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

Thank you for standing by. This is the conference operator. Welcome to the SMU Second 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 all for joining us today. I'm here with Arturo Silva, our CFO. I'm going to briefly go over a few slides summarizing our second quarter results, and then Arturo will 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 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 presentation 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. On Slide #3, we have revenue for the first half and second quarter. Revenue for the first half increased 3.7%, and in the second quarter, 12.7%. The strong growth in sales reflects in part a significant recovery with respect to the previous year, but also solid demand leading to a higher average ticket and improved store traffic. As a result, revenue for the second quarter, which has historically been the quarter with the lowest sales in the year, was even higher than revenue for the first quarter of this year. At the bottom of the slide, we've added a graph comparing first and second quarter revenue for the last 4 years to illustrate this point. Also, as you can see in the graphs above, we not only have revenue growth compared to last year, but also compared to 2019, 3.9% higher than the first half and 5.9% higher than the second quarter even though 2019 was still the good old days, before we even knew what the coronavirus was. And in 2021, we are still very much affected by the pandemic. With respect to gross margin, as you can see in the graph, we had an expansion of 50 basis points in the half and 80 basis points in the second quarter. On Slide 4, we have a breakdown of revenue performance by format for the first half of 2021 versus 2020. The graph makes it clear that the drivers behind our strong revenue performance has been UNIMARC, which grew 4.7% in the half and 16.2% in the quarter; Cash & Carry, where we continue to see growth even on top of the consistent growth we have had from Alvi since the beginning of the pandemic. In this segment, we had total growth of 3.7% in the first half and 9.4% in the second quarter. This quarterly growth includes 10% revenue growth from Mayorista 10, in addition to similar growth in Alvi. And OK Market's revenue increased 22% in the half and 31% in the quarter. E-Grocery revenue from our own platform was down, although total online sales, including last milers, grew 10% in the half. In Peru, we continue to be affected by government imposed restrictions on supermarkets such as requiring them to close earlier and not allowing them to operate on Sundays, while other key retailers such as mom-and-pops are not subject to these restrictions, which, of course, puts supermarkets at a disadvantage, contributing to the 10.4% decrease in local currency. There's also an exchange rate impact that contributes to the lower revenue in pesos, where the decrease was 27.4% in the first half. On Slide 5, we have same-store sales, which grew 3.5% in the half and 12.3% in the quarter in line with revenue growth. Performance by format was also very much in line with revenue growth by format with the growth being driven by UNIMARC, Cash & Carry and OK Market. On Slide 6, we have a graph to illustrate the effects of the pandemic on customer traffic in our operations in Chile. As we have explained on previous calls, Chile established very strict quarantine for municipalities with high infection rate. On this graph, the red bar at the top shows the average number of UNIMARC and Mayorista 10 stores that are affected by these most extreme restrictions, which in Chile is called Phase I or 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, that is because there is a curfew at night. But on the weekend, they only had access to one permit to go out. This graph does not include those Phase 2 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 following throughout the second half of the year. In the first half of this year, the number of stores in Phase 1 started to increase again, peaking in April with record high and then falling again in May and June. On the bottom part 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 lifted last year. When restrictions started to pick up again in the beginning of this year, traffic was not down as much. And now during the second quarter, we saw positive growth in traffic for the first time since the beginning of the pandemic. We would expect this recovery in traffic to be accompanied by a lower average ticket as customers shop more frequently and distribute their purchases accordingly. But in the second quarter, we actually continue to see a higher average ticket compared to the same period of last year, which certainly contributed to revenue growth. Moving on to Slide 7. We have operating expenses for the first half and second quarter. As has been the case since the second quarter of 2020, in the first half 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 4.3 billion in the half and CLP 2.3 billion in the quarter compared to CLP 5.3 billion in the first half of last year and CLP 4.6 billion in the second quarter of last year. Even with these extra expenses, our total operating expenses decreased 4.2% in the first half and 5.2% in the second quarter, clearly showing the success we have had with the operating efficiency initiatives we've been working on during the past several years as part of our strategy. OpEx as a percentage of revenue decreased 170 basis points in the first half and 400 basis points in the second quarter. When we look at OpEx excluding the COVID expenses, the comparison is less dramatic because COVID expenses were significantly higher than the second quarter of last year, but it is still extremely noteworthy that we are still reporting lower operating expenses in nominal terms, 3.6% in the first half and 3.9% in the second quarter. In nominal terms, we are actually similar to where we were in 2019. And as a percentage of revenue, we are significantly better than in 2019, 70 basis points lower than in the half and 110 basis points below for the second quarter. On Slide 8, we have 2 indicators that are related to operating efficiency. Our rate of centralized distribution decreased slightly from 54.5% in the first half of 2020 to 52% this year related to the mix of products sold during the period, but still generally trending upwards. And sales per full time equivalent improved 18% year-over-year, consistent with the improvement in operating efficiencies that we described on the previous slide. On Slide 9, we have EBITDA where we can use the same structure that we use for operating expenses. At the top, we have EBITDA, as reported, including COVID expenses; and below, we have excluded COVID expenses. EBITDA grew 38.3% in the first half and 134.4% in the second quarter, when COVID expenses are included, and we achieved an EBITDA margin of 9.1% in both periods. And excluding COVID expenses, EBITDA growth for the half was 34.7%, and for the quarter, it was 104%, and the EBITDA margin reached 9.4% and 9.5%, respectively. Once again, just as I mentioned for revenue, here, we have a significant expansion with respect to both 2020 and 2019. Including COVID expenses compared to 2019, EBITDA margin expanded 120 basis points in the half and 150 basis points in the quarter. Taking out those extraordinary expenses, the expansion is 150 basis points in the half and 190 basis points in the quarter versus 2019. On Slide 10, we have net income, which reached a record level in both the half and the quarter, CLP 24.2 billion for the first half and CLP 19.1 billion for the second quarter, again, with a significant improvement over both 2020 and 2019. The strong performance in the bottom line is driven by operating results. On Slide 11, we have our bond covenants, where we continue to have plenty of flexibility in terms of meeting the restrictions. Our interest coverage has increased quite a bit due to the growth in EBITDA as well as the lower interest expense. On Slide 12, we have an updated maturity profile. We don't have any relevant maturities coming up. Basically, what we have in terms of short-term debt is revolving bank debt, and we have a very comfortable cash position. On the next slide, we thought we would add a little bit more color in terms of what we did during the second quarter that contributed to the strong revenue growth. In UNIMARC, we've been happy with the results of our promotional activity, and we've gotten an excellent reaction with promotional campaigns focused on product category where we have historically had strong performance. In UNIMARC, we've also been applying our customer insight to improving the product assortment in our stores. In Alvi, we have been focusing on specific B2B segments, including promotional campaigns targeting mom-and-pop and also a renewed focus on the hotel and restaurant segment. We've also continued to have good results in our institutional sales. And Mayorista 10 [indiscernible] has seen strong results -- strong growth in categories that have traditionally been strong sellers. And from an operating standpoint, we have also worked at improving in-store product availability. Finally, a couple of recent highlights. First of all, a couple of weeks ago, we announced the binding agreement to lease up 22 locations that used to be operated by the Montserrat supermarket chain. These stores are located in the Santiago Metro and Valparaiso regions of Chile, which is precisely where our market share is the lowest. So we think this opportunity is an excellent fit with our organic growth strategy. This transaction would also allow us to expand our geographic coverage at a lower cost than it would be required to open new stores from scratch. The transaction is subject to regulatory approval, which means it's another short-term prospect. This will give us time to analyze each location and determine which of our formats would be the best fit in each case. Second of all, in June, we paid an interim dividend of CLP 0.018 per share for a total of about CLP 3.8 billion. This dividend is equivalent to 75% of retained earnings as of March 31, 2021, maintaining the same dividend policy as in previous periods. And finally, with respect to the sale of OK Market. The free competition authorities had identified certain potential risks from a competitive standpoint. And together with OXXO, we proposed certain mitigation measures. The authority is in the process of analyzing those measures, and this means that the deadline for the regulatory approval has been extended. That's it for our presentation. Thank you so much for listening, and if there are any questions, Arturo will be happy to take them.

[Operator Instructions] Our first question comes from Alonso Aramburu from BTG.

And congratulations on the very good quarter, Arturo, Carolyn. A couple of questions. So can you comment on trends? And have you continued to see the good top line trends that you saw in 2Q and 3Q? Are you seeing this recovery in traffic to continue and the average ticket also to continue to be relatively high? And my second question on expenses. What should we expect in nominal terms in the second half? I mean, should we expect expenses to decline roughly what we saw in 2Q, so negative 2%, 3%, 4%, even 5%, given that you had more COVID expenses last year?

Thanks for the congratulation. First question about the trends in Q3. In the third quarter, sales continued with growth in July and in the beginning of August. As in the second quarter, increasing transaction due to a fewer stores in quarantine, as Carolyn mentioned, but with an increase in average ticket, we have better transactions and also average ticket and the same behavior as second quarter. Therefore, we expect sales improvement in the second half of the year due to the increase in traffic in our stores. We also hope to maintain discipline in expenses in order to keep the good level of margin obtained during this year. Specifically, in some of the -- the second question, a lot of the trends in terms of expenses. Our optimization plan in terms of head count continuing in the second half, and it's a very, very important issue to keep the level of expenses reduction. But no doubt, in May, we -- the minimum salary increased and also the inflation is increasing in Chile. Therefore, we will have price shock or price pressure in the second half. But anyway, we are reducing the expenses in other items, independent of salaries, but anyway, probably the reduction of the expenses in comparison with the last year will be a little bit lower, but anyway with reduction in nominal terms.