SMU SA

SGO:SMU

Earnings Call Transcript

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the SMU Second Quarter 2018 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.

[Carolyn McKenzie, executive]

Thank you. Thank you, everyone, for joining us today.

I'm here with Arturo Silva, our CFO. I'm going to briefly describe our results for the first half and second quarter of 2018, and then Arturo will be happy to take any questions.

If anyone isn't using the webcast to follow the slides today, we will be going through the presentation that I sent out to the distribution list this morning. It's also available in the investor relations section of our website, www.smu.cl, in the Financial Information section. 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 just a reminder to please take a look at the caution regarding forward-looking statements on Slide #2 of our presentation.

As a final administrative note, this quarter, we once again presented our Construction Materials subsidiary Construmart as available for sale. That will be the case all year because, although the sale was completed in April, we still need to present Construmart's contribution to the first 4 months of the year. This creates comparability issues with previous periods. There's a full description on Slide #3, but to summarize, we have restated the first half and second quarter 2017 P&L numbers so those numbers are comparable to the 2018 numbers. The cash flow statement for the first half of 2017 has also been restated. And the balance sheet compares June 30, 2018, to December 31, 2017, and Construmart was presented as available for sale in both of those periods so those numbers are also comparable. Where you have to be careful is with the comparisons between these numbers and prior periods. In the case of today's presentation, all of the P&L numbers are comparable because, for the periods before 2017, we're using revenue, OpEx and EBITDA for the food retail segment only. And in 2017 and 2018, we only have the food retail segments. If you have any questions about this, please feel free to contact me afterwards.

We'll start with Slide #4, where we have revenue for the food retail segments, which increased by 2.5% in the first half of this year and by 2.3% in the second quarter. Gross margin increased from 28.4% in the first half of last year to 28.5% in the first half of this year and it remained stable year-over-year in the second quarter at 28.5%.

On the next slide, we have the breakdown of revenue growth by formats comparing the first half of 2017 to the first half of 2018, where most of the growth came from our Unimarc supermarkets and our cash & carry segment. Specifically, in cash & carry, we've seen very strong growth from Mayorista 10 where revenue increased 5.7% in the first half of 2018 and 6.6% in the second quarter. And while Peru doesn't look so good in this graph, we have actually seen strong revenue performance there.

There are 2 effects in the first half of this year that explain the lower revenue we see in the graph. One is the exchange rate. These numbers are in Chilean pesos, but measured in local currency, revenue actually grew over 5% in the half and over 10% in the second quarter. The other effect is a high comparison base in the first quarter and to the very strong revenue performance in the first quarter of last year. However, even with a high comparison base, we did manage to grow revenue in Peru.

On Slide 6, we have our same-store sales and sales per square meter performance. We had overall same-store sales growth of 3.1% in the first half and 2.7% in the second quarter. And by format, same-store sales were in line with revenue growth, with very strong performance in the cash & carry format driven by Mayorista 10. And since same-store sales for Peru are measured in local currency, here we can see that the performance has been very good this year, growing 5.5% in the first half despite the high comparison base and 10.9% in the second quarter.

Sales per square meter continued to grow, reaching an average across all food retail formats in both Chile and Peru of CLP 307,000 per month for the first half of 2018, which is 3.7% higher than in 2017.

On Slide #7, we have operating expenses, defined as distribution costs plus administrative expenses excluding depreciation and amortization. Here we'd like to highlight the improvement in OpEx as a percentage of revenue. We had an improvement of 20 basis points in the first half and 30 basis points in the second quarter. Even though our distribution expenses increased by over 14% as a result of higher centralized distribution, our selling and administrative expenses only increased by 1% in the first half and 0.4% in the second quarter. A lower average headcount enabled us to decrease our personnel expenses by approximately 3%, which is significant because personnel expenses account for around half of our OpEx. Average headcount decreased by approximately 7% year-over-year.

On Slide 8, we have our EBITDA, which grew 7.8% in the first half and 7.2% in the quarter. We also gained 30 basis points of EBITDA margin both in the half and in the quarter. The EBITDA margin for the first half was 6.2%, up from 5.9% as a result of a 10 basis point improvement in gross margin and 20 basis points in OpEx as a percentage of revenue. In the second quarter, EBITDA margin was 5.9%, up from 5.6% in 2017 as a result of the 30 basis point improvement in OpEx margin.

On Slide #9, we have net income, which increased by 164% in the first half of this year. Net income was affected by a number of onetime effects. First is the cost of the restructuring program that we carried out in January of this year as part of our operating efficiency initiatives, approximately CLP 8 billion that were reflected in nonoperating losses in the first quarter. The second is the costs of prepaying our international bonds. We had extraordinary financial expenses of about CLP 12 billion in the first half, which includes the prepayment costs, the unwind of the cross-currency swap and the recognition of issuance expenses. Before taxes, the combined impact of both effects is nearly CLP 20 billion. On the bottom part of the slide, we've included an exercise showing real pretax net income, which fell by CLP 7.5 billion because of these nonrecurring effects; and pretax net income excluding these 2 effects, in which case we would have seen an increase of approximately CLP 12.3 billion.

Finally, the sale of Construmart during the second quarter generated a deferred tax asset, which is reflected as a gain in our income taxes.

On Slide 10, we have an update on Plan CIMA, our strategic plan. A key focus of this plan is improving the customer experience. And one of our most important initiatives is upgrading a group of our Unimarc supermarkets. We initially identified 130 Unimarc stores that we plan to upgrade over 5 years. Between 2017 and 2018, so far, we've completed 20 upgrades. And we're currently working on the next set of 20. This year, we plan to upgrade a total of 30 stores. We've also opened 3 new OK Market stores in Santiago so far this year as well as 1 Unimarc store in Talagante in the Greater Santiago metro region.

With respect to operating efficiency, one of the main initiatives is increasing our centralized distribution so we can optimize our inventory management. For the first half of 2018, we've increased our centralization rate to 47.5%, showing that we continue to make progress. For the full year 2017, the rate was 45.1%. And we continue to roll out our training program that seeks to standardize key in-store processes. We are rolling, we are currently rolling out the program at a group of 60 stores in the North of Chile. This is another initiative that targets improved operating efficiency.

On the next slide, we have a summary of the financial highlights for the first half of this year. In these 2 placements of local bonds, in both cases, these were Series T local bonds which mature in March 2025 and have a 4-year grace period on capital and a UF plus 3% annual coupon rate. The first placement was at the beginning of April for UF 2.5 million or approximately $110 million. The placement rate was UF plus 3.04%. And proceeds were used to refinance the remaining outstanding amount of our international bond which had $1 plus 7.75% interest rate, which means that this bond placement is contributing to the savings on interest expenses that we will see in the coming quarters.

The second placement was in June for UF 1 million or approximately $43 million with a placement rate of UF plus 2.67%. These proceeds were primarily used towards a portion of the syndicated loan that matured at the end of June. Just as a note, since June 30 fell on Saturday this year, the syndicated loan payment will be reflected in the third quarter. Our June 30 balance sheet [ references ] both bad debt, which is approximately CLP 36 billion; and the cash that we used to pay it.

In addition to the Series T placements, in the second quarter, we also reported the sale of our Construmart subsidiary. We received approximately CLP 46 billion. And these proceeds were used primarily to reduce debt, including the payment of tranche 3 of our syndicated bond for approximately CLP 17 billion.

And finally, during the third quarter, we completed the prepayment of 100% of our international bond. This bond was issued in 2013 and originally matured in February 2020. Given the 7.75% interest rate, paying down this debt was a priority for us. The prepayment was financed using the proceeds from our capital increases in November of last year and January of this year, plus the local bond we issued in April. We made 3 partial redemptions: one on February 9 for $120 million, one on April 2 for $80 million and the last on May 15 for $100 million. The prepayment cost is about 2%. And as I mentioned before, we also had to recognize the effect of unwinding the cross-currency swap as well as the issuance expenses. The prepayment for -- of our international bond represents a significant improvement to our financial situation. We have less debt, less expensive debt and a more favorable maturity profile.

On Slide 12, we have an overview of our financial debt. The pie charts on the left are only financial debt excluding leases. Now that we have fully prepaid the international bond, we are left with local bonds and bank debt. And almost all of this debt is UF denominated. We have essentially eliminated exchange rate risks.

On the right-hand side. In the net debt-to-EBITDA figures we are including the leases, so this includes all of the financial liabilities on our balance sheet. The graph shows the significant progress we've made here. We ended the second quarter at 4.1x. And this number should continue to trend downward as we expect to continue to grow our EBITDA and pay down the debt that matures in future periods.

On Slide 12 (sic) [ 13 ], we have our debt maturity profile as of June 30. During the first half of this year, we saw significant improvements to our maturity profile with the redemption of international bonds and the payment of tranche 3 of the syndicated loan as well as the placement of the Series T local bonds. The new maturity profile is more evenly distributed and in line with the cash flows we expect to generate going forward. And also, here you can see, in 2018, what I mentioned before about the June payment of the syndicated loan, which is still here in the profile as of June 30 but will be reflected as paid in the third quarter.

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

[Operator]

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

[Alonso Aramburú, analyst]

I have 2 questions. First, on Unimarc, can you comment on the sales growth? It was a little bit slower than last quarter. What's driving this weaker sales growth? And maybe also comment a little bit on the results of the new store, the upgraded stores. How are those developing in recent months? And my second question is regarding your gross margins, which were flat in the quarter versus last year. You continued to grow the centralization and that had been driving higher margins. Should we expect this to continue also in the future, both driving the centralization higher and that driving itself -- the higher gross margins?

[Arturo Ortiz, executive]

Okay, Alonso, the first question in regard of the Unimarc sales growth. In fact, the same-store sale of Unimarc was 1.7% in the second quarter. It's a little bit lower of the industry. But if you see the gross margin, consolidated gross margin was a little bit flat. It increased 10 basis point in the first half of the year. But you see the gross margin, specifically Unimarc, increasing 20 basis points in the first half. Because in the first half -- what is the relation of these 2 numbers? Because in the first half, the promotional sales in Unimarc was more important, passing from 36%, 37% of total sales to 41.2% of the total sales. In this scenario, the sales growth is lower because you include the discount in the sales for our clients, but you will see the sale out from the supplier because these promotional activities are financed by supplier, therefore affecting negatively the revenues but affecting positively the gross margin. For this reason, the gross margin of Unimarc was higher 20 basis point in comparison to the rest of the format, with this affecting its revenues and gross margin. In the same line, the gross margin was not so higher than in the previous year even with more centralization. You are right, but the reason is because, in the first quarter essentially and also in the second quarter, the company increased the participation in the private label in terms of sales and the total purchases and also in other products with a high consumption. And for this reason, the inputs were in the first half higher than the first half of 2017. And these products is not part of the rebate that we receive from our supplier because in the input we are not receiving rebates. You will see about 100% of the effect in the original cost, affecting the mix of the rebate received from the supplier, with greater centralization, but the mix was more -- with more weight of input, affecting the average weight of rebates. But it's very, very -- and for the same reason, the contribution of the additional centralization in the gross margin was practically few for this effect. 100% of the 10 basis point in addition in the gross margin was more operational efficiency but nothing about of logistic [ rebates ].

[Alonso Aramburú, analyst]

And maybe a follow-up on your first question. Can you comment on the upgraded stores, the Unimarc upgraded stores? How are those performing relative to the others?

[Arturo Ortiz, executive]

The -- we -- our -- in general, our [ remodel plan ] included there 15% sales growth in average in the first 10 stores remodeled in 2017. And in 2018, we remodeled 20 stores more in the first half. We upgrade actually 10 store in the first half. The result was similar with our previous evaluation or assessment. And also, we improved the gross margins in 30 or 40 basis point and the EBITDA margin 200 basis point. The result was as expectation in our previous assessment. And for the same reason, we are very, very happy with the result and implementing 20 store more in the second half of this year.

[Operator]

[Operator Instructions] There are currently no questions at this time. 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]

Okay. Thank you so much, everybody, for joining us today. I hope you have a great day. And I hope we will see you in our next call for the third quarter. Bye-bye.

[Operator]

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