SMU SA

SGO:SMU

Earnings Call Transcript

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the SMU Fourth Quarter 2019 Conference Call. [Operator Instructions] And 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, ma'am.

[Carolyn McKenzie, executive]

Thank you. Thank you all for joining us today. I'm here with Arturo Silva, our CFO. I'm going to go through a few slides that summarize our fourth quarter numbers. And then Arturo 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 any additional questions. E-mail is the best way to do that to be safe. 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 sent out the link to the distribution list this morning. An audio recording of this call will be available on our website later today.

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.

I'm extremely pleased to announce that this is the last quarter that we will be dealing with the transition from IAS 17 to IFRS 16. As you can see on Slide 3, this quarter, once again, we have provided pro forma numbers, so 2019 and 2018 figures will be comparable. Those numbers are available in our earnings release or our analysis as for now, and we also have pro forma numbers in our presentation today.

We decided to start today's presentation with an explanation of how insurance affected our fourth quarter results on Slide 4. The social unrest in Chile during the fourth quarter had a number of effects on our business. We had loss of merchandise caused by stores being looted and we had physical damage, including some stores that burned down, resulting from acts of vandalism. Consequently, during the period, some of our stores were completely closed and others were partially closed or operated with reduced operating hours, leading to a loss in revenue.

Our insurance policies cover all of these concepts, physical damage, loss of merchandise and business interruptions. So following an extremely detailed store-by-store analysis, we filed a claim with the insurance companies, and we subsequently received a preliminary estimate from the insurance adjuster of the indemnity for each of these types of loss. Based on that information from the adjuster, we were able to recognize that amount in our fourth quarter financial statements.

As you can see on the slide, the business interruption indemnity is for about CLP 8.5 billion, and that amount is recognized under revenue. However, the way this amount is actually calculated is based on the EBITDA of the stores that were closed plus the fixed costs. Therefore, even though this number is treated as revenue, it is not equivalent to the loss in sales. As you will see, this has implications for the year-over-year comparison and also for the calculation of gross margin and OpEx margins.

The physical damage and loss of merchandise indemnities are recognized under other gains and losses in nonoperating income. This is also where the actual losses for these concepts are recognized. On the slide, we broke out the losses from acts of vandalism, CLP 29.8 billion, and also the insurance indemnity of CLP 24.2 billion, which net out to a loss of CLP 5.6 billion.

On Slide 5, we have an update on the status of our operations following social unrest of the fourth quarter. We've been hard at work reopening stores. And as of this week, in Chile, we have 492 stores open and 26 stores that are closed due to the events of the fourth quarter. This means that 95% of our stores are operating. The breakdown by format is on the slide. With respect to our reopening plan, we are currently focused on 12 stores and evaluating the remaining 14.

On Slide #6, we have revenue and gross margin for the full year and the fourth quarter. In the first 9 months of the year, revenue has been growing 0.6%, and we ended the year with 0.2% year-over-year. This is because of a 1.6% decrease in fourth quarter revenue. As I mentioned before, revenue includes CLP 8.5 billion that we recorded as the preliminary estimate of the recovery of business interruption insurance. And this amount makes up for the loss in EBITDA and cover fixed costs. It is not equivalent to sales, which is why we have this decrease in the fourth quarter, even though we have insurance.

This also helps to explain why we have this 210 basis point jump in gross margin in this fourth quarter. The denominator of revenue is smaller than usual. If we calculate our gross margin excluding the insurance payment, we have an increase of 110 basis points in the fourth quarter from 28.4% to 29.5% and 90 basis points in the full year from 28.5% to 29.4%, which is consistent with the expansion in gross margin that we saw throughout the year.

On Slide 7, we have a breakdown of revenue growth by format, comparing 2018 to 2019. As you can see on the graph, we continue to see strong performance in our cash & carry segment, which grew 1.5% in the year. OK Market contributed with 2.2% growth in the full year, managing to more than offset the 8% decrease in the fourth quarter. The reduction in operating hours that was necessary in all formats in order to ensure safety conditions for employees and customers had a more significant impact on OK Market than in other formats due to the peaks in demand the first thing in the morning, associated with breakfast, and at the end of the day. Similarly, in Peru, we had revenue growth of 12.6% in the year, measured in Chilean pesos, and 4.2% measured in local currency. However, in the fourth quarter, local currency revenue fell 5.2% due to a decrease in sales to mom-and-pops.

On Slide 8, we have same-store sales and sales per square meter. Same-store sales performance generally was in line with revenue performance. Same-store sales only include stores that were operating as of December 31, 2019. However, many of the stores that are included in the calculation were affected by temporary or partial closures during the period, negatively affecting same-store sales for the fourth quarter. Sales per square meter grew 3.9% year-over-year. And part of this is due to the fact that we have been optimizing selling space in some of our stores and also some stores have had their selling space modified during the remodeling process.

Sales per square meter are calculated on a monthly basis and include all stores that reported sales during each month, even when the store did not operate for the entire month. Therefore, sales per square meter for the fourth quarter are affected by temporary and partial closures during the period. Same-store sales and sales per square meter do not include the recovery of business interruption insurance.

On Slide 9, we have operating expenses, defined as distribution costs plus administrative expenses excluding depreciation and amortization. Administrative expenses are affected by the application of IFRS 16 because for full year 2019, lease expenses are CLP 38 billion lower under IFRS 16 than they would have been under IAS 17, which was the previous standard.

In the graphs, we've presented operating expenses for 2019 both ways. First is the pro forma version, which is comparable to the historical figures. On a comparable basis, operating expenses increased 4% in the full year and 3.5% in the fourth quarter of the year. Most of the increase is explained by personnel expenses. And that is mainly due to the minimum wage, higher inflation and provisions for variable compensation.

The final bar of the graph with the white and red stripes shows OpEx for 2019 as it was presented in our financial statements under IFRS 16. As you can see, under the new rule, OpEx fell with respect to 2018. And that is because of the change in accounting treatment for lease expenses. In addition to the impact of IFRS 16, there is also an insurance impact on OpEx as a percentage of revenue.

Since total revenue includes the business interruption insurance, and as we have already explained, that amount is less than the actual lost revenue and we divide OpEx by revenue, the denominator is smaller than it otherwise would be. Therefore, OpEx margin is inflated, which explains part of the increase year-over-year, 90 basis points in the full year from 21.8% to 22.7% and 150 basis points in the fourth quarter from 21.2% to 22.7%.

On Slide 10, we have 2 operating indicators that are related to operating efficiencies. Our rate of centralized distribution increased from 46.6% in 2018 to 47.7% in 2019. So we are moving in the right direction in terms of inventory management and by extension in-store product availability. Sales per full-time equivalent, which we look at to measure productivity, have been consistently increasing over the last several periods. And that is still the case in 2019, even despite the issues in the fourth quarter.

On Slide 11, we have EBITDA, which excluding the effects of IFRS 16, grew 5.2% in the full year and 7.8% in the fourth quarter. Our EBITDA margin increased 35 basis points in the full year from about 6.6% to about 7.0%. In the fourth quarter, EBITDA margin increased 70 basis points from 7.2% to 7.9%. EBITDA includes the recognition of the business interruption insurance. But unlike gross margin and expense margin, there isn't really a distortion in the EBITDA margin.

Just like on the previous slide, in the graph here, we have presented EBITDA as it would have been calculated under the previous accounting rule, IAS 17, which is comparable to the historical figures. And we have also provided the official IFRS 16 figure, which is not comparable. IFRS 16 has a positive impact on EBITDA because of the lower lease expenses.

On the next slide, we have an explanation of our nonoperating results to explain the difference between our nonoperating loss of CLP 85.7 billion for 2018 and CLP 72 billion for 2019. First, we have the impact of IFRS 16, which increases financial expenses but decreases the loss on inflation indexed assets and liabilities. On net, IFRS 16 increases in nonoperating loss by CLP 3.6 billion.

Next, we have nonrecurring financial expenses. Last year, we recognized approximately CLP 12 billion relating to the prepayment of our international bonds. And this year, we recognized CLP 1.4 billion for the prepayment of our syndicated loan in September. Year-over-year, the net difference is savings of CLP 10.6 billion.

Recurring financial expenses for the year fell by CLP 3.9 billion as a result of all of our efforts to reduce debt and strengthen our capital structure. Excluding IFRS 16, the loss on inflation indexed assets and liabilities was lower by CLP 1.6 billion this year due to lower inflation. Another difference has to do with our efforts to improve operating efficiency. We carried out an organizational restructuring program in January of 2018. And in 2019, we carried out a second stage of the program. Year-over-year, the related expenses decreased by CLP 4.4 billion.

One of the biggest negative impacts year-over-year is the net effect of the losses we suffered due to physical damage and loss of merchandise in the fourth quarter. The total loss we recognized, around CLP 30 billion, was higher than the estimated amount of insurance that we should be able to recover, which is around CLP 24 billion. On net, we had a loss of CLP 5.6 billion in the quarter for this reason.

On Slide 13, we had net income, which excluding the effects of IFRS 16, increased 10.1% in full year 2019 and fell 4.6% in the fourth quarter. In the fourth quarter, the decrease is due to the nonoperating loss from the events related to the social unrest in Chile. The comparison with full year net income for 2018 is strongly affected by taxes. In 2018, we had a significant one-time income tax benefit related to the sale of Construmart.

More on this, on the next slide, Slide 14, where you can see a comparison of pretax income for full year 2018 and 2019, where there's an improvement of 146%. The idea here is to show that even though the bottom line shows growth of 10.1%, excluding IFRS 16, the quality of the 2019 numbers is quite different. Because in 2018, a significant portion of that net income was a result of a one-time tax gain, whereas in 2019, net income reflects structural improvement in operating and nonoperating results.

On the next slide, we have an update on our financial debt. As you can see on the graph at top, our ratio of net debt/EBITDA, excluding effects of IFRS 16, has increased slightly from 3.8x in December 2018 to 4.0x in December 2019. The increase is due to new lease contracts that we have signed during the period.

At the bottom of the slide is our updated maturity profile. This reflects the situation as presented in our financial statements as of December 31, 2019, with one modification, which is the restructuring of a loan for CLP 55 billion that was set to mature in the first half of 2020. This restructuring happened in January, and it was described in the Subsequent Events section of our financial statements and earnings release. Under the new structure, instead of the whole CLP 55 billion maturing in the first half of this year, only CLP 5 billion will. A further CLP 17 billion mature in the second half of this year and the remaining balance matures over the course of 2021.

There are other short-term bank loans in our balance sheet as of year-end 2019, which were basically used to finance the extra purchases of merchandise we had to make during the fourth quarter to replace the losses due to looting. Once we receive payment from the insurance company, we will repay those. Also, in case it wasn't clear, the insurance indemnities we recognized in the P&L are provisions based on the estimate we received from the adjuster. We have not yet received that cash.

On Slide 16, we have an update on some of our operating initiatives. In addition to working on our store reopening plan, our OK Market team has been busy opening new stores this year. To date, they've opened 5 new locations. We're also very pleased with the progress we've been making and the response we've seen from our customers regarding our Club Ahorro loyalty program app. We've had over 1 million downloads since October, and we received very positive feedback. With respect to store remodels, in light of the events of the last several months, we are reevaluating which stores we are going to prioritize. For example, if a store was on the list for 2022 but was severely damaged during the fourth quarter, that store will be remodeled this year.

We announced our CapEx plan for the next 3 years, and we announced the new 3-year plan back in November. Those haven't changed. Our plan for 2020 calls for CapEx of between CLP 60 billion and CLP 70 billion. Of course, given the current situation with coronavirus, it is hard to know today how many projects we will actually be able to execute. So that number could be revised down. Last year, we were forecasting CapEx in the same range, and we ended up closer to CLP 40 billion as our plans were interrupted in the fourth quarter.

On that note, we have received many questions in the last couple of days about how coronavirus is affecting our operations. So on Slide 17, we've put together a brief summary. On the left, we've described the main impact from an operating standpoint, which is that we are seeing customers stocking up, and we're seeing especially high demand for certain product categories like nonperishable foods and cleaning supplies.

On the right, we've outlined some of the health and safety measures we're taking to safeguard our employees and customers and also how we are responding to the increased operating demand. These measures, of course, include increasing the frequency of all cleaning and disinfecting processes. We're monitoring health of our employees and also of any contractors and suppliers on site, including at the beginning and end of each shift.

We're also trying to reduce movement and contact of people to the extent possible. All domestic and international trips have been suspended. People who can work from home are working from home. Meetings are being held virtually, et cetera. We're also increasing inventory of the high-demand product categories. And we have recently been slightly reducing opening hours in our large formats, Unimarc, Alvi and Mayorista 10 opening a little later and closing a little earlier, so we can restock the shelves because people are buying these products faster than we can get them on the shelves.

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]

[Operator Instructions] The first question comes from Emilio Acevedo with Santander.

[Emilio Acevedo Caro, analyst]

I have 2 questions, of course, related to the coronavirus. I know you talked a little bit about this. My question -- my first question is about how you [ traced the growth ] in the last day among the different format? I don't know if you can say it, the growth in particular format or in general or even, we don't know -- we can know the growth. And the second point is about the relationship that you have with suppliers. If you have -- if they respond accordingly to cover the increasing demands from customers in order to know if we could see potential shortage in the short term?

[Arturo Ortiz, executive]

Indeed, the demand increased in the -- essentially in the last 4 days. Until last Friday, the situation was a little bit regular. But of course, in the new situation of the coronavirus in the country, of course, the demand was increasing and was essentially double of the -- our budget or our forecast in the last 4 days. We're expecting the similar situation in the next 2 or 3 days. In fact, yesterday, it was not so high in comparison with the previous year. And the experience in other countries, because we are in contact with another supermarket chain in other countries, the demand was decreasing. And in Chile, we're expecting the same. Because in the -- more people in the house with more restriction to purchase, the situation is more regular. And also the consumers acquired the stocks and is enough for the next day, it's not necessary to buy more. Therefore, we're expecting in the next day, more regular demand. Of course, in some categories like cleaning categories, of course, the situation is more critical, not only in the supermarket, also at the supplier.

And in this point and to your second point, what is the relationship with the suppliers? It's good. Until now, the response from them is good in the old basic categories with more problem in the cleaning category. But we're expecting good supply chain in the next day with some problem to attend the people in the supermarket because we are subject to the decision of the government in terms of the real capacity to open the store. We are reducing the schedule with idea to have a capacity to replenish the product in the shop because that is very, very important issue. Because also we suffered some reduction in the number of employees in the stores because some of them have problems in the house or in the family. But in general, the situation is really regular in the stores and the supply from the suppliers as well, except in the specific category.

[Operator]

The next question comes from Alonso Aramburú of BTG.

[Alonso Aramburú, analyst]

I wanted to ask about the insurance. Just when do you think you will get the cash -- the actual cash payments from the insurance company? And what's left to be recognized from damages? And when will those recognitions happen? Would it be this quarter or still into the next quarters?

[Arturo Ortiz, executive]

Yes. We recognized in the fourth quarter 2019 and also the effect in this quarter. And the amount recognized in this quarter is the best estimation from the insurance company. But it's not cash, of course. The cash of this amount probably will be received in the first half of this year. But we have business interruption claims also in the -- in 2020 because we remained with some stores closed and also -- and in consequence, business interruption as well in this year. This amount probably will be collected in the second half of this year. And also the physical damage because we are reopening stores, as Carolyn mentioned before, 12 stores in this year. And this amount probably will be received in the end of this year. But the stocks, payments and -- that was in the fourth quarter of 2019. And the business interruption of the fourth quarter 2018, we will receive in the next month, in the first half of 2020.

[Alonso Aramburú, analyst]

Okay. And going back to the demand, if you can update us...

[Arturo Ortiz, executive]

Excuse me. Excuse me, Alonso. I guess this amount to pay the short-term debt that we have, because it was necessary to purchase new inventories and also to repair the damage in the stores, and we capture money from the market, from the financial market more or less CLP 30 billion. And the idea is to prepay this amount in the first half when -- to our banks where we shorten debt. That is the use of these funds.

[Alonso Aramburú, analyst]

Okay. That's the use of the insurance proceeds?

[Arturo Ortiz, executive]

Yes.

[Alonso Aramburú, analyst]

Okay. Yes. And I wanted to ask you about also demand in general. So before this increasing demand due to the virus, were you seeing -- I mean were numbers sort of in line with your expectations? Or were they below or above?

[Arturo Ortiz, executive]

No. The new -- this additional demand is essentially in some categories, in basic products and also -- but it's a transitory, in our opinion, additional demand and not -- and were not permanent demands. And the growth in March and probably in some days in April will be higher in the old format, not only in Unimarc, also -- in the first day, it was more in the wholesale format. And -- but in the last 3 days, also in Unimarc. But it's a transitory demand in the -- probably in the next days. But in the end of the month or in the beginning of April, the situation should be regular.

[Alonso Aramburú, analyst]

Okay. And prior to these last few days, so January and February was...

[Arturo Ortiz, executive]

[indiscernible], the demand in the first quarter was good. Absolutely, we recovered in comparison with the fourth quarter 2018. Because the social crisis was in the third quarter. But in January, February and March was regular demand in line with our forecast. But with this coronavirus, prices are higher in these days, but transitory demand, additional demand in our opinion.

[Operator]

[Operator Instructions] Next question comes from Diego Guzman of BTG.

[Unknown]

I have a couple of questions. First one is about the dividend. If there is any chance that you can propose a higher dividend on 2019 earnings? And the other question is regarding the current situation. If -- well, there's a lot of uncertainty and maybe we will face some months of disruption and closing of some format, et cetera. And I want to know if maybe the complexity of the restocking process in the supermarkets to serve a very -- shopping demand from customers can also, in total, damage your sales.

Because obviously, you will face empty shelves at some times of the day, but if these factors can damage your total sales or your expectations of total sales. And also, what are the context of margins in this situation? Because there is less need of being promotional but also many lower-margin products are demanded. So I would to like -- like if you can explain a bit deeper on this restocking and maybe sales loss that can happen and what about the margins.

[Arturo Ortiz, executive]

Okay. About dividend, the decision will be done in the next -- the proposal will be decided in the next Board on March 30 and, of course, the final decision in the Shareholder Meeting. But probably, the proposal will be higher than the previous year, but -- because the company is in condition to propose more. About the demand, of course, we have some problems restocking. But the main problem is the replenishment in the stores. We have inventories. The demand is higher now in this last day, transitory in our opinion, but it's more demand. We have more sales, not -- we are not losing sales. In the worst case, we will sell the same amount that our forecast.

The main problem could be that more demand will not chance to sale for lack of inventory. But it's not the situation until now. Therefore, we will have more sales in market than our budget, of course. And to the margin in the price, the prices are the same as previous the coronavirus crisis. Therefore, by SKU, the margins will be the same. But we can have some changes in the mix because probably it will depend -- the prices probably can change a little bit the mix. But we are not -- I am not clear that will be higher or lower. But in the total, in average, should be similar. I don't see important progress or changes in -- or improvements in the level of margin.

[Unknown]

Okay. And the inventory days that you are facing right now is around -- or how much above the 40s that you have shown in the past?

[Arturo Ortiz, executive]

The dividend...

[Unknown]

No, the inventory.

[Arturo Ortiz, executive]

The inventory days, today, it's more or less 35, 36 days. As we said, our regular number last year was 37, 38. We have 1 or 2 days left for this additional demand. But because, to be honest, the company was a little bit prepared for additional demand in March because March was a special day for the country, not only for the coronavirus, also because the expectation in terms of the social crisis was important demand as well. Therefore, the company was a little bit prepared to receive more demand in March. But finally, it was more by -- for coronavirus, not for the social crisis. But finally, the inventory was in our distribution center and also in our stores.

[Operator]

This concludes the question-and-answer session. I would now like to turn the conference back over to Carolyn McKenzie for any closing remarks.

[Carolyn McKenzie, executive]

Thanks, everybody, for joining us today. Stay healthy, stay home. And hopefully, we'll have you with us next quarter. Bye.

[Operator]

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