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Edited Transcript of SMU.SN earnings conference call or presentation 26-Nov-19 3:00pm GMT

Q3 2019 SMU SA Earnings Call

LAS CONDES Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of SMU SA earnings conference call or presentation Tuesday, November 26, 2019 at 3:00:00pm GMT

TEXT version of Transcript


Corporate Participants


* Arturo Silva Ortiz


* Carolyn McKenzie

SMU S.A. - Head of IR


Conference Call Participants


* Alonso Acuna Aramburú

Banco BTG Pactual S.A., Research Division - Strategist




Operator [1]


Thank you for standing by. This is the conference operator. Welcome to the SMU Third Quarter 2019 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Carolyn McKenzie, Head of Investor Relations. Please go ahead.


Carolyn McKenzie, SMU S.A. - Head of IR [2]


Thank you. Thank you for joining us today. I'm here with Marcelo Gálvez, our CEO; and Arturo Silva, our CFO.

Today, in addition to discussing our third quarter results, we would like to share some of the key initiatives for our new strategic plan for the 2020 to 2022 period. Marcelo and Arturo will be happy to take your questions at the end of the call. And as always, please feel free to contact me afterwards if you have 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 sent out the link to the presentation to this distribution list this morning. 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.

On Slide 3, we have the agenda for today's call. We have divided today's presentation into 3 sections: First, we'll talk about where SMU is today and what we have achieved in the last 3 years to provide context for what is to come. Second, we will discuss our plans for the coming 3 years; and third, we will go over our third quarter results and also talk about how recent events in Chile have affected our operations.

Getting started with Slide #4, where is SMU today. SMU is a leading player in the Chilean food retail industry. We're #1 in a number of stores with 510 locations throughout the country as of September 30, and we are #3 in market share with 20.4%. We have revenue of around $3 billion for the last 12 months. We operate multiple formats, which allows us to serve different customers and different shopping [missions]. We have traditional supermarkets, cash & carry stores, convenience stores and an e-grocery format in Chile, and we also have cash & carry stores in Peru.

Our customers are at the center of what we do, and we have been working hard in recent years to get to know them better, so we can more effectively meet their needs. We have identified over 10 million customers in Chile. And on average, nearly 5 million customers visit us every month. We strive to make life easier for our customers by providing a quick and easy shopping experience at smaller sized stores that are conveniently located, which is why we are focused on food retail. Our store portfolio does not include hypermarkets and nonfood items, such as clothing and electronics, represent less than 2% of our total revenue.

In Chile, we have stores in all 16 regions of the country with excellent locations that are convenient for our customers. In Peru, our operations are small, with 24 stores, but we see an opportunity for growth.

Flipping on to Slide 5. I believe most of you are familiar with our strategic plan for 2017 to 2019, Plan CIMA. The key pillars of which are summarized here: Customer experience, operating efficiency, organizational excellence, sustainability, technological development and financial strengthening. Over the next few slides, we will summarize what we have done in each of these areas.

On the next slide, we have one of the central initiatives of Plan CIMA, store upgrades or store remodels for our Unimarc format. After the foundations of SMU were built through a period of rapid inorganic growth between 2007 and 2011, the company went through a store portfolio optimization process. As a result, we were left with a strong store portfolio with prime locations all over the country, but the stores themselves, in many cases, were outdated, both in a physical and a commercial sense. Therefore, in 2015, we carried out a pilot program, where we remodeled 3 of our Unimarc stores, changing the store layout to better match the way customers move through the store, expanding selling space for our fresh and fill-in products and improving the look and feel of the stores. We were very pleased with the results of the upgrade and so we carried out an analysis of all of our Unimarc stores to identify the ones where we saw the greatest potential upside from the store upgrades.

Based on that analysis, we selected 130 stores to upgrade, beginning with 10 stores in 2017 and then 30 in 2018. At the beginning of 2019, we carried out a complete analysis of the performance of the first 10 stores considering that they had been operating for a full year, and we have used that information in order to optimize subsequent remodels. Our progress this year has been somewhat affected by recent events here in Chile, and as a result, we expect to complete the 30 upgrades that were originally planned for 2019 in March or April of next year, and we will also continue with the next group of 30 stores for 2020.

We have a few before and after slides here to give you a sense of some of the changes we have made. On Slides 7 and 8, you can see the changes we made to the exterior of one of our Unimarc stores in the city of Curicó a couple of hours south of Santiago.

On Slides 9 and 10, you can see how we have changed the layout in the stores based on what our customers are looking for. One of the most important purchase occasions for our customers is what we call celebration. And here in Chile, that usually involves a barbecue. That's why in the after picture, you can see the charcoal next to the wine, and the meat section is behind the photographer. This way, it is easier for our customers to buy everything they need for their celebration. In the after picture, you can also see the LED lighting we have implemented, which contributes to both energy efficiency and the look and feel of the store.

On Slides 11 and 12, you can get a better look at the meat section in one of our remodeled stores. New coolers make it easier to display a greater variety of products, and they also have doors, making them more energy efficient. As a result of the store upgrades, sales in remodeled stores on average have grown between 5 and 9 percentage points more than the average for the Unimarc format, and gross margin has improved around 50 basis points, as we have expanded our fresh product offering.

Moving on to Slide 13. Although our original plan was focused on remodeling Unimarc stores, we also identified an opportunity for our Alvi cash & carry stores. In 2018, we piloted a remodel of an Alvi, including changes to layout, incorporation of a greater assortment of products for the hotel and restaurant segment, more efficient cold storage with walk-in coolers that make it much easier to restock the shelves without getting in the way of customers, and a number of other changes that aim to make the shopping experience easier for our customers, especially the mom-and-pop owners that account for 70% of sales in this format.

Based on the results of that pilot, we decided to implement the changes in 10 more of our Alvi locations this year. In this format, we were also affected by recent events, but we are planning to complete these 10 upgrades in the beginning of next year.

Here again, we have a few before and after slides, so you can see some of the changes. On Slides 14 and 15, you can see that our Alvi Pajaritos got a much needed facelift on the outside.

Slides 16 and 17 show how we have changed the entrance to the store, giving much greater visibility to our loyalty program and our goal to better serve our core customers for this format, which are small neighborhood store owners.

Slides 18 and 19 show the changes we have made to checkout.

Let's move on to Slide 20. Although we have been primarily focused on store remodels, we have also had new store openings during these last 3 years. We've opened a total of 4 Unimarc stores, 1 last year and 3 during the second half of this year, for a total of 3,500 square meters, and 12 OK Market stores; 5 this year, 5 last year and 2 in 2017, for a total of 900 square meters. We have a few more OK Markets in the pipeline for this year, but they may be pushed to the beginning of 2020, depending on how circumstances evolve in the coming weeks.

On Slide 21, you can see the loyalty programs for our different formats, which is another way we have been working towards a better shopping experience for our customers. These programs help us to get to know and understand our customers. In 2017, we launched loyalty programs for Unimarc, Mayorista 10 and OK Market. And we relaunched our existing loyalty program for Alvi with a very high penetration. We're able to identify the customers that account for over 90% of sales. These programs have provided us with valuable knowledge that has enabled us to optimize assortment, store clustering and promotional activity.

On Slide 22, we have another initiative that is a key part of improving the customer experience. In order to identify more specifically what we need to do in order to improve the experience of our customers, we began measuring the Net Promoter Score or NPS in 2016 and incorporated all formats into the calculation in 2017. This measurement is done through customer surveys. We receive over 75,000 completed surveys each month. After shopping at one of our stores, customers are asked how likely it is that they would recommend the store to a friend or family member on a scale of 1 to 10. Depending on their response, they're asked a series of follow-up questions that aim to understand specifically what part of their shopping experience was positive or negative.

SMU's NPS has improved from 58% in 2017 to 62% in the first 9 months of 2019, and the main drivers behind the improvement are promotions and wait time at checkout as well as prices and product availability. These improvements are very significant because these are the drivers that are most important to customers overall in their shopping experience. The data behind the customer feedback tells us clearly that the thing customers like the most about our format is our promotional activity. And we've been leveraging our loyalty programs in order to innovate, finding new ways to add value for our customers.

On Slide 23, you can see our first ever personalized promotional campaign, the Gran Cuponazo, which we launched last year, and in which customers received personalized digital coupons based on their own shopping history.

Initially, we created a unique sets of 9 different coupons for over 6 million customers. Over 500,000 customers downloaded the coupons and over 25% of the customers that downloaded the coupons used at least one of them at the checkout. The feedback from this [initiative] was very positive, as customers valued receiving discounts on products they specifically purchase. We have seen how personalization is improving the NPS [of our promotion.] However, there was room for improvement with the Cuponazo, as using the coupons was not a frictionless experience. The customer had to download the coupon and then read off the serial number at the checkout. We repeated the Gran Cuponazo 2 more times for Unimarc and once for Alvi, and we learned from each experience.

On Slide 24, you can see that we have now taken a new step along the path to personalization. Last month, we launched an app for the Club Ahorro loyalty program, so customers can access the coupons directly any time. The app is simple and easy to use, and the coupons are now frictionless. The customer activates the coupon within the app, provides his or her ID number at the checkout and the discount is applied automatically. The app also provides customers with information about other promotional activity, store locations and how much he or she has saved in the last year by being a member of Club Ahorro. The app also provides our customers with free WiFi in every store as well as other content. We're off to a great start with the app. Over 100,000 downloads in the first week.

Another one of the strategic pillars of Plan CIMA is operating efficiency. And as you can see on Slide 25, one of the main initiatives here has been to expand and optimize our distribution network in order to more efficiently supply our stores and improve product availability for our customers.

Centralized distribution, by which we mean the percentage of revenue that comes from products that we have distributed from our distribution centers to our stores is one of our most important initiatives. It's very important for us to have as much control as possible over our inventory, so we can make sure that the products are on the shelf when our customers need them. Our centralized distribution rate has grown from 42.5% in 2016 to 47.4% for the first 9 months of 2019, an increase of nearly 5 percentage points. We've been working to increase centralized distribution since our first 3-year plan started in 2014. And this initiative will continue as we believe that there are still significant improvements to be made. Of course, in order to handle distribution to the stores ourselves, we need to have the appropriate capacity in our distribution network. And that is something else that we've made progress on since 2017.

This year, we inaugurated a new distribution center in Coquimbo in the north of Chile. The existing center was the oldest one in our network. The new center is larger and has cold storage as well as new technology. We've also added a new larger distribution center for imported products. And last year, we opened a new dedicated distribution center for our Alvi format, which we then expanded further this year to incorporate cold storage. This year, we have also added cold storage capacity to our Concepción and Puerto Montt center.

On Slide 26, you can see another initiative within the operating efficiency pillar of CIMA, automatization and standardization of processes. One example is self-checkout. We've began implementing this technology at the end of last year. And today, we have self check-outs in 12 Unimarc stores with plans to grow that number. Self-checkouts help improve productivity, and they also have a positive impact on customer experience. A related initiative is a tool that helps store managers to assign the correct number of checkers to cover demand at any given time in the day. This also relates to customer experience because having the right number of checkers helps cut down on wait times. And as I mentioned before, customers respond very well to a faster checkout experience.

Another example of technology that helps us to improve productivity is self-service scales for weighing fruits and vegetables or bread, as you can see on Slide 27. We also began implementing these last year, and today, we have them in over 200 Unimarc and Mayorista 10 stores.

Moving on to Slide 28, ensuring that we have the maximum in-store product availability is a key part of making life easier for our customers. In addition to optimizing our supply chain, there are a number of in-store processes that we have been working on. As part of our restocking model, we've put a lot of work into understanding which products our customers want to see in our stores in order to optimize the product assortments. Of course, if the products aren't displayed properly on the shelves, all of that work goes to waste. This is where we need planograms, which are essentially diagrams that map out exactly which products have to go in exactly which space on the shelf. Throughout Plan CIMA, we have been developing planograms and incorporating them in our in-store restocking processes. By the end of this year, 100% of our Unimarc stores will have implemented planograms for a set of 58 product categories that accounts for 50% of revenue.

Another tool we are implementing in order to improve product availability are stock -- stock-out alarms. We have algorithms that tell us how often each store sells each product. If there is a product that we normally sell, for example, every 10 minutes, and it's been 2 hours without a sale, and the system says that product is in stock in that store, the store manager receives an alert to go see if the product is on the shelf. If it's not on the shelf, that means the product is in the storeroom and needs to be restocked on the shelf.

And finally, just a centralized distribution gives us more control over when products are delivered to each of our stores. Having the shelves restocked by our own personnel allows us to ensure that we are complying with the planograms and that restocking happens in a timely manner. These inventory management initiatives are key to ensuring improved product availability, which, in turn, allows us to minimize what we call lost sales, the lost opportunities that occur when we have a customer in our store ready to buy a product, but he or she can't find it on the shelf.

On Slide 29, we have another strategic pillar in Plan CIMA, organizational excellence, where the goal is to achieve alignment and commitment throughout the organization. In order to better identify where our strengths and weaknesses lie, in 2018, we carried out an employee engagement survey. The survey results helped us to identify the values that are central to SMU's corporate culture, and that we want to guide our everyday interactions both internally among employees and externally with our customers.

At the beginning of this year, we launched a program to promote these values. This program is called CERCA, Spanish for close, and it stands for close, excellence, respect, collaboration and agility.

Moving on to Slide 30. With respect to our strategic pillar focused on sustainability, we've made significant progress in strengthening the culture of sustainability throughout the company and by defining a sustainability policy, we have mapped out long-term guidelines.

On Slide 31, part of creating this culture of sustainability has been to develop a corporate sustainability model based on 8 pillars of sustainable management, which are aligned with our strategic plan. These pillars are financial performance, governance, environment, commitment to society, responsible sourcing, customer centricity, our people and promoting ethics and integrity. Each of these pillars is associated with specific action plans and KPI that allow us to monitor the company's performance in terms of social, economic and governance indicators.

On Slide 32, in the last 3 years, we have made significant progress in our ESG reporting. In 2017, for the first time, we published a sustainability report corresponding to the year 2016, and we have built on that base to improve the quality and scope of the information and the sustainability reports for 2017 and 2018, applying the global reporting initiative methodology.

On Slide 33, we have a fifth pillar within Plan CIMA, which is technological development, where the focus is on making sure we have the right technology to properly support our business. To that end, technological renovation is an ongoing initiative, and we have also incorporated new technology such as access controls using fingerprints so that we can better manage both internal and external workers at our stores. We've already mentioned self-checkouts and self-service scales. We've also digitalized some back-office processes such as invoice registration.

Information security is another area that we have focused on in the last 3 years, creating a dedicated team to ensure that our customers' data is safeguarded. Another initiative is our data warehouse, which provides us with valuable information in a timely manner that is key for decision-making and is therefore a key support for our plans to further develop CRM going forward.

Moving on to Slide 34. We have the final pillar of CIMA, financial strengthening, which we have discussed at length over the past 3 years. So I will just mention a couple of highlights. Since January 2017, we've completed 3 capital increases for a total of $472 million. We've refinanced CLP 293 billion worth of financial liabilities, and our local credit ratings have gone from BB minus and BB to A minus, making us investment grade and giving us access to a much broader set of potential investors. Our net debt-to-EBITDA has decreased from 6.6x to 3.9x, and our interest expense has decreased over 40%.

On Slide 35, we have a different kind of before and after, where you can see that just like our Unimarc stores, our debt maturity profile has also gotten quite a facelift, thanks to the capital increases and refinancing I just mentioned. The after version of the maturity schedule is very much in line with the cash flows we expect to have going forward. And we have also essentially eliminated exchange rate risk as practically all of our financial liabilities are in U.S. or pesos.

Of course, in order to make these improvements to our financial position, we needed to deliver improved operating results. And on Slide 36, you can see we have done just that with EBITDA that has had a compound annual growth rate of over 6% since 2016, and an EBITDA margin that has expanded 90 basis points from 5.9% in 2016 to 6.8% for the last 12 months, if we exclude the effects of the new accounting rule, IFRS 16 in order to compare numbers on a like-for-like basis.

Hopefully, by reviewing some of the highlights of the last 3 years, we've provided some context for what's to come. Before we get into the plan itself, we have included a few slides to provide some industry context.

On Slide 38, on the left, we have the market share of the main players in the Chilean food retail industry based on revenue. As I mentioned before, we are #3 with 20.4% market share. These market shares have been relatively stable over the past several years. On the right, we have a graph that we think is helpful given how top line growth has slowed in recent years for us and for the industry as a whole. The graph shows growth in the grocery industry versus growth in food inflation, and there is a clear relation between the 2. Nominal industry growth has slowed, but growth in real terms hasn't changed much.

Moving on to Slide 39, part of our analysis in developing our new strategic plan was to look at where the potential opportunities are in the food retail industry in Chile. And in that sense, an important input was to see if there is room to continue opening supermarkets here. In Chile, modern grocery or supermarkets has the penetration of approximately 62% out of all grocery channels. In developed countries, modern grocery usually varies between 70% and 90% of total grocery. Similarly, when we look at the ratio of modern grocery selling space for 1,000 people in the graph on the right, we also see that Chile has room to grow.

Moving to Slide 40, as our customers are at the center of what we do, it is important to look at how their needs and habits have been changing. And one of our conclusions here is that time is more valuable than ever. We have more women in the workforce. And commute times have practically doubled in the last 15 years. Our customers need a fast and easy shopping experience.

On Slide 41, we can see that Chilean families have, on average, increased their incomes and that household sizes have been steadily decreasing, which has an impact on shopping habits, as we see on Slide 42. We believe that these factors are the drivers behind the change that we have been observing in customer shopping habits over the past several years. Fill-in purchases, where customers don't buy as many types of product, less than 10 categories per purchase, but they visit stores more frequently, have been steadily increasing over time when compared to stock up purchases, where customers buy more than 10 product categories and visit stores less frequently.

In 2014, 45% of purchases were considered fill-in purchases and 55% were considered stock up purchases. In 2018, the situation was practically inverted with fill-in purchases accounting for over 54% of all purchases. That is an increase of 9 percentage points in 5 years. Customers are increasingly looking to make the most of their time, seeking out smaller-sized stores that facilitate a quick shop and that are conveniently located. In addition, fill-in categories include a lot of fresh products and purchases of fresh products relates to income level.

We also want to specifically talk about the world of e-grocery, on Slide 43, where we thought it was important to include this graph that shows the penetration of the e-grocery market relative to the overall supermarket industry in Chile. Online grocery purchases have grown from under 1% in 2011 to 1.6% in 2017. So there is no doubt that this segment is growing fast. However, we do think it is important, especially given the level of interest that we often see from investors to provide this context. E-grocery is quite small in Chile. When we look at more developed countries, we see penetrations of, for example, 4.4% in the United States, 2.4% in Spain, 1.5% in Germany, 5.6% in France and 7.2% in the U.K., to name a few. So again, there is certainly room to grow, but we don't see e-grocery crowding out physical grocery stores anywhere. It is also important to keep in mind that unlike the grocery industry as a whole, which is very much a mass market business, e-grocery is a service that is primarily used by a very small percentage of the population. And of course, when we talk about e-commerce trends, we have to mention the growing role of last milers here in the Chilean market. The introduction of last milers have certainly led to many changes in a very short period of time, and we believe that the e-grocery business is still very much in a transition stage, which is why we believe it is important to closely monitor and evaluate the different opportunities and to be open to making changes in strategy. In the case of SMU, today, we continue to operate our Telemercados brand, which we complement through partnerships with both Rappi and PedidosYa.

On Slide 44, we wanted to share our vision as a company, which is our guiding principle, and therefore, has been a key input as we have developed our strategic plan for the next 3 years. At SMU, our vision is to be the food retailer that best understands our customers and meets their needs.

On Slide 45, we have the overview of our strategic plan for 2020 to 2022. This plan contains many of the same elements as previous plan, and it also incorporates new initiatives. The plan features 5 strategic pillars: organic growth, customer experience, efficiency and productivity, organizational excellence and sustainability. In addition, there are 3 areas that provide the necessary support in order to successfully implement the strategic initiatives. This supports our financial capacity, technology and digitalization and logistics development. On the coming slides, we have outlined some of the key strategic initiatives.

On Slide 47, you can see perhaps the biggest change between the previous plan and this new plan, which is in organic growth. The focus for the next 3 years has really been -- sorry, for the last 3 years, has really been on store upgrades. While we will continue to remodel stores, we also plan to have more new store openings. We've been building up our internal capacity in our pipeline of projects in order to accelerate our organic growth. An important input for the strategic pillar was the fact that, as I mentioned before, we believe that there is room to continue growing in Chile based on the relative supermarket penetration. We also believe that it is important that new stores align with customer preferences, which is why we plan to focus on opening Unimarc stores that are slightly smaller than the current average size for this format. Customers are looking for something quick and easy, and that is what we plan to provide.

Our goal is to open 15 Unimarc stores in the next 3 years, an average of 5 stores per year. We also plan to continue with the store remodels, maintain the pace of 30 per year. Our organic growth plan also considers store openings for Alvi with a goal of 6 new stores. We believe that our core customer segment for Alvi, mom-and-pop, is underserved in certain regions of Chile, and we see an opportunity there. We also plan to carry on with our store remodels for Alvi. Once we complete the 10 stores we set out to remodel this year, we will move on to the remaining 20 locations. And we will also continue to open new OK Market locations with a target of opening 10 new stores per year.

On Slide 48, we have another initiative, e-commerce. We have given careful consideration to the direction we want to take with our e-commerce business. We've evaluated many e-grocery operators around the world, and we have taken a hard look at our existing operations, and we have come to 2 important conclusions. First, we don't want to ruin the shopping experience for our off-line customers. As we mentioned before, e-grocery is a very small piece of the grocery pie. We don't want to focus on 2% of the market at the expense of the remaining 98%. One of the options we have been evaluating this year was to pilot in-store picking for Unimarc's [FPO], as the more we studied the other players, the more we saw that filling the store with shoppers for online customers has an adverse impact on off-line customers. Second, we want to be mindful of profitability. It is very difficult to make money in the e-grocery business.

With these considerations in mind, we have decided that we need to consolidate our position as a pure player, avoiding unnecessary friction with our off-line customers and meeting the needs of online customers by filling orders at customer fulfillment centers. And that is what we are working on today. We're continuing to operate Telemercados, and we are preparing to launch a new market FPO , so whichever front end platform our customers use to reach us, the back end order fulfillment is going to happen in a way that doesn't get in the way of our off-line customers. At the same time, we are going to continue to partner with last milers, which gives our customers an express delivery option. But we will monitor the stores where we allow last milers to operate to make sure that our offline customers are not being negatively affected.

We have talked a lot about Chile. But as I mentioned earlier, we do see an opportunity for organic growth in Peru. On Slide 49, we have a graph that shows how the Peruvian grocery industry differs from Chile. In Chile, supermarkets account for almost half of the food retail market, which explains why Unimarc is our leading format in terms of revenue and number of stores. In Peru, however, supermarket penetration is much lower, 16%, and that number is even lower if you go outside of Lima. In Peru, the leading segment is traditional trade, neighborhood mom-and-pop stores. This is why we have remained focused on the cash & carry and discount supermarket segment, which sells to mom-and-pops and to lower income segments, rather than trying to develop Unimarc or something similar in Peru.

We have achieved a very solid results with our existing formats in Peru. Our revenue has had a compound annual growth rate of 9% since 2016. This is why, as you'll see on Slide 50, we want to start piloting new store openings and remodels in Peru. Our plan is to start with 5 new openings, focusing on small store sizes, which is where we have obtained the best results in recent years. In addition, we will also be remodeling 2 stores as part of a pilot program. If we see promising results from these pilot programs, we will be in a position to roll out further organic growth in Peru.

Moving on to the customer experience pillar on Slide 51. Although we have made a lot of progress since launching our customer loyalty program, we still think there are many opportunities here. We've just gotten started with personalized promotional activity, and we're sure that there's more to be done here in order to give our customers what they really want. We believe that we will be able to capture more value through truly focusing on the customer, leveraging our partnership with Dunnhumby, who are experts in customer data science. In addition to optimizing promotional activity, we can also do more effective category management and optimize pricing.

On Slide 52, our NPS data tells us that although we have made improvements to the stock driver, we still have room for improvement, which is why product availability continues to be a key part of our strategy going forward, and this is related to both customer experience and efficiency and productivity. We plan to continue to optimize our distribution network and aim to increase centralized distribution to 65%. We will also expand our use of planograms to 100% of stores and more product categories. We are also beginning to implement automated replenishment for fresh products with a target of 100% of these products.

On Slide 53, we have our organizational excellence pillar, where the focus is on continuing to consolidate our CERCA culture and developing leaders in all levels of the organization who embody our corporate values and culture. This will be achieved through training programs and workshops that we have already begun rolling out with a very positive reaction from our employees.

On Slide 54, in our sustainability pillar, one of our key initiatives is creating shared value. Given SMU's strong geographic coverage with operations in all 16 regions of Chile, we play an important social role. We strive to be a good neighbor in the communities where we operate, and we are working on developing a good neighbor policy in order to give more structure and consistency to our community relations.

In addition, we plan to continue to develop our 100% Nuestro program, where we provide support to small local suppliers who sell their products in our Unimarc stores.

On Slide 55, we have another focus of the sustainability pillar of the new plan, which is our commitment to the environment. In this area, the main initiatives include measuring our carbon footprint, defining and implementing an environmental policy and implementing a program designed to reduce food waste.

Finally, on Slide 57, we have provided some rough CapEx estimates. Our original estimate for 2019 CapEx was in the neighborhood of CLP 65 billion. However, recent events in Chile has forced us to slow progress on store remodels so we will probably be a bit below that number. Our CapEx estimates for the following 3 years is on the range of CLP 60 billion to CLP 70 billion per year for a total of CLP 200 billion for the 2020 to 2022 period. This total is split approximately 50-50 between maintenance CapEx and growth CapEx. We intend to finance CapEx through our own operating cash generation, not by taking on new debt.

Finally, I'll go through the third quarter numbers before taking your questions. On Slide number 59, we have revenue and gross margin for the first 9 months and the third quarter. Revenue increased by 0.6% in the first 9 months of the year and by 0.8% in the third quarter. However, it is interesting to note that in the first half of the year, revenue growth was driven by Peru. In the first 6 months, Peru grew over 20%, while Chile grew 0.2%. But in the third quarter, Chile grew 0.7%, which is more than double the growth for the first 2 quarters of the year. At the same time, in the third quarter, growth in Peru slowed, primarily due to regulatory changes that went into effect during the period, restrictions on plastic bags and stricter food labeling requirements. We expect this slowdown to be temporary as the whole market, customers, suppliers and food retailers get used to the new rules. That is what happened in Chile when similar reforms were implemented.

Gross margin increased from 28.5% in the first 9 months of 2018 to 29.4% in the first 9 months of 2019, reflecting higher commercial efficiency. That's an increase of 90 basis points, which is similar to what we saw in the first half of this year. We also had an increase of 100 basis points in the third quarter from 28.6% to 29.6%.

On Slide 60, we have a breakdown of revenue growth by format comparing the first 9 months of 2018 to the same period of 2019. As you can see on the graph, the most significant contribution to revenue growth came from our cash & carry segment, which grew 2.7% in the period. OK Market contributed with 6% growth in the period. And Peru grew 15.6%. Unimarc decreased 0.4% in the first 9 months of the year, but almost all of that was in the first and second quarters. As I mentioned in the last slide, we saw a change in the third quarter with Chile driving growth. This is because sales growth was even more pronounced in cash & carry, with 3.1% growth and convenience was 6.6%. And in addition, after a couple of negative quarters, Unimarc was practically flat with respect to the third quarter of last year.

On Slide 61, we have same-store sales and sales per square meter. Same-store sales performance tracked revenue performance. And here again, you can see what I described in the last slide, every format, except for Peru, had stronger same-store sales growth in the third quarter than in the 9 months. Sales per square meter grew 5.1% in the first 9 months of this year, and part of that is due to the fact that we've been optimizing selling space in some of our stores. And also, some stores have had their selling space modified during the remodeling.

On the next slide, 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 the first 9 months of the year, lease expenses are CLP 28 billion lower under IFRS 16 than they would have been under IAS 17, which was the previous standard.

In the graph, we've presented operating expenses for 2019 both ways. First is the pro forma version, which is comparable to the historical figure. On a comparable basis, operating expenses increased 3.6% in the first 9 months of the year and 3.5% in the third quarter of the year. Most of the increase is explained by personnel expenses, and that is mainly due to the minimum wage, which on average increased 7.5% year-over-year. And also, inflation increased 2.8%. These increases were partially offset by lower average full-time equivalents in the period. Excluding the effects of IFRS 16, operating expenses increased CLP 13.4 billion with respect to the first 9 months of 2018, and personnel expenses account for CLP 10.7 billion of that increase. The same is true for the third quarter, where 80% of the increase in OpEx is explained by higher personnel expenses.

The final bar of the graph with the white and the 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 expense.

On Slide 63, we have 2 operating indicators that are related to operating efficiency. As I mentioned earlier in the presentation, our rate of centralized distribution was 47.4% for the first 9 months of this year. And then in the third quarter, it was 49.5%. So we are moving in the right direction in terms of inventory management. Sales per full time equivalent, which we look at to measure productivity, have been consistently increasing over the last several periods.

On Slide 64, we have EBITDA, which, excluding the effects of IFRS 16, grew 4.2% in the first 9 months of this year and 7.6% in the quarter. Our EBITDA margin increased 30 basis points in the first 9 months from 6.4% to 6.7%, reflecting the gross margin expansion and partly offset by the increase in OpEx as a percentage of revenue. In the third quarter, EBITDA margin increased 50 basis points from 6.9% to 7.4%. Just like on the previous slide in the graph here, we have presented EBITDA as it would have been calculated under the previous accounting rules, 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 68.4 billion for the first 9 months of last year, and our nonoperating loss of CLP 46.1 billion in the first 9 months of this year. 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 the nonoperating loss by CLP 3.1 billion.

Next, we have nonrecurring financial expenses. Last year, we recognized approximately CLP 12 billion relating to the prepayment of our international bond. 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 CLP 10.6 billion. Recurring financial expenses for the first 9 months fell by CLP 3.4 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 1.8 billion this year due to lower inflation. And finally, as part of our efforts to improve operating efficiency, we carried out an organizational restructuring program in January of last year. And this year, we've carried out a second stage of the program. Year-over-year, the related expenses decreased by CLP 4.4 billion.

On Slide 66, we have net income, which, excluding the effects of IFRS 16, increased 17.2% in the first 9 months and 49.1% in the third quarter. In the first 9 months of 2018, net income includes a tax gain of around CLP 15 billion related to the sale of Construmart in April of that year, which is why there's such a high comparison base. The total impact of IFRS 16 on the bottom line is negative CLP 1.9 billion for the year to September. This is the sum of the lower lease expenses, higher depreciation, higher interest expense and lower loss on inflation indexed assets and liabilities.

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 to EBITDA, excluding the effects of IFRS 16, has increased slightly from 3.8x in December to 3.9x in September. The increase is basically due to new lease contracts that we have signed during the period. The bottom of the slide is our updated maturity profile. Earlier in the presentation, we already saw this. We can see that we have a smooth maturity profile for the coming period, in line with our expected cash flow generation. The most recent changes are that on September 25, we paid the series T local bonds, which was for $1 million. That was paid with the cash we had on hand, which is why cash and cash equivalents are lower at the end of September. And on September 30, we prepaid the final installment of our syndicated loans, which was going to mature in June of next year. Stock prepayments was refinanced with bank debt under more favorable conditions.

Finally, we have the recent events in Chile. For the last 5 weeks, Chile has been affected by protests, social unrest and active vandalism. The situation has, of course, affected our operations as many of our stores have been looted, damaged and in some cases, even burned. We've also had to operate stores using reduced opening hours, depending on the conditions at each store as the safety of our employees and our customers is our #1 priority.

Over 160 of our stores have been affected by some form of damage, but thanks to the commitment of our employees, we've been able to reopen most of them. As of yesterday, the stores we have operating account for 90% of our sales. And according to our current plan in the coming weeks, we expect to open 39 stores, reaching a total of 98% of our sales operating. The 13 stores that were essentially burned down will, of course, take more time to reopen. Our insurance policy covers a loss of merchandise and cash as well as physical damage done to the stores, fire damage and business interruption. We are working with the insurance adjusters to carry out the inspections and provide all the information necessary in order to receive payment for the losses. This has certainly been a challenge for our operations, but we are working hard to get our stores back up and running, and we are not making changes to our strategic initiatives as a result of the situation. We may, of course, decide to change the order in which we remodel certain stores, and there will surely be temporary effects such as lower centralization in the fourth quarter of this year as we have asked suppliers to deliver directly to stores, in some cases, as we work to reopen as fast as possible, but the underlying strategy remains the same.

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


Questions and Answers


Operator [1]


(Operator Instructions) Our first question is from Alonso Aramburú with BTG.


Alonso Acuna Aramburú, Banco BTG Pactual S.A., Research Division - Strategist [2]


Two questions from my side. The first one on your new 3-year plan. When you put all of these together, what should we expect in terms of sales growth and margins for the next couple of years? Should we continue to see some margin expansion? And do you expect sales to accelerate on the bulk of the new openings of stores? And my second question is regarding also the plan, I mean you're growing mostly the Unimarc stores not so much the cash & carry, but cash & carry is the format that is doing the best and now you don't see an opportunity in cash & carry to grow that at a faster rate in the short term?


Arturo Silva Ortiz, SMU S.A. - CFO [3]


Alonso, first question that sales growth and gross margin. In terms of sales growth, of course, depending on the food inflation because we are considering that we will grow 1% more than food inflation. That's our projection for the next 3 years. If the food inflation is 3.5%, our growth should be 4.5%. That is our projection. And in gross margin terms, we're expecting a chance to improve in shrinkage 20 basis points, no more than this. And also the rest of the improvement will be located in the more centralization, but with more expenses, therefore, would not impact in the bottom line. But we have space essentially in this aspect because our gross margin today is at very good gross margin.

Second question about why it's not more aggressive, our growth in cash & carry and more in Unimarc. Today, we have Alvi stores essentially in -- not in the [extreme part] of the region, essentially in the central part of the country, from Region 4 to Region 8. And the idea is to grow in the extreme of the country, in the northern part and southern part of Chile. We see the real chance to growth in cash & carry because the additional market in Chile is growing. But in parallel, we are seeing, a good chance to grow more in the metropolitan region and also in the rest of the country in the traditional supermarket with Unimarc because we will see space and opportunities also in this segment. But both are important in our growth strategy in the next years.


Alonso Acuna Aramburú, Banco BTG Pactual S.A., Research Division - Strategist [4]


Okay. And as a follow-up on your first answer. So when you talk about roughly 20 basis points of gross margin improvement, should we expect a similar margin improvement at the EBITDA level, given that the centralization will be offset by the higher expenses? So I'm not assuming that your top line...


Arturo Silva Ortiz, SMU S.A. - CFO [5]


Excuse me, if we grow 4%, 5%, also, we will improve our gross margin for the dilution of the fixed cost. Therefore, our goal for 2021 was 7.5% EBITDA margin in the old IFRS rule. And we keep the same goal between -- depending -- 2021 or 2022, depending on the growth of the sales because essentially, for the real chance to dilute more fixed costs. But our goal is 7.5% EBITDA margin in the end of this 3 years' period.


Operator [6]


(Operator Instructions) There are no further questions registered at this time. I would like to turn the conference back over to Carolyn McKenzie for any closing remarks.


Carolyn McKenzie, SMU S.A. - Head of IR [7]


Thank you, everyone, for joining us today. Feel free to get in touch with us if you have any follow-up questions, and we hope to have you with us on our call for next quarter. Thanks. Have a great day.


Operator [8]


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