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

Good morning, and welcome to InRetail Peru's Third Quarter 2022 Conference Call. And please note that this call is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Rafael Borja of InspIR Group. Please go ahead, sir.

Thank you, and hello, everyone, and welcome to InRetail Peru's Third Quarter 2022 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 Peru are Mr. Juan Carlos Vallejo, Chief Executive Officer; Mr. Marcelo Ramos, Chief Financial Officer; and Mrs. Vanessa Danino, Investor Relations Officer. They will be discussing the quarterly report, is should be provided 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 discussion during this call. If you need any assistance, please contact the Investor Relations team of InRetail Peru. 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 Peru 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 for 2022. Joining me today are Marcelo Ramos, our Chief Financial Officer; and Vanessa Danino, our Investor Relations Officer. I will start with a brief executive summary, and then Marcelo will walk you through our earnings presentation. Overall, the global environment is becoming less favorable with higher interest rates, lower growth and less international trade. -- geopolitical tension and complicated politics are also weighing on the world's economy. Peru continues to merge in a constant political crisis that has been going on for the last year. However, economic growth is still resilient. In the last 20 years, only Covid has been able to store growth in the country. In addition, Peru's fiscal and financial positions remained among the strongest in the region. Still some businesses and households are affected. Even in this context, InRetail experienced a strong third quarter, which turned into a solid financial performance, we reported a solid high single-digit growth in revenues and a strong double digit growth in adjusted EBITDA with top of industry profitability margins. Our Food Retail segment had another solid quarter, growing 8.3% in revenues and 7.6% in adjusted EBITDA, driven by strong same-store sales growth in both our cash & carry and hard discount format, compensating a slowdown in same-store sales growth in our Supermax format, impacted by the continued market-wide slowdown in the electronic categories. In spite of that, during this quarter, we continued to strengthen our leadership position in the food retail market. As mentioned in our previous earnings call, our Pharma segment began to experience a recovery in demand since late May, filled by the winter campaign as well as by the continued successful execution of our multi-format and diversification strategy. Our Pharma segment posted a growth in revenues of 10.1% and a growth in adjusted EBITDA of 16% from increased fixed cost dilution. These results show an important improvement in performance when compared to the first semester. Finally, our Shopping Malls segment show a solid quarterly performance with revenues and adjusted EBITDA growth of 24.6% and 30.8%, respectively. During the quarter, our malls operated with no restriction on maximum visitor capacity, nor in opening hours. However, vaccination cards and use of face masks inside malls remain in place until September 30, 2022, after which they were finally lifted. During the quarter, we continued to strengthen our omnichannel strategy, applying a disciplined approach of cost optimization, a diligent investment in growth. Despite the general market slowdown in these sales, online penetration in our different brands remain stable. We continue to consolidate our market leadership in food and pharma e-commerce platforms. In terms of our digital services and solutions incorporated within retail, we keep working on maturing this in order to complement our omnichannel strategy. In light of the solid performance, we are confirming the guidance for in detail outlined during the Q4 2021 earnings call at the beginning of the year. We expect to achieve a high single digit growth in both revenues and adjusted EBITDA for the year. In addition to our financial results, we want to highlight our continued commitment to move forward with our sustainability efforts. During this quarter, Supermercados Peruanos from our Food Retail segment become the first company in the Peruvian retail sector to receive a sustainability-linked loan. This loan commit the company to improve the metrics of 2 sustainability goals. The percentage of waste recycle and the number of beneficiaries from the food and nonfood donations. These are goals very much aligned not only with our sustainability strategy, but also with the core of our operations. With that, let me pass the word to Marcelo and as always, we look forward to answering your questions by the end of the call.

Thank you all for participating in the third quarter earnings call. This morning, we will review the main highlights InRetail's third quarter results for 2022. Now please turn to Page 4 in our earnings presentation to start reviewing our consolidated financial results of the third quarter for InRetail Peru. In the third quarter of the year, InRetail reported a high single-digit growth of 9.7% in revenues due to a solid growth in our Food Retail segment, a strong demand in our pharma segment, capitalizing on the incremental demand from the winter campaign, combined with the continued growth in our shopping mall segment. Overall, it was another strong quarter for InRetail. Our businesses continue to show their defensive nature, even with a high comparison basis from the comparable quarter of last year. In terms of adjusted EBITDA, we recorded a double-digit growth of 12.5% in comparison to the same period last year, driven by the strong top line growth to the increased fixed cost dilution in our Pharma and Shopping Malls segment as well as a slight improvement in gross margin. The consolidated adjusted EBITDA considers PLN 18 million of net expenses aimed to strengthen the new digital services and solutions incorporated in 2021, which continued in their development phase. These expenses are not included in the third quarter of 2021. In terms of net income, we registered a strong growth in the third quarter, mainly due to a strong performance in our segments as well as the absence of onetime financial expenses registered in Q3 '21. As a reminder, in Q3 '21, we registered a noncash expense of PEN 39 million related to the restructuring of apex derivatives in food retail, pharma and InRetail consumer. Now please turn to Page 5 to review a financial and operational snapshot of our consolidated figures. Overall, contributions have remained very much in line with the second quarter of this year. We have continued to register margin improvements in all of our segments. As I commented last quarter, our Shopping Malls segment has already reached levels of contribution in retail, close to prepandemic levels with a solid net rental margin. Now please turn to Page 7 to comment on our main sustainability highlights. During the third quarter, we continue with our commitment to move forward with our sustainability efforts. I will not go over all of the initiatives applied. However, I do want to highlight that Supermercados Peruanos from our Food Retail segment is the first company in the Peruvian retail sector to receive a sustainability-linked loan for a nominal amount of PLN 100 million. This loan commits the company until its 5-year maturity to increase the metrics of 2 sustainability goals. The percentage of waste recycled and the number of beneficiaries from food and nonfood donations. As you recall from our prior earnings calls, these sustainability goals have been in place in our organization for some time and are aligning to the strategic pillars of our sustainability strategy. We will now continue with our results by segment. Please turn to Page 9 to start with the third quarter results for our Food Retail segment. Our Food Retail segment had a solid quarter despite the high comparison basis of Q3 '21 when we raise a 35% growth in revenues due to the incorporation of Makro. During Q3 '22, revenues increased 8.3% with a positive same-store sales growth of 3.1%, driven by a strong growth in food categories, compensating a decrease in nonfood categories from a continued contraction in the Electronics segment, given the high comparison basis in 2021, particularly in July. As I have mentioned during the last 2 quarters, the decline in electronics is a market-wide effect. In terms of performance by format, Plaza Vea, our traditional supermarket format had a more challenging third quarter, posting a slightly negative same-store sales growth affected by the decline in consumption of electronics. However, our cash and carry and hard discount formats Makro and Mass posted strong same-store sales growth of high single digit and high double digit, respectively, evidencing the consolidation of their value proposition. Additionally, revenues were positively impacted by the contribution of approximately 30,000 square meters of additional sales area opening in the last 12 months, which includes 96 stores and 2 new Makro stores. At the end of last year, we also reopened 2 Plaza Vea stores, which were closed for remodeling, further contributing to this third quarter in comparison to the third quarter of last year. Our gross margin was 24% this quarter, relatively in line with the comparable quarter of last year. The impact on gross margin from the higher participation of our Makro and Mass formats, which operate with lower margins was offset by a change in category mix primarily from the decline in the relevance of the electronics category, which generally has lower margins. In terms of adjusted EBITDA, Food retail adjusted EBITDA grew 7.6% with a margin of 9.9%, relatively in line with the comparable quarter of last year. This is mainly explained by operational efficiencies, continued fixed cost dilution despite an increase in personnel expenses from the minimum wage and in transportation costs, given the surge in fuel prices. Additionally, we registered an increase in marketing expenses related to a communication campaign to enforce the everyday low price strategy in Plaza Vea. In terms of sales performance for the third quarter of 2022, our flagship format, Plaza Vea, represented 60% of sales, our high-end supermarket Vivanda, 3% of sales, our hard discount format Mass 10% of sales and our cash and carry format Makro, 27% of sales. Compared to the revenue contribution from last quarter, the new format slightly decreased their participation in the sales mix in the hands of Plaza Vea. However, compared to the comparable quarter of last year, they have increased approximately 3% in the sales mix, evidencing once again, the consolidation of our multi-format strategy. Our full e-commerce platform recorded an 8% decline in sales given a drop in nonfood categories, which represent close to 65% of our total online sales. Food sales in our e-commerce platform increased 20% compared to the comparable quarter of last year. This, in a general context in which digital sales continue to slow down. Year-to-date, as of September, digital sales are 4.6x higher than the comparable period in 2019. Online penetration remained stable at approximately 6% of total sales in performance with an active digital platform. We still remain as the leading supermarket e-commerce platform in Peru. In summary, our Food retail segment registered another solid quarter despite the continued slowdown in certain nonfood categories impacting to a greater extent, our supermarket format Plaza Vea. We continue to lever on our multi-format and every price strategies. We are the only retail player in Peru with a sizable platform that includes both cash and carry and hard discount formats that have been performing significantly well. These are formats that tend to compete not only with the modern retail channel but also directly with the traditional trade. With a highly competitive pricing strategy, both of which have been very relevant in the current context. Please turn to Page 10 to review our first quarter results for our Pharma segment. Our Pharmacies unit registered a top line growth of 7.8% in the quarter with a same-store sales growth of 6.3%. As mentioned in our previous earnings call, since late May, we started to see a moderate recovery in demand from the faster-than-anticipated slowdown in consumption of COVID-19-related categories earlier in the year. The increase in demand for pharma categories strengthened during the third quarter, fueled by the winter campaign. The company improved product replacement and inventory supplies for our stores, which allowed us to fulfill customer demand. We also continued to experience a solid growth in most of our non-pharma categories as a result of the ongoing execution of our category diversification and multi-format strategy. This growth was fueled mainly by consumer categories, particularly baby products, personal care. As of the third quarter, we have reconverted approximately 440 Inkafarma stores and 150 Mifarma stores. In Q3 '22, we also opened 15 pharmacies. Finally, this third quarter, we saw an important optimization in inventory levels as demand picked up, supplier service levels improved, and we experienced fewer logistical challenges relatively to the prior quarters. Our gross margin was 37.7% this quarter above Q3 '21 and above the first half of the year, mainly driven by a change in sales mix towards higher-margin products and lower promotional activities due to the strongest demand. In terms of adjusted EBITDA, we recorded an adjusted EBITDA margin of 18.7% above the comparable quarter of last year, mainly explained by improvement in gross margin and increased fixed cost dilution from a better top line growth, compensating an increase in store personnel expenses related to the minimum wage increase and to the new personnel required for the new stores opened in the last 12 months. Additionally, Q3 '21, we raised PLN 13 million of extraordinary expenses reducing the comparable basis of last year. Our digital channel in the Pharma segment maintained its growth tendency, registering a strong growth of 50% in online sales in the third quarter despite the high comparison basis in 2021. Year-to-date, as of September, digital sales are 4.8x higher than the comparable period in 2019. Online penetration of nonphysical sales in our Inkafarma brand stood at approximately 6% of total sales in Lima. In terms of our delivery strategy, Click & Collect increased its relevance reaching 34% of our digital sales by September. Now moving on to our distribution unit. This quarter, revenues increased by 9.4%, mainly due to the higher sales in Ecuador from new exclusive distribution lines and to the increased demand from independent pharmacies in Peru, which compensated the dropping sales from pharmacy chains due to the optimization of inventory levels. Gross margin was 12%, affected by a higher representation in the sales mix of this exclusive distribution lines in Ecuador, which have lower margins. Adjusted EBITDA declined 11.7% mainly due to a decrease in gross margin as well as to onetime expenses related to indemnizations from organizational efficiencies in Peru. Finally, on a consolidated level, our revenues registered an increase of 10.1% in comparison to the third quarter of last year. Our adjusted EBITDA increased by 16% with a consolidated adjusted EBITDA margin of 14.9%. In summary, our Pharma segment experienced a recovery with respect to the previous quarters, particularly in our Pharmacies unit, capitalizing on the winter campaign as well as on the successful execution of our multi-format strategy. Please now turn to Page 11 to review our third quarter results for our Shopping Malls segment. In the third quarter of this year, our Shopping Malls segment registered a strong top line growth of 24.6% versus the comparable part of last year. This growth was mainly explained by the increased GLA opened versus same period last year, with approximately 93% of GLA opened versus approximately 89% opened in the prior year for the same period. Additionally, this quarter includes the contribution of 16,000 square meters of GLA from Molina Plaza Power Center, which was acquired in July 22. Despite the strong growth, total tenants sales showed a more moderate performance with a same-store sales growth of 1.8%. This deceleration is explained by a slowdown in sales from anchor tenants, particularly home improvement and department stores, given a high comparison basis from last year. Excluding our continent, same-store sales growth would have been around 10%. On October 1, vaccination cards and the use of face mask inside malls are no longer required. We have seen an important increase in traffic in our malls from this change as well as from the reactivation of social interactions in corporate offices and selected higher education centers, reaching levels of traffic of approximately 80% of pre-pandemic levels. Additionally, we have continued executing different initiatives to increase traffic and strengthen the tenant mix within our malls. In October, we inaugurated the new max Center in La. Libertad Trujillo, our fifth max Center to date. We also signed an agreement to open the first within our. This are government customer service centers, where a citizen can carry out diverse procedures. We believe this center should bring consistent traffic to our malls. In terms of adjusted EBITDA, we reached PEN 107 million, registering a 30.8% growth and a net rental margin of 81%. This growth is mainly explained by the solid top line growth, higher fixed cost dilution and lower net provision expenses due to higher recoverables related to the cinemas. As of September 30, our Shopping Malls segment had a solid liquidity position with PLN 134 million in cash and equivalents and an investment of PEN 181 million in retail shares as additional source of liquidity. In summary, and as Juan Carlos mentioned before, in terms of guidance for InRetail on a consolidated basis, we expect to achieve a high single-digit growth in revenues and in adjusted EBITDA for the year. This guidance is aligned with the expectations provided at the beginning of the year during our Q4 '21 earnings call. Now please turn to Page 12. 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, we opened 41 Mass stores this third quarter, accelerating the opening pace versus the previous quarter, continuing with our strategy to grow the format nationwide. To date, only 42 of the 612 stores are located outside of Lima, evidencing the significant growth opportunity for our hard discount format. We expect to open around 130 stores in 2021, slightly higher than anticipated in the prior earnings call as we have decided to accelerate the expansion of our hard discount format in another region outside of Lima this year. These openings will be complemented with 2 new Plaza Vea stores and 3 new Makro stores, all of which will be opened by year-end. We accelerated the opening of our third Makro store, which was originally planned for early Q1 '23. In our Pharmacies unit, we opened 15 net new stores this quarter. As I mentioned last quarter, we decided to defer some store openings to next year with greater focus in the productivity of existing stores as well as in store re-conversions for the year. We maintain an active pipeline of locations, allowing us to quickly react and diligently adjust our store expansions in pharmacies without materially affecting our operations. Finally, in our shopping mall segment, as I commented in the previous slide, we have added Molina Plaza Center to the portfolio and ended the concession of Estacion Central, which on a net basis, has added 14,000 square meters of new GLA under operation. We do not expect any additional material expansion this year. In terms of same-store sales, we can observe a more modern same-store sales growth in the Food Retail segment in comparison to the first semester. We recorded a positive same-store sales growth in spite of a faster slowdown in nonfood categories. As I mentioned, we are the only retail player in the market with a platform that includes both cash and car and hard discount, capitalizing on their higher growth trends. As such, we feel optimistic in our ability to continue delivering growth in this segment. Additionally, we can observe the important pickup in same-store sales growth in pharmacies, which I commented in the Pharma segment. Finally, the slide reflects a slower in overall tenant same-store sales growth, which I also commented in the Shop and mall segment. As I mentioned, excluding nonpar tenants, we're still recording double-digit same-store sales growth of around 10%, and we expect increased traffic in our malls to help improve same-store sales value. Please turn to Page 14 to review our consolidated net income results. In retail registered a gain of PEN 165 million in the third quarter of 2022 compared to a gain of PEN 62 million in the same period, mainly explained by the additional contribution of EBITDA of PLN 74 million, a lower net FX loss of PEN 50 million compared to the comparable quarter of last year, a higher mark-to-market of PLN 6 million and lower net financial expenses of PEN 35 million in the quarter. As I mentioned before, in the comparable quarter of last year, we reduced a noncash expense of PEN 39 million related to the restructuring of the derivatives. Excluding exchange rate impacts and mark-to-market from the valuation of investment properties, net income for the third quarter would have reached PEN 204 million. Now please turn to Page 15 to discuss our CapEx and cash flow generation. During the third quarter of 2022, we invested PLN 322 million in CapEx for our 3 business segments. This CapEx was invested mainly in the expansion plan for our Food Retail segment, including the construction and implementation of the 5 big boxes we expect to open this year as well as in the opening of our Mass stores and in scheduling maintenance in our existing stores. Additional CapEx was also invested in our Pharma segment in formconversions and scheduled maintenance. Finally, our CapEx amount for the third quarter includes the acquisition of Molina Plaza Power Center for approximately PLN 110 million as well as minor expansions and maintenance CapEx in our existing models. Overall, we expect CapEx for the year to be around PLN 1 billion, given the extraordinary purchase of Molina Plaza Power Center, the purchase of land bank for our former logistics networks mentioned in the prior earnings call and the acceleration of the opening of the third Makro store this year. In terms of cash balance, we ended the third quarter with PLN 672 million of cash, below the end of last year cash balance of PLN 917 million. This decline in cash was mainly due to distribution of $75 million -- $75 million dividend in May of this year, the purchase of the noncontrolled interest in retail pharma, which included a $35 million cash payment and the pickup in growth CapEx, which I just commented. However, our cash levels have improved versus the second quarter of this year. mainly explained by a higher operating cash flow generation from our adjusted EBITDA growth as well as from an improvement in working capital management, particularly in our pharma segment, which executed an important optimization in inventory levels as demand recovered and the winter campaign began. We will continue to work to gradually improve our working capital needs. Now please turn to Page 16 to discuss our consolidated financial debt. As of September 2022, InRetail had a consolidated net debt of THB 7.686 billion with a net debt to adjusted EBITDA ratio of 3.1x, slightly below the previous quarter. Please turn to Page 17 to review our debt by segment. Supermercados Peruanos, our Food Retail segment ended the third quarter with a net debt of PEN 3.132 billion. Net debt to adjusted EBITDA stood at 3.1x, slightly above the previous quarter. During the third quarter, Supermercados Peruanos closed 2 5-year maturity medium-term loans for an aggregate amount of PLN 250 million to finance the CapEx related to the 5 B boxes expected to open by year-end. In retail pharma, ended the third quarter with a net debt of PEN 2.498 billion and a net debt to adjusted EBITDA ratio of 2.2x, below the previous quarter. As I mentioned previously, our Pharma segment delivered strong operating cash flow generation from a solid performance as well as from an improvement in inventory levels, allowing the company to reduce its certain debt originally drawn to finance working capital needs during the second quarter. Finally, in retail shopping malls, ended the first quarter with a net debt of PEN 1,891 billion, resulting in a net debt to adjusted EBITDA ratio of 4.4x another reduction versus the last quarter. Overall, in line with what we've disclosed previously, we expect to maintain a relatively stable net leverage by the end of 2022 on a consolidated basis compared to the end of 2021. This covers our presentation, and now we will be glad to answer any questions you may have.

[Operator Instructions] Thank you this concludes our question-and-answer session. I'll turn it back over to Mr. Vallejo for final comments.

Thank you all for participating in our third quarter earnings call. As a final remark, I just wanted to underline that the third quarter ended up being another solid portfolio in detail, even with the less for global environment and constant local political turmoil. In spite of our positive financial results at InRetail, we continue to work on becoming more efficient and productive. We're conscious that further deterioration of the international economic environment or even local politics could wedge on growth. Fundamentally Peru will most likely remain solid. As such, we remain confident that we are in a solid position with the correct strategy to continue our growth and maintain our performance, once again, confirming our guidance from the beginning of the year. If you have any follow-up questions, please do not hesitate to contact any of us. Thank you very much.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.