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Thank you for standing by. This is the conference operator. Welcome to the SMU Third Quarter 2020 Earnings Conference Call and Webcast. [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.
Thank you. Thank you all for joining us today. We have a few slides to summarize our numbers for the first 9 months and third quarter of this year. And 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, the presentation is available on our website, www.smu.cl, in the financial information section. I also sent out the presentation 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.
On Slide #3, we have revenue. As with our last quarter, during the pandemic, we have seen changes in customer behavior that has 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. These restrictions peaked in the month of June and July in terms of coverage. In August, restrictions began to be lifted in some areas and in stages as the number of coronavirus cases has fallen.
In September, October and November, the number of municipalities under quarantine has continued to fall, and this has led to a gradual recovery in customer traffic in our stores. However, performance in July, before this recovery began, weighed down our third quarter results.
The other issue affecting our top line 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 different times of this year as well. Following those incidents, we have stores that were seriously damaged, and therefore, have not been operating for part or all of this year. Over time, we have reopened many of those stores, but pandemic-related restrictions have slowed our progress on rebuilding outlets.
These closed stores explain why revenues fell 1.9% in the first 9 months of the year, while same-store sales grew 2.3%, and may also explain the gap in the third quarter, with revenue falling 4.1%, as same-store sales only 0.6% lower year-over-year. We have managed to grow our gross margin during the period despite the increase in demand for basic grocery products. In the first 9 months, gross margin grew 30 basis points and in the third quarter, we had an expansion of 50 basis points. As a result, the decrease in gross profit was not as pronounced as in the top line, essentially flat in the 9 months and lower by 2.4% in the quarter.
On Slide 4, we have a breakdown of revenue performance by format for the first 9 months of 2020 versus 2019. The decrease year-over-year is concentrated in Unimarc and to a lesser extent OK Market, where we saw both the lower number of stores and the COVID restrictions, both in terms of quarantine limitations on customers and in terms of reduced operating hours to comply with mandatory curfews, which particularly affected OK Markets.
Performance in these formats was offset by growth in cash & carry, even with fewer stores and a negative impact on profits for 9 months of the year. E-Grocery revenue grew over 60% in the first 9 months, and it more than doubled in the third quarter as we saw more demand from customers who couldn't or didn't want to leave their homes in order to get groceries. And Peru once again contributed to revenue growth as well.
On the next slide, we have same-store sales, which corrects for the effects of the store closures and gives us clear year-over-year comparison. As I mentioned before, same-store sales growth for the first 9 months amounted to 2.3%. Here, growth was driven by the cash & carry segment with 10.6% growth and especially OK with 23% growth, as strength in B2B and institutional sales continued.
Unimarc and Mayorista 10 were more effective by the lower traffic, as both of these formats have a high percentage of centrally located stores. For Unimarc, over 30% of sales come from centrally located stores. And in the case of Mayorista 10 it is closer to 60%. Central locations generally have underperformed residential stores under these circumstances.
In the third quarter, same-store sales fell to 0.6%. The restrictions in July had a significant impact on this figure. As I mentioned before, in August and September, we began to see a recovery. The fact that OK Market achieved 1.4% same-store sales growth in the quarter, even while closing earlier, shows the change in trend.
On Slide 6, we provided 2 additional graphs that illustrate how same-store sales and traffic have evolved this year. The first quarter reflects the fact that the year got off to a strong start in January and February. And in the second half of March, we had the added impact of customers stocking up on groceries in the early stages of the pandemic. In the second quarter, we have the drastic drop in traffic due to the quarantine and other restrictions.
This continues through July and then in August same-store had turned around and have gradually been improving since then. Overall, traffic was still down over 50% in the third quarter. We certainly are not back to normal by any state of the imagination. But we started moving in the right direction, and we included October in the graph to show that the trend continues to improve. The recovery is reflected when we compare the 2.7% drop in same-store sales in the second quarter to a 0.6% decrease in the third quarter, which as I said, is pulled down by the situation in July.
Moving on to Slide 7. Just as we did last quarter in this presentation, we spread operating expenses over 2 slides in order to illustrate the impact that extraordinary COVID-related expenses had during the period. First, we had operating expenses for the first 9 months of the year. Before I go into that explanation, just as a reminder, to explain the colors on these graphs, last year, we had the application of IFRS 16 making historical figures not comparable to 2019 and 2020 figure. We've left the historical figures and the pro forma IAS 17 2019 numbers as well as the IFRS 16 2019 numbers, so you can see how much of the difference can be attributed to the change in accounting rules.
As you can see in the graph at the top, we had year-over-year growth of 4.4% in operating expenses. In 2020, this includes CLP 7.4 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 2.3% year-over-year, and OpEx as a percentage of revenue would have grown 70 basis points instead of 120.
The non-COVID expenses growth was mainly explained by higher insurance expenses under our new post social unrest policies as well as salaries. Due to higher minimum wage and inflation net adjustment, although that was partially offset by lower average headcount.
On Slide 8, we have the same review, but for the third quarter. However, in the third quarter something very unusual happened, because the total operating expenses decreased year-over-year, even when we include CLP 2.2 billion of extra COVID related expenses. When you exclude the COVID expenses, total OpEx decreased 2%. Here you can see the effect of our disciplined approach to expenses. We have been working hard to optimize the COVID expenses. But as you can see on the bottom graph, we are also achieving savings and other expenses. Distribution expenses were lower in the quarter as well personnel and advertising expenses.
On Slide #9, we have provided an illustration of the optimization of COVID expenses that I mentioned on the previous slide, comparing Q2 to Q3. During the second quarter, we had nearly CLP 4.6 billion in extraordinary expenses. This was due to the fact that during that quarter, we were reacting to the prices and did not yet have a clear supply chain in place for the different products and services that we needed in order to continue to operate safely.
As the months have gone by, more suppliers have become available to us, and we have also been able to plan better, which has resulted in the significant optimization, where expenses were cut in half. It is very important to mention here that we have achieved these savings while remaining strict compliance with all public health protocols. The healthy safety of our employees, contractors and customers is our #1 priority.
On Slide 10 and 11, we've provided the same breakdown for EBITDA as we did for operating expenses, showing the impact of the extraordinary COVID-related expense. In the first 9 months, EBITDA, as reported, fell 11.7% to CLP 125 billion and a decrease of 70 basis points in EBITDA margin.
Excluding the COVID expenses, the decrease in EBITDA would have been 6.5% and the drop in EBITDA margin would have been 40 basis points.
On Slide 11, we can see EBITDA for the third quarter, where we had a decrease of 7.5% to CLP 49 billion and 30 basis points lower EBITDA margin. This is a significant improvement over the second quarter, where EBITDA fell 45.8% and EBITDA margin fell 320 basis points. So here we can see the impact of the gradual recovery in the top line and also the optimization of operating expenses.
Excluding the COVID expenses, EBITDA fell 3.4% and EBITDA margin actually expanded 10 basis points from 9.0% to 9.1%.
On Slide 12, we have net income, which fell 59% in the first 9 months, essentially due to the net loss we had in the second quarter. In the third quarter, we had net income of CLP 9.5 billion, which is 7.6% lower than in the same quarter of last year. At the bottom of the slide, we've included a graph showing net income for the first, second and third quarters of this year.
As you can see, the second quarter loss practically offset the entire profit of the first quarter, but in the third quarter, not only did we manage to recover the positive net income, we achieved net income that was even higher than the first quarter.
On Slide 13, we have an updated maturity profile. This doesn't change much since June. The bank debt we have in the remainder of 2020 is essentially revolving short-term debt.
On Slide 14, we have a look at our bond covenants, where we have plenty of flexibility in terms of meeting our restrictions. You may recall that in July, we have Bondholders meeting in order to standardize our covenants across all bond lines. Those changes were approved by bondholders and has since been officially registered with the financial market commission, so they are in effect beginning [indiscernible] September 30, 2020. On Slide 15, we have a graph that shows our sources and uses of cash in the first 9 months, which is very much in line with what we are seeing in June. While EBITDA was lower this year than last year, we did have the new bond issue from June, which provided liquidity and was used to refinance financial liabilities.
On the user side, CapEx was about CLP 24 billion, and we continue to expect full year CapEx to be in the neighborhood of CLP 40 billion. As we have explained throughout the year, the restrictions, first related to social unrest and then related to the pandemic have led to delay in our CapEx plan. So many targets have been pushed back to next year. Other uses of cash this year have included interest payments and lease payments. 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 was running at more of a deficit in the first half of this year, and we have been recovering in the second half, which is normal due to our business cycle.
On Slide 16, we have a few highlights relating to different company initiatives. Customer experience is one of the pillars of our strategic plan. Our loyalty program and personalized promotional activity are part of that, and we continue to innovate there. Most recently, we added a new benefit for our Club Ahorro royalty club members, where by using our apps, they can receive promotional pricing even after in-store promotional events have ended. Customer response to these extended promotions have been very positive, exceeding our expectations. As part of our ongoing efforts, we also continue to closely monitor our customers' needs and preferences, especially given the changes we have seen during the pandemic. To that end, we have made some adjustments to product performance. With respect to e-commerce, we have moved our Unimarc.cl platform into the next stage.
We were piloting this on friends and family, and we have now expanded the pilots over to the customers in order to get ready for the full launch. In terms of our organic growth plans, as restrictions due to the pandemic have lifted, we are focusing our efforts on some of the projects that we have to postpone.
For the first half of next year, we are planning to open 2 Unimarc stores as well as reopen 1 of the stores that has been closed since the end of last year. We're also planning to reopen those 3 OK Markets that have been closed since the social crisis as well as 2 new stores. And in Peru, we are on track to open 3 new stores in the first half.
We are also very proud of the campaign that we designed to help people who have been severely affected by the economic consequences of the pandemic.
The campaign is called Unidos salimos de esto which translates to, we will get through this together. Between July and September, we invited customers and neighboring communities to participate in this initiative, and we contributed an additional 10%. As a result, we were able to help 142 organizations with a total donation of CLP 186 million.
Finally, on Slide 17, we have a few comments on the binding agreement we signed in October to sell our OK Market business to FEMSA, which operates the OXXO convenience stores in Chile. This transaction includes the sale of 100% of the shares in OK Market for a U.S.-denominated price equivalent to approximately CLP 43.5 billion. The transaction is subject to regulatory approval. We submitted documentation of the Antitrust Authorities about a week ago, and the timing on that process is highly variable, which makes it difficult to estimate when the transaction could be finalized.
If we obtain regulatory approval, FEMSA will need to perform a due diligence process. Considering all these steps, we believe transaction should close during the next year. The proceed from the sale will be reinvested into the company and put towards strengthening our strategic plan for the coming years.
We continue to operate OK Market as normal, and we will carry on with our organic growth plans for this format. As for the terms of our agreement with FEMSA, we will be compensated for these investments as adjustment to the purchase price.
That's it for our presentation, thank you very much for listening. If there are any questions, Arturo will be happy to take them now.
[Operator Instructions] Our first question is from Alonso Aramburú with BTG.
Two questions on my side. You mentioned the better trends in the fourth quarter. Are they -- I mean, do you expect same-store sales now to turn positive, specifically in Unimarc? I mean how much of an improvement are you seeing in Unimarc in the last couple of months?
And regarding e-commerce, with the launch of unimarc.cl, do you have a target on where you see e-commerce sales as a percentage of total sales? Today it's below 1% and some of the competitors are much higher than that. I mean where do you think e-commerce sales can grow.
Okay. In Unimarc -- Unimarc performance improved a lot in August and September and also in October and November, essentially, because the quarantine's reduction in some counties or municipalities is very important. Now we have less stores with these restrictions and also the -- in some cases, we don't have any restriction for the customer to buy in any day in the week in our stores. That's a very, very important issue beginning in August and also September and October and November, improving the same-store sale in Unimarc. Also in the beginning of -- in the last quarter, in October and November, the performance is good, very good in comparison with the previous quarter.
And in terms of the unimarc.cl, we are implementing the testing period, the test period with a few clients in November. And the idea is to increase these number of customer in -- 6,000 customer in addition in the next week with the idea to launch it finally for the all customers, the unimarc.cl in the end of the year, in December with an idea to capture more sales from e-commerce.
Anyway, the e-commerce is increasing in the SMU, in general, considering the Telemercados sales and also last milers. In total, in the third quarter, the last miler increasing 250% and Telemercados and Los Dominicos store, the dark store increasing 135%, but we can consider the 100% of e-commerce business increased in the third quarter is 155%. With the unimarc.cl, we are increasing our capacity and also with the idea to capture more demand during December.
In parallel, we are working in the back, considering the -- investing or signing the contract for our new micro-fulfillment center with the idea to improve our profitability in the e-commerce business in 2021. The idea is to invest in this facility, improving our performance in this e-commerce channel.
If you include the sales from -- through last mile operators plus Telemercados, how much is that roughly as a percentage of total sales?
Okay. Including the last miler, the increase was 155% and not including the last mile was 135%. And...
But as a percentage of sales? Yes...
10% -- 2% penetration in total because before the pandemic, remember that our penetration was 0.7% or close to 1%, now it's close to 2% in the total sales of SMU.
[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.
Thanks very much. Thanks, everybody, for joining us today. I hope you have a great week, and we hope to have you with us for our fourth quarter call next year. Bye-bye.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.