InRetail Perú Corp. (INREF) Earnings Call Transcript & Summary

Good morning, and welcome to InRetail Peru's Third Quarter 2025 Conference Call. [Operator Instructions] And please note that this call is being recorded. [Operator Instructions] Before we begin, I would like to remind you that today's call is for investors and analysts only. Therefore, questions from the media will not be taken. Joining us today from InRetail Perú are Mr. Juan Carlos Vallejo, Chief Executive Officer; Mr. Marcelo Ramos, Chief Financial Officer; and Mrs. Andrea Fabbri, Investor Relations Officer. They will be discussing the quarterly report distributed by the company yesterday. If you have not yet received a copy of the earnings report, please visit www.inretail.pe on the Investors section, where there is also a webcast presentation to accompany the discussion during this call. If you need any assistance, please contact the Investor Relations team of InRetail Perú. Please be advised that forward-looking statements may be made during this conference call, and they do not account for economic circumstances, industry conditions, the company's performance or financial results. As such, these forward-looking statements are based in several assumptions and factors that could change causing actual results to materially differ from the current expectations. For a complete note on the forward-looking statements, please refer to the quarterly report, which was issued yesterday. At this point, I would like to turn the call over to Mr. Juan Carlos Vallejo, Chief Executive Officer of InRetail Perú for his opening remarks. Mr. Vallejo, please go ahead, sir.

Thank you, Mega. Good morning, everyone. I'm Juan Carlos Vallejo. Thank you for joining InRetail's third quarter earnings call. Today, we will discuss the main highlights of InRetail's third quarter results for 2025. Joining me today are Marcelo Ramos, our Chief Financial Officer; Andrea Fabbri, our Investor Relations Officer. I will start with a brief executive summary, and then Marcelo and Andrea will walk you through our earnings presentation. During this quarter, the Peruvian economy continued experiencing a stable economic momentum, benefiting from the low inflation and a strong exchange rate. In spite of the latest presidential transition, country risk and volatility remained low, reinforcing Peru's position as one of the most stable economies in the region. In terms of consumption, this quarter was affected by the high comparison basis in 2024, given the pension funds and compensation time accounts withdrawals, which created a temporary increase in demand, particularly in the month of July. Although general economic conditions are gradually more favorable, consumption is experiencing only a caution recovery given the international context and the pre-election period. In this quarter, we moved forward with determination in the execution of our strategic priorities, advancing in our expansion projects in reinforcing the value proposition of our different formats and in the transformation of our logistics operations, further consolidating our leading multi-format platforms. In general, our businesses continue to show resiliency with the challenging comparison basis mentioned before, posting on a consolidated basis, a positive growth in revenues of 3.5% and a slight decline in adjusted EBITDA of 0.7%. Our Food Retail segment had a moderate growth in revenues of 5.4%. Growth was mainly driven by Mass and to a lesser extent by Makro. Plaza Vea, on the other hand, was the most affected by extraordinary withdrawal mentioned before and by the general slowdown in the supermarket channel. Our Pharma segment had a low growth in revenues of 0.8%, combining a steady growth in our pharmacy unit with an anticipated decline in our distribution unit in Perú, impacted by an important change in its business model that prioritize cash flow generation over top line growth. Finally, as expected, our Shopping Malls segment was still affected by the extraordinary impact related to the incident in the Real Plaza Trujillo Mall. However, this impact had a lesser effect on the financial results of our segment in terms of adjusted EBITDA compared to the prior quarters. Revenues and adjusted EBITDA declined 5% and 12.8%, respectively. Based on the impacts already recognized and on the information we have today in terms of the guidance for InRetail, we remain in line with the guidance given in the prior earnings call of mid-single-digit growth in consolidated revenues and low single-digit growth in consolidated adjusted EBITDA for 2025. Finally, I would also like to highlight that on October of this year, we successfully issued approximately $500 million of senior unsecured notes at InRetail Shopping Malls in 2 bond tranches. The spreads were the lowest ever achieved by InRetail Shopping Malls. These new issuances extend relevant debt maturity beyond 2030. With that, let me pass the word to Marcelo. And as always, we look forward to answering your questions by the end of this call.

Thank you, Juan Carlos. Good morning, everyone. Thank you for joining us on this call. Today, we will review the main highlights of InRetail's third quarter results for 2025. Now please turn to Page 4. As anticipated in our previous earnings call, Q3 '25 had an overall challenging comparison basis given the pension fund and compensation time account withdrawals, which created a temporary increase in consumption during the initial weeks of the quarter. Even in this context, InRetail delivered revenue growth across most segments, resulting in a mid-single-digit growth in consolidated revenues of 3.5%. This growth results from a moderate growth in our Food Retail segment and a slight growth in our Pharma segment. Our Shopping Mall segment, to the contrary, registered a decline in revenues, mainly explained by the closing of the Real Plaza Mall in Trujillo. In terms of adjusted EBITDA, we recorded a slight decline of 0.7% compared to Q3 '24, explained by the decrease in gross margin, the increase in operational expenses from the new stores opened and remaining extraordinary impacts arising from the incident in the Real Plaza Trujillo Mall, affecting mostly our Shopping Malls segment. As it relates to net income, we registered a 12.7% decrease in the quarter, explained by the decline in adjusted EBITDA and the increase in net financial expenses despite a higher net FX gain. In summary, in spite of the challenging comparison basis, our Food Retail and Pharma segments showed the resiliency, while our Shopping Malls segment experienced lingering impacts related to the incident earlier this year. As evidenced by our financial results, these impacts are dissipating towards the end of the year. Overall, based on the information we have to date, we remain in line with the guidance given in the prior earnings call of mid-single-digit growth in consolidated revenues and a slight positive growth in consolidated adjusted EBITDA for 2025. Now please turn to Page 5 to review a financial and operational snapshot of our consolidated figures. In terms of contribution by segment, these have remained similar to recent quarters. Our Food Retail segment continues to gain more participation in revenues relative to the last 12 months, while our Pharma segment has gained a share in adjusted EBITDA. Now please turn to Page 7 to give you a brief update on our continued ESG progress during this quarter. First of all, we're extremely proud that our Food Retail segment obtained its fourth carbon footprint star from MINAM in recognition of its progress in reducing emissions. On the social front, our flagship program, Bueno por Dentro, donated more than 4 million food rations equivalent to PEN 17 million. On the environmental front, we managed to save over PEN 1 million in our Food Retail stores by implementing best practices in energy management and recycled over 3,000 tons of waste. Additionally, thanks to Perú Pasiónó, we generated over PEN 10 million of SME sales through all our channels. Finally, during the third quarter, we released our annual sustainability report with additional and valuable information about our sustainability strategy and projects, which is available on our website for your review. Now we will discuss the results by segment. Please turn to Page 9 to review our third quarter results for our Food Retail segment. Our Food Retail segment registered a top line growth of 5.4% in Q3 '25 with a same-store sales growth of 1.5% despite the temporary closure of stores, including the Plaza Vea store in the Mall in Trujillo and the high comparison basis mentioned before. Growth in revenues were mainly driven by strong growth in our Mass format with a same-store sales growth of around 15% and a moderate growth in our Makro format with a same-store sales growth of about 2%. Our Plaza Vea format, on the other hand, posted a low single-digit decline in same-store sales affected by the short-term boost in disposable income from the pension fund and time deposit withdrawals on the comparison basis, impacting the supermarket channel in general. In terms of categories, our food categories experienced a low same-store sales growth with a modest growth in fresh food and a slower growth in dry food. On the other hand, our nonfood categories registered a slight decline in same-store sales. Revenues were also favored by the contribution of the new stores opened in the last 12 months, including 325 net new Mass stores and 1 new Makro store. During Q3 '25, we opened 53 net new Mass stores, reaching a total of 1,467 hard discount stores. Next week, we will inaugurate our 1,500 store. Our gross profit increased 3.7% with a gross margin of 23.4%, below Q3 '24 due to the change in format mix. Our emerging format account for approximately 50% of our Food Retail revenues with Mass already represented more than 20%. In terms of adjusted EBITDA, Food Retail's adjusted EBITDA grew 2.3% in Q3 '25 with a reduction in margin of 28 basis points. This reduction is mainly explained by the decrease in gross margin and by the incremental expenses from new stores opened, the new minimum wage and the increase in logistic expenses associated with additional warehouse space rented for 8 new dedicated distribution centers for Mass and with a greater presence of our hard discount stores in provinces. Overall, despite the challenging comparison basis, we showed progress in our multi-format strategy, refining our formats and their value propositions. As already mentioned and in line with our strategy, the change in format mix, the progress made in our organic expansion plans and the investments made in our logistic platform involve incremental investments and expenses that affect our short-term results. However, we are confident that they are essential to building a solid and sustainable foundation for strong and profitable growth starting next year. Now please turn to Page 10 to review our third quarter results for our Pharma segment. Our Pharma segment posted an increase in revenues of 0.8% in Q3 '25, combining a positive growth in revenues of 1.9% in our Pharmacies unit with a decline in revenues in our distribution unit. Same-store sales growth for our Pharmacies unit reached 1.2%. Pharma categories were favored by the winter season, driving demand for cold, flu and respiratory-related products. Non-pharma categories posted a slight positive same-store sales growth. And during the quarter, we continue to see growth in consumer-related categories, in particular, personal care, driven by the successful execution of our category diversification strategy. During Q3 '25, we continued innovating with our formats, looking to increase productivity per store. We implemented certain modifications in some of our Mifarma Beauty stores to enhance the experience and increase focus on personal care and beauty care categories. This new format aims to exploit niche categories with high growth potential where our market penetration is still low. Additionally, in our pharmacies unit, we progressed with our expansion plan, opening 48 net new pharmacies. And in the last 12 months, we've opened 87 net pharmacies. In relation to our distribution unit, we posted a decrease in revenues of around 3%, combining a slight growth in Ecuador with a decline in Perú. As mentioned before, our distribution business in Perú is going through an important change in its business model that started late last year, prioritizing cash flow generation and return on invested capital, implementing stricter collection terms and focusing on our main channels, aligned to our core competencies in the Pharma segment. Although these changes have resulted in a drop in revenues, they have also created substantial efficiencies in working capital and in operating expenses. We expect these trends to persist in the near term as we continue to simplify structures, streamline processes and focus on our core categories and competitive capabilities. In terms of gross margin, we registered a gross margin of 32.5%, below Q3 '24, mostly explained by the lower gross margin in our Pharmacies unit, given the high comparison basis of last year, which included an extraordinary reversal of provisions related to shrinkage costs. Gross margin was also affected by the decline in margins in our distribution unit. These effects were partially offset by the higher participation of our pharmacies unit in the revenues mix. Our Pharma segment recorded an adjusted EBITDA growth of 1.1%, driven by the growth in revenues and operational efficiencies despite the lower gross margin. Overall, our Pharma segment continues to deliver a positive growth, supported by the steady performance in our Pharmacies unit despite the changes in business model in our distribution unit in Perú, maintaining profitability and enhancing cash flow generation in the segment. Please turn to Page 11 to review our third quarter results for our Shopping Malls segment. As anticipated in our previous earnings call, the financial results in Q3 '25 for our Shopping Malls segment still experienced some impact arising from the incident in the Real Plaza Trujillo Mall, although to a lesser extent compared to prior quarters. Our Shopping Malls segment registered a decline in revenues of 5%, impacted by the income loss from the continued closure of the mall in Trujillo and by the extraordinary discounts granted to tenants of the mall. Additionally, revenues were hindered by the decrease in variable rent in several tenants from the high comparison basis in Q3 '24. These effects were partially offset by the improvement in performance in other malls. Our tenants registered a negative same-store sales of 2.3% during the quarter, impacted by the high comparison basis mentioned before. Our gross margin was 65.6% this quarter, lower than Q3 '24, mainly explained by higher marketing and maintenance costs due to the phasing in the incurrence of these expenses in addition to the higher rental costs. In terms of adjusted EBITDA, we reached PEN 109 million, a drop of 12.8%. This decline is mainly explained by the extraordinary impact arising from the incident earlier this year, the lower gross margin and the increase in other operating costs. As anticipated, the impacts from the incident are gradually easing towards year-end as evidenced by the lower decline in adjusted EBITDA compared to prior quarters. Now please turn to Page 12. During Q3 '25, we advanced in our organic expansion strategy, opening new Mass stores and new pharmacies together with the expansion of our Real Plaza in Primavera mall. In terms of same-store sales, Q3 '25 presented a more challenging consumption environment driven by a more demanding comparison basis, particularly during July, resulting in lower same-store sales growth across our segments. Now please turn to Page 14 to review our consolidated net income results. InRetail registered a net income of PEN 241 million in Q3 '25, a 12.7% decrease compared to Q3 '24. As mentioned before, the decrease in net income is explained by the decline in adjusted EBITDA and the increase in net financial expenses despite the higher net FX gain. The increase in net financial expenses comes from the larger IFRS 16 related financial expenses associated with the opening of Mass and pharmacy stores and from higher financial debt interest rates related to the liability management strategies executed over the last 12 months in all segments. Now I will pass the word to Andrea, who will discuss our CapEx, cash flow generation and consolidated financial debt.

Thank you, Marcelo. Now please turn to Page 15. During Q3 '25, we invested PEN 230 million in CapEx for our 3 business segments. This was mainly invested in the expansion of our physical network in maintenance of our existing network and in our new Pharma Distribution Center. In our Food Retail segment, CapEx in Q3 '25 was mainly invested in the opening of 57 new Mass stores, 53 net, in the implementation of 2 new Plaza Vea stores in provinces and in scheduled maintenance of existing stores. In terms of openings, we expect to open around 300 Mass stores and 2 Plaza Vea stores in 2025. In our Pharma segment, CapEx was largely invested in the construction of our new distribution center in the opening of 51 new stores, 48 net and in scheduled maintenance of our existing network. We expect to close 2025 with around 100 stores open. Finally, in our Shopping Malls segment, CapEx this quarter was invested in scheduled expansion projects in existing malls, mainly in Piura and in Primavera, the latter inaugurated in August and in new power center in Tarapoto. The remaining CapEx was invested in maintenance of our malls, mainly related to extraordinary investments made of further preventive and corrective measures. In terms of cash balance, we ended the third quarter with approximately PEN 1.5 billion of cash, in line with the end of last year's cash balance despite the higher CapEx investment and the decrease in adjusted EBITDA during 2025. Now please turn to Page 16 to discuss our consolidated financial debt. As of September 2025, InRetail had a consolidated net debt of PEN 5,859 million, with a net debt to adjusted EBITDA ratio of 2x, below the comparable quarter of 2024 despite the decrease in adjusted EBITDA during 2025. The decrease in total net debt compared to Q3 '24 is mainly explained by the higher cash position despite the scheduled amortization and by the appreciation of the local currency, which affects our dollar-denominated bonds related to our international bond issuances. The short-term position of our consolidated debt stood at PEN 798 million, significantly below the prior quarter as we completed the refinancing of our structural medium-term loan during Q3 '25 in our Food Retail, Pharma and Shopping Mall segments. As of September 2025, we have successfully refinanced more than PEN 2 billion in our 3 business segments over the last year. Now I will pass the word back to Marcelo to review our debt by segment.

Thank you, Andrea. Please turn to Page 17. Our Food Retail segment ended the third quarter with a net debt of PEN 2.875 billion below the previous quarter and below Q3 '24. Net debt to adjusted EBITDA stood at 2.6x, in line with the comparable quarter of 2024. InRetail Pharma ended the third quarter with a net debt of PEN 1.518 billion and a net debt to adjusted EBITDA ratio of 1 from a continued increase in cash flow generation given the execution of the strategies mentioned before, despite the higher CapEx. InRetail Consumer ended the third quarter with a net debt to adjusted EBITDA ratio of 1.6, below the previous quarter. We expect to close 2025 with a net leverage ratio slightly below 2024. Finally, InRetail Shopping Malls ended the third quarter with a net debt of PEN 1.477 billion, resulting in a net debt to adjusted EBITDA ratio of 3.4x, affected by the decline in adjusted EBITDA and the pickup in CapEx related to our expansion projects and to preventive maintenance investments. Nevertheless, our Shopping Malls segment remains with a very solid liquidity position and a very comfortable outlook with respect to our limits set by our bond intention. We anticipate our Shopping Malls segment to end 2025 with a slightly higher leverage ratio compared to Q3 2025. Now please turn to Page 19 to give you a brief summary of an extraordinary post-quarter event. On October 9, we successfully issued approximately $500 million of 7-year senior unsecured notes at InRetail Shopping Malls, combining one U.S. dollar tranche of $375 million and one PEN tranche of PEN 428 million at attractive coupons of 5.65% and 7.125%, respectively. The implied spreads were the lowest ever achieved by InRetail Shopping Malls. The proceeds were mainly used to refinance all outstanding 2028 notes, extended material debt obligations for Shopping Malls to 2030 and beyond. The dollar tranche reached an order book oversubscription of around 3x at peak, evidencing investor confidence and trust in the credit given its high predictability, strong liquidity position and resilient nature. As we have done in previous issuances, we executed different hedging structure until maturity to partially hedge the U.S. dollar-denominated principal debt and coupon payments. With that, we cover our presentation, and now we will be glad to answer any questions you may have.

[Operator Instructions] The first question comes from Alonso Aramburú with BTG.

I wanted to ask first on Trujillo, whether you have any updates on the potential reopening of the shopping center? And if you can comment on potential new projects in the shopping center business in 2026? And second, if you could also give us some color as to how sales and consumption has evolved after the close of the quarter in October and November.

Thank you, Alonso, for the questions. Can you repeat -- sorry, the third question? We couldn't hear you very well for the third question.

Yes. No, it was -- the first one was on Trujillo. The second one was on the trends after the quarter, what you're seeing in sales in October and early November.

Okay. Perfect. Thank you. So look, as it relates to the opening of the mall in Trujillo, as we mentioned before, we continue to work closely with the authorities. However, the final decision lies beyond our control, and it's dependent on local authorities, to be honest. Despite our efforts at this point, sadly, we don't have a precise visibility regarding the opening of the mall. We believe it's highly unlikely or nearly impossible that the mall is going to be opened this year. Having said that, as you guys know, in 2024, Real Plaza Trujillo accounted only for 6% of total revenues and adjusted EBITDA. And over the next year and next year, the natural growth of the business will more than offset the income and EBITDA loss from the closure of the mall. And as we mentioned in the call as well, most of the impacts regarding the incident have been recognized to date. And in terms of adjusted EBITDA, the impacts are essentially progressively dissipating. Then the second question on the new projects, I believe, was regarding the -- in Shopping Malls. What we have is this year, we opened not in the third quarter, but we opened in the fourth quarter, a new power center in Tarapoto that was opened a couple of weeks ago. We have a couple of important expansion projects, one of which is already opened in Primavera, the other one in Piura. And as it relates for next year, we have a big expansion project as well in Lurín for the existing mall and one power center as well in provinces that should be opened by the end of the year. And then the third question, as it relates to trends. So important to mention again, Alonso, that if you look at the third quarter results, the effect on the same-store sales and the performance had to do basically with a very negative July, and that's essentially given the high comparison basis that we had in 2024. Beyond July, if we looked at August and September, there was a progressive improvement in same-store sales, all of the businesses with positive same-store sales in August and in September. And October has been pretty similar to what we saw in September. I mean, we have Food Retail at same-store sales of around 2%. Pharma is actually performing slightly better. Same-store sales closer to 4% as opposed to the 1% and the 2% that we saw in the quarter. Still though, as I mentioned in the call, on a consolidated basis in Pharma, if we add the distribution business, distribution business in Perú is still suffering from a decline in revenues given this change in the business model.

[Operator Instructions] Our next question comes from Giovanni Vescovi with JPMorgan.