Pro Spain is smaller but very fast growing in Spain. It’s a delivery service of the same brand which is catering primarily to customers in the organized HoReCa sector. So that’s basically our landscape of FSD activities.

Let me now update you, based on that, on our latest initiatives that we have rolled out in that environment. Regarding our network in Q3, we have successfully finished nine more network transformation projects. This entails seven store transformations into multichannel fulfillment centers. So that basically means we are generating out-of-store delivery capacity out of existing infrastructure. And this was mainly done in France, Spain, Italy, Austria and in the segment West, and in Bulgaria and Croatia in the segment East. Additionally, we opened two new depots in Pakistan and the Kingdom of Saudi Arabia for delivery.

Regarding acquisitions, and I already mentioned that in June our Swedish FSD specialist JHB successfully acquired Donier Gastronomie in Finland. They are a recognized premium food supplier with their own meat production capabilities and distinctive meat expertise. The acquisition of Donier is a classical bolt-on acquisition on smaller scale with sales of around EUR16 million in ’23 and that will able JHB now to competently fulfill the professional needs for burgers, minced meat, dry aging, cutting, packaging in Finland. And it will significantly strengthen JHB position in Finland and contribute to the ambition to become the leading fresh meat and fish specialist in the Nordics. Not mentioned on the chart, but also important information for you, because it’s also very consistent to our reports before. We also have grown, now nine months accumulated, our sales force as key FSD enabler. It’s a push model, you need to sell FSD. So we are looking at 700 more FTE in salesforce on a nine-month basis in this very financial year. So we are very much on track in increasing our sales force until 2030 significantly.

So, let’s look to the overall sCore progress on the sCore KPIs that you are used to see in our quarterly and annual reportings. Very consistently, we are on track with all the key strategic KPIs. One by one, that means that you see here kind of the two-year perspective and also the Ambition 2030 you see, very much in line that we have grown the customer — strategic customer sales share, so that’s HoReCa and trader customers from 63% to 75% now on a nine-month basis. And also in the year, in this very financial year, we are able to grow in the last quarter from before 73% to now 75%. So that’s very good. Actually, we’re becoming more relevant for professional customers month by month by month by month, and we are confirming the Ambition 2030. FSD sales share, we have talked about. We are looking now at 25%. So every fourth euro is now done in delivery in METRO. We are aiming for 33%. We feel very comfortable to reach the target. It’s the key growth driver and we are completely on track in the performance on that one.

Own brand sales share, a very important differentiator and also margin generator, is at 24% roughly. Also the intra-year performance is looking very good. So we are continuously growing the own brand share also month by month, and we also confirm our target above 35% for the year 2030. And then digital, of course, that’s on ‘the lower sale, but you need to see that we have more than doubled now in two years our digital sales share. That’s not only METRO MARKETS or DISH that I already have mentioned, but it’s also the main driver of that is the digital orders that are coming mainly for FSD, then no more manually or manipulated, but fully digital. And we are on a very good track to push that. And then, of course, it’s a way to go to the 40%, but we are confident to get there. So, overall, the sCore KPIs, very on track. The METRO giant is moving. We are changing. We are as wholesale as never before.

Talking now on some internal topics that we have actually also done in the last month, and that’s the new organization of the Board and the leadership structure. To just reflect on that shortly, the key aim was, number one, to be more operative and even closer to the business than before. And number two, to also be slimmer, to be honest, yeah, to be more efficient, to be more kind of close together, and to also set the tone in terms of productivity and efficiency for the entire organization. So that means all of us, and that’s myself, that’s Christiane Giesen as the new COO, and the Labor Director, that’s Guillaume Deruyter, as CCMO and that’s Eric Riegger. They all have now new operational tasks to fulfill. For me, I have now also the direct leadership for France — for French business, but also for the others. It all meant that we are getting closer to the business, that we are getting more pragmatic, more wholesale and at least slimmer and slicker than before. So that’s basically the core motivation why we are doing that. And it also gives or sets example how we think about the organization, the operating model, for the entire organization. Let me finish with the confirmation of our ambitions, so that holds true for our sales targets, that holds also true for our EBITDA and free cash flow ambitions, not only for that year but also for mid and longer term. Having said that, so that’s a full confirmation of our sCore ambitions.

I would like hand over now to Eric for more depth on the financial results. So thank you very much for listening. And Eric, please.

Eric Riegger

Thank you Steffen, and good morning also from my side. I am happy to present the financial performance of our third quarter. Let me start with the high-level KPIs for Q3 financial performance. First, look at sales. We achieved a 4% growth, portfolio adjusted and at constant currency. This was driven by good progress on strategy execution. We see growth across all our channels. Some countries developed above our plans while other countries had a slower start into the summer season. We continue to outgrow inflation by 2% despite overall lower inflation compared to last year.

Adjusted EBITDA is almost on previous year level. We have a negative effect from the expiration of the China license fee. Good news here, it’s the last time that we have this effect. Our earnings per share in Q3 are slightly positive. The previous year earnings per share was highly impacted by the sale of India and additionally by the non-cash foreign exchange effects from the Russian ruble. Alone, the earnings per share effect of selling METRO India amounts to EUR0.27. Without these effects last year, EPS would be around current year level. We also achieved a positive free cash flow of EUR239 million. This was mainly driven by a positive net working capital. We have improved our stock days versus prior year. Still, this year figure is below previous year level. This is due to recovery of a cyberattack in the last year. We continuously monitor and put measures for improving our free cash flow. Our net debt stands at around EUR3.3 billion. This is a slight increase to previous year but below previous quarter due to positive free cash flow.

So let’s have a look at the details. On the top left, you find the mentioned 4% portfolio-adjusted growth at constant currency. The portfolio effect in Q3 is around 1 percentage point. Therefore, we reached around EUR8 billion sales in the reported view. In Q3, adjusted EBITDA declined by EUR9 million. An effect from segment Others that included post-transactions effects from previous year was partially compensated particularly by segment East.

Looking at the regions. Q3 sales growth was driven mostly by region East. To be more specific on this one, Germany reached sales of EUR1.2 billion with a decrease of 2% versus previous year in a deflationary environment in Germany. HoReCa business was impacted by a delayed season start. Germany is still in the transformation phase, as we mentioned before. Despite that, the adjusted EBITDA has slightly increased by EUR5 million. This is partly due to the low comparison basis in Q3 from previous year when the transformation actually started in Germany.

In the segment West, reported sales of EUR3.3 billion, slightly decreased by around 1% versus previous year. Strong sales growth contributed from Spain and like Steffen mentioned, the FSD companies, such as Pro a Pro France, Pro a Pro Spain, JHB, could not — but they could not compensate the negative effect of the delayed season start in France. The adjusted EBITDA at the segment West remained almost stable and amounted to EUR191 million. This was driven mostly by the sales development. Additionally, we see a sustainable trend of productivity increases. More to this later. In Russia, sales in local currency increased by 13% which is above our expectations. Despite high volatility in Russia, we are upgrading our guidance here for the segment. More on this also later. Adjusted EBITDA in Russia at constant currency increased by EUR8 million.

In the segment East, sales in local currency increased by 9%. Almost all countries in this segment contributed to the sales growth, especially Romania and Bulgaria developed very well. The strong sales growth in Turkey was also affected by hyperinflation. The reported growth is around 14%. The difference is caused by the devaluation of the Turkish lira before the closing date in June. The adjusted EBITDA for the segment East reached EUR106 million. This is an increase of EUR10 million versus previous year at constant currency following the positive sales development.

In the segment Others, reported sales grew by 30%. So that’s mainly METRO MARKETS impact here. So actually in the METRO MARKETS, especially France is developing well and contributed to that sales growth. This sales growth was around 12% versus the previous year. This sales growth was mainly a result of the investment and rollout of our digital business. Adjusted EBITDA decreased to minus EUR53 million. Please note that the previous year figures included for last time the mentioned license fee from China.

So let me further guide you through our P&L. As mentioned, adjusted EBITDA is almost on previous year level. Also, our margin development versus previous year is nearly stable. Including transformation gains of EUR3 million and EUR8 million of real estate gains, reported EBITDA is at EUR339 million. The difference versus previous year is caused by transformation gains from the sale of METRO India, as mentioned before as well. The depreciation is almost stable. Previous year net financial results included a positive non-cash currency effect related to the ruble in the last year. Without sale of METRO India effect and non-cash currency effects in previous year, the earnings per share are almost stable and land at EUR0.04 of earnings per share in Q3. Earnings per share for the first nine months at minus EUR0.13, are in line with our guidance.

But before we move on to the cash flow, I would like to — want to point out how our sCore initiative and the transformation of our stores into multichannel fulfillment centers are improving the productivity. This is an important element to improve our bottom line. In Q1, we presented a good example of Makro Poland. Their early multi-channel fulfillment center pilot included efficient wholesale-oriented space management, full digitalization of the stock management and optimized, more efficient in-store logistics.

Today, we present a first overview on the figures on a group level. Total inflation-adjusted productivity increase was above 5%. We measure productivity as a sales divided by full-time employees. And we see even around 6% increase when focused on operational productivity, mostly driven by in-store transformation, like faster and more efficient picking, replenishment, process, as well as assortment optimization. This goes along with additional benefits, increased stock availability and an increased delivery service level. We also optimize our administration productivity by around 2% which is one of my focus areas. While increasing our sales force in line with our growth strategy, also which is important to — and Steffen mentioned, to develop our sales. We will continue to focus on productivity, especially to absorb the rising personnel costs.

Moving on to the cash flow now. Generally, we see continuous improvement of stock days almost in all countries. We reached positive net working capital as well as positive free cash flow. Still, previous year was very strong due to the recovery quarter after the cyberattack, and it caused a decrease in delta net working capital and free cash flow versus previous year, as mentioned before. And we continue to focus on gaining operational efficiency through the implementation of sCore. The delta in other operating cash flow is due to the technical EBITDA offsets from the sales of METRO India in previous year. Investments and divestments are in line with our sCore execution and are almost stable against previous year. Due to the positive free cash flow, net debt of EUR3.3 billion decreased versus previous quarter but is above previous year, as mentioned before.

So for the financial year, we reconfirm our guidance of 3% to 7% sales growth and adjusted EBITDA development in a range of minus EUR100 million to plus EUR50 million. But due to the persistent high volatility and inflation in Russia, we now have the following guidance for segments. All segment channels contribute to the sales growth. The segment Germany is expected to grow below the guidance range, so there are no changes. Segment West is expected to grow within the guidance range. No changes as well. While the segment East, Russia and Others are expected to grow above the guidance range. Russia was previously expected on around previous year level. Adjusted EBITDA development per segment is following with the change only by Russia segment. Segment Others, strongly declined due to the post-transaction effects. Segment Germany moderate decline. Segment Russia, slightly increase. Previously, we said moderate decline. Segment West and East, grow moderately. Also, all other financial KPIs developed in line with guidance. Normalization in depreciation and amortization, taxes and financial results. Slightly negative free cash flow, which is around previous year level, and an increase in our net debt under consideration of prolongation of leases in following months.

So this concludes our presentation today and now we are happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We have a question from Christian Bruns from Montega AG. Please go ahead with your question.

Christian Bruns

Yes. Hello, Steffen. Hello, Eric. Christian from Montega. Thank you for taking my questions. I had some technical problems. Yeah. Thank you for — I would like to highlight some aspects. First, thank you for giving us a more detailed insight into your FSD operations and how you see the three pillars of it. And maybe you could also give us a hint on which of these channels, fine dining or casual or organized HoReCa you think you should grow, maybe also via M&A. This would be of interest for me. And the other thing I was interested in — I’m interested in is the productivity gains, which Eric highlighted, I think for the first time, was new for me. And I think it’s a very important step here to increase productivity to — also in financial terms, close the gap to your financial ambitions. On the other — and the last thing then, gross margin, that was also, I think, a good thing that gross margin in Q3 increased. And this is something I also observe. But if you see the gap between your free cash flow in the current year, which is negative, and the free cash flow of EUR600 million which is your target, that it’s more — I think it’s more about productivity gains, or is it also about gross margin increase? Where would you see the bigger chunk coming from. So thank you. Sorry for the question — for a lot of questions.

Steffen Greubel

No, Christian, very clear. And thank you very much for the questions. Let me answer the first one and give then Eric the opportunity to answer the two — the second and the third one, which is very much related to productivity gross margins that I think Eric is the proper one to answer. So when you ask me in FSD, which of the three segments or customer groups we plan to grow, so the short answer is all of them, yeah, but in a very different way. When we look at the more casual dining, that is a classical METRO/Makro topic, because it’s targeting independent restaurants. And here the main logic is to grow organically via out-of-store capability. So that means really to make more or less our existing assortments available for FSD to invest in sales force, to sell it, and to invest in infrastructure, which is mainly a repurposing in MSC logic of stores to deliver it. So that’s a number one, and it’s by far the biggest one that’s purely organically. For two and three, so for fine dining and the organized one, we are looking at rather — I mean, of course, we are growing the operations per se organically. So that’s number one. And number two here, we are also looking on opportunistic M&A, I would say. I would not say it’s a big focus, but here and there we can always find good targets that we can bolt onto our existing operations. So 80% is organic and maybe 20% is M&A.

Christian Bruns

Okay, thanks.

Eric Riegger

Coming to your second question, what are we working on and how do we close the gaps to 2030 EUR600 million. So a couple of things to mention there. We want to continue our growth with our sCore strategy. That’s our main ambition and this is what we continue to do. On the other hand, we want to improve our bottom line, so to improve our cost basis. And so we have a couple of measurements. One I mentioned before was the productivity gains. That’s an important task. It’s part of the sCore strategy as well. Having simpler assortment, relevant assortment, selling of pallets, improve the productivity there. Also, our admin productivity. So have our backwards departments more optimized over all countries. So we are currently harmonizing IT processes, as you heard. I’m responsible for IT as well. So we are optimizing our financial processes, bundling them. So that’s kind of really important to improve our productivity. On the other hand, we also look at our other costs. So we have to work on our cost structure to improve our overall goal there. But we are confident to reach the EUR600 million-plus goal for the free cash flow there in 2030.

Christian Bruns

Okay. So if I get it right, it will be more about productivity gains than gross margin increase?

Eric Riegger

Yeah. So just to comment on the gross margin. So, actually — so EBITDA margin is slightly down from 4.3% to 4.1%, because our EBITDA is kind of stable compared to last year, but the sales increased. So that’s a percentage decrease on the overall margin — so on our income margin. So we are working on different areas. So we are kind of improving them by focusing on common sourcing, private — own branded items. So this is kind of what we’re working on. Optimizing our net working capital by getting the right inventory right. So we are currently working on — in these areas and improving our margin for this as well.

Christian Bruns

Okay, thanks.

Operator

The next question comes from (Ulrike Dauer) (ph). Please go ahead with your question.

Unidentified Analyst

Yeah. Good morning. Thanks for taking my question. Can you hear me?

Steffen Greubel

Yes.

Unidentified Analyst

Wonderful. You had a very small net profit in the third quarter, which brings you to two quarter in profits out of three quarters. Your EPS guidance for the full year is unchanged around EPS breakeven. What do you expect for the final quarter and what does that mean for a possible resumption for a dividend payout from today’s perspective? Would you reiterate what you’ve said all along, dividend payout unlikely this year? How would you phrase that now? Thank you.

Eric Riegger

Just to — yeah, thank you for the question. So the fourth quarter is one of our strongest quarters. So July, August, really important for us. So, of course, we want to see a positive development there. We said in our guidance, and we keep that with the earnings per share, we are around zero. So that’s kind of where we want to end up by having a positive fourth quarter. And we will comply to our dividend policy.

Unidentified Analyst

Which means?

Eric Riegger

Yeah, there’s no dividend for — if the earnings per share is zero or negative.

Unidentified Analyst

Sorry, can you — this year or next, can you repeat that? Thank you.

Eric Riegger

So for the — so we are currently, after nine months, negative in our earnings per share. We expect that we will come around zero. Around zero means negative or slightly positive. And so we are currently following our dividend policy. And so this would be that we don’t pay our dividend if it’s negative.

Unidentified Analyst

Thank you.

Operator

(Operator Instructions) We do have a follow-up question from Mr. Bruns. Mr. Bruns, please go ahead.

Christian Bruns

Yes, hi. Christian Bruns again. I might take the opportunity if there are no others, so I’ll use my chance. I would like to have another question on Germany because I mean, it’s still lagging performance here and I think now for years and years, and which is also very difficult for your tax situation. Of course, you know that. And given this long period of underperformance, I question sometimes whether it’s the right thing to not to close any of the stores in Germany because, I mean, there must be some which are really negative. Is there any idea on this?

Steffen Greubel

Yes. Thank you very much for the question. So, A, operative result of every store is positive in Germany. So there is no store that is contributing a negative contribution margin in Germany. Number two, I think our network is a good one, but I agree with you that we need to optimize, especially the business model alongside the sCore strategy going forward. So that means very much streamlining of assortment, also taking out of assortment. That’s particularly true in Germany and especially in the non-food section. So we are massively in the moment taking out assortment and also improving productivity here. And this is in full swing in terms of transformation. I would say that in this very moment, we are in Germany progressing as we never have progressed before in the journey towards a wholesale — a true wholesale business model. FSD is growing double digit. We are more relevant for our customers in digital, it’s growing. And in the store, productivity is also moving up. So — but it’s a marathon, yeah, and it’s not a sprint, because this is a big organization and we need to move a lot of people here in terms of mindset and strategic orientation. And that’s, basically, the thing that it takes a while. I cannot comment so much what happened 10 years ago, but I know exactly where we need to head for, and I’m sure we’re going to make it a profitable business, but you cannot expect that we will do it in a month. It’s rather a game of years, yes, but we continue to do what’s right for the company, Mr. Bruns.

Christian Bruns

Yeah. Thanks. That’s good to hear, Steffen. Okay.

Operator

Ladies and gentlemen, we will now give the journalists the additional opportunity to ask their questions in German. And therefore, I will switch to German language. (Foreign Language)

Steffen Greubel

I like the answer.

Operator

(Foreign Language) There are no further questions at the moment. And I will hand back to Dr. Steffen Greubel for closing comments.

Steffen Greubel

I’m hearing an echo now. Okay. So, thank you very much for listening. Sorry for the technical problems. And, yeah, my key message is go out eating like always. So, thank you very much for the attention and see you soon.

Operator

Ladies and gentlemen, the conference has now concluded and you may disconnect your telephones. Thank you very much for joining and have a pleasant day. Goodbye.