SMU SA

SGO:SMU

Earnings Call Transcript 2022-Q1

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the SMU First Quarter 2022 Results Conference Call. [Operator Instructions] 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.

[Carolyn McKenzie, executive]

Thank you. Thank you all for joining us today. I'm here with our CFO, Arturo Silva. We have some slides describing some recent business highlights as well as first quarter financials, and Arturo will be happy to take any questions at the end of the call. And of course, please feel free to contact me afterwards if you have any additional questions. If anyone isn't using the webcast to follow the slides, the presentation is available on our website, smu.cl, in the Financial Information section, and I sent out the file to the distribution list this morning. An audio recording of this call will be available on our website later today. Also please note that we may be making forward-looking statements today. So as always, please remember to take a look at the caution regarding forward-looking statements on Slide #2 of our presentation. Most of you are familiar with our current strategic plan, which has 4 pillars: omnichannel growth, customer experience, efficiency and productivity and committed and sustainable organization. Over the next few slides, we have a few recent highlights in the context of that plan, starting on Slide #3 in omnichannel growth. We started the year with the opening of a new Unimarc store in La Serena. And in March, we opened a new Maxiahorro store in Piura, Peru. And last week, we reopened an Alvi location in Santiago that have been closed for over 2 years since the social unrest that began in Chile in October 2019. On the next slide, another component of our omnichannel growth pillar is our online sales platform. Last quarter, we discussed how we have been expanding coverage and we were aiming to have unimarc.cl operating in all 16 regions of Chile by the middle of this year, and we actually made it to that goal a little bit ahead of schedule in April.

On Slide #5, with respect to our customer experience, we've seen strong performance in our private label offering so far this year. On this slide, we've included a few examples of recent product launches in our different brands. In the last 12 months, our private label offering has grown by about 50%. Our strategy here is to offer products of equal or superior quality at attractive prices. And as customers increasingly seek value, they have been more willing to try out these new products and are pleased with what they find as evidenced by the sales growth in recent months.

On Slide 6, with respect to the efficiency and productivity pillar of our plan, this quarter, we've continued to see the benefits of new technologies and processes, both in stores and in our distribution network. We've continued to implement self-checkout modules, digital task managers, workforce management systems and automatization of distribution routes in order to keep operating expenses under control and to ensure in-store product availability. As a result, our sales per full-time equivalent has improved by 23% with respect to the first quarter of last year. On Slide 7, another part of our efficiency and productivity pillar is the expansion of our distribution network and the implementation of technologies and processes to get more out of our existing infrastructure. We can see the impact both in terms of our current operations and our future capabilities. In the first quarter of this year, we moved 6.6% more boxes per day than in the same period of 2021, and our capacity expanded over 10% as we continue to build out our logistics capability. On Slide 8, with respect to the fourth pillar of our plan, committed and sustainable organization, a key area of focus is caring for the environment and the packaging materials used in the products we sell are part of our commitment. We recently signed on for the second clean production agreement, which is an initiative led by government agencies and NGOs to promote the use of recyclable packaging.

We ended last year with 18 of our private label products certified under the ecolabel seal. Today, we're near 60 products, and we have targets in place to reach 150 products this year and 500 products by 2024.

We also continue to promote reusable packaging. Last quarter, we had just announced our partnership with EcoCarga to set up refill stations for laundry detergents, so customers are able to reuse the same bottle, thereby reducing packaging weight. This initiative has gotten a great response, and we are adding a new store. And in April, we partnered with Coca-Cola to encourage our customers to trade in their single-use plastic bottles for reusable bottles, setting up stands in 20 of our Unimarc locations. On the next slide, we have another focus area of our committed and sustainable organization pillars, diversity and inclusion, which are a fundamental part of our corporate identity and value. We believe that by promoting equality, both in the workplace and in society as a whole, we gain a better understanding of the business and community environment in which we operate, which then enables us to better serve our customers. Our performance in this area was recognized last month by the audit firm EY and the El Mercurio newspaper, who named SMU as a distinguished company in diversity, equality and inclusion as part of their annual corporate awards ceremony. We feel very proud of this recognition, which reflects our work internally and externally, and we look forward to continuing on this path. On Slide 10, we have some information about the sale of OK Market, which was completed on February 28. We mentioned this last quarter as a subsequent event, but we've included it again since the financial impact is reflected in our first quarter numbers. As I said before, the agreement to sell OK Market to OXXO, which we announced in October of 2020, was a result of the strategic decision for us to focus on our core business through Unimarc, Alvi, Mayorista 10, Super 10, Mayorsa, Maxiahorro and e-commerce. We received approximately CLP 49 billion for the equity value of this business upon completion of the sale in February, as you can see in our first quarter cash flow statement. The impact on first quarter 2022 net income was around CLP 21 billion, a little over CLP 18 billion in other gains in nonoperating income and a deferred tax effect of about CLP 2.5 billion. That amount is subject to our standard dividend policy with the rest of the proceeds being used primarily towards our strategic initiatives. We also explained this last quarter, but it's good to have a reminder that since we received regulatory approval for the sale of OK Market in November, in our December financial statements, we have to present the OK Market business as available for sale according to IFRS 5, and that continues to be the case in 2022. On Slide 11 and also on our earnings release, there is a complete description of how this works, but to summarize, in the income statement, OK Market is consolidated in a single line, net income from discontinued operations. So revenue expenses, taxes, et cetera, exclude OK Market. The income statement is comparable year-over-year because we restated the first quarter of 2021. The balance sheet is also comparable because December 2021 was already presented with OK Market available for sale. The cash flow statement is not specific. On Slide #12, we have revenue and same-store sales for the first quarter. These figures do not include OK Market. We had top line growth of 17.6%, mainly driven by same-store sales growth of 17.1% with the rest coming from new stores that we've opened over the past year. As we saw over the last year, customer traffic continued its recovery with the number of transactions growing over 30% in the quarter for our Chilean operations, while the reduction in average ticket was closer to 10%, which means the average ticket remains well above historical averages, even as the ticket and transaction mix continues to trend back towards pre-pandemic levels. On the right-hand side of the slide, we have same-store sales with a solid performance across all of our formats, showing the benefits of our multi-format strategy, which allows us to cover different customer segments and needs. Moving on to Slide 13, we have operating expenses, which grew 10.6% in the quarter. Inflation is one of the main drivers here, affecting the cost of services, leases and distribution costs. Minimum wage also affects the cost of services. There are other supply chain effects as well such as oil costs affecting distribution costs. Changes to the payment [ card ] model has also pushed up the cost of [ commissions ], 34%. Notably, personnel expenses, which make up about half of our operating expenses remains practically flat in the quarter despite inflation and minimum wage increases as average headcount was lower and also the levels of absenteeism remained high. And while overall operating expenses did grow, the strong top line growth generated operating leverage so that the OpEx margin improved 130 basis points from 20.8% in the first quarter of last year to 19.5% this year. On Slide 14, net EBITDA, which grew 29.2% in the quarter, reaching an EBITDA margin of 9.8%, is an expansion of 90 basis points over the first quarter of last year. As we've said in the past, we believe that an EBITDA margin over 9% is sustainable in the long term, and we will have some periods such as this quarter where strong top line growth drives the higher EBITDA margin. On the next slide, net income for the first quarter of 2022 reached almost CLP 50 billion compared to CLP 5 billion for the first quarter of last year. Looking at the business from a forward-looking standpoint, the solid growth in operating results, which increased 45.6% was a very relevant component of the total bottom line growth. And this quarter, we also have 2 nonrecurring effects in nonoperating income: the sale of OK Market, generating a onetime gain of CLP 18 billion this year; and a restructuring plan last year that generated a onetime loss of CLP 13 billion for a combined nonrecurring effect of CLP 31.5 billion, affecting the year-over-year comparison. On Slide 16, we have a few recent financial highlights. In March, we issued the series AO bonds for USD 1 million or about CLP 32 billion, maturing in 5 years with a bullet structure. Those proceeds are going to go towards refinancing financial liabilities as part of our long-term financial strategy. We plan to refinance a portion of the maturities we have in the coming years. We continue to generate solid levels of operating cash and this transaction further adds to our long-term financial flexibility.

In March and April, respectively, the rating agencies ICR and Feller-Rate carried out their annual reviews of our credit ratings. And following the continued improvement to our operating and financial results in 2021, they both decided to improve the outlook on our rating from stable to positive. And in other recent news, in April, we held our Annual General Meeting and also an extraordinary shareholders meeting. Among other voting matters, shareholders approved a dividend policy, 75% of net income, including interim dividends to be charged to first, second and third quarter earnings and the final dividend to be approved at the AGM. And at the extraordinary meeting, shareholders approved a share buyback program. During the second quarter, we've had 2 dividend announcements. The first was the final dividend paid in April from for CLP 3.8 a share, and the second was the interim dividend we announced on Monday for CLP 6.5 a share charged to first quarter net income. We had a dividend yield of 11.6% in 2021. On Slide 18, we have our bond covenants, where we continue to have plenty of flexibility and our numbers continue to improve with net financial debt to equity down to 0.45x, and interest coverage up to 5.4x. On Slide 19, we've decided to add some new information to our financial ratios. As IFRS rules continue to generate confusion and in comparison to other companies that are not actually comparable. As most of you know, we rent almost all of our stores. And most of those rental contracts are treated as financial liabilities under IFRS, even though they are completely different in their financial and legal structure when compared to actual debt such as [ bonds or bank loans ]. However, these rental contracts, which are called obligations for rights of use in our financial statements make up for nearly half of our financial liabilities and over half of our interest expense. This leads to distortions in our financial indicators. So we've disclosed a new concept in our earnings release, which is EBITDA adjusted for store rental expenses. This EBITDA is a lower number than our normal EBITDA because it includes all rental expenses, including those that under IFRS are not included in our administrative expenses. By including all of these expenses in adjusted EBITDA, we can also remove the effect of these rental contracts from our financial liabilities and [ interest expense ]. Therefore, in the graph on the left of the slide, where we have net debt to EBITDA, we'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 December and 3.4x in March. When we take the adjusted figures, net financial debt, excluding rental contracts, to adjusted EBITDA, the ratio is 2.7x in December and 2.1 in March. Something similar happened with interest coverage. Our net interest coverage unadjusted, as shown on the previous slide, is 4.9x in December and 5.4x in March. So when we adjust the EBITDA and the interest expense for store rental expenses, coverage goes up to 9.5x in December and 11.7x in March. We think these adjusted figures are extremely relevant when comparing us to other companies because the store rental impacts distort these indicators. Finally, on Slide 20, we have an updated maturity profile, where for this year, we have revolving bank debt and bond maturities that are fairly evenly divided over the second, third and fourth quarter. We've also included a graph showing cash and cash equivalents as our debt has increased with the new issuance from March, but our cash position is also much stronger as the purpose of the new issuance is to prepare for upcoming maturities as part of our long-term strategy. That's it for our presentation. Thanks so much for listening. If there are any questions, Arturo will be happy to take them now.

[Operator]

[Operator Instructions] The first question is from Alonso Aramburú with BTG.

[Alonso Aramburú, analyst]

I have 2 questions. First, I was wondering if you can just give us some comments on just general trends after the quarter? Do you continue to see the double-digit same-store sales growth that you saw in the first quarter in all the formats in Chile? And also related to that, I mean, how are you seeing the evolution of the average ticket? Is that continuing to come down? Do you think it gets back to the levels it used to be before COVID? Just general color on that. And my second question is, can you remind us of your CapEx plan for the year and the number of stores you plan to open in 2022?

[Arturo Ortiz, executive]

[ About the ] first question, the -- let's say, for the second quarter, [ so the trends ] was similar to that of the first quarter. Expenses grew, especially due to increase in freight and services, but growing in a [indiscernible], the increase in sales as in the first quarter. So we expect to continue growing EBITDA and [indiscernible] the EBITDA margin because the dilution of the fixed cost maintaining our strong growth will be possible. This growth in terms of sales is in the old [indiscernible] in Unimarc with a lot of people returning our stores, increasing our frequency in our -- in the purchases. And also a strong sales in Mayorista 10 and [ Super 10 ] and also in our cash-and-carry format, Alvi, in the similar behavior with the first quarter growing in the old format.

And the second question about the opening plan, our expecting -- our expectation is to open 5 Unimarc stores. And also, 2 Alvi -- we opened 1 Alvi in the first quarter and also to open 5 stores in Peru because the growth in Peru is very, very important in terms of sales in the first quarter and in the second quarter, also maintain the same CAGR.

[Operator]

[Operator Instructions] There are no further questions on queue. This concludes the question-and-answer session. I would like to turn the conference back over to Carolyn McKenzie for any closing remarks.

[Carolyn McKenzie, executive]

Thanks so much, everybody, for joining us today. Feel free to get in touch if you have any more questions, and hope you'll join us next quarter. Have a great day. Bye-bye.

[Operator]

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