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

Good morning. Welcome to DIA's Full Year 2022 Results Presentation. My name is Stephan DuCharme and I'm the Chairman of the Board of Directors of DIA Group. It is good to be back with you today, and thank you for joining us. I am joined by Martin Tolcachir, Group Chief Executive Officer of DIA Group; and Jesus Soto, Group Chief Financial Officer. We will start with a strategic update for you, and Jesus will take you through the financial results 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. DIA Group has closed a key year in the deployment of our food retail proximity strategy. While 2022 presented us with a complex economic backdrop marked by inflation and the rising cost of raw materials, fuel and energy, we made significant progress across all dimensions of our business and in relation to all significant stakeholders.  We are particularly proud of the positive reaction of this progress has generated among our customers, employees and franchise partners. 2022 has been a turning point for the company. DIA Group is a new deal, and we are firmly in a phase of acceleration towards sustainable growth and reaching profitability. DM has more than 40 years of history, decades of learning and experience in local food distribution, the heart of our business. With nearly 5,700 company-owned and franchised stores in Spain, Argentina, Brazil and Portugal, we are a leading network of proximity stores with a dedicated team of more than 33,400 colleagues who share on purpose to be closer every day and offering high quality within everyone's reach. [Foreign Language]  Three years ago, we initiated a journey aimed at putting in place a new value proposition for our customers with everything that entails, and we started to rebuild relationships of trust and transparency with employees, franchisees and suppliers. A committed leadership team guided each of our businesses towards renewal based on a comprehensive road map with concrete milestones towards this new deal, which is now clearly visible. We have fulfilled our original road map, and our 2022 results demonstrate the achievement of important strategic and operational objectives, improved financial results and a further strengthening of our corporate governance. I would like to take this opportunity to thank the management team of DIA and each and every one of our dedicated employees and franchise partners for their important contribution to this result.  At the end of 2022, more than 60% of our global proximity network was operating under the new store model. Over the last year, we refurbished more than 1,000 stores and opened another 128 stores following a clear proximity strategy to offer our customers a friendly neighborhood store where they can have a complete shopping experience easily and quickly with a wide assortment, fresh products from local suppliers and a wide range of DIA brand products of the highest quality. I would like to underline the success that our new DIA branded products are achieving due to their combination of high quality and excellent value for customers, particularly in the current economic environment, along with modern and innovative concepts and packaging. Customer uptake underlines the success of the new DIA products, and our DIA products have a very important place in the homes of more than 14 million of our loyal customers globally. We are proud to be an ally of so many families with proposals adapted to their needs as well as the newest trends, particularly in the current times.  In addition to the boost to our network of new physical stores, we have continued to grow our online channel, a key lever in our proximity strategy and, above all, another way to fulfill our purpose of being closer to our customers every day. All of these initiatives have contributed in 2022 to an improvement in both net sales and in the number of tickets, indicators that customers value and trust in their new DIA. Adjusted EBITDA of EUR 200 million, a EUR 76 million increase compared to 2021 and an adjusted EBITDA margin of 2.8% of net sales, 0.9% better than 2021 show that the efforts of the last 3 years have served to consolidate our path towards sustainable financial recovery and the beginning of sustainable equity value creation. We have a solid and sustainable capital structure support from our banking partners and the support and industrial vision of our majority shareholder. During the course of 2022, in line with a strategy to simplify DIA Group and focus on what we do best, namely proximity food retail, we announced 2 key corporate deals within the Spanish market, the sale of a group of large format stores to Alcampo and the sale of Clarel, our beauty, personal and home care business. Both transactions upon their closing in 2023 will allow us to focus even more strongly on being our customers' favorite neighborhood and online food store. Based on strategic business and financial progress in August of 2022, we were ready to take another important decision in the future of DIA Group, a reset of our governance model and leadership model in line with and supporting the new phase of the company's business strategy with a focus on simplification and hand future growth. The role of Executive Chairman, which I assumed in May of 2020 was divided into 2 roles from the 1st of September of 2022, and I returned to my previous role as Nonexecutive Chairman of the Board of Directors. At the same time, the Board of Directors appointed Martin Tolcachir, formerly CEO of DIA Argentina as Group Chief Executive Officer, based in Madrid, to deliver the strategy and run the company. The governance reset combined change and continuity in a way that provides an additional impetus towards achieving our strategic and financial objectives. And 6 Monson, it is a pleasure for me to be sitting next to Martin this morning at the helm of DIA Group as Group Chief Executive Officer, and confirm that this was the right decision to drive the company forward in this new phase. It is my honor and pleasure to be chairing the Board of Directors in a nonexecutive capacity with a focus on guiding sustainable equity value creation and stakeholder support. In 2023, the Board of Directors will support Martin and his team in key strategic deliberations in embedding the ESG strategy into the business in providing effective oversight of the people agenda and developing a greater Board focus on shareholder engagement.  In terms of Board composition and roles, we yesterday appointed Gloria Hernandez as the new Chairman of the Audit Committee. Pete Wanon who is stepping down from the Audit Committee chairmanship after close to 4 years, we'll remain on the Board of Directors. I would like to thank Pete for his leadership of the Audit Committee over the last years at a delicate time for the company, and I look forward to continuing to work together with him. In handing over to Martin Tolcachir, I would like to again express my thanks to all of our collaborators across the 4 countries of operation, be it in stores, warehouses or offices for their dedicated efforts and commitment. Equal thanks to our customers, franchisee partners and their collaborators, suppliers, financial partners and investors. Thank you all for trusting in our vision and helping us to build this new DIA together. Martin, over to you.

Thanks, Stephan. Good morning, everyone. I am Martin Tolcachir, CEO Global of Group DIA since last September, although as you know, I have been part of the company since 2020. During 2022, we have also made changes in the management board, mainly in the corporate functions with a simplest structure with a focus on finishing the turnaround and providing strategic support to our business, looking for value creation for all our stake holders. The year 2022, marked by the high inflation and economic and political uncertainty has been a challenge for the distribution sector in the 4 countries in which we operate. But challenges are also used to grow to move forward. This last year, we have consolidated the performed redirection of the business that we started in 2019, and that helps both us today. This new DIA is a company driven by its purpose and moving forward, thanks to a team committed to our values, passion for customer, commitment to results, continuous growth, collaborative spirit and simplicity apply to everything we do.  Proximity is the essence of DIA and is the guide for the deployment of our proximity strategy for building valuable relationship with all our stakeholders. This vision and leadership with a clear road map has enabled us to close a key year for DIA, in which the data shows consistent growth and support the success of our value proposition. Net sales advanced 9.6% compared to 2021 to EUR 7,286 million. Spain and Argentina are in the final phase of transformation, gaining market share in the last 6 months. Adjusted EBITDA increased to EUR 200 million with a margin of 2.8%. The group has helped its losses from EUR 257 million to EUR 123 million. The company is making progress in the deleveraging with a leverage ratio of 2.7x despite the investment effort to advance in the transformation of the business in Spain and Argentina. For us, it's key to improve our clients, suppliers, employee and franchisee satisfaction, and we are improving on these areas as a part of the transformation of DIA Group.  Over the last 3 years, we have consistently hit our road map and delivered real changes across all the countries where the group operates. We have done so by focusing on our customer base and acting on 3 areas: commercial, franchise and operations. For the commercial transformation, we put customer in the center to implement key initiatives, a new value proposition for customers. This translates into proximity neighborhood store model for easy user-friendly shopping experience that covers everything customer need with a new assortment with high-quality fresh products at good prices. Improving the quality and assortment of our own brand to offer products that respond to customer proximity needs, reinforcing also our logistics and online operations as a leverage to further boost our proximity strategy and new value proposition. As for the franchise business, we rolled out the new model and confirm its value for partners. The aim was to drive the conversion of company-owned stores to franchise and we made stunning progress in this area. 66% of the group proximity network now involves franchise stores. At the operational level, we simplified the structure and improvement in the supply chain, bringing in logistics transformation plans in every country to cover the DIA business model and improving our operations.  Now let me share with you the main milestones achieved in each country that show the results of this strategy. In Spain, during 2022, we have accelerated to transform more than 800 stores, which together when the 23 openings this year, bring the total number of stores operating under the new model to 1,660, which means that 88% of the proximity store has been renewed, and the entire network is expected to be complete during 2023. It should also be noted that the online business continued to be a major commitment for the group in Spain and a source of growth. The like-for-like of the e-commerce segment has grown to 11% and has led to improvement in market share within the segment. The weight of franchise has increased and now is 71% of the proximity network. DIA Group's commitment to this model has been rewarded with a greater confidence on the part of the franchisees with more than 150 new franchisees and significant increase in the level of satisfaction compared to 2021. I want to stress that Spain is growing market share in a comparable basis. And from 6 months ago, we are growing market share in total market. This is a major change and show the robustness of our model and the model we have implemented.  Argentina closed 2022 with a very positive result in terms of net sales, market share and profitability, demonstrating the model and strategy following the country as successful. Like-for-like sales growth in volumes in Argentina, 2%, which allows us to accelerate our growth ahead of the competition and gain market share in the country for 6 consecutive quarters. During 2022, 255 store renovation were carried out with results 70% higher than the non-renovated stores, confirming the success of the model. There were also 101 companies, bringing the number of stores in the country to almost 1,000. The new franchise model has been rolled out during 2022 with a great acceptance and more simple operation. The franchise representing the Argentina, about 73% of the store network. So its relevance to the business is critical and the excellent collaboration with the franchisee is proof of our commitment to them on this operating model. In Brazil, net sales were 10.9% higher than 2021 despite the 70% decline in the number of stores following the strategic closure of unprofitable locations. In addition, with the revision of the franchise model in 2021, we have experienced a high volume of outsourcing in the last year with a total of 89 transfers. The new partnership model has generated an increase in the satisfaction level of our partnership -- of our partners. The online business has developed well during 2022, highly leveraged on technology partners and focus on express delivery. In Portugal, with a challenging scenario due to the entry of new players and the strong investment and expansion of competitors, net sales of EUR 596 million were achieved, up 0.5%, also reversing the negative like-for-like trend experienced in 2021. The own brand has been one of DIA's major commitment in Portugal with a renewal of more than 600 products, already representing 43.6% of total basket of our customers.  Let's talk a little bit about our own products. The DIA brand has been a benchmark for 1,000 of households for almost 30 years. We work closely with our suppliers to respond to the needs of our customers with high-quality products at affordable prices, which is very important, especially in the current context. During 2022, DIA Spain has added almost 700 new products to its DIA brand assortment. There are already more than 1,800 products with a new idea quality. And in 2022, we will complete the renewal of the assortment with a total of 2,200 products. Argentina has added 8 new products to its assortment, Brazil 150 new products and Portugal, more than 200 references. The increase in sales of our DIA products as well as external recognition of their quality confirms that the redefinition of our own brand has been the right one with high-quality modern products that meet the needs of households, offering option of all categories at price when everyone can reach.  In the ESMA, you can see some of -- in the ESMA you can see some of our products that during 2022 have been distinguished with hours and recognition, especially in Spain and Portugal. As you can see, we have the foundation of this new DIA well in place and are ready to take on a new less challenge in 2023. In this acceleration phase, we will focus on completing the transformation of the store network and DIA brand assortment review in Spain, finishing the store remodeling in Argentina, the belong the right value proposition for Brazil continuing with the pilot test we start at the end of 2022. Accelerate the growth of our e-commerce, a key lever for our proximity strategy and boost our store network with our franchisees. In addition, we want to show neighborhoods that beyond our role as an essential service, we are at their side to generate value. We want DIA to be their favorite proximity and online store with a differential value proposition complemented with services that make shopping easy and quick. We are also a driver for employment and self-employment for communities. And given the heart of our business and our proximity proposition, we are uniquely positioning to promote actions that make it easier for all families to have access to quality food.  I would like to thank now our teams, franchisees and suppliers for the enormous effort. I will also like to thank our customers and investors for their trust. DIA has overcome a turbulent period, and we are aware that there is still a lot of work ahead. But knowing that we are on the right path to accelerate the growth of the company allows us to face the challenges of 2023 with optimism. [Presentation]

Thank you, Martin. Jesus Soto speaking, and good morning to everyone. Unless we will go over the main financial results for the full year 2022. Before I start with the analysis of the full year results, I need to make a disclaimer to help understand this presentation and the results shown in the H2 and 2022 financial results submitted to the CMV prior to today's market opening and published in our corporate website. As mentioned before, in 2022, we announced 2 corporate deals, the sale of a group of large format stores to Alcampo and the sale of Clarel, the beauty, personal and home care business. Given this, these 2 businesses have to be treated, especially from a statutory accounting point of view, and this impacts our results for both Spain and for the group in the published accounts. In short, the implication is that all financial metrics related to the stores under the sole perimeter must be removed from our financial results and included as a separate reporting line level result of discontinued operations. This line is added to our net results, but that's not consolidated into any other line, net sales for margin EBITDA or EBIT. In order to give a comprehensive explanation of our results and the performance of the business we have, unless otherwise stated, removed this accounting reclassification from the analysis.  In the 2022 financial results published on our website, all require reconciliations between accounting and reported results are clearly listed. So going to the financial results. With regards to the gross sales under banner we saw a growth of 1.5% year-over-year, highly impacted by a net reduction of 238 stores and Argentina hyperinflation adjustments, but with a like-for-like growth of 5.7%, 9.3 points better than 2021. Net sales closed the year with EUR 7,286 million, 9.6% higher than last year. And gross profit closed with EUR 1,580 million, 6.1% increase versus 2021. This represents a margin of 21.7% of net sales, a drop of 0.7 points versus 2021. As a result of the rising cost of goods, higher shares of franchisees and our efforts to protect price to consumers at the time of generalized inflation. As mentioned before, adjusted EBITDA for the year was EUR 200 million, 61% increase over the same period last year with a 2.8% margin over the net sales. 0.9 points increased the spec was in energy, fuel and rent prices, demonstrating our ability to contain cost together with efficiency and process improvements we are undertaking in different areas.  Cash flow from operations has been EUR 160 million, EUR 85 million better than in 2021. The improvement of our operational allow us to reduce net losses by 52%, delivering a net result of minus EUR 124 million, EUR 133 million better than 2021, which also demonstrates that we are taking the right steps in the implementation of our improved operating model with other strategic measures moving towards sustainable financial performance. Net debt was increased to EUR 544 million with a leverage ratio of 2.7x net debt to adjusted EBITDA. This is a reduction to our leverage since 2021 by 0.5x. The increase in net debt compared to December 2021 is mainly due to the investment in force mainly in the refurbishments and in the technology area, in addition to recurring business investments. As I mentioned before, gross sales under banner finished in the year at EUR 8,900 million, 1.5 percentage growth over the last year as adjusted by hyperinflation effects in Argentina. Growth is explained by a 5.7 like-for-like, a reduction of footprint store footprint of minus 1.2% and a negative exchange rate impact of minus 3.3% due to the devaluation of the Argentinian peso that offset the gains of the Brazilian Real.  All geographies grew like-for-like and net sales in 2022, highlighting the success of the measures implemented and the consolidation of the transformation model. Spain already represents 61% of the total net sales of the group in Argentina next to 20%. And the like-for-like, as I mentioned before, closed the year at 5.7% with a significant progression during the year. H1 like-for-like was 2.6%, an increase to 8.5% during H2. Previously, Martin has given some insights about the operational results of the business units, and I will focus more into the financial results by geography. Spain like-for-like was 7.3%, 12.5 points growth year-over-year. Net sales grew 5.4%, impacted by a net reduction of 118 stores that was compensated by the growth of our sales density. EBITDA margin grew 1.1 points to 3.3%, showing a strict onto over fixed cost and the effects of the new operational model and trans footprint put in place.  Additionally, during 2022, we have been able to control 2 of our biggest cost drivers. We signed energy contract hedge and collective labor agreements until 2026 and 2024, respectively. Investment in Spain show paybacks ranging from 1-year franchising to 3.3 years for refurbishments, providing the benefits of our model and investment decisions. Argentina had a like-for-like measure in volume of 2%, up from minus 0.5% last year. Both net sales and adjusted EBITDA grew during the year despite the peso devaluation, driven by store openings and operational performance. This growth in sales was above market, driven market share gains. Adjusted EBITDA also rose by 0.9 points, proof of the sustainable model developing Argentina. Adjusted margin was 3.8% of net sales. Investments in Argentina delivered paybacks of 2.1 years for refurbishments and 2.3 years for openings, providing a good perspective for future investments.  Portugal had a like-for-like of 3.7%, with a net sales growth of 0.5%, impacted by the closing of 36 stores. Margins in the geographies suffered a negative evolution of mid 0.2 points, driven by inflation and our competitive pricing policy to support our clients. Brazil unit sales by 10.9% despite a 17.5% reduction in the store footprint from the closure of 129 stores at the beginning of the year. Like-for-like sales grew 7.4%, which, together with a good cost management, helped improve profitability by 0.3 points. Adjusted EBITDA margin is still negative at minus 1% of our net sales for 2022. All these operational measures impact gross adjusted EBITDA that grew significantly above 2021 to EUR 200 million, 61% increase year-over-year, driven by Spain and Argentina. Margin increased up to 2.8% of adjusted EBITDA or net sales, 3.9 points above 2021 despite this inflationary environment. And as I commented before, this improvement shows the success of our operational improvements and cost management actions in place. The improvement of our performance, increased our EBITDA and the positive financial results due to the effects of the exchange rates in Argentina with a better behavior than inflation, has pushed our group net result by EUR 133 million better than 2021. This means we were able to cut losses by 52%, showing the progress of our financial and operational performance.  Cash flow from operations was EUR 160 million and growth of sales also provided a better working capital performance. CapEx amounted to EUR 269 million, EUR 20 million higher than last year, driven by refurbishments in Spain and Argentina and store openings, mainly in Argentina. As opposed to 2021, this year was a year with our cash from in capital increases, nor relevant disposal of assets. Both corporate deals announced will impact 2023 cash flow. As mentioned, CapEx for the period was EUR 269 million. The investment was highly concentrated in Spain and Argentina and help us advancing the deployment of our network transformation. CapEx was focused on [indiscernible] store openings and technology. With this amount, we were able to before almost 1,100 stores and accelerate openings in Argentina with over 100 stores and more than 20 stores in Spain. Paybacks as seen before, range from 123 years depending on the geography and the type of investment but confirm the success of our store onset. [indiscernible] Net financial debt rose by EUR 140 million, up to EUR 544 million as a result of the company's investment efforts. But given the improvement of operational results, we were able to reduce our debt leverage to 2.7x net debt adjusted EBITDA at the end of the year 2022. Regarding our total debt, the biggest amount of our debt matures still in 2025, which gives us sufficient time to continue deploying our strategy while improving our operational results and reducing our leverage ratio. And this is all from my side. Thank you.

Thank you, Jesus. To conclude this presentation of the 2022 financial results, I would like to emphasize several aspects. Spain and Argentina are in the end of the transformation process. Our focus is on completing the turnaround process after consolidating a winning business model and value proposition. We are still working with Portugal and Brazil to improve results and finalize the winning business model in those countries. We want to accelerate the growth of e-commerce and continue to grow hand-in-hand with our franchisees strategic allies in the deployment of our proximity strategy. The company is committed to a value proposition of proximity and differentiate digital value across the 4 countries it operates in. The goal is to lock in customer loyalty and sustainable growth and profitability in line with the interest of our customers, employees, franchisees, suppliers and investors and backed by our goal of reaching out more closely to them all every day. This is all from our side. We can now take any questions you may have.

[Operator Instructions]

Thank you, Martin. We will now proceed to answering questions received during the presentation. Could you please comment on recent press reports that you mentioned that DIA could be about to sell the Portuguese operation?

Yes. The company keeps focus on implementing its strategic road map and running the day-to-day business operations. Part of our responsibility to shareholders to assess any potential opportunity presented to us. But at the moment, no decision to invest or this invest has been taken. In the meantime, we keep focused on running our business across all geographies, working to accelerate growth and reach our ambition to become the favorite neighborhood store.

Connected with this topic, can you please comment on -- Sorry. Can you please comment on the difficulties you're having in Portugal to increase your margins to a healthy level?

Thank you. Well, I think the margins in Portugal has not been very bad at the beginning of the year, mainly in the Q2. We had some stress there with the gross margin, but we recuperate the performing in our gross margin during each 2. And at the end, we consider that the Portugal business is absolutely on track regarding this metric.

Moving to Spain. Could the adjusted EBITDA margin achieved in Spain in the second half of 2022 be a good guide for the margin in the division in 2023?

Well, you know that always in this sector of the food retail, H2 is more powerful than the H1. So always, you are going to have a difference there. So I think our goal is to have a better adjusted EBITDA margin for 2023 better than 2022. And we are going to work to improve that growth -- that EBITDA margin.

What was the adjusted EBITDA margin in Spain, excluding Clarel and stores to be sold to Alcampo?

The margin is going to -- is around 3.4% of adjusted EBITDA.

Okay. Some more questions on Portugal. Is the Portuguese operation following the business plan?

Yes, the Portuguese operation is following the business plan. Despite the comment we have mentioned before regarding the gross margin the Q1, Q2, now it's absolutely on track, as I mentioned before.

And what impact do you foresee from competitors entering and heavily investing in Portugal?

Effectively, there is important investors -- new competitors entering this market. But we can see that our model of proximity, the value proposition we offer in this country is able to compete and keep performing in this tough context. And that's why we are sustaining our market share in the geography.

As you say, the restructuring is now complete. How should we think about the number of new store openings for the coming year?

As we have mentioned, we have been working on renewing our network during the last 2 years. We are going to finish this process during 2023, and we will start also accelerating openings where we have opportunities.

Thank you. I think this concludes the Q&A session. Any follow-up questions, please address them to the IRR department or the communications media team. You have the contacts listed in our corporate site. Thank you. Martin, for any closing remarks.

Thank you. Our teams -- I would like to still reinforce our gratitude to our teams on all the franchisees, suppliers and investors that trust on our teams. Thank you very much.