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 will be your coordinator for today. [Operator Instructions] In the first part, Mr. Alejandro Gonzalez, Chief Financial Officer, will present a summary of the consolidated results for the fourth quarter of 2022. Following this, Mr. Gaston Bottazzini, Chief Executive Officer of Falabella S.A. will share some highlights on the performance of the company. Afterwards, we will open up the lines for questions. [Operator Instructions] Now we'll start with the conference with Mr. Alejandro Gonzalez.

Thank you, Gigi. Good afternoon, everyone, and welcome to Falabella's Fourth Quarter 2022 Earnings Call. Joining me on today's call are Gaston Bottazzini, our CEO; Francisco Irarrázaval, our Department Store CEO; and [indiscernible], our new Head of Investor Relations. In this call, I will start with the main highlights for the quarter. Then Gaston will make a few strategic remarks. And then we will go to Q&A. I'd like to remind you that numbers presented during the call will be according to IFRS, which was expressed in U.S. dollars and rounded to millions. Therefore, certain small differences may arise with the published financial statements. Let us begin with reviewing the highlights of our physical-digital ecosystem, and we should go to Slide 2. The most [indiscernible] before we get into details of the other is the fact that we were able to finish fourth quarter with 36 million customers in the region. I'd also like to highlight the fact that we had 1.9 million square meters dedicated to logistics, and we were able to dispatch over 37 million orders. If we go to the next slide related to digital banking the most relevant key feature that we achieved is that our loan portfolio grew almost 18% to $7.7 billion across the region, achieving a 13.2% customer loan market share in Chile, our main market. If you move to the next slide related to the Marketplace. During the fourth quarter, our 3P online sales grew 24% year-over-year, showing that our marketplace strategy is certainly gaining traction. Overall, our e-commerce platform achieved $3.3 billion in GMV during 2022. Going to the next slide related to our loyalty program. It does remains the most relevant program in the region, reaching 18.6 million active participants with an 18% growth year-over-year. When we go to the payments platform, we were able to double our active digital wallet users to reach 935,000 while we achieved also $2.9 billion in TPV. Related to our real estate operations, we were able to achieve the highest quarterly revenue in its history with $120 million, which represents an increase of 12% year-over-year. Also relevant and one of the main explanations for this achievement is the fact that visitor flow reached 76 million, fully recovered and normalized pre-pandemic level. If we move to Slide 8, related to the expansion plan during the fourth quarter 2022, we followed our selected physical growth plan. And during the quarter, we were able to open 6 stores, 2 were in Brazil, 2 were in Mexico and 2 were Chile, including the second IKEA store, which was opened in [indiscernible]. Now related to the announcement of the investment plan for 2023. 60% Of this investment plan will be related to IT and logistics, and increasing the capabilities that we already have in those platforms. And in this case, I would like to highlight the relevant launching of falabella.com in Colombia. Also it is relevant to highlight a $98 million investment that will be dedicated to remodeling in order to improve per square foot allocation to high-margin categories. Finally, around the digital physical ecosystem, I'd like to highlight the commitment that Falabella has taken to become net zero in 2035 on the Scopes 1 and 2. This is done mainly by mitigating our greenhouse emissions where we have gas emissions and also the decarbonizing of our operation. This will require an investment of $15 million in 2023, and that's already been considered in the investment plan that we previously announced. Now going to the financial results. During the fourth quarter of 2022, the company's consolidated revenue reached $3.8 billion, a 4% decrease versus what we presented in 2021. This is mainly due to a 10% decrease in nonbanking revenue, mostly related to the Home Improvement Business in Chile with a 23% reduction year-over-year and also Department Stores in Chile with a 21% decrease year-over-year. This was partially offset by our retail businesses in Peru, which increased the revenue by 9%. These results were partially compensated by Shopping Centers, as I previously mentioned, revenues in Mallplaza, which grew by 12%. And as I also mentioned, our businesses are fully coming back to normal levels. And also relevant to this is the fact that the revenues in the Shopping Mall business are indexed to the inflation-linked work. Bank businesses revenue grew 47%, mainly driven by an 18% year-over-year increase in the regional loan book, reflecting that we are progressing towards our goal of becoming the leading bank in the Andean regions. Our gross profit reached $1.2 billion in the fourth quarter 2022, a decrease of 16% year-over-year, mainly explained by a reduction in contribution from the nonbanking businesses, particularly in Chile. Department Stores and Home Improvement, both in Chile contributed to a lesser extent, mainly explained by lower sales and higher purchase on margin due to market and challenging competitive figures as they experienced strong demand for the products in 2021 despite zero maritime. This was partially offset by the Shopping Centers in the region as the markets improved. From the banking business side, we did experience a reduction in contribution mainly due to the business in Chile, which faced challenging comparative figures and a scenario with higher risk provisions. Going to the next slide in terms of EBITDA and profit. Our EBITDA reached $262 million for the quarter with a reduction of 54% compared to the $654 million (sic) [ $564 million ] in the same period last year. This decrease was mainly explained by the 7% increase in SG&A, mainly impacted by expenses associated with developing our growth platforms, primarily marketplace and digital banking as well as the new IKEA stores. This was partially offset with lower variable expenses attributed to the decrease in commercial activity. It is worth noting that during this quarter, we incurred in some onetime associated to the implementation of the efficiency plan that we announced in the Investor Day that we did in October 2022. We're talking about an amount of $20 million for the quarter. Finally, in terms of our net result for the fourth quarter of 2022, we had a loss of $26 million, which was impacted mainly in addition to the EBITDA impact by increasing the net financial expenses of $36 million year-over-year and also the accounted translation of U.S. denominated financial debt of our real estate business to Chilean pesos, which did not affect our cash position in the period, but did have a $30 million impact on earnings. From a contribution standpoint, businesses in Chile registered a high decrease in particular Department Stores and the banking business and Home Improvement are most relevant businesses. With that, I will now let you with Gaston, which will bring -- join with us with some strategic remarks.

Thank you very much, Alejandro. So I would like to make a short summary of how on top of what Alejandro described as our results for the year and the quarter. I would like to highlight that these results are affected by several short-term impacts that have been particularly severe in the case of Chile. In the first place, a strong decline in consumption after a strong 2021 fueled by the withdrawals from pension funds. This, combined with disruptions in our logistics chain affecting the arrival of products to the markets with an impact both on inventories and margins. And additionally, combined with higher inflation and logistics costs that affected our SG&A with an impact in our -- mostly in our retail operations. In addition to this, we had a permanent increase or a gradual increase in our funding costs in all of our 3 banking operations combined with a deterioration of our loan portfolio that was accentuated in terms of provision recognition by the relatively short duration of that portfolio. Despite this challenging scenario, I would like to highlight some less visible positive developments we have seen in our business. In the first place, our new market expansion has substantially improved operational leverage, with Brazil results turning positive for the last 12 years -- 12 months and Mexico getting closer to breakeven both in our Home Improvement and financial businesses. This means that our future investments in these 2 countries are supported by positive results operations. Secondly, with the launch of our marketplace in Colombia this month, we will have completed launching our 6 digital platforms in the region. And with this, our investment cycle completes a relevant milestone in terms of a focus that moves from building these platforms and launching them to optimizing their operations. For example, in the case of Marketplace, we're reducing our unit shipping costs or improving seller services and revenues. All of this translates into better growth prospects going forward, which are taking place despite the challenging context. So as examples, our Marketplace sales increased 24% during the year 2022. And this means that 3P sales now represent 25% of our digital GMV or our e-commerce sales. We are also progressing substantially towards our goal of becoming the leading digital bank in the region, growing 18% of our gross loans, but also growing substantially the usage of our products with our credit card becoming the #1 credit card in usage during the last quarter in Chile as well as us becoming the second largest bank in terms of checking accounts during that quarter. Another signal of this is our loyalty program that has consolidated and closed the year with over 18.6 million participants, which triples our base of customers from 3 years ago and continues to be the preferred program in each one of the countries in which we operate. In summary, as we move forward, we see our retail and banking operations gradually improving in line with the rate of improvement of the macro context I just described, which is turning positive as we speak. We also see the efficiency plan that Alejandro referred to coming fully into effect during the next few months and being complemented by additional measures. And finally, we see our digital platforms start to gain traction and become sources of growth of revenue and of results as we move forward. We, therefore, see the overall performance of the company improving based on a much more solid set of businesses that we are constructing over the past few months -- years. Thank you very much. And with that, we move forward to our Q&A.

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

It's always helpful to see the investment plan. I'm curious if you could comment more at the format level, which business segments you think could be the focus for the OpEx part of the investments in 2023? And then if there's any early view you can share on how you think the investment intensity could trend in, say, 2024, 2025 when compared to these '23 levels?

Andrew, thank you very much for the question. So as we double click on the investment plan, I'd say there are 3 main areas of investment as we declared in it. And in retail or in our physical network, I should say, the focuses are completing the IKEA investments over the next 2 to 3 years, and that is particularly heavy over the shorter term and then it starts to gradually decrease. The plan is also to continue and eventually ramp up the rate of growth in Brazil and Mexico. And as the new physical store development decreases gradually, our clients also to make more investments on square footage allocation toward higher-margin categories. Net-net, we think overall and moving beyond 2023, as you asked, Andrew, there will be a gradual decrease in physical store development. The second area of focus is technology. Much of our investment in technology has had to do with building the digital platforms, as I have said before. I'd say going forward, the one platform that will continue to require relevant investments is the Marketplace, particularly on the seller services and seller value proposition side. But the other platforms we see gradually getting to a more mature state in terms of investment required. And therefore, what we think is we're going to have overall a gradual decrease. In logistics, we think there will be a continuous requirement on investments. And this will move probably from an emphasis we have had in infrastructure over the past few years to a higher emphasis on technology and making the infrastructure more efficient, more optimal. So longer term, what we see is we should gradually see a decrease in -- gradually trending down the investments, but more or less at the levels we showed for 2023.

Our next question comes from the line of Antonio Hernandez from Barclays.

Well, [indiscernible] at your Investor Day last year, you provided some guidance and color of your expectations. You already -- you mentioned that it was going to be a tough consumer environment for the next quarters. But now it's basically 2022 in rearview mirror and almost -- basically 2 months of the first quarter already are over. What are you -- like how are your expectations maybe changing? I know that you reiterated in your press release, the 200 basis points margin improvement. But overall, like have your expectations changed, maybe a little bit more cautious or maybe taking more of the improvement instead of the second half of the year more towards the last quarter of the year? Any more color that you could provide on that would be helpful.

Thank you, Antonio, for the question. So when we announced our efficiency efforts and the impact they will have on margin. This, of course, had to do with lowering our expenses and as a result of that improving margins. Of course, as we move into the first -- as you saw in the last quarter and we're moving into the first quarter, we're seeing that our top line and top line margins are still under pressure. And therefore, that requires that we reinforce what we announced in the Investor Day. So basically, what we are doing in that line is reinforcing that effort itself in terms of structure efficiencies and other additional efficiencies that can be gained in the business. . Also looking at our operations, and I think I already mentioned in terms of our Marketplace, looking at seller services and revenue, looking at shipping recovery, looking at some of the key variables that are having an impact on top line margins. And in addition to that, we are being a lot more selective on our technology CapEx with focus on improvements that have real impact on clients and sellers and therefore, have real impact on sustaining the growth we are seeing in our marketplace and maintaining our share in e-commerce and our physical stores. As our -- in addition to that, we're looking at physical CapEx, also being selective in terms of the prioritization of that CapEx and making sure that we do the investments that actually have more impact. So that would be how we're looking at the year going forward given what we are seeing versus what we announced in the Investor Day.

Our next question comes from the line of Nicolas Larrain from JPMorgan.

I had a couple specifically on Chile. I wanted to see if you could comment maybe on how you've seen January and February, especially in the core formats you're thinking on Home Improvement, Department Stores and maybe some qualitative comments on the bank? And also still on retail, if you could add some color on how are you seeing inventory levels in the industry? We're seeing, of course, adjustment by many players. I wanted to see your view there. And lastly, thinking on leverage, it reached high levels now. I wanted to get your input on where do you see -- how do see this trending throughout the year? And what's the level you would feel comfortable with going forward?

Thank you Nicolas, for the questions. We will distribute with the group. We have here since you touched on several topics. So I'll give you a general view on the first quarter, and then I will pass the work to Francisco will tell you more about retail and inventory levels. And then finally, Alejandro can cover on leverage and our perspective going forward. So in terms of the first quarter, we're seeing a continuation and more or less in line with expectations of what you see during the last quarter in terms of the pressure on revenues and in terms of not further deterioration, but a relatively stable level at -- relatively high levels of provisions in the bank. So I would say there's a continuation with a positive perspective at the macro level with exchange rates, particularly [ Chilean ] peso helping us with inflation gradually coming down, which reinforces the effect of the previous variable and also logistics cost coming down actually quite drastically. So we see some positive effects during this quarter, but still not a rebound in demand or in the provision levels. But as we become or actually became a lot more restrictive in credit origination, we are seeing a higher quality of new credits originated, which will translate into better quality of our portfolio going forward. So with that -- and in terms of your question about inventory, we actually don't have visibility of inventory, but we do have visibility of imports. So we see imports drastically coming down by the retail industry in general and at levels that are around 50% of what they were a year ago. So that should translate into a decrease in overall industry inventories quite fast over the next few months. Francisco will add some color on what we're seeing in retail.

Okay. Thanks, Gaston, and thanks Nicolas for the question. Let's talk for a second about the inventories and margins. And if I may, I would like to leave the question to 2 buckets at least. One about electronics and the other one about garments. . On the electronics side, as you may know, last year, we moved from a very high demand to below historical level of demand in a very short period of time. That did put us a bit of pressure on the electronics margin. So by the end of Q4 2022, we have achieved the desired level of inventory, even considering the current or actual demand. So we should observe in the future that low level of margin of the electronics. Actually, we stopped importing low-margin categories on electronics, because it's very hard to do that in an import basis. So we ship all that purchasing power to local sourcing at each country. On the garment side, it is the most relevant for the Department Store business. During the last quarter, we did significantly reduce in factory level by the end of the year. During this quarter, we have continued pushing some seasonal and obsolete garments through discounts. So you will see in the reduced margins on garments in the current period. And finally, I think that during the -- and this is maybe the most important part, due to the cost-containing period due to the delays in the international supply chain, as you may know, we added an extra 30 days to the buying cycle, just to be sure we have the inventory on hand at time. But by the second half of last year, the international supply chain started to normalize. So we're moving back to the standard buying cycle. That means we are postponing 30 days of the purchase orders. So that is going to have a significant impact on the inventory levels that you will see in the coming future. And of course, we reduced the cost of -- operational cost of handling more inventory. And I think that the other good side of that is it's going to allow us to have a higher fashion content on the private labels, which is a key to dedifferentiate our sales and to achieve a higher level of margins. And adding to what Gaston says, other than the exchange rate that is more favorable, we also are observing a lower cost level from the producing side in terms of raw material prices. And on the international shipping freight costs, as you may know the container cost of -- the cost of pricing in container has dropped down significantly as well. So we are foreseeing a better cost to sales price rating.

Thank you, Nicolas, for your questions. This is Alejandro now talking about the leverage. I think it's important to clarify first that the main reason why we are presenting this levels of leverage is because we ended up facing an unexpected slowdown in the economy. So this is mainly a reduction of EBITDA more than, I would say, gross debt increase that we had. That said, just for everyone to be aware, this is not the first time that Falabella goes through a situation like this. 2009, after [indiscernible] went down, we had a net debt to EBITDA of 6.5. In the pandemic, we had similar situation, but we were able in both cases to recover relatively fast and go back and take that back to normal levels, which by the way just for everyone to be aware, 3x is something in which we tend to be comfortable with. Now how does this [indiscernible] forward, we're taking several proactive actions, as I said before, to increase the EBITDA. First one is basically we are committed to improve profitability by executing our efficiency plan. And as Gaston mentioned, we're reinforcing that plan in order to make sure the success of that. As I mentioned before, we are not planning to materially increase the borrowings. The only activity that we're going to be having this year in terms of debt will be to refinance the upcoming maturities. And we're also planning to resume asset sales that we were evaluating during the pandemic, making sure that we basically succeed in going back to this level. If it's not going to be during this year, it's going to be coming year. But it's part of the plan of the company and the commitment to make sure that we keep our financial strength as we had in the past.

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

Some of my key questions have been answered, but I wanted to follow up with two quick things on the credit business. I understand that you mentioned that in the short term, provisioning level would probably still remain high, but I was wondering, it did sound like you feel that you've probably gotten sort of towards a peak and that we should start seeing some improvement later on maybe this year, but I was wondering if you could shed some more light on how you're seeing that situation sort of evolved throughout the year? And how we should think about returning to maybe sort of resuming higher credit limits and growth maybe sort of in terms of timing or shape of that curve going forward and recovering obviously, the overall profitability of that business as that was already on the cards this year or maybe more for next year, understanding that there's also an element of funding costs obviously involved? And then the second question, it's interesting, like as you now sort of see for the Department Stores, the online penetration stabilized sort of in the high 20s percentage rate, how do you think about sort of the gap of profitability between the online and the off-line channel? And how fast are you progressing to really sort of starting to be channel agnostic? If you can sort of talk a little bit about different levers of sort of evening out profitability across the 2 channels?

Thank you, Irma, for your question. This is Gaston. So I will cover the question on our financial business and then Francisco will talk about digital versus physical sales in our Department Stores. By the way, just as a clarification, our Department Stores themselves are about 40% digital sales. The 20% is the overall, including supermarkets and Home Improvement. So it has a very big impact with the economics of online sales on that particular business. So I'll let Francisco expand on that. . But going back to the financial business. So today, we have NPLs that are substantially higher than a year ago, depending on the country. So in the case of Chile is where we have the highest increase going from 1.4%, which was a very, very low level historically to 4.1%, which is higher than historical by half a point or so. In Peru, we went from 1.8% to 3.1%. In Colombia from 1.6% to 3.3%. So a lot of the all of the banking operations have substantial increases in NPLs, which, of course, translates into higher provisions and higher losses. So as a result of that, of course, we became more restrictive in our credit, particularly consumer loan credit. So what we are seeing is that our credit card usage is actually continuing to grow, not at the level it was growing, but it's continuing to grow while our consumer credit or free disposal credit stock is the one that is contracting more. So that's good news in the terms that customers continue to enjoy the benefits of the product and use the product in the whole ecosystem that has more impact, which is the credit card. But as a result of this risk mitigation that we did, we will see, as I said, a lower growth in credit stock. We also are implementing some level of renegotiations, particularly for customers that had good credit history. And we are also improving and developing number one, more frictionless payment processes for recovery as well as better and digitally enabled communication with customers also on bad loan recoveries. In addition to this, as you mentioned, one of the factors that is affecting the performance of the business is the cost of funding. And therefore, we're putting a lot more emphasis in the short term in growing the base of current account holders and as a result of that, our site deposits. So the focus of the financial business is moving from credit to site deposits in the short-term sales substantially, and that will allow us also to improve gradually cost of funding going forward. In terms of your last question about when we see growth starting to take place, I don't think we're going to return to the growth we saw a year ago or so because that was a combination of commercial growth as a result of being commercially active, but also as a result of our rebound from a lot of prepayment of debt that took place during the pandemic as a result of the pension fund disbursement. So that type of growth, I don't think we're going to see in the short term. But we do think probably going towards the third and fourth quarter of this year, we're going to start to see an uptake again in the growth of this business. Francisco?

Okay. Thanks, Gaston. Irma, it was a bit deeper on the question. The year 2021, the Department Stores had only 40% penetration on the online. And as Gaston said, 23% was the overall. Last year, 2022, we had 23%, so it did went down as the stores opened back, but we are foreseeing for the future that number to go up again, maybe reaching 35% this year. That is our expectation. Now the mix of what we are planning to sell online is going to change. This current year is to do the 1P operation mainly focused on the high rotation items and left the long tail a little bit more hands of the marketplace itself. So we do want to focus on high-rotation items, especially in garments where we see we have a differentiation, which is relevant in the industry. So we're going to keep pushing the growth of garments online. And on the electronic side, I would say we're going to just keep the market share that we already have, which is high enough. On the offline, we're planning to, as Gaston also said, to relocate the square footage towards more higher-margin We're talking about garments and fashion here. So in general, we're going to move the stores out of the highly online penetration categories of electronic, furniture and mattresses. That's something we want to keep doing. And the other thing that we're continuing with our physical store footprint optimization. That means resizing stores or some foreclosures as we have talked in the past.