Jerónimo Martins, SGPS, S.A.
Q4 2023 Earnings Call Transcript

Published: 7 Mar 2024

[Operator:]

Good day, and welcome to the Jerónimo Martins Full Year 2023 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Ana Luisa Virginia, Chief Financial Officer of Jerónimo Martins Group. Please go ahead, madam.

[Ana Luisa Virginia:]

Thank you, Sandra. Good morning, ladies and gentlemen, and thank you for joining this call. Before I invite you to go through the Jerónimo Martins' 2023 full year results, I will give the floor to our Chairman and CEO, Mr. Pedro Soares Santos. Mr. Pedro Santos, the floor is yours.

[Pedro Soares Santos:]

Thank you, Ana. Good morning, ladies and gentlemen. Before I give the floor to Ana Luisa, let me take a couple of minutes to share with you, how I feel about 2023 performance and also how I see the months ahead. As you may remember in the last couple of years my remarks regarding the operational environment has been very consistent with the words like uncertainty, pressure and inflation clearly setting the tone. It was against the persistently challenging backdrop in the three countries where we operate that once again we delivered what I consider a remarkable set of results. In 2023, we surpassed two very meaningful milestones, the €30 billion in sales with the relevant help from inflation and the €2 billion in EBITDA. These indicators alone when put into perspective allow us to tell a story of growth, driven by a clear priority, firm execution, efficiency and profitability. In fact, since 2019, we have been living through a very demanding and risky times, a pandemic a long lasting war in the neighbor countries to our most important market, inflation rates at the peak and the more recent war in Gulf. This tragic conflict in the Middle East is raising tensions, namely in the Red Sea and the Gulf of Aden further impacting international trade. Between 2019 and 2023, we open more than 1,750 stores mostly in Poland and Colombia and added more than €13 billion of sales to our consolidated sales while decreasing by around 40%, our current footprint in relative terms per each €1,000 of spend. During this period, we also invested above €4 billion in our business, of which not surprising most of them -- most have had in the Biedronka model. And we also doubled the net profit attributable to Jerónimo Martins. In the five years period, the accumulated net profit surpassed €2.5 billion. Many things have changed in the last five years some even dramatically, but our business priorities remain the same to always put sales first to keep customers with us and to protect volume as a means also to preserve profitability. In the period, Biedronka grew sales by over 80%, reinforcing its role at the group -- as the group main growth engine and became Poland's biggest employer. All our banners irrespectively of the market they are operating in committed themselves to reinforce price leadership and market share. Under many sources of simulators pressure, our teams kept focused and worked hard to deliver impressive sales growth year-on-year. This was true also in 2023. Inflation did help sales on one hand but also further pushed costs up, namely personnel and rents. When looking at the last five years we see both an consistent trends of cost increase and price investments pressuring EBITDA margin. Since the end of 2023, a dangerous combination of persistent cost inflation and rapid decrease of food inflation has presented itself. Our main food retail business are already operating with deflation in their baskets which makes comparatives with the previous year even tougher. We also experienced an increase of competition particularly in Poland and of the fight for volumes and market particularly in Poland and for the Polish market we share again that -- let me share again. This necessarily means more cost and therefore further pressure on margin as we will not put our price leadership at risk. We will also not compromise on the remuneration package of our people. In 2023 all our companies increased salaries and we invest nearly €360 million in bonus and their incentives and also in social responsibility and well-being measured targets at our employees. In January of 2024, our biggest companies rose their minimum salaries again and will also have nearly €100 million more in bonuses, payments to our operational teams and in the three countries with regard to 2023. It's worth mentioning that in the last five years we have invested more €1.1 billion in bonus paid to our employees to acknowledge their contribution and sense of commitment. We will also keep investing in the expansion and quality of our network including the development of the logistics infrastructure in the three countries. And we are enthusiastic about Biedronka, internationalization to Slovakia and the prospective of the first store opening by the end of the year. We expect nothing to be easier for us in 2024 and we are prepared to keep working very hard to grow while reinforce our competitive position and meet our goals. We expect further cost discipline from our teams and sacrifice of all our non-essential expenses. At the same time, we will keep the strategic investment in our business and our people and to guarantee that real progress is made in the sustainability-related targets we set for ourselves. Thank you very much. Ana Luisa, now it's your time.

[Ana Luisa Virginia:]

Thank you, Chairman. As a reminder in our corporate website, you can find the results release, a slide presentation and a media presentation for the year. 2023 was another year of remarkable performance for the group. Against the backdrop of economic slowdown, consumers turned more cautious and price-sensitive despite the progressively lower food inflation registered throughout the year. All our banners worked relentlessly to keep prices low and offered compelling promotional dynamics driving sales to grow by 20.6% and surpassing the €30 billion milestone. At constant exchange rates, sales increased by 18.1%. The strong sales delivery mitigated the impact of price investments and cost inflation, while EBITDA margin was 7.1%, 22 basis points down on the prior year EBITDA in absolute terms grew by 17% to reach €2.2 billion. Despite margin pressure our sales-focused strategy allows capital turnover to improve and protect the profitability with pre-tax ROIC reaching 26.8%. While working hard every day to win consumer preference, we also executed an ambitious investment program encompassing all companies. All-in-all, we ended the year with reinforced market positions, improved store networks and enhanced logistics infrastructure and a strong balance sheet that included a net cash position excluding IFRS 16 of €1.2 billion by the end of December. We also continued to firmly follow our path to accomplish and deliver our corporate responsibility agenda and targets with important steps taken in all five pillars. Amongst the key achievements of the year, I would highlight the following

[Operator:]

Thank you. [Operator Instructions] We will now take the first question coming from the line of João Pinto from JB Capital. Please go ahead.

[João Pinto:]

Hi. Good morning, everyone. Thanks for taking my questions. The first one on margins in Poland. Let me break it down in two. Firstly, on gross margin, do you see any room for gross margin to increase? I'm just trying to understand the balance between better mix and lower PPI versus the tough price competition in the market? The second part of the question on electricity costs, how much could be the tailwinds in 2024? Of course, this is volatile, but if you could share with us what do you factor in in your budget would be great? My second question on CapEx plans. Can you tell us how much do you include for Slovakia? And how much do you include for the deposit return system in Poland? And finally, in Colombia, why are you slowing down expansion? And do you see any risk to the 2300 stores target for 2028? Many thanks.

[Ana Luisa Virginia:]

Hi, João. Good morning. So on margins in Poland and particularly in gross margin. Of course, we have to take into consideration that as you mentioned, we are having several moving parts. So what we think is that we will have to continue to invest in prices. And this is not just the -- of course, it's the tougher competition in the market and is also of course the willingness to keep our price position and really lead the market in terms of price as we always have done with Biedronka. As to a better mix, again, it will depend on how the consumer will behave. Until now and what we saw in January although anticipating a quite significant increase in salaries we didn't see really a pickup in the consumer demand. So, it will -- really will depend. I think that on the positive side, we can have that. So, if the consumer reacts to the fact that it has more available income, it will be on the positive. Also if some of the suppliers will want in a deflationary context also get more volumes, they may be able to also invest with us and this is on the positives. But again until now what we will know is that we will fight for price competitiveness and that will put pressure also at the level of the gross margins. As for the energy costs, I think that we made it clear that it really helped in the second half of 2023 because it compares with a very high prices in 2022. Until now the markets in energy are quite stable and/or going down. But we also have to consider that there is a transition to be made still in terms of climate change and Poland will have to do that. And this may put further pressure on the energy costs. What we are doing from our side of course is to prepare to mitigate that. And that's why also we are installing photovoltaic panels in our stores to really have some savings as that is basically the production of those panels is to be used in the store. It's not really a very significant part of the store, but it's nevertheless almost 15% of savings that we can have and so it's quite important for us. This being said, I think that it will not be the energy. It will not be the main cost lines increasing. I think that as we expect growth in sales that line we believe it will be further allowances. Where we see a high cost really is of course, on our major heading is everything that has to do with salaries and wages and it's the rents that really follow not the year's inflation, but the prior year's one, which was in Poland above 10%. As for the CapEx, in terms of the number of stores in Colombia, it's true that it's slightly less than the last year and it's slightly less than the average that we would need around 200 stores to reach our targets, but we don't see it as an issue. I think that our main priority is really finding the best location for now and ensuring that while the market is still subdued and take that opportunity to really grab the best locations in the market and then we can always accelerate if we want to. So, I think that the ambition remains. Of course it may be difficult, but this will -- I don't think it puts really in danger the ambition that we can accelerate if we want in the following years. As for the CapEx in Poland -- as for the deposit returns system, so it is foreseen and included in our CapEx. So, from 2025, we will have to have the deposit system in place. This is going to be a CapEx from the company and we believe it will be between €80 million to €100 million for all the stores. And -- but this is included in the €1.2 billion. As for Slovakia, yes, we are preparing the logistics infrastructure and per stores, but this is marginal. So, we are -- at this point, I don't think that we need to disclose it because it really will depend on the ones -- and very difficult we don't hide. Because of course all the licensing process all the -- and we don't want to just open stores, we want to open stores where they should be opened and to really test the concept and test the market in Slovakia, but it's very marginal, João.

[João Pinto:]

Thank you, very much.

[Ana Luisa Virginia:]

Thank you.

[Operator:]

Thank you. We will now take the next question from the line of William Woods from Bernstein. Please go ahead.

[William Woods:]

Thank you for taking the question. The first one is just on your outlook for inflation. I think you've mentioned deflation in your report a number of times. Do you think that we will see actual deflation i.e. negative pricing? Or do you think, it will just see disinflation, the continued falling of inflation to a lower level? And then the second bit is on the EBITDA margin pressure in Poland. I suppose, are you building the greater than -- the greater margin pressure in 2023 on a view that there is no recovery or little recoveries in the Polish consumer throughout the year. And that's what should we think of that as a worst case scenario? Thanks.

[Ana Luisa Virginia:]

Okay. Good morning William. I will try to address your questions, but I have to tell you that we were hearing very badly. So I believe that you referred to deflation. So what we said and even the Chairman has confirmed that in his introduction -- introductory speech. We are working with deflation. So, prices are going down compared with the prior year prices. So what happened in 2023 is that, we -- prices went up quite significantly in the beginning of the year still and peaked in the first quarter then there was disinflation. And what we saw in the last months of the year in 2023, so the exit in terms of prices was already deflation in the main categories. Now, in the first months of the year, we are having decreases in prices versus the prior year. So it's really deflation in the market. And it's not just in Poland. We are also seeing that in Portugal and in Colombia. Because of course, you have first of all, commodities, prices are going down and this is overall. And then of course, you have all the players also wanting to fight for volumes and reacting and wanting to grab a piece of the market share in a market that is getting lower than it was before. On the margin pressure, I think that's the worst case scenario of course is, if the consumer does not react to the fact that it has more available income at least in Poland. That's -- I understood that the question was for the margin pressure in Poland. But we are seeing that we are not -- currently, we are not really seeing a massive trade up. We are being able to grow in volume. But of course, this is a very challenging context as we say, because with deflation at top line and inflation on quite significant cost headings, this will put further pressure not only on the gross margin. If the -- as I said, if consumers do not react but also on our EBITDA margin.

[William Woods:]

Great. Thank you. Just to follow up on the deflation. Do you think, you'll see deflation across the whole basket in 2024? I appreciate there are some commodity-driven products that are negative, but do you think it will be across the whole basket?

[Ana Luisa Virginia:]

I think that is the most possible scenario for at least the first half of the year, definitely. And even so, you have to take into consideration that, even with deflation, prices are still high. So, considering what they have increased in the last two years, so we are not -- prices are lowering, but it comes from a very high level and that is also part why or partially why the consumers remain quite cautious.

[William Woods:]

Understood. Thank you.

[Ana Luisa Virginia:]

Thank you.

[Operator:]

Thank you. We will now take the next question, coming from the line of Viraj Brahmbhatt from Citi. Please go ahead.

[Viraj Brahmbhatt:]

Thank you. Good morning. I have two questions if I may. So the first one is for store openings for Biedronka. You've noted 130 to 150 net openings. But you could give some more color, please? I guess what's the split of the small large formats in Poland perhaps the expected average store size? And what's the split between Poland and Slovakia? It might be too early for Slovakia but it would be helpful. And the second question is for Ara with notable increases in minimum wage in Colombia while Ara is understandably protecting its price leadership also thinking about the store openings and maturity playing through. How do you expect the margin profile to go forward?

[Ana Luisa Virginia:]

Hi, Viraj. Good morning. So on the openings of Biedronka from those 130, 150, we believe that around 40% of those will be in smaller towns, so what we call our efficiency stores that are really adapted to a lower number of customers in the area of influence of the store. And for Slovakia, as you said, at this point, it's very premature. Of course, we really want to open and we think that we are not considering to open just one store. But this being said, it's going to be – its still quite challenging to open stores. So at this point, we don't commit with any definite target for 2024. As for our Ara, it's true that the market continues to be very challenging. We had as we mentioned negative growth in real terms so volumes didn't increase in the country on the contrary throughout the whole year. We don't expect a major pickup at this point as the economy is still not recovering. This being said, again, the company will have to continue to invest. What we are really doing is preparing even to have better saving opportunities for the family. So betting on more relevant promotions. What we have to do? On the positive side of course, we will have the recovery somehow of the stores that are less mature from one hand. And also we will be – and we already did work on – even on our cost structure to be the most efficient possible, if we need to further invest in margin. So we are not expecting really a big pickup in margin considering again, that we will continue to invest in pricing.

[Viraj Brahmbhatt:]

Very clear. Thank you.

[Ana Luisa Virginia:]

Thank you.

[Operator:]

Thank you. We will now take the next question from the line of José Rito from CaixaBank BPI. Please go ahead.

[José Rito:]

Yes, hi, good morning to all. So I have three questions. The first one on the gross margin just a clarification. You mentioned that we have a lot of moving parts, so the company's – gross margin in the company is investing in prices you have also potential through that. Suppliers also may bet on those players that have increasing volumes. But on the specific case of Biedronka, what is in bulk on your target? Is gross margin going up in 2024 flattish or eventually going down. So that will be my first question. The second question on higher competition in Poland in 2024, if you can provide, which players have been more aggressive at the beginning of the year? And finally on the working capital side, there was four days reversion in 2023. You mentioned that eventually, we could have further investment in 2024. How many days we could still see working capital as a percentage of sales declining in 2024? Thank you.

[Ana Luisa Virginia:]

Thank you, Jose. On the gross margins, as I said, at this point I believe we do not have visibility. What we will have to be prepared is really to maintain competitiveness and price leadership. In what we consider as it will happen in fact in all food retail markets under this kind of context is that we may have to continue to invest. But at this point I cannot say, because as I said, it will really depend on the mix on the level of price investments, which we expect to be quite significant. And also, on how PPI -- so the inflation even and the willingness of the suppliers to invest to further recover their market shares, will be willing to invest with us to really drive the market. So, on that I think that we cannot commit on any guidance on gross margin. And as for high competition, what we believe -- so this is now more visible in Poland, but we expect really a rise in competition, in all food retail markets. As I mentioned, the food inflation will no longer be a driver of growth. The delay in high cost inflation, so the fact that wages are increased the following year, rents are increased the following year, will put further pressure not only of course in Biedronka, but in all players in the market. And so, the only way to protect profitability is continuing to fight for them. And so, what we will think it will happen, is what is already happening is in a very competitive market, competition is getting tougher. Of course, there are some players that are a little bit more tough than others, because they have also or they play exactly on the same growth drivers, which is price. So, basically the ones that we are seeing more aggressive are the discounters and Lidl. But this is a normal reaction to let's say, all the food retail dynamic in the last years where Biedronka really gained, a lot of market share. And now, as the market is being pressured with deflation at the top line and inflation at the cost line, this will put pressure and puts pressure also to be more aggressive to get sales. So what we are seeing is really is, a raise in the communication of price by all players. As for the working capital, it was four days. As for the future, it really will depend, Jose. Because in fact, you have part -- one thing is of course, the terms of payments. And what we are planning is really that we will have to invest on that definitely. We are seeing some of our suppliers and curiously even, some big suppliers wanting to decrease price terms even because otherwise, they will have getting into trouble, with the kind of constraints in funding really from the banks and from other sources. And of course, the level of -- so interest rates that are demanded. But it's not just interest rates, it's really a constraint in funding. And on the other hand, you really have in -- the fact that inflation and the level of growth really influences also the way that the working capital evolves. So, if you have -- even if you have the suppliers investing more with us, the cost of goods sold will go down. And so even working capital when growth tends to slow down being it for deflation or being because of volume, this will have the opposite effect that it has for instance in 2022, when the inflation trajectory was going up. So the level of suppliers at year-end was quite significant compared with the prior year. So, this really will depend and will depend also on the level of assets.

[Q – José Rito:]

Okay -- Just on the gross margin, question on -- in terms of the suppliers there is a change on the suppliers willing to offer better terms now versus what you comment on October? Because I think that in October you mentioned, that you were seeing that suppliers were willing to bet on those players that were offering higher volume growth. Is this the same -- are you seeing any change versus what you mentioned in October?

[Ana Luisa Virginia:]

What we mentioned in October is that what would make sense is in a market where really the A brands were losing share in several markets that in principle, if at a certain point if they will want also to increase sales and protect their own profitability we believe they should be willing to invest with us. And -- but of course that will depend on the dynamics. In principle that would be what makes sense.

[José Rito:]

Okay. Best of luck. Thank you.

[Operator:]

Thank you. We will now take the next question from the line of Michal Potyra from UBS. Please go ahead.

[Michal Potyra:]

Hi. Good morning, everyone. I have most of my questions have been answered. I have two questions -- follow-up questions, please. The first one is on VAT on basic food in Poland. It's unclear what may happen during the year. But I'm wondering what is embedded in your guidance, please? Are you accounting for the VAT to be increased soon? Or that increase to be delayed? That's the first question. Thank you.

[Ana Luisa Virginia:]

Thank you, Michal. I think that's -- well VAT unfortunately here can only pressure consumers but not helping retailers as you can imagine. So at this point what -- our base scenario what the government has said that probably they will put back the VAT on essential products. But from -- again from a consumer perspective, it's not good because of course it increases the prices for consumers. But for the retailers, it can only put further pressure, because of course, it is not -- it is an amount that is not going to their sales or to their net sales. But -- and so it can be inflation for consumers but not -- it will not be an inflation for our basket.

[Michal Potyra:]

Yeah. That's all very clear. So I just wanted to make sure that you anticipate in your declining EBITDA margin guidance that the VAT will be reversed right? Hello, can you hear me, please?

[Ana Luisa Virginia:]

Hello, Michal. I don't know, if you hear the -- my answer it was, yes.

[Michal Potyra:]

From the next quarter -- is that from the second quarter do you assume?

[Ana Luisa Virginia:]

We are considering that, this will be put back by the government as it was announced. But for now, it's something that it will -- as I said, we'll put just pressure on consumers not from our side.

[Michal Potyra:]

Understood. And just another question, I think, I asked about it a year ago. I have this question about those exceptional bonuses. I think it's like four years in a row. So, I'm now thinking that you pay those bonuses. So do we still see it as a non-recurrent, please?

[Ana Luisa Virginia:]

On that Michal, so this is bonuses that is decided -- the one that we are mentioning these are bonuses that are decided on top of what we provide as remuneration and performance bonuses. So, this is a discretionary bonus decided at the level of the Board of Jeronimo Martins. And it is clearly, given to our employees being mentioned that it's on an exceptional basis. It's true that we have been since 2020 considering the COVID and then the high cost inflation, and then increasing the cost of living that as we can we have been providing this to our employees as a way of recognition. But of course, it's something that is not a given. It's really a discretionary decision made at year-end.

[Michal Potyra:]

Same as in our industry. Understand. Thank you.

[Ana Luisa Virginia:]

Thanks. Michal.

[Operator:]

Thank you. We will now take the next question from the line of Clément Genelot from Bryan, Garnier & Co. Please go ahead.

[Clément Genelot:]

Yes. Good morning. Thank you. Just two questions on my side. So the first one is just to come back on the working cap. Are you trading off shorter payment times for let's say higher back margins or lower Ara purchasing prices? Or are you just offering what I would say payment times just for free. And then just to come back on the competitive landscape in Poland. So if I'm right there we're going to just have three players fighting while the cheapest prices being Lidl, Auchan and you. So are you just Ana responding to the Lidl at this stage? Or is it also Auchan becoming more aggressive? And do you would expect other players historically not being so cheap to try to really join the pack of Lidl you and Auchan to really – very be cheaper players? Thank you.

[Ana Luisa Virginia:]

Thank you, Clement. On the working capital so in some cases of course I believe that we are betting and the fact that we are willing to decrease the terms of payments has really to do -- and these are particularly the suppliers that are more critical. We are talking about the fresh product suppliers and the private label suppliers. So in turn of course the idea is to not lose any alternatives in our offer first of all and to really make sure that we have the best offers in place and this is something that is not for free. So of course if we have -- if this allows our suppliers also to provide us a better margin because of better cost price conditions of course this is something that we will take into consideration. So it's not just something done from a financial point of view to have alternatives in our supply chain. It's something that our commercial teams also know. And I think that this increases the engagement of critical suppliers with our banners. As for the competitive landscape what we assume Clement is that I think that all the market in fact will have to turn more competitive if they want to strive in to 5%. So it's true that we are seeing some players are being more vocal than others particularly on the communications side. But I think that all of them will have to turn to also look at prices even the ones that have in large assortments et cetera. So in fact I would say that currently even Carrefour, Auchan all the players are really communicating price because this has become really even more as a drive to -- or more important KPI to drive that. And so what we expect is that every player will have to go and communicate price more aggressively -- in a very aggressive way.

[Clément Genelot:]

Very clear. Thank you.

[Ana Luisa Virginia:]

Thank you.

[Operator:]

Thank you. We will now take the next question from the line of Nicolas Champ from Barclays. Please go ahead.

[Nicolas Champ:]

Hi. Good morning. Most of my questions have been answered, but I have two technical ones. Regarding Q1 I mean could you elaborate on the Easter impact during the first quarter? Is it possible to have a view of the magnitude of the tailwind? And second the technical one. I mean how do you see your net debt position evolve this year? I mean should we expect a reduction of net cash – sorry, net cash position by the end of 2024? Thank you.

[Ana Luisa Virginia:]

Hi, Nicolas. So on Q1 it's true that we will have a tough comparison versus last year considering the -- that we don't have the tailwind as the part of the inflation. But as we have two calendar effects that have to be considered. One is the leap year. And that -- we think that will account for more or less one percentage points in terms of growth. And the other one as you say, Easter will take place in the first quarter, and we think it will be around two percentage points for our like-for-like sales at the group level. As for net debt, the base scenario that we are assuming even considering the level of dividends that we will be distributing this year is that our net cash position will go down. So, currently excluding IFRS 16, of course, if its IFRS 16 we haven't been increasing because we are investing. And when you capitalize more leases, most of the stores are leased, the ones that we opened. So it will tend always to go up, if we consider with IFRS 16. If we consider just on a cash, a pure cash base what we assume is with the level of CapEx and with the working capital that we will have to invest and dividends that we'll have to pay is the level of cash generation will, of course, probably drive a lower net cash position at year-end.

[Nicolas Champ:]

Understood. Very clear. Thank you.

[Pedro Soares Santos:]

Thank you.

[Ana Luisa Virginia:]

Thank you.

[Operator:]

Thank you. We will now take the next question from the line of Nick Coulter from Citi. Please go ahead.

[Nick Coulter:]

Hi, good morning. Three quick ones if I may. I'll go one by one. Firstly, just to follow-up on Nicolas' question on balance sheet. You do have a very sizable cash balance, which clearly gives you certainty in an uncertain world. But how do you think about balance sheet efficiency going forward please, noting it's a while since you paid a special? Thank you.

[Ana Luisa Virginia:]

Hi, Nick. So, on the balance sheet as we know, we believe that we should have full flexibility on our balance sheet. We are facing a period that -- as we said, it is and probably this is a strong word but it's what we really feel. It's a dangerous combination of having no or smaller growth. So growth is getting tougher at the top line, and even if we strive for volumes, which we will do because we have been increasing our volumes this will add further pressure on costs. So you have not only the negative impact from the pressure on the P&L. And this, of course, has an impact on cash as we want to grab the opportunity to continue to invest to improve our businesses. And we have to have -- and we want to have the flexibility of being able to also help our suppliers to cross this quite trouble times with us. So all-in-all, we prefer to maintain the flexibility and that's why we keep this on the balance sheet. This being said in terms of cash. Of course, we have a different situation in the different countries. We have chosen to naturally hedge our investments in the different countries. And this means that we are having debt increasing in Colombia in Colombian pesos. And this, of course, will increase the interest expenses also. And then we have the other countries where we really need the flexibility to continue to invest all across the board if we have opportunities to grab as it is the case of Poland and Portugal.

[Nick Coulter:]

Very good. Thank you. And then the second one, I guess, as your ability to leverage SG&A sales, how do you think about Biedronka's basket differential to market inflation? It seems that you're really taking the opportunity to dramatically improve your price position rather than just sustain it over the past couple of years. Does that normalize? And may I ask what you're solving to? I assume you're solving to maximize sustainable EBITDA, but if you could kind of talk through your thought process please? Thank you.

[Ana Luisa Virginia:]

So, of course, we use as a proxy even of our competitiveness, the difference that we have for the country's inflation and this has been widened. But, although, we have, I must say we have some questions regarding the level of food inflation that has to do really with the fact that all players are already decreasing prices. And you don't see that really on the food inflation in the country, which is something that surprises us a little bit. So this is really a proxy of competitiveness. But again, for us and this is something that we measure quite on a very regular basis versus our peers. We maintain the competitiveness, and that's what we will continue to do. Of course, we know that this may be further pressure on the gross margins. As I mentioned, the rest is going to be the way that the consumer will also react. And if it's going to increase volumes or if it's going to trade up to see what is the final or operational leverage that we can count on. At this point, we are assuming and we don't hide that it's going to be very challenging and we are assuming that we will not be able to dilute the total increase in wages and the increase that we are having in rents. And it's going to be very challenging. And that's why we are saying that probably our EBITDA margin in Poland will decrease or may decrease even further than it did in 2023 because this is the most possible scenario.

[Nick Coulter:]

Okay. Thank you. And then just a follow-up on your comments on working cap and end-to-end supply chain. Your gross margin this year has been remarkably resilient given the vast inflation versus input cost. Could you talk to the shape of that gross margin evolution? And maybe the role that overriders or trade dollars have played in 2023 or mix? Or just help us understand the shape of the reported year's gross margin. So we can think about how it plays through in 2024 please?

[Ana Luisa Virginia:]

So Nick on that, of course, the fact that you, and that's why we usually use the proxy of the food inflation in the market to see our competitiveness and not so much the gross margin, because of course you have several effects. For instance, in Pingo Doce when you increase the weight of meal solutions, this category has higher gross margins. And then -- and so it doesn't mean that you are not investing in other categories. Just it's the mix that it's also contributing positively to that. For instance, Recheio was exactly the same. So the recovery of HoReCa. So you have several...

[Nick Coulter:]

Sorry, I was not thinking about Biedronka really than Portugal.

[Ana Luisa Virginia:]

Okay.

[Nick Coulter:]

Because that's the way the group -- it looks remarkably resilient, I just.

[Ana Luisa Virginia:]

And it is. But that has really to do also to the fact that first of all, you didn't saw a major trade down as it happened in other markets in Poland. So as we mentioned, the consumer was cautious, but the fact is that what we saw in fact was in terms of the categories, we didn't see so you didn't have the same kind of increase in private label products or the -- so much of a trade down in Poland in 2023. Now, of course, it may be a different thing depending on the toughness of the competition, because as I said, this year you won't have the help at the top line of the inflation as a driver for growth for any of the players. And this may lead of course to more competitiveness in the market or more competition in the market and having to have further investments even on prices.

[Nick Coulter:]

Okay. And just one cheeky one if I may. You kind of talked to the second half inflation deflation environment being better. So it kind of feels like you're talking to the potential or kind of transitory deflation what kind of gives you that shape into your forecast or thoughts and then I'll go away? Thank you.

[Ana Luisa Virginia:]

No issue. Nick, you can continue to question. No problem. So for what we mentioned for the second half or what we say is that the first half, of course, deflation will be more important because of the comparison with the last year. But it doesn't make it more or it doesn't make it easier for the second. Because even if deflation is lower or you have -- even if by any chance, you have the possibility of having inflation versus last year, the fact is that you are having lower prices already. And that of course, is not helping sales to grow at the same level. So it's a question of comparison with the prior year in fact.

[Nick Coulter:]

Got it. Just the comps, not SG&A is getting through into inflation. Okay. Great. Thank you so much.

[Ana Luisa Virginia:]

Yeah.

[Operator:]

Thank you. There are no further questions at this time. I would like to hand the conference back over to Ana Luisa Virginia for closing remarks.

[Ana Luisa Virginia:]

Thank you all for your questions and for attending this conference call. 2023 was another outstanding year and we are happy that we have navigated the last three tricky years, never agitating to defend price competitiveness to invest in our businesses by execution -- by executing ambitious CapEx programs and by protecting our teams and our supply chain. We are aware that this work will be paramount in a period when our group will face with extraordinary severity, the combination of deflation at top line and high inflation on cost. In this context, we will remain focused on sales performance, while working to enhance cost discipline and operational efficiency as the only way to limit the impact on our profitability. Thank you once again and I wish you all a nice day.

[Operator:]

This concludes today's conference call. Thank you for participating. You may now disconnect.