SMU SA

SGO:SMU

Earnings Call Transcript 2024-Q1

[Operator]

Hello, ladies and gentlemen, and welcome to SMU's Q1 2024 Earnings Conference Call. [Operator Instructions] I will now hand over to Carolyn to introduce the call.

[Carolyn McKenzie, executive]

Thanks, Tim. Thanks, everyone, for joining us today. I am here with our CFO, Arturo Siva. As usual, we have some slides describing some of our business highlights as well as financial results for the first quarter of 2024. And after that, Arturo will be happy to take any questions. You can send questions by chat or you can raise your hand and we can unmute you. 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. 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 3 stores so far this year and Unimarc,Super10 and the Maxiahorro. The rest of the stores 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 and as the delays to continue some of the stores may end up opening in early 2025. Last year, we opened 14 new stores, and those stores have been performing above our plan in terms of sales and EBITDA. On Slide 4, we have the customer experience pillar of our plan. Our loyalty programs are a central part of our value proposition, innovative promotional activity that satisfies the changing needs of our customers is one of Unimarc's defining characteristics and the key feature of the Club Unimarc loyalty program. And this year, we continue to launch different campaigns that tie into popular culture or focus on product categories that are particularly relevant to our customers. We have a couple of examples on this slide. We've also continued to add new benefits for club members with partnerships that offer discounts on travel, gyms, pharmacies, restaurants, movie theaters and more. On Slide 5, another element of our customer experience strategy is to continue growing our private label offering, providing customers with excellent quality at attractive prices to help them to optimize their budget. This year, we've continued to launch new products in different categories and under different specialty brands. We've included a few examples here on the slide, such as Ready-to-eat Pasta under our Como en Cassa brand. Chocolate-covered nuts and dry fruit under our Tento brand for sweets and a new cereal flavor under our [indiscernible] brand for [ DriveCots ]. On Slide 6, third pillar of our strategic plan targets, efficiency and productivity. We've been consistently implementing different initiatives, tools and technologies. For example, self-service modules such as self-checkouts, voice-picking and demand planning tools. We've continued to implement our efficient operating model at our Unimarc stores, focused on efficient replenishment, higher frequency of deliveries from distribution centers, the use of rural containers that go straight from the truck to the sales floor without using a storage area, among other processes. The benefits of this model include reduced shrinkage and inventory turnover and improved product availability. The remaining focus on operating efficiency and productivity, we were well positioned to adapt to new labor regulations in Chile, which gradually reduced the work week from 45 to 40 hours. This year, the 44 hour work week went into effect, but last year, we had already started implementing the 40-hour work week at stores that have adopted the new efficient operating model, going beyond legal requirements and without the need to increase headcount. On Slide 7, another component of our efficiency and productivity pillar is energy efficiency. Last year, we implemented an energy management system and 100% of the facilities operated by SMU Chile, designed to optimize energy consumption and efficiency. And in February of this year, we received certification under ISO 50001 for the system, thereby meeting one of our goals for 2025. On Slide 8, regarding the committed and sustainable organization pillar of our plan. Our commitment to diversity and inclusion is part of our corporate identity. And we have been working to implement gender equality and work-life balance management systems and our operations. Our latest operation to receive independent certification of the system is Lo Aguirre distribution center, which received the national service for women and gender equities award for equality and work-life balance and recognition of its commitment and best practices in the area of gender quality. Going on to the numbers on Slide 9, we have revenue and same-store sales. We had top line growth of 1% in the quarter. We haven't seen much of a change in consumer behavior this year compared to last year. We continue to see income elasticity from our customers whose budgets are affected by the economic conditions, and therefore, they buy fewer quantities and substitute for cheaper products, which affects the average ticket. However, we also continue to see growth in the number of customers and transactions across format, which was also happening last year. So our value propositions are continuing to attract consumers. What we need is for economic conditions to improve, so the growing number of customers can increase their average ticket. The year-over-year comparison is affected by the fact that 2023 started off strong, especially in the Cash & Carry segment. So we have a challenging comparison base. This is clear when we look at same-store sales performance and the graph on the right-hand side of the slide, same-store sales growth overall last year was 4.3% in the first quarter, which includes a 10.8% increase in the cash & carry segment. And this year, we have a slight decrease in same-store sales. However, one of the highlights of the quarter was the same-store sales growth of 12% in Super10, our soft discount format, which is an important part of our organic growth plan going forward. On the gross margin side, we had an increase of 90 basis points in the quarter, reaching 31.5%. On the next slide, we have operating expenses, which grew 6.2% and 108 basis points as a percentage of revenue. As we have seen in recent periods, the 2 main drivers behind the increase continued to be the higher minimum wage, which increased 12.2% year-over-year, affecting both personnel expenses and the cost of services and accumulated annual inflation, which was 4.8%, affecting not only salaries and the cost of services, but also leases and distribution costs. Service expenses are also affected by higher electricity rates. Personnel expenses and service expenses alone account for 56% of the total increase in operating expenses, as you can see in the pie chart on the right. Moving on to Slide 11. Our EBITDA remained relatively stable despite the pressure on expenses and the challenging consumption environment. Our EBITDA margin was 9.4%, below the first quarter of last year, but well above our long-term target of 9%. We've also added operating income to the slide because while EBITDA was stable, we have a decrease of 6.6% in operating income, and that is because of higher depreciation and amortization related to the higher levels of CapEx we've had recently as part of our strategic growth initiatives. Operating income fell by CLP 2.9 billion, and almost all of that was because of higher depreciation. On the next slide, we have net income, which was down 12% compared to the first quarter of last year, basically for 2 reasons. The first is the lower operating income, which, as I explained on the previous slide, is related to the higher depreciation. The second is a higher income tax expense because inflation was lower this year, which means we had lower inflation adjustments to our deferred tax assets. These effects were partially offset by an improvement in nonoperating results also related to the lower inflation because we had lower losses on inflation index liabilities, although this was partially offset by higher net financial expenses as our liabilities from rights of use have increased because of new store rental contracts, and financial income is lower due to lower interest rates on time. On Slide 13, we have our dividend yield of 6.7% for the last 12 months as of March 31, the same as at the end of 2023. Since that date, we have approved 2 dividend payments. At our Annual General Meeting in April, shareholders approved a final dividend of PHP 4.8 per share, which was paid last week. And this week, we announced an interim dividend of CLP 2.5 per share, which will be paid in June as part of our dividend policy with a 75% payout ratio. As you can see on the graph below, the very strong share price performance explains most of the decrease in the dividend yield between 2022 and 2023. The return on equity is a bit lower due to lower net income and higher shareholders' equity, but we are still above 10%. 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 3.5x in March of this year. And when we adjust for store rentals, we went from 2.7x in 2021 to 2.1x in March. On the right, net interest coverage as reported is up from 4.9x in 2021 to 5.6x in March 2024 and a bit lower than December 2022 and December 2021 because of the lower financial income. When we adjust EBITDA and interest expense for store rentals, we started with coverage of 9.5x in 2021, up to 12.7x in March. On Slide 15, we have our bond covenants, where we continue to have plenty of flexibility. Net financial debt to equity is at 0.44x well below the 1.03 limit and interest coverage is up to 5.6x, more than double the 2.5x requirement. On Slide 16, at the top of the slide, we have a summary of our cash flow for the first quarter. 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. As we explained when we published our fourth quarter results, in January, we received CLP 52 billion from the insurance plan for the social crisis utility back in 2019. This payment had already been reflected in the P&L, but we didn't receive the cash until January. 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 quarter was CLP 50 billion. On top of that, we also issued a local bond in March, the Series AR bond for USD 1 million or CLP 37 billion. This bond matures in 2034. That maturity is highlighted in pink in the misery profile below. The uses of cash for the quarter included the amortization of bank debt and bonds for CLP 23 billion, lease payments of CLP 15 billion, interest payments of CLP 13 billion and CapEx of CLP 13 billion, leaving us with an ending balance of CLP 181 billion. In April, we carried out another borrowing placement, the Series A bond this time for USD 1.5 million or CLP 55 billion maturing in 2029. The purpose of these bond placements is to refinance financial liabilities and flatten out our maturity profile, which is what we are showing in the graph below. Of the CLP 145 billion in maturities that we have in 2025, these 2 bond placements allow us to cover CLP 92 billion. And finally, on Slide 17, we held our Annual Shareholders Meeting in April, where all of the voting matters were approved, and the Board of Directors was elected. The 2 independent directors who had served for the past 6 years, Tina Rosenfeld and [indiscernible], left the Board and were replaced by 2 new independent directors, Alejandro Danus and Enrique Gundermann. The remaining 7 Board members were reelected. That's it for our presentation. Thank you very much for listening. And if there are any questions, Arturo be happy to take them.

[Operator]

Thank you. We will now move to the question-and-answer section. [Operator Instructions] Our first question comes from Felipe Paragon from Santander.

[Unknown Analyst]

I actually have 2 related questions. First, how did the additional Jan-February and the Easter shaped up the first quarter results, do you have those pro forma numbers? And second, how have you seen the second quarter perform so far? Have the same trends persisted? And should we expect a weaker second quarter compared to the first one due to the absence of these calendar effects?

[Arturo Ortiz, executive]

Okay. In the first quarter, effectively, we had an Easter impact in the end of March, improving the result March and in -- but the negative impact was in April in the beginning of April. And for this reason, the second quarter will be -- have this negative effect in the beginning of the quarter. But it's not so significant. It's more significant in the third quarter, the one day more in February in comparison with the previous year because we have one day more, that significant effect, CLP 7 billion in sales that is not present in the comparison with the second quarter.And in terms of the performance of Q2 is similar sales remain weak and there is still no improvement in consumption. A drop in average ticket, as Carolyn mentioned in the first quarter, continues because customers continue to be buying fewer units and high-value product for lower-value products. However, we maintain growth and transaction frequency and number of clients in all formats, which shows that our clients are reacting positively to our value proposition and promotional activities, but with lower purchase volume for the number of units in the average ticket. Given this, we hope that when consumption recovers, we will be able to capture that growth in the next quarter. In terms of margins, the lower growth, no doubt, affect the dilution of expansions. But we can deal with discipline expansions and also in commercial margin. That has allowed us to maintain EBITDA margins above 9%. We hope to achieve this objective during a full year 2024. And that is in conclusion, the second quarter is in the same line of the first quarter in the all aspects.

[Operator]

Our next question comes from Alonso Aramburú from BTG.

[Alonso Aramburú, analyst]

Can you comment on your expansion plan and the number of store openings you expect for 2024? If you can confirm that? And you had a couple of closures of stores in the first quarter. Do you expect closing more stores in the short term? And in addition to that, if you can comment on the good performance of Super 10 and given that performance, are you, maybe thinking about accelerating some of the openings of that format.

[Arturo Ortiz, executive]

So the execution of the strategic plan, in general is on track. The is to open this year, 19 stores in Chile. We only have some doubt about the opening time because in certain stores, we have some delays in impairments. But if they are not open, this specific store that could be something like 5 stores, not opening 2024, they will be opening in early 2025, but we are working to open store anyway because as Carolyn mentioned, the performance of the new stores opened in the last 12 months has been -- have been very, very good, better than the rest of the stores and better than planned. And in the Super10,we have the same case, very good performance. In fact, the central sales was growth viewed at 12% in the first quarter. And no doubt this good performance, which make us the precise in our expansion plan specific, not only in Unimarc also in Super10. We consider also in our expansion plan, the remodel plan for some stores and conversion plan of super10, Unimarc, [indiscernible] stores in SBS. We keep the same plan for the next month, persevering in this aspect for the good performance of these stores.

[Operator]

[Operator Instructions] We have a question from Diego Guzman from BTG.

[Diego Guzman, analyst]

My question is regarding the gross margin of this quarter where we saw an important increase of 90 basis. So I would like to know, basically, you have a mix effect because Unimarc grew more than the other formats. But I would like to know what were the main trends in terms of promotional activity and your efforts to increase margin. And if you see this sustainable to the future because you have an above 31% margin and you have been very consistent in maintaining your hikes in margin in the upcoming months. So I would like to know the trend and the sustainability of what's behind this?

[Arturo Ortiz, executive]

Effectively, we improved the margin. Gross margin because the weight of Unimarc was higher case 2% and Unimarc margin is better than the rest of the format -- gross margin. And especially because we had a better performance in the perishable products that most of them have a better margin than the basic product. We keep the behavior of the consumer preferring basic products. But anyway, Unimarc value proposition, the operation is very, very important, represent 60% of the total assortment. Therefore, for this reason, the margin was better for the more weight of Unimarc in the total sales. Thinking in the next quarter, the idea is to keep the same level of gross margin could be 30 basis points higher or lower depending on the quarter because depending on the promotional activity because, for example, in September, we can do some specific promotions in meat or wine that is -- in general, we don't receive 100% of the financing from suppliers. But we can have this minimum impact changing the gross margin of 20 to 30 basis points more or less. But in general, the idea is to keep the same level of gross margin for the next quarter.

[Diego Guzman, analyst]

And just a follow-up on the expansion plan. What could be your -- maybe if you are recalculating your CapEx for the year at this time of the year or you remain steady with your CLP 120 million?

[Arturo Ortiz, executive]

No, we remain in the same amount, CLP 10 billion could be, as I mentioned before, that if we opened some stores in the first quarter of 2025 for the part of this amount will be spent in spending in the first quarter of 2025. But with the delay for the projects in a specific store. But the total amount, we will spend the total amount of CapEx that we consider in the original plan.

[Operator]

We have a text question from [indiscernible] from Compass who asks you have been several quarters with an EBITDA margin above 9%. Do you still keep 9% as your long-term target? And what would it change it to revise it upwards.

[Arturo Ortiz, executive]

Again, in terms of the time to keep the 9% EBITDA margin is absolutely possible. In fact, this quarter with weak economical scenario of weak consumption will reach 9.4% EBITDA margin. I think it's absolutely possible to be about 9% in the full year 2024 and in the future because our strategic plan considered expansion in terms of the revenues with VIA to multiply more times this EBITDA margin that in our panic. It's difficult to improve more, but it's absolutely possible to keep this level. Another question is about of the GDP number improving a little bit in the last quarters. But we need to -- we have a delay in the consumption, of course, because after the improvement in GDP, we need to see the improvement in employment and salaries and real salaries and the final effect is the consumption. And that, in my opinion, the delay that we're -- what we have in the consumption payables. But no doubt the GDP improvement will have impact finally in the consumption in the next months. And we are expecting at this moment with very good -- very high disciplined cost or expenses and also in gross margin to capture this improvement in the next quarters.

[Operator]

Thank you. I'm not seeing any more questions. So perhaps I can hand back to Carolyn and Arturo for closing remarks.

[Carolyn McKenzie, executive]

Great. Thanks, Tim. Thanks, everybody, for joining us. If you have any further questions, feel free to get in touch, and we hope to have you with us in the next quarter. Have a great day.

[Operator]

That concludes the call for today. Thank you, and have a nice day.