SMU SA

SGO:SMU

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to SMU's Third Quarter Results Conference Call on the 13th of November 2024. [Operator Instructions].

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, ma'am.

[Carolyn McKenzie, executive]

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 of our business highlights as well as financial results for the first 9 months and third quarter of 2024. And after that, Arturo will be happy to take any questions at the end of the call. You can send questions by chat or raise your hand and we can unmute you. 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.

As usual, we'll start with recent highlights from our 3-year strategic plan for 2023 to 2025 with its 4 key pillars, starting with omnichannel growth on Slide 3. This year, we've opened 14 new stores, including 9 in the third quarter, which is a record number of openings for us in a single quarter.

To date, as you can see on the slide, we've opened 11 stores in Chile, that's 7 Unimarc, 1 Alvi and 3 Super 10, and 3 Maxiahorro in Peru. During the fourth quarter, we should have a further 4 openings in Chile and 3 in Peru for a total of 21 this year. Last year, we opened 13 stores in Chile and 1 in Peru. And next year, we should have 15 openings in Chile and 8 in Peru, bringing us to 43 openings in Chile and 15 in Peru for the 3-year period for a total of 58 new stores. The new stores have been performing well with sales and EBITDA exceeding our plan, and more than half of the stores that we opened in 2023 already have higher EBITDA margin than the average EBITDA margin for their respective format.

On the next slide, another part of our omnichannel growth strategy is our e-commerce business, where we had strong results this quarter. Online sales through both our own platform, Unimarc.cl and Alvi.cl, as well as strategic partnerships with last milers, grew 28% in the third quarter, reaching penetration levels of 4% of sales.

On Slide 5, we move on to the customer experience pillar of our plan. As we explained last quarter, in May, we made some changes to our promotional activity as part of our ongoing efforts to satisfy the needs of our customers. Throughout the year, we have seen how economic conditions put pressure on our customers' budgets. And consequently, they seek to optimize by purchasing fewer quantities and substituting for cheaper products.

In response to the situation, in May, we launched new promotions focused on basic products to which consumers are highly price sensitive. On the slide, we have an example of the campaign from Unimarc called precio oferta or sale price, and with the selection of basic products such as pastas, oil, mayonnaise, canned tuna, et cetera. We have similar campaigns at the other formats. Customers reacted favorably to these promotions, increasing their average ticket and average spend, which led to a sales recovery in May and June, continuing through all 3 months of the third quarter.

On Slide 6, private label growth is another key initiative within our customer experience strategy. And this is also another way we help customers optimize their budget while still enjoying excellent quality products, in line with the promotional activity I described on the previous slide. Here on this slide, we have examples of some of our basic products under the Merkat and most cuisine brands. We've also continued to grow our private label assortment, launching 130 new products this year so far in a range of different categories. There are a few examples of this on the slide as well, helping our private label sales penetration to reach levels 13% to 14% of sales. On the right-hand side of the side, we have a graph showing progress towards our goal of having certified recyclable packaging for 50% of our private label assortment. And to date, we are at 35%.

On Slide 7, another part of the customer experience pillar of our strategy are the loyalty programs. Over 10 million customers visit our stores each year and in Unimarc, 3.8 million club members have made a purchase in the last 3 months. In July, we launched a new concept of membership levels for our Club Unimarc, making us the first food retailer in Chile to offer this type of program. Our customers benefit from exclusive promotions and discounts at Unimarc and also partnering businesses depending on their membership level. The levels are club, gold and platinum member, and there's also a paid membership for the diamond level with further associated benefits.

The membership levels are associated with the customers' average spending levels over the preceding 3 months. So if they increase their spending at Unimarc, they can upgrade to a higher membership level and benefit from higher discounts. We believe that this will contribute to customer loyalty. Since launching this initiative in July, approximately 300,000 customers have upgraded to a higher level each month.

With respect to our Alvi Cash & Carry format, as you can see on Slide 8. Our recent highlight was our 2024 Alvi Members Expo event. Sorry, I'm on the wrong slide, there we go. In the beginning of October, where over 7,000 small business owners in attendance were able to meet with representatives from major brands that supply the traditional trade, discovering new products and opportunities to help them increase the profitability of their businesses.

Club Alvi has over 100,000 members that have made purchases in the last 3 months. And the key part of our strategy is to help our club members develop their businesses so we can grow together. On the next slide, the next pillar of our plan is the efficiency and productivity. The initiatives we have implemented in terms of new technology and new processes throughout our operations in order to drive productivity have been essential to keep the operating expenses under control in the face of inflation and increases to the minimum wage.

Initiatives implemented include self-service modules, voice picking, automated demand planning and a digital treasury system, among others. And you can see the results in our productivity indicators. Sales per full-time equivalent grew 2.8% from the third quarter, and the average headcount per store is down 1.8% year-over-year.

On the next slide, another part of the efficiency and productivity pillar is logistics efficiency, where our plan includes expanding our logistics network in order to supply our growing store footprint. In October, we inaugurated a new distribution center in Peru. This center is strategically located in Puerta in the North of Peru, where today, we have 16 stores operating and where our future growth is focused. The new distribution center will enable us to improve inventory management and in-store product availability as we will no longer have to rely exclusively on direct distribution from suppliers or on distribution from our other DC and Lima, and there will naturally be an improvement to distribution costs.

On the next slide, we have our plan that also includes energy efficiency initiatives with an impact on both environment and on our operating expenses, which is important as electricity rates in Chile have increased significantly. As such, 1 of our initiatives is to increase the number of facilities that contract unregulated electricity rates, which are lower than regulated rates.

This depends on the electricity consumption at each location. Stores that have high enough consumption levels are eligible to negotiate directly with generation company. Currently, 15% of our energy consumption in Chile is at unregulated rates, and we're in a bidding process with electricity suppliers to contract additional facilities under unregulated rates. These additional facilities account for a further 15% of energy consumption, so we will be doubling the coverage of lower unregulated rates. As part of these contracts, the electricity supplied to these stores must come from renewable energy sources. So we will also be doubling our renewable energy. Another initiative is our sustainable store project, which includes monitoring and automated climate and lighting control, helping to save energy by reducing consumption between 5% to 10% in the stores where the product has been implemented this year.

On the next slide with respect to our committed and sustainable organization pillar. In September, we received the results of the 2024 S&P Corporate Sustainability Assessment in which our score improved from 62 to 68 points, placing us in the 96th percentile, that is in the top 5% of companies evaluated to date. We're very pleased with this result because it reflects the progress that we've made in our sustainability management. Our score improved in all 3 of the dimensions covered by the assessment: Governance and economic, environmental and social.

Going into the numbers. On the next slide, we have revenue, which was 0.7% higher in the first 9 months of this year compared to the first 9 months of 2023, and 2.8% higher in the third quarter. We had a sequential improvement in the third quarter after reporting a decrease of 1.9% in revenue in the second quarter. As I mentioned before, we have started to see a recovery in May and June, and we were able to sustain this growth throughout all 3 months of the third quarter, driven by a 3.6% growth in our Unimarc format, where we also had a recovery in same-store sales growth with an increase of 1.5% in the quarter.

Strong performance from the new stores we've opened also contributed to the revenue growth. The promotional activities I described before, focused on basic products to which customers are highly price sensitive, improves our competitive position by offering more attractive prices with a positive effect on sales. But the change in sales mix affected gross margin, which fell 100 basis points in the quarter.

However, so far in the fourth quarter, we've achieved an improvement in gross margin as a result of improvements to commercial efficiency, and we expect this trend to continue, contributing to a recovery, not only in sales, but also in gross margins. To help explain some of the drivers behind revenue, last quarter, we added this additional slide to provide more color on the number of customers and transactions as well as average ticket and average monthly spend per customer.

On the left, we have a comparison of the percent change year-over-year in number of transactions in red and average ticket in gray, starting just before the pandemic in January 2020. Pandemic restrictions caused the number of transactions to fall sharply while the average ticket basically doubled. These 2 figures began to converge back towards historical levels in 2021. And then in 2022, when inflation levels started to go up and customers look to optimize their spending, the average ticket started to fall with the number of transactions going up.

The number of transactions was consistently growing year-over-year throughout the period until April of this year, but then it recovered in May and June, with growth continuing in the third quarter. On the other hand, the average ticket had been lower year-over-year and showed a recovery for the first time in June and generally trended positive in the following months.

On the right, we have a number of customers and the average lease spend, also shown as a percent variation year-over-year, with customers in red and spending in gray. Here again, we had consistent growth in the number of customers up until April of this year with the number recovering in May and June and continuing to grow in the third quarter. The average monthly spend per customer has been down year-over-year since early 2023. But in May and June of this year, we also saw an increase in these figures continuing in Q3.

On the next slide, we have operating expenses, which grew 5.7% in the first 9 months and 8.1% in the third quarter. We continue to see the impact of the higher minimum wage, which was up 10% in the 9 months and 12% in the quarter, and inflation on our operating expenses, essentially reflected in personnel expenses and service expenses, where cleaning and security services are affected. The service expenses are also impacted by the higher electricity rates. These 2 accounts, personnel expenses and service expenses, explain practically the entire increase in operating expenses. Operating expenses as a percentage of revenue grew 100 basis points in the first 9 months and 110 basis points in the quarter.

Moving on to the next slide. As a result of the lower gross profit and higher operating expenses, EBITDA decreased 14.2% in the first 9 months of the year and 21.4% in the quarter. EBITDA margin was also lower, although we did have a sequential improvement from 6.8% in the second quarter to 7% in the third quarter. As I mentioned before, so far in the fourth quarter, we've seen a recovery in our gross margin, which will also be reflected in our EBITDA margin.

On the next slide, we have net income, which was down 35.2% in the 9 months and 31.7% in the quarter. The decrease is essentially due to the lower operating income, partially offset by higher income tax benefit relating to deferred taxes.

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 rental, was 4.2x in September, and when we adjust for store rental, it was 2.1x. This is higher than recent periods, primarily due to the lower EBITDA.

On the right, net interest coverage, as reported, was 4.7x in September, lower than in December because of the decrease in EBITDA, and also because we've increased our financial debt and preparation for maturities we have next year and the higher interest income that we received from that cash isn't enough to offset the higher interest expense. When we adjust EBITDA and interest expense for store rentals, interest coverage was 9.7x in September.

On the next slide, we have our bond covenants, where we continue to have plenty of flexibility. Net financial debt to equity is at 0.55x, well below the 1.03 limit. And interest coverage is 4.7x, almost double the 2.5x requirement.

Finally, on the next slide, we have at the top, a summary of our cash flow for the first 9 months of this year. We started the year off with a very strong cash balance of CLP 105 billion, significantly higher than the minimum that we'd like to have on hand, which is in the neighborhood of CLP 45 billion to CLP 50 billion.

Operating cash for the period was CLP 220 billion, and we've also issued 3 bonds this year and refinanced bank debt for total cash inflow of CLP 183 billion. The bonds we issued are part of our refinancing strategy to flatten out our maturity profile. The uses of cash for the period included the amortization of bank debt and bonds for CLP 86 billion, lease payments of CLP 47 billion, interest payments of CLP 43 billion, CapEx of CLP 74 billion and dividend payments of CLP 47 billion. CapEx was CLP 74 billion, leaving us with an ending balance of CLP 207 billion in September, which is a cash surplus of about CLP 160 billion, leaving us well positioned to cover the maturities we have in the fourth quarter and next year for about CLP 190 billion.

Below on the slide, we have our debt maturity profile, where you can see the amounts I just mentioned in 2024 and 2025 and shaded in pink, you can see the maturities of the 3 bonds that we placed this year. That's it for our presentation. Thank you so much for listening. If there are any questions, Arturo, will be happy to take them now.

[Operator]

[Operator Instructions] Our first question comes from Mr. Joel Lederman from Itau.

[Unknown Analyst]

Can you hear me guys?

[Arturo Ortiz, executive]

Yes, we can hear you. Please go ahead.

[Unknown Analyst]

I just want to understand better the dynamics for the fourth quarter. Carolyn mentioned during the presentation that gross margin is improving due to the commercial activity that you guys are having. I just want to understand how average ticket and traffic is evolving in the stores and how you're seeing fourth quarter results in terms of the -- your commercial activity improving? Or whatever you can give us in terms of that specific issue.

Just to add to my question, because you guys mentioned during last quarter results that you were expecting an EBITDA margin of 8% in terms of the guidance. With these numbers, I just want to understand if you still believe that you can manage to get to that guidance.

[Arturo Ortiz, executive]

In this quarter, the sales is proven, and we expect to maintain this performance in the next months and Q4, but also improvement in the gross margin because in October and the first days of November, the gross margin of the company improved significantly, reaching the level of our regular margin or similar margin of 2022 or first quarter of this year. And with this good news until now, we can ensure Q4 sales and gross margin. Therefore, the EBITDA margin should be better in Q4, projected for 2025 better result than Q2 and Q3 in 2024. Because our long-term targets for the EBITDA margin is 9%. Of course, this year is a difficult year because the growth of sales significantly important. This quarter was good with 2.8% with an important improvement compared with the previous quarter, but not enough to dilute efficiently fixed cost.

And for this reason, our EBITDA margin for the full year in 2024 should be in the level of 8%. But with significant improvement in Q4, therefore, our expectation for 2025 is to improve the EBITDA margin close of our target of 9% in the level of 5.8% -- 5.9%, especially because we are expecting improvement in sales, then our regular gross margin that was lower in Q2 and Q3 but will be again in the level of 3.5 [Technical Difficulty]. If we have to represent that was another -- is to improve because [Technical Difficulty] Alvi's ticket and of quarter less pressure of inflation in the average ticket increased the chance to improve the number of units in the basket. And for this reason, our average ticket is improving in the last months.

[Operator]

[Operator Instructions] Our next question comes from Mr. Alonso Aramburú from BTG Pactual.

[Alonso Aramburú, analyst]

Yes. I just wanted to ask a little bit about competition, and it seems like your same-store sales have been underperforming your competitors. And I was wondering if you have a feeling as to why the underperformance and what needs to be adjusted for you to be more in line with what the market is growing?

[Arturo Ortiz, executive]

Okay. Alonso, essentially, we are -- we changed our promotional strategy or commercial strategy in May and June. In Q3, we improved our sales, and we're expecting to improve more in Q4 because we are more competitive in terms of prices. But with promotions, with more duration than the regular high-low promotions, a good answer to our customers. And we are expecting that this trend will be present in the next months in Q4, improving our same-store sales. And also, we're expecting to improve also in 2025. But also it's very, very important for us to improve our gross margin because to grow all in sales with now very good gross margin than Q2, for example, is not our idea.

The idea is to have profitability and to keep a good level of sales, but also with good margin. But we're expecting improved with our new promotional activities because the customer receive well this new strategy. And also we are obtaining financing from suppliers. Therefore, we can balance sales and gross margin in October, also in November and probably in full Q4 and also in 2025. And also another important news is that in October, for example, our market share improved 20 basis points with better sales and also the good gross margin. That is an important balance for us. And also in the first 15 days in November, as we have a good expectation about the results in the next month in both variables, sales and margin.

[Alonso Aramburú, analyst]

Okay. I don't know if you mentioned this. I joined the call a little bit late. How are same-store sales trending in October roughly?

[Arturo Ortiz, executive]

Same-store sales are positive in October, the level of 1% or 2%. Same-store sales, of course, revenue was more because we have a new store.

[Operator]

We have a text question from Mr. Emre Peksen from Impera Capital. Unfortunately, I got disconnected when Arturo was answering Joel's question in his remarks while I reconnected. Could you please remind us once again about your EBITDA margin expectation for the whole year of 2024?

[Arturo Ortiz, executive]

8% for the full year is our expectation for EBITDA margins.

[Operator]

[Operator Instructions] We see no further questions at this point. I will be passing the line back to the management team for the concluding remarks.

[Carolyn McKenzie, executive]

Thanks, everybody, for joining us today. Feel free to get in touch if you have any further questions, and we hope to have you with us next quarter. Have a nice day.

[Arturo Ortiz, executive]

Have a nice day.

[Operator]

Thank you very much. This concludes today's conference call. We'll now be closing all the lines.