Falabella S.A. (FALABELLA.SN) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Falabella earnings call. My name is Gigi, and I'll be your coordinator for today. [Operator Instructions] In the first part, Mr. Juan-Luis Carrasco, Head of Investor Relations, will present a summary of the consolidated results for the first quarter of 2022. Following this, Mr. Gaston Bottazzini, Chief Executive Officer; and Juan Manuel Matheu, Chief Executive Officer of Falabella Financiero, will share some highlights on the performance of the company. Afterwards, we will open the line for questions. [Operator Instructions] Now we'll start with the conference with Mr. Juan Luis Carrasco.

Good afternoon, everyone, and welcome to Falabella's First Quarter 2022 Earnings Call. Joining me today in the call are Gaston Bottazzini, our Chief Executive Officer; Juan Manuel Matheu, our Chief Executive Officer for Falabella Financiero; and Alejandro Gonzalez, our Chief Financial Officer. I would like to remind you that numbers presented during the call will be stated in U.S. dollars and rounded to millions. Therefore, certain differences may arise with the published financial statements. I will start the call by going over the key financial highlights of the period. Let's turn to Slide 3. During the first quarter of 2022, the company consolidated revenue reached USD 3,719 million, an 18% increase year-over-year. This was mainly explained by a 15% increase in nonbanking revenue with strong growth across all of our retailers, and we can highlight a 16% sales increase in home improvement and a 14% increase in department stores, both in Chile, which were facing a tough comparable base. Shopping center revenue at Mallplaza grew by 53% year-over-year, and it was explained by having a 100% of the GLA fully operational during the period, coupled with a normalization in rent collections in the period as well. Banking revenue grew 48%, mainly driven by the 35% growth in the regional loan book. During the first quarter, our omnichannel platform reported total sales growth of 16% in the region with e-commerce growing 8% and physical stores 18%. Our e-commerce platform achieved USD 3.8 billion in GMV during the period. Gross profit reached USD 1,229 million in the first quarter, representing an increase of 8.2% year-over-year. This was mainly explained by higher contributions from shopping centers and department stores, the latter driven by margin containment and better sales performance compared to last year, and home improvement contributed to a lesser extent, mainly explained by lower margins due to a tough comp base that we had last year as sales mix filled more towards soft categories and we have almost no markdowns. The higher contribution from the banking business was explained by good performance of the Colombian operations, where revenue grew 56% and its portfolio grew 46% in local currency. This was partially offset by the performance of the bank in Chile, which reported an abnormal margin expansion in the first quarter of 2021, explained by a release in provisions with a loan book that was decreasing in size, but it was improving its risk quality. Turning to Slide 4. Consolidated EBITDA reached USD 371 million for the quarter, down 17% compared to USD 447 million in the same period last year, and this decrease was mainly explained by the 22% increase in SG&A expenses that were impacted by one-timers, such as cost overruns in maritime transportation and increases in lease expenses as store operations returned to normal compared to last year and also OpEx related to the development of our technological platforms showed an increase in line with our guidance. Net income reached USD 92 million for the first quarter of 2022, impacted by nonoperational impacts related to losses on our hedging policy for imports and from a contribution standpoint, home improvement in Chile -- Banco Falabella, Chile and supermarkets decreased their contribution as well. I will now turn the call over to Gaston, who will share some remarks.

Good morning, everyone, and thank you for joining us today. So complementing Juan Luis' description of our results, I would like to start by highlighting how the full reopening of our network of stores is really enhancing the quality of our interactions with customers and how our customers are really becoming omnichannel in the full sense of that work, in the sense that we are seeing more and more customers both going to stores and buying online in our digital channels. Therefore, these restrictions lifted overall, our overall number of customers reached or served throughout the region has also expanded substantially. We have reached a level of 37 million customers over the last 12 months, which represents a growth of 25% over the previous years. But this has not only driven our growth, total growth, it's not only driven by customers returning to the stores, but also by the fact that we have retained a lot more customers in all of our channels that we have done in previous years in the comparison between the fourth quarter and the first quarter of the year. And this has been one of the drivers of our increase in total sales of 16%. As a result of that, when we look at our overall sales in comparison to our pre-pandemic numbers, we see quarter-to-quarter growth compared to 2019 of 47%, which disaggregates in a growth of 2.8x in our digital channels and a growth of about 30% in our physical store sales. And our physical store sales with a much higher conversion rates than we were seeing in the pre-pandemic environment. Our e-commerce also is consolidating its scale with a total GMV of USD 3.8 billion and the proportion that e-commerce represents of our total sales is representing today more than 10% what it represented pre-pandemic. In parallel with all of this, in our retail ecosystem, we are also seeing very good traction in our financial ecosystem, both in the growth of our customer base with a much lower acquisition cost, but also -- and this is different from what we have seen in previous quarters with substantial growth in our loan book across all the markets in which we operate, also as a result of the expansion of our digital capabilities and our improved abilities to originate loans digitally. Juan Manuel is joining us today, and he will expand on this point when -- just after I finish. We see also a pending assignment in terms of the development of the marketplace. The marketplace still represents -- I'm sorry, the sales of the market are still overrepresented by our 1P sales, and we are making important efforts to make our 3P sales also very relevant in the marketplace. We expect sellers to become much more active and drive growth in sales during the second half of this year. And this is a result of basically 3 events that will take place over the next few months. The first one is the sequential launch of our improved seller center. The current seller center is an adaptation of the technology we acquired through the acquisition of Linio. We are substantially improving that in terms of seller functionalities, ability to manage their interaction with the marketplace, track their sales, their inventories, et cetera, which we think is going to allow both to increase the number of sellers, but also to substantially increase the activity of our sellers. The second one is the launch of falabella.com as an umbrella marketplace in Peru during the second half of this year and in Colombia in the early part of next year. And the third one is the launch in which we are piloting right now and we will rolling out in the next few months of Falabella Director, which provides the ability for sellers to do same day and next day delivery on their own, and therefore also allows us to leverage their capabilities a lot better. So as a result of all this, we see the marketplace as a driver in the second half of the year. Finally, in terms of how the drivers of our ecosystem, the loyalty program continues to scale, not only in terms of participants, it's reached 16.5 million participants, which represents a 43% year-to-year increase. Also in terms of interactions as redemptions in our program have grown 83% year-to-year as the new participating customers start to earn points and redeem. But more important than that, what we are seeing also is an improvement of the preference levels in our tracking of market positioning of the program across all geographies. And the loyalty program is, therefore, becoming a very important part of how we are not only enhancing the relationship with customers, but also understanding customers much better and therefore driving decision-making in our company a lot more based on this richness of knowledge. And an example of that is our ability not only to make commercial decisions, but also a lot of planning decisions. When we turn to our financial results, we, in comparable terms, experienced a challenging quarter and basically driven by 2 factors: one, affecting our margins and other one affecting our nonoperational results. We see in home improvement, in particular, margin is the category that had the highest margin pressures. which as a result of mix changes, as specialists and construction becomes more relevant in the overall sales mix and also normalized inventory levels that turn into more discounted pricing than we had a year ago. Department stores were able to defend margins better, but also had pressure on margins as a result of inventories. On the other hand, the mix change played in the favor of this segment in the sense that apparel categories increased share in their mix, while electronics and durable categories decreased their share of the mix. In parallel with that, we had increase in expenses that were 22% year-over-year, while our revenue was 18% growth year-over-year. This is mainly explained by onetime costs and overruns in our maritime transport. This is normalizing substantially compared to what it was during the first quarter. And at the same time, we had a normalization of lease expenses, which also is going to decrease the comparable difference on a year-to-year basis as we move forward during the year. But this basically is what is making the difference between having higher growth in first -- in revenue versus expenses versus the opposite growing a revenue at a higher rate than our expenses, which is what we expect to do moving forward. At the nonoperational level, the main driver of the difference were -- was the impact of our FX strategy, the hedging strategy on FX, which we take on a real basis and not on an accounting basis, and therefore, when the appreciation of the USD-Chilean peso parity is abnormally high, like it was during this quarter, we suffer from that. In general, we see the increase in revenue and the growth as very encouraging as is a testament to the strength of the ecosystem strategy of really offering the customers a better value proposition across the whole value chain of different segments and different offerings. And therefore, this is something that we will continue to work on. And as Juan Luis mentioned, our investments in making ecosystem that is more robust every day are in line with what we planned for the year. While we anticipate a challenging second half of the year, we do see potential upside mostly in 3 fronts. The first one is that we see the financial services business continuing to grow substantially and having good space for that. And Juan Manuel will touch on that more deeply. The second one is the resuming growth of our marketplace. And finally, we do see that the pressure on expenses that we had during the first quarter is going to diminish going forward. So with that, I thank you very much, and turn over the call to Juan Manuel.

Thank you, Gaston, and thank you, everybody, for joining today. I will make a brief summary of our financial business. As Juan Luis mentioned in the beginning, our banking revenue grew 48% year-on-year. We believe this is a result of more customers in the region choosing Banco Falabella as their main bank and customers strengthening their relationship with the bank. For example, during this first quarter, we opened almost 400,000 new CMR cards and 320,000 saving accounts in Chile, Peru and Colombia. This implies an 82% growth year-on-year and 57 of these openings were fully digital without any human intervention. This is the result of leveraging the data and the touch points of our ecosystem. Our new AI credit models, which are already operating in all of the markets we operate in and our account opening digital journeys are enabled us to do this, and we expect to keep on growing. Customers on the other side are strengthening the relationship with the bank. Active customers reached 6.5 million. That is 17% year-on-year growth and that is surpassing pre-pandemic base. The volume transacted with our cards, debit and credit increased by USD 1.5 billion, and that is a 46% growth year-on-year. Out of the credit card purchases, already 55% are from merchants outside our stores, which reflects that customers are not only preferring our payment methods within our ecosystem, but they are also using it outside of the ecosystem. Our loan portfolio grew 35% year-over-year, reaching USD 7.8 billion. We reached third place in customer loans in Chile and we are gaining market share in credit card purchases, debit card purchases and consumer loans in all countries in which we operate. As Gaston mentioned, the level of interaction of customers with our loyalty program has also increased significantly. And that is extremely positive for our banking business as it not only increases our customer preference for our payment products, but also today 50% plus of our new credit card customers come from our loyalty program customer base. On the other side, our digital wallet has also shown strong customer adoption, both in Chile and Peru. More than 2.5 million registered users today and we also have more than 510,000 active Fpay users, that is triple of what we had in the previous year. Our current focus is in developing new use cases that will drive more use for Fpay like the new functionalities, free prepaid account and public transport card top-ups in Chile. We also continued growing our buy-now-pay-later and seller finance initiatives. Regarding buy-now-pay-later solution, we already have it in Colombia and Chile. And in 2021, approximately 25,000 credits have been sold for a placement of approximately USD 13 million between both countries. And on our seller finance solution, which will be integrated soon to our new global seller platform that Gaston mentioned in falabella.com has already 400 sellers with financing. We believe that Fpay traction will allow to increase our customer base and synergies with our products. And regarding risk cost, it went from MXN 12,000 million in the first quarter of 2021 to MXN 89,000 million. We expect our delinquency rates to keep on converging to pre-pandemic levels, particularly in Chile, where payments past due were at the lowest historical levels. Our strategy prioritizes ecosystem customers with preapproved grade offers. Today, as we mentioned, more than 16.5 million customers enrolled in our loyalty program, allow us to have a better understanding of the purchase history, get the contact info under consent to receive personal offers from our different businesses. Our strategy prioritizes consistent customers and we are more rigorous with segments with higher risk, high indebtedness and low income. Our risk models has allowed us to grow our portfolio 35% year-on-year with contained risk and low rate of renegotiation. Finally, on our SG&A, Banco Falabella customers are becoming more and more digital. We grew our up customer base in the 9%, reaching 4.8 million customers enabling a more direct relationship with them. Today, more than 94% of customers interactions are via digital channels in the region. Our operational expenses grew 26% quarter versus the same quarter last year, which is significantly lower than our 48% growth in net banking income. Consequently, our efficiency ratios have been improving across the region, 4 basis points in Chile, 9 in Peru and 5 in Colombia. The main drivers for operational expenses growth were the loyalty rewards and marketing expenses, which grew 45%, both significant drivers for customer acquisition and increased customer preference. Thus, we expect this trend to continue. So I go back to Alejandro.

Thank you, Juan Manuel. We can now open the line for questions.

[Operator Instructions] Your first question comes from the line of Andrew Ruben from Morgan Stanley.

Great. Just digging in a bit more around expenses. You mentioned maritime freight and leases, particularly around items that drove kind of more of a onetime step-up. I was hoping you could dig in more to each of those, just to better understand what was temporary versus 1Q and how we can think about the rest of the year for those line items?

Andrew, for your question. This is Alejandro. Related to the SG&A that we had, as we correctly said, we had this impact related to the maritime expenses. On top of that, if you see, we also had a relatively high increase in personnel. Let me get into further detail with that. Roughly speaking, 30% of that increase was, I would say, temporary personnel due to the increase in the physical activity that we saw during the first quarter. And about 20% of that increase together with the other 30% would be 50% of that is basically related to the increase in bonuses given the increase in sales that we get on and Juan Luis mentioned the 18% that we saw. What we expect to normalize, the increase in leases that we had is basically as well to mention a normalization of that. There's also an impact in OpEx IT, which is in line with the investment guidance that we presented in January, that was USD 240 million. And about this, the impact that we had on the mortgage and the logistics, the USD 20 million that we had there, that's almost gone. So therefore, you should not expect something as of today, a further increase in that in the coming quarters that we had. As we see -- we've seen, especially in this route, vessel availability is normalized today. So -- and bottlenecks in destination ports have also eased. And so we think on that side of the impact that we had in the first quarter, we should not have further impact. So, that will be related to the SG&A for the first quarter.

Great. It's helpful. And if I could, sorry, just follow up on the lease expense, it makes sense on the transport side. But for leases, specifically, I know you mentioned the operations returning to normal, but was that kind of just one-time related to sales ramp or just to dig in slightly more on that item specifically?

No, I would -- the vast majority of that increase is basically -- if you remember a year ago, during the first quarter, we still were facing a lot of restrictions in the stores opening and the malls opening. So, this is basically, the first quarter of year 2022 is the first quarter after we started the pandemic in which we had almost no restrictions. We had some capacity limits in some -- I would say, in some stores in some areas. But that was basically -- we almost have full utilization during the first quarter. So, it's basically recovering that. That's why we mentioned this concept of normalization. Because you know at the end of the day, the lease expenses is something that should be relatively easy to forecast, but it's not so much related to the increase in sales, but more to the, I would say, recovery of our operational activity.

Our next question comes from the line of Emilio Acevedo from Santander.

Basically, I would like to make a question to Juan Manuel specifically. We know that the cost of risk in the last year were very below and now they are starting to going up. What is your view on that particular risk? Do you think that the cost of risk of the Banco Falabella could increase to the historical level?

We actually anticipated a normalization in risk. Risk was at all times low. And this occurred as a result of the liquidity that was injected in the market, particularly in the case of Chile. We believe that risk will convert to pre-pandemic levels. And we as a management anticipated that and have adopted more restricted credit policies for those segments with higher level -- particularly those segments of customers that we know less and those segments that are more exposed to rising inflation levels.

Juan Manuel, but do you think that the potential like opportunity to have a lower cost of risk that is structurally considering your efforts on efficiencies, also on strategy and also on things like that?

I believe that our cost of risk level will convert to pre-pandemic situation because on one side, I do believe that we have improved significantly the use of information of our ecosystem. We have implemented AI models. We have a lot of traction with our loyalty program. But on the other side, we are growing in an important way. So, I will expect that the combination of both factors will lead us to the convergence of pre-pandemic credit lease levels.

Can I make another question for Gaston please. My question is basically on the concern on inflation. Core inflation is one of the main topic that Brazil is going through. What is your view on the pass-through to the final product considering inflation? Do you think it will decelerate demand? And with this, we should expect lower margin because of the higher level of inflation, particularly in department store?

Yes. So thank you for the call -- for the question, sorry. The impact on costs has been substantial during the first quarter and we actually have not surpassed all of the cost to the final customer. In part, as I said before, because we see some of these as onetime costs, but also in part because of our -- of how the market evolves, we have to -- we don't price based only on cost, we price based on where the market is moving. But we do see that this is a gradual process in which, on one hand, the inflationary pressure has been quite high during the first quarter and evolving right now and is expected to ease somewhat during the second semester as at least expected by the Central Bank. And because there were so many impacts during the first quarter, we also expect that. And therefore, we see a process of catch-up of being able to cross paths at higher cost to customers. Having said that, this is not working out in the same way across the region. We actually have been more effective and being more able particularly in home improvement to pass cost to the market in Peru and Colombia and have been slower in doing that in Chile. So we expect in Chile, we will be doing more catch-up in the coming months and less in the other 2 countries.

And do you think that Falabella has a competitive advantage on the pass-through of prices due to sort of the position compared to other players, like it's less than [indiscernible] pricing?

I think the competitive advantage we are developing comes from 2 sides. One is the efficiency of purchases and making that more and more data driven. And the other competitive advantage pass comes from the efficiency of the distribution channels. In spite of the increase in expenses that you've seen in the first quarter, our stores are significantly more efficient than they were before the pandemic, and we are deploying many initiatives to make those stores more and more efficient in the coming months. You have to remember that they have gone through a reopening process and therefore, the energy was mostly placed on an effective reopening process rather than on the efficiency itself. The focus going forward is going to be much more on the efficiency of the stores.

Our next question comes from the line of Irma Sgarz from Goldman Sachs.

I was curious just if you could comment a little bit more about the demand backdrop, specifically in Chile? I know you've made a couple of comments, but I was trying to sort of separate how much sort of you're seeing a slowdown in macro demand on the one hand side, like a sort of really consumer backdrop? And to what extent when you're thinking about the return of customers to stores, what sort of behaviors you're seeing in terms of what is sticking more in the online world, maybe across channels or across customer categories? If you can call out sort of where you're seeing more of a shift back to the offline and where you're seeing sort of stickiness in the online channel? And then the final question, more specifically on the supermarket segment, specifically in Chile, you had margin pressure both on the gross margin level and on the EBITDA margin level. I totally appreciate you coming off a very sort of demanding comp because of moving out of the pandemic, but just trying to understand what else is going on there in terms of specific different drivers for supermarket that maybe we haven't seen in other segments?

This is Alejandro. It's a relatively long question. I'm going to try to tackle all those and if I miss any part, please feel free to jump back and we can go back to those. First, I'd like to go on the -- what you mentioned the different -- what has changed with the -- I would say, with the going back to normal restrictions of mobility. And in that sense, there's some things that we see that I think we ended a complete quarter without restrictions. One of the first thing that comes to our mind is that more than just different channels, like people going on department store or supermarket or home improvement in our case, there's more, I would say, differentiation in terms of categories. And in that sense, we see that categories like apparel, construction materials or food, they tend to go back strongly to the store and remain in there. Even though, they still have a higher penetration online that they used to have before the pandemic, they take to go strong in that. On the other hand, we tend to stay strong online is basically big ticket items like electronics. And at a mix level, I would say, we could say that they can maintain scale despite some deceleration in categories. But bottom line, as I said before, it's more related to categories. And what we have been able to see is that customers tend to stay more omnichannel, that, I would say, I used to be -- like it used to be the case before, where you have some customers that were basically physically driven and some of them were online driven. Now, it's more focused on categories and customers, they feel comfortable with this. And that's the main explanation to have a strong recovery in the physical world and also to have, I would say, a big level of strong activity on the online business. The other one was, how we -- supermarkets. Okay. There you go. The 2 things, we had a very strong comparable base from first quarter last year, in which, by the way, just to remind everyone, nonfood grew 60% last year and food sales grew 14%. That said, we are starting to see, I would say, normalization on that. Nonfood has decelerated, but food sales are basically going back and consumers are basically coming back from restrictions. If you remember, last year, we had a relatively high impact on nonfood because a lot of people didn't go on holidays outside of main cities. They basically stayed local. And that also brought a lot of impact on food and nonfood activity for the supermarket. So what are we expecting from this performance, we are expecting the nonfood -- we don't see that as also bringing a good recovery as much as it's going to be in food driving growth moving forward. Then your thing is our expectations for the rest of the -- Irma, can you confirm your last question, we believe we covered what you asked.