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Edited Transcript of SMU.SN earnings conference call or presentation 27-Aug-19 3:00pm GMT

Q2 2019 SMU SA Earnings Call

LAS CONDES Sep 17, 2019 (Thomson StreetEvents) -- Edited Transcript of SMU SA earnings conference call or presentation Tuesday, August 27, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arturo Silva Ortiz

SMU S.A. - CFO

* Carolyn McKenzie

SMU S.A. - Head of IR

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Conference Call Participants

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* Alonso Acuna Aramburú

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

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the SMU Second Quarter 2019 Earnings 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.

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

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Thank you. Thank you all for joining us today. I am here with Arturo Silva, our CFO. I will briefly describe SMU's results for the first half and second quarter of 2019, and then Arturo will be happy to take your questions. If anyone isn't using the webcast to follow the slides, we'll be going through the presentation that I sent out to the distribution list this morning. It's also available in the Investor Relations section of our website, www.smu.cl, in the Financial Information section. 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 just a reminder to please take a look at the caution regarding forward-looking statements on Slide #2 of our presentation.

On Slide 3, we have a note about the effects of IFRS 16 on our 2019 numbers. We described this in detail in the first quarter, so in the interest of time, I'll just quickly summarize. This is a new accounting rule that affects how lessees account for lease contracts. And since we lease practically all of our stores, this rule has a significant impact on our financial statement, although it does not have an economic or cash impact. The application of IFRS 16 means that many line items in our financial statements cannot be compared year-over-year. However, in our earnings release, we provided pro forma figures to help analyze our performance, and we also included those numbers in this presentation where relevant. Feel free to contact me afterwards if you have any questions.

On Slide 4, we have a note about how the sale of our Construmart subsidiary in April of last year affects the comparison of our 2019 numbers with our 2018 numbers. With regard to the presentation of Construmart, all of the information in our June 2019 financial statements is comparable with the prior year figures because Construmart is presented as discontinued operations in both periods.

In this presentation, all historical figures are comparable because for periods prior to 2017 -- excuse me, we are using revenue, OpEx and EBITDA for the Food Retail segment only. And in 2017, '18 and '19, we only have the Food Retail segment.

That's all for the more administrative matters. On Slide #5, we have our revenue, which increased by 0.6% in both the first half of this year and the second quarter. The formats that have the strongest revenue performance this quarter were Peru, OK Market and the cash & carry segment.

Gross margin increased from 28.5% in the first half of 2018 to 29.3% in the first half of 2019, reflecting higher commercial efficiency. The second quarter figures are the same, an increase of 80 basis points from 28.5% to 29.3%.

On Slide 6, we have a breakdown of revenue growth by format, comparing the first half of 2018 to the first half of 2019. Peru had revenue growth of 20.1% measured in Chilean pesos and 10.2% measured in local currency. OK Market had revenue growth of 5.7%, and cash & carry grew 2.5%, offsetting the lower revenue in Unimarc and Telemercados.

On Slide 7, we have same-store sales and sales per square meter. Same-store sales performance tracked revenue performance with the best results, again, coming from Peru, OK Market and cash & carry. Sales per square meter grew 5.4% in the half, and part of that is due to the fact that we have been optimizing selling space in some of our stores. And also, some stores have had their selling space modified during the remodeling process.

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 half of the year lease expenses are CLP 18.6 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 a pro forma version, which is comparable to the historical figures. On a comparable basis, operating expenses increased 3.7% in the first half of the year and 4.3% in the second quarter of the year. Most of the increase is explained by personnel expenses, and that is mainly due to the increase in the minimum wage. Average headcount remained relatively flat year-over-year. To a lesser extent, we also had increases in lease expenses, excluding IFRS 16, and distribution expenses.

The final bar of the graph with the white and gray 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 treatments for lease expenses.

On Slide 9, we have a few of our operating indicators. Our rate of centralized distribution was 46.3% for the first half of this year. That is the percentage of revenue that comes from products that went through our distribution centers as opposed to being delivered directly by suppliers to our stores.

That number is lower than the 2018 figure, but this is because of product mix.

As I mentioned on the previous slide, headcount remained stable with respect to the same period of last year and sales per full-time equivalent, which we look at to measure productivity, have been consistently increasing over the last several periods.

On Slide 10, we have our EBITDA, which, excluding the impact of IFRS 16, grew 2.3% in the first half of this year and 1% in the second quarter.

Our EBITDA margin increased 10 basis points in the first half from 6.2% to 6.3%, reflecting the growth margin expansion, partly offset by the increase in OpEx as a percentage of revenue.

EBITDA margin was 5.9% in the second quarter of 2019, the same as the second quarter of 2018.

Just like on the previous slide, in the graph here, we have presented EBITDA as it would have been calculated under the previous accounting rule, IAS 17, which is comparable to the historical figures, and we have also provided the official IFRS 16 figure, which is not comparable.

IFRS 16 has a positive impact on EBITDA because of the lower lease expenses.

On the next slide, we have an explanation of our nonoperating results to explain the difference between our nonoperating loss of CLP 51.1 billion for the first half of last year and our nonoperating loss of CLP 32.1 billion in the first half of this year.

Last year, we recognized nonrecurring financial expenses of approximately CLP 12 billion relating to the prepayment of our international bonds. Recurring financial expenses for the first half fell by CLP 3.4 billion as a result of all of our efforts to reduce debt and strengthen our capital structure.

And finally, on financial expenses, in the first half of 2019, we have around CLP 4.1 billion of extra financial expenses related to the application of IFRS 16.

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 carried out the second stage of the program, the effects of which will be reflected during the third quarter. In June, we recognized the cost of the plan.

Year-over-year, the related expenses decreased by CLP 4.4 billion.

Another nonoperating impact relates to our inflation indexed liabilities where we had a lower loss of CLP 2.6 billion, despite the fact that total inflation in the first half of 2019 was similar to the first half of 2018, although, in 2019, it was concentrated in the second quarter and our total base of inflation indexed liabilities was significantly higher due to the increase in debt associated with IFRS 16 in 2019.

The reason for the decrease in the loss is because under IFRS 16, inflation adjustments to financial liabilities caused by obligations for rights of use are recognized as assets under rights of use, and they are depreciated over the remainder of the contract.

On Slide 12, we have net income, which, excluding the effects of IFRS 16, increased 1.3% in the first half and decreased significantly in the second quarter. The most relevant impact here is a gain on income taxes in the second quarter of last year, related to the sale of Construmart. This gain amounted to approximately CLP 15 billion. Even though pretax income in the second quarter of 2019 was higher than in the second quarter of 2018, we didn't have the extra CLP 15 billion in 2019. So year-over-year, the comparison was negative. You can see on the slide, where we break down the change in net income. And in the second quarter, there is a decrease of CLP 8.6 billion and the overall decrease in the income tax benefit is CLP 11.9 million (sic) [CLP 11.9 billion]. Excluding the sale of Construmart in 2018, we would have seen an increase in net income year-over-year.

The total impact of IFRS 16 on the bottom line is negative CLP 1.1 billion for the first half. 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, our ratio of net debt to EBITDA, excluding the effects of IFRS 16, has increased slightly to 3.8x in December to 4x in June. The increase is basically due to new lease contracts we have signed during the first half of the year, totaling approximately CLP 30 billion.

Including the effects of IFRS 16, the ratio was higher, 5x, because, as of June 30, we have the full effects of the new debt we recognized under the new rule, around CLP 250 billion, but our last 12 months' EBITDA only includes 6 months of the new and improved IFRS 16 EBITDA. Once we have a full year of IFRS 16 EBITDA in the denominator, the ratio will still be higher than it used to be, but it will be lower than it is today.

In June, we issued a local bond for USD 1 million or around CLP 28 billion. The proceeds of this bond were used to refinance a part of the syndicated loan that matured on June 30. The total payment of the syndicated loan was around CLP 45 billion. The difference was financing and cash from operations.

However, that payment was not reflected in our June financial statements because June 30 was a Sunday, so we made the payment on July 1. This is why the 2019 bank debt is still reflected in our maturity profile below as well as a new bond which matures in 2040.

As we explained, when we released our first quarter earnings, our financial debt contracts that contain covenants also contain clauses that allow for changes in covenants when there are changes in accounting rules so that the original spirit of the covenant can be maintained. Therefore, the covenant limiting the ratio of net financial liabilities to shareholders' equity has been modified from 1.3x to 1.66x. This covenant applies to our local bonds and goes into effect for the financial statements after December 2019.

On Slide 14, we have summarized some of our recent highlights. With respect to our operations in Plan CIMA, we continue to move forward with our Unimarc store upgrade plan. Most of the re-inauguration of the remodeled stores will be concentrated in the final part of this year. So far this year, we have opened 4 new OK Market stores, and we have 5 more that are set to open during the third and fourth quarters. We also have 3 Unimarc openings, including one scheduled for next week.

Another important part of our customer experience initiatives is our loyalty program. Between March and April, we had our second Gran Cuponazo, which is a promotional campaign that offers personalized discounts to our customers. We're very pleased with the results of this campaign, and we see opportunities to continue adding value by truly understanding the needs of our customers.

With respect to operating efficiency, this year, we have a made a lot of progress in our supply chain expansions. We have been operating a new distribution center for imported products since May of this year, and in July, we started operations at our new distribution center in Coquimbo in the North of Chile.

We have also added cold storage capacity to our Alvi distribution center, and that has been operational since the beginning of this month. These initiatives are important to ensure we are able to continue growing our centralized distribution in order to maximize in-store product availability.

From a nonoperating standpoint, we are happy to report that in June, the local rating agency, ICR, upgraded SMU from BBB+ to A- with a positive outlook. As we reported last quarter, at the end of April, Feller Rate had upgraded our credit rating by 2 notches from BBB to A minus. So we now have 2 A- ratings. We also received an upgrade from Humphreys from BBB to BBB+.

As I mentioned on the previous slide, in June, we should bonds in the local market. The amount of the transaction was USD 1 million or approximately CLP 28 billion at a placement rate of 2.06%. These bonds, the W Series, have an annual coupon rate of 2.5% and a bullet structure maturing in 21 years, 2040. This transaction was in line with our strategy continues -- to continue strengthening our financial position through savings on interest expense and optimization of our debt maturity schedule.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Alonso Aramburú of BTG.

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

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A couple of questions. The first one, just on same-store sales at Unimarc. This is the second quarter that you have a slightly negative same-store sales growth. Can you comment a little bit on your expectations on whether you expect this to be on the positive side in the second half of the year? And why -- what is the company doing to improve the same-store sales? And regarding your net debt to EBITDA, which was slightly higher this quarter, what are your expectations for the end of the year in terms of net debt to EBITDA, excluding IFRS?

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

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Alonso, first question about same-store sales. Of course, the same-store sales for Unimarc is weak in comparison with the previous year, but anyway, in the second quarter, improved a little bit, not too much. But compensated for the increase in the same-store sales of our cash & carry segment, wholesale segment. We're expecting a little bit improvement in the Unimarc same-store sales in the next month because we're seeing the improvement in the food inflation index. In fact, in the last 2 or 3 months, the food inflation has been 2.6%, 2.7% 12 years. And in the first quarter, was -- until May, was lower than 2%. Therefore, we are expecting an improvement for this reason. And also, in the end of the year, the idea is to include more remodeling in -- of our plan, improving our sales in Unimarc as well.

But no doubt, the market is weak in terms of the consumption, in terms of the growth. Unimarc is not exception. But we are seeing good performance in the cash & carry and convenience segment or format, compensating -- and also Peru, compensating the weak [schedule] in the Unimarc sales. But our expectation that the -- in the end of -- the third quarter and Q4 improve the performance in Unimarc as well.

In terms of the leverage or net debt over EBITDA, increased a little bit, as you comment, essentially because we include some -- 2 or 3 new contracts related with our new series of (inaudible) and also import distribution center and the -- increasing a little bit the index. But -- and also, in the end of -- in the second half of the year, the cash of the company is better. In January -- in December, it is better because we have a concentration of sales in the last quarter. And it should be a little bit better, but not too much. We're expecting to close the year in the level of 3.8x or something like this.

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

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Great. And maybe a third question. You mentioned in the last call that you were working on the new online platform. Do you have an update on that on when would that be launched, the unimarc.cl?

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

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Yes. The idea is to have a -- 2 stores in the first week of November and with idea to (inaudible) the numbers and to do the rollout in 2020. Considering more stores, we're including delivery from distribution centers and also from stores in this pilot, in this 2 pilot in November 2019.

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Operator [6]

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(Operator Instructions) This concludes the question-and-answer session. I'd like to turn the conference back over to Ms. McKenzie for any closing remarks.

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

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Thank you very much, everybody, for joining us. Have a great day, and we hope you'll join us next quarter. Bye-bye.

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Operator [8]

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