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

Thank you for standing by. This is the conference operator. Welcome to the SMU First Quarter 2021 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. Thank you for joining us today. I am here with Arturo Silva, our CFO. I'm going to briefly go over a few slides summarizing our first quarter results. And then after, we'll be happy to take any questions at the end of the call. And of course, please feel free to contact me afterwards if you have any additional questions. If anyone isn't using the webcast, to follow the slides, the presentation is available on our website, www.smu.cl, in the Financial Information section. I sent out the link to the distribution list this morning as well. 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. On Slide #3, we have revenue and same-store sales. Revenue for the first quarter decreased 4.1% with respect to the first quarter of last year. The main explanation is that we had a high comparison base in the first quarter of last year. The same-store sales graph on the right clearly shows that the first quarter of 2020 was an extremely strong quarter. For starters, 2020 was a leap year, so we had 1 less day of sales this year. That's around CPL 6 billion of a difference. And last year, we had a positive impact from the pandemic, whereas this year, we had a negative impact. What I mean by this is that last year, in the second half of March, we had high levels of demand as customers were panic buying at the onset of the pandemic. However, the government had not yet begun to impose restrictions that affected traffic. This year, however, we don't have any extra stocking up. And especially in February and March, a large percentage of our stores were affected by very strict quarantines. These quarantines mean that each person in Chile is only allowed 2 permits per week in order to leave their house, for 2 hours per permit. When people are only giving 2 chances to leave the house per week, they're naturally going to want to make sure they can cover as many of their needs as possible in that trip. Which, as we also saw last year, tends to benefit hypermarkets that sell nonfood categories such as clothing and household goods, and put us at a disadvantage with our smaller neighborhood store. Centrally located stores are especially hard hit by these restrictions on movement, and we have a significant number of those stores, which, in non-COVID times, were strong performers. With respect to gross margin, as we can see in the graph, we had an expansion of 30 basis points from 29.7% to 30%. However, the 29.7% from last year is distorted by the recognition of the provision for business interruption insurance that we expect to recover following the acts of vandalism in the context of the social unrest. The insurance as recognizes revenue, but it has no associated cost of goods sold. So it effectively has a gross margin of 100%, which makes total gross margin higher than it otherwise would be. If we exclude this effect, gross margin for the first quarter of last year would have been 29.4% instead of 29.7%, making this year's 30% an expansion of 60 basis points. On Slide #4, we have a breakdown of revenue performance by format for the first quarter of 2021 versus 2020. As I mentioned on the previous slide, the pandemic restriction affected sales, especially essentially located stores, which particularly FX, Unimarc and Mayorista. A new effect this year is in Peru, where the government imposed restrictions on supermarkets, such as requiring them to close earlier and not allowing them to operate on Sunday. These restrictions were not imposed on other food retailers, such as mom-and-pop, which, of course, puts supermarkets at a disadvantage, contributing to the 5.5% decrease in local currency. There's also an exchange rate impact that contributes to the lower revenue in pesos, where the decrease is 21%. On the positive side, while you can't see it on the graph because it is grouped with Mayorista 10 under cash and carry, Alvi had revenue growth of close to 5%. This is particularly impressive given that Alvi had outstanding performance consistently throughout 2020. So this is growth on top of a high comparison base. We also saw very strong growth in the convenience segment, over 14%. And the trend of strong growth in online sales also continued this quarter, with an increase of 30% in sales through our own platform and growth of 85% when we include partnerships this last month. On Slide 5, we have a graph to illustrate the effect of the pandemic on customer traffic in Chile. As I mentioned before, Chile has established very strict quarantines for municipalities with high infection rate. On this graph, the red bars at top show the average number of Unimarc and Mayorista stores that are affected by these most extreme restrictions, which in Chile, is called Phase I of quarantine. As the number of COVID cases decreases, the restriction levels can be rolled back. In Phase II, people can move around freely during the week during the day because there is a curfew at night. But on the weekend, they only have access to 1 permit to go out. This graph does not include those Phase II restrictions, so it understates the true level of restrictions. As you can see, we started with a limited number of stores in quarantine in April of last year, steadily increasing to a peak in August, and then falling throughout the second half of the year. On the bottom side of the graph, in gray, you can see the year-over-year change in number of transactions. And how that number quickly started to bounce back as restrictions were listed last year. If you'll notice, quarantine it right back up in the first quarter of this year as the number of COVID cases increased. And we had more stores under these more extreme restrictions than we had even in the second quarter of last year, but traffic was not down as much. We believe this shows that our customers have responded favorably to the different adjustments we have made in order to satisfy their team in needs and preferences under these circumstances. When traffic is down, the customers tend to spend more on to shop. And the higher average ticket does partially offset the lower number of transactions. Average ticket was up 51% in the first quarter of this year. However, our preferred companies maybe more traffic even when that comes at a lower ticket. Moving on to Slide 6. We have operating expenses for the first quarter. As was the case during the second, third and fourth quarters of 2020, in the first quarter of 2021, we faced extraordinary operating expenses related to the pandemic, including personnel expenses, standardization services, personal protective equipment and other materials. These expenses amounted to CLP 2.1 billion this quarter. Even with these extra expenses, our total operating expenses decreased 3.1% year-over-year, clearly showing the success that we have had with the operating efficiency initiatives that we have been working on during the past several years as part of our strategy. OpEx as a percentage of revenue increased 20 basis points due to lower operating leverage with a decrease in sales, but we are confident that by developing the deficient operating structure, we positioned ourselves to continue improving our results going forward when public health conditions enable customer traffic to return to normal levels, with the resulting positive impact on sales. If we exclude the COVID expenses, the decrease in OpEx is even more significant, 4.8%. In addition, OpEx margin decreases 20 basis points from 20.8% to 20.6%. On Slide 7, we have 2 indicators that are related to operating efficiencies. Our rate of centralized distribution increased from 50.5% in the first quarter of 2020 to 52.5% this year as the number of suppliers whose products are distributed through our network has increased. Our logistics department has been building up capacity over time in order to cement better inventory management and by extension, improved in-store product availability. Consistent with the improvement in operating efficiency that we described on the previous slide. Sales per full-time equivalent, which we look at to measure productivity, have been consistently increasing over the last several periods. And in this quarter, we had an increase of 5.9% with respect to the first quarter of 2020. On Slide 8, we have EBITDA, where we review the same structure that we used for operating expenses. On the left, we have EBITDA as reported, including COVID expenses, and on the right, we've excluded covered expenses. EBITDA for the first quarter decreased 2.8%, but excluding corporate expenses, it would have increased by 1%. EBIT margin -- EBITDA margin, sorry, expanded 10 basis points. So we have continued our positive trend despite the weakness in the top line. And excluding COVID expenses, EBITDA margin would have expanded 50 basis points, reaching 9.4%. On Slide 9, we have net income, which fell 26.9% with respect to the first quarter of last year. However, this is mostly due to nonrecurring effects in our non-operating income. We had onetime effects in both the first quarter of this year and the first quarter of last year. This year, it was a plan to optimize our organizational structure, which cost approximately CLP 13 billion, all of which was recognized this quarter. We implemented the plan in February of this year and to begin to generate savings in March as we saw in the operating expenses. Last year, the main one-off was from losses related to accidentalism as well as a fine related to the Supreme Court ruling on the free competition case. The total one-off last year totaled approximately CLP 7 billion. So the net difference year-over-year was around CPL 6 billion. We also had higher losses on inflation index liabilities than we otherwise would have passed because we have the maturity of the series G and K bond on March 26, basically at the very end of the quarter for USD 3 million. We would refinance those funds in December. So we had essentially double debt sitting on our balance sheet for those 3 months. Operating income was slightly lower this year as well and had a positive impact from taxes, but the most important factor in net income was nonoperating result. On Slide 10, we have our bond covenants where everything is ordered, we have -- in order. We have some flexibility in terms of meeting these. On Slide 11, we have an updated maturity profile. We don't have any relevant maturities coming up. As I just said, we amortized USD 3 million in bonds in the first quarter. And basically, what we have in terms of short-term debt now is revolving bank debt. Finally, a couple of recent highlights on Slide #12. First of all, both of our local rating agencies upgraded our credit rating as a result of their annual review processes. ICR upgraded our rating from A minus with a positive outlook to A with a stable outlook. And Feller Rate upgraded our rating from A minus with a stable outlook to A with a stable outlook. They both explained this upgrade was due to a combination of sustained improvement in our financial position and the resilience that we have shown throughout the pandemic. We also received 2 dividends this year. The first was a special dividend paid in February, and the second was a final dividend payed in April. Together, they are equivalent to a payout ratio of 75% of 2020 net income. That's it for our presentation. Thank you so much for listening. If there are any questions, operator, we'll be happy to take them now.

[Operator Instructions] The first question comes from Alonso Aramburú with BTG.

Two questions on my side. Arturo, can you provide maybe some details on the operating efficiency initiatives? What are these initiatives? Maybe provide some color on that and whether you will have more come in the rest of the year? Or have you implemented all of them already? And second, if you can just give us maybe some color or guidance on what's happening after the quarter, if sales performance improved? Or has it stayed at similar levels than in the first quarter?

Alonso, about the first question, efficiency initiatives, the company has been an important pillar in operational efficiency in the last 6 years more. And in the last year, the company developed a lot of initiatives in terms to improve the operational model in the Unimarc and especially Mayorista 10 as well. In the all activities in the [ Alvi ] store with automatization process and also improvement in the availability of product, incorporating different tools -- technological tools in the different process to replenishment. And we are incorporating different tools to predict the demand and also to replenish the stocks in the store and also in the distribution center with idea to improve the full process to receive the inventory into store in efficient process, reducing the inflation also allowing the more efficient headcount in the stores. For this reason, in February, the company developed the optimization plan. The cost of this plan was still in the result, CPL 13 billion, with sales for this reason of CPL 1.2 billion savings in -- per month for this on the paper, as this initiative is 11 months, more or less. Therefore, we will have more benefit of this decision in the rest of the year because in the first quarter, the benefit was present only in March because the execution of this plan was in February. But in the second quarter and the rest of the year, we receive 100% of the benefit quarter-by-quarter. In terms of the performance of the company for the future, in the second quarter, the -- no doubt the sales have been affected by high percentage of quarantine towards taking transaction and raising the other tickets. However, the total space performed better than the same month last year, which shows that the company has been able to compensate the effect of the pandemic with adjustments, this value position and promotional activities. And we hope that with less [indiscernible] as a consequence of [ achieving ] profit, the sales reach better performance in the second half of this year as we mentioned in the end of the last year. As Carolyn mentioned, the company has implemented different activities to receive -- to improve the other tickets and receive this demand for our client. No doubt the transaction is very important for minimal format. And we need more transaction that but less subscription. No doubt this transaction will better in the second half of this year. The first quarter was a very, very good quarter because the base -- the comparison base was very excellent, demanding. But in the second quarter, the situation will be reversed because the performance is better and also the compression base will be less demanding because last year, the effect of the pandemic was more important because the company was without initiative to incentivize the purchase for the high ticket with more basic products and not necessarily a position of pressure. This adjustment and also in the promotional plan, allow to reduce the impact of the pandemic in the end of last year and also in the beginning of this year with an important restriction in the mobility of the population, as Carolyn mentioned. Therefore, we are optimistic that in the -- with the numbers of the company's sales will be better. And with our important effort in the -- to improve the efficiency in the company. You can see the numbers, the expenses decreased in nominal days 3.1% and ex COVID 4.8%. It's very, very important. Therefore, we are very, very fit to receive better pace in the next months, improving our margin, EBITDA margin because our gross margin has been very, very good independent of the pandemic period. Thank you.

[Operator Instructions] We currently have no more questions from the phone lines. And this concludes the question and answer session. 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 I hope you'll join us for our second quarter 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.