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Edited Transcript of DIA.MC earnings conference call or presentation 27-Feb-20 5:00pm GMT

Full Year 2019 Distribuidora Internacional de Alimentacion SA Earnings Call

Madrid Mar 24, 2020 (Thomson StreetEvents) -- Edited Transcript of Distribuidora Internacional de Alimentacion SA earnings conference call or presentation Thursday, February 27, 2020 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Enrique Weickert Molina

Distribuidora Internacional de Alimentación, S.A. - CFO

* Karl-Heinz Holland

Distribuidora Internacional de Alimentación, S.A. - CEO & Executive Director

* Stephan DuCharme

Distribuidora Internacional de Alimentación, S.A. - Chairman of the Board

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the DIA Full Year 2019 Results Presentation. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday, the 27th of February 2020.

And now I would like to hand the conference over to your speaker today, the Chairman of the Board of Directors of DIA Group, Stephan DuCharme. Please go ahead.

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Stephan DuCharme, Distribuidora Internacional de Alimentación, S.A. - Chairman of the Board [2]

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Ladies and gentlemen, good afternoon. It is an honor and a great pleasure to be opening the 2019 results presentation as Chairman of the Board of Directors on behalf of the full Board, on behalf of the senior management team led by Karl-Heinz Holland and on behalf of all employees.

It would be an understatement to say that 2019 was a year of change. That being said, our sights are clearly set forward. Since June 2019, DIA is focused with the support of the Board and active involvement by management on 3 overarching objectives, which represent the foundation of the DIA transformation and the creation of the new DIA.

It all starts with capabilities. Over the past 6 months, we have been fortunate to have attracted significant world-class retail and management talent to shape and drive the DIA transformation and turnaround. At the same time, we are supporting and promoting promising internal talent. Most importantly, we are harnessing the energy of these employees and all employees who believe already today in the new DIA. This talent goes hand-in-hand with an operating model that empowers 4 strong country teams with full responsibility for the results in each country, alongside core strategic capabilities at the center.

Rebuilding DIA's culture and trust among all stakeholders is a prerequisite, and we are well underway in this process. Our employees are important change agents who believe in who we are and where we are going. Our franchisees are valued business partners for DIA, and Karl-Heinz will address this in more detail in his comments. It is the support of our employees and franchisees that allow us to better serve our customers to retain the loyal customers and attract new ones and to develop the necessary new value-for-money customer proposition for them.

In this new DIA culture, we believe in transparent, long-term relationships with all stakeholders. We believe in being results-oriented. And last but not least, we believe in contributing actively and constructively to the economies and societies where we operate as a transparent, modern retail and a good corporate citizen. As a proximity player, we believe in contributing to each neighborhood, cada barrio, cada bairro, which is at the heart of who we are as DIA.

The third building block is the new commercial value proposition for our customers, and I will leave it to Karl-Heinz to share these details with you.

In closing my introductory comments, I would like to thank Karl-Heinz Holland, Group CEO, for his leadership, his dedication and his commitment. Together, we are working for the long term, of course, including clear annual objectives, and we're confident in making DIA a successful and profitable modern proximity player.

Karl-Heinz, over to you.

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Karl-Heinz Holland, Distribuidora Internacional de Alimentación, S.A. - CEO & Executive Director [3]

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Thank you very much, Stephan, and good afternoon. Since the new management arrived, we have identified the weaknesses and started to reinforce the strengths of DIA's fundamentals. DIA has a proximity network of more than 6,600 stores, serving every day the grocery needs of 21 million active loyalty card customers with dedication and support of our employees and franchisees.

I was appointed as CEO of the group in May 2019, and since then, we have made meaningful changes and achieved important progress in terms of leadership and management. With Ricardo Alvarez, the new CEO of DIA Spain, joining this month, we completed the new executive committee for Spain. All of them outstanding individuals with a great team spirit and even greater capabilities.

Marcelo Maia, the new Executive Chairman of DIA Brazil, will lead the growth over the coming years in Brazil. With a significant strengthened executive team, a new CFO, a new Chief HR Officer and an additional Chief Operation Officer who are all highly experienced Brazilian senior executives, Marcelo will drive our business to become the leading proximity retailer in Brazil.

On the DIA Group level, with the DIA Group executive committee, we have a complete team in place with best-in-class executives in every single area to support the country executives and leverage their performance.

Clarel, now led by Paul Berg and his team, is operating independently from grocery with a strong focus on the specific requirements of the customers in this segment. DIA now has an excellent management team in place with proven capabilities in all areas of the business. Close to 100 external hirings of executives to key CEO minus 1, 2 and 3 positions, together with internal promotions of highly engaged, motivated and capable people have taken place. This team, together with around 40,000 employees in our 4 countries, puts DIA in a very strong position to manage this turnaround successfully. With the new organizational structure in place, country CEOs with full P&L responsibility and a strong focus on adapting to the culture of the country and the local customer needs, supported by excellent executives at the group level, means that today, DIA has the best possible structure to achieve great results in the future.

The culture of the company is changing, firmly centered around our business principles. They are pivotal to our focus every day and to every decision made. This is embedded in sound governance and compliance, where we want to achieve the highest industry standards. Building transparent and collaborative relationships with all key stakeholders is a key objective for DIA in 2020 and for the years to come. The management team is now supported by a strong and diverse Board of Directors. Many years of business experience in different areas add significant and relevant value to DIA's journey going forward.

In the last 6 months, we launched many important key initiatives across our transformation pillars. In the commercial area, the teams have optimized the assortment and improved the efficiency of the promotional business significantly. We have a strong focus on the fresh areas and can already see considerable improvement in the most important category, food and vegetable. Additionally, we are currently working on the improvement of our private-label products, with the objective to improve the quality, design and value-for-money perception and, therefore, to enhance customer experience.

Outstanding real own brands that will be visible in our stores this year, in combination with the compelling and extended choice of branded and local products, will result in an attractive and convincing assortment for our customers.

Our loyalty program is industry benchmark in Spain with over 7 million active members. We are launching many of initiatives to leverage on the data we have in order to support the shopping experience of our loyal customers, as well as to get new customers to join our program. These initiatives will help us to increase the average basket.

Another key pillar of our transformation is the franchise business. We are set on developing an attractive new franchise model, which will establish a simplified win-win environment for retail-focused entrepreneurs and DIA based on value-enhancing support, incentives and customer focus.

In operations, we launched the biggest transformational project in DIA's history. Based on optimizing the assortment in different clusters, the operations teams designed and developed planograms and new layouts on a store-by-store level to be rolled out in the first half of the year in the vast majority of our store network.

The new food and vegetable presentation will be a key element of that. The mantra in operations is the operational excellence program. This program was designed and launched in October 2019 and includes the establishment and improvement of store and supply chain processes, along with multiple initiatives to drive efficiency and workflow in our stores in order to reduce costs and enhance the customer experience. The operational teams have already achieved significant improvements with the optimizing of processes in the distribution centers and in consequence, improving productivity.

The teams launched various programs to reduce the costs significantly. The most important are renegotiation of our rents, procurement renegotiation in all areas, renegotiation in logistics and an action plan to reduce known as well as unknown losses. There is a high level of awareness in the management to focus on initiatives to improve working capital. There is a stock optimization project in both stores and warehouses in place in order to reduce inventory days, only one example of many.

As you can see in this presentation, the performance over the last 6 months showed a clear upward trend in both like-for-like sales as well as like-for-like tickets, which translates into customer growth already in December.

It's a lot of work and on many fronts and across many markets, but we are steadily progressing.

Let me, at this point, hand over to the Group CFO, Enrique, to speak about the financial results. Over to you.

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Enrique Weickert Molina, Distribuidora Internacional de Alimentación, S.A. - CFO [4]

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Good afternoon, ladies and gentlemen. This is Enrique Weickert, Group CFO of DIA, speaking. I will now be covering the main highlights of the 2019 financial review section.

Regarding 2019 results summary, we offer here a broad overview of the main P&L items in 2019 compared to 2018. Net sales went down by 9.3%, 2.2% ex currency, driven mostly by the 41% depreciation of the Argentine peso. Gross profit declined from 22% to 19.2%, equivalent to EUR 192 million, negatively impacted mainly by stock liquidations, write-off of accounts receivables from franchisees and the erosion in purchase conditions, resulting from supplier disruption and tightening. Adding to that, higher labor costs due to dismissals and OpEx due to maintenance catch-up and other, results in an EBITDA decline in 2019 of EUR 143 million from EUR 209 million, down to EUR 66 million. Such decline increases to EUR 342 million at the adjusted EBITDA ex one-offs level as a result of excluding in 2019: first, the EUR 321 million positive effect of IFRS 16; and second, the one-offs impacting negatively adjusted EBITDA, which totaled EUR 125 million.

The net financial results deteriorate additional EUR 80 million versus 2018, primarily due to IFRS 16 financial costs because additional interest expense and other financial expenses is largely offset by the increase in finance income, coming mostly from the activation of ICMS tax to be recovered in Brazil. Finally, on a prudent basis and taking into account ESMA's new guideline issued in 2019, the company has the recognized tax assets totaling EUR 92 million.

Moving into sales performance. Gross sales under banner declined in 2019 by EUR 2 billion, mostly 53%, driven by negative effects due to the devaluation of the Argentine peso and negative like-for-like, 39%, with the remainder 8% being attributable to the reduction in selling space related to store closings.

Net sales declined by EUR 705 million, primarily in Spain and Brazil, due to store closings and negative like-for-like. In Argentina, though, the inflation reduced substantially the negative effect of FX and like-for-like.

Adjusted EBITDA ex one-offs in 2019, due to the disruption context, our underlying performance metric, adjusted EBITDA, was negatively impacted by the sizable one-offs totaling EUR 125 million incurred in relation with the company's cleaning and rebuilding process, which was required mostly in Brazil and to a lesser extent, in Spain. Accordingly, the adjusted EBITDA ex one-offs reached a positive figure of EUR 34 million, 0.5 percentage point on net sales, hit by declining sales and negative operational leverage.

On balance sheet and trade working capital. The balance sheet that incorporates in 2019 the new application of IFRS 16, adding EUR 705 million of incremental debt, reflects also the repayment of the 2019 bonds at maturity on the long-term refinancing of the syndicated debt. The net shareholders' equity at DIA individual financial statements at year-end 2019 is positive, amounting to EUR 223 million, providing sufficient equity buffer.

Trade working capital shows an outflow of EUR 50 million in the full year, which splits into a Q1 and Q2 outflow, followed by a Q3 and Q4 inflow. The situation with suppliers is now perfectly stable, and all the reduction in commercial financing resulting from shorter DPOs has already been digested as well as the reduction in nonrecourse factoring.

Net debt, excluding IFRS 16, went down in 2019 from EUR 1,456 million down to EUR 1,322 million, a total reduction of EUR 134 million, thanks to the net proceeds coming from the capital increase.

The cash flow from operations was negative, minus EUR 246 million, but it's including the cash impact of the EUR 131 million of restructuring costs. And the CapEx reached $168 million but including around EUR 65 million of catch-up CapEx payments from prior years. Also, interest and financial payments are unusually high due to incremental costs arising from the lengthy refinancing process completed successfully during 2019.

On debt maturity, after the refinancing agreement reached with the syndicate lenders, the company now enjoys a comfortable debt maturity profile to execute the business turnaround, with the only relevant maturity being the EUR 300 million of bonds due in April 2021. The company plans to address the refinancing of those 2021 bonds maturing sufficiently in advance in order to secure a smooth process.

At year-end 2019, the company had available liquidity totaling EUR 421 million, after having funded already in 2019 all the restructuring costs needed to prepare the company for a successful transformation.

What's our ambition? 2019 is over, and we are now fully engaged into building the new DIA with the transformation initiatives previously described by Karl-Heinz. We will work hard and enthusiastically to complete the transformation of the company in the shortest possible time frame. But we are also realistic, and we know it will take time to bring to the surface and combine together all the benefits, which will be resulting from the different transformation initiatives.

After we have successfully completed the turnaround of the company and DIA gets into cruising speed, our ambition is to run a DIA that has become a leading modern proximity retailer, a clear #2 in Spain, with net sales exceeding EUR 10 billion, primarily through the improvement of sales density, delivering a 5% to 6% adjusted EBITDA margin; who will grow in like-for-like terms at a sustainable rate, around 2%, 3%; and who will reinvest in CapEx annually 4% of its net sales to modernize its business and store network, while keeping safe levels of financial discipline with leverage below 3x.

In summary, we can say that 2019 has been a decisive year to bring DIA back on track, recapitalize the business and clean up the past legacy in order to start fixing the basic, all of which has resulted in the recognition of significant one-off losses. Now we're looking to the future and fully engaged into the transformation plan that is being implemented by a brand-new management team with strong retail and transformation credentials. We know what to do and how to do it. We have the team, the discipline, the capital, the will and the determination needed to be successful in this exciting transformation journey. We believe that positive signs will start to be visible already in 2020 and will bring us back into positive like-for-like. We are fully committed to turn DIA into a leading modern proximity retailer.

I'll hand it over to Karl-Heinz.

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Karl-Heinz Holland, Distribuidora Internacional de Alimentación, S.A. - CEO & Executive Director [5]

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The most valuable asset of DIA is its employees and franchisees. The dedication and engagement of our people led by a world-class management team in place now is the most important driver back to success. I want to thank all of them for their engagement every day.

Equally, I want to thank our customers who maintain their loyalty to DIA through a difficult year 2019. Based on the new strategy, hard and focused work of everybody in the company and uncompromising customer orientation, I'm absolutely convinced that we will develop DIA to an outstanding shopping destination for our customers in the coming years with profitable growth as a result.

Thank you very much.

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Enrique Weickert Molina, Distribuidora Internacional de Alimentación, S.A. - CFO [6]

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And with that, we have finalized this presentation. Ladies and gentlemen, thank you very much for attending the call. We trust it's been helpful for you to get a richer view on DIA's performance in 2019 and to better understand what we're currently engaged with in terms of the transformation initiatives that we are pushing forward. If you have additional queries, please contact us, and we will be happy to address them through our Investor Relations team. Good afternoon. Bye.

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Operator [7]

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That does conclude our conference for today. Thank you for participating. You may all disconnect.