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

Ladies and gentlemen, welcome to the Falabella Earnings Call. I'm Gigi, your coordinator for today's session. [Operator Instructions] Present with us are Alejandro Gonzalez, CEO; Juan Pablo Harrison, CFO; Benoit De Grave, Chief Strategy and Transformation Officer; Alejandro Arze, CEO of Home Improvement; First, Mr. Juan Pablo Harrison, CFO, will provide a summary of the consolidated results for the third quarter of 2024. Following his presentation, we'll open the floor for questions. [Operator Instructions]. Now we'll start with the conference with Mr. Juan Pablo Harrison.

Thank you, Gigi. Good afternoon, everyone, and welcome to Falabella's Third Quarter Earnings Call. I would like to remind you that during this presentation, management may make forward-looking statements relating to our company. The results operation of expenses, strategy, potential restructuring and other matters alike. This will be characterized by the use of terms such as planned, pretend, expect, anticipates, estimates, hope and seek. Such statements are based on assumptions and expectations of future events that are uncertain and contain risks. Therefore, for further information on this matter, I kindly refer you to the disclaimer on forward-looking statements that is displayed on the screen. Also, the numbers presented during the call will be according to IFRS rules, expressed in U.S. dollars around $2 million. Therefore, certain small differences may arise with the publisher's financial statements. I will start the call by going over some key operational highlights of our physical digital ecosystem and capabilities. Let us begin reviewing from Slide 3 onwards. During the quarter, our retailers in the region continued to show sequential improvement with superior local currency growth, when compared to the figures presented in the second quarter '24. A result formats in countries -- across all format in countries, notably year-over-year consolidated revenue growth reached 7%, for home improvement 9%, for Falabella retail and 12% for [ Toby ]. Additionally, Falabella's revenue grew 11% year-over-year in Chile and 7% in Peru, with Colombia's revenue impacted by a nonrecurring effect. Now looking at the GMV graph. The figures of the e-commerce channel, which includes the first day of the Cyber Day event in Chile demonstrated growth in both 1P and 3P channels, highlighting a 20% increase in the sales of home improvement and 21% growth among our more than 20,000 sellers. This reflects the progress of our e-commerce strategy. On the financial services side, we continue to see the contraction in the consolidated loan book, while risk levels continue to improve at a regional level, reaching a consolidated NPL ratio of 3.6%, decreasing 62 basis points versus second quarter '24. However, regarding the operation in Chile, it's worth highlighting the quarter-over-quarter growth of the portfolio, enabled by the good credit behavior of our plants, which has allowed us to really make our credit origination policies more flexible, as well as the 1.4% year-over-year increase in the net interest income which was driven by reduced cost of funding. Lastly, purchases with our payment metals increased 14% year-over-year, showing progress in becoming the primary bank of our -- for our customers. While in Chile, we continue to consolidate ourselves as the leading bank in a number of current accounts. Consolidated revenues increased 6% year-over-year, in line with the previously stated top line improvement of the retailers, and a decrease in the banking revenue due to a lower level of loan book and lower interest rates. However, it is worth noting that the banks in Chile and Peru showed year-over-year expansion in the net interest income. Gross profit expansion of 20% year-over-year mainly explained -- was mainly explained by Falabella retail that grew 21% year-over-year, mostly attributed to Peru, which increases its contribution 40%, followed by Chile with a 14% increase, due to better commercial proposition and inventory management. Banking businesses increased 23.3% year-over-year, mainly due to the variation in Chile that improved 28.2%, with a cost of risk that declined 53.8% and to a lesser extent, to the operation in Colombia, where the cost of risk decreased 51.4% year-over-year in local currency. Lastly, home improvement increased its gross profit, 11.5% in Chile and 20.3% year-over-year in Peru where total Peru grew 22.5% and Mercado grew 10.4% year-over-year. We closed the quarter with SG&A contention, reaching an SG&A over revenue ratio of 29.8% versus 30.7% in the third quarter last year and growing 2.8% compared with '23, below inflation rates in our main market, reflecting the operational efficiency efforts implemented. Considering all these factors, we achieved an EBITDA growth of 1.8x year-over-year, reaching $368 million. Finally, we closed the quarter with a net profit of $97 million, which compared to the $5 million loss in Q4 '23. The highest performance of this quarter since 2021 and better numbers than the previous quarter. Our strategy of focusing on the customers and improving profitability has yielded results with EBITDA reaching a margin of 11.6%, the highest level since 2021. Additionally, our operations continue to contribute to an improved cash position, ending the period with an amount of $1.5 million roughly for the nonbanking business, highlights that out of the $1.5 billion, nearly $1.3 million is invested in retail funds and term deposits. This operational improvement bind with a stronger cash position has resulted in our leverage ratio declining to 3.7x, reaching its lowest level since second quarter 2022, significantly below last year's peak and 1 point lower than second quarter this year. On another note, we maintain a balanced amortization profile with proportionally more debt arising from our real estate operations, in line with our financial strategy. Now I would like to leave you with Alejandro Gonzalez, CEO of Falabella.

Thank you very much for joining our call today. This quarter at Falabella, our focus on strengthening connections with our customers translated directly into improved operational metrics and robust financial performance. Without a doubt, we have been through a journey of complex position, but as a team, we remain focused on two clear goals, delivering the best experience to more than 35 million customers and restoring our profitability. Today, as we begin to see the result of our efforts, we remain keenly aware that this is just the beginning. Each of our 5 business lines hold significant untapped potential with exciting growth opportunities ahead. This journey will require focused dedication and hard work, but we are energized by the role that lies ahead of us. We just closed a quarter in which all 5 of our growth drivers improved their financial performance. Our retail operations grew at a faster pace compared to the previous quarter, though still below historical and potential levels. Most importantly, we achieved strong sales growth while also improving our margin levels due to better inventory management. Something we're pleased when our banks continued their positive trajectory, improving risk levels, and we've seen growth in the portfolio in Chile compared to the previous quarter. Finally, Plaza closed the quarter with the lowest vacancy rates in the last 5 years, reflecting high level of interest in our urban shopping centers and positioning us as a partner for the best brands in the region. As a result of the improvement in profitability, we've reached an EBITDA margin of 11.6% this quarter, as Juan Pablo mentioned, and combined with our ability to generate cash flow, our leverage ratio decreased to 3.7x below 4x for the first time since 2022, continuing the positive trend we've discussed in premium quarters. After 4 quarters of positive financial performance, we can say as a company that we are entering a new phase. Seasonal recovery consolidated, we are now focusing on the sustainable and selected growth of the group. We have a clear strategy, leveraging the strength of our brands, our omnichannel capabilities and the strong ecosystem we have built. This will enable us to strengthen our leadership in the industry and create value for both our customers and shareholders. I would like to conclude by expressing my sincere gratitude to the entire Falabella Group team. Without a doubt, the results we've achieved reflect the hard work and commitment of our teams across the various countries where we operate. Together, we're well positioned for the challenges and take the opportunities that lie ahead. Now we would like to open the line to any questions you may have.

Ladies and gentlemen, we are ready to open the lines up for your questions. [Operator Instructions]. Your first question comes from the line of Andrew Ruben from Morgan Stanley.

Perhaps if I could dig in on the sales trends for a couple of your formats in Chile. First, for home improvement, we saw a good bit of a sequential pickup in the quarter. I think you mentioned home goods. Just curious to understand a bit more of the trends for B2B versus B2C. And then for Falabella Retail, also, it's been a high comp. At the same time, you've been closing stores. Just trying to get a better sense of what's been driving the comp in Falabella Retail, including as you close stores? How much share do you see recapture color on both those segments would be very helpful.

Hi, Andrew, this is Alejandro. During the quarter, all our three customer segments showed sales growth with better performance in terms of numbers of transactions among the pro customers and the business to consumer customers. In terms of product categories, outdoor furniture, hardwares and cleaning performed particularly well. And additionally, e-commerce maintained its positive growth trajectory increasing 30% compared with the third quarter of last year. And another important fact is today, over 40% of our sales are occurring through our app or the specialist [ Sodimac ] we said that we relaunched. Looking ahead, we expect to continue improving both in margin levels and sales levels. And regarding a little bit more in your question of the B2B. We anticipate that the construction sector will begin to recover more meaningful in the second half of next year.

Thank you. This is for your question. This is Alejandro. I'll take the final retail question about the same-store sales. As you mentioned, during this quarter, we were able to increase the same-store sales. And the main reason behind this, I would say is, in certain categories, we were able to especially apparel were to focus on fast fashion as we've been sharing with you in the last quarters, especially having this new model, having delayed its first in Falabella. And also, that was translating to margin improvement. And with this, we were able to overcome the closing of stores that you mentioned. Also, I'd like to emphasize that we're taking more of a specialist approach in the different categories that we have, especially apparel, which is the most relevant in terms of performance during this -- specifically during this quarter.

Our next question comes from the line of Hector Maya from Scotiabank.

Congrats on the results. I was remembering for the banking business, if you could share with us how much more room do you see or do you have on the side of lower cost of risk? And if you could expand on the details of initiatives that you have been implementing to achieve the sequential improvement in the loan portfolio in Chile versus the second quarter that we saw?

Victor, this is Raimundo. For the fourth quarter that we report, we anticipate sequential growth in the loan portfolio in Chile, driven by recent improvement in risk metrics as you were mentioning, that have allowed us to enhance our offering in consumer loans and cash and bank, as well as the seasonal uplift in credit card purchases during the holiday season, a trend that should also benefit our portfolio in Colombia, Peru and Mexico as well. And if we look to the 2025, we forecast to continue the portfolio expansion, particularly in Chile, where we see that the risk metrics are performing better. The cost of risk is quite in line with historical levels.

And also, if I may have a follow-up this time on the online segment. We were seeing the positive performance that we've had in the category, particularly in 1P in your own product. So I just wanted to make a double-click there to see the strategy that you've been implementing to get this performance in the ramp products compared to the third-party products, because really, the own products have been trailing the third-party products, I just wanted to double click on that.

Right, Hector. This is Benoit De Grave speaking. So regarding our strategy in e-commerce, we've commented in the last quarter that our -- we've adjusted our value proposition to be differentiated by format, with Falabella being the most generalist format, that's seek to specialize in four categories: Apparel Beauty, Deco and Electro. Like Sodimac and Tottus are more specialized in their specialist categories. So we have developed a very attractive value proposition for both consumers and sellers, leaving us well positioned, in particular, the ability to leverage our omnichannel capabilities with our stores footprint and the logistics network that we have. Secondly, on the digital banking for both sellers and customers or unique capabilities in terms of fraud management, financing, and so on and then leveraging also our loyalty program, right? Regarding the differentiation and the 1P and 3P offering, as you mentioned, One Piece has been recovering, and we had a strong cyber events in September. We just closed also a strong fiber event in Peru at the beginning of November. And 3P is gaining traction. Today, 3P represented, we have curated 3P offering that represent 26% of e-commerce sales, in the third quarter and 25% year-to-date, growing 14% up to date. So the 3P offering in the specialist categories that I mentioned before and in the long term is gaining traction and being complementary to what we offer.

Our next question comes from the line of Gustavo Fratini from Bank of America.

Two questions on Peru, actually. In the retail business, we saw a very strong performance, and you mentioned higher liquidity given the pension fund withdrawal, right? How sustainable is that going forward? And how are you being cautious in terms of not having a similar situation to what you had in Chile when you had a higher liquidity, right? And the second one is, regarding your banking operations in Chile, we saw a big decline on profitability there. And I think the main driver was higher provisions. What exactly happened there?

Hi, Gustavo. This is Alejandro. I'll take the first part of your question about the retail business in Peru and then Raimundo will take the one about the bank business in Chile.