El Puerto de Liverpool, S.A.B. de C.V. (LIVEPOLC1) Earnings Call Transcript & Summary

Good morning. My name is Daniela, and I will be your conference operator. [Operator Instructions] This is Liverpool's Second Quarter 2021 Conference Call. [Operator Instructions] With us are Mr. Enrique Guijosa, CFO, El Puerto de Liverpool; Mr. Santiago de Abiega, General Manager, Financial Services; Mr. Jose Antonio Diego, Treasury and IR Director; and Mr. Enrique Grinan, Investor Relations Officer. Our speakers will present the results for the second quarter 2021. As a reminder, all forward-looking statements on this call are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions discussed today. This may be due to a variety of factors, including the risks outlined in El Puerto de Liverpool's most recent annual report. At this time, I will now turn the conference over to Mr. Enrique Guijosa. Please go ahead.

Thank you, Daniela. Good morning to everyone. Thanks for joining us, and welcome to Liverpool's Q2 2021 conference call. First of all, and as has been the case in the past several quarters, I sincerely hope that you and your loved ones are healthy and doing well. For this conference, we have with us Santiago de Abiega. As you know, Santiago is the General Manager for Financial Services business unit, and he will share with you the highlights of this business right after I present my perspective on the overall company results. Afterwards, we will open the session for Q&A. Importantly, throughout the second quarter of this year, all our stores and shopping centers were open and operating with very few nonmaterial constraints. Our retail revenues during the second quarter increased 8.3% compared to the same quarter in 2019, that is prepandemic. Liverpool's performance stands out as same-store sales grew 8.6%. Although traffic for Liverpool was still 15% below prepandemic levels, our average ticket was up almost 30%. The latter reflects both product mix and a higher conversion. Our EBITDA for the quarter was MXN 6.1 billion, almost 6% above the same quarter 2019. EBITDA margin was 16.2%, a 13 basis point increase. Although retail gross margin was 190 basis points below 2019, this was more than offset by the strict control that we have implemented since the pandemic in our operating expenses and the outstanding performance of our due accounts. In the second quarter, the company reported an operating cash flow of MXN 8.6 billion and free cash flow of MXN 7.6 billion, reflecting the positive operating performance, strict inventory control and the normalization of accounts payable to suppliers. If we were to highlight the cash balance as of June 30, was 25 -- MXN 24.9 billion. Quarterly results for our digital channel were in line with expectations, but with 25% reduction year-on-year given the challenging comparison base that we faced since a year ago, all our stores were closed, as you know. Our digital participation in the second quarter was 24% and this is 2.4x higher than in the same quarter of 2019. On a cumulative basis, the digital channel is 9% above a year ago, regardless of very high comparison base. Sales in our marketplace during the first 6 months of this year grew by more than 80%, SKUs doubled and our sellers grew by 60%. For perspective, marketplace sales in the first 6 months of this year were 24x higher than in the first semester of 2019. Results of Liverpool Pocket were encouraging in terms of participation and growth during the year. Our new customer base has increased by more than 80%. In Logistics, we continue to carry out a series of strategic initiatives focused on improving our processes and operations. These has allowed us to achieve a 31% reduction in last-mile costs and delivered 96% of our orders on time. During the second quarter, direct store deliveries represented 11% of our total home deliveries. With the reopening of stores, Click & Collect levels continued to improve. During the second quarter, 23% of deliveries were made through this option. The Arco Norte project continues to advance according to plan. The start of Phase 1, which is for big ticket items, is scheduled for the second quarter of 2022 and cumulative CapEx for this project during the first 6 months of this year was MXN 663 million. This is around 1/3 of our total cumulative CapEx of MXN 2.2 billion. During this year, we will open just 1 Liverpool store. This is in Guadalajara in the La Perla shopping center as unfortunately, the Tijuana project has been postponed until 2022 because of delays of the developer of the shopping center. On this Suburbia front, 8 stores will be opened this year and it's worth to highlight that 5 of them have already been opened as of this time. I will now pass the mic to Santiago to talk about Financial Services business. Please go ahead, Santiago.

Thank you, Enrique. Can you hear me now?

Yes.

Hello, everyone. I hope you are all doing well. It is a pleasure being with you, and I will be presenting some highlights on all of the financial services business. Total balances of the credit portfolio, and this includes the Liverpool and the Suburbia portfolios, both the private label and the Visa cards. They keep recovering, showing a 13% growth versus same quarter of last year. While credit card accounts also showed a positive growth of 2.7% versus the last quarter, reaching 5.75 million accounts. Regarding the quality of the portfolio, we keep seeing a very important improvement on the delinquency rate decreasing from 5.2% of last quarter to 3.1%. The actual rate is even better than the 5.6% that we observed on June 2019 prior to the pandemic period. We have observed an improvement on the credit quality of our existing customers across all of the country. In addition, credit card bookings from 2020 and 2021 vintages are performing better compared to prior years. This improvement of the credit quality is real. And it is not artificially generated by relief programs. Relief programs actually account for less than 7% of the total outstanding balances. And the nonperforming loans for this segment is much better than our expectations. Loan loss provisions for this quarter was MXN 214 million versus MXN 1,126 million we had last year, representing an 81% reduction. And we also continue maintaining a very conservative approach regarding our provisions due to the uncertainty of the external factors such as the recent increase of COVID cases. Our current reserves coverage is higher compared to 2019 and we are maintaining a very strong reserve coverage ratios. Credit revenues grew 10% this quarter compared to last year. But keep in mind that our stores were partially or fully closed during the same quarter of last year. On the year-to-date comparison, we are still 5% below 2020 and 15% below 2019. Lower revenues are basically explained by 3 drivers: number one, an increase of customers paying their total balances and, therefore, not generating interest; number two, lower rates applied to customers with relief programs during the pandemic period; and number three and most important is the credit tightening to risk riskier programs, such as, for example, cash advances. In order to regain the profitability of the portfolio, we are strengthening our value proposition offers as well as revisiting all credit criterias for line management programs. We're also always keeping a very strong focus on maintaining the credit quality of the portfolio. Some of the main projects that we are currently working on, I would mention is, first of all, we are upgrading all of our infrastructure across the credit cycle, including credit origination, portfolio management and collections platforms. In addition, we are implementing a new fraud prevention platform. We are replacing all of our risk models for next-generation score models. We expect by December 2021 to have 18 new score models. We recently incorporated additional channels to our credit origination process. Online credit application was launched during the first semester of the year. And currently, it contributes with 9% of the total new accounts. Coming soon, we will incorporate the instant digital credit card. We continue improving our digital capabilities with, for example, a couple of releases that we just launched is the digital bill payments like cable, phone, electricity, et cetera. And our monedero digital, which is our digital Liverpool money. Well, these are just some examples of the initiatives we are working on today. Now I will turn the word back to Enrique. Thank you very much.

Thank you, everyone. Well, that's all we have in terms of our prepared remarks. We can now move straight to the Q&A. Thank you very much.

[Operator Instructions] Our first question comes from Andrew Ruben.

Andrew Ruben at Morgan Stanley here. The question I'm interested on the e-commerce side, specifically on logistics. I think it was in your release, you noted what was a pretty impressive reduction in your logistics costs on a per order basis. Can you please provide some more color on what drove the reduction? And any other commentary on trends in delivery times and how the e-commerce logistics are progressing?

Yes. Thank you, Andrew. Yes, you're right. I mean, we said that, that we saw a significant reduction, in fact, a 31% reduction in our last mile delivery cost. And this is basically a reflection of all the improvements that we have been making in the past several months or several quarters [ for apart ] in terms of our delivery, logistics in general or supply chain in general has to do with the work processes and systems. Specifically, in terms of the logistics cost, what we saw is an increase of the deliveries that we do directly from the stores. We are now running at a little bit ahead of 10%. That's something that we are pushing very hard in order to -- we already fulfill like 90-plus percent of our orders from the stores, bought only 10% of the total orders. Our delivery is straight from the store, straight to the customer homes. So that's -- we believe that that's scientific and competitive advantage, and we are fine-tuning all our work processes inside the store in order to be able to do that. So that's one of the things that drove this reduction. The other thing is that if you compare to the second quarter of 2020, of course, we have that surge that we saw because stores were closed. So we did a significant portion of all our deliveries through external suppliers. We have reduced significantly the amount of external suppliers that we use as we have seen more normalized volumes. So we have been able to handle more of the total deliveries for internal fleet. And finally, we have also been working very hard in order to improve our rates with our partners. We have seen a lot of excess capacity that was built, as you know, in the previous year. So our suppliers are willing to reduce our rates. So that's something that we have been taking advantage of. We achieved very promising reductions with several of our partners. And also, we have been like putting in place a lot of smaller delivery companies that we do some like an online bidding in order for -- to get the most favorable rates. So both with the big -- the FedEx, the DHL and the Stafeta's partners and with also smaller supplier on a local basis, we have been doing more business with them and negotiating better rates. So that's more or less like taking a picture of why we are seeing this significant reduction in our delivery last mile costs.

Got it. That's all very helpful. And maybe just as a quick follow-up. The Click & Collect, you mentioned the 23%, but still below prepandemic levels. Are you seeing a change in the way consumers shop now that stores have reopened? Do you think it will ever reach prepandemic levels? Or how does Click & Collect feature into your plans in terms of what you think for the mix?

Yes. That also has been a help in terms of something I didn't mention in terms of reduced cost in terms of the total gross margin. The fact that Click & Collect has been improving month by month, I frankly don't think that we will go back to the 40-plus share that we had in Click & Collect before the pandemic. I think a lot of customers that were not comfortable asking for home delivery before trying it out. They have tried it and they are happy with the timeliness of the delivery. So I think that we will hopefully go back to low 30s, that's our expectation. But I think it's going to be a little by little, I think that where today, close to 23%, 24%, has been improving like 1, 2 percentage points month-on-month. But again, I think it's going to be very, very hard to get back to the prepandemic 40-plus share that we saw.

Our next question comes from Álvaro García.

Álvaro García from BTG Pactual. Two questions for Santiago. You mentioned that the 2020 and 2021 vintages were performing better on the quite front. I was wondering if you could expand on that a bit what that means exactly? And then on the digital payments and the monedero digital, any sort of initial learnings on how consumers are engaging with the monedero digital? And any initial learnings there would be great.

Okay. Thank you for your question, Álvaro. I'm going to start with your second question. Actually, it is very early today. I think we're in a very, very early stage. A lot of the digital bill payments that we have, I think, it's something like we've only had like 5,000 payments, and this is because we are just finishing tuning up and the customers are really -- we haven't even done a big campaign, which we are just about to launch. So I think it's going to be interesting once we launch the marketing campaign for the customers to know that they have these services, then I think I will be able to tell you more about the engagement of the customers with this service. But what we're seeing is that by just putting it on the app, as the customers have started using and I think in a couple of months, we had, I know it's a very low figure, but we have more than 5,000 payments that we've had. On the monedero digital also, that's been we haven't -- also we haven't launched a very, very big campaign to let the customers know. But what we've seen is that customers here, they are really liking it. We've had some transactions on it. And what -- this is what we're going to be able to learn from the customers is that we're going to be able to track down is the 100% of our customers because, as you know, the -- most of our promotions are done with the monedero digital, and you can transfer to that monedero, you can transfer either the monedero that you have for your loyalty program, that you have on the Visa cards or also all of the -- whatever you had on your physical monederos, so you're going to be able to transact online and you're going to be able to transact with your digital monedero, just with your phone in the stores. So we do have very big expectations on these 2 things in order to have a much better engagement of our customers. And your first question. Going to your first question, Álvaro, regarding these new vintages. This means that all of the new accounts that we generated in 2020 during the pandemic period and all of the new accounts that we have generated on this first semester, the behavior that we are seeing on the early stages of these customers are even better than the ones that we had on the prepandemic period. And this is because all of the adjustments that we did to our -- as the risk models. Obviously, we tighten them up a little bit, and we did some adjustments to risk models. And this has allowed us to have better vintages, what we call vintages is that we measure whatever was generated in a certain period of time and see how that behaves. And on the early stages of the -- early delinquency stages, what we are seeing is that the entry rates are much lower even than the ones that we had on the prepandemic. I don't know if that answers your question, Álvaro.

Yes. That was clear. And just to clarify that, so it's fair to say that the monedero digital stays still in -- the digital payments is still sort of a friends and family say, pre-launch sort of stage?

No. But I would say that pretty soon in the next week, you will see a big launch.

Our next question comes from Joaquín Ley from Itau.

Can you hear me.

Yes, Joaquín. Go ahead.

Congratulations on the results. Two questions. First, on the balance sheet, I mean, the free cash flow generation in the quarter was impressive, right? So the way you are performing, it's likely that you're going to end this year below 1x net debt-to-EBITDA, financial debt-to-EBITDA. So how should we think about balance sheet management and dividends and so on going forward? Or should we think that part of the cash that you have now is going to be consumed as you resume the growth of your loan book? If you could please elaborate on that?

Yes. Thank you, Joaquín. Yes. So well, thanks for the congratulations. Yes, our cash flow generation has been very strong, in particular, in this second quarter, we saw a big help in terms of accounts payable for suppliers, which, of course, compares very favorably to the -- very easy comparison base that we had in 2020 when we were like stopping all merchandise receipts in our warehouses in other stores in order to face the pandemic, now is the other way around. We have a very strict inventory controls -- very -- performing very well, and that has been helping us to rebuild our accounts payable. So you see accounts payable compared to inventories were around 90-plus percent which is even better than we had prepandemic. In terms of balance sheet management, you're right, we will probably end the year at the levels that we described below the 1.0x net debt-to-EBITDA. We -- in terms of dividends, we -- the last shareholders' meeting approved dividends, both the timing of the dividends has still to be confirmed by the Board of Directors. So I expect that most likely we will pay half of those dividends still this year, sometime in Q4, and then the other half in early 2022, once we get more data in terms of how this Q3 is performing. As you know, we are in the middle of a third wave, whether this is the right name of the pandemics. We're not sure what's going to happen in terms of particularly customers visiting our stores I don't think that it's going to -- it's highly unlikely there's going to be a shutdown ordered by the government, but I'm sure that a lot of customers that are going to be very hesitant to probably visit our physical stores. So we will have to see and that's why we want to be very cautious in terms of that front. So that's basically what I can say that if we have these high levels of cash flow, there is a lot of flexibility. And as usual, we have shared with you also that we have like very strong plans CapEx-wise for the next couple of years where CapEx probably is going to be in the MXN 10 billion to MXN 12 billion. So what we have seen is that we will be able to do that very strong investment in the next 2 years without having to go to raise additional debt.

All right. And just a follow-up also on the balance sheet, if I may. You mentioned that your same-store sales are roughly 9% better than second Q '19, right? And at the same time, your inventory is 2% lower than second Q '19. So I'm curious to learn if you have changed the way that you negotiate with suppliers regarding terms of delivery, for the different seasons and so on and so forth, particularly in apparel?

No, not really. I mean, we have respect for the terms that we have with suppliers even in the pandemic, we pay with the terms that were agreed. What has happened is in terms of inventories that we have, particularly in the case of Liverpool, as you're pointing out, same process. We're close to 9% ahead of 2019. And frankly, what we have in our financial plans, as I shared with you in the previous calls, we were expecting a minus 6% in same-store sales compared to those in the '19. So frankly, we were surprised by the -- what we saw in terms of the top line growth, and that has put inventory levels below what we expected. So we are now like doing everything we can to secure supply for a second semester. We are now, I think, that are running the risk of being short in terms of supplier. As you also know, there has been some disruptions in the supply chains for things like consumer electronics. So we have been working very hard on buying organization in order to secure supply for the second semester and particularly for Q4, which is the critical quarter for retail. So if anything, again, I think that we are now facing some issues in terms of low inventories in certain categories. So that's where we're trying to fix as soon as possible.

Our next question comes from Rodrigo Alcantara.

This is Rodrigo Alcantara from UBS. Can you hear me?

Yes, Rodrigo. Please go ahead.

Just a quick one here on the delivery times, if I may. So you mentioned that around on the delivery time, if you can give us some figures about where do you stand in terms of delivery at least in the main cities, Mexico City, Monterrey, Guadalajara, how [ stand on ] two-day deliveries, same day delivery what's the target that you have there? And the second one would be just a follow-up here on the CapEx. So you mentioned this MXN 10 billion, MXN 12 billion for the next year, right? So we know the investments that you have on Arco Norte, but just was wondering if perhaps for next year, we would expect a new distribution center or some of these projects that you mentioned on the Investor Day, that would by my 2 questions.

Yes. Thank you, Rodrigo. Well, in terms of delivery times, I'd pick out that. Our average delivery times on a national basis are around 5.5 days. That's the average on a national basis again. So if you see the major areas of the country, that's Mexico City, Guadalajara, Monterrey, Querétaro and Puebla, those are the most important metro areas for us. I would say that we are delivering between 2 to 3 days. I think that the same day delivery, we can do that on the Click & Collect, where we have the merchandise in the store. And we are advertising that you can pick up your merchandise in 4 hours. And in fact, we have the merchandise already before that. But when we have to deliver to your home, I think it usually takes us 2, 3 days in the metro areas. In the balance of the country, it's higher, and that's why the average is 5.5 days. We're working very hard in order to make sure that we can delivery, and that's the plan that we have for the next several years that we can deliver 90% of our home deliveries in less than 2 days. That's our medium-term target, but we're not going to be achieving that this year for sure, it's going to still take some like major changes in our supply chain, particularly the fulfillment centers that we also announced in our Investor Day, and those are not going to be ready on the -- until next year, a couple of them. So that's what's going to be critical in order to be able to deliver on this time frames. In terms of the CapEx that MXN 10 billion to MXN 12 billion I was mentioning, we had -- basically, we are not changing as was share with you in the previous calls or in the Investor Day. A significant chunk of that is going to be earmarked to logistics and technology. So we're expecting that probably 35% to 40% of those levels of CapEx are going to be targeted to these 2 spending categories. That's still going to be the case. And we also -- in terms of like new store openings, we have announced also that in the case of Liverpool, we're just planning to open 2 Liverpool stores per year. That's going to be -- for next year in the case of Liverpool because of the fact that Tijuana has been delayed, we most likely will open 3 Liverpool stores in 2022. And in the case of Suburbia, we're going to go back to not to the 30-plus per year we have announced prepandemic, but probably between 15 to 20 stores per year as of starting next year and for the next 3 to 4 years. So again, in terms of changes to our CapEx plans, there are not any major divisions. We're also planning to invest that we have announced in the case of Liverpool and also in the case of Suburbia, although much smaller amounts, also in terms of remodeling, making sure that our flagships stay current. So that's another important spending item for our CapEx.

Yes, that's very clear. Just to confirm here, on these 7 new distribution centers over the next few years that you spoke about at the Investor Day, should we expect any of this in 2022? Any of these 7 new DCs that you announced at Investor Day?

Yes. You can expect 2 of them in the next year. 1 in Guadalajara, 1 here in Mexico City. But those are not going to be new ones. I mean when to use the same like already the distribution center that we have in those metro areas. And we're just going to put some like new work processes. We do not start like storing merchandise, instead just doing -- using the [indiscernible]. So it's more a change of work processes and doing some kind of automatization. So we're not talking about new facilities or just, again, making a better use of what ones we already have.

Our next question comes from Antonio Hernández.