SMU SA

SGO:SMU

Earnings Call Transcript

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the SMU Fourth Quarter 2021 Results 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.

[Carolyn McKenzie, executive]

Thank you, and thank you all for joining us today. I am here with our CFO, Arturo Silva. We have some slides describing the highlights of 2021 as well as the fourth quarter and full year financial results. And Arturo will be happy to take any questions at the end of the call. And of course, feel free to contact me afterwards if you have any additional questions. 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 send out the slides to the distribution list this morning, and an audio recording of this call will be available on our website later today. Also, as always, please note that we may be making forward-looking statements today. So please remember to take a look at the caution regarding forward-looking statements on Slide #2 of our presentation.

Starting on Slide #3, we'd like to review some of the highlights of the year, and we structured the information around the 4 pillars of our strategic plan. omni-channel growth, customer experience, operating efficiency and committed and sustainable organization. With respect to organic growth, last year, we made progress with our store operating plans -- for opening plans, starting with Unimarc in Tocopilla at the beginning of the year, followed by another opening in Talca in October.

We opened a third store in January of this year in La Serena and we also reopened a location in Santiago that has been closed since the social unrest that began in Chile in October 2019. In August, we launched Super 10, a new soft discount format that targets final customers across both economic segments. These stores offer an optimized assortment of fresh products, dry goods and personal hygiene products, allowing customers to make a complete purchase and with an operating model that's focused on efficiency and productivity and with a significant share of private label products, reducing costs in order to offer an attractive price.

The first one was the reopening of our previous Mayorista 10 store location that had been closed since October of 2019 and we then went on to remodel and convert 3 additional Mayorista 10 locations into Super 10, ending the year with 4 stores and operations.

In December, Alvi opened its first new store in 7 years in La Serena, in the north of Chile, strengthening its regional presence, and we also had a reopening, the same month, of a store that had been closed since January of 2020, also related to the social unrest. This brings the total number of Alvi stores in operation from 29 to 31. 2021 was also a big year for organic growth in Peru with 3 new Maxiahorro stores, the soft discount format, where we see more growth potential going forward.

In Slide #4, we have a look at how we have been expanding coverage of our online sales platform. As we announced previously, on September 30, we launched our unimarc.cl e-commerce platform. And at the same time, we launched our Unimarc app. When we launched, we had coverage in the Santiago Metro region of Chile, and we have since expanded to a further 10 regions with plans to reach all 16 regions of Chile by the middle of the year.

So far, performance has been in line with our expectations, and we are particularly pleased with the performance of the app, which accounts for around 80% of orders. We've also grown our coverage through last milers. We ended 2020 with 100 Unimarc stores operating through these platforms. And in 2021, we made it to almost 150 with coverage in all 16 regions of the country, leveraging our large regional store footprint. Online sales overall accounted for 0.9% of Unimarc's revenue in 2021.

On Slide #5, with respect to our customer experience, we've continued to grow our private label portfolio. In 2021, we launched new brands, including Nuestra Cocina for basic staples like cereal, pasta, canned goods and others. We also launched a line of cleaning products called Smart Clean. And we significantly grew our bread and pastry offering as well. Overall, we launched more than 600 new private label products last year. These products helped to differentiate our assortment and attract customers by offering them quality at an affordable price.

Moving on to Slide 6. Another element of the customer experience is promotional activity. This is one of our key strengths and differentiating factors for our Unimarc value proposition. During the first year of the pandemic, customers were less sensitive to promotional activity. But in 2021, we were able to reactivate this tool with very positive results. as the share of promotional sales return to what we consider normal levels and also with a focus on the product categories where we are strongest, fill-in and celebration purchase occasions.

Our loyalty programs are another central component of our customer experience initiatives on the next slide. We want to better understand our customers' preferences so that we can better serve them and our loyalty programs help achieve that goal. We're constantly looking for ways to apply our customer insight towards a better shopping experience. In 2021, after analyzing shopping habits and trends, we carried out a reclusterization of Unimarc stores as we had realized that the product assortment for certain stores was not aligned with customer needs. By assigning stores to the correct clusters, we are able to better satisfy our customers, driving sales growth.

We also aim to provide solutions for our B2B customers at our Alvi cash-and-carry format. To that end, in 2021, we developed a new solution for members of our Club Alvi loyalty program. After realizing the credit and debit card payments had been increasing significantly since the beginning of the pandemic, and that many of these small business owners did not accept card payments, but their customers were less and less interested in paying with cash.

Group Alvi Pagos provides these customers with an easy solution. We provide them with a card reading device and then all they have to do is download an app on their phone, and they are able to add value to their businesses by expanding the forms of payment that they expect, which has a positive impact on their sales. We've got an excellent feedback on this initiative, which in turn adds value to our loyalty program.

On the next slide, we thought it would be interesting to include a graph from last year's Q4 earnings presentation and show how things have changed since then. During the first year of the pandemic, we saw a major shift in what we call shopping missions. We divide these into stock ups and fill-in purchases depending on the number of product categories and the frequency of purchases.

Following years of growth in fill-in purchases, in 2020, stock-up purchases suddenly increased their share of total purchases by 11 percentage points. We interpreted this as a temporary shift. And in fact, in 2021, we saw a significant recovery in fill-in purchases, which are a very relevant part of Unimarc's value proposition.

Similarly, as you can see on Slide 9, we've also seen a recovery in the number of transactions, whereas the average ticket remains above prepandemic averages. The graph at the top of the slide shows how the average ticket in 2021 compares to 2020 in gray and to 2019 in red. As you can see, things haven't changed much in comparison to 2020. There is a slight downward trend in the third and fourth quarters, but the average ticket compared to 2019 is significantly higher. And while there is a downward trend from 130% in the second quarter to 62% in the fourth quarter, this also tracks with the recovery in the number of transactions in the [ graph below ]. After being down by over 50%, in the fourth quarter, we were down by only 24%. And it's also interesting to see that there has been a positive trend compared to 2020 as well.

On the next slide, with respect to our operating efficiency pillar of our strategic plan. This year, we have continued with our efforts to implement new technologies and processes, both in our stores and in our distribution network in order to keep operating expenses under control and to ensure in-store product availability. Self-checkout modules, digital task managers, workforce management systems, automatizing distribution routes to name a few examples, contribute to our increased productivity, and the results can be seen when we look at our sales per full-time equivalent, which have improved by 24% in the year.

With respect to the fourth pillar of our plan, committed and sustainable organization, we'd like to share a few different initiatives today, starting on the next Slide 11. One of the most significant impacts of food retailers can have on the environment is from reducing food waste. At SMU, we have taken a 4-tier approach to managing food waste. We began by making sure we're selecting the right products according to our customers' needs and preferences. This is where our customer insight is valuable.

The next step is to make sure we're buying the correct quantities of these products in order to avoid waste through efficient demand planning. For example, in the past, we have mentioned Blue Yonder, which is a world-class system that incorporates machine learning to generate highly accurate demand forecast for fresh products by SKU, store and day. Replacing a process that today is performed manually at each store.

The third step is to reduce waste by lowering prices on products that are going to expire soon, but that are still in optimal conditions for consumption. We call this program Pronto Consumo, consume soon, and we label discounted products that are easy for customers to identify. In fact, in 2021, through Pronto Consumo, we were able to keep over 2 billion pesos worth of products from going to waste and to shrinkage. And finally, we have the option to donate food. In 2021, we began to carry out through donation directly from our stores, and this has been implemented at 98% of our stores in Chile. Last year, we had over 4,000 donations. We call our food waste reduction program, Todos Ganan, or everyone wins, because when nothing is lost or wasted everyone wins.

Another highly relevant area of concern for our industry is responsible sourcing on Slide 12. Over the last couple of years, we have been working to gain visibility on our supply chain, gathering information about supplier practices and certifications through surveys and questionnaires. So that going forward, this information can be used as part of the supplier evaluation and selection process. On a related note, earlier this year, we received the Sello Azul accreditation for sustainable fishing at our Unimarc Los Militares store, and we are working to obtain this accreditation of other stores that sell fresh fish.

On the next slide, we have additional initiatives relating to our environmental impact. Since 2018, we have been measuring our carbon footprint, starting with about 20% of our operations and gradually building up the coverage of our analysis. In 2021, we measure 100% of our stores and distribution centers in Chile. Through these measurements, we have obtained HuellaChile certification from the environmental ministry but measurement is only the first step, next comes management.

And in this sense, in 2021, we also applied for and obtained HuellaChile reduction certificate, relating to one of our energy initiatives -- energy efficiency initiatives and selling LED lighting in a group of Unimarc stores, which leads to a reduction in emissions.

Another initiative is our recent partnership with EcoCarga to set up refill stations for laundry detergents, so customers are able to use the same bottle -- reuse the same bottle, thereby reducing packaging. We launched the first station last month, and we're looking to expand this initiative.

On the next slide, diversity and inclusion are a fundamental part of our corporate identity and values, and we strive to promote equality both in the workplace and in society as a whole. Internally, we carry out training programs, and we've developed different communication materials relating to unconscious bias, human rights, inclusive language and other topics. We believe that these efforts contribute to the fact that we have a growing percentage of women in management roles. In fact, in 2021, we were the top ranked food retailer in the Index of Women In Senior Management, placing 13th out of 124 companies in Chile.

And finally, as we transition from the strategy part of our presentation to the financials on Slide 15, we have an overview of our recently completed sale of OK Market. We announced the agreement to sell OK Market to OXXO back in October of 2020. This was the result of a strategic decision for us to focus on our core business through Unimarc, Alvi, Mayorista, Super 10, Mayorsa, Maxiahorro and e-commerce.

This transaction was subject to regulatory approval and the due diligence process by OXXO and after satisfying all of the requirements in order to complete the transaction, we signed a share purchase agreement on February 28, finalizing the sale. SMU received approximately CLP 49 billion for the equity value of this business, and we estimate that the impact from first quarter 2022 net income will be around CLP 20 billion, and that will be subject to our standard dividend policy with the rest of the proceeds being used primarily towards our strategic initiatives.

Given that we received regulatory approval for this transaction in November, in our December financial statements, we had to present the OK Market business as available for sale according to IFRS 5. On Slide #16 and also in our earnings release, there is a complete description of how this works. But to summarize, in income statement, OK Market is consolidated in a single line, net income from discontinued operations. So revenue, expenses, taxes, et cetera, include -- exclude sorry, OK Market.

The income statement is comparable year-over-year because we restated full year and fourth quarter 2020. In the balance sheet, 2021 figures also consolidate OK Market in one line under assets held for sale and liabilities held for sale. 2020 is not restated, so the figures are not strictly comparable. And the cash flow statement is also not restated.

On Slide #17, we have revenue for the full year in the fourth quarter. At the top of the slide, we have the figures as reported, which exclude OK Market under IFRS 5. At the bottom, we provided some pro forma figures that do include OK Market. Revenue for the year, as reported, increased 13.5% and -- sorry, it was 9.2%, and in the fourth quarter, 13.5%. This strong growth reflects the trends that we discussed in previous slides, tedious assortment, promotional activity, recovery and fill-in purchases and recovery in traffic, while still maintaining a high average ticket.

Gross margin decreased 30 basis points in the year and 130 basis points in the fourth quarter, which is similar to the third quarter of last year, is essentially due to product mix. Despite the lower gross margin, gross profit for the quarter was up 8.8% in the fourth quarter.

On the next slide, we have same-store sales, which grew 9% in the full year and 13.5% in the quarter, in line with revenue growth. Broken down by format, Unimarc grew 10.1% in the year and 13.2% in the quarter. Cash & Carry grew 8.9% in the year and 14.9% in the quarter. And Peru grew 0.8% in the year, reflecting lower same-store sales in the first half when the government restricted operating hours for supermarkets, but not for competitors like mom and pop. So recovering in the second half with growth of 8.4% in the fourth quarter.

Moving on to Slide 19. We have operating expenses where we use the same structure as for revenue. The numbers at the top are as reported, excluding OK Market and below is the pro forma. Our efforts to optimize expenses are reflected in these numbers as OpEx only grew 2% in the full year despite high levels of inflation and increases to the minimum wage. And as a percentage of revenue, we had an improvement of 150 basis points year-over-year.

On Slide 20, we have EBITDA, which grew 25.4% in the year, reaching an EBITDA margin of 9.1%, which is the target we had announced 5 years ago for 2021. And this we've achieved even excluding OK Market, which has a positive impact on EBITDA margin, including OK Market, EBITDA margin was 9.2% for the full year. In the fourth quarter, we had growth of 6.6% in EBITDA over a strong fourth quarter in 2020. And the EBITDA margin decreased from 9.4% to 8.8%, basically due to the lower gross margin from the product mix effect. But going forward, we expect gross margin to recover and EBITDA margin to be over 9%.

On the next slide, Slide 21, we have net income where we can see that the excellent operating results have had a positive impact on the bottom line. Net income grew 154% in the full year, reaching almost CLP 76 billion, which is more than double the net income for any previous year. These figures include OK Market because they include the total of net income from discontinued operations, which is OK Market and net income from continued operations, which grew 171% over the year.

Similarly, in the fourth quarter, we had net income of CLP 29 billion, which is just below the total net income for the full year 2020 and an increase of 45% over the fourth quarter of 2020. with net income from continued operations growing 66%.

Our strong results this year are reflected in profitability indicators as we can see on the next slide. We had a dividend yield of 11.6% for 2021, and our return on equity reached 10.1%, a significant increase with respect to the previous year. On Slide 23, we have our bond covenants where we continue to have plenty of flexibility and our numbers continue to improve with net financial debt to equity down to 0.55x and interest coverage up to 4.9x.

On Slide 24, we have an updated maturity profile and also a graph showing net debt to EBITDA at the top. On net debt to EBITDA, we added some extra information because we have recently been receiving some questions that made us think the information might not have been clear. We've traditionally shown net financial liabilities to EBITDA, and that number, the financial liabilities, includes store rental contracts that are treated as financial leases under IFRS but are very different from financial debt. We rent essentially all of our stores, so those financial leases account for about half of our financial liabilities.

If we just look at financial debt, which is bank debt, bonds and regular leases, the ratio goes down from 3.9x to 1.9x. The red bars on the graph include the rental contracts and the gray bars do not. And also, if you look year-over-year as the trend, there is a nice downward trend continuing to happen. Going back to the maturity profile. For this year, we have some revolving bank debt and bond maturities that are fairly evenly divided over the second, third and fourth quarter.

This graph includes the bond placement we announced yesterday, which is a 5-year bullet, maturing in 2027 for UF 1 million or about CLP 32 billion. Those proceeds are going to go towards refinancing financial liabilities as part of our long-term financial strategy. We plan to refinance a portion of the maturities that we have in the coming years.

Finally, on Slide 25, we have some of the characteristics of the bond placement I just mentioned. The coupon rate for this bond is 6.3%, with a placement rate of 6.25%. This was actually the first relevant bond issuance in the Chilean market in the last 9 months by an issuer with an A rating, and we were pleased to see a lot of interest from institutional investors.

Market conditions have obviously changed since our last bond placement, which was in December of 2020 with the Series AL bond. So base rates have gone up, but the spread for this placement was 60 basis points lower, even though the duration for this bond is 4.4 years, compared to 2.6 years for the AL bonds. In between these 2 transactions, our financial position has continued to improve and consequently, our credit ratings were upgraded by both Feller Rate and ICR in April of last year.

Operating cash flow from last year had already left us very comfortably positioned to handle all of our cash needs, including CapEx, dividend payments and debt maturities. This transaction further adds to our financial flexibility, that's it for our presentation. Thanks so much for listening and If there are any questions, Arturo will be happy to take them now.

[Operator]

We will now begin the question-and-answer session.

[Operator Instructions]

Our first question comes from Alonso Aramburú of BTG.

[Alonso Aramburú, analyst]

Three questions from my end. First, regarding use of cash, I mean how are you thinking about cash this year, dividends versus potentially paying down some debt, especially in the higher rates and higher inflation you're facing in 2022. Second question on CapEx. What are your CapEx plans and generally your growth strategy for this and next year?

And can you also comment on margins, we saw some pressure on gross margins the last couple of quarters, what's driving that? And what's your outlook there as well? And with inflation also picking up, should we expect better operating leverage as top line growth, potentially higher expenses? And how do you see that trade-off of inflation, certainly both in the top line but also putting some pressure potentially on the expense side?

[Arturo Ortiz, executive]

Alonso, first question about cash. The cash situation of the company is very comfortable, essentially for the better results, operational results or EBITDA in 2021. Also the beginning of 2022 is in the same line with good performance in terms of sales and also in margin and EBITDA margin. Therefore, in addition, our CapEx plan is the same, in the level of CLP 60 billion including all initiatives in our 4 pillars, Carolyn commented previously.

The idea is to keep the same initiatives and our EBITDA allowed to finance 100% of this strategic plan. In addition, the sale of OK Market format incorporate additional cash to power our strategic plan for the next year, the company comment when the transaction was done. Therefore, in general, our situation in terms of the CapEx and cash is absolutely [ comfortable ] to implement our 100% of initiatives in our strategic plan.

In terms of the margin, the gross margin, as you commented, in the Q4 2021 decreased a little bit for the product mix effect essentially because in December, there is a higher sale of products, such as mead or liquid that have a lower margin than the average.

However, the first quarter of 2022 already shows an improvement with a normal mix returning to average level of margin -- or gross margin in the Q1 2022. The total expenses or the inflation effect will have effect in our expenses, no doubt, but also in our revenues because the food inflation also is in the high level in Chile, and we have an "operational hedge" in this aspect because we're essentially a food retailer because we don't have no food products in our assortment, only 2%.

Anyway, we have a very -- an important discipline in total expenses 2021 and '22, it's part of our -- very important initiative in terms of the operational efficiency, incorporated new technologies to -- with the idea to have -- to increase the productivity in terms of the headcount, in terms of the other expenses. We reduced significantly our headcount back in 2021, incorporating these new technologies, new tools, technological tools in our operational process.

That is to continue in this line in 2022. We have projects in this line for this year. Therefore, improving our gross margin on those things in the first quarter and keeping the discipline in expenses, we're expecting for Q1 2022, to keep the level over 9% in EBITDA margin for Q1 2022 and also for the full year. And -- that's our -- my view.

[Alonso Aramburú, analyst]

Okay. So it seems -- you closed the year with 9.1% EBITDA margins. And so it seems you think you can improve EBITDA margins in 2022, given the good top line and you see better gross margin now. But I guess that may change throughout the year, but you think you can go top line faster than your operating expenses generally throughout the year? I mean is that fair to say?

[Arturo Ortiz, executive]

Yes. Because also, we are expecting for -- in fact, the sales performance in Q1 2022 has been very good in January, February in the same level of the end of 2021 with growing double digits. Therefore, the dilution in terms of expenses will be very important in Q1 of this year. Therefore, we are compensating the inflation effect in terms of expenses for the dilution and the improvement in the gross margin for the improvement in the mix of products essentially will allow to keep level over 9% in this quarter and for the rest of the year as well.

[Alonso Aramburú, analyst]

Okay. And regarding your first answer on cash. Can you talk a little bit about what are the plans in terms of dividends, is it like if you plan to be paid between that? I mean our financial expenses are getting higher given rate increases and inflation rates, as you're exposed to the U.S.?

[Arturo Ortiz, executive]

So cash, our level of EBITDA allowed to keep the dividend policy on the level of 75% of the total net income. And the current cash allowed to pay this level of dividend to accomplish the CapEx, including in our strategic plan, at the level of CLP 60 billion, and also to pay our debt payment that we have in this year.

[Alonso Aramburú, analyst]

Okay. So you're going to just pay down the maturities here, you're not going to pay additional debt if you have excess cash? So just to be clear.

[Arturo Ortiz, executive]

Yes.

[Operator]

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]

Great. Thanks so much. Thanks, everybody, for joining us today. Feel free to get in touch if you have additional questions, and we hope you'll join us in the next quarter. Have a good day. Bye-bye.

[Operator]

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