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

Thank you for standing by. This is the conference operator. Welcome to the SMU Second Quarter 2022 Results 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 our CFO, Arturo Silva. As usual, we have some slides describing some recent business highlights as well as first half and second quarter financials. 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 any additional questions. If anyone isn't using the webcast to follow the slides, the presentation is available on our website, smu.cl, in the Financial Information section. I sent out the file 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. We'll start today's presentation with the latest updates on our strategic plan for 2020 to 2022, which has 4 pillars: omnichannel growth, customer experience, efficiency and productivity and committed and sustainable organization. Beginning on omnichannel growth, on Slide 3, we continue to open new stores with a total of 2 Unimarcs, 2 Maxi Ahorros and the reopening of an Alvi that has been closed since January of [indiscernible]. For the remainder of this year, we expect to open between 3 and 5 new Unimarcs as well as 3 Maxi Ahorros. On the next slide, we have more plans for growth. Last year, we announced an agreement to lease a group of stores that were previously operated by the supermarket chain Montserrat. That transaction was subject to regulatory approval, which we obtained in July of this year. And following that approval, we've signed a lease contract for 21 stores. These stores are located in the Santiago Metro and Valparaiso region of Chile, which, as you can see in the graph on the slide are 2 of the regions where we have the lowest market share. So this is a great opportunity to expand our coverage. In addition, our multi-format strategy gives us the flexibility to choose which format is the best fit for its location: Unimarc, Alvi or Super 10. The lease contracts require the owner to fulfill certain conditions relating to us having access to each location so we can begin to operate. And we expect that to start to happen in the coming months. This should be a gradual process as each location becomes available, the leased store openings should be spread out over 2023 and possibly into 2024. On the next slide, another recent announcement relating to omnichannel growth is a strategic partnership we announced in June between Unimarc and Mercado Libre. This partnership adds yet another channel to our online sales offering. Mercado Libre is the most visited online marketplace in Chile, and they just recently added the groceries category. So we think this partnership is a great opportunity for both of us to better serve our customers. On Slide 6, we have more news in the online world. On August 1, we launched App Alvi Compras, an online shopping platform for members of our Club Alvi loyalty program. Club Alvi serves B2B customers such as owners of mom and pops, hotels, restaurants and other small businesses. App Alvi Compras makes it possible for these customers to order and receive products without having to leave their place of business, which means they can continue to serve their own customers and ensure product [indiscernible] sorry, at the [indiscernible]. By offering new solutions, we help these customers grow their businesses, and we also build loyalty to Alvi. The next pillar of our strategy on Slide 7 is customer experience. Making lives easier for our customers is our company purpose, and we are proud of our deep insight into what customers are looking for when they shop for grocery. This year, the higher levels of inflation have affected consumer behavior. 90% of the customers we surveyed say they have made changes to the way they shop. 54% said they seek out discounts and promotions before they shop. 42% say their products they only buy when they are on sale. And we are seeing these changing needs and coverages reflected in our sales mix with some customers substituting lower-cost products, including our private label products as well as other examples such as white meat instead of red meat. Our multi-format strategy allows us to offer different alternatives to different customers. At Unimarc, we launched a promotional campaign called The Path to Savings, offering discounts on basic products to help customers maximize their budget. We also saw strong growth in our low cost and cash and carry format as these value propositions were very attractive to customers. In addition, in all formats, we use our customer insights to make adjustments to our product assortment as cases and needs shift. Another initiative within the customer experience pillar of our plan is the development of private label products on Slide 8. And this relates well to the trends I described on the previous slide. Our private label strategy is to offer products of equal or superior quality at attractive prices. And as customers increasingly seek value, they have been more willing to try out these new products and are pleased with what they find. Private label sales performance has been very strong this year. We've also continued to roll out new products and brands such as the Como en Casa line of prepared food we've included on the slide, and we have many more products in the pipeline. The third pillar of our strategic plan is efficiency and productivity. And on Slide 9, we describe some of the progress that we made this year. We've been rolling out a new operating model at Unimarc, and we implemented 78 stores to date. This model includes changes to different operating processes, including logistics. These stores receive daily deliveries from our distribution centers. And we have seen a positive impact from different operating indicators, including levels of in-stock merchandise and lower estimated lost sales resulting to improved product availability. We started implementing self-checkout modules in stores a few years ago, and we've seen a positive impact on both customer experience as shoppers value the quick and easy process and on productivity. This year, we've added self-checkout modules to about 30 more stores for a total of 135, and we aim to reach 150 by the end of the year. Another initiative that we've mentioned in the past is the Blue Yonder system for automated demand planning, which uses artificial intelligence to more accurately predict demand so that we purchase the right amount of each product, avoiding both lost sales and unnecessary [ weight ] . So far this year, we've implemented the system for the food and vegetable category in 100 stores. And we're seeing sales growth better than comparable stores without the system as well as a reduction in shrinkage. Continuing with efficiency initiatives on Slide 10, we are also working to make improvements in energy efficiency. These initiatives have a double benefit as we reduce consumption and are, therefore, more cost efficient. And we also [ reduce ] emission, which helps with our carbon footprint and the plan. We are implementing an energy management system based on ISO 50001. We also started a pilot program to use sensorization technology or the Internet of things to monitor and reduce energy consumption at a group of 4 Unimarc store. In addition, we signed a new electricity supply contract in order to use renewable energy sources. This contract covers stores that accounts for about 25% of our electricity consumption. On Slide 11, we have another initiative that will help reduce our impact on the environment as part of the fourth pillar of our plan, committed and sustainable organization. As we continue to grow our offering of private label products, we are aware we have an opportunity to have a positive influence on different characteristics of these products, including packaging. Our goal by 2024 is to have 500 private label products certified with the Ecolabel Seal that indicates that the packaging is recyclable. For this year, our target is 150 products. We started the year with 18, and now we are up to 106. So we're very pleased with the progress. On the next slide, we have another focus area of our committed and sustainable organization pillar, diversity and inclusion, which are a fundamental part of our corporate identity and value. Specifically with respect to gender equality, we are proud to have 50% of our leadership role filled by women, including 1/3 of our Board of Directors and 31% of our executive management team. However, there is clearly still plenty of room for improvement. To help drive these improvements, we are in the process of getting certified under the Chilean Standard 3262 on gender equality and work, family and personal lifestyle. As part of this process, we have been reviewing our internal governance practices, identifying and developing new policy procedures, carrying out internal audits and offering training programs on a number of different topics related to gender equality. Our performance in this area was recognized earlier this year by the audit firm EY and the El Mercurio newspaper, who named SMU as a distinguished company in diversity, equality and inclusion as part of their annual corporate awards ceremony. We feel very proud of this recognition, and we also feel motivated to continue improving. On Slide 13, as part of our committed and sustainable organization initiatives, we aim to create shared value with the company -- with the communities to which we belong. We recently concluded the Unidos or Together gift card campaign, through which customers were able to buy a gift card at Unimarc, Alvi, [indiscernible] or Super 10. And SMU contributed 10% of total gift card sales to 4 organizations whose missions are aligned with the social role we play as a food retailer and with our commitment to diversity and inclusion. The total amount of the donation was CLP 172 million. And it benefits organizations that help care for senior citizens and migrants and that work to eradicate hunger in Chile. Before we get into the numbers, on Slide 14, we have a reminder about how the sale of our OK Market convenience business earlier this year affects our financial statements and the comparability of information from previous periods. To summarize, in the income statement, OK Market was consolidated in a single line net income from discrete operations. So revenue expenses, taxes, et cetera, exclude OK Market. The income statement is, therefore, comparable year-over-year. The balance sheet is also comparable because December 2021 was already presented with OK Market available for sale. The cash flow statement is not comparable. 2021 figures include cash flows for OK Market. On Slide #15, we have revenue for the first half and second quarter. These figures do not include OK Market. We had top line growth of 17% in the first half and 16.3% in the quarter mainly driven by same-store sales growth of 16.2% in the half and 15.4% in the quarter. We also had revenue growth coming from new stores we've opened over the past year. During the first half of this year, the Chilean food retail industry grew by 11.4%, whereas our revenues in operations in Chile grew 16.8% Similarly, in the second quarter, the industry grew by 7.5%, and we grew 16% in Chile. So we are growing faster than the industry, gaining market share. We continue to see a recovery in customer traffic with the number of transactions in Chile up 42% in the half and 51% in the second quarter. As you'll see on the next slide, we saw very strong revenue growth in our cash and carry formats in both the half and the quarter. On the gross margin side, we had a decrease of 50 basis points in both the quarter and the half. This is largely due to the change in revenue mix as the more economic format grew more than the traditional format. However, gross profit grew 15.3% in the half and 14.4% in the quarter. On the next slide, you can see what I just mentioned about very strong growth in the lower-cost format. Alvi grew 17% in the first half and 20.5% in the second quarter, whereas Mayorista 10 had same-store sales growth of 27.4% and 32.4% in the half and the quarter, respectively. Unimarc grew 13.7% in the half and 10.7% in the quarter. This slide clearly illustrates the benefits of our multi-format strategy, which allows us to cover different customer segments and needs. On the next slide, we have a different view of how the different formats are driving revenue growth with strong contributions from both Unimarc and cash and carry. Moving on to Slide 18. We have operating expenses, which grew 13.4% in the half and 16.2% in the quarter. The 2 main drivers behind the increase are a higher minimum wage, which affects both personnel expenses and profit services and inflation, which also affects personnel expenses and the cost of services as well as leases and distribution costs. There are also other supply chain effect that -- such as oil costs that affect distribution costs. Although operating expenses increased quite a lot, the strong top line growth generated operating leverage so that the OpEx margin improved 60 basis points in the first half from 20.7% to 20.1%. And in the quarter, it remained stable at 20.7%. On Slide 19, we have EBITDA, which grew 19.5% in the half and 10.2% in the quarter. EBITDA margin grew 20 basis points in the first half to 9.2%. In the second quarter, EBITDA margin fell 50 basis points, but the comparison base for the second quarter of last year was quite high. Normally, we have our lowest EBITDA margin of the year in the second quarter because of seasonality. But last year, second quarter EBITDA margin was actually higher than in the first quarter. We remain confident that for the full year, an EBITDA margin of over 9% is sustainable in the long term. On the next slide, net income for the first half of 2022 reached CLP 71 billion, almost 3x net income for the first half of 2021. In the second quarter, we had net income growth of 13.5% to CLP 22 billion. On Slide 21, we have a more detailed look at the variation in net income in the first half. CLP 16.4 billion of the improvement comes from operating results. About CLP 29 billion are nonrecurring effects. In particular, in 2022, we had the sale of OK Market as a nonrecurring gain. And in 2021, we had a restructuring program that was a nonrecurring loss. Next, we have inflation, which has a negative impact because of our inflation index debt, but that effect is basically offset by the higher income tax benefit, which is mostly related to inflation adjustments to our deferred tax assets. Setting aside the inflation effects, which cancel each other out, and the one-offs, our strong operating results are contributing significantly to the solid income -- net income growth. On the next slide, our profitability indicators continue to improve with a dividend yield of 18% for the 12 months to June and a return on equity of 16%. On Slide 23, we have our bond covenants, where we continue to have plenty of flexibility. Net financial debt to equity is at 0.58x, similar to December. And interest coverage is up to 5.7x versus 4.9x in December. Last quarter, we started adding some new information to our financial ratios in hopes of helping with the comparison to other companies and industries. And we have done so again on Slide 24. As we explained last time and as most of you know, we rent almost all of our stores, and most of those rental contracts are treated as financial liabilities under IFRS even though they are completely different in their financial and legal structure when compared to actual events such as a bond or bank loan. However, these rental contracts, which are called obligations for [indiscernible] in our financial statements, makes up nearly half of our financial liabilities and over half of our interest expense. This leads to distortion in our financial indicators. So we have begun disclosing EBITDA adjusted for store rental expenses in our earnings release. This adjusted EBITDA is a lower number than our normal EBITDA because it includes all rental expenses, including those that under IFRS are not included in our administrative expenses. By including all of these expenses in this adjusted EBITDA, we can also remove the effect of these rental contracts from our financial liabilities and interest expense. Therefore, in the graph on the left of the slide, where we have net debt to EBITDA, we have included 2 numbers. In red, we have total net financial liabilities, including the rental contracts over a total non-adjusted EBITDA amounting to 3.9x in December and 3.5x in June. When we take the adjusted figures, net financial debt, excluding rental contracts to adjusted EBITDA, the ratio is 2.7x in December and 2.6x in March. Something similar happened with interest coverage. Our net interest coverage unadjusted, as shown on a previous slide, is 4.9x in December and 5.7x in time in June. But when we adjust EBITDA and interest expense for store rental expenses, coverage was up to 9.5x in December and 13.8x in June. We think these adjusted figures are extremely relevant when comparing us to other companies because the store rental effects distort this indicator. Finally, on Slide 25, we have an updated maturity profile. We're very comfortable with our current level of tax, which is over CLP 100 billion and cash generation in order to meet all of our capital needs. 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] It appears there are no questions. I would like to turn the conference back over to Carolyn McKenzie for any closing remarks.

Great. Thanks, everybody, for joining us today. Feel free to get in touch if you have any questions. Have a great day.

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