Distribuidora Internacional de Alimentación, S.A. (DIA) Earnings Call Transcript & Summary

Welcome to DIA Second quarter and First Half 2020 Financial Results. My name is Stephan DuCharme. I am the Executive Chairman of DIA, and thank you for joining us today. I'm going to take you through the key financial and operating highlights for the quarter, including a quick update on our first half business transformation progress. Then our group CFO, Enrique Weickert, will provide a more comprehensive review of our financial performance for the first half before I wrap things up with a few concluding remarks. In terms of the key highlights, we delivered positive top line performance in 2Q '20 on the back of our effective response to the COVID-19 crisis driven by the impact of our ongoing business transformation and our continued focus on operational excellence. Customers have responded favorably to our proximity offer, and we have sustained momentum post lockdown, both at the end of Q2 and into the start of Q3. We have improved our adjusted EBITDA margin in the second quarter, and the first half as a whole, controlling costs at a time when our industry is under pressure in terms of COVID-19-related expenditure. The key financial indicators of improving trade working capital, positive free cash flow and reduced net debt are all tracking in the right direction. Moving first to Page 5, where we provide an overview of our group financial results for the second quarter. Group net sales increased over 6% year-on-year primarily due to COVID-19-related consumer behavior, as shoppers continued to rely on our stores during the lockdown period. We were able to deliver this increase through a smaller, optimized network with over 400 fewer stores or 6% less than in the same period last year, and in the face of negative foreign exchange effects that I will address in more detail shortly. Gross profit was up on increased sales volumes and the positive impact of our transformation program, while EBITDA increased, thanks also to lower restructuring costs and OpEx improvements. Labor costs were up slightly as 2019 workforce rationalization measures were offset by increased COVID-19 staffing requirements and remuneration. Adjusted EBITDA, which is effectively underlying operating profit, was up driven by improved gross margin, thanks to continued cost discipline. On Page 6, we show our group like-for-like progression since the start of financial year 2019. At a group level, the main growth driver was average basket size, up over 25% in the 6-month period, which more than offset any decrease in ticket volumes. The lockdown period, which affected each of our markets in different ways, was a significant contributor. First half group like-for-like was plus 8.7%, incorporating 2 months pre lockdown and 1 month post lockdown. And if you look at just June, we were able to maintain positive like-for-like at group level of plus 10%, with July around 8%. Moving to trading at country level on Page 7, where Spain and Portugal continued the positive trends seen in Q1, with good progression in like-for-like, driven by increased basket size. Spain, in particular, has seen high levels of home consumption, which have been maintained after lockdown restrictions began to ease. In Portugal, in particular, we have seen a good response to local measures in terms of increased frequency of stock delivery as well as continued light store refurbishment to support our fresh offer. The second quarter was a positive in terms of trading for both Brazil and Argentina, but both were impacted by strong currency effects. Brazil has seen a return to positive like-for-like since March driven by the efforts of the team in rolling out a new commercial strategy. And in Argentina, we achieved positive like-for-like against a backdrop of continuing challenging macroeconomic conditions. I am now going to give you a short update on DIA's business transformation on Page 9, looking briefly at what has been achieved during the period. In line with the road map presented at our first quarter financial results in May, Phase 2 of DIA's business transformation is underway, and defined actions are being implemented by country leadership with strategic guidance, performance oversight and capital allocation provided by the corporate center. Starting first with commercial initiatives. The core priority has been the first iteration of our assortment optimization in terms of new store layouts and planograms to deliver our improved fresh offer. This has been rolled out to around 500 stores in Spain, while 125 stores have been refurbished in Portugal so far this year. In Brazil, our strategic focus is on the rollout of a store clustering model that complements the new wider commercial strategy. We made good progress in the first half with the development of our improved private label range. In Spain, we will introduce 800 new products during 2020, with the first ones having entered the market in Q2. We also launched over 200 new products in Brazil during the first half. On Slide 10, the other major commercial development in the first half has been the continued expansion of our e-commerce home delivery offer in all markets. As we explained at Q1, we will continue to accelerate both our online grocery and our express delivery initiatives, combining in-house and partner capabilities based on the results achieved during the lockdown period. Our most developed offer is in Spain, where we saw over 1.1 million orders delivered following a coordinated offer expansion, which will continue into 2H. During the first half, we also began to roll out an updated franchise model in Spain based on greater transparency and clear incentives for our franchisee partners. One of the innovations implemented included a payment after sales framework, which postpones the payment of purchased inventory by the franchisee to the moment it is actually sold in the store. This measure has little impact on DIA's trade working capital, but provides more flexibility to the franchisee to stock up the store, which will ultimately result in increased sales for both the franchisee and DIA. This model has been rolled out to almost 500 locations. In Portugal, a new Franchise Director has been appointed to lead the rollout there, while in Brazil, the primary focus is on simplifying the existing arrangements. And in Argentina, 17 stores were transferred to the franchise model in the first half. And finally, in terms of operations on Page 12, our focus remains on ensuring excellence and reduced complexity in areas such as supplier relations, inventory management, logistics and procurement spending. A completely new supply chain function has been created in Brazil to deliver wider efficiencies with a focus on effective supply to meet weekly promotional cycles and improved balancing of stock levels. Argentina has also delivered improved supply chain performance with 26% fewer out of stock levels in stores and 7% fewer in warehouses. That's all for me for now. I will now hand over to Enrique Weickert to deliver the financial review before I provide some concluding remarks.

Good morning, ladies and gentlemen. Enrique Weickert speaking, group CFO of DIA. It is my pleasure to cover the main highlights of the financial review section of this presentation with a focus on first half figures. Starting with a quick overview of the group's P&L in first half 2020 versus the same period last year on Page 14. Net sales increased over 2% on 6% fewer stores as well as adverse currency effects in Brazil and Argentina. The underlying increase in sales density is and will be a key driver of our business transformation. COVID-19-related costs were EUR 26 million in the period and include the purchase of protective equipment and extraordinary bonus and extra hours paid to employees, additional workforce requirements to cover quarantined staff and costs related to disinfecting stores and warehouses. In terms of the split of these costs, EUR 22 million were incurred in Q1, considering that some of them were one-off costs. This amount was reduced to EUR 4 million in Q2, which provides a better sense of what we may be incurring in the following quarters. As we stated in Q1, some elements may become part of our ongoing cost structure, but cost discipline and tight monitoring of overtime and labor KPIs should help us keep new costs under control. Gross profit up 21.6% on sales, up from 19.5% last year, improved in spite of one-off COVID-19 costs we just mentioned as well as logistic costs to support enhanced fresh offer. Labor costs remained stable as workforce rationalization measures carried out in 2019 were offset by higher staffing requirements as well as COVID-19-related bonus payments. EBITDA increased to $176.9 million primarily for the increase in gross profit and thanks to the sharp reduction in restructuring costs, following the completion of key initiatives during 2019, and despite $26 million COVID-19 costs. Adjusted EBITDA, which we remind you, strips out IFRS 16, IAS 29 and restructuring costs, improved by 1.7% as a percentage of net sales on the back of operational excellence initiatives implemented in 2019, with significant margin improvements in all countries. Financial results include EUR 79 million of negative FX impact in Brazil, of which $61 million relate to euro-denominated intra-group structural financing, with the remaining $18 million resulting from U.S. dollar and euro-denominated bank financing of DIA Brazil. This is partially offset by an improved interest costs and reduced refinancing expenses. Looking now at adjusted EBITDA by market on Page 15. Adjusted EBITDA margins increased in all regions, despite COVID-19 costs and some legal contingencies recognized in Spain, together with the FX effects in Brazil. These improvements were achieved on the back of operational excellence measures implemented during Phase 1 of our transformation process. Moving to Page 16 and the evolution of our net financial debt during the first half since year-end 2019. Net financial debt improved by EUR 69 million on the back of EUR 62 million positive cash flow from operations; improved trade working capital inflows of EUR 37 million, thanks to the net sales increase; and an improvement in inventory, as well as our continued CapEx discipline, as already mentioned. Moving to debt maturity and available liquidity on Page 17. The debt maturity profile was significantly enhanced following the long-term refinancing agreement and bond repayment in July 2019, with the largest maturity now moved to 2023. The financial agenda will now focus on the 2021 bond refinancing, on which, as announced, alternatives are being analyzed, including a debt for debt exchange offer and consent solicitation. The rest of the non-syndicated revolving bilateral facilities are in general being renewed at maturity in the normal course of business. The EUR 200 million L1R super senior loan facility has been fully drawn during the second quarter as a condition proceeding to extending for an additional year, the EUR 71 million super senior supplier facility, thus increasing, as a result, the balance of cash and cash equivalents. Available liquidity reaches EUR 435 million, with an enhanced debt maturity profile following the long-term refinancing agreement on bond repayment in July 2019. Looking finally at the balance sheet on Page 18. Trade working capital increased by EUR 37 million since December 2019 due to a decrease in inventories once initial stocking to meet supply requirements during the COVID-19 pandemic had been absorbed, an increase in trade payables related to incremental sales, together with a reduction in trade receivables. Our suppliers have been very supportive all through the pandemic, and that has helped us keep stock levels and product availability indexes at very satisfactory level. In relation to payment terms with suppliers, they remain stable at very similar levels to those prevailing at the end of 2019. The net shareholders' equity of the parent company, DIA S.A., which is a key metric under Spanish law, amounted to positive EUR 194 million versus EUR 223 million of December 31, 2019. And with that, I now hand back to Stephan for some concluding remarks.

Thank you, Enrique. A few concluding remarks from me. DIA delivered positive top line and financial performance in the second quarter, performance underpinned by our effective response to COVID-19. We have seen sustained like-for-like growth as lockdowns eased across our markets in June and July. In the second half of this year, we will maintain our focus on the transformation road map initiatives, which are based on the key pillars of our improved commercial value proposition and franchise model, underpinned by continued improvement of operational efficiencies. Thank you very much for your attention.