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

Good morning, [Foreign Language] Welcome to DIA's full year 2020 financial results. My name is Stephan DuCharme, I'm the Executive Chairman of the group. Thank you for joining us today. I would also like to take this opportunity to introduce you to the group CFO, Jesús Soto, who joined us at the end of last year. First, I'm going to take you through the key financial and operational highlights for 2020, including a quick update on the business transformation progress over the last year. Then Jesús will provide a more comprehensive review of our financial performance for the full year before I wrap things up with a few concluding remarks. DIA's strategic road map is fully on track based on our commitment to operational excellence, and focused on the new franchise model, our improved commercial offer as well as online expansion. In 2020, we delivered a continued positive progression of topline growth and positive adjusted EBITDA performance. This clearly demonstrates that the ongoing business transformation, supported by DIA's improved financial position, is showing results. Our employees and franchisees were able to effectively serve customers during COVID-19, boosted by the accelerated expansion of DIA's online and express delivery offer. I'm extremely proud of our teams who rose to the challenge of becoming a true neighborhood food retailer when their communities need it the most. Our new organizational model, characterized by a devolved, empowered country leadership, with support from a lean strategic corporate center is an important driver of this. DIA can also now rely on an improved, stable, long-term capital structure, thanks to the successful recapitalization and refinancing solution led by LetterOne and announced in November of last year. Once the terms of the proposed solution are completed, we will communicate them to the market. As a result, our teams are laser-focused on their day-to-day work, being closer to our customers, franchisees, suppliers and employees. Trusted long-term relationships are the foundation of the transparent performance-oriented business and business culture we are creating at DIA. Moving first to Page 6, where we provide an overview of our group financial results for the full year. Group net sales were stable year-on-year, even though our store network is 7% smaller and group net sales were impacted by the devaluation of the Brazilian real and Argentinian peso. This result is thanks to our ongoing transformation effort as well as COVID-19-related consumer behavior, as shoppers we're able to continue to rely on our stores during the lockdown period, and we were able to offset the lack of tourists in the peak holiday season both in Spain and in Portugal. This performance also offset currency effects from Brazil and Argentina. Gross profit as a percentage of sales rose, benefiting from positive operational improvements. Adjusted EBITDA, which is effectively underlying operating profit, rose significantly in 2020, driven by the improved gross margin and supported by our continued focus on cost discipline. This underpinned positive cash flow generation from operations and allowed DIA to reduce net debt in line with its plan. On Page 7, we provide an updated group like-for-like progression since the start of financial year 2019. Throughout each quarter in 2020, DIA achieved positive group like-for-like growth, reaching 7.6% for the full year, covering both pre COVID and post lockdown periods. The lockdown period, which affected each of our markets in different ways, was clearly a contributor to group like-for-like as restaurants, schools and offices were shut and people prepared meals at home. There are a number of positive indicators that point to underlying progress, thanks to our transformation efforts across all markets based on our optimized assortment and improved operations. In particular, higher average basket size, up 24.6% for the full year, more than offset any decrease in ticket volume as customers changed the way they shop at DIA stores. I would also like to emphasize the strong performance achieved in Spain, with 11.3% like-for-like growth, driven by a continued emphasis on our fresh assortment, and the positive customer response to our new store layouts, not to mention our expanded online offer. DIA's new organizational model, which is based on empowered country leadership with support from a lean corporate center, has been a key contributor to performance. Over the course of the year, DIA made several high level hires with new leadership for Spain, Brazil, Argentina and Clarel, in line with our philosophy of strong local country leadership. I would like to thank Marcelo Maia, who handed over the CEO role in Brazil to Enéas Pestana in order to join our Board of Directors. Marcelo's vision, knowledge and experience were critical to setting Brazil back on the right path, and I'm delighted he will continue to provide oversight in a market where we see significant opportunities. And at the corporate center, the appointment of Jesús Soto as the Group Chief Financial Officer was another important step. With a strong long-term capital structure now in place, one of Jesús' main missions will be to support the country teams in key areas such as the digitalization of internal processes to drive efficiencies. I wanted to pause briefly to express our deepest condolences to the family of board member, Christian Couvreux, who sadly passed away last week. Christian played an active and valuable role in DIA's transformation journey, contributing his deep knowledge and experience of the food retail industry. He will be sorely missed. Moving to Page 9. In line with the road map presented at our first quarter financial results in May, our focus has been to drive improvement across the following areas of the business. First, our commercial value proposition. Thanks to the improved assortment with a focus on fresh produce and the development of new private label offerings combining quality, value for money and more attractive packaging. We successfully rolled out the optimized assortment and store layouts to over 1,100 stores in Spain, which represents around 40% of our store network, excluding Clarel. Our focus on the fresh fruit and vegetable offer resulted in a 12% increase in net sales for fresh produce categories. During the year, we launched over 300 new SKUs of private label products, including ready-to-eat in Spain. And in Brazil, we reinforced the assortment with the development of over 400 new private label products. We also began testing a new store model in Spain, with the test stores featuring an improved look and feel and a more customer-friendly layout. In Argentina, we are also currently testing a new store model following the same principles. I look forward to updating you on these developments and their impact later in the year. The expansion of online and express delivery continues in all 4 countries to meet new customer purchasing trends accelerated during endemic restrictions. Online currently represents around 2% of our net sales and has increased around 120% during the year. In Spain, 14 stores were converted into dark stores, i.e., online fulfillment only, and the company reached agreements with a number of partners to improve last-mile delivery, which is now available from 440 stores, covering 90% of the population in cities with over 50,000 inhabitants. In Portugal, online delivery now covers the Greater Lisbon and Oporto the areas, with express delivery available in 95 stores via regional partnerships. Our franchise model saw a comprehensive rollout in the second half of the year and is now active for over 2/3 of franchisees in Spain and Portugal. The new model includes financial and operational supports, a new merchandise payment and sales incentive system as well as a simplified cost structure. In Spain, we now have around 200 multi franchisees who manage more than 1 store. And during the year, we attracted new entrepreneurs, allowing us to transfer 113 stores from owned stores to franchise stores. With this, we have reached an inflection point during the fourth quarter, initiating the conversion of owned stores back to franchise stores following completion of a 2-year franchise network rationalization process. We are applying the learnings from the rollout of the new franchise model in Spain and Portugal to our franchise models for Brazil and Argentina, adapted, of course, to the local needs of franchisees and suppliers. We continue our focus on achieving operational excellence. We are reducing complexity, thanks to the ongoing redesign of our operations model across the store network as well as the supply chain and logistics activity. On this slide, we have also highlighted our key priorities for the corporate center in addition to the areas of finance focus already covered. Other developing areas for DIA include institutional relations and ESG. In summary, we will continue to relentlessly focus on improving our position as a modern proximity food retailer with innovative commercial and e-commerce solutions delivered by motivated employees and franchise partners in all 4 of our markets, growing closer to our customers every day. That's all for me from now. I will hand over to Jesús Soto, our group CFO, to deliver the financial review before I provide some concluding remarks. Jesús, over to you.

Thank you, Stephan. Good morning, ladies and gentlemen. Jesús Soto speaking, group CFO of DIA. Thank you for joining us this morning. I'm going to cover the main highlights of the financial review section of this presentation. Starting with a quick overview of the group's P&L for 2020 on Page 11. Net sales were flat despite, as mentioned by Stephan, fewer stores and adverse currency effects. 2020 saw the Brazilian real depreciate by 24%, while the Argentinian peso depreciated near 34%. Gross profit as a percentage of net sales increased to 21.8% from 19.2% during 2020, thanks to positive volume effects and operational improvements on the cost side. Labor costs were down slightly as 2019 rationalization measures continued to offset COVID-19 related staffing requirements. COVID-19 related costs have been offset by our wider cost discipline initiatives. EBITDA was up strongly to EUR 301.9 million, thanks to improved gross profit and our continued cost discipline as well as the decrease in restructuring cost. We recorded positive adjusted EBITDA, which we remind you, strip out IFRS16, IAS29 and restructuring costs, up to 1.8% of net sales driven by increased gross profit and continued cost discipline. This is an increase of EUR 214 million from 2019. Financial results were strongly affected by the depreciation of the Brazilian real, with EUR 57.3 million losses coming from euro-denominated intra-group financing provided by the parent company, most of which have been converted into capital during the year. There were also EUR 17.8 million in losses coming from USD and euro-denominated bank loans held by the Brazilian affiliate. Interest expenses, refinancing costs and other financial expenses decreased by EUR 35.9 million, mainly due to the improved financial condition achieved in their financing process executed in 2019. Moving to our market-by-market breakdown, starting with sales and like-for-like performance on Page 12. Spain and Portugal saw similar positive top line performance in 2020, with sales up 7.9% and 6.1%, respectively, year-on-year, again, on a smaller store network. This is despite lower tourist levels in both markets during the peak holiday period as a result of ongoing COVID-19 restrictions. Brazil recovered well in 2020 with sales up over 4.5% in local currency and with a store network over 10% smaller than 2019. And Argentina also performed strong in local currency, up 35.9% on the back of improved performance in a very challenging macro environment. All of our markets contributed to a significant improvement in adjusted EBITDA, as shown in Page 14. Adjusted EBITDA for Spain increased 180 basis points, offsetting increased operating expenses to support enhanced fresh offer and COVID-19 related costs. Portugal adjusted EBITDA was up 110 basis points, primarily due to operational efficiencies. Brazil achieved an almost 10% improvement in margin with a very important improvement in adjusted EBITDA, but remains negative due to low-performing regional activity. The group has already taken proactive measures to restore sustainable growth and profitability, including the sale of underperforming operations in the Rio Grande do Sul region. The group is now operating primarily in São Paulo and Belo Horizonte regions. Argentina also saw a strong increase in adjusted EBITDA driven by ongoing cost reduction efforts and despite negative volume effect and sales and currency effect. Moving to the balance sheet on Page 16. Trade working capital was broadly flat during the year, thanks to a 10% decrease in inventories, facilitated by improved stock management, an increase of EUR 17.4 million of trade and other receivables linked to the increase in net sales and the new franchise model and a EUR 32 million decrease in trade and other payables with improved relationship with credit insurance agencies and suppliers. The net shareholders' equity of the parent company, DIA SA, which is a key metric under Spanish law, amounted to a negative EUR 42 million versus positive EUR 222 million at December 31, 2019, impacted by a EUR 238 million impairment of the investment in the Brazilian affiliate to reflect the negative evolution of the Brazilian real. It's important to mention that in the context of COVID-19 pandemic, the Spanish government approved a decree that excludes 2020 losses from the calculation to determine if an entity [ has dissolution costs ]. This means that from a technical standpoint, the company is not facing any bankruptcy risk. In any case, the recapitalization transaction underway will serve to restore the equity position of the company, as we will explain further in this presentation. On Page 17, we look at the improvement of the cash flow from operations and our improved trade working capital. Looking at the bottom part of the slide, we ended 2020 with EUR 347 million in cash and cash equivalents, up from EUR 163.6 million as of December 31, 2019, driven by a positive cash flow from operations, stable working capital and limited capital expenditures to weather with a fierce cost discipline. It's noteworthy to mention that we have developed a strong and systematic approach to managing liquidity and cash flows and retain flexibility on capital deployment to ensure we obtain the right balance and we preserve liquidity. On November 30, 2020, we announced that it had reached an agreement with this majority shareholders, LetterOne, their finance and its indicated financial lenders to implement a comprehensive recapitalization and refinancing transaction which will allow the management to focus fully on the implementation of the DIA Group business plan. The transaction involves a EUR 500 million equity increase at DIA to discharge an equivalent amount of financial debt under the EUR 200 million LetterOne retail Super Senior Facility and EUR 300 million of 2020 (sic) [ 2021 ] bonds due to April 28, 2021; an amendment and restatement of the existing EUR 973 million syndicated facilities agreement to extend the maturity date of certain facilities to December 31, 2025, and amend other terms and conditions; an amendment of terms and condition of EUR 300 million 2023 bonds to extend the maturity date from April 8, 2023, to June 30, 2026, and increase the interest to 5% per annum; and an extension of the maturity dates of certain bilateral facilities and credit lines entered into the certain syndicated financial lenders. The effectiveness of the transaction is subject to the fulfillment or waiver of certain conditions precedent by no later than April 28, 2021. The company is currently working on the details of the transaction, and we will make an announcement when the decisions are made on this regard. The recapitalization of DIA Group, together with the discharge of a significant amount of net financial debt as well as the extension of the maturity days of the senior facilities, the 2023 bonds and the bilateral facilities, will reduce the financial indebtedness of DIA Group, eliminate refinancing risk over the medium-term, ensure operational financing requirements in place and provide a stable long-term capital structure for DIA. On Page 19, we have provided a pro forma debt maturity profile for the group once the transaction is closed. As you can see, the recapitalization and refinancing transaction reduced net financial debt significantly and extends maturity to years 2025, 2026, changing the debt maturity profile of the company. Liquidity at the year-end reached EUR 397 million, with 87% of it is in cash and cash equivalents. And with that, I now hand back to Stephan for some concluding remarks. Thank you.

Thank you, Jesús. A few concluding remarks from me. Our financial results demonstrate the progress DIA continues to make every day along our multiyear business improvement road map. Having laid the foundations in 2019, 2020 saw us implement key commercial and operational improvements in each of our 4 countries of operation based on empowered country leadership. While our markets, like all markets, continue to face some level of restrictions related to COVID-19, we remain focused on improving our position as a modern proximity food retailer with innovative commercial and e-commerce solutions delivered by motivated employees and franchise partners, growing closer every day to our customers. [Foreign Language] And this is all from our side. Very happy to take any questions we may get from you.

[Operator Instructions] Your first question comes from Rafael Bonardell. And his question is, could you give us some more color on the price war that, according to Kantar, is taking place in the sector? What actions are you going to take with an adjusted EBITDA margin of 1.8%, doesn't seem that you have much room to reduce prices.

I would say that -- I mean a price war is a very strong word. What we are actually seeing in the market is that all players are acting very rationally, focusing on serving the customer. But the players are acting rationally. And as far as I'm concerned, there is not a price war that is underway. I'd like to underline that DIA is not participating in any price war.

And our next question comes from [ Javier Perez de Lazar Agrigruer ]. Can you give us a status on the number of remodeled stores per country and the results of the remodelings?

I'm very pleased to confirm to you that our franchisees are responding very positively to the new franchise model. The new franchise model is a win-win situation for them and for us with simpler cost structure for them, with simplified payment terms and with a lot of additional support to them from DIA. And the response we've had from the franchisees to the rollout of the new operating model is very positive.