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

Good morning, and welcome to InRetail Perú's Third 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 good morning, everyone, and welcome to InRetail Perú's Third 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, questions 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 in 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 of 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. Juan Carlos, please go ahead.

Thank you, Rafael. 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. I will begin with a brief introduction on current market conditions and then Gonzalo will walk you through our earnings presentation. As already anticipated in our previous quarterly call, since the beginning of the third quarter, we started experiencing a progressive recovery in economic activity from the tough second quarter of this year, which was significantly affected by the strict lockdown measures imposed by government. In that context, InRetail reported a double-digit top line growth, a high single-digit growth in EBITDA and double-digit growth in net income with a slight reduction in margins, mainly explained by the underperformance of our Shopping Malls segment and additional COVID-19 expenses. With regard to our segments, our Food Retail segment managed to maintain a double-digit top line growth and a strong EBITDA growth of 45.5% with a record same-store sales growth of 23.5%, possibly impacted by a strong increase in both food and nonfood categories across all formats. On the other hand, our Pharma segment posted a 10.4% growth in revenues and a mid-single-digit growth in EBITDA due to a high single-digit growth in revenues in the Pharmacies unit and a double-digit growth in revenues in the MDM unit, recovering from the slow second quarter of this year. Finally, our Shopping Malls segment reported another weak quarter, although significantly better than the very tough second quarter of this year, with a 30.5% reduction in revenues and a 41.2% drop in EBITDA, maintaining a high occupancy rate of 93%. Before passing the word to Gonzalo, I just wanted to make a brief comment on the latest political events in Peru. As you know, over the last few weeks, confrontation between Congress and government scaled up amid corruption allegation involving President Vizcarra, resulting in the impeachment of the President and the approval in Congress of the presidential vacancy on November 9. On Tuesday this week, Head of Peru's Congress, Manuel Merino sworn in as President. He appointed his cabinet yesterday, conformed by politicians with previous experience in the public sector and promising independence from Congress to lead the transition government towards the announced presidential election in April next year. We just wanted to share with you that due to the strength and positioning of our 3 segments despite the political turmoil, we continue expecting a recovery in our Pharma and Shopping Malls segments going forward and maintaining the positive trend in our Food Retail segment, remaining optimistic that InRetail will continue consolidating its leadership position and omnichannel strategy in 3 segments. 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 that the numbers we'll be discussing today are presented under IFRS 16 and are fully comparable to numbers reported in our financial statements from 2019. Now please turn to Page 4 to review our consolidated financial results for the third quarter of 2020 for InRetail. In the third quarter of the year, InRetail reported a double-digit growth in revenues and a high single-digit growth in adjusted EBITDA in comparison to the previous quarter of last year due to a strong growth in our Food Retail segment, an improvement in our Pharma segment and a progressive recovery in our Shopping Malls segment, which gradually started reopening since June 22. Revenues reached PEN 3.7 billion, a 14.9% increase versus the third quarter of last year; and gross margin stood at 28.9% in the quarter, a slight reduction, mainly explained by the underperformance of our Shopping Malls segment in the COVID-19 context. In terms of adjusted EBITDA, we recorded a 9% increase in comparison to the same period of last year recording PEN 482 million and an EBITDA margin of 13%, mainly explained by the strong double-digit growth in our Food Retail segment, which compensated a significant reduction in our Shopping Malls segment in the COVID-19 context. Finally, our net income increased 13.4% in the quarter, reaching PEN 122 million due to the good operating performance at a consolidated level. Now please turn to Page 5 to review a financial and operational snapshot of our consolidated figures. In terms of contribution considering the last 12 months as of September 2020, our Food Retail segment accounted for 47% of consolidated revenues and 35% of consolidated adjusted EBITDA with an adjusted EBITDA margin of 9.9%. Our Pharma segment accounted for 50% of consolidated revenues and 53% of consolidated adjusted EBITDA with an adjusted EBITDA margin of 14.2%. Finally, our Shopping Malls segment accounted for 3% of consolidated revenues and 12% of consolidated adjusted EBITDA with a net rental income margin of 74.2%. We will now continue with our results by segment. Please turn to Page 7 to start with the highlights for our Food Retail segment. Our Food Retail revenues recorded a strong double-digit growth of 24.6% in comparison to the third quarter of last year. This growth is explained by a record same-store sales growth of 23.5% in the quarter, positively impacted by a strong increase in both food and nonfood categories and across all formats. Additionally, revenues were positively impacted by the contribution of the approximately 17,000 square meters of sales area we opened in the last 12 months. This quarter, we opened 22 net mass stores, accelerating the pace of openings in comparison to last quarter. Our gross margin reached 26% this quarter, a decrease of 24 basis points, mainly due to the higher penetration of new products and e-commerce in the sales mix. In terms of adjusted EBITDA, Food Retail's adjusted EBITDA grew a strong 45.5% in the quarter, reaching an adjusted EBITDA margin of 10.2% compared to 8.8% in the same period of last year, mainly due to a better fixed cost dilution and cost-saving initiatives aiming to offset incremental expenses related to COVID-19 and despite the increasing weight of new formats and e-commerce sales. Overall, the strong positive trends registered in the previous quarters have continued this quarter with a solid performance in all our formats, which reinforces our multi-format strategies. In particular, the COVID-19 context has strengthened the positioning of our high discounting Cash&Carry formats, Mass and Economax. In the third quarter, Mass has continued to perform well due to its conveniently located stores, adequate product assortment for the basic daily consumer basket and low prices. Economax has also continued to respond well in this context, serving the professional client but also being close to the end consumer, looking to stock up at everyday low prices. Both of these formats are positively contributing to EBITDA. In terms of sales per format, in the third quarter of 2020, our flagship format Plaza Vea represented 81% of sales. Our high-end supermarket format, Vivanda represented 4% of sales. Our highest format, Mass, represented 10% of sales. And more recently launched Cash&Carry format, Economax, represented 5% of sales. In terms of e-commerce, we have continued to experience an important demand for food and nonfood categories versus prepandemic levels, however, with a more stabilized month-to-month progress. Considering the positive trends we have been experiencing in our Food Retail segment, we expect to record a good fourth quarter as well, expecting to end full year 2020 with a solid double-digit growth in revenues and adjusted EBITDA in line with what I anticipated in our previous quarterly earnings call. Now please turn to Page 8 to review the highlights for our Pharma segment. Our Pharmacies unit registered a top line growth of 9.6% in the third quarter of 2020 with a solid same-store sales of 8.6%, positively impacted by the pickup in food traffic due to the relaxation of the strict lockdown measures imposed by governments in the beginning of June. The increased traffic has positively impacted both Pharma and new Pharma categories. Third quarter will resume the opening of new pharmacies, opening 35 stores and closing 4. Our gross margin reached 34.5% this quarter, in line with the second quarter of this year and with a slight reduction in comparison to the comparable quarter of last year due to the increase in sales of lower-margin products in the context of COVID-19. In terms of adjusted EBITDA, we recorded an adjusted EBITDA margin of 16.4% due to a lower gross margin and the incremental expenses related to COVID-19, despite the cost-saving initiatives that we executed since the beginning of the quarantine. Finally, in terms of e-commerce, in our Pharmacies unit, we also continued experiencing strong demand versus prepandemic levels, however, with a more stabilized month-to-month growth rate. Now moving on to our MDM unit. This quarter, we reported a revenue increase of 13.8%, mainly due to the recovery in demand from independent pharmacies and pharmacy chains, seasonal purchases in institutional channels and an easier comparison basis in Q3 2019. Gross margin reached 11.8% in the quarter, lower than in the third quarter of last year, mainly due to a change in channel and product mix in the context of COVID-19. Finally, in our MDM unit, adjusted EBITDA margin reached 3.7% in the quarter, in line with the first and second quarters of this year, mainly due to the gross margin effect in the context of COVID-19. All in all, at a consolidated level, our Pharma segment revenues registered an increase of 10.4% in comparison to our third quarter of last year with an adjusted EBITDA growth of 5.4% and a consolidated adjusted EBITDA margin of 14.2%. Going forward, for the pharmacies unit, we expect to continue experiencing a positive top line trend towards the fourth quarter, closing full year 2020 with a mid-single-digit growth in revenues and adjusted EBITDA slightly above what I commented in our previous quarterly earnings call. For the MDM unit, we expect to maintain similar revenue and EBITDA levels in the fourth quarter as in this third quarter, closing full year 2020 in line with 2019 revenues and with a decrease in EBITDA due to a lower gross margin from the temporary rebalancing of sales channels in the context of a pandemic. Now please turn to Page 9 to review the highlights of our Shopping Malls segment. As a reminder, since June 22, nonessential retail stores started gradually reopening within our malls as soon as authorized by government. During Q3 2020, our Shopping Malls went from approximately 59% of GLA opened at the beginning of the quarter to approximately 76% of GLA opened by the end of the quarter. The last 3 shopping malls to reopen were allowed to reopen nonessential retail at the end of September, early October after the focalized lockdowns were lifted. Within this context, a progressive recovery in GLA and the operation, but with temporary rent reductions, revenues picked up in comparison to the second quarter of this year, but with a 30.5% decline versus the previous comparable period and a 41.2% decline in adjusted EBITDA. In terms of mark-to-market, we registered a loss of PEN 3 million this quarter compared to a gain of PEN 12.2 million in the same period of 2019. This mark-to-market loss is also directly associated with a restricted GLA within our malls, which affected the projected cash flows for the year and therefore, impacted mark-to-market valuations. Going forward, we expect to continue with the progressive recovery in our shopping malls as traffic continues to gradually increase, maintaining our guidance for the year of a drop in revenues of around 25% to 35% versus 2019 and a drop in adjusted EBITDA of around 40% to 50% for the year, hopefully leaning closer to the lower end of the range. In terms of liquidity, as of September 30, our Shopping Malls segment had PEN 135 million in cash and equivalents and an investment of PEN 167 million in InRetail shares. At the beginning of the third quarter on August 14, we took an additional medium-term loan of PEN 110 million to further strengthen our liquidity position preventively in the context of the uncertainty of more reopenings and lockdowns. Furthermore, as a reminder, our Shopping Malls segment has no relevant maturities or financial obligations due in 2020, and we have postponed all nonessential investments and have significantly reduced operating and SG&A expenses with respect to our initial yearly budgets. Now please turn to Page 10 for a further update on the reopening of our shopping malls. As of November 30 -- 13, 78% of our GLA have reopened with all our shopping malls now operating nonessential retail. Gyms, entertainment tenants and education centers, which represent around 13% of GLA are still not allowed to reopen and 1% of GLA is in the process of opening. During the third quarter, our shopping malls maintained an occupancy rate of 93%. And we continue to expect our occupancy rate to remain above 90% by year-end and going forward. Since October 1, restaurants can operate on-site dining with 50% of seating capacity and visitors remain limited to 50% of mall capacity. Between September 20 and October 25, our shopping malls were allowed to open on Sundays. However, the use of private vehicles on Sundays remains restricted throughout the country. Finally, on September 28, we launched Real Plaza Go, our new marketplace for tenants and third party sellers, which now has more than 180,000 SKUs. This marketplace is part of the different digital initiatives we are pursuing in the Shopping Malls segment to adapt to new customer needs and improve our service offering with an omnichannel strategy, which I commented in more detail in our last quarterly earnings call. Now please turn to Page 11. This slide sums up our food retail sales area and number of pharmacies and shopping malls as well as our same-store sales by quarter. In the Food Retail segment, we opened 22 net Mass stores this quarter, ending the quarter with 418 Mass stores and 397,000 square meters of total sales area. Additionally, last week, we inaugurated a new Plaza Vea store in the city of Chiclayo. In the pharmacies unit, we resumed new store openings, opening 31 net stores this quarter, totaling 2,125 pharmacies. In the Shopping Malls segment, we added 900 square meters of GLA after conditioning available unused space in the basement of our Salaverry Mall, ending the quarter with 808,000 square meters of GLA. Please turn to Page 13 to review our consolidated net income results. InRetail registered a gain of PEN 122 million the third quarter of 2020 compared to a gain of PEN 107 million in the same period of 2019, mainly explained by an increase in EBITDA due to the strong performance of the Food Retail segment and an improvement in the Pharma segment as well as the absence of material extraordinary expenses in comparison to the same quarter of 2019. In terms of mark-to-market, we registered a gain of PEN 1 million compared to a gain of PEN 30 million in the comparable quarter of last year. In terms of FX exposure, we registered a net exchange rate loss of PEN 24 million, of which PEN 16 million relates to the FX loss on dollar-denominated lease liabilities after IFRS 16 compared to a loss of PEN 28 million in the comparable quarter of last year. Excluding exchange rate impacts and mark-to-market from the valuation of investment properties, net income for the third quarter would have reached PEN 138 million. Now please turn to Page 14 to discuss our CapEx and cash flow generation. During the third quarter of 2020, we invested PEN 69 million in CapEx for our 3 business segments, a significant reduction in comparison to prepandemic investment levels. It will reflect the discretionary nature of our investments and our ability to quickly react to different scenarios. For full year 2020, we expect an approximately 50% reduction in CapEx versus 2019. The reduction is mainly explained by the temporary suspension of projects in the Shopping Malls segment and the delay in the execution of projects in our Food Retail segment as well in the context of COVID-19. In terms of store openings for food retail, we expect to continue with our store openings in the fourth quarter, adding at least 50 additional Mass stores, closing the full year with approximately 60 net new Mass stores. In terms of store openings for the pharmacies units, we also expect to continue with our store openings in the fourth quarter, opening also around 50 net new Mass pharmacies and closing full year with around 100 net new Mass pharmacies currently. Finally, for shopping malls, we continue with the temporary suspension of projects, investing only a minimum necessary CapEx. In terms of cash balance, we ended the quarter with PEN 515 million of cash. Please turn to Page 15 to discuss our consolidated financial debt. As of September 2020, InRetail had a consolidated net debt of PEN 5,617 million with net debt to adjusted EBITDA ratio of 2.5x, slightly below the 2.6x of 2020. We continue to maintain a stable 2% exposure to Peruvian soles denominated financial debt [indiscernible] exposure we had in previous years. Please turn to Page 16 to review our debt by segment. Supermercados Peruanos, our food retail segment, reduced its net debt to PEN 1,066 million in the third quarter of the year, reducing its net debt-to-EBITDA ratio to of 1.6x, mainly with its consistent quarterly double-digit growth in EBITDA. On the other hand, InRetail Pharma ended the third quarter a net debt of PEN 1,844 million with a net debt-to-EBITDA ratio of 1.7x, slightly below the 1.8x net debt-to-EBITDA ratio of the previous quarter due to a recovery in EBITDA. Finally, [ InRetail Shopping Malls registered an increase ] net debt from PEN 1,852 million with PEN 1,891 million in the third quarter. I was on Page 15, and I was talking about the leverage ratios of our different segments. So I'm going to resume on the leverage ratios of our different segments, in particular, Supermercados Peruanos on Page 16. Supermercados Peruanos, our Food retail segment reduced its net debt to PEN 1,066 million in the third quarter of the year, reducing its net debt-to-EBITDA ratio to 1.6x, mainly due to its consistent quarterly double-digit growth in EBITDA. On the other hand, InRetail Pharma ended the third quarter with a net debt of PEN 1,844 million with a net debt-to-EBITDA ratio of 1.7x, slightly below the 1.8x net debt-to-EBITDA ratio of the previous quarter due to the recent -- due to the recovery in EBITDA growth. And finally, InRetail Shopping Malls registered an increase in its net debt from PEN 1,852 million to PEN 1,891 million in the third quarter, and its net debt-to-EBITDA ratio increased to 7.8x, above the 6.7x at the end of the second quarter of this year, mainly explained by the almost complete closure of our shopping malls in Q2, which impacted EBITDA and the gradual recovery this third quarter. This covers our presentation. And now we'll be glad to answer any questions you may have thank you.

[Operator Instructions] And we will take our first question from Chelsea Colón with Aegon.

I just have two. Regarding InRetail shopping malls, you mentioned that 76% of GLA was open by quarter end. Can you give us an update on where that stands as of today? And then also, can you tell us how's the pandemic change your outlook at all for the long-term in terms of the growth potential for brick-and-mortar shopping malls in Peru?

Perfect. Thanks for your questions, Chelsea. Yes, indeed, we closed the quarter with is 76% of our GLA operational. That percentage has slightly increased today. We are at around 78% today. So there has been an improvement around 77%. There's been an improvement, but there's still 13% of our GLA that is not allowed to operate by government measures. Those tenants are basically cinemas, entertainment tenants, education GLA. So in order to go above significantly, we still need to wait for government to authorize the operation of those tenants. And that's basically where we are today. And with regard to the long-term view of the shopping mall industry in Peru, we believe that the potential remains intact midterm. Peru is one of the countries in the region with the lowest penetration of malls per capita and GLA per capita. Despite the development of the industry in the last 10 years, we're still well behind any comparable country in the region. And for that reason, we still believe there's a very big potential to continue developing successful urban shopping malls with the same successful profitability metrics of the current platform we have. Evidently, in a particular case, we have temporarily suspended and postponed our projects until we have more visibility on where we're going to recover prepandemic levels of 2019. We, for a time being, expect to getting back to similar metrics of prepandemic in 2022, normally going through a consistent recovery throughout next year. And in our midterm view, only in 2022, we're going to start thinking about putting in place new projects to continue developing the pipeline going forward. But again, the potential in Peru is very big. The level of penetration of modern retail in general in Peru is very low, informality is very high, and there's big differentiation in the value proposition of a modern sale shopping malls with the right tenant mix of retail and entertainment and to be the destination point for emerging middle class families in Peru that don't have anywhere to go during their weekends. So even this has been temporarily affected by the context of pandemic but we do not expect this pandemic to last forever. So as soon as we have more visibility during next year of when things are going to end up normalizing, we're going to have a clear view on when are we going to start resuming again our pipeline investment.

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

I have two as well. The first one is in terms of opening . Gonzalo, is there an update on how many units we should expect of new supermarkets, Cash&Carrys and Mass and pharmacies in upcoming years? What's your view then on a sustainable growth pace for those formats? And also just on trends, how have you seen October. And on the positive quarter, how is the recovery going?

Thank you, Nicolas, for your questions. With regard to the opening pace of new sales area and stores going forward, we haven't closed our budgets for next year yet. So I would rather give you a formal answer to that question in a couple of months once we have the defined plan for 2021 and a clear view for the future. Having said that, we continue committed to developing all our formats. Within Food Retail, we have tried to go as fast as we can in terms of the development of big-box stores. As you know, it's not easy to develop a pipeline of big-box stores, given the scarcity of well-located and reasonably priced land lots in highly populated areas. And for that reason, we have been opening between 2 to 4 big-box stores per year over the last 4 years approximately. So the original assumption would be to remain within that, that range of 2 to 4 stores of big-box formats within Food Retail midterm of Plaza Vea's Economax stores. With regard to Mass, we as well remain very committed to the development of a format. As you know, the format is performing pretty well. In this context and is performing pretty well in this context and was performing pretty well even prior to the beginning of the pandemic earlier this year. And for that, we are trying to accelerate the development a footprint of the Mass format going forward. But again, we haven't closed our definite plans for next year, and I'd rather give you a concrete guidance in the next quarter earnings call. But definitely, we'll continue opening. Our reasonable assumption is that we will open at least 100 net new Mass stores next year. And hopefully, I'll give you an update in our next quarterly earnings call of a more aggressive goal than [ that ]. But at least 100 net new Mass stores, I would say, is a reasonable assumption. And with regard to pharmacies, again, we have resumed as you see the opening of new stores. As I've mentioned in the past, we devoted our time and energy after acquiring Quicorp in 2018 to, first, capture synergies and reduce the overlap of redundant stores between the pharma and new pharma. And we spent the last couple of years doing that. And now we have started, again, thinking about expanding our footprint in locations of low-density of pharmacies. And for that reason, this year, we intend to get to the 100 net new pharmacies full year 2020, opening 50 net in the fourth quarter of this year. We feel pretty comfortable with that goal. So for next year, I would say that, again, with the disclaimer that we haven't closed budgets yet, assuming net new -- 100 net new additions next year should be a reasonable assumption as well. And with regard to malls, as I mentioned, for now, we have suspended our expansion plans. There is only going to be small GLA expansions in currently operating malls that had already commitments with some high-quality tenants that will be expanded in 2021. But it's not a significant expansion and [ thinking about new ], as I mentioned to Chelsea, expanding the platform will resume probably only in 2022 forward. And with regard to trend, sorry. What we have seen in October and so far in November is that demand is still there. We've had a strong October in our Food Retail segment as well, and we expect to continue keeping similar trends going forward. The money is there. The question mark is what's going to happen in the Christmas campaign, given the capacity restrictions of full traffic within stores. But again, what we have seen so far is a strong demand and good performance and good trends in Food Retail as what we have seen during Q2 and Q3. We haven't seen any slowdown yet. And in terms of pharmacies, we have seen as well positive trends in October. So we don't expect a slowdown from what we have seen so far in the fourth quarter in pharmacy side.

[Operator Instructions] And we will move next with Alonso Aramburú with BTG.