SMU SA

SGO:SMU

Earnings Call Transcript 2020-Q2

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the SMU Second Quarter 2020 Earnings Call and Webcast. [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, for opening remarks. Please go ahead.

[Carolyn McKenzie, executive]

Thank you. Thank you, all, for joining us today. We have a few slides that summarize our numbers for the first half and second quarter of this year. And then our CFO, Arturo Silva, will be happy to take any questions at the end of the call. As always, please feel free to contact me afterwards if you have additional questions. If anyone isn't using the webcast to follow the slides today, the presentation is available on our website, www.smu.cl, in the Financial Information section. I sent out a link 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.

Let's get started with revenue on Slide #3. Our top line was affected by 2 main issues during this period. The first is the fact that we have fewer stores operating than we did at the same time last year. This is due to the social unrest that took place in Chile at the end of last year, with some incidents at the beginning of this year as well. We ended up with 26 stores with serious damage, and we have been able to reopen a few of those in the past couple of months. But for most of the first half, they were out of commission.

The other main issue has been the pandemic. While we did see a boost to our sales during the last 2 weeks of the first quarter as customers stocked up on groceries in the early stages of the public health crisis, we subsequently saw changes in customer behavior that had a negative impact on our stores. This was largely related to the restrictions that were imposed in Chile with quarantines, shelter-in-place orders and a limited number of permits to leave the house each week, which naturally had a negative impact on traffic and frequency of purchases. As a result of these factors, we had a weak second quarter, with a 6.1% decrease in revenue, which offset the strong first quarter performance and lesser for the first half that was essentially flat in terms of revenue growth compared to the first half of 2019. Although we saw an increase in demand for basic grocery products, our gross margin remained stable in the second quarter at 29.3% and increased slightly in the first half, 20 basis points.

On the next slide, we had same-store sales, which corrects for the effect of the store closures and gives us a clear year-over-year comparison. Same-store sales growth for the first half amounted to 3.7%. Here, growth was driven by the cash & carry segment with 12.4% growth, and especially Alvi, with 21.1% growth as B2B and institutional sales increased significantly. We also saw solid growth in Peru, with 4.2% in local currency as many customers chose to migrate from informal formats to modern stores as they thought out a safer shopping experience in the face of the pandemic. Both of these formats continue to perform well in the second quarter. But this, among the other formats, began to see a negative impact from the restrictions I mentioned on the previous slide.

Over 50% of our stores are located in municipalities that were under quarantine restrictions in the second quarter, and customers were only allotted a limited number of permits to leave their homes each week in order to buy groceries, go to the doctor or perform other essential tasks. As a result, we saw a significant drop in traffic. Transactions in the quarter fell by more than half.

The impact on traffic and same-store sales was even more evident when we break down stores by location. Centrally located Unimarc and Mayorista 10 stores significantly underperformed residential locations during the second quarter. The OK Market convenience stores were further affected by the fact that we had to close earlier than usual in order to comply with curfews that are in place in order to minimize movement and contagion. Most of the decrease in same-store sales can be attributed to sales made between 7 and 11 p.m. last year.

We also saw a shift in purchases. Customers made more stock-up purchases and tended to prefer basic dry goods over fresh products. The stock-up purchases led to a higher average ticket, but this was not enough to make up for the lower traffic. This was especially relevant in Unimarc, where our value proposition focuses on conveniently located stores that are small and well suited to quick, frequent shops. We have made adjustments to the assortment in Unimarc, expanding selling space for basic goods and adding promotional campaigns focused on stock-up purchases, growing our market share in some of these categories. However, it hasn't yet been enough to outweigh the decrease in sales of fresh foods like fruits and vegetables, meat and bread and also liquids, which are categories where Unimarc had a very strong position.

As we mentioned in our earnings release, we believe that's a negative impact on customer traffic and our sales should be temporary. In August, we began to see restrictions lifted in some areas, and we also saw positive same-store sales growth. We, of course, need to continue to monitor the situation, and understanding our customers' needs is perhaps more important now than ever.

On Slide 5, we have a breakdown of revenue performance by format, where you can see the combined effects of the lower number of stores and COVID-related changes. Here, we can see the negative impact for Unimarc and OK Markets, offset by 5.3% growth in cash & carry even with fewer stores and a negative impact on traffic remaining for the year. E-grocery revenue grew almost 40% in the first half, and it more than doubled in the second quarter as we saw more demand from customers who couldn't or didn't want to leave their homes to get grocery. And again, here, we see solid performance from Peru, with revenue growth of 11.2% measured in local currency and 23.2% growth measured in Chilean peso.

We've spread operating expenses out over 2 slides in order to illustrate the impact that extraordinary COVID-related expenses had during the period. On Slide #6, we have operating expenses for the first half of the year. As you can see on the graph, we had year-over-year growth of 6.7%. These amounts included CLP 5.3 billion in expenses that are directly related to COVID, personnel expenses, sanitization services, personal protective equipment and other materials. Excluding these amounts, OpEx would have grown 4.5% year-over-year, and OpEx as a percentage of revenue would have grown 90 basis points instead of 140.

The non-COVID expenses growth was mainly explained by salaries, due to higher minimum wage and inflation adjustments and higher insurance expenses under our new post social unrest policy. As a reminder, last year, with the application of IFRS 16, these numbers changed. So in this graph, only the last 2 bars are comparable. We've left the historical figures and the pro forma IAS 17 2019 numbers as well as IFRS 16 2019 numbers, so you can see how much of the difference can be attributed to the change in accounting rules.

On Slide 7, you can see something similar for the second quarter. COVID expenses of CLP 4.6 billion were behind a 7.9% year-over-year increase in OpEx. Excluding those expenses, OpEx grew 4.1%.

On Slide #8, we have some of our operating indicators. Our rate of centralized distribution, which is an indicator that helps us to monitor operating efficiency and inventory management, increased significantly this year, largely attributed to product mix as we sold more basic goods that generally tend to be distributed through our own logistics network. Centralization for the first half reached 54.5%, an improvement of 8.8 percentage points compared to the first half of last year. And in the second quarter, we reached an all-time quarterly high of 58.8%. Sales per full-time equivalent managed to improve by 3.8%, even though we had weak sales performance in the period.

On Slides 9 and 10, we've provided the same breakdown for EBITDA as we did for operating expenses, showing the impact of the extraordinary COVID-related expenses. In the first half, EBITDA, as reported, fell 14.2% to CLP 77 billion, a decrease of 110 basis points in EBITDA margin. Excluding the COVID expenses, the decrease in EBITDA would have been 8.3%, and the drop in EBITDA margin would have been 60 basis points. The lower EBITDA margin reflects the higher operating expenses as a percentage of revenue.

On Slide 10, we can see EBITDA for the second quarter, where the combination of lower sales and higher expenses is more pronounced, with a 45.8% decrease year-over-year and EBITDA margin falling 320 basis points. Excluding the COVID expenses, EBITDA fell 35%, and EBITDA margin fell 230 basis points.

On the next slide, we have a graph showing how our nonoperating loss increased from CLP 32.1 billion for the first half of 2019 to CLP 36.2 billion in the first half of 2020. The main variations are nonrecurring effects related to the losses from vandalism that occurred -- that affected some of our stores at the beginning of this year in the context of the social crisis as well as the fine handed down by the Supreme Court in April and its ruling on the proceeding between Chilean antitrust authority and supermarkets, including SMU. Last year, we incurred expenses of CLP 3.5 billion for our restructuring brand, which was also a onetime effect.

On Slide #12, we have net income, which fell 97% in the first half, mostly used to the CLP 13.4 billion decrease in operating income. The CLP 4.1 billion increase in nonoperating loss was offset by CLP 4 billion in taxes.

In the second quarter, we reported a loss of CLP 6.5 billion, whereas last year, we had net income of CLP 6.1 billion. Here, the reason is a decrease of CLP 19.3 billion in operating results, partially offset by the CLP 7.5 billion improvement in operating results in the quarter -- non-operating results.

On Slide 13, we have an updated maturity profile. The bank debt we have in the remainder of 2020 is essentially revolving short-term debt that is helping us to finance working capital. This profile includes the bonds we issued in June, Series 8-K for USD 3 million or close to CLP 85 billion, which matures in 2025.

On Slide 14, we have a look at our bond covenant. Even with the lower EBITDA and higher short-term debt, we still have plenty of flexibility in terms of meeting these restrictions.

On Slide 15, we have a graph that shows our sources and uses of cash in the first half as well as our estimated uses of cash for the second half. While EBITDA was lower this year than last year, we do have the new bond issue, which provided liquidity and was used to refinance financial liabilities. We also have about CLP 35 billion in new short-term bank debt, as I mentioned earlier. On the uses side, CapEx for the first half was about CLP 17 billion. For the full year, we expect CapEx to be in the neighborhood of CLP 40 billion to CLP 45 billion. As we have explained throughout the year, the restrictions first related to social unrest and then related to the pandemic have led to delays in our CapEx plans. So most of our store openings and remodels will be pushed back to next year. Other uses of cash this year have included interest payments and lease payments, which will be similar in the second half. We also have paid down debt with the proceeds from the bond, and we paid a dividend in May.

Other mainly includes working capital, which is fairly standard for the first half of the year, when we tend to run in more of a deficit and then we recovered during the second half of the year. The other source of cash we should have at the end of this year is the account receivable from the insurance for the losses related to social unrest, acts of vandalism and business interruption for closed store.

Finally, I'd just like to cover a couple of other things that have happened recently. I mentioned the bond placement already. As was in June, the USD 3 million at a 3.5% annual interest rate with the 2025 bullet maturity. On July 30, we held bondholder meetings in order to standardize our covenant across all bond lines. As a result, all of our bond lines have a net financial debt-to-equity restriction of 1.03x starting on September 30. And we also fixed the definition of EBITDA and some of the bond lines were missing the words are amortization. Yesterday, we announced that we will be holding an extraordinary shareholders meeting on September 22. This is because part of the Supreme Court ruling that I mentioned before requires us to modify our bylaws in order to establish a compliance committee, and any changes to the bylaws must be approved by shareholders. This meeting will be held remotely due to the pandemic. We will have instructions up on our website in the next few days for shareholders who would like to participate.

And finally, a quick update on the store status. Out of the 26 stores that had severe damage from the acts of vandalism, we have reopened 4. 11 are pending construction or evaluation, and 11 have permanently closed. So we have made a lot of progress there.

That's it for our presentation. Thank you very much for listening. And if there are any questions, Arturo will be happy to take them now. Thanks.

[Operator]

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

[Alonso Aramburú, analyst]

I just wanted to ask a couple of things. You mentioned that August, we're seeing better numbers. I'm just wondering how July was, whether you continue with the same trends of the previous quarter? Or did you see some recovery as well? And just thinking strategically, you mentioned in the -- you expect this to -- this change in consumer habits to be structural. But are you -- I know you mentioned some adjustments to Unimarc. Are you making some other adjustments to the other formats? Or are you maybe prioritizing growth of some of the formats that are doing better, such as Alvi? I mean how do you think about your store formats going forward, given what's going on right now?

[Arturo Ortiz, executive]

Good morning, Alonso, thank you for your questions. First point about the performance in July and August. July was a similar month with April, May and June, not good months, especially in Unimarc for the same reason that Carolyn explained. But August -- because in July, we keep more than 50% of our shops in quarantine and -- but in August, as Carolyn mentioned, the quarantine in a lot of municipalities decreased and was a very, very clear, the improvement in our sales for this reason in August. In fact, we closed the month in regular numbers, similar with growth in Unimarc and growth in SMU completely, with similar level of the first quarter of this year. Therefore, we have regular models in line with the beginning of the -- more freedom to purchase for our clients with more traffic in the stores and also with more consumption in the categories are liquid needs where Unimarc is more strong, stronger than the competitors.

And also with a similar level of increase in the basic products, where Unimarc also have had increase in April, May and June, but not enough to offset the decrease of -- in the perishable products. Therefore, we are very, very optimistic that the second quarter was a transitory effect for the quarantine effect, to the pandemic effect, but in August with more regular situation or the beginning of the regular situation, and the situation is absolutely different for us with regular numbers, especially in Unimarc because in Alvi, the situation has been very good because the traditional segments are increasing a lot and with very, very good numbers in Alvi in the first quarter and also in the second quarter, as Carolyn mentioned.

The format with more negative effects in the second quarter was Unimarc and Mayorista 10. And in this aspect, as you mentioned in the -- having, in our consumer, change with more demand of the basic products and less in the perishable products, with effect in the transaction and with increase in the average ticket. But no doubt that Unimarc has an overture in the categories, liquid, meats and the perishable product. Therefore, with more impact in this category, no doubt the impact in Unimarc was more important in the second quarter in sales. And also Mayorista 10, with more shift in purchase and with more -- and for this reason, the category is more significant.

In Alvi, it's more stock-up behavior of the consumer and with more strong growth in the traditional market, affect positively the Alvi format. In OK Market, the situation is different because the restriction in terms of the schedule affecting the last part of the day, with -- producing the chance to sell more in this period. And also with a lot of jobs in the centric of the downturn of the cities, the same case of Unimarc and Mayorista 10, we have the centric shops, Unimarc present 30% of the total sales and Mayorista 10 60% of the total sales, and in OK Market more than 50%. This effect is very important as well because the traffic in these areas is lower. But in August, with the municipalities in the Phase 2 with more chance to purchase during the week, the situation changed in August and improving Unimarc and also in OK Market and Mayorista 10.

Another important issue is that Unimarc changed a little bit the assortment, the exhibition of assortment, with more deficits in the stock-up products, oil, pasta, rice, this type of product. And in August, of course, the effect of these measures, it's clear because we have good growth in this category. And also, we are capturing the improvement in the perishable products. This is very, very important also in the promotional activities because we changed the product in their promotions. Now that we have a [indiscernible] and not gelato, it's beer products or meat in the promotion and with more promotion with basic products or stock-up products, with the idea to show the real chance to show for our kind at Unimarc, a good option for the stock-up product because the average ticket do a lot in the last 4, 6 months. But that is -- with these changes in the Unimarc assortment, with big changes in the promotional activities. And although we are extending the promotions because now in 3 days, it's not possible to sell the same because the restriction in the number of the days that the clients are purchased, it's necessary to expand the promotion for more days. We are implementing this as well.

We talked, with this -- all elements is -- in August, the situation is better in Unimarc. And also for the external scenario or the pandemic scenario also is the restriction are reducing. And these 2 elements permit to -- allowed to improve the sale in Unimarc, in fact in August. And we are concerned permanently in the change of the habit of the clients, but we are expecting that the normal situation in the second half of the year, because our focus is a clear example of, with less restriction, the Unimarc value proposition is -- improved a lot because we have celebration again, we have more perishable products again and also with growth in the basic products.

In Alvi, the situation is very good permanently during this year, with the traditional mobile shops -- mom-and-pop, excuse me, store growing a lot, with a lot of institutional sales as well from the government, municipalities, people are purchasing a lot of basket of products for donations or -- and also governmental plans to supply the population. And Alvi, very, very important in this segment. And in OK Market, the situation for the future is more regular with more stores open, because stores were closed in the -- for the social crisis, closing a lot of stores but -- a lot of shops, but now the situation is more regular. And also the schedule now, it's more regular because the restriction to finish now in 11:00 and not 10:00, and, therefore, it's possible to close later. And that one hour more to sell in OK Market is very, very important in the end of the year and the end of the day. And therefore, all these elements are present in August and not present in the previous months, and the result in our sales is very clear, clearly better.

[Operator]

[Operator Instructions] 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, everyone, for joining us today. Feel free to get in touch if you have further questions, and we hope to have you with us next quarter. Have a great day.

[Operator]

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