InRetail Perú Corp. (INRETC1) Earnings Call Transcript & Summary

Good morning and welcome to InRetail Perú's First Quarter 2020 Conference Call. [Operator Instructions] It is now my pleasure to turn the call over to Rafael Borja of i-advize Corporate Communications. Sir, please begin.

Thank you and hello, everyone, and welcome to InRetail Perú First Quarter 2020 Earnings Conference Call. Before we begin, I would like to remind you that today's call is for investors and analysts only. Therefore, question from the media will not be taken. Joining us today from InRetail Perú are Mr. Juan Carlos Vallejo, Chief Executive Officer; and Mr. Gonzalo Rosell, Chief Financial Officer. They will be discussing the quarterly report distributed 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 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.

Thank you, Rafael. Good morning, everyone. I'm Juan Carlos Vallejo. Thank you for joining InRetail's first quarter earning call. Today, we will review the main highlights of InRetail's first quarter results, beginning with a brief update on the initiatives we are implementing in the context of the challenging COVID-19 pandemic. I will start with a brief introduction, and then Gonzalo will walk you through our presentation. As you all know, the government of Peru declared a national state of emergency to contain the COVID-19 spread, which has started on March 16, and which is expected to end on May 24 after 70 days of general quarantine. Until May 10, only commercial establishments related to essential goods and services were allowed to operate. As of May 11, the economy started regulating in 4 consecutive phases by economic activities. On May 11, the reactivation of e-commerce, restaurant deliveries, textile and confection already begun. Since the beginning of the quarantine, we have worked very hard to prioritize the health and safety of our employees, clients and business partners and have complied with all the recommendation imposed by the Peruvian government. Gonzalo will cover the main initiatives taken by us to deal with this unpleasant pandemic. In this context, we consider it fundamental to preserve liquidity in our business. At our 3 business segment, our debt is mostly long term, and we have enough liquidity to cover our operating needs and debt service obligation even if the state of emergency was further extended. In spite of that, in particular in our Shopping Malls segment, we are restricting nonessential investment until further notice. In our Food Retail and Pharma segment, we have been operating relatively normal, although with restricted opening hours and closed on Sundays and on other strategic dates determined by government. Our shopping malls are mostly closed, except for the supermarket and some banks and pharmacies that operate within. Our shopping malls are not yet charging rent to a tenant that are not legally allowed to operate during this national state of emergency. According to the government's reactivation plan, shopping malls will progressively resume operations with capacity restriction in the second phase of reactivation, beginning in June. As shared in previous quarters, we have been working very hard in developing our e-commerce and omnichannel strategy, and we're already leaders in e-commerce sales in food retail and pharma in Peru. Despite that, over the last several weeks, we have put on an extraordinary effort and resources to expand several fold our processing capacity of digital daily orders for delivery and click-and-collect and improve service levels and the customer journey. With that, we expect to better serve the significant increase in daily orders during the pandemic and seize the permanent incremental demand or migration of customers to digital channels. Despite the difficult to predict the near future and knowing that this will take time to go back to normal mainly for our Shopping Malls segment, we wanted to highlight that InRetail is a consolidated, adaptable and diversified market leader in Peru in its 3 segments, with a solid financial stability. All these will allow us to overcome and adapt to this unpleasant situation and become stronger to continue development more in retail in Peru, looking to satisfy the daily consumption needs of our clients, any place and time in a simple way and with the best prices. With that, let me pass the word to Gonzalo. And as always, we look forward to answering your questions by the end of this call.

Thank you, Juan Carlos. Good morning, everyone. Thanks for joining us on this call. Before starting, I would like to briefly remind you of what I commented during our last quarterly earnings call. As of this year, 2020, we will begin to discuss our earnings presentation and our management discussion and analysis under IFRS 16 since our numbers will now be fully comparable to numbers reported in our financial statements from 2019. As always, we will make our best effort to give the necessary information for an easy comprehension of our performance. For this reason, in the appendix of this presentation and in our management discussion and analysis, we will continue to show the reconciliation of our adjusted EBITDA and net income to pre-IFRS 16 figures. And there is also information in the notes accompanying our financial statements. Now please turn to Page 4 in the presentation to start with an update on the COVID-19 scenario. I will begin with an overview of the different government measures that have been implemented during the 60 days of quarantine that we have completed yesterday to try to contain the spread of the pandemic while trying to give some relief to our severely affected economic activity. As you can imagine, the last several weeks have been very hectic in our Food and Pharma segments in terms of adjusting these 2 organizations, with thousands of employees to maintaining store and supply chain operations with new biosecurity standards in the context of mobility restrictions, severely limited public transportation and frequent changes in operating hours and unexpected announcement of additional days of general national lockdowns. Government measures and the pandemic itself also impacted consumption patterns, changes in sales mix, frequency of customer visits and days of peak sales and others of 0 sales while in mandatory lockdowns, putting significant stress and demanding a rapid response from the supply chain to avoid stock-outs and food waste shrinkage. In this context, the government released different measures, aiming to support companies and households, trying to avoid a payment chain break. In terms of measures for companies, the government first announced a subsidy of 35% of company payroll for salaries of up to PEN 1,500. And shortly after, a PEN 30 million line of guaranteed low-rate credits to companies through a Reactiva Perú program, which was recently extended to an additional PEN 30 million, totaling PEN 60 million in low-rate credits to companies. Additionally, government has released more than PEN 1 billion in available funds to support small companies and has postponed taxes for small companies as well. In terms of incentives to households, the government has provided subsidies to poor families, rural families and independent workers, aiming to benefit approximately 6.8 million households. Additionally, several measures related to allowing the withdrawal of pension fund savings were taken during this period with the latest modification allowing the withdrawal up to 25% of pension fund individual savings for up to an amount of PEN 12,900 per affiliate. Finally, service time accounts have also been allowed for withdrawals of up to PEN 2,400. All government measures, which include the ones I mentioned and others, are expected to represent approximately 16% of Peru's GDP. Finally, on May 4, the economic reactivation plan was announced and approved by government. The economy has started being reactivated in 4 consecutive phases by economic activities. The first phase started earlier this week on May 11 with the reactivation of e-commerce, restaurant deliveries, textile and confections. However, the number of companies which have resumed operations is still small due to the strict biosecurity standards. The shopping malls industry is expected to progressively resume operations with capacity restrictions in the second phase beginning in June. Now please turn to Page 5. This slide provides to summarize a normalized version of the main government measures I just commented in the previous one. So please turn to Page 6 to comment on the measures that we, at InRetail, have taken in this context. Since the beginning of the quarantine, we have worked very hard to assure business continuity in these challenging context in order to satisfy the consumption needs of our clients and prioritizing the health and safety of our employees, clients, business partners and communities as well as complying with all the recommendations imposed by the Peruvian government. Over the following slides, I will walk you through the main measures taken by us with focus on employees, clients and community at our store operations, commercially in logistics, in our e-commerce and ultimately, to preserve liquidity. Please turn to Page 7 to discuss the main measures of InRetail's COVID action plan related to our employees. Currently, most administrative teams and risk groups are working from home, ensuring business continuity. Face mask, gloves, anti-bacterial gel and other personal protective measures have been granted to all store employees. We are constantly surveying our employees' health as well as performing COVID-19 testing and providing medical assistance. We're primarily educating our employees on health and prevention matters related to COVID-19. We have also granted a subsidy to employees to facilitate transportation to work given the lack of public transportation available. And finally, we have introduced differentiated shifts for store employees to avoid risk of potential cross-contamination. Now please turn to Page 8 to discuss the main measures of InRetail's COVID action plan related to our clients and communities. As I previously commented, the safety of our clients, employees and business partners is a top priority for InRetail. We have kept close to clients, constantly communicating our store opening hours, store protocols and recommendations for prevention and care through several communication channels with focus on digital channels. We have also offered emotional support to clients through these digital channels, offering tips for healthy eating, sports routines, stress relief, activities for kids, among others. Finally, we have helped with a donation of food and personal care products to vulnerable populations and also donated masks and health kits to public entities. Now please turn to Page 9 to discuss the main measures of InRetail's COVID action plan focused on our store operation. As I previously commented, all food retail and pharmacy stores are open with reduced operating hours, which constantly changed. Additionally, stores are closed whole day on Sundays. Gender restrictions were -- per day were temporarily imposed and stores were closed on other imposed days, for example, Easter holidays. Shopping malls are mostly closed since March 16, except for supermarkets and some banks and pharmacies that operate within malls. In the beginning of the quarantine, we have implemented new COVID-19 protocols for stores and malls, with a priority of protecting employees, customers and third-party suppliers. We have also strengthened hygiene, cleaning and biosecurity and maintained strict control of number of customers inside stores and malls. In Plaza Vea and Vivanda stores, we have implemented plastic shields at cash registers, one-way aisles, constant cleaning of shopping carts and additional checkout lines for seniors and vulnerable population. In pharmacies, we have implemented 1-meter distance separation between clients and employees. In malls, we have segmented access lines for supermarkets, pharmacies and banks, mandatory cleaning of shoes and temperature control before entry to malls among others. Now please turn to Page 10 to discuss the main measures of InRetail's COVID action plan in the commercial front. Our commercial teams rapidly responded to increased safety stocks of key categories in all food and pharma formats. We also strengthened product assortment to attend the new customer needs tailored to our different formats and establish new supplier relationships to meet demand and compensate temporary shortage of supply in specific categories. In this context, we maintained our every-day-low-price strategy in our EDLP formats. Especially in Food Retail, we also introduced additional packaging for bakery and fresh products to reduce risk of contagion. Now please turn to Page 11 to discuss the main measures of InRetail's COVID action in the logistics front. Our logistics teams were also vital in rapidly increasing the safety stocks of key categories. In our distribution centers, we reallocated employees to attend key categories and redefine the shifts to avoid contagion, increasing productivity to satisfy demand. We also increased fulfillment frequency to our Mass stores, which registered a relevant increase in demand due to the convenient location and wide network of stores throughout Lima. In this context, we also rented additional storage space for our Food Retail segment. Overall, our logistics teams has rapidly responded to the permanent changes in store opening hours and days, which impacted demand patterns and required supply adaptability to avoid stock-outs and food waste shrinkage. Now please turn to Page 12 to discuss the main measures of InRetail's COVID action plan in our e-commerce business. E-commerce registered a significant increase in demand in both Food Retail and Pharmacies, overwhelming our operational capacity. In Food Retail, we are working on increasing capacity by improving our picking process. We have recently implemented one new dark store for dry food and an additional dark store for dry and fresh food will be operational by the end of May. With these 2 dark stores, we expect to increase our processed daily orders 5 fold versus where we were prior to the pandemic. In pharmacies, we are working on increasing capacity of our dedicated e-commerce distribution center as well as introducing 7 new mini distribution centers to be operational by the end of the second quarter and increasing the number of pharmacies that attend e-commerce and call center orders. With that, we expect to increase our processed daily orders 2.5 fold versus where we were prior to the pandemic. In malls, we are working to implement a marketplace for our tenants to be operational in the third quarter, and we'll be piloting a drive-through service and personal shopper service, among others. In all our business segments, we will focus on strengthening our click-and-collect channels. Currently, food has 70 click-and-collect stores for nonfood sales and 34 click-and-collect stores for food categories. Pharma has 48 click-and-collect stores and is accelerating rollout to reach 450 in the second quarter of this year. Shopping malls will also be introducing click-and-collect modules by the time of reopening. Finally, we will continue with other digital initiatives in all our segments related to user experience, customer support, payment options, digital checkouts, among others. Now please turn to Page 13 to discuss the main measures of InRetail's COVID action plan related to preserving liquidity. In this context, we consider it fundamental to preserve liquidity in our 3 business segments. For this reason, we have used short-term credit facilities and are negotiating additional preventive credit lines. We have also postponed all nonessential investments until further notice. Finally, we have implemented a rigorous expense control to generate savings to compensate additional expenses related to COVID-19 protocols in our 3 business segments. Now please turn to Page 13 to briefly comment on how our COVID-19 action plan fits into our current and future business models. Our business models have proved to be strong and adaptive within this context. We are the leading multi-format retailer in Peru with strong brands and leadership positions in our 3 segments. In our Food Retail segment, we expect to continue strengthening our leadership position, adapting to new client needs and priorities. We will strengthen our e-commerce platform with increased operating and logistic capacities. We'll also enhance the Mass format, covering the basic consumer baskets, with low prices and convenient locations. And finally, we will continue to implement rigorous expense controls to generate savings. In our Pharma segment, we will also strengthen our leadership position, maintaining strong value propositions in both pharmacy chains. We will strengthen our e-commerce platforms with increased operating and logistic capacities. We will also strengthen and develop categories to attend needs arising from COVID-19. And finally, we will continue to implement rigorous expense controls to generate savings and efficiencies. And in our Shopping Malls segment, we will also strengthen our leadership position, reinforcing our strategic partnership with tenants. We will postpone all nonessential investments until further notice and implement rigorous expense controls to generate savings and efficiency. We are also currently learning from international mall players, which are reopening malls before us. We will be implementing digital initiatives such as marketplace for tenants, click-and-collect modules and piloting new services, such as drive-through and personal shoppers to adapt to this new context. This sums up our COVID-19 updates. Now please turn to Page 16 to review our consolidated financial results for the first quarter of 2020 for InRetail Perú. In the first quarter of the year, InRetail reported a mid-single-digit growth in revenues and relatively stable gross margin despite the start of a national state of emergency since March 16 and the closure of our shopping malls. Revenues reached PEN 3.4 billion, a 4.8% increase versus the first quarter of last year, and gross margin stood at 29.1% in the quarter. In terms of adjusted EBITDA, we recorded a double-digit growth of 10.5% in comparison to the same period of last year, reaching PEN 440 million, explained by the double-digit adjusted EBITDA growth in both our Food Retail and Pharma segments, offsetting the decline in our Shopping Malls segment. This translated into an adjusted EBITDA margin of 12.9% in the quarter, compared to 12.3% reported in the first quarter of last year, an expansion of approximately 60 basis points. Finally, our net income reached PEN 92 million in the quarter with a net margin of 2.7%, negatively impacted by an FX loss related to the dollar-denominated lease liabilities as per IFRS 16. For reference, our soles currency appreciated approximately 4% in the first quarter of the year from the PEN 3.317 per dollar at the end of 2019 to PEN 3.442 per dollar at the end of March. Please turn to Page 17 to review a financial and operational snapshot of our consolidated figures. In terms of contribution, considering last 12 months as of March 20, our Food Retail segment accounted for 44% of InRetail's consolidated revenues and 29% of consolidated adjusted EBITDA with an adjusted EBITDA margin of 9.2%. Our Pharma segment accounted for 51% of consolidated revenues and 53% of consolidated adjusted EBITDA with an adjusted EBITDA margin of 14.5%. Finally, our Shopping Malls segment accounted for 4% of consolidated revenues and 18% of consolidated adjusted EBITDA with a net rental income margin of 80.9%. We will now continue with our results by segment. Please turn to Page 19 to start with the highlights for our Food Retail segment. Our Food Retail revenues for the first quarter recorded a double-digit growth of 10.7% in comparison to the first quarter of last year. This growth is explained by a solid same-store sales growth of 7.5% in the quarter, positively impacted by a strong increase in food categories, which compensated the negative performance in nonfood categories since the start of the national state of emergency due to the restrictions imposed on the sale and delivery of non-food categories, and despite the high comparison of same-store sales basis of 9.5% were registered in the first quarter of 2019. Additionally, revenues were positively impacted by the ramp-up of the approximately 22,000 square meters of the sales area we opened in the last 12 months, compensating the temporary closure of one of our top 5 Plaza Vea stores, Plaza Vea Miraflores, which remained closed since February due to the maintenance and refurbishing works. We expect to reopen our Plaza Vea Miraflores store in the third quarter of this year. This quarter, we opened 3 Mass stores and closed 10 Mass stores, totaling 7 net closings. The closings of these stores forms part of our plan to close 40 of the smaller size, less efficient Mass stores this year. Our gross margin reached 25% this quarter, a slight reduction of 24 basis points versus Q1 2019, mainly due to the higher penetration of new formats in the sales mix. In terms of adjusted EBITDA, Food Retail's adjusted EBITDA grew a solid 19.2% in the quarter, reaching an adjusted EBITDA margin of 8.7% compared to 8.1% in the same period of last year mainly due to a better fixed cost dilution, offsetting the incremental expenses related to COVID-19 and despite the increasing weight of new formats and e-commerce sales. Overall, we continued strengthening our multi-format strategy in the Food Retail segment. The COVID-19 context has strengthened the positioning of our higher discount and Cash&Carry formats, Mass and Economax. Mass has positively performed due to its conveniently located stores, adequate product assortment for the basic daily consumer basket and low prices. Economax has also responded well in this context, serving the professional clients but also being close to the end consumer looking to stock up at everyday low prices. We expect these 2 formats to positively contribute to EBITDA through the rest of the year. In terms of sales performance, in the first quarter of 2020, our flagship format, Plaza Vea, represented 82% of sales. Our high-end supermarket, Vivanda, represented 5% of sales. Our high-discount format, Mass, represented already 9% of sales, and our more recently launched Cash&Carry format, Economax, represented 4% of sales. Given the dramatic impact of the pandemic on society and on the economy and despite the remaining uncertainty to predict the near future, we wanted to share with you an updated guidance of projections for this year. For our Food Retail segment, for 2020, we expect to maintain a high single-digit growth in revenues and adjusted EBITDA. This assumes that we will be able to offset the incremental costs related to the pandemic and the higher penetration of our new formats and e-commerce sales with additional fixed cost dilution. Now please turn to Page 20 to review the highlights for our Pharma segment. Our pharmacies unit registered a slow top line growth of 2.6% in the first quarter of 2020, explained by a flat same-store sales of 0.3%, which was negatively impacted by a slow consumption environment and reduced foot traffic since the start of the national state of emergency, which affected both pharma and non-pharma categories. As I commented in the COVID-19 update section, foot traffic has been significantly impacted by the mandatory curfews and stay-at-home policies. Opening hours of our pharmacies have been limited during weekdays, and there's been mandatory whole day curfews on Sundays, which negatively impact traffic to our stores and therefore, sales. This quarter, we opened 18 net new pharmacies. Despite the slower top line growth, gross margin reached 35.8%, 90 basis points above Q1 '19, mainly due to higher rebates and adjusted EBITDA margins reached 17.5% compared to 15.5% in Q1 '19, offsetting the incremental expenses related to COVID-19. In our MDM unit, we reported a low single-digit revenue growth despite a high comparison base in Q1, where we still distributed discontinued business lines. Gross margin was 12.7% in the first quarter, lower than Q1 '19, mainly due to a change in client mix in the distribution unit in the context of COVID-19. Finally, in our MDM unit, adjusted EBITDA margin reached 3.5% in the quarter, 37 basis points above Q1 '19, mainly due to the absence of PEN 3.4 million of one-time personnel expenses registered in Q1 2019. All in all, at a consolidated level, revenues registered a flat growth this quarter in comparison to the previous quarter, and adjusted EBITDA grew 12.2%, reaching a consolidated adjusted EBITDA margin of 14.1%. In terms of revised guidance for pharmacy, we have to bear in mind that these business units benefits from foot traffic passing by our stores, buying not only pharma but also personal care, consumer and nutrition categories. During the first 8 weeks of national lockdown, in mid-March today, we have experienced traffic reductions of 10% to 15%, negatively impacting sales, and we still have a couple of more weeks to go to May 24, the end of the 70-day general quarantine. From then on, we expect that as traffic starts normalizing, we progressively return to daily sales in line with pre-COVID averages. Margins might also slightly deteriorate in this revised scenario as consumers trade down to lower ticket categories and the slower sales impact fixed cost dilution, while we continue incurring in additional biosecurity expenses related to COVID-19. For the MDM unit, although too early to tell, we also expect a slightly slower performance of our distribution channels. Now please turn to Page 21 to review the highlights for our Shopping Malls segment. As I mentioned before, our malls are closed since March 16, operating only supermarket, pharmacies and banks within malls, which represent approximately 20% of GLA. Our shopping malls are not yet charging rent to the tenants that are not legally allowed to operate during this national state of emergency. Our Shopping Malls segment registered a slow top line growth of 0.9% in the first quarter with tenant same-store sales growth of 0.7%, negatively impacted by the closure of our shopping malls, which offset the strong [ de-growth ] in revenues of close to 20% in the first 2 months of the year with the ramp-up of our recently inaugurated mall, Real Plaza Puruchuco. Our average occupancy rate maintained high levels of 94%, in line with the occupancy levels at the end of last year, which were slightly below our 96% average due to the inauguration of Real Plaza Puruchuco, which is in the process of maturation. In terms of margin, our net rental income margin decreased to 79.2%, mainly due to the closure of our shopping malls, which offset the net rental income margin improvements we have registered at the beginning of the year. In terms of mark-to-market, we registered a gain of PEN 7.5 million in this quarter, compared to PEN 3.2 million in the same period of 2019. In terms of revised guidance for our Shopping Malls segment, despite the difficulty to predict the near future and knowing that it will take time to go back to normal in the second half of the year, we do expect a material drop in revenues this year of around 25% to 35% versus 2019 and a material growth in adjusted EBITDA of around 40% to 50%. However, our Shopping Malls segment is a consolidated market leader in the country with a necessary financial stability to overcome this unprecedented situation. At the end of March 2020, in shopping malls had a cash balance of PEN 209 million in cash and cash equivalents, which includes PEN 147 million of investments in InRetail shares and have additional borrowing capacity. We are currently in the process of negotiating PEN 200 million of additional preventive credit lines. Furthermore, our Shopping Malls segment has no relevant maturities of financial obligations due in 2020, and as I commented before, we have postponed all nonessential investments and have significantly reduced operating and SG&A expenses with respect to our initial yearly budget, which includes temporary salary reductions for headquarter employees. Now please turn to Page 22 to comment on the protocols we have been implementing in our Shopping Malls segment. As I previously commented, according to the last government announcement, the economic reactivation of the country will be done in 4 consecutive phases by economic activities. Shopping malls will progressively resume operations with capacity restrictions in the second phase beginning in June. Our Shopping Malls segment is fully prepared to -- for reopening. Several protocols were already in place for the operation of supermarkets, pharmacies and banks within our malls, and others have already been implemented for reopening. We're strictly controlling the entry of visitors with temperature control, cleaning of shoes and hands at entry, live update of number of people in malls, among others. Inside the malls, we are also restricting the use of lifts for elderly and pregnant women only, marking spaces in mechanical stairs, using visual communication to inform customers on restrictions and recommendations, among others. We have also implemented specific restrictions for the food court areas with limited seating, separated seating at tables, marked spaces for waiting lines, and prohibiting food trays. We will also have temporary closure of spaces within our malls, such as the kids areas, reduced sitting areas, closure of water drinking stations, among others. Finally, we will have 2 special brigades for cleaning and emergency to increase hygiene and security in our malls. Now please turn to Page 23. This slide sums up our Food Retail sales area, number of pharmacies and shopping malls as well as our same-store sales by quarter. In the Food Retail segment, there were no relevant openings this quarter. We opened 3 Mass stores and closed 10 Mass stores in the quarter, ending the quarter with 394,000 square meters of sales area. In the pharmacies unit, we opened 19 stores and closed 1 store in the quarter, totaling 2,095 pharmacies. In the Shopping Malls segment, there were no additions this quarter, ending the quarter with 807,000 square meters of GLA. Please turn to Page 25 to review our consolidated net income results. InRetail registered a gain of PEN 92 million in the first quarter of 2020 compared to a gain of PEN 160 million in the same period of 2019, mainly explained by a strong increase in EBITDA, which was offset by an exchange rate loss of PEN 45 million of which PEN 34 million relates to the loss on dollar-denominated lease liabilities after IFRS 16. Excluding exchange rate variations and mark-to-market from the valuation of investment properties, net income for the first quarter will have reached PEN 121 million, growing 26.7% versus the adjusted comparable quarter of last year. Now please turn to Page 26 to discuss our CapEx and cash flow generation. During the first quarter of 2020, we invested PEN 126 million in CapEx for our 3 business segments. Our main CapEx investments for the quarter came from the Shopping Malls segment for the remaining payables of Real Plaza Puruchuco and the expansion of Real Plaza Cusco and from the Food Retail segment for a construction and refurbishing of the Mass and Plaza Vea stores. In terms of cash balance, we ended the quarter with PEN 862 million of cash. Please turn to Page 27 to discuss our consolidated financial debt. As of March 2020, InRetail had a consolidated net debt of PEN 4,661 million with a net debt to adjusted EBITDA ratio of 2.5x, in line with 2.5x at the end of 2019. We continue to maintain a stable 2% exposure to U.S. dollar-denominated financial debt, lowered than the approximately 20% exposure we had in previous years. Please turn to Page 28 to review our debt by segment. Supermercados Peruanos, our Food Retail segment, increased its net debt to PEN 1,140 million in the first quarter of the year, but maintained its net debt-to-EBITDA ratio at 2.1x, in line with 2.1x at the end of 2019. On the other hand, InRetail Pharma ended the first quarter with a net debt of PEN 1,614 million with a net debt-to-EBITDA ratio of 1.6x, slightly above the 1.5x net debt-to-EBITDA ratio over the previous quarter -- previous year, sorry. In terms of ratings for our InRetail Pharma bonds, they have recently been reviewed by the 3 rating agencies, Fitch, S&P and Moody's, which have all maintained their current ratings and their stable outlook. Finally, InRetail Shopping Malls increased its net debt to PEN 1,810 million in the first quarter and also increased its net debt-to-EBITDA ratio to 5.3x, above 5x at the end of 2019, which was mainly explained by the 15-day closure of our malls in the first quarter due to the national state of emergency. In terms of ratings for InRetail's Shopping Mall bonds, they have also been recently reviewed by the 3 rating agencies. Fitch and S&P have issued great opinions, maintaining their current ratings and their stable outlook. Ratings over the next 12 months could be revised if the anticipated recession takes a materially higher-than-expected toll on our financial performance. Now please turn to Page 29 for an update on our 2020 CapEx guidance. Given the current COVID scenario, we anticipate 20% to 30% reduction in CapEx for full year 2020, mainly due to the delays in the execution of projects in the context of a prolonged mandatory lockdown. This is causing delays in construction permits and works for new Plaza Vea and Economax stores, putting at risk the big box store openings for this year. We are also temporarily suspending the expansion and refurbishing of projects in the Shopping Malls segment until further notice when we see a normalization in the operations of our malls and traffic recovery. And on the other hand, we are increasing and accelerating our investments in IT and logistics to better serve the rapid migration of clients to digital channels. This covers the presentation, and now we will be glad to answer any questions you may have.

[Operator Instructions] And we're taking our next -- our first question from Chelsea Colón with Aegon.

I have a few questions related to the shopping segment. First of all, could you provide us some color around what your monthly cash needs are while the stores are closed? And related to that, I'm wondering in terms of the cash balance that you have, you said that includes InRetail shares. Are those mark-to-market every quarter?

Okay. Thank you, Chelsea, for your questions. In terms of liquidity and cash position, in our Shopping Malls segment, we feel very comfortable with where we are today. In cash burn, in that segment, is not that high with all the measures that we have implemented to contain liquidity. Normally, today, if we assume that we didn't resume operations and we remain only operating hypermarkets, pharmacies and bank branches within our malls, we are obtaining around PEN 15 million to PEN 20 million of rental income. Now we have operating expenses on a monthly basis of about PEN 25 million and about PEN 10 million of provisions of interest expense of our debt that we're including in order to be able to pay our debt servicer when it comes later on. So in general terms, we have PEN 20 million of cash burn per month, if we didn't resume operations at all, and we remain as we are today, that's less than $7 million per month. So with the cash position we have today, with the shares of InRetail we have in treasury and also with the PEN 200 million of additional credit line that we are currently negotiating with local financial institutions, we are way covered to continue going through this crisis, and we have plenty of liquidity to go through it. In terms of the balance of InRetail's shares, those shares are valued at mark-to-market at about PEN 147 million at the end of March.

I'm sorry, you said they are mark-to-market?

Yes. And they're valued -- those are about 1,368,000 shares of InRetail. At current market terms, it's a value of PEN 147 million at the end of March here.

Okay. And another question. On your leases, you mentioned the impact of dollar-denominated leases on your financials this quarter. Do you hedge the dollar-denominated lease expense at all?

No, not really. This FX impact is relatively new to our P&L and is a consequence of the recent implementation of IFRS 16 when we are activating our rental expenses related to long-term contracts. So no, we haven't hedged and we don't hedge rent expenses. About 57% of our rent expense within our Food Retail business is denominated in U.S. dollars. And about 45% of our rent expense in our Pharma and Shopping Malls business segments are denominated in U.S. dollars. Regretfully, Peru is still a very dollarized economy and real estate valuations and prices normally are benchmarked in U.S. dollars, and that makes tenants always push it to keep their real estate contracts in U.S. dollars. So we are making evidently a lot of effort to continue reducing dollar-denominated exposure to rent expenses. But it's not an easy process, given the level of dollarization of the real estate industry in general in Peru.

Got it. And just one more question. Can you remind me how the rent is charged to your tenants at the shopping malls? Is it predominantly a fixed rent? Or is it mainly variable based on the sales?

Yes. We have, for all our tenants, a combination of minimum fixed rents and variable rents. And depending on the size and type of tenant, we have longer-term contracts like the big boxes, anchor tenants that we have, like hypermarkets, department stores, movie theaters and so on, that normally sign longer-term contracts of 20, 30 years with lower, in general terms, the retail big boxes, lower variable rent as a percentage of their sales and lower fixed rent as well. As you go down through the size of the tenant, contracts tend to be shorter. And normally, rent per square meter and dollar rates tend to be higher, higher minimum fixed rents and higher variable rents as well. So it's a combination of both. In our Shopping Malls segment, in total, 85% of our rental income, pre-COVID, came from minimum fixed rent and only 15% came from variable rent. So normally, that's why we've always had pretty stable and predictable cash flow generation in our Shopping Malls segment.

Do you -- as you reopen, do you anticipate immediately charging your tenants the same minimum fixed rent as you did before? Or will there be some sort of negotiation process or a phase-in?

Today, during the lockdown and as long as our tenants haven't been able to legally operate during this lockdown period that is expected to end on May 24, and again, as we mentioned, the shopping malls should resume operations in June. Today, we haven't been yet charging rents to our tenants that haven't been able to operate. And going forward, when we expect to progressively get back to normal, obviously, it's sensitive information. We are pretty -- very close to our tenants, making sure that all of them go through this crisis as well. And we'll start understanding where they're now standing today. And with that, we're going to deal with allowing them to go through the crisis with a focus on keeping our occupancy ratios stable where we were and defending and protecting also our customer generation.

Our next question comes from Nicolas Larrain with JPMorgan.

I wanted to ask what are the trends you've been seeing on April, May, if it's being something very different versus what you guys saw in May.

Thank you, Nicolas. What we have seen in general terms since the beginning of quarantine, of general lockdown mid-March, is a reduction in traffic to our stores, lower transactions, but compensated in general terms with increases in average ticket, particularly in our Food Retail segment. And as you know, the lockdown didn't allow people to use motorized vehicles, only foot traffic going to stores. And in the food retail in particular, that favors the convenience of formats like our high-discount format, Mass. And also given that we have an efficient supply chain, our Economax format has performed pretty well. So what we have seen in the food retail space is a dramatic increase in sales, particularly in our high discount in Cash&Carry formats and a good performance as well in Plaza Vea and even in Vivanda, but significant improvement in Mass and Economax. And in our Pharma business, as you know, the Pharma business depends on foot traffic. Our relevant share of our sales is non-pharma products as well. And given the national state of emergency and curfews and reduced opening hours and lack of mobility, we have seen a reduction in traffic between 10% to 15%, as I mentioned, basically in April and so far in May, and that's impacting transactions and average ticket has been really compensated the reaction in transactions in this context. So what we are expecting in pharma, as I mentioned previously, is that as soon as the general state of emergency is raised and apparently, this time, it's going to happen actually on May 24 for sure, traffic should progressively resume. Mobility should progressively resume, and we should expect a normalization of transactions and sales per store and therefore, get back to pre-COVID numbers pretty soon.

Okay. And just to ask on the food retail part. Because normally, you see a spike and then some stabilization maybe during April and May. Have you seen this new level in what it used to be pre-COVID or maybe just between the peak and the -- what we had last year?

Nicolas, sorry, it's probably my line, but I couldn't get your question too clearly. Could you repeat it, please?

Yes, sorry, apologies for the line. I was just wondering if the new sales level you're seeing in Food Retail is still higher than the usual base case we were used to seeing before COVID.

Yes. What we are experiencing in Food Retail is, if I understood well, higher sales in new formats that we expect are going to represent a sustainable trend for the rest of the year. Now our value proposition is the right one. Our supply chain is more efficient than the traditional trade as well. So we're probably gaining a traction from the traditional trade, and we expect to maintain post normalization of the lockdown, we expect to maintain positive trends in our Food Retail segment and other formats. But in particular, we've seen a significant improvement in the new formats I mentioned, Mass and Economax. And to complement also what I already mentioned, we are putting a lot of effort to increase our logistics and operational capacities to significantly increase sales in our digital channels. And we expect to -- with the implementation of the new dark stores, a significant increase in capacities and multiply our sales of e-commerce in the Food Retail segment by fivefold versus the pre-COVID capacities we have.

Our next question comes from the line of Alonso Aramburú from BTG.

A couple of questions on my end. First, on the CapEx and I guess the openings of the smaller formats, such as Mass and the pharmacies. How should we think about that this year? Are those also going to be cut significantly or the plans to open those stores will continue roughly in line with what you were expecting at the beginning of the year? And then in terms of your e-commerce, can you just comment on the penetration of e-commerce? How much has that increased? And who is fulfilling the last mile for your orders in Food Retail?

Thank you, Alonso. So with regard to our CapEx, reduction for the year is mostly postponing the expansion and refurbishing of our Shopping Malls segment and some delays in the opening of big boxes that we had planned for this year in the Food Retail segment. We don't intend to change the guidance we gave at the beginning of the year for the smaller formats that are normally easier to implement in the Food Retail business and in pharmacies, given that we don't have to construct the stores. We just have to implement them. And therefore, we are keeping the -- our intention to open about 100 new stores of the Mass format for the year, but offset with 40 store closings for full year. So we will add 60 net Mass stores for the year. The closing of the 40 stores of Mass respond to the fact that at the beginning, when we started developing the format, we started opening sometimes very small stores that are not very efficient to operate, stores of less than 100 square meters of total area. And through time, we realized that we still have to keep discipline in terms of closing non-efficient stores. So that's why we're closing a relevant number of stores in Mass for the year, 40, but we're going to continue opening new ones, 100 new ones. So net is going to be 60 for Mass. In pharmacies, we're going to continue opening stores as well this year. We opened a few in the first quarter. For full year 2020, we still expect to open 60 new stores of pharmacies for the year. But we're also going to close a few less productive and unproductive stores, about 40 probably full year 2020. So in the case of pharmacies, it's going to be 20 net openings for the year, for full year. And going forward, the same guidance we gave at the beginning of the year. And in terms of e-commerce penetration, evidently, we saw a significant increase in sales at the beginning of the pandemic, and that's kept throughout to date. As I mentioned, we are putting additional effort and investments in IT and logistics to accelerate the development of the e-commerce capacities we had, and that's why we're going to significantly increase our daily processing order capacity like 5x in -- fivefold in Food Retail and about threefold in pharmacies. With that, the penetration of e-commerce within Food Retail, which today, it had about 1.5% of total sales, should go to about 3% [ or 4.2% ] for the end of 2020, so a significant increase for full year, sorry, 2020. We're going to significantly grow this year. And Pharma is, today, the e-commerce sales represent about 2% of our pharmacy sales and we should significantly increase that to about, as well, 3.5% throughout the year with the implementation of the mini distribution centers and the other initiatives shared with you.

And you yourselves are doing the fulfilling? The delivery to homes?

So in the last mile, we are operating as we used to. Normally, we work with third-party logistics operators to do the last-mile delivery. We manage all the intelligence and the know-how, but the execution itself is done through third-party, non-related last-mile players. Basically, logistic operations. None of the new economy digital players. It's just logistic last-mile operators.

[Operator Instructions] And our next question comes from Nicol Helm from MetLife.

I have a few questions regarding your shopping center business. First, can you give us an idea of the assumptions behind your revised guidance of 50% decline in EBITDA? Does this assume an early and a [ latter ] reopening beginning early June? And what are you assuming for third and fourth quarters? And also, if you can give us an idea of how negotiations have gone with tenants? I know you're currently not charging rent. But have you had discussion on lowering rents going forward? Or have you seen some tenants trying to exit? So I'd appreciate if you can give us some color regarding that. And lastly, I know you have an insurance incurrence, say, in coverage ratio or covenant in the -- in retail shopping bonds. You said that you felt comfortable with liquidity, but just wondering if you plan to negotiate there some space? Or are you comfortable with the current level?

Thank you, Nicol, for the questions. With regard to the guidance we have given, we are assuming very conservative metrics for the projection for the year. That's why I also gave ranges and not specific guidance or numbers with regard to the target. What we're assuming is that we start operating from June on. But evidently, and I don't want to be too specific because there's always risk of this leaking to our tenants and kind of tech negotiations, but we're assuming very conservative assumptions with regard to when certain tenants like, I don't know, movie theaters, gyms, several operators in the food court and entertainment players, will really start operations. In those scenarios I shared with you, we're assuming that tenants like movie theaters are not going to operate at all throughout the year. Similar thing for some others that I would like to avoid mentioning specifically. But we feel very comfortable with the projections we're giving because we feel they are really conservative. And that -- and then with regard to the negotiations we are starting with tenants, it's also a delicate issue I would avoid specifically mentioning. But definitely, what we have done since day 0 is being really close to all our tenants, keeping the dialogue going, understanding where they are standing today in terms of their financial situation. And obviously, a critical aspect of the negotiations that we have to go through with them has to do with understanding, something that we already do, very clearly what their expected ramp-up in sales and their expected occupancy costs in order to manage a progressive normalization in operations from both sides. Evidently, negotiations are ongoing since day 1, but we are being sensitive evidently of the fact that they are still not operating today. But we are being very conservative in the guidance we gave with respect to that. And that's why I have given a dramatic drop in guidance of a dramatic drop in EBITDA in the Shopping Malls segment. So that's exactly because of extremely conservative assumptions we are taking. And with regard to the last question on the covenants, it's true that I talked about liquidity. In terms of compliance with the covenants of our bonds, we still expect to comply with all the covenants we have. In the extreme, covenants of our shopping mall bonds are incurrence covenants, not maintenance covenants. So anyway, we wouldn't have any risk of not complying with any financial covenant that would put us at risk. So in general terms, we still expect to comply with all covenants. But we have to bear in mind also that there are incurrence covenants and nonmaintenance ones.

And our next question comes from Josseline Jenssen with Lucror Analytics.

Just as a follow-up from the previous question. Could you provide also information regarding covenants for -- not only for the bonds but for other financings in the other sector also in the Pharma segment and the Food segment?

Yes. Josseline, we include the reporting of our covenants in the management discussion and analysis report, published here actually as well. We are complying with all the covenants in our different segments. We don't expect to get at risk in complying with those, and mostly all of them are incurrence covenants. As you know, our Food Retail business is operating, leverage is low. We are growing in our Pharma business. Let's remember as well that we have debt there, but it's an asset-light business with very good margins, a lot of liquidity. And in our Shopping Malls segment, we have already discussed with our expectations. So in general terms, we don't anticipate any risk of complying with our covenants in all the debt we have, and we have the fortune of having 2 of the few business segments that operate in this context, Food Retail and Pharma. And we don't anticipate having any liquidity issues or compliance issues in retail in general terms.

Okay. And specifically, in the Pharma segment, I saw the distributed dividend this first quarter. Could you provide some color on -- if you expect to continue distributing dividends for the rest of the year? And if the dividends stayed within the group? And regarding your strategy -- sorry. Okay. And regarding your strategy for the pharmacy, they're relying in the foot traffic. Are you contemplating change in strategy, like, for example, more e-commerce sales?

Thank you, Josseline, for your questions. With regard to dividends, we indeed distributed dividends from the Pharma segment during the first quarter, and we expect to continue distributing dividends from that segment throughout the rest of the year. Historically, we have done that prior to the acquisition of Quicorp as well. We used to distribute dividends from the Pharma business on a frequent basis. And the distribution of dividend serves 2 purposes. First is funding the distribution of InRetail's dividend, which is actually being distributed today. Now if you remember, we announced on the General Shareholders Meeting that took place at the end of March, a dividend distribution of $58 million from InRetail to its shareholders. That distribution is taking place today. That distribution is basically funded with dividends coming from the Pharma business that again, as I mentioned, is an asset-light market leader in Peru with a very strong EBITDA margins and liquidity. So what we expect to continue doing for the rest of the year, after having already funded InRetail dividend distribution of today, is keeping dividends within InRetail. Within InRetail consumer, there is a trust that is above the Food Retail and Pharma segments and keep that liquidity within InRetail, within the circuit through any -- to serve any eventualities related to this pandemic context. And so as part of our liquidity, we have to maneuver within InRetail in the future to support eventually the Shopping Malls segment or any eventual mix. With regard to the pharma question, with regard to the strategy, we intend to continue executing our strategy. As you know, we are the leaders in Peru in retail pharma, operating the 2 largest chains in the country in the [ family ] pharma, we intend to continue strengthening our value proposition, strengthening our EDLP strategies and always taking help to the Peruvian population, getting closer to them. And that's our core strategy. We're going to keep it that way. Evidently, we're enhancing and accelerating all our digital initiatives trying to significantly increase capacities as soon as possible, given that we expect normally a peak in e-commerce demand through the lockdown. But probably, people that started trying e-commerce will feel comfortable to continue supporting the significantly increasing trends in e-commerce after lockdowns end going forward. So that's why we do intend to accelerate our capacities across the board. And that's why we're developing the logistics capacities we discussed previously in many distribution centers, additional dark stores and improving UX, UI, the checkouts in our e-commerce stages and so on in order to be able to multiply by 2 to 3x the sales of -- the digital sales of our pharma formats as well.

Our next question comes from the line of Marco Contreras with KALLPA Securities.

I have got a question regarding the traditional channel in food retail. We have heard that nearly 20% to 30% of mom-and-pops are currently closed due to the pandemic and the state of emergency. Could you give us more color on how much of the growth you obtained in the quarter was due to the market share you have taken from the traditional channel? Any comment on that front would be helpful.

Thank you for your question, Marco. Normally, we don't have a necessarily too up-to-date information with regard to the share of the traditional trade. We get normally with a lot of frequencies, the market share of the modern channel. But we feel that we are gaining share significantly from the traditional trade as well, given what you mentioned, those estimations of a relevant percentage of the traditional trade, not being able to operate with the challenges of operating an efficient supply chain. So having said that, that might be being one of the driving forces behind as well the significant growth in sales in the new formats like Mass and Economax. To give you a sense of how dramatic the increase in sales in those 2 formats are, Mass already was performing pretty well this year, growing at more than 30% in January, about -- a little bit more than 40% in February. And in March, sales increased more than 70% versus what we had in the comparable month last year. And in April, sales increased in the Mass hard discount format more than 90%. And in Economax, the Cash&Carry format, sales were also growing at double digits in January. This is not only a consequence of the pandemic. The formats work more in tune, operating better with better supply chain behind them, and therefore, they were growing already at double digits. And during the lockdown months, they have increased sales, even Economax, more than 70% per month during the quarantine and lockdown. Given that, we have an efficient supply chain that is being able to really serve not only commerce in bodegas but also in consumers that are stocking up and so on. And probably, the bodegas that are also going to our Cash&Carry formats to get the needed inventory to operate their own business. So in general terms, that's what I can comment. I don't have the updated metrics of market share between modern trade and traditional trade, but we are surely gaining share from the traditional trade in this context probably.

We have a follow-up coming from Chelsea Colón with Aegon.

I just have 2 follow-ups. Related to the dividend that was approved, I think you said $58 million to InRetail Perú shareholders. Is that for the full year as in we should not expect any more dividends up to the shareholders for the rest of the year?

Yes, Chelsea. That's the only dividend InRetail is going to distribute to shareholders during 2020. And who knows what happens going forward.

And that is entirely funded by the Pharma segment? Or do you pay any dividends from the supermarkets?

That dividend is entirely funded with the dividends from the Pharma segment. We have also distributed dividends from the Food Retail segment that are being kept within InRetail in order to keep liquidity at InRetail consumer for any eventualities in the future as well. And Chelsea, we have not distributed relevant dividends ever in the past. No, very small amounts, nothing material.

Did Food Retail distribute any dividend in the first quarter?

InRetail, sorry?

Did Food Retail distribute any dividends in the first quarter?

Food Retail in the first quarter, probably, yes, probably about PEN 15 million, if I remember well. And we will distribute dividends in the second quarter probably as well, but that liquidity is going to be kept within InRetail. It's not going to go outside the circuit to fund any dividends into the outside world.

Okay. Understood. And lastly, can you give us a rough breakdown of your rental income in a normal year at the Shopping Malls segment by industry segment of your tenants? Like what percentage comes from cinemas versus ordinary, like, I guess, consumer-type luxury stores or whatever sort of breakdown you can give us to give a better sense?

I don't have the breakdown in the top of my mind right now regretfully, Chelsea. I can tell you that most of our rental income comes from well-positioned long-term relationships we have with tenants that not only operate in a single mall but operate in several of our 21 shopping malls throughout Peru. So we have a regional diversification within the country. Most of our tenants are well-established long-term players, and we don't feel we have a high risk of eventual vacancies, given the quality of the tenants we operate with. And again, with regard to trying to anticipate how rental incomes are going to be impacted, I believe that the approximation I can give is the one I gave. A big share comes from big anchor tenants. And then that probably represent around 60% of our rental income. And then you go down to strategic midsize and small tenants and lower [ ones ].

It appears that we have no further questions at this time. I would now like to turn the program back to Mr. Vallejo for any closing remarks.

Thank you. As a final remark, I just wanted to highlight again that InRetail is a consolidated, adaptable and diversified market leader in Peru in its 3 segments. With a solid financial stability, which on the back of our strong and well-renowned brands, our multi-format strategy, low prices and attractive value proposition supported by our permanent focus on operational efficiencies, will allow us to overcome and adapt to this unpleasant situation and become stronger to continue developing more in retail in Peru, looking to satisfy the daily consumption needs of our clients any place at any time in a simple way and with the best prices. We also remain confident that with the extraordinary effort and resources we are investing and expand our digital capacities and improved service level and the customer journey, we will be able to seize the permanent incremental demand of migration of customers to digital channels, maintaining our leadership position in these new digital markets that is finally taking off in Peru. Thank you all for participating in our first quarter earnings call. If you have any follow-up questions, please do not hesitate to contact any of us. Thank you very much.

This does conclude today's conference. You may disconnect your line at any time, and have a wonderful day.