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

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to SMU Q4 2022 Conference Call on the 15th of March 2023. [Operator Instructions] So without further ado, I would now like to pass the line to Ms. Carolyn McKenzie, the Head of Investor Relations at SMU. Please go ahead, ma'am.

Great. Thank you very much. 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 financial results for the full year and fourth quarter of the year. And then Arturo will be happy to take any questions at the end of the call. You get some questions by chat or Michael is going to give instructions for Q&A once we get to that part. An audio recording of this call will be available on our website later today. And also please note that we will 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. The first part of today's presentation will be a review of some of the achievements during the third and final year of our strategic plan for 2020 to 2022. A few months ago, we had our SMU Day, where we provided a more thorough review of everything we accomplished during that period. That presentation is on our website if you're interested. Today is more of a brief update. Starting with the omnichannel growth pillar on Slide 3. We have 2 more openings in the fourth quarter, Unimarc and Maxiahorro, capping off a very strong year in terms of new store openings, with a total of 9. We have 5 Unimarcs, 1 Alvi and 3 Maxiahorro. We also remodeled close to 30 stores during the year. And we've gotten off to a good start in 2023 as well, opening at Unimarc in Puerto Montt and also inaugurating our 5h Super 10 store, which we converted from a Mayorista 10 store. In November of last year, we inaugurated our robotic microfulfillment center, or MFC, the first of its kind in Latin America to provide online order fulfillment for unimarc.cl. The MFC serves multiple objectives. It increases the completeness and accuracy of orders, thereby improving the customer experience and it also optimizes the picking process, adding efficiency to the operation and having robots at work allows us to pick orders much faster than having a person going up and down the aisles of the store. The MFC has been delivering on expectations with a 98% found rate and a significant improvement in order accuracy. The MFC was the last big milestone of the year in terms of e-commerce, but there were other achievements as well. We expanded geographic coverage of unimarc.cl to all 16 regions of Chile. We entered into a strategic partnership with Mercado Libre, the most visited online marketplace in Chile. And we launched Alvi.cl and the app Alvi Compras offering our B2B customers the possibility 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 availability at the same time. Our multi-format strategy gave us a range of options to help our customers save, bringing us to the next pillar of our strategy on Slide 5, customer experience. The value propositions that are Alvi, Mayorista 10 and Super 10 received a strong positive response this year as well, growing revenue over 20% in the year. Headlining market promotional activity was an essential part of our value proposition this year as customers look for savings in the face of high inflation. Since promotions are defining characteristic of our strategy, we were well positioned to offer innovative campaigns such as The Path to Savings, which focused on offering low prices on basic products, as well as other promotions offering savings on products that still allow customers to treat themselves while maximizing their budget, such as the year-end campaign that we have on the slide. And while promotional activity is most predominant in Unimarc, we also have different campaigns for other formats, including the Super 10 Ten, offering deep quarterly promotions on 10 key value items. On the next slide, our growing portfolio of private label products also provided an excellent opportunity for our customers to save with high-quality products at convenient prices. In 2022, we had 330 product launches adding new categories and specialty brands to the mix. Customers were drawn to the attractive prices and then they were pleased with the quality, continuing to buy the products after giving them a try, as evidenced by our 69% growth in private label sales in 2022. Part of our private label strategy is to promote recyclable packaging. We've been working on getting these products certified under the ecolabeling seal. As you can see on Slide 7, we certified 18 products in 2021. And then last year, we got up to 171, surpassing our target of 150 for the year. Beyond just getting the product certified, we also have communications campaigns designed to encourage customers to prefer products with the seal. On Slide 8, the third pillar of our strategic plan targets efficiency and productivity. And one of the newer focus areas is energy efficiency, finding ways to reduce our consumption, generating savings and also reducing our impact on the environment. We're rolling out our energy management systems throughout our operations, and we already attained certification under ISO 500001 for our Lo Aguirre distribution center as well as 2 Unimarc stores. Our goal is to certify all of our operations in Chile by 2025. We're also working on incorporating electric vehicles into our supply chain actually starting last year with the MFC, where 30% of the fleet used to make deliveries to customers are electric. And we also have more good news from our logistics team this week because on Monday, we have the very first shipment from Lo Aguirre using an electric truck. The truck you see on the slide was, in fact, being very truck that made a delivery to a Mayorista 10 store in [ my town ]. Our goal is for 10% of shipments from DCs to stores to use electric trucks by 2025. On the next slide, as a food retailer, one of our main environmental initiatives is reducing food waste. As part of the fourth pillar of our plan, committed and sustainable organization. We work to minimize waste throughout our operations, starting with ensuring that we have the right assortment of products for our customers using our deep customer insight. New technological tools help to optimize demand planning using artificial intelligence to have more accurate forecasts. We also have a program called [Foreign Language] which we use to offer discounts on products whose expiration dates is coming up soon, but that are still in perfect conditions to eat. And finally, we have our food donation program, where we are able to help people facing food insecurity and also divert food from the waste stream. Last year, we donated over 660 tons of food to over 250 nonprofit organizations, reaching over 87,000 people in need. On Slide 10, we have another focus area as a committed and sustainable organization pillar, creating shared value by promoting diversity and inclusion. Diversity and inclusion is part of our corporate identity at SMU with an approach that covers gender, disabilities, different generations and migrants. Last year, we made a big push to certify our gender equality management program under the Chilean standard 3262, which involves reviewing our internal governance practices, identifying and developing new policies and procedures, carrying out internal audits, and offering training programs on a number of topics related to gender equality. We successfully completed the process, becoming the first food retailer to receive third-party certification. And at the beginning of this month, we received the Equality & Conciliation seal from the Chile's National Women and Gender Equity Service. On Slide 11, as I mentioned at the beginning, we have now successfully completed the plan for 2020 to 2022, and we have a new road map for 2023 to 2025. The structure of this plan may look familiar, we're keeping the same four pillars, but we have plenty of initiatives and ambitious targets for 2025. Again, all the details of that plan are in the presentation section of our website, if you missed the launch in November. On Slide 12, we have the same reminder that we've had for a few quarters now about how the sale of our OK Market convenience business in the first quarter of 2022 affects our financial statements and the comparability of information from previous periods. And we also have an additional note relating to the consolidation of our financial service business. The Unipay credit card as a payment method that is available for customers at our stores in Chile as a complement to the value proposition of those stores and the promotional activity we offer helping to build customer loyalty. We had a minority stake in the 3 companies that make up the credit card business, and therefore, the results of those companies were treated as an equity investment. However, in December, we made a capital increase in order to help finance these businesses. And as a result, they became subsidiaries and are consolidated on a line-by-line basis beginning on December 20 of last year. Moving on to the numbers on Slide #13. We have revenues for the full year 2022 and fourth quarter. We had top line growth of 14.3% in the full year and 10.1% in the quarter, mainly driven by same-store sales growth of 13.2% in the full year and 8.4% in the quarter. We also had revenue growth coming from new stores we've opened over the past year. During this year, the Chilean food retail industry grew by 8.2%, whereas our revenue from operations in Chile grew 14.1%. Similarly, in the fourth quarter, the industry grew by 4.9%, and we grew 9.9% in Chile. So we are growing faster than the industry, gaining market share. These industry numbers are according to the National Statistics Institute of Chile. We also continue to see a recovery in customer traffic. And as you'll see on the next slide, we saw very strong revenue growth on our cash and carry formats in both the full year and the quarter. On the gross margin side, we had an increase of 40 basis points in the full year, reflecting improvements in our commercial efficiency. In the fourth quarter, the increase was 210 basis points, which again reflects commercial efficiency but also the very low comparison base in the fourth quarter of last year, which we have illustrated on the slide with the graph showing that it was the only quarter with a 28% gross margin over the past several years. In the first half of 2022, our gross margin was lower year-over-year, and it was only in the third quarter that we started hitting back to previous levels. That recovery continued in the fourth quarter. So while we know some of you were surprised by the increase, this margin is actually within the normal range for us. Thanks to this recovery in the gross margin, gross profit grew 15.9% in the full year and 18.1% in the fourth quarter. On the next slide, as promised, you can see the continued strong growth in the lower-cost formats. Alvi grew 18.9% in the full year and 19.1% in the fourth quarter, whereas Mayorista 10 had same-store sales growth of 26.5% and 20.7% in the full year and the quarter, respectively. Unimarc grew 9.1% in the full year and 3.6% in the quarter. In Peru, we had lower same-store sales, mainly because growth in Peru is being driven by new store openings, which are not reflected in same-store sales calculations. Overall, our consolidated same-store sales growth was 13.2% for the full year and 8.4% for the fourth quarter. We are really pleased with these numbers, which show the benefits of our multi-format strategy, which allows us to cover different customer segments and needs and also just the benefits of our very defensive focus on food. Moving on to Slide 15. We have operating expenses, which grew 15% in the full year and 17.1% in the quarter. The 2 main drivers behind the increase are the higher minimum wage and inflation. The minimum wage underwent 2 increases in the year, one in May from 350,000 to 380,000 and another in August to 400,000. This increase affects both personnel expenses and the cost of services. Inflation also affects personnel expenses and the cost of services as well as leases and distribution costs. On Slide 16, we have EBITDA, which comes up 18% in the full year and 20.2% in the fourth quarter. EBITDA margin grew 30 basis points, reaching 9.4% for the full year and reached 9.6% for the fourth quarter, which was an expansion of 80 basis points, but that is mainly because of the lower comparison base in the gross margin as described before. The recovery in gross margin made up for the higher OpEx margin this year. Our EBITDA margin for the year and for the quarter are comfortably above our 9% target. On the next slide, net income for the full year 2022 reached CLP 132 billion, an increase of 74% compared to 2021. That includes the one-off from the sale of OK Market, which had an impact of CLP 20 billion on the bottom line. So to be fair, we've also included a graph excluding that effect, our net income still rose 48% to CLP 112 billion. On Slide 18, we have a more detailed look at the variation in net income in the full year. We have nonrecurring effects, as I just mentioned, such as the sale of OK Market this year and our restructuring plan that was a nonrecurring loss last year. Those accounts were up CLP 29 billion of the total of CLP 56 billion increase in net income. Higher inflation has a negative impact because of our inflation index to 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, which increased almost CLP 29 billion year-over-year are driving recurring net income growth. On the next slide, we continue to show a very attractive dividend yield of 14.5% for the full year and the return of equity -- return on equity, sorry, of 16.8%. On Slide 20, we have our financial ratios including the as-reported figures as well as figures that are adjusted for the fact that 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 debt such as bonds or baselines. These rental contracts make up nearly half of our financial liabilities and over half of our interest expense. EBITDA adjusted for store rental expenses 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 these expenses and the adjusted EBITDA, we can also remove the effect of these rental contracts from our financial liabilities interests payments. Therefore, in the graph on the left of the slide, where we have net debt to EBITDA, we've included 2 numbers. In red, we have total net financial liabilities, including the rental contracts over total non-adjusted EBITDA amounting to 3.9x in 2021 and 3.4x in 2022. When we take the adjusted figures, net financial debt, excluding rental contracts to adjusted EBITDA, the ratio was 2.7x in 2021 and 2.3x in 2022. Same thing with interest coverage. Our net interest coverage unadjusted is 4.9x in 2021 and 6.4x in 2022. But when we adjust EBITDA and interest expense for store rental expenses, coverage goes up to 9.5x in 2021 and 17.5x in 2022. On Slide 21, we have our bond covenants, where we continue to have plenty of flexibility. Net financial debt to equity is at 0.54x, well below the 1.03 limit and interest coverage is up to 6.4x, well above the 2.5x bar. On Slide 22, we have a summary of our cash flow in 2022. Our operating cash generation of CLP 271 billion allowed us to cover all of the basic cash needs for the year, including financial lease statements, which are really store rental payments. interest payments, CapEx and dividends, which would have left us with a balance of CLP 122 billion, a little higher than the opening balance of CLP 114 billion. But this year, instead of refinancing all of our maturities, we paid down debt with net amortizations adding up to CLP 46 billion. If we had stopped there, we would have ended the year with cash of CLP 76 billion, which is comfortably above our internally defined minimum cash level of CLP 50 billion. However, we also have the proceeds from the sale of OK Market, which bring us all the way up to CLP 125 billion at year-end, providing us with excess cash of CLP 75 billion, giving us lots of financial flexibility. And with this solid cash position is we are very comfortable with our maturity profile, which we have on Slide 23. So that is it for our presentation. Thanks so much for listening, and I'll hand it back over to you, Michael. So you can explain the questions and Arturo will be more than happy to answer.

[Operator Instructions] Our first question, Alonso Aramburú from BTG Pactual.

Yes. I wanted to ask about the gross margin. And maybe you can give us some color on the commercial efficiencies that are leading to this gross margin expansion and also related to the gross margin more thinking about 2023 and the faster growth of your low-cost formats. I mean, what do you expect going forward? Do you expect some pressure because of the change in mix from a format perspective?

Alonso, the gross margin improvement in the fourth quarter we can keep this level in the first quarter and in the rest of the year in 2023. Expansion compared to 2021, was plainly because the level in 2021 was recently low as Carolyn mentioned before, but they need to keep this level independent of the more mix-oriented in the low-cost format because in the low-cost format, also the gross margin improved in the second half of 2021. And it's possible to keep this level. And also, we will have the same mix that we had in the fourth quarter of 2022. Therefore, it's absolutely possible to keep this level. And in the first month of 2023, the situation is very similar in the last part of the 2022.

Okay. And can I follow up with your OpEx growth, which is growing double digits. Do you expect that also to continue to grow at that pace? Or do you expect that to moderate probably as inflation comes down in 2023?

In the OpEx, we have a high impact of the increasing the minimum salary in the -- for the full year because we had an increase in May and August last year. Therefore, the impact was not in the full year. In 2023, the effect is 100% and also the inflation effect in the salaries in December because we have adjustments each 6 months also will be in the full year. Therefore, we have a pressure in the salaries but with the improved on the -- in our gross margin and also the dilution of expenses for the increase in the sales will be possible to keep the level of EBITDA margin in the level of 9% or more than 9% EBITDA margin.

Our next question comes from Mr. Andres Navarrete from BTG Pactual.

Yes, I've got a couple of questions regarding the consolidation of the financial business that you mentioned. The first question is what is the origin of this transaction. It was because, I don't know, the financial business needed an inflow of money or is this is more a strategic move? And second question, what are your goals in this regard in this new business -- this new line of business?

The idea is to complement the value position for our clients because it's important to give the credit card as a payment option for them. And because this -- our studies demonstrate that the level of the sales increase. We have incremental sales when the customer uses the credit card, this situation with all retailers. Therefore, we have a positive effect in the business for this reason. But another part is the financial business, the idea is to share this business with a partner or we have a partnership with a financial partner in the future because they need to obtain good funding for this partner and receive incomes for the transaction for each transaction in our channel, in the retailer channel. We are talking with different possible partners to share this business by this financial business because it's not the idea to incorporate more debt for this business. And it is to obtain the benefit in the retail business for the incremental sales or traffic and loyalty of the client and to share the financial business with this partner. That is the idea of business for the future and the benefit for us, but it's not the idea to invest in the financial purposes.

Okay. Got it. So you ended up with 51% of the financial business at the end of all this?

We got a 60 -- 68%.

68%?

Yes. In the financial business. For this reason, we consolidate this businesses in December 2018. Excuse me, of course, we sell the financial business, we have a partner in this business. We can reduce our position because the idea is to receive the benefit in the retail business, and we can reduce our participation in this specific business, it would have a partnership with somebody.

[Operator Instructions] It looks like we have a follow-up question, Alonso from BTG Pactual.

Yes. Yes, I wanted to follow up also on your expansion plan for 2023. How should we think about that in terms of number of stores, growth of selling area and whether that will be more towards the beginning of the year or is spaced out during the year.

Yes. In the first quarter, we continued to grow the sales despite comparing ourselves to a very demanding number of stores, number of store openings. We have a national plan and also the regular open store they need to receive and -- also it is 5 or 9 stores in April, while Montserrat and it is to remodel in the next 2 or 3 months. And with the idea to have revenues for these new stores in the second half of 2023. The reference store we'll receive in the second half of this year and the rest or part of the stores being remodeled in 2024. This is the most important time of expansion in this year. But also, we have 5 additional stores in Unimarc, opening during this year. And also, the idea is to complete 100% of the plan without problem. Also, we have remodeled stores in the level of 30, at least 30 to 40 stores, and we're on track in this plan for this year.

Okay. So just to be clear on the new stores, so you said 5 new Unimarcs plus the -- I didn't hear the number on the Montserrat stores. How many do you plan to have opened this year?

Nine, 9 stores.

And those will be -- forgive me, Arturo. So those will be mostly open in the second half of the year?

In total, for Montserrat, we have 23 stores, new stores, but maybe we'll receive 9 and following the second half, another store would be open more and the rest of '23 in the 2024.

Okay. So the 9 you'll receive in April and the 4, 5 more in the second half, they will open this year. They will be operational this year.

Exactly.

Okay. And in addition to that, you have 5 Unimarc as well.

Yes.

Okay. Okay. Great. And you were commenting about -- maybe you can give some color about January, the first half, the first part of the year, how it trends going forward.

What was the question from the chat that this was the first quarter.

Sorry, I don't want to double on the query.

This quarter will continue on the global sales. We start comparing ourselves to a very demanding 2023 quarter. The regular market including the lower impact of inflation in consumers. Therefore, this -- in this quarter, the comparison will be strong. In addition, we had a greater demand in the final result in the fourth quarter -- in 2021 in the first quarter. And this year we'll see less demand in this specific region, we see demand for summer, but anyway, we are growing in comparison with 2021 lower than the fourth quarter of the last year. But anyway, we are growing for our defensive business, of course, and as mentioned before, we keep the same level of margin that is very important for us to mitigate the effect of our expenses with the idea to keep the current level of EBITDA margin more than 9% in the first quarter. That's and for the rest of the year.

We have received two text questions. I believe one already has been, to some extent, answered. I'm going to read both out. The first question, can you please provide an update on the competitive environment and trends that you are seeing? That's question number one. Question number two, are all of your market share gains coming from cash & carry segment. Are you seeing more competition in this segment?

Yes the competition in this business is very strong. And the all campaigns are -- we are very, very active in the promotional activity. But our low-cost formats are performing very well, growing in all cases. Unimarc is more complicated because it's not low-cost format. But anyway, the -- is implementing promotional activities would level of comparison with the growth of the industry because in the first quarter, we are keeping the market share in the market as and better in the low-cost format in a similar level in January and February but now being the same level of market share than fourth quarter in 2021. But environment -- the competitive environment is very strong with all players with promotional activities.

We see no further questions at the moment. I'll pass the line back the team for the concluding remarks.

Great. Thanks so much, Michael. Thank you, everybody, for joining, and please feel free to get in touch if you have any questions you can get to us today or if you need a meeting for anything. Thanks. Have a great day.

Thank you very much. This concludes our conference call. We'll now be closing all the lines. Thank you. Have a great day.