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

Good day, ladies and gentleman, 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. Raimundo Monge, Head of Investor Relations, will present a summary of the consolidated results for the second quarter of 2023. Then Mr. Juan Manuel Matheu, Chief Executive Officer of Falabella, Financiero, will update the digital banking business strategy. [Operator Instructions] Now we'll start with the conference with Mr. Raimundo Monge.

Thank you, Gigi, and good afternoon, everyone, and welcome to Falabella's Second Quarter 2023 Earnings Call. Joining me today are Gaston Bottazzini, our CEO; Juan Manuel Matheu, our Financial Service CEO; and Alejandro Gonzalez, our CFO. I would like to remind you that numbers presented during the call will be according to IFRS rules expressed in U.S. dollars and rounding to millions. Therefore, certain small differences may arise with the published financial statement. I will start the call by going over some key operational highlights of our physical digital ecosystem. Let us begin reviewing from Slide 3 onwards. The slowdown in [ consumption ] and high inflation levels continued to impact our operations. In the case of our retailers, the businesses that were impacted more were Home Improvement and Department Store in Chile and Department Stores in Colombia. The consolidated revenues of Department Stores decreased 18% year-over-year. Electro category experienced the largest drop in sales versus the previous year, both in the physical channel and in the online channel. In Home Improvement, consolidated revenues reached $1.4 billion, a decrease of 21%, mainly explained by a contraction in product categories associated with construction in the region. Supermarket decreased 4%, reaching $633 million, non-food categories continued their downward trend, reducing their participation at a safe level. Mallplaza revenue reached $128 million, an increase of 16%, due higher occupancy rate and the indexation to the OFA. During the second quarter, online GMV decreased 15%, while our 3P Online sales grew 2%, representing now 25% of total online GMV. Overall, our e-commerce platform achieved $3.2 billion in GMV during the last 12 months. Consolidated revenues decreased 13% year-over-year mainly due to the decline in Home Improvement and Department Stores in Chile and Department Stores in Colombia. The financial service revenues increased 3% over the period. Gross margin decreased 17% year-over-year mainly explained by Home Improvement in Chile, which declined 22% year-over-year despite higher gross margin due to lower sales volume, mainly explained. As we already mentioned by the decline in the construction sector. Department Stores decreased 24% year-over-year, mainly due to lower revenues in the region, coupled with the decrease in gross margin in Peru and Colombia, partially offset by an improvement in the case of Chile. The banking business declined 28% due to the increase in risk exposure and funding cost, mainly from the banking business in Colombia. The bank margin in Chile improved compared to the first quarter of 2023. I would like to highlight that the inventory normalization process that has allowed us to reduce them by 22% year-over-year and 6% since March of this year. In terms of EBITDA, it fell 42% year-over-year, reaching $176 million. Our SG&A expenses have decreased 8% year-over-year despite an environment of high inflation in the region. Thanks to the reduction in logistics the optimization of our marketing customer loyalty campaigns and personnel expenses, excluding severance payments. We would like to highlight that we have been -- we have successfully completed the execution of the efficiency plan that we launched in October of 2022. However, in a more challenging than anticipated environment, we have intensified the efforts towards restoring our profitability by adding new initiatives to the plan. This quarter and in line with the industry practices, we have adopted a fair value valuation model for our investment properties which had a net impact of $108 million in Falabella. We believe that this will more appropriately reflect the equity and economic situation of our real estate business and therefore, of Falabella. Given all the above, we closed the quarter with a profit $61 million. Finally, as far as our financial position, we would like to highlight that we have no relevant maturities until January 2025. I would like now to leave you with an Juan Manuel Matheu, our Financial Services, CEO.

Okay. Thank you, Raimundo. Good afternoon, and thank you, everyone, for joining us today. In the financial business, we continue advancing in our goal of becoming the main digital bank in the Andean region. Our value proposition is based on up-first customer journeys, that's a core characteristic of digital bank, but in our case, strengthened by a comprehensive set of benefits that include discounts, both inside and outside our ecosystem and the February loyalty program of Andean region, [indiscernible]. We reached 7.3 million active customers that is 7% increase year-on-year and $5.8 billion in purchases with our means of payment that is a 4% increase year-on-year. Reflecting that our customers prefer our value proposition based on [ digitation ] and benefits of our loyalty program, despite a more restrictive environment in credit origination due to risk levels. I'd like to highlight that our TPV out of the ecosystem already represents 70% of total volume and growth. This shows that our customers are increasingly adopting our credit and debit cards at the preferred payment method. In terms of financial performance, the bank in Chile is recovering quarter-by-quarter stabilizing the risk levels of the portfolio. Our current priority -- our first to continue strengthening our digital value proposition improving the experience and thus continuing to deepen the relationship with our customers; second, continue our efforts to allow us to control the risk of our portfolio and strengthen our collection capacity. And third, drive profitability, keeping our value proposition attractive for our customers. Going forward, we expect a significant increase in the bottom line in the second half of the year. This improvement will be driven by a lower cost of risk and a slow decrease in funding cost. In contrast, we expect a decrease in our income as a result of more restrictive credit policies that will slightly reduce our total loan portfolio. The active participants in our Loyalty Program reached $18.6 million across the region with over 2.3 million redemptions during the second quarter. The program is a key pillar for transforming our organization into a data-driven one. Finally, I would like to refer to the situation on Fpay. In 2020, we set out to be the essential payment solution for our customers and businesses. Today, we have a presence in 3 countries with more than 4.5 million customers and USD 706,000 quarterly TPV. Since then, the market conditions and customer needs have changed, resulting in a sharp decrease in profitability of pure wallets and a demand for a broader financial product portfolio. Consequently, most of wallets are broadening their services or turning into digital banks. Our bank is successfully transforming into a digital bank. In the case of Chile, we believe that we will soon be the first bank in personal checking accounts. In this context, we decided that the functionalities of FPay digital wallet will be integrated into the Banco Falabella application and focused FPay business on the processing of payments for Falabella's e-commerce at falabella.com market. We believe that with this, we will be able to provide a better solution to our clients and also make the Falabella operation more efficient with annual savings of $30 million in EBITDA next year. Now we will open the line for questions.

[Operator Instructions] Our first question comes from the line of Antonio Hernandez from Barclays.

Well, actually, 2 quick ones. First, is there any update on how you're seeing the asset monetization strategy, particularly [ deleveraging ] -- you briefly mentioned that in the last conference call and given the results any further light that you could provide on that? And the second question would be regarding how are things shaping up in the first 2 months of the third quarter, i.e., are you seeing any improvement in terms of consumption, either in the region or strategic format.

Antonio, we didn't hear you well the first question. Can you repeat it, please?

Sure. First question is regarding any specific driver that you're considering for asset monetization or anything else that could help in terms of deleveraging because of the increase in net debt to EBITDA metric.

Antonio, this is Alejandro. If I heard correctly because and apologies with the message is not getting here that clearly. I understand that you were asking about the real estate, the [indiscernible], the real estate assets that we mentioned that we are working on -- what I can tell you is that we already launch a process of monetize a group of real estate assets in the range of $300 million to $400 million. Basically, we're talking about stand-alone stores and some distribution centers, mainly in Chile, -- and on top of that, we've already launched the sale of what used to be the headquarters, the offices of Sodimac in Chile -- those are processes that should be basically materialized within given the demand that we've seen in the market within, I would say, fourth quarter this year, first quarter next year.

Sorry, Antonio, I think you had a second question, and I also have trouble figuring out whether you are asking about online GMV and the decline of online GMV or what was the second question.

Second question is on how are you seeing performance already for the quarter -- 2 months in the third quarter in terms of any consumption share improving and what statistically in terms of [indiscernible] and vision.

Okay. So let me again repeat because the clarity of the line is not great. But what I'm understanding is you are asking about what we are seeing in terms of commercial performance in our retail segments. I would say that we were seeing in the beginning of the third quarter is still consistent with what we have seen in the first 2 quarters in terms of demand. We are not seeing a turn around on demand yet. Although we are seeing some of the macro signals that would point towards a turn in demand, mainly a drop in inflation, stable employment levels. And as a result of that, we do expect that to start happening. But given that we are not seeing it in the market, we have taken a set of measures to counterbalance that. The first one, of course, is a much better inventory position. We have a 20%, 22% lower stock year-over-year, which would bring us lower margin pressure. We already have lower margin pressures. If you look at our gross margins, they are dropping mostly as a result of top line pressure. But the gross margins themselves are actually getting better, and we are seeing those continuing to get better throughout the second -- I'm sorry, the first half of the third quarter. And in addition to that, we are taking a set of additional measures having to do with store closures. We already closed 1 store, we're closing a second store in Chile in Mallplaza Alameda and in October, Mallplaza Sur. And also, we have made some investments in rebalancing the presence of different categories in the stores themselves given that the more relevant drop in demand is coming from electronics and therefore, giving more space to higher-margin products and also products that are having higher demand such as in general, soft goods, but in particular, apparel.

Our next question comes from the line of Nicolas Riva from Bank of America.

My question is a follow-up on the prior question about some asset sales to reduce your leverage. And I do appreciate that response that you gave. It appears to me that unfortunately, $300 million or $400 million is not going to carry in the sense that it's not transformational enough. So you have -- in your retail business, you have a total debt of about $7 million, your annual EBITDA is running at about $800 million. So your net leverage is about -- right now, it's about 9x. So it appears to me that something more transformational should potential involved, for example, and I wanted to ask you if you would consider selling a stake in your shopping mall business, -- for example, right now, you start, I think, reporting the accounting for that business using market values. You have $5.5 million in asset value of that business. I wanted to ask also what -- how much that is associated with that business? I count about $1.5 billion. But the question would be, would you consider something more transformational like that, like, for example, selling us take shopping more business or even -- you have banks in 3 countries. I understand the bank in Chile is very, very large, the third largest consumer lender in the country, but the book value of the bank in Colombia is another roughly $200 million. The book value of the bank in Peru is another $200 million roughly -- is that business core as well, coming to bank in Peru and Colombia, would you consider doing that to reduce our leverage and essentially really to be able to retain the IG ratings.

So Nicolas, thank you for the question. So to answer your question, of course, we -- we agree that the $300 million to $400 million that Alejandro mentioned, are not transformational in terms of changing the leverage levels. We are, in addition to that, considering other actions that we cannot disclose related to real estate. We also, in addition to that, have decreased substantially some of the investments associated with initiatives such as FPay, which Juan Manuel already mentioned, and [indiscernible], which we have focused completely on our grocery business, and that will have an impact just in the case of FPay of $30 million on yearly EBITDA. So each one of these adds up to continue to close the gap in terms of the overall leverage level. But the real effort and focus that we are putting today is more on continuing to look for additional efficiencies, such as the one that Juan Manuel mentioned, and we have others in the books -- and also put a lot more emphasis on this turnaround in sales. On your second question about the banking businesses in Peru and in Colombia. We -- even though they are much smaller businesses than the one we operate in Chile. We do see the potential given our retail presence in those 2 countries and given the synergies that we have effectively extracted from operating the banking business side by side with all of these retail businesses. We see those 2 also as very strategic for the development of our business, both in Peru and in Colombia. And as a matter of fact, they are very important differentiators for our customers. They're going through a difficult period, as Juan Manuel mentioned, in terms of risk levels. We are seeing those already improving in the 3 countries. So we expect that the third and fourth quarters will be much more positive than the first and second quarters have been in those businesses. In Chile, first, but also in Peru and Colombia.

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

I wanted to -- I have 2 actually. The first one is on the new initiatives you mentioned in the release towards efficiency. We had a guidance of margins, right, of margin gains that would arise from the first initiatives? Any idea on how much this additional efficiencies could unlock in terms of bps in 2024 for margins? -- the first one. And my second one is on the bank, maybe taking opportunity of the performance is there to see, specifically in Chile, we see that risk levels have been stabilizing. Interesting to understand how you're seeing opportunities maybe to reaccelerate a bit growth into the second half or maybe into early next year? Or do you think it's still too early for that, and we need to see a confirmation that NPLs have indeed stabilized?

Thank you, Nicolas, for your question. About the efficiency through this, when we announced this plan in October last year, when we presented that in basis point. We thought we were going to have, I would say, a relatively normal year in terms of consumption, which is far from what we've been witnessing this year. That said, if you allow me, I'll take that into numbers, which is something more, obviously, reliable when I -- a more comparable in terms of -- what we said 200 basis points last year, were basically talking about something in the range of $250 million. [ Through this ], we finished that plan, we did some, I would say, improvements and increase that size to $350 million which is what we have been able to achieve this part. Now something that's rather than for you to be aware, this is something that, as we mentioned, we did finish on second quarter this year, but there are several one-offs, and we didn't start the quarter with this finishing up the plan. Most of that was done towards the end of the quarter. Just for you to be aware, if you take off the extra severances just related to this, the SG&A reduction that we presented of 8% would actually be 9%, 1% of sales in SG&A reduction, which is we could -- 1% reduction, sorry, 1% That's basically going to this. And in terms of the additional measures that we've taken, -- we disclosed some of them. Gaston mentioned about the store closures. Alameda, which was already public, we put on top of that the closure of [ Plaza Sur ] in October this year. And on top of that, what [ Juan Manuel ] mentioned about [indiscernible], which should give us in the range of $35 million on a yearly basis. So you see moving forward the full, I would say, execution of this efficiency plan, and please keep in mind that there are several one-offs that we had to recognize as part of the execution of this program. So that -- that's more or less the extra flavor that we're bringing. And as Gaston mentioned, there are some other initiatives that we have in our mindset, but it's highly likely that we'll keep adding new measures. We don't have, as we said in the first quarter call, 1 single efficiency, 1 single golden bullet. We have several, if you can call them silver bullet. So we're going to keep moving in [indiscernible] getting those.

Okay. And Nicolas, regarding your question about NPLs and growth in our banking Chile, what I would like to share is that in Chile, in July and August, -- we have seen that NPLs has already started to decrease. And we think this trend will continue during the third and fourth quarter of the -- in this context, we expect the loan portfolio to stop decreasing. We have been decreasing our loan portfolio in Chile. And through the second half of the year, we expect it to stop decreasing. Of course, as you all know, in December, this is a cyclical month for us in terms of consumption of our credit cards, and we think that, that could help our loan portfolio.

Our next question comes from the line of Diego Guzman from BTG.

You have talked a little bit about the bank, but I want to maybe focus a bit more on July results that were just released where there was an important net income increased because of cost of risk and expenses. But I would like to know if the $15 million net income that you showed in the quarter is our run rate that we can expect for this -- for the rest of the year? -- considering that the bank has a different size and expenses have been also treated considering the pre-pandemic comparison. So do you think this is a run rate, this can grow from this figure? And maybe what are the micro data or specific indicators that you can share with us as well. I have also another question. I don't know if maybe fair to say it now. It's regarding the Falabella.com business, we also saw a sequential improvement in the other category results where Falabella.com is included. So can you maybe give us more color on how have you executed profitability measures and what to expect in the coming months in terms of results in this particular area? Or maybe where do you see a breakeven?

Okay. Diego, regarding to your first question we have seen that, of course, inflation in Chile is -- it's starting to decrease -- and also, we have already seen that the impact of the initiatives that we have been doing, I would say, through the last year in terms of recent litigation, have already changed the slope in our risk expense. On the other side, as you well mentioned, we have also been working in bank in Chile in our SG&A that has also started to change its growth. So as a result of both, we think that the result that you mentioned, it is, of course, a turning point in the bank in Chile, and we expect during the second half of the year to result of net income to actually go higher than you just mentioned. So we do think that is a change in the trend of the net income of the bank in Chile.

Your second question. This is Gaston. So as you see in the others, which is mostly covering our Falabella.com business, the improvement that you can see there is mostly related to operational improvements in Falabella.com. I'd say, basically 3 levers -- the most relevant of which is shipping recovery, we have decreased the proportion of free shipping substantially in Falabella.com. We have also improved slowly, but also as a result of optimizing seller mix, et cetera, the take rate -- and finally, value-added services to the sellers have also improved from around 1% of overall revenues to closer to 2% -- a little lower than 2% of overall revenues in the case of the Marketplace. Also the Marketplace, if you take our overall GMV, which is actually decreasing our marketplace GMV or 3P GMV is increasing and that also has a better take rate than the one than the 1P GMV given the volumes of the sellers, et cetera.

Great. Sorry, just for Juan Manuel. I think I told you $15 million in a quarter run rate, but I am talking about July results. So a monthly result of $15 million for you is like a bottom and this number you expect to start increasing, right?

Exactly -- that's correct.

Our next question comes from the line of Gabriela Benjamin from PineBridge Investments.

Can you hear me well?

Yes.

Okay. So thank you very much for the presentation. My question is a follow-up on a previous question. So you were mentioning this is about the efficiency plan. So you were mentioning that the $250 million efficiency plan that you had announced last year, which was already implemented -- and still implemented. So given that you had 2 weak consecutive quarters, I understand you have mentioned some of the initiatives that you were implementing to further cut costs -- but I was wondering in numbers, how much more do you expect to achieve? So $250 million already implemented. And with all the new initiatives that are several more than 1 and some bigger than others, but overall, how much more do you expect to achieve in savings in annual savings?

Gabriela for your question. Just to be precise, what I said, the plan initially was for $250 million, where we ended up achieving is $350 million -- and we are still in the process of, basically, as I said before, focusing on other issues which may probably not have much of a further impact in SG&A. There's going to be some other initiatives [indiscernible] I wouldn't say that they are not material and we're more concentrated today in focusing, like start doing the focus in Fpay that we mentioned. Those are the $35 million on a yearly basis. With Fpay and [indiscernible] that's not considering the $350 million that I was mentioning. And today, we're actually in the process of focusing and actually building out what 2024 will look like for Falabella. So we know that we're going to get those savings. We're taking care of basically make them structural as it's supposed to be. And more than just giving you a number, we're basically very concerned not only on the savings. Today, it's more related to the stop doing the closures that Gaston mentioned about stores -- and certainly, on focusing also on the growth of the company. We need to make sure because at some point, this is not just a matter of reducing and reducing -- there's certainly more, I would say, SG&A that we can take down, and we are -- there are some initiatives that we're working on that. But I would say the most material structural part is what we already did. And now we're focusing on making sure that the sales start going back to start normalizing to levels that we've historically had. I don't know if you were in the first quarter call, but this is not the first time that we've seen leverage ratios like this one. This is the third time that at least I see them. And the company has the capacity, it has had the capacity in the past to recover this in a period of 12 months, 16 months -- 18 months, sorry, so maybe it's going to take longer than that, maybe it's going to be 2 years. But at least the plan that we're making consider that kind of recovery, not certainly not during this 2023, but within 2024 time horizon.