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

Good morning, and welcome to InRetail Peru's First Quarter 2023 Conference Call. [Operator Instructions] Please note that this call is being recorded. After the presentation, we will open the floor for questions. [Operator Instructions] And it is now my pleasure to turn the call over to Rafael Borja of InspIR Group. Thank you, sir. Please begin.

Thank you. Hello, everyone, and welcome to InRetail Peru's First Quarter 2023 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; Ms. Vanessa Dañino, Investor Relations Officer. They will be discussing the quarterly report distributed by the company last Friday, May 12. If you have not 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 last Friday. 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 first quarter earnings call. Today, we will discuss the main highlights of InRetail's first quarter results for 2023. Joining me today are Marcelo Ramos, our Chief Financial Officer; and Vanessa Dañino, our Investor Relations Officer. I will start with a brief executive summary, and then Marcelo and Vanessa will walk you through our earnings presentation. We experienced a challenging first quarter with a high comparison basis from last year, a complex social scenario, persistently high inflation and a slowdown in consumption in certain sectors of the economy. As outlined in the prior call, we continue to experience social tension during the first half of 2023, which combined with severe weather episodes impacted our operation with intermittent store closings, reduced foot traffic and supply chain complications. However, as you will see during this earnings presentation, InRetail continued to show strength and resiliency in its 3 business segments. InRetail once again reported solid results, which contributed to reach a high single-digit growth in revenues and a strong double-digit growth in adjusted EBITDA for the first quarter of 2023. Our Retail segment had a nice solid quarter, growing 8.6% in revenues and 11% in adjusted EBITDA, with growth in all of our formats, evidencing the success in the execution of our multi-format everyday low price strategy. Revenues were also favored by the store opening in 2022. During this quarter, we continued strengthening our leadership position, capture incremental market share from our competition in the modern food retail channel. Our Pharma segment, on the other hand, continues showing an improvement in performance despite the high comparison basis in January '22 from the appearance of the new COVID variant and the reduced foot traffic in this first quarter from the social unrest and coastal floods, reaching a 7.4% growth in revenues and a strong double-digit growth in adjusted EBITDA with industry-leading profitability margins. Finally, our Shopping Malls segment had a nice solid first quarter with revenues and adjusted EBITDA growth of 17.3% and 17.7%, respectively. These results were achieved even in the context of intermittent closing of malls through a quarter. We continue to progress in our omnichannel strategy of growth with focus on profitability. Despite a generalized market downturn in online sales given the high comparison basis from 2022 and 2021 during pandemic, our data platforms continued to perform. Supermarket online sales, considering only food categories and our pharmacists online sales grew double this quarter compared to the same period last year. Additionally, we are well advanced in the execution plan to fully integrate JOKR into our omnichannel food retail platform. As a reminder, this was a nonmaterial opportunistic purchase for InRetail. In terms of guidance for InRetail, we remain in line with the guidance given early this year in our previous earnings call. With that, let me pass the word to Marcelo, and as always, we look forward to answering your questions by the end of this call.

Thank you, Juan Carlos. Good morning, everyone. Thank you for joining us on this call. Today, we will review the main highlights of InRetail's first quarter for 2023. Now please turn to Page 4 in our earnings presentation to start reviewing our consolidated financial results for the first quarter for InRetail Peru. In the first quarter of the year, InRetail reported a high single-digit growth of 8.5% in revenues, with another strong performance in all of our segments, despite a high base of comparison for the first quarter of last year and a more challenging economic and social environment. In terms of adjusted EBITDA, we recorded a double-digit growth of 22.2% in comparison to the same period last year, driven by the strong top line growth with improvement in gross margin, the execution of operating efficiencies and the increased fixed cost dilution. Similar to prior quarters, the consolidated adjusted EBITDA considers approximately PEN 17 million of net expenses related to our digital services and solutions developed transversely at products. Additionally, this quarter, our consolidated EBITDA incorporates approximately PEN 14 million of lower rent expenses in our Pharma segment relative to Q1 '22 that were reclassified due to IFRS 16 in Q3 '22 from a delay in the recognition of renegotiated rent contracts. Given this reclassification was adjusted in Q3 '22, we expect some differential in the comparable base until the second semester. Finally, in terms of net income, we registered a slight reduction in the quarter, mainly due to a lower net FX gain compared to Q1 '22. Excluding this effect, net income would have increased in Q1 '23. Overall, as we have seen in our consolidated financial numbers, Q1 '23 was another strong quarter for InRetail, even with consumption challenged and unstable social context at the beginning of the year. Our segments confirm their resiliency and defensive nature outperforming peers in the market. As such, looking forward to the full year 2023, we remain in line with initial guidance given earlier this year on a consolidated basis in terms of both revenues and adjusted EBITDA. Now please turn to Page 5 to read the financial and operational snapshot of our consolidated figures. In terms of contribution by segment, these have remained in line with recent quarters. At a consolidated level, during the last 12 months, InRetail has generated more than PEN 20 billion in revenues and more than PEN 2.6 billion in adjusted EBITDA with a solid EBITDA margin of 13%. Now please turn to Page [ 7 ] to give you a short update on our ESG progress during this quarter. During Q1 '23, we continue with our commitment to move forward with our sustainability efforts. On the social front, we continue to grow our [ Bueno x Dentro ] program, donating 4.6 million food rations, 15% higher than Q1 '22 and an equivalent to PEN 17.6 million, benefiting 78,000 people, which received both dry and fresh food on a daily basis. On the environmental front, in our Shopping Malls segment, we concluded the installation of a building management system in San Martin de Porres, where we opened one of our new macro stores at the end of last year. This system allows for a complete management of energy consumption, thanks to the automatization of lighting, control of electric consumption and the collection of data from several systems. In our Pharma segment, we are also piloting sustainable transportation for our delivery service, switching from traditional cars to bicycles and electric cars to reduce our carbon footprint. During the month of March, 10% of our express delivery orders were attended by sustainable transportation. In our Food segment, we started our 0 waste project in our fabrication center with the objective of recycling 100% of our waste. In Q1 '23, we recycled 71% of waste generated in our 3 segments, showing an important increase from the average of 63% achieved in 2022. Moving to the diversity front. During the first month of the year, our pharmacies business was ranked #15 in Great Place to Work for Women and our food retail business was ranked #3 in part gender equality, evidencing our commitment and practices in favor of gender equality. During the quarter, we also continued to support SMEs through our Peru Pasion and Placita del Emprendimiento projects, generating sales through our stores and malls for PEN 6.6 million and PEN 1.5 million, respectively. Now please turn to Page 9 to review our first quarter results for our Food Retail segment. Our Food Retail segment had another strong quarter despite a high comparison basis in Q1 '22 when we registered an 11.6% growth in revenues. Revenues increased 8.6% in Q1 '23, driven by sales growth in all formats with a strong same-store sales growth of 5%. Our food categories more than compensated the continued decline in electronics segment. This decline is still a market-wide effect experienced since the beginning of last year. We expect this trend to continue at least through the first half of the year. As we mentioned in our previous call, this quarter, revenues were impacted by the store closures in the South, specifically Puno and Juliaca and by the operating complications related to the severe weather and coastal floods in the north of the country. Our same-store sales growth is adjusted for the stores in Puno and in Juliaca, only for the days in which these were fully closed, now that our Puno and Juliaca stores only represent approximately 1.5% of total sales in our Food Retail segment. In terms of performance by format, our Food Retail segment posted positive same-store sales growth in all of our formats. Plaza Vea, our supermarket format, registered a low single-digit same-store sales growth, compensating the decline in sales of electronics with an increase in food categories. Makro, our cash and carry format, posted mid-single-digit same-store sales growth despite a slowdown in demand from professional clients affected by the social disruptions. Additionally, we had a comparable basis for Makro in Q1 '22, including an extraordinary peaking sales in specific certain food categories given shortages in the market, resulting in incremental sales volume for our stores. Finally, Mass or hard discount format continued to post strong double-digit same-store sales growth, further evidencing its growth potential. Additionally, revenues were positively impacted by the contribution of new stores opened in the last 12 months, representing approximately 52,000 square meters of additional sales area. In Q1 '23, we opened 30 net new Mass stores with a focus in provinces such as Trujillo, Piura and Arequipa. As of this quarter, we have over 720 hard discount stores with only 15% of them outside of Lima. Our gross margin was 23.5% this quarter in line with the comparable quarter of last year. As I have commented before, our gross margin incorporates a high participation of our Makro and Mass formats in the sales mix, which operate with lower gross margins consistent with the pricing and commercial strategies, offset by a change in category mix from the decline in relevance of lower-margin categories, such as electronics. In terms of adjusted EBITDA, Food Retail's adjusted EBITDA grew 11% with a margin of 9.4%, slightly above the comparable quarter of last year. This is mainly explained by the slim improvement in gross margin, increased cost controls and by the continued fixed cost dilution from a solid topline growth. Our margins remain in line even with certain cost overruns related to the social unrest and coastal floods as well as with pressures in certain inflation linked costs like energy, utilities and supplies. Our omnichannel food retail proposition continues to progress. Despite a generalized slowing in supermarket online sales driven by declines in the electronic categories, considering only food categories, our supermarket sales, online sales grew double digit versus the first quarter of 2022 due to the continued growth in all of our different platforms, including Plaza Vea web, Agora Shop and the Corporation of JOKR into our value proposition. Both Agora Shop and JOKR now represent over 40% of our food digital sales. As announced during the last quarter, the acquisition of JOKR represented a nonmaterial opportunistic purchase for InRetail to further develop its omnichannel strategy in supermarkets, strengthening the [ infant ] and convenience delivery channel. JOKR has been successfully incorporated into our omnichannel food retail platform and is being managed as an independent channel with its own brand. As part of the execution plan, we will centralize JOKR's procurement, logistics and cost structures into our platform. As such, we remain as the leading e-grocery platform in Peru with a multi-solution offering tailored for digital purchase [ machines ]. In summary, our Food Retail segment registered another quarter with solid growth and stable profitability margins, consistent with previous quarter and ahead of peers in the market. Now please turn to Page 10 to review our first quarter results for our Pharma segment. Our pharmacies unit registered a top line growth of 3.8% in this first quarter with a same-store sales growth of 3.2%. We experienced a solid growth in non-pharma categories fueled by strong performance in dermo and personal care due to the successful execution of our category diversification and multi-format strategy. Revenues were affected by lower foot traffic and intermittent closings due to the social unrest in the first 2 months of the year, slightly mitigated by higher demand in March due to the rainy season. Additionally, the comparable quarter of last year includes an extraordinary peaking sales in January from the appearance of the new COVID variant affecting our growth in pharma categories this quarter. In the last 12 months, we opened 24 net new pharmacies. During the first quarter of 2023, we opened 3 and closed 6 pharmacies. This is consistent with management's decision over the last few quarters to focus on store remodelings and reconversions given the strong performance of our newer formats. Our gross margin was 37.4% this quarter above Q1 '22, mainly due to significantly lower promotional activities and a change in sales mix towards higher-margin products across categories. In terms of adjusted EBITDA, we recorded an adjusted EBITDA margin of 19.2% above the comparable quarter of last year. This increase in margin is mainly explained by the improvement in gross margin outlined before and by the continued fixed cost dilution. Additionally, as mentioned before, adjusted EBITDA in Q1 '22 had approximately PEN 14 million of rent expenses that were reclassified due to IFRS 16 in Q3 '22 from the delay in the recognition of renegotiated contracts. Excluding this effect in the comparable basis of Q1 '22, adjusted EBITDA margin in that quarter would have been 15.8%, and our adjusted EBITDA would have grown 26% compared to Q1 '22. Given this reclassification was adjusted in Q3 '22, we expect our comparable expense basis to normalize during the second semester. In terms of our pharma digital sales, we recorded a strong double-digit growth in the first quarter compared to the comparable quarter of last year, thanks to the persistent growth in both pharma and non-pharma categories. We continue with our strategy of growth, focused on profitability, improving our logistic capabilities, optimizing categories and product mix, among other initiatives. As part of these efforts, our Click and Collect network now represents over 40% of our digital sales. This delivery method helps us expand our digital offering in more districts of the country in a more cost-efficient manner. Our pharma digital sales continue with improving positive EBITDA economics, penetration of nonphysical channels in our Inkafarma brand stands at approximately 6% of total sales in Lima for the quarter. Now moving on into our distribution unit. This quarter, revenues increased 8.4% due to higher sales in Ecuador from the new distribution lines, offset by a decline in sales in Peru, primarily from independent pharmacies and from our own pharmacies unit. Gross margin was 10.7%, slightly above Q1 '22 due to a change in sales mix in Peru towards exclusive representation lines, which bring higher margins, compensating the higher share in the sales mix of the new distribution lines in Ecuador. Additionally, this quarter, the net FX translation effect from operation in Ecuador had a milder effect in our cost of sales relative to the comparable quarter of last year. Normalizing for such differential, our gross margin would have remained in line with Q1 '22. Adjusted EBITDA increased 32.9%, mainly due to increased fixed cost dilution in Ecuador from a strong top line growth and to the organizational efficiencies executed in Peru during the second semester of 2022. Finally, on a consolidated level, our revenues registered an increase of 7.4% in comparison to the first quarter of last year, and our adjusted EBITDA increased by 32% with a consolidated adjusted EBITDA margin of 15.2%. Please turn to Page 11 to review our first quarter results for our Shopping Malls segment. Our Shopping Malls segment experienced a very challenging first quarter because of the social disruptions and subsequent coastal floods. During Q1 '23, Real Plaza Juliaca was closed nearly 2 months where Real Plaza Cusco and Real Plaza Arequipa experienced intermittent closures. In an effort during the quarter to further strengthen our relationship with tenants, we offered 100% discounts in Real Plaza Juliaca [indiscernible]. Through a thoughtful and well-coordinated effort in conjunction with local authorities and tenants, we progressively reactivated activities in the mall starting late February. Additionally, in the North of Peru, Real Plaza Piura, Trujillo and Chiclayo experienced intermittent closures due to the coastal floods without any material impact in our results. As of to date, all of our shopping malls are operational. Even in this context, our Shopping Malls segment raised very strong top line growth of 17.3% versus the comparable quarter of last year. This growth was mainly explained with increase in GLA opened versus the same period of last year, with approximately 94% of GLA opened versus approximately 90% opened in the prior year for the same period. This quarter also includes the contribution of incremental GLA in Molina Plaza Power Center, not incorporated in Q1 '22. Our tenants registered a healthy same-store sales growth of 5%. Excluding anchor tenants, same-store sales growth would have been around 18%. Similar to prior quarters, anchor tenants, in particular, department stores and home improvement continue to experience a slowdown in demand given the high comparison basis from Q1 '22. Our gross margin was 65.9% this quarter below Q1 '22 due to cost overruns in security and maintenance, among others, related to the social unrest and coastal floods. We expect our gross margin to normalize in the following quarters as our operations remain in normality. In terms of adjusted EBITDA, we reached PEN 110 million, registering a 17.7% growth versus Q1 '22 and a net rental margin of 83.4%. This growth is explained by lower provision for doubtful accounts, lower discount to tenants, higher publicity income and continued fixed cost dilution from a solid top line growth. In terms of mark-to-market, we registered a loss of PEN 5.2 million this first quarter in comparison to a [ PEN 21 million ] last year, explained by a lower FX effect on the mark-to-market value of our USD-denominated assets during the first quarter in comparison to the previous year. As of March 31, our Shopping Malls segment continued with a solid liquidity position with PEN 199 million in cash and equivalents and an investment of PEN 171 million in InRetail shares as additional source of liquidity. Now please turn to Page 12. As I previously mentioned, our same-store sales in Q1 '23 are adjusted for the days of our stores or malls that were only fully closed due to the social unrest. Additionally, as highlighted before, the opening of new pharmacies has slowed down this last quarter as we are prioritizing store reconversions to enhance our customer experience with the amount increasing sales and profitability per store. During Q1 '23, we reconverted over 30 additional stores to our new formats, mainly Mifarma. Please turn to Page 14 to review our consolidated net income results. InRetail registered a gain of PEN 209 million in the first quarter of 2023 compared to the gain of PEN 219 million in the same period of 2022. Net income in the quarter was affected by a lower net FX gain in Q1 '23 compared to Q1 '22 and a higher D&A expense despite an increase in EBITDA contribution of PEN 121 million and a lower mark-to-market loss of PEN 15 million. Excluding exchange rate impacts and mark-to-market from the valuation of investment properties, net income for the first quarter would have reached PEN 193 million, a 38.8% growth versus the comparable quarter of last year. Let me now pass the word to Vanessa, who will discuss our CapEx, cash flow generation and financial debt.

Thank you, Marcelo. Now please turn to Page 15 to discuss our CapEx and cash flow generation. During the first quarter of 2023, we invested PEN 137 million in CapEx for our 3 business segments. This CapEx was invested mainly in the expansion plan for our Food Retail segment, including the remaining payments for the construction and implementation of the big boxes opened in December of last year as well as in the opening of 40 Mass stores this first quarter and in scheduled maintenance in our existing stores. Additional CapEx was invested in scheduled maintenance in our Pharma and Shopping Malls segments and in pharma reconversions in our Pharma segment. In terms of cash balance, we ended the first quarter with PEN 940 million of cash, slightly below the end of last year's cash balance of PEN 952 million, explained by cash management investments of PEN 79 million in short-term liquid mutual funds compared to the end of last year, which reduced our comparable cash position. Now please turn to Page 15 to discuss our consolidated financial debt. As of March 2023, InRetail had a consolidated net debt of PEN 6,878 million with a net debt to adjusted EBITDA ratio of 2.6x, slightly below the ratio at the end of last year, with a stable total debt and an increase in total adjusted EBITDA. As we have commented before, in terms of the FX exposure of our financial debt, all of our U.S.-denominated debt has been hedged through different hedging structures, which are detailed here and in our quarterly reports. As an update on April 4, taking advantage of the lower exchange rate environment and lower volatility of the PEN currency, we executed an additional call spread for a nominal value of $100 million for our shopping mall bonds, protecting the range of PEN 3.90 to PEN 4.30. This range is consistent with the call spread structures for our InRetail consumer bonds. We constantly monitor the market to identify opportunities to provide further predictability in our balance sheet. However, we are not expecting to close additional hedges in the near future. Now please turn to Page 17 to review our debt by segment. Supermercados Peruanos, our Food Retail segment, ended the first quarter with a net debt of PEN 3,093 million above the end of last year. The incremental debt was used to finance the incremental CapEx outlined before, temporary increases in working capital for seasonal purchases related to the back-to-school and Mother's Day campaigns as well as for tax-related payments. As we have seen in 2022 and in previous years, leverage in our Food Retail segment historically increases during the first quarter of the year and presents a faster deleveraging towards the end of the year. For 2023, we expect to conserve a healthy leverage ratio while maintaining a diligent growth investment plan, showing a similar deleveraging trend, ending the year slightly below 2.8x. InRetail Pharma ended the first quarter with a net debt of PEN 2,096 million and a net debt to adjusted EBITDA ratio of 1.7x, below the previous quarter and below the comparable quarter of last year. This evidences the company's efforts to reduce its short-term debt in the first quarter and to improve operating cash flow generation while maintaining a diligent CapEx investment policy. For 2023, we expect the leverage ratio to remain below that of last year as the company continues with its deleveraging process. InRetail Consumer, which consolidates our Food Retail and Pharma segments, ended the first quarter with a net debt to adjusted EBITDA ratio of 2.3x, in line with the previous quarter and below the comparable quarter of last year. Finally, InRetail Shopping Malls ended the first quarter with a net debt of PEN 1,715 million, resulting in a net debt to adjusted EBITDA ratio of 3.7x, another reduction versus the last quarter. For 2023, we expect to continue deleveraging by year-end to levels around 3.5. Now I will pass the word back to Marcelo.

Thank you, Vanessa. Overall, as we have seen in our consolidated financial numbers, the first quarter of 2023 was another strong quarter for InRetail, in spite of the social disruptions and the severe weather, together with a high comparison basis from the previous year. This covers our presentation, and I will be glad to answer any questions you might have.

[Operator Instructions] Our first question from the phone comes from the line of Nicolas Larrain with JPMorgan.

Okay. Can you guys hear me?

Yes, Nicolas. We can barely hear you, but we can hear you.

Okay. My question is basically on drug retail. I mean, we've seen margins at really high levels, close to historical highs, and I think first quarter was also maybe a historical high. I wanted to understand, as you mentioned here, Marcelo, how many stores or what's the pace of refurbishment that you hope to maintain over the next quarters? How much of the footprint is still to be refurbished or may be remodeled? I'd like to understand like what are the dynamics over there?

So in terms of the new format, as of this quarter, we had about 230 Mifarma beauties and about 445, 450 of Inkafarmas reconverted. This year, in the case of Mifarma, there's about 160 drug store formats. So the softer this format, the old ones that we had that could potentially become Mifarma Beauty. So we think that this year, we're going to have about 120 million around that of extra reconversions of Mifarma beauties. In the case of the Inkafarma ones, I think the reconversions would be less than that given that we already have about 450 of those, we should envision about 100 extra models on those. So this year, we should be around 220, 230 store reconversions to the new emerging formats. And look, as it relates to the margin question, we've seen clearly an improvement in the gross margin, specifically starting the second semester of last year, which is basically when demand recovered and when we saw less promotional activities and a change as well in the sales mix. So the margins that you see this quarter are pretty stable compared and consistent with the margins that we saw in the last couple of quarters of last year. I think that our view is that specifically in the pharmacies, we should kind of remain with similar gross margins going forward. And what we're seeing is operating leverage as it relates to EBITDA. The strong top line growth is leading to fixed cost dilutions, which, of course, will lead to operating leverage, and we should see a better EBITDA margin this year relative to last year.

[Operator Instructions] And the next question comes from the line of Alonso Aramburu with BTG.

Yes, I also wanted to ask about pharma. So can you comment on your store openings, given that you started the year with net 3 closures. Are you still thinking about 50 openings for this year, given that you're focusing more on reconversions? And can you also give us some color on your strategy in Ecuador. You mentioned in the press release that it drove some of the growth of your distribution segment. Can you comment on that? And whether retail potentially is a plan for Ecuador as well?

So in terms of the first one, as I mentioned in the call, it is not surprise that we're in kind of a flattish store opening this quarter. It's consistent with the message that we've been sending over the last couple of quarters where the company is more focused on the reconversions and an increasing profitability and revenue per store. Having said that, we still maintain the guidance that we gave the prior quarter of opening about around 50 stores this year. So that's related to the stores in pharma. And in terms of Ecuador, look, I think the company last year, gained a couple of important new distribution lines, which all in all, essentially increased sales by about 50% of the company. So what the company did last year is trying to focus on cost controls. And so a lot of the margin improvement that you see in the distribution business comes precisely from Ecuador from a very strong top line growth and a very controlled cost basis related to 2021, 2022, correct? And so that's a little bit of the strategy that we have there, which is trying to gain new distribution lines, ideally exclusive distribution lines that will increase top line and at the same time, try to maintain the costs under control. So we have operating leverage and EBITDA increase in that country. And to the second part of the question, look, I think we're always looking at opportunities and inorganic opportunities. It's part of what we do, honestly on a daily basis. Having said that, we don't have anything tangible right now as it relates to retail in Ecuador, although it's a market that we follow closely.

Marcelo, just to confirm the figure that you mentioned, you said 50% of your sales are coming from Ecuador, your distribution business?