SMU S.A. (SMU) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to SMU's Third Quarter 2026 Results Conference Call on November 11, 2026. [Operator Instructions] So without further ado, I would now like to pass the line to Ms. Carolyn McKenzie, Head of Investor Relations at SMU. Please go ahead, ma'am.

Thank you. Thanks, everyone, for joining us today. I am here with our CFO, Arturo Silva. As usual, we are going to start today's presentation with a few slides describing some of our business highlights, and then we will go to the financial results for the first 9 months and third quarter of 2026. And after that, Arturo will be happy to take any questions. You can send questions by chat or you can raise your hand and we can unmute you. An audio recording of this call will be available on our website later today. Sorry, Danielle, I'm just not able to -- I'm not sure if the slide is moving. Are you guys seeing Slide #2?

Yes, we are on Slide #2.

Okay. Great. Excellent, all right. Okay. So then here on Slide #2, we have our disclaimer. Remember that we might be making forward-looking statements today. So as always, please remember to take a look at this caution regarding forward-looking statements on Slide #2. And then on Slide #3, we have our strategic plan for 2026 to 2028, which is structured around 3 pillars: growth with value for the customer, technology assets and efficiency and productivity. Our sustainable culture serves as a supportive base to implement our strategy. Over the next few slides, we will go over our progress so far. On Slide 4, we have 2 of our key initiatives in the growth with value for the customer pillar of our plan: store openings and store upgrades. The 2026 to 2028 plan includes a total of 60 new stores in 3 years. And in 2026 to date, we've opened 3 Unimarc stores, 2 Super10 stores and 2 Maxiahorro. Between November and December, we have a further 3 Unimarc openings as well as our first Alvi in the city of Calama. The 4 openings we had planned for Peru will likely be pushed back to early 2027 due to delays in permitting. The stores we've opened in recent years continue to perform strongly compared to our expectations when we evaluated the locations, and this performance is what motivated our store upgrades initiative. The new stores have our full prototype implemented. That is the best possible version of our different value propositions, and customers respond very well to that prototype. This is where we saw an opportunity to upgrade stores that do not have the full value proposition implemented and where we see potential to grow sales by improving the shopping experience through a better layout and a more complete assortment. Our 3-year plan includes 80 store upgrades, 36 of which will be completed this year, including 18 Unimarc stores and 18 Alvi stores. Unimarc has already re-inaugurated three upgraded stores, one of which is pictured on the slide. And in the coming weeks, we will be rolling out the remaining 15 as well as all 18 Alvi upgrades. In the case of Alvi, we will be upgrading all 15 of the stores that we converted from Mayorista 10 last year, and a major component of those upgrades will be adding more coolers to the stores. The Alvi prototype sells a significant amount of frozen and refrigerated products, especially to the hotels, restaurants and catering segments. And following the remodel, these stores will be able to offer a much more complete assortment to those customers. We expect the new stores and the upgrades to contribute to sales growth this quarter and especially next year. On Slide 5, we have an update on the performance of our low-cost formats, Alvi and Super10, which has been consistently improving in recent quarters. Last year, we converted 100% of our Mayorista 10 stores into either Alvi or Super10, and this mostly took place during the third and fourth quarters. Remodeling stores generally produces a temporary negative impact on sales as customers are affected by work in the store, changes in the layout and changes in assortment, and that is what happened with the stores that we converted, as you can see on the graph on the slide. Sales for Alvi and Super10 were down 11.5% in the third quarter of last year and 8.3% in the fourth quarter. However, we've been improving quarter-over-quarter. Sales were only down 0.6% in the first quarter. In the second quarter, we had slightly positive revenue growth. And in the third quarter, the segment was up 4.7% and had the largest contribution to revenue growth out of all of our business lines. Given the success of the store conversions, we have identified further opportunities to optimize our multi-format portfolio in order to maximize sales potential at every location, which is why in the fourth quarter, we will be converting a further 3 stores to Alvi. One was actually already completed last week and two more will take place in the coming weeks. One of those is located in Iquique in the far north of Chile, so we will also continue to expand Alvi's geographic coverage. On Slide 6, our growth with value for the customer pillar also includes an expansion of our omnichannel coverage, reaching our customers not only through our physical stores, but also through our online sales channels. By adding over 200 new locations to our coverage this year, we've contributed to double-digit sales growth, driven by our unimarc.cl and alvi.cl platforms, where transactions were up 18% in the third quarter and sales overall increased 17%. We operate in a highly competitive industry, and this is one of the main reasons why the pillar is called growth with value for the customer. In order to grow, we need to offer a compelling and competitive value proposition. This is a broad concept, but on Slide 7, we describe some of our most recent initiatives. The images on the slide are from our recent relaunch of the Unimarc brand. This started in August, and the focus of this campaign is to highlight key attributes that Unimarc offers to its customers such as proximity, quality and freshness, value for money and a quick and easy shopping experience. In September and October, we saw an uptick in sales growth in key categories such as fresh bread, fruits and vegetables and prepared meals compared to the trend that we had seen between January and August. This campaign also puts a lot of emphasis on our geographic coverage, which additionally helps to reinforce our efforts in omnichannel growth. Competitive pricing is another essential part of offering value to our customers, which is why our promotional strategy is a key driver for our results. We are constantly reviewing all of the dimensions of our promotions, the product selection, the discounts, the duration, the mechanism, et cetera, and we have identified some opportunities to make some adjustments so that the focus of the promotions is on achieving incremental sales while providing value to customers. In addition, we recently added new talent to our commercial team, including a new Chief Commercial Officer. They bring a fresh perspective as well as significant industry experience, so we look forward to seeing the impact of their contributions here. Another initiative within the plan is to grow private label penetration as these products contribute to our competitiveness and our profitability, and they also help us to offer a differentiated and attractive assortment to our customers. On Slide 8, we have some highlights from the program. In the third quarter, we had private label penetration of 13.3% of sales, which was a little below the second quarter as September's sales mix is heavy on meat and drinks due to the Chilean national holidays, but we continue to see penetration grow year-over-year. In line with the goals of differentiation and profitability, we've had particularly strong growth in the national brand equivalent segment, which are higher-margin products. The combination of higher sales and higher margin means that we are seeing double-digit growth in the gross profit of the private label business. And we continue to expand our assortment. This year, we have launched over 150 new products. On the slide, we have a few examples. Cheese we're importing from Spain, ice cream and frozen fruits. And finally, within this pillar, we recently announced the acquisition of the assets of Ahorra Food Depot, a hard discount chain with six stores in the Santiago Metro region. We filed for regulatory approval of this transaction in September. We received authorization in October, and we began operating the stores last week. We've been studying the hard discount format for years and evaluating its potential for adaptation to the Chilean market, and now we've decided to test it. Taking over six stores that are already operating will allow us to pilot the concept and see how this format performs in Chile. Of course, we'll be able to leverage our experience as a multi-format operator with a robust logistics platform as well as an established portfolio of private label products, which is a key element of the hard discount model. We're currently in the process of implementing our value proposition, including our product assortment. On the slide, you can see a picture of one of the stores. On Slide 10, we have the second pillar of our plan, Technology Assets, which includes initiatives such as the incorporation of new technologies, digital integration and security and resilience, all of which contribute to becoming more agile, flexible and efficient. Regarding our move to the cloud, we have successfully established secure connectivity across our systems and already migrated a part of our servers. Transitioning to the cloud brings us greater flexibility and modernizes our technological foundation. And with respect to new technologies, we are working to make the most of our new AI platform, Gemini Enterprise, by rolling out training programs to increase productivity at the individual level, and we are also analyzing potential optimizations at the macro process level. On Slide 11, the third pillar of our plan is efficiency and productivity with initiatives throughout our operations, including supply chain, stores and back office as well as energy efficiency. As we have seen consistently over the past few years, the implementation of different technologies has contributed to productivity gains, allowing us to optimize our organizational structure, carrying out 2 restructuring plans in 2025, one in the first quarter and one in the fourth quarter as well as 3 additional plans this year, one in January, one in June and one in July, generating savings on personnel expenses. A clear indicator of the impact of these plans is sales per full-time equivalent, which increased 10% in the third quarter. Regarding efficiency in the supply chain, we're leveraging our distribution network using our largest regional distribution centers to serve all formats in Chile. Previously, Alvi was supplied only out of Santiago, but now we have made adjustments that allow us to take advantage of our other DCs to help supply Alvi's growing footprint of stores. For example, the new store in Calama and the new conversion in Iquique will largely be supplied out of our Antofagasta. This year, we have faced extraordinary increases in fuel prices, so maximizing efficiency in distribution costs has become even more important. We've completed implementation of our transportation management system, which helps us to minimize distances and use the most efficient mode of transportation. We've also been receiving more products from suppliers at our regional DCs instead of receiving products from Santiago and then having to ship them across the country, which helps reduce transportation costs. And an increase in the use of electric trucks also reduces our exposure to higher fuel costs. In October, 10% of deliveries from DCs to stores were made using electric trucks. In addition, we've been working to optimize energy costs, migrating qualifying stores to lower unregulated electricity rates and also using new technology to automate and control the main sources of energy consumption, refrigeration, lighting and air conditioning. Finally, with respect to our sustainable culture, which is the foundation of our plan, we recently received our score on the 2026 S&P Corporate Sustainability Assessment, which measures industry-specific sustainability performance. We were very happy with the results as our total score increased from 69 points to 75 points out of a maximum of 100, placing us in the top 3% of companies within our industry and #1 in Chile. The CSA is a very useful benchmarking tool with which to evaluate our sustainable development strategy and to understand our performance relative to our peers around the world. Our score improved in all 3 dimensions. In the environmental dimension, we are now in the top 6% of companies globally. In the social dimension, we are in the top 3%. And in the economic and governance dimension, we are in the top 2%. We can move on to the numbers now. On Slide 13, we have revenue, which grew 2.4% in the first 9 months and 3.1% in the third quarter. We once again had revenue growth across all formats this quarter with the largest contribution coming from Alvi and Super10, as I mentioned earlier in the presentation. The next slide has more detail on sales. The strong growth in the low-cost format led to a decrease in gross margin of around 30 basis points in the first 9 months and around 70 basis points in the third quarter. The low-cost formats have a lower gross margin, which is offset by a leaner cost structure and greater sales volumes. The higher share of low-cost formats in the sales mix affected the overall gross margin. There is an additional effect from the conversion of Mayorista 10 stores to Alvi. As a wholesale club, Alvi's business model considers a lower gross margin. So the 15 stores that were operating under the Mayorista 10 banner in 2025 are today operating under the Alvi banner with a recovery in sales but a lower gross margin. This change will no longer be an issue starting in November because the stores were converted in November of last year, so the comparison base for margin will be the same. In addition, since sales volumes at the converted stores have continued to increase, their contribution at the gross profit and EBITDA level should also continue to grow. At the bottom of the slide, we have gross profit, which increased 1.5% in the 9 months and 0.8% in the third quarter, even despite the lower gross margin due to the top line growth. On Slide 14, we can see how revenue performance by format has evolved over the past 4 quarters. At the top left of the slide, we have the same third quarter revenue and gross margin graph that we saw on the previous slide. Revenue was up 3.1%, and we had growth in all of our business segments for the second quarter in a row. Unimarc, 1.8%; Peru, 19%; and Alvi plus Super10 were up 4.7%, which, as we saw before, followed a decrease of 8.3% in the fourth quarter of last year and 0.6% in the first quarter of this year, which then turned slightly positive in the second quarter. The improvement in this segment isn't only attributable to the converted stores. We also have an important contribution from new store openings. Both groups of stores, the openings and the conversions are maturing in terms of sales, but not all of the converted stores have reached positive growth, which you can see in the same-store sales figures, which are not quite positive yet, but they have also shown a sequential improvement. We had minus 9.1% in the fourth quarter, minus 5.8% in the first quarter, minus 4.7% in the second quarter and minus 1.5% in the third quarter. And on the right-hand side of the graph, we have this evolution, but in terms of what these formats are contributing in actual money rather than percentages. Each graph shows how revenue changed year-over-year, starting with the fourth quarter, in the first quarter, the second quarter and finally, the third quarter. So in all 4 periods, Unimarc and Peru have been contributing positively to revenue growth. In the Alvi plus Super10 segment, revenue was CLP 18 billion lower in the fourth quarter. We made significant progress in the first quarter with only CLP 1 billion decrease. In the second quarter, we were up by CLP 1 billion. And in the third quarter, these formats became the leading contributors to revenue growth. On Slide 15, we have operating expenses, which once again increased less than inflation, even with significant pressure from fuel costs as well as higher labor costs. In the first 9 months of the year, operating expenses increased 1.3%, but fell 27 basis points as a percentage of revenue. And in the third quarter, expenses increased 1.5%, but fell 37 basis points as a percentage of revenue. Inflation for the last 12 months was 4.1%. In addition, this very low growth in expenses is taking place when we are operating more stores than last year. On Slide 16, we have a breakdown of operating expenses where you can see that the most significant impact is coming from distribution costs, which increased 15.7% in the first 9 months of the year. Total operating expenses increased 1.3% in the period, and this one item explains 1% of that. All the rest of the operating expenses combined account for the other 0.3%, where the main increase comes from service expenses. That includes cleaning and security services that are affected by inflation and the higher minimum wage. However, we were able to achieve savings in personnel expenses despite the higher labor costs, thanks to our optimization plans, and we also cut insurance and credit card processing costs, thanks to new procurement and negotiation processes. If we were to exclude distribution expenses and the impact of net store openings, operating expenses would have fallen by 1.6% in the period. In the third quarter, we have a very similar situation. Expenses grew only 1.5%, but that is basically caused by distribution expenses, which were up 22.5%. Savings in personnel, insurance and card processing costs offset the higher service expenses. And excluding distribution expenses and net store openings, we would have had the same nominal decrease of 1.6% in the quarter. On Slide #17, we have EBITDA. Starting with the graph on the top left, we have EBITDA for the first 9 months, which grew 1.8% with an EBITDA margin that remained flat at 7.5%. At the bottom left, we have EBITDA for the third quarter, which was down 1.8% -- sorry, in the 9 months, it grew 2%, not 1.8%. In the quarter, it was down 1.8% and with EBITDA margin decreasing 35 basis points in the quarter. Why do we have EBITDA growing in the first 9 months but falling in the quarter? The graphs in the middle show the breakdown. So in both periods, gross profit is higher, but in the first 9 months, it's 1.5% higher, whereas in the second quarter (sic) [ third quarter ] it's only 0.8% higher. And that is a result of the lower gross margin, as I described before. Revenue grew more in the quarter than it did in the year to September. Operating expenses are very much under control. What we need to grow EBITDA in coming quarters is more top line growth and ideally a stronger contribution from Unimarc. The graphs on the right show the EBITDA margin breakdown, where in the first 9 months of the year, the operating leverage helped to offset the lower gross margin. But in the third quarter, even though expenses as a percentage of revenue was down almost 40 basis points, it wasn't enough to make up for the lower gross margin. On Slide 18, we have nonoperating income, where we've had some significant extraordinary items this year, specifically relating to restructuring costs and asset sales. The asset sales were from stores or land that we owned or purchase options from stores that we leased. As we've explained before, none of this affects our operations or future development because we signed long-term rental contracts in all of these cases, but it was a financial optimization. We had asset sales last year and this year; we had many more asset sales last year, which is why the comparison is negative. The difference in the 9 months to September is CLP 54 billion. And in the third quarter, the difference is CLP 43 billion because the third quarter is when most of the sales took place last year. We've also had restructuring plans in both 2025 and 2026. Restructuring costs were about CLP 8 billion higher in the first 9 months of 2026 than in the same period of 2025. And in the third quarter, we didn't have restructuring costs last year, but this year, we did have about CLP 5 billion from an optimization plan that we implemented in July. These are costs that lead to savings in personnel expenses. Net interest expense is up mainly because of lower financial income as we've had a more normalized cash balance this year. Last year, we had a significant surplus in anticipation of a large bond maturity. So both in the quarter and the 9 months, we have a nonoperating loss that is significantly higher than in the previous year, and most of that is explained by higher restructuring costs and lower gains on asset sales. On Slide 19, we have net income, where we actually have a net loss of CLP 3.9 billion in the 9 months and CLP 5.7 billion in the quarter. As we saw on the previous slide, the main explanation is the extraordinary effects in nonoperating results. In the first 9 months, net income was lower by CLP 55.7 billion with a decrease of CLP 70 billion in nonoperating results. And in the quarter, net income was down by CLP 38 billion and nonoperating results were lower by CLP 49 billion. On the next slide, we have our financial ratios and our bond covenants. Net financial liabilities to EBITDA and net financial debt to adjusted EBITDA are both up mainly because we had increases to financial debt and financial liabilities from a bond placement in May and a lease contract to finance the purchase of a corporate office building in September. In addition, our organic growth plan has a temporary impact on indebtedness indicators as upon opening a store, financial liabilities reflect 100% of the new right-of-use liabilities associated with the rental contract for the store, and the cash balance reflects 100% of the CapEx invested in fitting out the new store. The EBITDA is generated gradually over the first 12 months, and on average, stores take approximately 3 years to reach maturity in sales and EBITDA. Consequently, the contribution to EBITDA is lower in the first years of operation. In addition, the cash balance as of September 30 was negatively affected by a change in working capital. The working capital variation in the first 9 months of the year was about CLP 24 billion. This is a temporary effect. It's mainly explained by higher levels of inventory because we've been implementing a strategy of increasing purchases of merchandise but with better terms in order to strengthen our competitive position. We expect inventory levels to gradually normalize in the coming months. On Slide 21, at the top of the slide, we have a summary of our cash flow for the first 9 months of the year. We started the year off with a cash balance of CLP 84 billion. We generated operating cash of CLP 92 billion, and we've also had net cash inflows from asset sales of about CLP 8 billion and refinancing of about CLP 93 billion between bonds and bank debt. And the uses of cash for the quarter included lease payments, interest payments, CapEx, dividend payments and share buybacks, ending the quarter with CLP 94.8 billion in cash. We still remain well above our minimum cash level of around CLP 50 billion. In the maturity profile below in 2026, we have a small bond maturity and the rest is the bank debt that tends to be revolving. Finally, we'd like to mention a couple of recent events. In September, as I briefly mentioned before, we signed a lease contract to finance the purchase of a corporate office building. The cost of rent at our current location is quite high, and it was going to increase next year. The monthly payments on the lease for the new building are less than what we are currently paying in rent here. The value of the building is approximately UF 760,000 or around CLP 31 billion. We paid UF 160,000 or around CLP 6 billion as a contribution towards the purchase option that we will have at the end of the lease in 30 years, and the remaining UF 600,000 was financed through the lease. This is recognized under right-of-use liabilities with a purchase option in our financial liabilities. Essentially, the purpose of this transaction was to secure a lower rent payment for the next 30 years. And secondly, in October, a new law went into effect in Chile, which, among other things, gradually lowers the corporate tax rate from the current 27% down to 23% in 2029. The change in the tax rate changes the value of the deferred tax asset that we have on our balance sheet. We estimate that the impact will be approximately CLP 69 billion, which will be recognized in our income tax expense for the fourth quarter of this year. This is a noncash, accounting-only effect. We do not have to make any cash disbursements now, and this also does not have an effect on our ability to offset tax expenses in the future because the amount of the tax asset is lower, but so is the tax rate. We have an illustration of this on the next slide. So on Slide 23, we included this slide only for illustrative purposes. It's a simplified version. There's no inflation in this scenario. It's very, very basic. And the idea here is to show where the tax reform will affect the financial statements and to try to explain why this is not a cash effect. So as I mentioned on the previous slide, the change in the tax rate will have a noncash impact of approximately CLP 69 billion in the fourth quarter, and that will be charged to income tax expense in the P&L, which will, in turn, affect retained earnings. If the tax reform were the only thing happening in the fourth quarter, we would see retained earnings decrease by exactly that CLP 69 billion from CLP 136 billion as of September 30 to CLP 67 billion at the end of the fourth quarter. And on the left-hand side of the balance sheet, we will see deferred tax assets decrease also by CLP 69 billion. Now where does the value of the deferred tax assets come from? We have tax losses from previous years. For accounting purposes, those losses are valued at the tax rate. So for example, if in the past, I lost CLP 100 billion, if the tax rate is 27%, the value of my asset is CLP 27 billion because that is the amount of tax expense that I won't have to pay in the future. If the tax rate is 23%, the value of my asset is CLP 23 billion. The tax loss base is CLP 100 billion regardless of the tax rate. In our case, the tax loss base is approximately CLP 1.8 trillion, which when you multiply it by 27%, gives you the current tax loss asset of CLP 478 billion. On the bottom right-hand side of the slide, we have an example of what happens under different tax rates, starting with the same tax loss base of CLP 1.8 trillion. So if the tax rate is 27%, our deferred tax asset is valued at CLP 478 billion, which is the actual situation as of September 30. Let's say we have a pretax income of CLP 100 billion next year. That means we use up CLP 100 billion of the tax loss base, which goes from CLP 1,770 billion to CLP 1,600 -- it should be CLP 1,670 billion sorry. This also means that our income tax expense would be 27% of that CLP 100 billion or CLP 27 billion. Therefore, our tax asset will decrease by CLP 27 billion from CLP 478 billion to CLP 451 billion. Now if the tax rate is 23%, and we have the same pretax income of CLP 100 billion, we once again will use up CLP 100 billion of the tax loss base. Those numbers are the same regardless of the tax rate. But at a lower tax rate, our deferred tax asset is no longer worth CLP 478 billion, but rather CLP 409 billion. However, our tax expense is also lower, CLP 23 billion instead of CLP 27 billion. So we will use up less of the deferred tax asset each year. In the end, the tax losses get used up over the exact same number of years at any tax rate. We hope this explanation helps. That's all for the presentation. Thanks very much for listening. If there are any questions, Arturo will be happy to take them now.

[Operator Instructions] Our first question comes from Alonso Aramburú from BTG Pactual.

You mentioned the adjustment to the promotion strategy. If you can give us some color as to what adjustments are you making, that would be very helpful. And also, if you can provide us some just information about some of the trends in the fourth quarter to see if there's a continued improvement in the sales trends.

Question about the adjustment in our promotional activities. Essentially, we are implementing in the short-term promotions, the selection of the products with more incremental sales is the main adjustment that we are doing in the short promotions. And also, we have more extensive promotions that we have included. The idea is to include also the product with more incremental sales because we had in the previous month, a high percentage of promotional sales, but not necessarily with the good performance in all of cases, the incremental sales. This is the main adjustment we will implement now. In terms of the second question about the color of the Q4, we are growing slightly better than previous quarter, higher than 3% of growth, and we expect this trend to continue throughout the end of the year. And in terms of the margins, the idea is to have more impact of Unimarc sales in the next month or more weight in the total sales, improving our average margin. Independent of that, until now, the gross margin should be lower than previous year, 20 basis points lower, different than Q3. Respect to expenses, expenses, we expect to maintain the low growth of expenses lower than inflation in Q4 as well. And consequently, we are expecting the better EBITDA and EBITDA margin in Q4 in comparison with the previous quarter. In Q4, reaching the EBITDA margin in the range of 8% or 8.5%.

For the quarter -- that's the EBITDA margin for the quarter.