SMU SA

SGO:SMU

Earnings Call Transcript 2022-Q3

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the SMU Third 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 am here with our CFO, Arturo Silva. As usual, we have some slides describing some recent business highlights as well as financial results for the first 9 months and third quarter of the year, and then Arturo will be happy to take any questions at the end of the call. As the operator, Jamie, just mentioned this time, we're trying out a new option to ask questions through the webcast or via chat. So we have a lot of people connecting through the webcast. So feel free to give that a shot.

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. I sent out the file to the distribution list this morning, please use the second version I sent out since there was a mistake in the first one. And an audio recording of this call will be available on our website later today.

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.

Today's presentation was the latest update on our strategic plan for 2020 to 2022, which has 4 pillars: omnichannel growth, customer experience, efficiency and productivity and committed and sustainable organization. But before that, I would like to mention that at the end of the month, we will be launching our new strategic plan for the 2023 to 2025 period, and we will be holding a webcast to share the details on Friday, December 2.

That link is already available on our website, and we will also be sending it out to the distribution list in the next couple of days. But for now, we're going to talk about progress under the current plan. Beginning with omnichannel growth on Slide 3. We had a very strong quarter in terms of new store openings. We opened 3 Unimarc stores between July and September as well as 1 Maxiahorro store. Two stores include 1 in the South of Chile and 2 in the Santiago Metro region, including Unimarc Las Tranqueras, which is a store that was closed due to fire damage a couple of years ago and that we have reopened [indiscernible] that we are calling premium affordable, and that includes a strong focus on fresh products and a new look and feel. The slide includes a picture of the bakery section to give you an idea.

The new Maxiahorro store is located in the North of Peru, which is where we're focusing our organic growth [indiscernible]. On Slide 4, also within our omnichannel growth initiatives. During the third quarter, we launched App Alvi Compras, an online shopping platform for members of our Club Alvi Loyalty Program. Club Alvi serves B2B customers, such as owners of mom-and-pops, hotels, restaurants and other small businesses. App Alvi Compras makes it possible for these customers to order and receive products without having to leave their place of business, which means that they can continue to serve their own customers and ensure product availability at [indiscernible] by offering new solutions, we help these customers grow their businesses, and we also build loyalty to Alvi.

This service has only been operating for a couple of months, so it is a bit [indiscernible], but we see an opportunity to generate incremental sales for existing customers and to attract new customers.

The next pillar of our strategy on Slide 5 is customer experience, where a defining characteristic of our strategy is our deep customer insights. We understand our customers and are able to use that understanding to provide them with value propositions that make their lives easier. Intense promotional activity is also a defining characteristic of our strategy, especially at Unimarc, where our different promotions are a major driver of customer traffic. Over the past several years, we have made innovations in response to very dynamic changes in customer habits and preferences. Traditionally, our promotional activity was more focused on what we refer to as [ Celebrations ], products people consume at social gathering.

In the beginning of the pandemic, we shifted the products and [indiscernible] that's what customers needed. However, during the pandemic, especially the beginning, tight restrictions on mobility, where in Chile, people were legally required to stay home and also the increased liquidity due to pension fund withdrawals and government aid, made customers less sensitive to promotion. Last year, as restrictions were lifted, we saw a consistent recovery in customer traffic, which has continued this year, and this has definitely increased the effectiveness of our promotional activity as customers again shift away from infrequent socket purchases and return to frequent fill-in purchase.

This year, we launched a new campaign called the Path to Savings, offering discounts on basic products, as many customers are looking to optimize their budgets in the face of higher inflation. We've also been implementing some of the traditional campaigns, such as one called, The Barbecue, which we highlighted during Chile's national holidays in September when barbecues are almost always part of the celebration.

This campaign really connects with customers. In fact, we recently won first place in the [Indiscernible] Marketing Awards for last year's of barbecue campaign. Recently, we also applied our promotional expertise to our online business with our Cyber Day for unimarc.cl where we combine some of our best-known campaigns covering a broad range of categories, including baby products, cleaning supplies, basic food products, wine and others. The Cyber Day has been a great way to raise awareness of the platform and to attract new customers.

Another initiative within the customer experience pillar of our plan is the development of private label products on Slide 7. We mentioned last quarter that we are seeing very strong growth in our private label products as we've been expanding our product offering and also as customers are increasingly sensitive to prices, as I mentioned on the previous slide. As customers increasingly seek value, they have been more willing to try out new products. And since our private label strategy is to offer products of equal or superior quality at attractive prices, customers tend to be [indiscernible] in fact, they tend to buy the products again, about 70% of the time.

The third pillar of our strategic plan is efficiency and productivity, where we have a range of products both in store and in our logistics operations. We have also been incorporating new technologies. These improvements to processes serve multiple objectives. First and foremost is ensuring that our customers have the best possible shopping experience, which means they will find the products they're looking for, and their wait times at checkout will be minimized. In addition, we want to maximize productivity and keep operating expenses under control.

On this slide, we're showing the improvement in sales per full time equivalent, which increased 15.5% in Chile in the third quarter, outpacing revenue growth. The fourth pillar of our plan is called committed and sustainable organization. And here, we would like to highlight how we create shared value by promoting diversity and inclusion. Diversity and inclusion is part of our [indiscernible] and our actions cover different areas. On the slide, we mentioned 3: community, customers and employees. Although we also engage suppliers such as [indiscernible] small and medium businesses to help them with best practices. With respect to community, in Chile, there is a very well-known institution called the Teletón, which provides comprehensive rehabilitation to children and young people with physical disabilities. The Teletón carries out a major fundraiser every year. And for the last 12 years, Unimarc has been a sponsor.

In addition, all of SMU Chile contributes through the sale of gift cards that can be used in our different formats, and 10% of sales are donated to the Teletón. Finally, all of the employees work to raise money and visibility throughout the year. All told, our contribution to the Teletón this year was CLP 1.3 billion. Another example of our commitment to diversity and inclusion is a new service we launched, offering Unimarc customers with a disability or reduced mobility, [indiscernible] appointment to have an Unimarc team member help them while they shop. This idea was one of the winning submissions from an internal contest we have where we look for ways to innovate. And it came from a store manager [indiscernible]. We're really proud to see how SMU's culture of diversity and inclusion is reflected in ideas like this where our values align with opportunities to better serve our customers.

The third example relates to our employees. During this year, we have been in the process of getting certified under the Chilean standard 3262 on gender equality and work, family and personal-life balance. As part of this process, we've been reviewing our internal governance practices, identifying and developing new policies and procedures, carrying out internal audits and offering training programs on a number of topics related to gender equality. And last week, we successfully concluded this process, receiving third-party certification of our gender equality management system.

On Slide 14, we have -- Slide 9, sorry. We have a reminder about how the [indiscernible] convenience business earlier this year affects our financial statements and the comparability of information from previous periods. To summarize, in the income statement, OK Market is consolidated in a single continued operations. The revenue of expenses, taxes, et cetera, exclude OK Market. The income statement is therefore, comparable year-over-year. The balance sheet is also comparable because December 2021 was already presented with OK Market available for sale. The cash flow statement is not comparable. 2021 figures include cash flows for OK Market.

On Slide #10, we have revenue for the first 9 months and third quarter. These figures do not include OK Market. We had top line growth of 16% in the year to September and 14.2% in the third quarter, mainly driven by same-store sales growth of 15% in the 9 months and 13% in the quarter. We also had revenue growth coming from new stores we've opened over the past year.

During the first 9 months of this year, the Chilean food retail industry grew by [indiscernible] where our revenue from operations in Chile grew 15.8%. Similarly, in the third quarter, the industry [indiscernible], and we grew 13.9% in Chile. So we are growing faster than the industry, gaining market share. These industry numbers are according to the National Statistics Institute of Chile. We also continue to see a recovery in customer traffic, as I mentioned before, with the number of transactions in Chile, up 33% in the year to September.

As you will see on the next slide, we saw very strong revenue growth in our cash and carry formats in both the 9 months and the quarter. On the gross margin side, we had a decrease of 20 basis points in the year to September, but an increase of 20 basis points in the third quarter. This shows how we have been improving our commercial efficiency. As for the preceding 4 quarters, our gross margin was down to 40 and 80 basis points, and we have now closed that gap despite the change in revenue mix, where the more economic format grew more than the traditional format.

Gross profit grew 15.1% September and 14.8% in the third quarter.

[Operator]

Pardon me. This is the operator. Carolyn, we seem to have lost the volume from your line. Are you still there? I think we should probably try to reconnect your line because we're having longs gaps or silence from your line. If you will give me a moment, could you -- do you want to dial back in or should I dial you out? Okay, I'm going to... [Technical Difficultly]

Please standby. I'm going to restart the hold music until we reconnect with the presenters.

Okay. We have Carolyn back on the line. Carolyn, over to you.

[Carolyn McKenzie, executive]

Great. Thank you, sorry, everybody, for the technical difficulties. Hopefully, this is better. I'll get started. I'll start again at the top with the same-store sales in case that didn't come across. So on that slide, what we can see is the very strong growth that we mentioned in the lower-cost format, where Alvi grew 18.9% in the first 9 months and 22.4% in the third quarter and Mayorista had growth of 28.7% and 31.1% in the 9 months and in the quarter, respectively. Unimarc grew 11.3% in the 9 months and 7.1% in the quarter.

In Peru, we had lower same-store sales, in part because the third quarter of last year was very strong with double-digit growth. And also growth in Peru is being driven by new store openings, which are not reflected in the same-store sales calculations. Overall, our consolidated same-store sales growth was 15% for the year to September and 13% for the third quarter.

We're really pleased with these numbers, which show the benefits of our multi-format strategy, which allows us to cover different customer segments and needs and also our especially defensive focus on food.

Moving on to Slide 12. We have operating expenses, which grew 14.8% in the first 9 months and 15.5% in the quarter. The 2 main drivers behind the increase are the higher minimum wage, which affects both personnel expenses and the cost of services and inflation, which also affects personnel expenses and the cost of services as well as leases and distribution costs. There are other supply chain effects as well such as oil costs affecting distribution costs during this period.

As a percentage of revenue, our OpEx margin improved by 40 basis points in the first 9 months of the year due to strong top line growth, generating operating leverage. In the quarter, we had a slight increase of 20 basis points.

On Slide 13, we have EBITDA, which grew 17.1% in the first 9 months and 13.2% in the third quarter. EBITDA margin remained stable at 9.3% for the 9 months and was down slightly in the quarter, but from a very high comparison base in the third quarter of 2021 and still reaching 9.6%. These margins are comfortably above our 9% target.

On the next slide, net income for the 9 months of 2022 reached CLP 101 billion, more than double the net income for the same period of 2021. In the third quarter, we had net income growth of 30% to CLP 29 billion.

On Slide 15, we have a more detailed look at the variation in net income in the first 9 months of the year. We have some nonrecurring effects from the gain on the sale of OK Market this year. And from our restructuring plan, that was a nonrecurring loss last year. Those accounts for about CLP 29 billion of the total CLP 54 billion increase in net income. Higher inflation has a negative impact because of our inflation index debt, but that effect is basically offset by the higher income tax benefit, which is mostly related to inflation adjustments to our deferred tax assets. [indiscernible] aside of the inflation effects, which cancel each other out and the one-offs, our strong operating results, which increased almost CLP 21 billion year-over-year, are driving recurring net income growth.

On the next slide, we continue to show a very attractive dividend yield of 17% for the 12 months to September and a return on equity of 16.7%. On Slide 17, we have our bond covenants where we continue to have plenty of flexibility. Net financial debt to equity is at 0.55x, same as in December, and interest coverage is up to 6x versus 4.9x in December.

On Slide 18, we have our adjusted financial ratio that we have started including in our financial reports in hopes of helping with the comparison to other companies and industry. Since we rent almost all of our stores and most of these 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 a bond or a bank loan. This leads to a distortion. These rental contracts, which are called obligations for rights of use in our financial statements, make up nearly half of our financial liabilities and over half of our interest expense.

To provide more transparency on how our numbers are affected, we have begun disclosing EBITDA adjusted for store rental expenses in our earnings release. This adjusted 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.

So including all of these expenses and 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 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 3.6x in September. When we take the adjusted figures, net financial debt, excluding rental contracts to the adjusted EBITDA, the ratio was 2.7x in December and 2.4x in September.

Something similar happens with interest coverage. Our net interest coverage unadjusted, as shown on the previous slide, is 4.9x in December and 6x in September. When we adjust EBITDA and interest expense for store rental expenses, coverage goes up to 9.5x in December and 16.7x in September. Again, we think these adjusted figures are extremely relevant when comparing us to other companies because the store rental affects the historical indicators.

On Slide 19, we have an updated maturity profile. This year, our strong cash flow generation has allowed us to pay down debt. We've only refinanced 57% of our financial debt maturities this year, paying down the remaining CLP 24 billion, and we plan to pay down the bond maturities we have in the fourth quarter as well. We also have a very solid cash position. The minimum cash position we defined internally is CLP 50 billion, and we closed the third quarter at CLP 130 billion.

Finally, on Slide 20, we have a few of our recent financial highlights. First of all, our local credit rating was operated from A to A+ by both of our rating agencies, ICR and Feller-Rate. In both cases, the upgrade relates to the continued strengthening of our operating and financial results. On Monday after the earnings release, we announced an interim dividend payment, CLP 3.8 per share, which is 75% of third quarter net income in keeping with our dividend policy. And at the same time, we announced that our Board of Directors decided to extend our share buyback program. This program was approved by shareholders in April. And in May, the Board authorized management to implement the program for a period of 6 months. That period was set to end on November 30, so they evaluated the program again and agreed to extend it for an additional 12 months.

That's it for our presentation. [indiscernible] and of course, if there are any questions, we'll be happy to take some now.

[Operator]

[Operator Instructions] Carolyn, would you like to begin with a question from the webcast?

[Carolyn McKenzie, executive]

Sure. We've gotten a few questions here. So this is apparently a technology that people are liking. So the first question we have is if there's any seasonality in the EBITDA margin, given that it was also very high in the third quarter of 2021.

[Arturo Ortiz, executive]

Okay. 2021 was a very special Q3 because the restriction for the pandemia reduced significantly. And for this reason, we received more customers in our stores, and therefore was especially high in 2021. In 2022 was a more normal quarter that is similar with Q1 -- a little bit lower than Q1, but higher than Q2. And Q4 is the most important quarter in terms of the result essentially for the higher sales in December, diluting more fixed costs and finally, improving our EBITDA for this reason. But Q3 is not a special quarter in general, but in 2021 was especially high.

The -- another question is about trends of sales in October and November. The performance of our sales in October and for the 15 days in November, keep the same trends of the Q3 or the rest of the year -- of this year with good level of sales, with more growth in the sub discount or price and cash and carry format. But with good performance also in Unimarc with a good response of our customer, of our promotional activities as Carolyn comment in the presentation. But we are expecting on the Q4 a good level of sales, similar level of sales, of course, in December with higher levels for seasonality and also better EBITDA margin for this reason for the dilution of the fixed cost for the better performance in December in sales, essentially.

What is the -- what was expectation about the growth plan for 2023 and 2024. In terms of the stores and number of stores, we will launch our strategic planning in the next days. But, of course, the idea is to include more new stores in the sub discount format and also in the cash and carry in the Alvi format. In fact, as example, in the [Indiscernible] store, for example, the idea is to open [ 3 to 7 ] Unimarc stores and the rest of the store to complete '23 will be Alvi and [indiscernible] stores. That is the -- and the answer is yes. In relative terms, the cash and carry and the sub discount format will represent more growth in comparison with Unimarc.

Other question is, do you see more pressure in cost -- you believe -- do you believe pressure of most [ working ] inflation already pricing? Today, we have a pressured cost on price during all this year, not only for inflation, also for minimum salary. But the comp, especially in salary, that's a very important expense in this business. But the company implementing technology tools and also the reduction that the company implemented in the beginning of 2021 has allowed to mitigate this impact in this year. The idea is to continue the implementation the technology tools with idea to reduce the headcount in some activities in the back office and also in the stores to mitigate this impact.

Anyway, we have the same effect in revenues. And the company puts through the cost in the product cost increase to pass through in the price that for the company, keep the margin -- the level of the margin in Q3 and also in Q4, the situation will be similar.

Another question is Peru. Will the store opening plan for the Peruvian market in 2023, they used to open 5 new stores in the northern part of Peru. Any idea of who you are taking market share from given the strong growth versus the Chilean food retail industry?

Not precisely. But of course, our market share increase versus the hypermarket and therefore, with our competitor with more sales in this type of format are suffering more, of course.

And any news about Montserrat stores? We received good news in the last weeks because it was affected the judicial reorganization in Montserrat and in Santa Maria [Indiscernible]. This including the respect of our rent contract. That's a very good -- very important for us because it's possible to receive the store in the next months to begin with the remodeling plan and to have this new store [Indiscernible].

The effect of the 40 hours as minimum schedule. The impact for us, we're expecting no impact -- no relevant impact because the idea is to reduce the schedule in the beginning -- in the morning and also in the evening with the idea to avoid the increase of our -- in our cost. That is the idea, to mitigate this possible price.

Do you expect the effect inflation to continue to be offset on the tax asset indexation and the liability indexation, especially inflation come down? The inflation effect in the U.S. is important in our debt. But also, we see the positive effect in our deferred taxes because the accumulated losses, tax losses increase for this -- for the inflation as well. And finally offset 100% of this effect because the total debt with the total deferred taxes is similar base. And finally, it's possible to offset a very important portion of this effect. Tax for the next year will be similar. It would keep the inflation [Foreign Language], the private level effect in the total size of the company or the penetration in the sales is very good. In average it's 12% but growing more at the modern industry. Therefore, the response of our customer of this private labels has been very, very good.

Our expectation for the next year is very high. And it's a very, very important initiative also for our new -- it's a big plan for the next 3 years.

More questions? I think that -- okay. I hope to answer 100% of the questions.

[Carolyn McKenzie, executive]

Great. Thanks so much, Jamie. I think we're all set. Thanks, everybody, for listening. Thank you for your questions.

[Operator]

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