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Thank you for standing by. This is the conference operator. Welcome to the SMU First Quarter 2019 Earnings 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 for joining us today. I am here with Arturo Silva, our CFO. I will briefly describe SMU's results for the first quarter of 2019, and then Arturo will be happy to take your questions. If anyone isn't using the webcast to follow the slides, we'll be going through the presentation that I sent out to the distribution list this morning. It is also available in the Investor Relations section of our website, www.smu.cl, in the Financial Information section. 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 just a reminder to please take a look at the caution regarding forward-looking statements on Slide #2 of our presentation.
Before we get to the actual results for the quarter, I'd like to explain few issues that affect the comparability of the numbers between 2018 and 2019. But first, as explained on Slide #3 is that IFRS 16 went into effect on January 1, 2019. This is a financial reporting rule that affects how lessees account for lease contracts. And since we lease all of our stores, this rule has a significant impact on our financial statements, although it does not have an economic forecast impact. Our financial statement and earnings release both contain a complete description of the effects of the application of this new standard. But to summarize, under the previous standard, IAS 17, some of our lease contracts qualified as finance leases and some qualified as operating leases. The contracts that qualify as finance leases will recognize on our balance sheet as financial liabilities and as lease assets. And on our P&L, we had to recognize the corresponding depreciation and lease expense. But the contracts that qualify as operating leases, the lease payments were treated as lease expenses within SG&A. Under the new rule, IFRS 16, essentially all of the lease contracts must be treated as finance leases, which means that we've had to recognize a new asset and liability for the contracts that previously qualified as operating leases. We also have to recognize depreciation and interest expense associated with the new asset and liability.
Our lease expenses have decreased, which has a positive impact on our EBITDA. The application of IFRS 16 means many line items in our financial statements cannot be compared year-over-year, however, in our earnings release, we provided pro forma figures to help analyze our performance. And we've also included those numbers in this presentation where relevant. The other issue described on Slide 4 has to do with the sale of our Construmart subsidiary in April of last year. With regards to the presentation of Construmart, all of the information in our March 2019 financial statements is comparable with the prior year figures because Construmart is presented as discontinued operations in both periods. In this presentation, all historical figures are comparable because for periods prior to 2017, we are using revenue, OpEx and EBITDA for the Food Retail segment only. And in 2017, '18 and '19, we only have the Food Retail segment. Hopefully, all of this make sense, but of course, feel free to get in touch with any questions.
And now we can get to the numbers. On Slide #5, we have revenue, which increased by 0.5% in the first quarter of this year. The format that had the strongest revenue performance this quarter were Peru, OK Market and the cash & carry segment. Gross margin increased from 28.5% in the first quarter of 2018 to 29.2% in the first quarter of 2019, reflecting higher commercial efficiency in the quarter. On this slide, we also have same-store sales and sales per square meter.
Same store sales performance trucked revenue performance with the best results, again, coming from Peru, OK Market and cash & carry. Sales per square meter grew 5.2% in the quarter. And part of that is due to the fact that we have been optimizing selling space in some of our stores and also some stores have had their selling space modified during the remodeling process.
On Slide 6, we have a breakdown of revenue growth by format, comparing the first quarter of 2018 to the first quarter of 2019, where you can see what I mentioned on the previous slide. Peru had revenue growth of 19.8% measured in Chilean pesos and 10.9% measured in Soles. OK Market has revenue growth of 6.4%. And cash & carry grew 2%, offsetting the lower revenue in Unimarc and e-grocery.
On the next slide, we have operating expenses defined as distribution costs plus administrative expenses excluding depreciation and amortization. Administrative expenses are affected by the application of IFRS 16 because lease expenses are CLP 9.3 billion lower under IFRS 16 than they would have been under IAS 17, which was the previous standard. In the graph, we've presented operating expenses for the first quarter of 2019 both ways.
First is a pro forma version, which is comparable to the historical figures. On comparable basis, operating expenses increased 3% year-over-year. And as a percentage of revenue, they increased from 22.0% to 22.6%, approximately, 60 basis points. The most significant increase was in personnel expenses and that is mainly due to the increase in the minimum wage. Average headcount remained relatively flat year-over-year, following last year's restructuring program.
We also had an increase in distribution expenses mainly to higher oil prices and exchange rates. Our rate of centralized distribution was 46.3% for the first quarter of this year and that is the percentage of revenue that comes from products that went through our distribution centers as opposed to being delivered directly by suppliers to our stores.
That number is slightly lower than the 2018 figure, but this is because of product mix. We've continuously been increasing the number of centralized suppliers. And in fact, if we look at the number of boxes that we moved, there was an increase with respect to the first quarter of last year, but the products we moved were lower-value products, and that is what is reflected in the centralization of wage. However, centralization should increase this year, and we are seeing a positive effect of our efforts in terms of in-store products availability, which improved year-over-year.
Going back to the OpEx graph, the final bar with a white and gray stripes shows OpEx for the first quarter of 2019 as it was presented in our financial statements under IFRS 16.
As you can see, under the new rule, OpEx fell with respect to the first quarter of 2018, and that is because of the change in accounting treatments for lease expenses. On Slide 8, we have our EBITDA, which, excluding the effects of IFRS 16, grew 3.4% in the first quarter of this year. And our EBITDA margin increased 20 basis points from 6.5% to 6.7%, reflecting the gross margin expansion partly offset by the increase in OpEx as a percentage of revenue. Just like on the previous slide, in the graph here, we have presented EBITDA as it would have been calculated under the previous accounting rule IAS 17, which is comparable to the historical figures. And we have also provided the official IFRS 16 figure, which is not comparable.
IFRS 16 has a positive impact on EBITDA because of the lower lease expenses. On the next slide, we have an explanation of our nonoperating results. There were a couple of significant one-off items last year and we have -- and here, we have separated them.
On slide, we have a graph comparing our nonoperating loss of CLP 29.9 billion for the first quarter of last year to our nonoperating loss of CLP 12.7 billion in the first quarter of this year.
Last year, we had a onetime nonoperating loss of approximately CLP 8 billion, relating to an organizational restructuring program we carried out in January to improve operating efficiencies. Last year, we also recognized nonrecurring financial expenses of approximately CLP 5 billion, relating to the partial prepayment of our international bonds in February. Recurring financial expenses fell by CLP 2.5 billion as a result of all of our efforts to reduce debt and strengthen our capital structure. Another impact relates to our inflation index liabilities.
In the first quarter of last year, there was inflation of around 0.6% in Chile. And that generated a loss on these liabilities of approximately CLP 3.6 billion. In the first quarter of this year, there was essentially no inflation, which means these liabilities didn't change in value and consequently, we don't have a loss on our P&L. Finally, we have the effect of IFRS 16 on nonoperating income.
Interest expense increased by CLP 1.9 billion. In addition, there is a very small effect due to inflation index liabilities, just CLP 1 million.
On Slide 10, we have net income, which amounted to CLP 7.7 billion in the first quarter, an increase of CLP 7.2 billion because last year we had a very low comparison base due to the nonrecurring expenses. Excluding the effects of IFRS 16, net income would have been CLP 9.3 billion, CLP 8.8 billion higher than in the first quarter of 2018. The total impact of IFRS 16 on the bottom line is negative CLP 1.5 billion.
This is the sum of the lower lease expenses, higher depreciation, higher interest expense and lower gain on inflation index, assets and liabilities. Broken down, the higher net income is due to CLP 0.9 billion of improved operating income and CLP 19.1 billion of improved nonoperating results, partly offset by CLP 10.8 billion of higher tax expenses as our pretax income improved significantly year-over-year, as well as a CLP 0.4 billion decrease in profit from discontinued operations. Since last year, we had a profit from Construmart and this year, we don't have Construmart anymore.
On the next slide, we have an update on our financial debt. There has not been any real changes since December. We haven't taken on new debt, nor have we amortized debt during the quarter. Our maturity profile for bonds and bank debt hasn't changed, and excluding the effects of IFRS 16, our ratio of net debt-to-EBITDA has remained at 3.8x.
However, as you can see in the graph, under IFRS 16, net debt-to-EBITDA jumped to 5.1x in March.
This is because we have the full effect of the new debt we recognized under the new rule, around CLP 250 billion, but our last 12 months EBITDA only includes 3 months of the new and improved IFRS 16 EBITDA.
Once we have a full year of IFRS 16 EBITDA in the denominator, the ratio will still be higher than it used to be but it will be lower than it is today. Regarding our covenants, our financial debt contracts that contain covenants also contained clauses that allow for changes in covenants when there are changes in accounting rules, so that the original spirit of the covenant can be maintained. As reported in our financial statements, the covenant limiting the ratio of net financial liability to shareholders equity has been modified from 1.3x to 1.66x.
This covenant applies to our local bonds and goes into effect for the financial statements as of December 2019.
On Slide 12, we have summarized some of our recent highlights. With respect to our operations in Plan CIMA, we continue to move forward with our Unimarc store upgrade plan, we reinaugurated 1 store in March, and we have 4 more currently in progress.
This year we've also opened 4 new OK Market stores to date, 2 in the first quarter and 2 in the second quarter. And with respect to our promotional activity, we continue working to optimize our promotions in order to better meet our customers' needs.
With respect to operating efficiency, as I mentioned before, centralization as a percentage of revenue decreased slightly in the quarter, but that is a function of product mix. It continues to make progress this year, and the centralization rate should continue to grow for the full year.
In-store products availability continues to be a central focus for us. We have been increasing our use of planogram in our stores. And we are also increasing our internal restocking, giving us more control over what goes on the shelves in our stores.
From a nonoperating standpoint, we are happy to report that at the end of April, Feller Rate upgraded our credit rating by 2 notches from BBB to A minus. This is in line with the sustained improvement to our financial profile. And finally, in April, we had our Annual General Meeting, at which shareholders approved a final dividend equivalent to 30% of net income for the year 2018. That dividend was paid on May. That's it for our presentation. Thank you very much for listening. If there are any questions, Arturo will be happy to take them in.
[Operator Instructions] The first question comes from Alonso Aramburú with BTG.
I wanted to ask about Unimarc and the sales performance. Can you give us a sense or information of what explains the relatively weak performance this quarter? And what should we expect for the rest of the year? And the second question regarding your gross margins, you talked about commercial efficiencies driving the improvement in gross margins. Can you just give us some color as to what are some of these efficiencies that you're obtaining?
Hey, Alonso, and thanks for your questions. The first question about the sales performance in Unimarc, no doubt, the sales performance in Unimarc is affected for the behavior of the sales in the total industry that was weak in the first quarter, in the same trend of the last year. Also, we had a very intensive promotional initiative in the industry. And in this scenario, the company decided to keep or to protect the gross margin. And that is in connection with the second question that -- because it is the reason that the gross margin of the company increased again because we are doing more personalized promotion activities, optimizing the promotional activities with more data of our clients, with idea to have more elasticity in the products we select in our promotional activities.
On the other hand, our competitors haven't opened more stores in the last 12 months. And this store -- and [indiscernible] of the stores today is higher with impact in our market share, of course. Our remodeling plan allowed to offset partially this effect, but no doubt, the company needs to open more stores and its idea in 2018 to open 4 stores in comparison with 1 store in 2018.
Also in OK Market, the idea is to open 10 stores. And last year, we opened only just 3 -- or 7 stores. And also in the future, the idea is to keep more aggressive plan in the -- opening plan in Unimarc in opening 4 or 5 stores in comparison with few or 1 store in the last 2 or 3 years, with idea to offset the action of our competitors in the industry. In terms of future for this year, we are expecting the majority of our remodeling plan, in fact, the stores when we opened, we remodeled in 2017, are doing good performance and also good gross margin in terms of sales and also in gross margin and the idea is to obtain the maturity of the remodeling plan implemented in 2018 in the second half of 2019. And in this line, of course, we need to have a more strong behavior in the total industry and in the inflation -- in the food inflation. But anyway, we're expecting some improvement but not so significant improvement in the second half of this year. Because we expected for the total industry a similar performance that the first quarter of 2019 and the full year 2018. But we expected that our CIMA Plan will improving customer experience in our store with remodeling plan, with the majority of the previous remodeled stores in the previous years, to which have better sales performance in the second half of this year.
Thank you, Arturo, and one more question if I may. On Telemercados, we saw a big drop in sales. I mean, can you just give us some color as to what's going on there? And your digital strategy in general?
Yes. Telemercados decreasing in the last 2 years and especially, the last 12 months for the competition with [ Last Milers ]. No doubt, the effect in Telemercados is evident.
And also, we are stabilizing the platform, the new technological platform with some improvements in the next -- we're expected to finish the improvement in the next 3 months. And also, we are expecting to have the unimarc.cl in the end of this year with idea to implement the online business in Unimarc as well with improvement that we implemented in the Telemercados.
But also, the strategies to do commercial agreement with [ Last Milers ], in fact, we have contract with -- or agreement with [indiscernible] today with idea to combine both elements to do more strong network owned platform and also to develop agreement with the [ Last Miler ] especially for the express delivery.
With idea to proof because this is market, the online market in Chile, it's not consolidated still. We believe that it's important to have in different segment or options like through [ Last Miler ] and also with our own site with idea to prove different logistic alternative, with idea to analyze the cost and also the profitability of this business that because it's a difficult business in terms of profitability. That is a strategy for the rest of this year.
[Operator Instructions] The next question comes from Arvin Bahl with the TRG Management.
Just a follow-up on the gross margin. This is a figure that was substantially higher in last quarter and probably high that we've seen in -- obviously in quarters. Is this 29.2% is a sustainable figure going forward? Or I know last Q1, there was a lot of promotional activity, so if we see promotional activity pick up, should we expect the decline here?
[indiscernible] how do we think about the figure of the gross margin for this quarter, this figure that will be kind of sustained going forward? Would it go beyond? Where it is? Or is this a little bit of a higher figure and things will probably revert back to historical levels going forward?
The gross margin we think is sustainable in the future. But I think it's difficult to improve in the same level of the first quarter of 2019. 70 basis points was a very, very important improvement. And -- but of course, probably, this gross margin could be higher eventually because the company, as Carolyn mentioned, we will increase the centralization in the future. And in that scenario, we will receive a logistic fee from the suppliers. But we have, as counterpart, the expenses for this service that we offer for our suppliers. Therefore, the gross margin will increase in the same level of the increase in our expenses or the distribution costs. Independent of these possible improvements in the gross margin, in the improvement of our promotional efficiency could be better but not too much because I think with the more personalized promotion activities, we can keep the current margin, we can improve a little bit improving our shrinkage that is included in this gross margin. All this is possible to improve 20 basis points or something like this in shrinkage of -- that the company had today -- have today, but not too much than this. But in summary, I think it's sustainable, the current gross margin and could be a little bit better for the more centralization or shrinkage reduction in the next months and years.
This concludes the question-and-answer session. I would like to turn the conference back over to Carolyn McKenzie for any closing remarks.
Thanks, everybody for joining us. Have a great day, and we hope to have you with us next quarter. Bye-bye.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.