SMU S.A. (SMU) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the SMU First Quarter 2020 Earnings Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Carolyn McKenzie, Head of Investor Relations. Please go ahead.

Thank you very much. Thank you, everybody, for joining us today. We have a few slides to summarize our first quarter numbers, and then our CFO, Arturo Silva, will be happy to take any questions at the end of the call. As always, please feel free to contact me afterwards if you have any additional questions. If anyone isn't using the webcast to follow the slides today, the presentation is available on our website, www.smu.cl, in the Financial Information section. I sent out a link to the distribution list this morning. An audio recording of this call will be available on our website later today. Also, please note that we may be making forward-looking statements today. So as always, please remember to take a look at the caution regarding forward-looking statements on Slide #2 of our presentation. Just as we did last quarter, we decided to start today's presentation with an explanation of how insurance affected our first quarter results on Slide 3. The social unrest in Chile started in October of last year, continued to some extent in the beginning of this year. And as a result of looting and other acts of vandalism, we had to close 3 Alvi stores and also 2 new Unimarc stores. We recognized losses from the loss of merchandise and the physical damage to the stores. In addition, the 21 stores that were closed at the end of December due to damages sustained during the crisis remains closed during the first quarter, which means we were losing revenue at those stores while continuing to incur fixed costs. Our insurance policies cover all of these concepts: physical damage, loss of merchandise and business interruption. And we have been working closely with the insurance adjuster since the beginning of the crisis on an extremely detailed store-by-store analysis. As you can see on the slide, the business interruption indemnity is for about CLP 2.6 billion, and that amount is recognized under revenue. However, the way this amount is actually calculated is based on the EBITDA of the stores that were closed plus the fixed costs. Therefore, even though this number is treated as revenue, it is not equivalent to the loss in sales. As you will see, this has implications for the year-over-year comparison and also for the calculation of gross margin and office margin. Unlike in the fourth quarter, where we had more time to work on the claim, in the first quarter, we're still working on the claims of the physical damage and loss of merchandise indemnity. Therefore, this quarter, we only recognized the losses, which were approximately CLP 5 billion accounted for under other gains and losses in nonoperating income. The offsetting amount of the estimated insurance indemnity will be recognized also in other gains and losses in coming quarters. This means that our nonoperating loss was quite a bit higher this quarter than when otherwise would have been. On Slide #4, we have revenue and gross margin for the first quarter. Revenue grew 6.4% with respect to the first quarter of 2019. There are a number of different factors that affect the year-over-year performance here. First of all, we achieved this growth in sales despite having 26 stores closed that have been opened during the first quarter of 2019. As I mentioned before, revenue includes CLP 2.6 billion that we reported as the preliminary estimate of the recovery of business interruption insurance. And this amount makes up for the loss in EBITDA and cover fixed costs. It is not equivalent to sales. We also think it is important to separate the impact of the COVID-19 pandemic from the performance in the rest of the quarter. We certainly saw an increase in demand during the last 2 weeks of March as customers stocked up on grocery. However, we were always seeing a positive trend in sales growth between January and the 16th of March. And finally, 2020 is a leap year, which means we have an extra day of sales in the first quarter. Therefore, even if it weren't for the situation with the closed stores, revenue growth would have been -- sorry, therefore, if it weren't for the situation with the closed stores, revenue growth would have been even higher because in addition to the lost baseline sales, these stores would have benefited from the positive trends of the quarter. With respect to gross margin, we have an increase of 50 basis points year-over-year from 29.2% to 29.7%. However, this number is affected by the CLP 2.6 billion of business interruption indemnities. If that amount does not replace the full amount of lost revenue, we have a smaller denominator in the calculation. Excluding the CLP 2.6 billion from gross profit, our gross margin would have been 29.2% in the first quarter of 2020, stable with respect to last year. On Slide 5, we have a breakdown of revenue growth by format comparing the first quarter of 2020 to the first quarter of 2019. As you can see on the graph, the biggest contributors to revenue growth this quarter were Unimarc with 4.2% growth and the cash & carry format, which increased 11.9%. OK Market saw a decrease in revenue as this format has been hit harder by reduced operating hours in the beginning of the quarter related to the social unrest and then with the pandemic and the significant reduction in traffic as more and more people are staying home. [ Telemercados ] also had a decrease, although there was a significant increase in demand in the last 2 weeks of the quarter. And growth in Peru related to the pandemic was offset by a decrease in sales to mom-and-pop. On Slide 6, we have same-store sales and sales per square meter. In sales per square meter, we have a change because following the social unrest as we have been repairing and evaluating stores, we've remeasured selling space in all of our stores and we've updated the numbers in our system where there were differences. This remeasurement is going to be useful going forward in order to maximize the effectiveness of in-store processes and the use of planogram. There's a reduction in total selling space in first quarter of 2020 and we have restated the 2019 sales per square meter, so the 2 numbers are comparable. As you can see, the increase in sales per square meter year-over-year was 9.6%, very similar to the increase in same-store sales, which was 9.5%. Same-store sales growth was higher than revenue growth because of the closed stores, which are not included here. The business interruption indemnity is not included in the same-store sales calculation. On the bottom of the slide, we have broken out same-store sales in Chile, showing growth between January and March 15 as well as full quarter. We separated Chile because in Peru, we saw the impact of the pandemic in the first half of March. So the numbers aren't comparable. As you can see, total same-store sales growth for Chile in the first quarter totaled 9.2%. But even before the increased demand related to the pandemic, we had seen growth of 8.8%. On Slide 7, we have operating expenses defined as distribution costs plus administrative expenses, excluding depreciation and amortization. As a reminder, last year with the application of IFRS 16, these numbers changed. So in this graph, only the last 2 bars are comparable. We've left the historical figures and the pro forma IAS 17 numbers for 2019 as well as the IFRS 16 numbers for 2019. So you can see how much of the difference can be attributed to the change in accounting rules. The year-over-year increase in operating expenses is 5.5%. And as usual, the biggest increase is in personnel expenses, which increased 5.8% mainly due to the higher minimum wage. OpEx as a percentage of revenue decreased 10 basis points, reflecting the operating leverage from the high proportion of fixed costs and the top line growth. However, just as gross margin was distorted, this ratio is also distorted by the business interruption insurance since, as we have already explained, that amount is less than the actual loss revenue. So when we divide OpEx by revenue, the denominator is smaller than it otherwise would be. Therefore, OpEx margin is inflated. Otherwise, the decrease in OpEx margin would have been 60 basis points instead of just 10. On this slide, we also have centralization, which is an indicator that helps us to monitor operating efficiency and inventory management. In the first quarter of 2020, there is a significant increase from 46.3% to 50.9%. Much of that increase can be attributed to product mix as we sold more basic goods that generally tend to be distributed through our own logistics network. On Page 8, we have EBITDA, which grew 14.4% with respect to the first quarter of 2019. And our EBITDA margin increased 60 basis points from 8.3% to 8.9%. Just like on the previous slide, we've kept the historical IAS 17 EBITDA numbers for reference, but the comparable numbers are just the last few bars in the graph, which are the IFRS 16 number. On the next slide, you have an explanation of our nonoperating results to explain the difference between our nonoperating loss of CLP 12.7 billion for the first quarter of 2019 and CLP 24.3 billion for the first quarter of 2020. First, we have the losses from acts of vandalism, which we explained at the beginning of the presentation. This is a nonrecurring expense. And moreover, it will be offset during the year when we recognize the related insurance indemnity. Second, as we announced back in April, the Supreme Court handed out its ruling on the proceeding between the Chilean antitrust authority and the supermarkets, including SMU, increasing the fine imposed on all 3 food retail chains. We remain convinced that we did not participate in any pricing coordination with our competitors. The events in question took place between 2008 and 2011, when we had just entered the industry as a small player. However, this ruling cannot be appealed. We already had a provision in place, and this quarter, we recognized the additional amount of CLP 2.1 billion. This item is also nonrecurring. Third, we have the rather unusual year-over-year comparison and losses on inflation indexed assets and liabilities. Normally, there isn't such a huge difference between quarters in this line item because the base of inflation indexed liabilities doesn't change much, and inflation is generally pretty stable. However, in the first quarter of last year, there was essentially no inflation. So comparatively, we have a much higher loss this year when we did have inflation. This had CLP 4 billion to the nonoperating loss. On Slide 10, we have net income, which fell 10.8% in the quarter despite the 22.8% improvement in operating income. This was due to the higher nonoperating loss. At the bottom of the slide, we've broken out the impact of operating income, nonoperating income, including the nonrecurring effects, and taxes, which were lower than last year in part because of lower pretax income and also because of inflation adjustments to our tax book carryforward. On Slide 11, you can see the impact of the onetime effects, the losses from vandalism and fine on pretax income. Pretax income, as reported, fell 42% year-over-year from CLP 13.3 billion to CLP 7.7 billion. Excluding the onetime effect, pretax income would have improved 11% year-over-year from CLP 13.3 billion to CLP 14.8 billion. On Slide 12, we have an update on the status of our operations following the social unrest and resulting store closure. As we mentioned, there were 26 stores closed following the crisis. During the quarter, we decided to permanently close 2 of our OK Market stores. And therefore, at the end of the quarter, we had 24 stores closed. A few weeks ago, we reopened one of our Mayorista 10 store, and we have plans to reopen an Alvi and a Unimarc in the coming weeks. The other 21 stores that remain closed are in different stages of evaluations, supplier bidding processes and executing the construction work. In addition to the 23 stores that are closed following the social unrest here in Chile, we currently have 8 OK Market stores that are located in universities or malls and that have been temporarily closed due to the pandemic. On Slide 13, we have an update on some of our operating initiatives. Regarding organic growth, we opened 5 OK Market stores during the first quarter, and we hope to open an additional 5 during the rest of the year. We also hope to open 3 Unimarc stores this year. Of course, these plans and other investment projects may be delayed due to restrictions related to pandemic. Our original CapEx guidance for this year was in the range of CLP 60 billion to CLP 70 billion, and we currently believe that CapEx will come in lower than that, in the CLP 50 billion to CLP 60 billion range and possibly even lower. With respect to customer experience, in April, we launched a new app for members of our Club Alvi. This app targets our mom-and-pop customers with a similar structure to our Club Ahorro app for Unimarc customers. We've received very positive feedback so far. In terms of sustainability and reporting initiatives, this year for the first time, had prepared an integrated report, combining our traditional annual report with our sustainability report. This was a natural step for us as we seek to improve our ESG disclosure and to strengthen sustainability culture within SMU. In April, we also had our Annual Shareholders Meeting, where shareholders approved payment of a final dividend amounting to 75% of 2019 net income. That dividend was paid on April 28. On the next slide, we have an update on our financial debt. As you can see on the graph at top, our ratio of net debt-to-EBITDA has decreased slightly from 4.4x to 4.3x. At the bottom of the slide is our updated maturity profile. This reflects the situation as presented in our financial statements as of March 31, 2020, with 1 modification. In January, we had agreed to restructure our loan for CLP 55 billion that was set to mature in the first half of 2020. This happened in January and was described in the subsequent Events section of our financial statements and earnings release for the fourth quarter. But there were some quarantine-related delays in the paperwork, so we weren't able to reflect this change in the March financial statement. And so once again, we have a subsequent events note related to this. Under the new structure, instead of the whole CLP 55 billion maturing in the first half of this year, only CLP 5 billion will and a further CLP 17 billion maturing in the second half of the year with the remainder maturing over the course of 2021. There are other short-term bank loans on our balance sheet as of year-end 2019 and March 2020, which were basically used to finance the extra purchases of merchandise we had to make during the fourth quarter to replace the losses due to looting. Once we receive payment from the insurance company, we will repay this. These are essentially revolving loans, and we also have flexibility in terms of available lines of credit. Finally, in line with the maturity profile, we've included a slide that will hopefully provide some clarity on what we expect in terms of uses of cash this year. We're projecting interest expense of CLP 46 billion and amortization of financial leases in the neighborhood of CLP 50 billion. As I mentioned before, CapEx may vary. But right now, we're forecasting something in the neighborhood of CLP 50 billion to CLP 60 billion, which could end up being lower. And we just paid a dividend of CLP 25 billion. So that puts use of the cash in the neighborhood of CLP 170 billion to CLP 180 billion probably yes -- probably less for the year. On a related note, in April, both of our local credit rating agencies confirmed our A- ratings following their annual review process. That's it for our presentation. Thank you very much for listening. If there are any questions, Arturo will be happy to take them now.

[Operator Instructions] Our first question is from Alonso Aramburú with BTG.

Yes, 2 calls on my end. First, can you give us an update on what has been the performance of the stores in Chile during the last couple of months, or April and May, to see if we've seen the similar levels of same-store sales growth? And second, looking at your balance sheet, net debt has been fairly stable the last couple of quarters. I mean where do you expect net debt EBITDA or where do you want net debt EBITDA to end this year?

The performance of the store, if we consider the -- Carolyn mentioned, it's an important to separate different period in the first quarter because in the -- in comparison with 2019, the performance has been very good even in comparison with 2018 and '17 because the food inflation now, higher than previous year and also we have a similar level of market share to capture the growth of the industry in general. We have a good performance, not only in the wholesaler format, also in Unimarc that you remember that in Unimarc, the growth in 2018 and '19 was very weak and now was very, very important growth in the first quarter. If you consider in the numbers until March 15, the growth was in total in same-store sales was 8.8% but with additional 15 days in March with the pandemia effect was where will see an additional demand, exceptional demand, and the same-store sale finally was 9.6%. But anyway until -- or before the pandemic effect, the same-store sale for the whole format except OK Market was very, very important growth. In OK Market, the situation was different because this format's softer in the first quarter, the impact of the reduction in the schedule each day because for the restriction -- time restriction to circulating in the city. And the restriction for the public transportation affect the capacity to open the store until the last 2 or 3 hours in the day, affecting the sales in the convenience is very, very -- the convenience business is very, very important. After this period, when the government -- because the quarantine, the demand increased exceptionally, previous 3 or 4 days. And after this, the demand decreased a little bit. For the same reason, in the end of March, the demand was very good. But in April, in the first days of April, the demand decreased, compensating the previous situation in the end of March. Finally, it's important in the full year relative to March, April because you have a compensation between both months. In May, the situation is more regular. The -- it's in the level of our expectation in the similar level of the previous -- in the beginning of the year. And -- But the expectation for the rest of the year is complicated to project because will depend the number of quarantine, no doubt the effect, probably not the total sale in the year, but the performance each month. But no doubt, we're expecting more demand in the basic products. We are reorienting the promotions, the assortment for the more basic product. We are seeing more demand for pantry product or stock up products. But in the world, if you analyze the situation in other countries in Europe, for example, you have a step with the -- after the unsecurity, you have a transition step with demand perishable product again. What will be the time in this previous step in -- on security product we have during May would be the situation in Chile, but probably in the next month, the situation would be more in the transition situation with more concerning prices and -- but with more demand in perishable products. We are analyzing the situation every day, every week, the demand for each product because the cap of the consumer are changing every day depending on the restriction from the government and the restriction to go to the supermarket because now it's more complicated to go to supermarkets. And it's very, very important to offer for our customer security, good info and also good prices. It's the very basic element that the customers are demanding today and probably in the next 2 months. And we are wrapping our promotion activities more oriented toward these type of products and had also a lot of change in the operational changes, including the element -- the security element for the clients and also for our workers. Our view for the rest of the year, no doubt, will be in this line, with fixed and in so specific period and after reduction because the customer demand stock -- and accumulate stock and after purchase less. It has been the same in other countries, and Chile is no exception. We are -- but it will depend on would be the peak in the pandemic in Chile. It's not clear what will be this day. But no doubt, we will suffer in Chile some effect in the salaries, employment, and will affect the capacity to purchase of the customers. Further, we are in the defensive industry. And now the main key items for the climate is food, no doubt, and now it's more basic today than 1 month ago, and probably June, July will be worse. Probably most of people will think only food to buy. And that is, we are, for me, in this industry. But to capture this demand, we need to operate correctly with security in price, assortment and also operational measures to avoid any health problem for our workers and clients. So that is the view for the next month. And we're expecting the -- of course, the more demand -- in Mayorista 10 probably than all the format because it's a discount format. Accordingly, we adapt the Mayorista 10 in the last 3 years for the final consumer that we have a good format to receive this demand more in price, or low price. I think we have a good format to compete in this segment. And also in Unimarc, we are having the promotion as mentioned before, the assortment in some stores. And it's -- and probably we are -- because we are analyzing there the chance to convert some stores with bad performance in Unimarc, in Mayorista 10, probably 6 or -- 5, 6 stores with the idea to improve the performance with this opportunity to capture clients that are finding low prices. That's our view for the next month. It's not easy to project the situation because it's -- we are updating our analysis permanently. But in e-commerce, for example, we are working in the -- in our plan to develop the stock up purchase of the online clients. Now this situation is clear that the customer in Chile in e-commerce, the delivery is different because in 2019, the demand increased in the express purchase. Now you have a lot of stock up purchasing through online business. And in this business, we are -- we have a good format with the Telemercados, and we are improving the front and back in this format and with idea to develop an efficient logistics with a 1 dedicated distribution center to supply with a very good on-time and info for our client because now the express purchase is not so frequent than some months ago.

Arturo, and can you comment on leverage? And where do you see leverage at the end of the year?

Excuse me. The idea is to keep the level of indebtedness. They need to keep their 4.3, 4.2x.

Okay.

Excuse me. Because, Alonso, we are -- if you consider the cash flow, the use of cash flow, as Carolyn mentioned, we have some CapEx of the company plus the interest expense and rent payment considering the financial portion, we have less -- and dividend, and we have less than our cash generation. That's why we have a real chance to keep our indebtedness in the same level.

[Operator Instructions] So there are no further questions registered at this time. I would like to turn the conference back over to Carolyn McKenzie for any closing remarks.

Thanks so much, everybody, for joining us today. I hope you have a great day. And we hope to have you with us for our second quarter earnings call in August. Take care.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.