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

DIA results presentation. The management of the DIA will run you through the presentation, which will be followed by a Q&A session. Stephan DuCharme, Executive President; and Jesús Soto, Chief Financial Officer, will be presenting this conference. I give the floor to the management of DIA Group.

Good morning to everyone. [Foreign Language]. Welcome to DIA's First Half of 2022 results presentation. My name is Stephan DuCharme, and I'm the Executive Chairman of DIA Group. Thank you for joining us today. I am joined by Jesús Soto, Chief Financial Officer of DIA Group. I will start today's presentation with a strategic update for you on DIA Group, and Jesús will take you through the financial results for the first half of the year. We will then open a Q&A session. Please feel free to send your questions through the chat so that we can address them fully. After starting a far-reaching transformational journey in 2019, it gives me great pleasure to say that DIA Group is entering a new phase now, progressing solidly in the consolidation of its business model. For this, I would like to thank our employees and franchisees in Spain, Portugal, Brazil and Argentina for their engagement and hard work. In 2020, we committed to building a new value proposition for customers and also began to build back transparent, long-term relationships based on trust with collaborators, franchisees and suppliers under a new leadership that could steer each of the business units through uncertain times. The sweeping changes made at DIA Group are now becoming visible. They are reflected in our stores and the quality of our freshness and in the quality of our private label super brands, in the way the new franchisee model has been welcomed by our partners, by the success of our technological and digital makeover to boost logistics and e-commerce and, last but not least, in the beginning reemergence of DIA as a consumer and corporate brand. Key to this progress has been the commitment to proximity that is our lifeblood and a great lever for turning the company around. And it is this lever, together with the engagement and effort of all of our colleagues in stores, warehouses and offices, that is allowing us to build together a new corporate culture that supports relationships based on transparency, trust and performance. The first months of this year introduced a complex geopolitical and economic scenario marked by inflation and rising raw material, fuel and energy prices. Nevertheless, we are confident that these challenges are an opportunity and an invitation to perform better and to move the dial on our future ambitions. The progress made through the end of June, including the clear thumbs-up from our customers and franchisees as well as the support shown by our shareholders at the general meeting in June, point to a watershed moment for the company. We can see this in one revealing fact: Spain and Argentina, representing approximately 80% of DIA Group's net sales, have reached substantial completion of their 2020 strategic road map and are growing volumes, like-for-like sales and market share; comparable sales surface in Spain, overall in Argentina. In parallel, Brazil and Portugal are improving their business models and making significant headway in executing their strategic road map, bringing them closer to completing their transformation plan as well. Altogether, this suggests we are becoming the company we want to be, focused on what we do well: a preferred proximity and digital shopping experience, beginning to deliver long-term customer loyalty and sustainable growth and profitability with a renewed corporate and brand purpose. Since May of 2020, we have endeavored to consistently execute across our strategic road map and deliver real change across all of the countries in which the group operates. We have done so by focusing on our customer base and by acting systematically across three areas: commercial, franchise and operations. For the commercial transformation, we have levered takeaways from the pilot stores and the needs raised by the pandemic to implement key initiatives such as a fully reset value proposition for Customers. This has translated into a modern, accessible neighborhood store with an easy, user-friendly shopping experience, plus an updated assortment featuring high-quality fresh produce and well-priced goods. Two, a complete reset of our private label range, launching DIA super brands of the highest quality, with modern packaging and responding to relevant customer needs of today. Three, continued strengthening of our operations and logistics, including online, as leverage to delivering our proximity strategy and new value proposition with the highest efficiency possible. As for the franchise business, we have fully rolled out the new model with confirmed value for our partners, laying the foundation for mutually beneficial, long-term business associations with them. The aim was to make our neighborhood stores attractive to franchisees, both existing and new. And we have made important progress in this area, especially in Spain and Argentina. 48% of the group network now involves franchised stores. Looking more closely at Spain. We can see that even in these uncertain times, the changes to the business model have been a success. 459 stores were remodeled between January and June alone. In total, we have 1,297 stores operating under the new model, 68% of the proximity network in Spain. I would like to express a heartfelt thanks to the team at DIA Spain for the way in which they have delivered on this challenge, a highly complex operation involving a large number of stores and an average CapEx of EUR 110,000 per store. The fact that these stores remained closed for 5 days during the remodeling represents an upside when looking at our future top line. Franchisees in Spain have embraced and supported the new relationship model put in place in 2020, which involved transferring part of our margin to the franchisees to build a win-win relationship for both parties. Our franchisees are strategic business partners, ambassadors of the DIA brand and values. And today, they make up 68% of the proximity network in Spain. In the first half of 2022, we attracted 42 new entrepreneurs to our network. Our private label super brands are now very present in the Spanish store network, and not only in stores but, more importantly, in customer baskets, confirming the appeal of New Quality DIA brands and their perception as modern, quality brands with a best-in-class quality/price ratio. Since the start of the transformation, we have introduced 1,550 new super brand references, 430 in the first half of 2022 alone. In this first half of the year, New Quality DIA super brands jumped 4 points over H1 of last year to 51.7% of total sales. I would like to bring to your attention the following numbers that really speak to the success of the new value proposition and remodeled stores in Spain. First of all, the remodeled stores have punched above the market with DIA Spain gaining share in terms of comparable sales surface. This is the result of the remodeled proximity stores delivering above-market like-for-like performance, 10.9%, more than double the market growth of 5.1% in the first 6 months of the year. This encourages us to continue converting our stores to the new model. The improvement is even more impressive, 13.4%, if we look at the second quarter of the year. Consumers are responding very positively to the new stores and value proposition. We see this in the rise of increasing level of satisfaction, be it NPS or growth in tickets. Argentina has also moved into the consolidation phase of its business model. Important milestones for the first half of the year include: 138 stores were remodeled and 33 new outlets opened. We now have 366 stores operating under the new model in Argentina, 39% of the network. Stores operating under the new model posted, on average, like-for-like sales growth of 16%, contributing significantly to the gain in market share. Just to remind you, our like-for-like numbers for Argentina are always volume numbers. DIA is the #1 retailer in the city of Buenos Aires with a market share of 30%. Customer satisfaction, measured in NPS, jumped from 42 in the first half of 2021 to 63.7 in the same period this year, reflecting the strong performance of the business and the brand. The team at DIA Argentina is fully focused on continuing its growth journey, operating within a complex macroeconomic framework. Moving now to Portugal and Brazil, both countries are improving their business models and making significant headway in executing their initial strategic road map, bringing them closer to completing their transformation plan as well. In Portugal, a market with strong competition, DIA has kept prices below inflation to encourage customer growth. The reporting period features a promising Q2 net sales recovery compared to Q1. The 121 stores remodeled in 2021 delivered above-market like-for-like performance of 8%. We are still working on reorganizing the network and in H1 closed 5 stores. All the franchisees in the country are operating under the new model. In Brazil, significant progress has been made in defining a new store concept and franchise model, two key aspects in delivering the future. Also, in the first 6 months, we are satisfied with the performance of the pilot stores both in terms of a like-for-like sales of 25% and customer satisfaction. The aim is to do further pilot stores before the end of the year and, subsequently, start rolling out the model across the entire network. The pilot stores are an appropriate laboratory for the new value proposition. At the start of the year, we closed 121 stores due to their unsuitable locations and profitability, creating the foundation for the store network of the future. We have strengthened supplier relations, including joint business planning, the joint introduction of innovations and promotional support. The competitive backdrop is complex in Brazil with significant inflation and volume pressures, but we are confident of the steps the team at DIA Brazil is undertaking. This page and the next feature examples of award-winning private label super brand products. In Spain, I can personally recommend the DIA Lactea natural yogurts along with the incredible Temptation ice-cream range. In Portugal, several categories of products obtained the Sabor Do Ano 2022 Award, including some of our ready meals, original cheeses and wines. Strong leadership has been the key to our transformation. The Board of Directors is the first pillar of this new leadership at DIA Group. The Board has 7 serving directors, a large majority of them independent directors, bringing their strong business experience and strong personal commitment to DIA. Over the course of the last 12 months, 3 new independent directors have joined the Board. Most recently, Gloria Hernández was appointed at the General Shareholders' Meeting in June. Gloria has over 30 years of experience in the world of finance and has been a Nonexecutive Director at IBEX 35 companies, including Siemens Gamesa. She's a former CFO at Bankinter and spent 15 years at the Spanish Ministry of Economy and Finance. I have personally been actively involved in all of our recent Board searches with a vision to continually strengthen our Board, its diversity and its capabilities, bringing together a group of experienced and committed leaders who guide strategic aspects of the business and support the construction of our new corporate culture with the right tone from the top, a culture based on transparency, diversity and social and financial sustainability. The second pillar of our corporate leadership is DIA Group's Management Board. I am very proud of the group of individuals that has come together to lead the company. The 12 members of the Management Board come from 4 different countries and have taken on many internal and external challenges in recent years. It is to their credit that DIA is entering a new phase now, progressing solidly in the consolidation of its business model. I would like to take this opportunity to thank all members of the Management Board for their hard work, their commitment to DIA and the first half results. Three members of the Management Board are new to DIA, adding important skills and capabilities to the next phase of DIA's strategic journey. First, Antonio Serrano as Strategy and Growth Director; second, Pilar Hermida as Chief Communications Officer; and Andrés Vegas as Chief Data Officer. Finally, DIA's governance is supported by a committed long-term industrial reference shareholder, a key promoter of the company's financial stability. Over the years, LetterOne has invested approximately EUR 2.1 billion into DIA Group. Last year, LetterOne anchored the successful transaction to reset the company's capital structure, significantly strengthening its equity base, reducing the debt burden and further extending debt maturities. Before handing over to Jesús Soto for a discussion of our first half financial results, we wanted to share with you a short video about the inauguration of our Illescas warehouse outside of Madrid in March of this year, a 68,000 square meters, state-of-the-art facility that will help the company to optimize its logistics in Spain. This facility was purpose-built to support the company's current needs and future growth. Illescas is a potent symbol of the transformation of DIA, a transformation that has allowed customers to rediscover DIA in parallel with the reset of relations with our employees, franchisees, suppliers and financial partners, getting closer to them every day, closer to making DIA our customers' favorite proximity and digital shopping experience. Jesús, over to you, but only after the video. [Presentation]

Thank you, Stephan. Good morning, everyone, and thank you for joining us. Next, we will go over the main financial results of H1. With regards to net sales, we closed the half year with EUR 3,465 million, 8.5% up on the last year and 2.6% up on the like-for-like. The gross margin closed at 21.8% of net sales, a drop of 0.8% as a result of the rising cost of goods and the group's effort to reach out to customers at a time of cost inflation. Adjusted EBITDA came to EUR 50.8 million, a 6.5% increase on the same period last year, with a 1.5% margin on the net sales, in line with first half of 2021 despite the recent energy, diesel and rent pricings, demonstrating our ability to contain cost together with efficiency and process improvements that were undertaken in different areas of the company. The net losses were EUR 104.7 million mainly due to restructuring costs from store closures and franchising closures -- and franchising and depreciation spending of the last year because of the significant volume of investment made in recent months. Financial result, on the other hand, improved significantly. Working capital was negative EUR 700 million, an 8.8% variation on last year due to good inventory management and despite the overstocking made in Spain at the end of June, having anticipating potential transport sector conflicts. Net financial debt was EUR 476 million, EUR 72 million more than December 2021 and 65% down on the first half of last year due to the capital increase and refinancing carried out in the second half of 2021. The increase in net debt comparing to December 2021 is mainly owing to the investment for mainly remodeling the network and in the technology area, in addition to recurrent business investments. Finally, the store network at the close of the 6-months period was 5,733 stores, a 4% reduction on the same period in 2021. As we have said in other occasions, until now the group has been focused on profitability and will continue to rationalize the network and keep the focus on proximity, although, as Stephan has mentioned, growth is becoming an important driver, too. The half year was strongly affected by high inflation through all elements of the value chain. Despite this, we kept the main profitability ratios in line with the same period of last year. In terms of gross margin, ongoing negotiations with suppliers across all the countries and our assortment management, together with our pricing and promotions policy, allow us to maintain a competitive market position without overly affecting the margin of prices we offer to customers. Our energy management policy allow to successfully contain the impact on our bottom line. We closed the purchase of 50% of our 2022 energy consumption in Spain and Portugal at the end of last year and ratcheted it up to 92.5% in March 2022, meaning we avoid exposure to the major fluctuations seen in the recent months. During June and July, we have closed long-term energy purchase agreements to avoid similar situations going forward. We have also been actively involved in managing interest rate hedge to manage the risk of adverse impact of market fluctuations. And lastly, we have implemented a strict OpEx policy, with organization-led initiatives that have contributed greatly to managing the impact of inflation on the P&L. Gross sales under banner closed the half year at EUR 4,143 million, thanks to a 2.6% like-for-like. This represents a slight uplift on the previous year's despite the closure of more than 250 stores negatively impacted sales by 2.1%, and the exchange rate having a 0.4% negative impact mainly to the devaluation of the Argentinian peso. Like-for-like sales grew 2.6% compared with 2021 with clear progress during the 6 months, where we saw a first quarter with minus 1% like-for-like and recovery during Q2 with like-for-like of plus 6%. Ticket sales were up in all countries due to more customers in the stores and increased purchase frequency. This higher number of purchase occasion was with a smaller average basket, offset by frequency increase and the greater relative weight of our private label. As mentioned above, net sales rose by 8.5% to see EUR 3,465 million. The increase happened mainly in the second quarter of the year. And now Spain and Argentina account for circa 80% of total group sales. The weight of online sales came from 2.4% to 2.5%, a 14% rise despite the strong comparable in 2021. The portion of franchisee sales rose from 32% to 36%, demonstrating our ongoing commitment to this business model and acceptance by our franchisees. Adjusted EBITDA came in EUR 50.8 million, EUR 3 million more than in 2021 despite an increase of almost EUR 50 million in energy and fuel costs compared with first half of the year 2020 and extraordinary expense associated with the store remodeling. Excluding this effect, adjusted EBITDA would have been almost EUR 100 million in the -- at the group level, double figure for the first half of 2021. Despite this increased cost, our proactive inflation management and cost-conscious mindset across all the organization saw us end the half year with an adjusted EBITDA rate on sales in line with H1 '21. Next, we will do a quick look at the results of each country. Spain closed the half year with a like-for-like 2.4%, almost 10 percentage points better than the previous year, with our strongest growth in the second quarter with 6.6% like-for-likes. Net sales grew 0.3% despite having 3.9% fewer stores. The adjusted EBITDA margin was 2.1 on sales, 2.1% on sales, 30 basis points better than the last year despite increase in energy, fuel and remodeling costs. If this effect was excluded, the margin would have been 4.2% on sales. I would emphasize that this result of EUR 45 million adjusted EBITDA was achieved despite the increase in the aforementioned expenses in 2022 compared to 2020, highlighting the profound operational improvement of the business in Spain. This reflects the turning point of the business that Stephan has mentioned before. Portugal had a like-for-like on less than 1.8% in the 6 months, although the second quarter already showed signs of recovery with 3.2% like-for-like. Net sales were down 4.5% partially because of 1% fewer stores and also strong comparable in Q1. We are seeing a positive trend in the first weeks of Q3, bouncing back from the start of the year. Adjusted EBITDA was EUR 1 million, significantly affected by, like Spain, rising fuel and energy cost, which also impacted adjusted EBITDA margin, which is 0.4% of net sales. In Brazil, sales grew by near 14% despite closing more than 18% of the store network at the beginning of 2022. Despite these closures of less profitable stores, the increase of average ticket and the revaluation of the real contributed to this net sales growth. Like-for-like was up near 7% also because of widespread price inflation. Cost increase impacted our adjusted EBITDA margin to close H1 at minus 2.6%, slightly down on the last year figure. In Argentina, net sales were up 53%, thanks to a like-for-like in volume of 3.4% and inflation above the devaluation of the peso. Adjusted EBITDA was up EUR 5 million in 2020 and held at 2.5% on sales in response to cost management to contain inflation but mainly to the good operational performance, network transformation and openings. As you can see from this cash flow composition chart for H1, we generated a positive flow of EUR 29 million in operations. And improvement of working capital deliver EUR 57 million. From our store investment effort of EUR 134 million, 53% of it has been invested in store remodelings, and we will explain this in more detail later on. Interest payments fell by 30% due to capital increase and refinancing operation carried out in the second half of 2021 that significantly reduced company debt. The drawn was EUR 36 million in the first half of the year. Once the other cash flow items are taken into account, we get a final cash position of EUR 328 million, 9% down on the figures presented last December. CapEx for the 6-months period stood at EUR 134 million and nearly EUR 50 million up to the same period last year, showing our commitment to renewing the group. This investment effort focused mainly on Spain and Argentina with EUR 70 million allocated to remodelings and nearly EUR 3 million to openings. Net financial debt rose by EUR 72 million as a result of the company's investment effort. As seen in the cash flow slide, at the operational level, we generate a positive cash flow with a strong focus on improved sales and comprehensive cost control that has proven challenging in the current macroeconomic situation. Liquidity has been reduced EUR 57 million compared to December 2021, reaching EUR 459 million. I would also point out that we enjoy the support of our lenders, who continue to partner closely with us and stand by our side. This is all from my side. Thank you.

Earlier this week, we announced a strategic transaction with Alcampo involving the sale of 235 supermarket stores and a warehouse in Valladolid. The stores included in the perimeter of this deal are stores that do not fit with the strategic focus on proximity. They're stores of an average size of 760 square meters with locations that do not necessarily fit our proximity mission. The assets involved in the transaction contributed at June 2022 approximately EUR 500 million in net sales and EUR 8 million in adjusted EBITDA to the group. We expect to close the transaction by the second quarter of 2023 as it is subject to certain conditions, including the approval of antitrust authorities and the approval of our syndicated lenders. Once the conditions precedent are met and assuming full execution of the deal perimeter, the maximum price would be EUR 267 million. This is an all-cash transaction, proceeds of which will be used to conclude the refurbishment of our proximity network in Spain as well as investments in the acceleration of store openings in the country. In concluding today's presentation of the financial results of DIA Group for the first half of 2022, I would like to emphasize the following points. Our strategic focus on proximity launched alongside the start of our transformational journey in 2019 is bearing fruits, and our first half results demonstrate this. Spain and Argentina, representing approximately 80% of DIA Group's net sales, have reached substantial completion of their 2020 strategic road map and are growing volumes, like-for-like sales and market share, comparable sales surface in Spain, overall in Argentina. In parallel, Brazil and Portugal are improving their business models and making significant headway in executing their strategic road map. DIA Group is entering a new phase now progressing solidly in the consolidation of its business model. We still have a lot to do. There always is in food retail, especially in the current geopolitical and macroeconomic environment. But I'm confident of DIA's ability to continue executing based on the right strategy, the right focus, the right culture and the right people. Thank you very much. This is all from our side, and we can now proceed to taking any questions you might have.

Thank you, Stephan. Let us start with more operational questions. "Considering inflation and post-COVID environment, like-for-likes are disappointing. Please comment."

Thank you, Miren. I think we have to distinguish Q1 from Q2. I think Q2 have good like-for-likes, and -- or if we see that like-for-likes in the formats that we consider that is the appropriate format for this company, which is proximity, so the like-for-likes we have in the proximity formats and mainly in the remodeled stores of that proximity format is very encouraging.

I think, I mean, if I can add, I think that's the single most strategic point, and we have talked about it. The like-for-likes of our new store concept have been 10.9% for the first half of the year, 13.4% for the quarter. That is not only above market, it is better than any other food retailer in Spain and makes us optimistic as we look at the continued development of the remodeled store network.

Thank you. "What is the time table to end store renovations, namely in Spain?"

Yes. I think this is something we have also mentioned before, that our goal is to finish as soon as possible. And because of that, we want to continue the investment in the Spanish market. And I think at the end of Q2, it should be finished, of the next year.

"Another 100 stores were closed in Brazil. When will your stores network stabilize?"

Well, I think the closures in Brazil were a very specific situation that we want to fix at the beginning of the year. But in any case, as I have mentioned before, we have been very focused this year in profitability and managing the network to really have a good phase of the network to growth and to improve our results. So we do this in a proactive way. We will take decisions as we -- if we see we need it.

"Energy prices and interest rate hedging, how much they represent in terms of costs?"

Regarding energy cost, we have a very good -- we did a very good price, 50% of the consumption for Spain and Portugal in the third quarter of last year. And during this first half of 2022, we have put also long-term agreements in Spain and in Portugal but also in Brazil to provide a cost that we consider are going to be that. Of course, currently, it's lower than the market, and we consider that as we can take good advantage of that contract because as also fixed that cost and allow us to manage our P&L and our future with less uncertainty. Regarding interest rates, well, you know the movement has been very quick. And we have an estimation, and also you can do this figure. The increase of 50 basis points of interest rate will have an increase of financial cost of EUR 4 million.

Thank you, Jesús. "Could we see any further divestments in the future?"

We are strategically committed to being the preferred proximity digital shopping experience in all four countries of operation. That being said, should tactical opportunities arise that reinforce our strategic focus, it would be our fiduciary duty to at least analyze them.

"When do you expect to achieve positive net benefit results for the group?"

Well, I think we want to have that positive results as soon as possible. As you can imagine, we are working on that. That's one of our main goals.

"In terms of equity position in the balance sheet, it's very low. Is there any risk of a capital increase if it turns negative in second half of the year?"

Well, we have -- you have to look at the individual of DIA S.A. Here, we have EUR 800 million of equity. So we are very comfortable with that amount, and we are not expecting any capital increase because, in fact, we don't need it.

"In terms of negotiations with banks, how are they going? Any risk in terms of accessing to financing?"