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's Q2 Results Conference Call on the 13th of August, 2024. [Operator Instructions]. Without further ado, I'd now like to pass the line to Carolyn to introduce the call. Please go ahead, ma'am.

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 of our business highlights as well as financial results for the first half and second quarter of 2024. And after that, Arturo will be happy to take any questions at the end of the call. You can send questions by chat or raise your hand and we can unmute. An audio recording of this call will be available on our website later today. Also, please remember that we may be making forward-looking statements today. So as always, please take a look at the caution regarding forward-looking statements on Slide #2 of our presentation. As usual, we'll start with recent highlights from our 3-year strategic plan for 2023 to 2025 with its 4 key pillars, starting with omnichannel growth on Slide 3. Our plan for this year includes 19 store openings in Chile and 5 in Peru. We've opened 8 stores so far this year, 4 Unimarc, 1 Super10, and 3 Maxi Ahorro. As you can see on the slide, at our most recent Unimarc opening in Pirque, we implemented our premium affordable value proposition, which caters to customers who are looking for a more sophisticated product assortment, but are also looking for savings. The premium affordable stores meet those needs with a very strong offering of fresh products, fruits and vegetables, bakery, deli, meat and fish, and a very attractive look and feel, but with affordable prices. The rest of the stores we have in our organic growth plans for this year are in various stages of permitting, design and construction, and most are expected to open towards the end of the year. In a few cases, we've had some administrative delays relating to permits, so there is a good chance that a few of the stores will end up opening in early 2025. The original plan was for those stores to open in the fourth quarter of this year. So it's not a significant change in terms of the financial impact we expect to have from those stores. Of course, it's important for us to continue to move forward with the new store openings, but it's also very important for the stores to perform well once they are open, and we're pleased to say that, that is what has been happening. Last year, we opened 14 new stores, and on average, those stores have had sales above our plans. In addition, half of the stores we opened last year already have sales per square meter in excess of the average for their respective format, which is significant because our base case when we evaluate opening a new store assumes that it will take 3 years for the store to reach maturity. So these stores have had a very strong performance. On the next slide, another part of our omnichannel growth strategy is our e-commerce business, where we had strong results this quarter. Online sales through both our own platform, unimarc.cl and alvi.cl as well as strategic partnerships with last milers grew 28% in the second quarter, reaching penetration levels of 4.7% of sales. During the quarter, we held our Cyber Day, which helped to drive sales and bring in new customers. On Slide 5, we move on to the customer experience pillar of our plan. We're always looking to satisfy the needs of our customers. And throughout the first half of this year, we continue to see the economic conditions were putting pressure on their budgets. Consequently, customers seek to optimize by purchasing fewer quantities and substituting for cheaper products. On top of this generally weak consumption environment, which has been going on for some time, in April, the whole food retail industry was affected by the fact that Easter sales were transferred to March this year instead of April of last year. In an effort to reactivate sales, in May, we launched new promotions focused on basic products to which consumers are highly price sensitive. We've included some pictures on the slide. These campaigns are called Precio Oferta or Sale Price at Unimarc. Oferta or Sale at Mayorista 10 and Super10 and Ahorro En Grande or Save Big at Alvi. Customers reacted favorably to these promotions. And as a result, we once again saw growth in sales in the months of May and June, partially offsetting the impact of April in the quarter. On Slide 6, private label growth is another key initiative within our customer experience strategy. And this is also another way we help customers optimize their budgets while still enjoying excellent quality products. We've launched over 100 new products this year so far in a range of different categories with pictures of some of the most recent launches on the slide, including fruits and vegetables, snacks, laundry detergent and baby products. At the same time, we continue to expand the use of recyclable packaging in our private label products. Our goal for 2025 is for 50% of the assortment to have certified recyclable packaging. And we've been making steady progress toward that goal, reaching the halfway level of 25% in the first half of this year. On Slide 7, we have a new initiative as part of our Club Unimarc Loyalty program. On July 1, we launched a new concept of membership levels for the club, making us the first food retailer in Chile to offer this type of program. Our customers benefit from exclusive promotions and discounts at Unimarc and also at partnering businesses depending on their membership level. The levels are cloud, gold and platinum members, and there is also a paid membership for the diamond level with further associated benefits. The membership levels are associated with the customer's average spending levels over the last 3 months. So if they increase their spending at Unimarc, they can upgrade to a higher membership level and benefit from higher discounts. We believe that this will contribute to customer loyalty. Of course, this program is brand new, so we can't draw conclusions just yet. But in the first month, over 300,000 customers upgraded to a higher membership level, and on average, those customers spent 15% more in July than in June. On Slide 8, the next pillar of our plan is efficiency and productivity. The initiatives that we've implemented in terms of new technology and new processes throughout our operations in order to drive productivity, have been essential to keeping operating expenses under control in the face of inflation and increases to the minimum wage. In fact, thanks to these initiatives, our operating expenses grew only 3% in the second quarter when inflation was above 4% in the last 12 months. And our personnel expenses grew only 2.3% in the quarter. Despite inflation adjustments on top of a minimum wage that, on average, was 7% higher than in the second quarter of 2023. And in terms of productivity indicators, we can see that in the first half of this year, we managed to improve sales per full-time equivalent by 1.5%, even in the face of lower revenue, and total headcount is lower even as we are operating more stores. On Slide 9, the efficiency and productivity pillar of our plan also includes energy efficiency initiatives. As we explained last quarter, we implemented an energy management system in 100% of the facilities operated by SMU Chile, designed to optimize energy consumption and efficiency. This system is certified under ISO-50001. Another initiative relates to both our environmental impact and also the cost of electricity. Electricity from renewable sources accounts for about 15% of our electricity consumption in Chile. Having electricity from renewable sources is something that we have agreed upon with the electricity suppliers or stores that have high enough consumption levels that we can negotiate an unregulated rate. So this 15% of energy from renewable sources is a proxy for the percentage of our consumption at unregulated rates, which are lower than regulated rates. We are currently in a bidding process with electricity suppliers to contract additional facilities under unregulated rates. These additional facilities account for an additional 15% of energy consumption, so we would be doubling the coverage of lower unregulated rates and of renewable energy. We've also been working to increase the use of electric vehicles in our supply chain, incorporating 3 electric trucks into our fleet last year and a fourth one in the second quarter of this year. This helps us to move towards our goal of using electric vehicles for 10% of shipments from distribution centers to stores by 2025. Last year, we were at 2%, and in the first half of this year, we've doubled that number. On Slide 10, regarding the committed and sustainable organization pillar of our plan, we recently launched the latest version of our traditional Unidos campaign through which we raised funds to help nonprofit organizations that have a positive impact on the community. We contribute 10% of the sales of Unidos gift cards for the duration of the campaign to 2 beneficiaries, Fundacion Las Rosas, which provides shelter and dignified living conditions for senior citizens, and Club de Los Leones Cruz del Sur de Magallanes, which operates rehabilitating centers for people with disabilities in the Magallanes region of Chile. These activities are part of our diversity and inclusion model. Going on to the numbers on Slide 11. We have revenue, which was 0.4% lower in the first half of this year compared to the first half of 2023, and 1.9% lower in the second quarter. As I mentioned before, when I talked about our new promotional activity, the low levels of consumption observed in recent periods, including the first quarter of this year, continued in the second quarter, as reflected by customer behavior. So we continue to see customers optimizing their budgets by buying fewer quantities and down trading. And in the second quarter, we also had a significant impact from the Easter-related calendar effect in April, with those sales being transferred from April 2023 to March 2024, leading to a year-over-year decrease in the number of customers and transactions in that month for the first time since the second quarter of 2021. However, in the month of May and June, we once again saw growth in sales and the number of customers and transactions recovered. The weak consumption environment affected same-store sales, which fell 2.5% in the half and 4.1% in the quarter, but the strong performance from new stores helped to offset this effect, as I mentioned at the beginning of the presentation. The new stores are outperforming their plan and, in many cases, maturing significantly faster than expected. As I also mentioned before, in May, we started to implement promotional activities focused on basic products to which customers are highly price sensitive, improving our competitive position by offering more attractive prices. As a result, sales in May and June improved and there was an impact on the sales mix, affecting gross margin in the quarter, where we had a decrease of 60 basis points. To help explain some of the drivers behind revenue, on Slide 12, we've provided a closer look at data on the number of customers and transactions as well as average ticket and average monthly spend per customer. On the left, we have a comparison of the percent change in number of transactions in red, and average ticket in gray year-over-year, starting just before the pandemic in January 2020. Pandemic restrictions caused the number of transactions to fall sharply, while the average ticket basically doubled. These 2 figures began to converge back towards historical levels in 2021, and then in 2022, when inflation levels started to go up and customers look to optimize their spending, that average ticket started to fall with the number of transactions going up. The number of transactions was consistently growing year-over-year throughout this period until April of this year, but then it recovered in May and June. On the other hand, the average ticket has been lower year-over-year and showed a recovery for the first time in June. On the right, we have the number of customers and the average monthly spend per customer, also shown as a percent variation year-over-year, with customers in red and spending in gray. Here again, we had consistent growth in the number of customers up until April of this year, with the number recovering in May and June. The average monthly spend per customer has been down year-over-year since early 2023 but in May and June of this year, we also saw an increase in those figures. On the next slide, Slide 13, we have operating expenses, which grew 4.7% in the first half and only 3% in the second quarter. Inflation for the last 12 months was 4.2%, which means that in the second quarter, we had a reduction in operating expenses in real terms, despite the fact that most of our expenses are affected by inflation, and we also have a significant impact from the higher minimum wage on both our personnel expenses and on service expenses, where cleaning and security services are affected. As I mentioned earlier in the presentation, our efficiency and productivity initiatives have been highly effective at helping to mitigate pressure on operating expenses. In fact, our personnel expenses grew less than inflation, 3.8% in the half and 2.3% in the quarter. The biggest increase to operating expenses in both the half and the quarter came from service expenses due to higher rates on electricity, security and cleaning services. Operating expenses as a percentage of revenue grew 110 basis points in both the half and the quarter due to the lower revenue. Moving on to Slide 14. Our EBITDA and EBITDA margin were affected by the lower revenue and the resulting lower operating leverage despite the fact that we kept operating expenses under control. EBITDA fell 10.4% in the first half and 21.3% in the second quarter, and our EBITDA margin was 8.1% in the first half, 90 basis points lower than last year, and 6.8% in the second quarter, 170 basis points lower than the second quarter of 2023. The second quarter is historically the weakest quarter in terms of revenue and EBITDA due to seasonality as we don't have any of the positive effects that benefit the other quarters. Summer vacation with customers traveling to regions where we have higher market share helps us in the first quarter, national holidays in the second and third quarter and Christmas and New Years in the fourth quarter. That seasonality is reflected in the graph we have added below with the quarterly EBITDA margin and this applies even in years with favorable economic conditions. This quarter's EBITDA margin is exceptionally low, and that is a product of the consumption environment, which reduces our operating leverage. On the next slide, we have net income, which was down 36% in the half and 64% in the quarter. We've broken down the effects between operating income, nonoperating income and taxes. And as you can see, the lower net income is essentially the result of the lower operating income. On Slide 16, we have our profitability indicators. Our dividend yield was 6.8%, similar to 2023, and lower than 2021 and 2022, partly due to the lower net income and resulting lower dividends and partly due to the strong share price performance. The return on equity was 9.1% in the 12 months to June, slightly lower than in 2023 because of lower net income. On the next slide, we have financial ratios, including as reported figures and figures that are adjusted for store rental expenses. On the left, net financial liabilities to EBITDA, including store rentals was 4x in June, and when we adjust for store rental, it was 2.9x. This is slightly higher than recent periods, primarily due to the lower EBITDA. On the right, net interest coverage, as reported, was 5.2x in June, also slightly below December because of the decrease in EBITDA. When we adjust EBITDA and interest expense for store rentals, interest coverage was 11.7x in June. On Slide 18, we have our bond covenants, where we continue to have plenty of flexibility. Net financial debt to equity is at 0.58x, well below the 1.03 limit, and interest coverage is 5.2x, more than double the 2.5x requirements. On Slide 19, at the top of the slide, we have a summary of our cash flow for the first half of this year. We started the year off with a very strong cash balance of CLP 105 billion, significantly higher than the minimum we'd like to have on hand, which is in the neighborhood of CLP 45 billion to CLP 50 billion. In January, we received CLP 52 billion from the insurance claim for the social crisis in Chile back in 2019. In our cash flow statement, this payment is reflected under operating cash, but on the graph, we've separated it. Normal operating cash for the period was CLP 76 billion. On top of that, we also issued local bonds in March, the Series AR bond for UF 1 million or CLP 37 billion, and in April, the Series AQ bond for UF 1.5 million or CLP 56 billion. The uses of cash for the period included the amortization of bank debt and bonds were CLP 48 billion, lease payments of CLP 30 billion, interest payments of CLP 29 billion, CapEx of CLP 45 billion and dividend payments of CLP 42 million, leaving us with an ending balance of CLP 129 billion in June. In July, we carried out another bond placement, the Series AS bond, this time for UF 2 million or CLP 75 billion, and we added that to the end of the graph to show a pro forma ending balance of CLP 204 billion. The purpose of these 3 bond placements is to refinance financial liabilities and to flatten out our maturity profile, which is what we're showing on the graph below. The 3 new bond placements maturing in 2029, 2030 and 2034 are shaded in pink in the graph, and they totaled CLP 169 billion, which positions us very well for the maturities that we have in the second half of this year and in 2025. That's it for our presentation. Thanks so much for listening. And if there are any questions, Arturo will be happy to take them.

Thank you very much for the presentation. [Operator Instructions] The first question will be from Mr. Alonso Aramburú from BTG Pactual.

Two questions on my end. First, if you can comment on whether you've seen the continuation of trends, especially on average ticket from June into July. And second, given the increased promotional activity you're doing, do you think it's still reasonable to think about 9% EBITDA margins in the second half of the year?

Alonso, first question about the trends of average ticket. In fact, in June, we improved our average ticket first time in a lot of times since December 2022. And in July, the situation is similar. We're expecting the similar behavior in the third quarter and also in Q4 because our focus in the basic product and sensible product -- sensible price product will have good results with our customer as was in June. Therefore, in terms of the EBITDA margin, our long-term goals is at 9%. Of course, it will be very difficult to reach this number for the full year because the impact of Q2 was very, very important. But we're expecting to improve our sales in the second half of this year with idea to reach a number in the level of 8%, 8.5%. But our long-term goal is 9% because in the future -- because it's very difficult to reach this number with flat growth in sales because the expenses are growing every year for inflation. We did a very, very important adjustment in expenses. In fact, our expenses decreased in real terms. But any way, increased in nominal terms, and therefore, we could not grow in sales. It's very difficult to reach the 9%, but we are very, very confident that in the next quarter, the growth of sales come back and will be possible to reach this number again in the future periods.

Our next question comes from Mr. Joel Lederman from LarrainVial.

Can you hear me?

Yes, please go ahead.

Just a quick follow-up on the last question. Just to understand better the promotional activities. So can you maybe give more color regarding the competitive environment in Chile, and how you are seeing trends in the third quarter to maybe understand better how the market is evolving through 2024? And my second question is related to expenses. Maybe if you can give more color regarding the 11% increase in services, how much of that portion is related to electric rates?

In the first question about the competitiveness, it will be similar in the Q3 and almost in Q4, the competition is hard in the full year, but especially in the second quarter because the impact of the April was very negative for the industry. And that all competitors are in the -- improving or trying to improve the competitiveness position. And in the next -- in Q3, our situation is better in terms of sales, but the competition is similar -- the competition we have is similar. And the impact in our margin -- gross margin in the third quarter will have impact also in the third quarter as well. But the idea is to improve our market position, adjusting the pricing and also with the negotiation with the suppliers with idea to receive support of them to finance our promotional activities. And in terms of the expenses, the pressure in terms of the minimum salary and also electricity expenses and security will be present in the next month and also in 2025, of course, especially for the electricity impact. The total impact of the electricity will increase in 2025 in the service account because we will have a 40% increase in average in our -- in this specific item. But this impact will be received for the full industry and probably we'll just pass through part or 100% of this additional cost in the margin and probably will be the same of the full industry with idea to keep our EBITDA margin in the future. That will be the impact in our opinion.

If I may, just to clarify something there. So before you mentioned that you guys want to reach the 9% EBITDA margin guidance during 2025. But you also mentioned that you will perceive high pressures from the electric drive during 2025 also. So which are the main things that you guys are preparing to mitigate those effects during next year?

We have a project with idea to reduce the consumption quantity and also increase our number of stores with the unregulated rates negotiation as free rate for the free customers. And also, the part of this additional cost will be passed through for the -- in the gross margin, it's part of the -- probably because the full industry will suffer the impact.

Our next question comes from Ms. Carolina Ratto from Itaú.

So I would like to know a little bit more about service dynamics between categories because we have seen the same-store sales for other competitors are performing better, even everyone is actually facing a very competitive challenging scenario. And I just would like to understand if you think that, that is related to non-categories penetration that may be higher for other players. Or do you think that promotional activity in your case for this incentive prices will push same-store sales downwards as well in terms of the new adversities for that. So I just want to get a little more color on category portfolio as well.

Our strategy is to increase the weight of in basic products in our assortment or in our promotional activities. And also in the nonfood, we don't have space to increase a lot our assortment in nonfood because the size of our store doesn't allow to increase significantly this assortment in nonfood. Of course, our competitors are improving their gross margin because the gross margin in those categories have been better than 2023. In our case, we need to improve our gross margin also and compete also in food, is our focus in our assortment. But for this reason, we will maintain the promotional activities in basic product, a lower-value product that have a good performance in sales. That will be our strategy to improve our sales and also reducing expenses and also obtaining the financing from the suppliers. And also with our pricing strategy, measuring the elasticity of this promotion because we have technological tools to -- that allows us to measure the effect of each promotions, and that will be our strategy in the next months to compete in this very, very, very hard competition.

So a follow-up on it. So when do you think that same-store sales will basically match the inflation again? It will be like the first half of next year? And what are the drivers for that to happen?

Excuse me, would you repeats, please because the....

The line was kind of fuzzy, Carolina or maybe you could send it by chat?

I am sorry, I am with my [indiscernible]. You can hear me, my question or?

That's better.

So my question was basically, when do you expect same-store sales to match food inflation again?

Okay. The food inflation analysis in July was a very, very special situation because it was lower than general inflation. That is good news specifically for the current scenario because the chance -- or the pressure of prices in the average ticket is lower and the chance to improve our quantity in average ticket that was our problem in the last 12 months and for the industry as well is higher, therefore, the chance to improve our average ticket is higher. Because the -- and general inflation is not viewed in terms of our expenses because that is higher than food inflation. But in the current situation, with the idea to improve sales and improve average ticket to keeping the level of food inflation 12 months in the level of 4.5% or 5% should be convenient in our opinion, for us.

We will take a couple of text questions now. This is from Peter Wille from Cuthman Capital. How do you see your dividend paying ability in the scenario where operating conditions don't improve meaningfully going forward?

Until now, we are not seeing a need to change our dividend policy because our operational result allowed to finance our strategic plan and also our amortization of debt. But until now we don't see any change, but the company permanently are analyzing this situation. And if the company needs any change, will be done in the future.

The next question comes from Mr.-- Please go ahead.

The competitive environment is hard not only in the first quarter and second quarter, it will be in the same situation in the third quarter and Q4. And for the same reason, we will keep our promotional activities with emphasis in the basic product and the sensible price products with idea to offer the best option for our customers that are finding good prices to select the supermarket.

We have a question also from Ignacio Llanos from Empresas Penta. In 5 years' time, how will SMU look like compared with today?

As I mentioned before, the idea is to keep our long-term goal that is 9% EBITDA margin and to continue with our -- the execution of our strategic plan, our organic growth, opening stores. We need to -- we will open 43 stores in this strategic plan, that is to keep after this planned 14 or 15 stores per year, with the idea to multiply more time this EBITDA margin, with idea to improve the net income and EBITDA. That's our look for the next 5 years and more. The organic growth with a very -- with a good EBITDA margin, with discipline in expenses and gross margin to keep this EBITDA margin.

[Operator Instructions] We have a follow-up question from Mr. Joel Lederman.

Just a quick follow-up question on Carolina's one. It seems that Unimarc suffered a little bit more during the quarter. And you also mentioned that in part is because you guys don't have nonfood items. And you also mentioned before that probably the promotional activity is going to continue going forward because of the competitive environment that we are seeing in the market. So maybe my question is that taking into consideration that Unimarc is may be suffering a little bit more, maybe you will be more aggressive in the reconversion part of some stores to Cash & Carry? Or that is something that you are not expecting? And also, if you believe the same-store sales taking into consideration holiday season and that you have more of your stores concentrated in regions maybe will be better in the third quarter and fourth quarter, taking all of the above into consideration?

Okay. Our opening performance as Carolyn mentioned, has been very, very good. The performance is -- in the first year, is in the level of the sales per square meter than the rest of the stores. The maturity is in 1 year, it's a very, very good performance, not only in Unimarc stores and also in the Super10 and Alvi. Therefore, very, very happy or very confident that the next opening will be -- will have a similar performance because our model to select the locations to open store is working very well. That is very, very important. That we are confident that the contribution of the new store in the total performance of the company will be very, very important in the next years, in the next months. That's the big, main issue with our assortment competing in food with the same size in the 1,000 square meter size that this model or this prototype is working very well in the new stores. And also, we have an opening plan, not only in the metropolitan region, also, we have a good performance in different places, in small towns, in big cities, in different locations, our model is working correctly to select the locations. And that is very, very important. And another question is about the effect of the food. Of course, the effect of the food in the industry in terms of the gross margin because our competitors have this -- or have better numbers in this portion of assortment because the softer last year in gross margin for this reason because they sell a lot of inventories in 2023 with low margin, and this year they are obtaining the regular margin, of course, they have this offsetting -- offset in comparison with the food where the promotional activity was very aggressive in the last month. Of course, we don't have this chance because our focus is in food in a store with a 1,000 square meter, but we have good performance in this segment, therefore, we are not thinking to change our strategy. But another important issue is that in our organic growth, we are considering more relative growth in Super10 and Alvi compared with Unimarc, therefore, we are -- we will have in the next year, more portion of low-cost sales or low-cost segment in the next year in comparison with Unimarc. Because we are betting that this format, our Super10 and Alvi are very, very good format for the customer that are finding price -- good prices. Therefore, the scenario for this type of segment or format will be good also in the -- not only in 2024 or in the current economical scenario, I think that the customer will find good prices also in the next period even with better economical conditions. Therefore, our relative weight of these sales or new format because our organic growth consider opening in Alvi and Super10 will be higher in the next years and also is our bet for the future.

[Operator Instructions] Okay. It looks like we have no further questions at this point. I'll pass the line back to Carolyn and the management team for the concluding remarks.

Thanks very much. Thanks for joining us. We hope to have with you with us next quarter. Have a great day.

Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you, and goodbye.