SMU SA
SGO:SMU
Earnings Call Analysis
Q3-2023 Analysis
SMU SA
In the past 12 months, the company has reported a dividend yield of 8.5%, which is lower than the previous year. This dip is attributed to the absence of an extraordinary dividend from the sale of OK Market and the company's strong share price performance. Meanwhile, the return on equity remained steady at 10.5%, mirroring the level seen in 2021 and indicating consistent profitability.
The company's financial health appears robust with an improvement in net financial liabilities to EBITDA, decreasing from 3.9x in 2021 to 3.5x, showing stronger earnings relative to debt. Adjusted net interest coverage ratio saw an increase from 4.9x to 6.2x, reflecting the company's improved ability to cover its interest obligations despite a slight decrease from 2022 due to reduced financial income in lower interest rate environments.
With net financial debt to equity at 0.56x, the company's leverage is well within covenants, providing substantial flexibility and reflecting solid financial stability. Interest coverage maintains at 6.2x, comfortably exceeding the minimum requirement of 2.5x, which suggests a strong capacity to meet interest expenses from earnings.
The company reported healthy cash flows with an ending balance of CLP 115 billion after covering various cash needs and investing in growth strategies. Notably, capex was significantly up year-on-year, indicating investment in the company's omnichannel growth strategy. Despite new bond issuances, the company comfortably handles its debt, with a debt maturity profile that suggests confidence in their financial planning and obligations stretching far into the future.
The company's credit rating has been upgraded by local agencies from A+ to AA-, marking recognition of its consistent financial and operational performance. The successful bond issuance in September, with nearly double the demand for the available amount, underscores investor confidence and enables the company to refinance upcoming maturities, contributing to a balanced debt amortization schedule.
The organizational optimization plan rolled out in August is expected to yield benefits in the upcoming final quarter of the year and will have an even greater positive impact in 2024. The plan is on track to recover the associated nonrecurring expenses within 6 to 7 months, which will likely contribute to improved efficiency and reduced costs in the future.
Commercial margins have been maintained at the same level as the previous quarter, suggesting disciplined promotion and pricing strategies in the context of a challenging economic environment. The company's strategic focus appears to be on leveraging technology to improve productivity and manage expenses, with the goal of maintaining an EBITDA margin over 9% and sustaining revenue growth.
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Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to SMU's Q3 2023 Conference Call. [Operator Instructions] The format of the call today will be a presentation by the management team, followed by a question-and-answer session. So without further ado, I would now like to pass the line to Ms. Carolyn McKenzie, Head of Investor Relations at SMU. Please go ahead.
Thank you. Thank you all for joining us today. I'm 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 this year. And then Arturo will be happy to take any questions at the end of the call. 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. And 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 will start with the recent highlights from our 3-year strategic plan for 2023 to 2025 with its four key pillars, starting with omnichannel growth on Slide 3. In the year-to-date, we've opened 5 Unimarc stores, including 2 in the third quarter in [indiscernible] and in Santiago. We also opened an Alvi store in Santiago during the third quarter. And in the first half of the year, we had opened a MaxiAhorro in Peru and inaugurated our 5th Super 10 store. We're making progress on the remodeling process of the Montserrat stores that we have received to date. The first 6 stores should be ready from a construction standpoint in December and with an additional non-Montserrat Unimarc also set to open in December as well as a MaxiAhorro in Peru. On Slide 4, we have the customer experience pillar of our plan. We recently relaunched our loyalty programs for Unimarc, Mayorista 10, Super 10 under the names Club Unimarc and Club 10, placing an increased focus on delivering immediate benefits. We've also added new partnerships that allow us to offer discounts on products and services such as airfare and restaurants, as you can see on the slide. 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. So far this year, we've added 135 new products in different categories and under different specialty brands. We have a couple of examples on the slide, some of the more recent launches. Another part of our private label strategy is to increase the number of products with recyclable packaging. And this year, we certified a further 140 products with the ecolabelling field, moving us closer to our goal of having 50% of private label products certified by 2025. On Slide 6 is the third pillar of our strategic plan that targets efficiency and productivity. We've been consistently implementing different initiatives, tools and technologies, for example, self-service modules such as self-checkouts. We've also expanded coverage of our Blue Yonder automated demand planning tool, which uses artificial intelligence to provide more accurate forecasting, contributing to higher in-stock levels and lower shrinkage. And we continue to roll out voice picking at additional distribution centers, reducing order picking time and thereby improving logistics efficiency. Targeting productivity while maintaining the level of service that we provide our customers has consistently been a key element of all of our strategic plans over time. Thanks to these initiatives, in August, we were able to carry out an optimization plan that will help us to generate savings on operating expenses going forward. Between 2019 and 2022, our productivity measured as monthly sales per full-time equivalent improved 47%. And we have achieved a further 9.3% improvement when we compare the month of September of this year to 2022. On Slide 7, another component of our efficiency and productivity pillar is energy efficiency. Here, we've continued implementing our energy management system as part of our goal of having all of our facilities in Chile, certified under ISO 50001. Most recently, we completed the internal audit and the next step will be external verification. We've also been increasing our use of energy from renewable sources. Last year, we signed renewable energy supply contracts for facilities that account for 20% of our energy use in Chile, and those contracts have been progressively going into effect, which is how we've gone from 3% renewable energy sources last year to 14% in the year-to-date. Our goal is to have renewable energy contracts for 40% of our energy consumption in Chile by 2025. And finally, we've incorporated additional electric trucks into our supply chain for deliveries from distribution centers to stores towards our goal of using electric trucks for 10% of shipments by 2025. On Slide 8, regarding our committed and sustainable organization pillar, we wanted to highlight the recent results of the S&P Corporate Sustainability Assessment, where our latest score improved from 56 points to 61 points, which puts us in the 93rd percentile. We've consistently been improving over the last several years since we've been participating in the assessment, which shows how both our ESG management and our transparency and reporting have been getting better over time. Going on to the numbers on Slide 9. We have revenue for the first 9 months and third quarter of 2023. We had top line growth of 3.1% in the first 9 months, and a 1.2% decrease in the quarter. This was consistent with industry trends, where according to the National Statistics Institute, sales growth was lower in the third quarter. This is also consistent with the challenging economic conditions, which have affected consumer behavior. We've seen higher income elasticity from customers buying fewer quantities and substituting for cheaper products, which leads to a lower average ticket. However, the number of customers has increased across formats and customers are visiting the stores more often. Therefore, we believe that once the consumption level starts to recover, we will be well positioned to capture higher sales. The other thing to keep in mind with these numbers is that the 2022 comparison base is very challenging, as we'll see on the next slide. On the gross margin side, we had an increase of 130 basis points in the first 9 months of 2023, and an increase of 140 basis points in the third quarter, reflecting improvements in commercial efficiency. On the next slide, we have our consolidated same-store sales growth for the first 9 months of 2023 and the third quarter where the high comparison base is very clear. Same-store sales growth for the first 9 months of last year was 15% and it was 1.6% for the same period this year. Whereas for the third quarter of 2022, it was 13%; and for the third quarter of this year, we had a decrease of 2.6%. The high comparison base is particularly relevant in the cash & carry segment, which had same-store sales growth of 28.1% in the third quarter of 2022, reflecting the very high demand for basic products. On the next slide, we have operating expenses, which grew 11.4% in the first 9 months, and 8.3% in the third quarter. Operating expenses as a percentage of revenue increased 170 basis points in the first 9 months, and 190 basis points in the quarter. The two main drivers behind the increase are the higher minimum wage, which increased 15.6% year-over-year, affecting both personnel expenses and the cost of services, and accumulated annual inflation, which was 11.2%, affecting not only personnel expenses and the cost of services, but also leases and distribution costs. In fact, as you can see in the pie chart on the right, out of the total CLP 47 billion increase in operating expenses in the first 9 months, 51% of that increase comes from personnel expenses and 14% comes from service expenses, where we have higher rates on electricity as well as security and cleaning services. Moving on to Slide 12, we have EBITDA, which was basically flat in the first 9 months of the year and decreased by 5.7% in the third quarter due to lower revenue growth and reduced operating leverage. Our EBITDA margin for the first 9 months was 9.1%, which is slightly below last year, but in line with our long-term target of 9% despite the challenging macro environment. On the next slide, we have net income, which was down compared to 2022 in both the 9 months and the quarter. If we break it down, we can see that in both periods, operating income was lower in 2023, which is mainly due to higher depreciation as we've been investing more over the last several years, combined with a flat EBITDA in the 9 months and lower EBITDA in the quarter. However, this is offset by improved nonoperating income, which we will get to on the next slide. In the end, basically, the entire decrease in both the 9 months and the quarter is because of taxes. Last year, the higher levels of inflation had a significant positive noncash impact on our deferred taxes, which we didn't have this year. The comparison between 2023 and 2022 is made difficult by two nonrecurring impacts that affects nonoperating income. So we've added a slide on pretax income to try to get to numbers that are comparable. So on Slide 14 on the left, we have pretax income for the first 9 months where we start with CLP 62.9 billion for 2022. That number includes the sale of OK Market, which generated a nonrecurring gain of CLP 18 billion before tax. Without OK Market, pretax income would have been CLP 44.8 billion. From there, we take the lower operating income, down CLP 7.3 billion, and the higher nonoperating income, which without the OK Market effect, improved CLP 25.2 billion, which is essentially due to lower inflation losses on inflation index liabilities. So that brings us to our pretax income for the first 9 months of 2023. However, this includes another one-off which was the optimization plan we implemented in August of this year. As I mentioned before, the implementation of strategic initiatives has allowed us to increase productivity, mitigating higher levels of operating expenses. The plan had a onetime cost of CLP 8.2 billion, but we started to see savings in September of this year. Excluding the second one-off, our pretax income for 2023 would have been CLP 70.9 billion, which is 58.4% higher than 2022 when we exclude the one-offs in both periods. We have the same exercise on the right-hand side of the slide for the third quarter where we only have to adjust for the optimization plan, and pretax income improved 45.4% year-over-year, excluding the one-off. On Slide 15, we have our dividend yield of 8.5% for the last 12 months, which is lower than 2022, partly because the dividend for the last 12 months doesn't include the extraordinary amount from the sale of OK Market, and partly because of the very strong share price performance over the past year. The return on equity was 10.5% for the 12 months to September 2023, similar to 2021, as 2022 includes the one-off from the sale of OK Market. 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 September of this year. And when we adjust for store rental, we went from 2.7x in 2021 to 2.4x in September. On the right, net interest coverage, as reported, is up from 4.9x in 2021 to 6.2x in September 2023. And when we adjust EBITDA and interest expense for store rentals, we started with coverage of 9.5x in 2021, up to 16.5x in September. The slight decrease compared to 2022 is mainly because we have lower financial income as interest rates have come down with respect to last year. On Slide 17, we have our bond covenants, where we continue to have plenty of flexibility. Net financial debt to equity is at 0.56x, well below the 1.03 limit, and interest coverage is up to 6.2x, well above the 2.5x requirement. On Slide 18, we have a summary of our cash flows for the first 9 months of 2023. We started the year off with a cash balance of CLP 125 billion, significantly higher than the minimum we like to have on hand, which is in the neighborhood of CLP 45 billion to CLP 50 billion. And our operating cash generation for the period was CLP 205 billion. We were able to comfortably cover all of our cash needs, including lease payments, interest payments, dividends and CapEx, which was significantly higher than the CapEx for the same period of last year as we have been making progress with our omnichannel growth strategy. We also had net debt amortization of CLP 15 billion, which included CLP 69 billion in financial debt that we paid back, and the new bond that we issued for USD 1.5 million, which was around CLP 54 billion. And the final cash balance was CLP 115 billion, only CLP 10 billion below the opening balance. This solid cash position means we're very comfortable with our debt maturity profile, which is on the bottom half of the slide, and includes the Series AP bonds that we issued in September, which matures in 2033. On Slide 19, we have a couple of financial highlights from the quarter. First of all, at the end of August, both of our local credit rating agencies, Feller-Rate and ICR upgraded our rating from A+ with a positive outlook to AA- with a stable outlook. They had both assigned a positive outlook to our rating back in March and April, and we met the expectation of continuing to maintain consistent financial and operating indicators for additional periods, which led to the upgrade. And as I mentioned on the previous slide, in September, we placed bonds for USD 1.5 million or around CLP 54 billion, with a bullet structure maturing in 10 years at a placement rate of 4.44%, which was a spread of 179 basis points over the benchmark. Demand for this transaction was nearly double the placement amount. And this issuance allows us to flatten out our debt amortization schedule by refinancing some of our upcoming maturities. That's it for our presentation. Thank you so much for listening. If there are any questions, Arturo will be happy to take them out.
[Operator Instructions] So I think our first question comes from Alonso Aramburú from BTG.
Yes. Two questions on my end. First, if you can provide some additional color on the organizational restructuring plan that was implemented, and how much would be the recurring benefits of the plan? And my second question is on the cash & carry or discount formats. Can you give us a breakdown of how Super 10 or Mayorista is performing relative to Alvi?
Okay. Alonso, great question about the optimization plan. We implemented this plan in August. And in September and October, we recovered part of this investment of these expenses that we had in August. Therefore, we recovered part of this. But in the future, in the next months in the Q4, the impact -- positive impact will be higher and also in the full year 2024. The idea is to recover this nonrecurring expense in 7 -- 6 or 7 months. But we finished the plan optimization in Q3. With respect of the cash & carry and soft discount performance, the comparison base in both format is too high. It's very demanding and -- but in terms of frequency, in terms of the number of clients, we have a very good performance. We are expecting that in the rest of the year, especially in 2024, we recovered of the level of consumption in the country with improving the [ PIB ] and to obtain benefit or higher revenues in both formats because we have a healthy format in terms of the frequency and number of clients or customer. In both case, the new stores, Super 10, where we implemented the new operational model, the performance in these new stores, in the 5 stores is very good and Super 10, we have a better performance in comparison with our plan for these stores. For the same, we are implementing openings in Alvi and also in Super 10 this year and 2024 to 2025 because the profitability of the new openings is better -- are better than our expectation.
[Operator Instructions] Maybe we'll just give it another 10, 20 seconds or so, Carolyn, and then perhaps we can close the call.
Maybe our presentation was just too complete and we covered everything that you all wanted to know.
Yes. I think that seems to be it Carolyn. So maybe you can -- I can hand over to you for some closing remarks. Hold on, one question sorry, Carolyn. So we have a question from Tertius Pelser from Cuthman Capital who asks by text. Outlook and October trading.
The behavior of the sales is very similar with the Q3 in October and in the first days of November in terms of the sales and in terms of serving the old formats. The comparable base continue very demanding in this quarter. And -- but we are -- we have a good expectation because we maintain the growth in term of the frequency, transactions and customer in the old formats. Therefore, we are expecting the recovering the level of consumption in the country and we will cover also the level of revenues as well because we have the customer visiting our stores, and that is very, very good in spite of the negative economic option. In terms of the margin, the commercial margin is in the same level of the Q3 and the rest of the year, a very good performance because we're not investing in margin or in the promotions without financing because we are -- we believe that it's not a good decision to sacrifice commercial margin with idea to recover because the general scenario is -- economical scenario is not good. Therefore, the -- it's so difficult to recover the investment in margin through incremental or additional sales. In terms of expenses, we implemented the optimization plan, where, as Carolyn mentioned, we are implementing technological tools in the store and also in the tools center with idea to improve our level of productivity, also with idea to have the level of expenses benefit, good commercial margin to receive the improvement in our revenues or same-store sales, with idea to keep the level of EBITDA margin in 9% -- over 9%. That is the outlook -- our outlook for the Q4.
Okay. Thank you. So we haven't had any additional questions. So perhaps I can hand back to you, Carolyn.
Great. Thank you so much, everybody, for joining us. If there are any other questions, feel free to get in touch with me and Sofia. Everybody, have a great day, and we hope to have you with us next quarter. Take care.
That concludes the call for today. Thank you, and have a nice day.