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

Ladies and gentlemen, thank you for standing by, and I'd like to welcome you to SMU's Q1 2023 Conference Call. [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.

Great. Thank you -- thank you all for joining us today. I'm here today, our CFO, Arturo Silva. As usual, we have some slides describing some recent business highlights as well as financial results for the first quarter of the year and then after we will be happy to take any questions at the end of the call. You can send your questions by chat or raise your hand, and we'll give you those instructions also at the end. An audio recording of this call will be available on our website later today. Also, please note that we may be making some 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've structured the business highlights slides around our 3-year strategic plan for 2023 to 2025 with its 4 key pillars, starting with omnichannel growth on Slide #3. In the year-to-date, we've opened 2 Unimarc stores, one in Puerto Montt and one in Rancagua, and we also inaugurated our fifth Super10 store, which we converted from a Mayorista10. We're also on track with our store opening plan for the remainder of the year, moving forward with the construction of the stores that were in our own pipeline, which include 4 more Unimarc stores and one Alvi store in Chile as well as 5 Maxiahorro stores in Peru. And we have good news regarding the Montserrat project because just last week, we received the first 2 stores that meet all of the conditions for us to be able to start remodeling and we expect to receive another 7 stores over the next couple of months. Assuming that happens on time and these stores meet the conditions we've defined with Montserrat, such as having the permits in order, we should be able to open those stores over the course of the second half of this year and the total openings for the remainder of the year would match the plan we have on the slide, an additional 4 Unimarc stores, 2 Alvi stores and 3 Super10 stores. In the second half of the year, we should also continue to receive more Montserrat stores to remodel and those will be opened in 2024. With respect to our online business, on Slide 4, we've continued to ramp up the utilization of the Robotic Micro Fulfillment Center, or MFC that we inaugurated last November and adding new municipalities to the coverage zone so that we are now serving 42% of the target Santiago metro region area using the MFC. This means that a greater number of orders are benefiting from this technology, which increases the completeness and accuracy of orders, thereby improving the customer experience. And it also optimizes the picking process, adding efficiency to the operation as having robots do the work allows us to pick orders much faster than having a person going up and down the aisles of the store. We've also been adding click-and-collect pickup points to select stores. As we said, when we launched the 2023 to 2025 plan, our goal isn't to have click-and-collect everywhere, we are targeting locations where we think customers will benefit from having this option. In recent months, we've added click-and-collect at 5 new Unimarc stores, and we're also piloting the system with Alvi. On the next slide, i'll move on to the customer experience pillar of our plan. Understanding our customers and serving their needs is essential to our business and the core commercial strategy that we have defined to differentiate ourselves from the competition is a high-low strategy, intense high-frequency promotional activity. We defined the strategy nearly 10 years ago, and we have built up a deep expertise in designing and implementing promotions in a way that benefits both customers and participating suppliers. This expertise allows us to adapt our promotional strategy depending on customer needs, which is something that we definitely saw over the course of the pandemic with rapid changes and preferences. This year, we continue to see that consumers are highly sensitive to price as they aim to maximize their family budget. Therefore, we continue to apply our expertise by innovating in our promotional strategy. Last year, we launched the Past to savings or [indiscernible] campaign to help customers identify savings on basic products. That campaign gained traction, and we are building on it in order to give more visibility to savings across different types of promotions. We're also leveraging our multi-format strategy and adding promotions at Mayorista10 that at times mirror the Unimarc campaigns. For example, one of the iconic campaigns that Unimarc is Red Friday, which focuses on meat and wine. And we've added a similar promotion for Mayorista10. On the next slide, another example of how we seek to improve the customer experience is a recent event we held for Alvi's B2B customers, the encuentra lasofertas Alvi or the Club Alvi Expo, as I have decided to call it. Over 6,000 members of Club Alvi came to the event and they were able to meet with over 35 suppliers and 80 major brands. By giving our B2B customers these benefits, we aim to build loyalty to Alvi while we create value for these customers, helping them to discover new products and assortments so they can grow their businesses. On Slide 7, another element of our customer experience strategy is to continue growing our private label offering. Providing customers with excellent quality at attractive prices. In the first quarter of the year, we added over 50 new products in different categories and under different specialty brands. Following last year's strong performance, we continue to see strong sales growth with an increase of 27% over the first quarter of 2022. On Slide 8, the third pillar of our strategic plan targets efficiency and productivity. And in the year-to-date, we've continued to make progress on initiatives focused on in-store efficiency and logistics efficiency. Specifically, we've continued to roll out our efficient operating model to a third group of Unimarc stores for a total of 151 stores. This model contributes to better in-store product availability with more frequent deliveries from our distribution centers and more efficient replenishment. We've also added more self-service modules such as self-checkout as you can see in the picture on the slide. Customers enjoy the speedy checkout experience. In terms of logistics, we've expanded coverage of our Blue Yonder automated demand planning tool to cover new product categories. Last year, we were using this tool for fruits and vegetables, and now we've added meat. Our experience with Blue Yonder has been that this more accurate forecasting contributes to higher in-stock levels and lower shrinkage. Finally, as a result of our different initiatives, sales per full-time equivalent improved 8.2% in the first quarter, outpacing revenue growth and thereby demonstrating productivity gains. On Slide 9, we thought we would highlight a couple of initiatives related to caring for the environment, which are part of the fourth pillar of our plan, committed and sustainable organization, but they also contribute to efficiency and productivity and to customer experience, which is why we've also included those little icons on the slide. Starting with the first picture. We recently obtained the Energy Sustainability Agency's cio limpio or Clean Business Certification as a company that generates cargo. As part of our commitment to climate action, we've been encouraging the transport companies that we work with to adopt technologies to improve energy performance. We've been able to get 70% of the transportation fleet we hired in this program, and we've been helping them in their own certification process. The second picture relates to our private label strategy, where we are working to promote recycle of packaging, and getting more products certified under the eco-labeling seal. Under the Clean Production Agreement, we have set commitments and targets related to this initiative, and we've been meeting those targets, which is how we obtained this Estrella azul or a Blue Star certificate Going on to the numbers on Slide #10. We have revenue and same-store sales for the first quarter of 2023. We had top line growth of 5.9% in the period, 5.8% in Chile, in line with the Chilean food retail industry, which grew by 5.5% according to the National Statistics Institute of Chile. The comparison base was challenging as in the first quarter of last year, consumer behavior was still reflecting the high liquidity that had characterized the year 2021. So customers tended to prefer more sophisticated product assortments. In the subsequent quarters, we saw a shift in consumer behavior where people became more sensitive to price due to higher levels of inflation. And that was the situation in the first quarter of this year and continues to be the case today. This quarter, we continue to see a recovery in customer traffic and strong performance in soft discount and Cash & Carry stores, where revenue increased 11.5%, and that's what was driving overall revenue growth. On the gross margin side, we had an increase of 130 basis points, which meant an increase of 10.3% in gross profit, reflecting improvements in commercial efficiency. On the right-hand side of the slide, we have our consolidated same-store sales growth for the first quarter of this year and last year, where the high comparison base is very clear. Same-store sales growth last year was 17.1%, and this year, it was 4.2%. On the next slide, we have operating expenses, which grew 13.6% in the quarter. The 2 main drivers behind the increase are the high minimum wage, which increased 17.1% year-over-year affecting both personnel expenses and the cost of services and accumulated annual inflation that also affects personnel expenses and the cost of services as well as leases and distribution costs. Operating expenses as a percentage of revenue increased 150 basis points compared to the first quarter of 2022. Moving on to Slide 12, we have EBITDA, which grew 3.7% in the quarter despite the high comparison base in the first quarter of 2022. We also had a very high comparison base for EBITDA margin, which was 9.8% in the first quarter of last year. The expansion in gross margin helped offset the growth in expenses which means despite this tough comparison, EBITDA margin was 9.6% this year, only 20 basis points lower than last year and still well above our 9% long-term target. On the next slide, we have net income, where the year-over-year comparison is basically entirely explained by 2 factors. First, the sale of OK Market had a total impact of CLP 20.8 billion, including pretax and tax -- sorry. The year-over-year comparison in net income was basically explained by the sale of OK Market, which was a CLP 20.8 billion impact, and that includes pretax and tax effects. And then the gain on the sale of OK Market also -- sorry, exclude that gain, our pretax income was CLP 4 billion higher this year. That's an improvement of 17%. That also means a higher income tax of approximately CLP 1.1 billion, 27% of that CLP 4 billion improvement. The other factor behind the decrease in net income is the fact that inflation was lower in the first quarter of this year, which meant lower inflation adjustments to deferred taxes. That accounts for about CLP 9.5 billion of the difference year-over-year. On Slide 14, we continue to show a very attractive dividend yield of 11.6%, which is lower than the 2022 yield because the share price went up about 25% in those 3 months, as you can see in the graph below. The return on equity was [ 12.9% ] for the 12 months to March 2023, also lower than 2022, and in this case due to the fact that net income for 2022 includes a one-off from the sale of OK Market, whereas the 12 months to March does not include that amount. However, we are still in the double digits. On the next slide, we have financial ratios, including as-reported figures as well as figures that are adjusted for store rental expenses. On the left, net financial liabilities to EBITDA, including store rentals has improved from 3.9x in 2021 to 3.3x in March. The same downward trend is true when we adjust for store rentals, but in this case, the ratio was 2.7x in 2021 and is now down to 2.1x. On the right, net interest coverage, as reported, is up from 4.9x. Are we okay to continue? Beg your pardon Okay. Net interest coverage, right? So we were -- we were up from 4.9x in 2021 to 6.6x in March of this year. And when we make the adjustment for EBITDA and interest expense for the store rental, we had a coverage of 9.5x in 2021, and that was up to [ 20.4x ] in March. And on Slide 16, we have our bond covenants where we continue to have plenty of flexibility. Net financial debt to equity is at 0.49x, well below the 1.03x limit and interest coverage is up to 6.6x, well above the 2.5x. On Slide 17, we have a summary of our cash flows for the first quarter of 2023, our operating cash generation was CLP 73 billion, which enabled us to pay financial debt maturities and CapEx without taking on new financing. And even so, we ended the quarter with a balance of CLP 136 billion which is an increase of approximately CLP 11 billion and well above the minimum cash balance that we'd like to have on hand, which is CLP 50 billion. This solid cash position means that we're very comfortable with our debt maturity profile, which we've also included on the same slide. We should continue to pay down debt during this quarter, and we also have 2 dividend payments, the final dividend that we paid in April and the interim dividend that will be paid in June. On the next slide, we have an update on our credit rating. Both of our credit ratings, ICR and Feller-Rate recently completed their annual review process following the publication of our 2022 financial statements, and they both decided to improve the outlook on our rating from stable to positive, confirming the A+ category. The reason they gave for the change in outlook was the sustained improvement in operating and financial results. And as we saw on the preceding slides, we've continued to deliver on our strategic plan and to strengthen our financial position in the first quarter of this year. That's it for our presentation. Thanks for listening. If there are any questions, we'll be happy to take those now.

[Operator Instructions]

Okay. We have quite a few questions. We have some chat questions, and we've got some hands raised. So start with Alonso. Okay. All right. Alonso, we will unmute you.

Yes. Two questions on my side. First, I wanted to ask you if you can give some color on gross margin improvement. You talk about commercial efficiencies. Maybe you can give us some examples of what exactly you're doing? The gross margin this quarter was, I think, the best gross margin you've had in the first quarter. So if you can give us some color on that? And my second question is on your expectations for top line growth. Would comps be more difficult? What are you expecting on revenue growth, right? Is it this mid-single-digit growth that you posted in the first quarter? Or is it maybe potentially higher given the opponents?

Okay. Alonso. Third question about the gross margin. Indeed, we increased the gross margin in the first quarter. And we explained in the fourth quarter as well that the gross margin of the company was increasing, and we -- we are expecting for the second quarter of this year to keep this level of gross margin because absolutely possible because we are financing the promotional activities to the suppliers. We are financing the promotion with our program because they can improve the -- your sales as well. And that is the main reason, including in this comment of commercial efficiency, okay? And the second questions -- our expectation is to keep the level of gross margin of the first quarter. And the second question about top line and the sales on growth. We're expecting in the April, May and the level of growth is similar of the first quarter and also growing more the discount format lower than Unimarc. But probably we will -- we are expecting in May and June, even a little bit better because the imports of the government in the delivering the winter bottles and also the basic food wallet or 1.5 billion people in Chile will be unused to receive more sales for the -- in May for the winter bottles and the wallet -- the electronic wallet for -- for basic product for the rest of the year. And therefore, I think for this reason in May and June, the growth in state could be better. But until now, the growth is very similar with the first quarter.

And we also have a question from Eduardo salvo. unmuting you. I'm having some trouble unmuting Eduardo. I don't know if you can help us.

Sure. One moment.