Robinsons Retail Holdings, Inc. (RRHI) Earnings Call Transcript & Summary

Good afternoon, everybody. Thank you for joining us to review RRHI's unaudited results covering the period of first quarter of this year. I am Gina Dipaling, the company's Investor Relations Officer. The panelists for this call are our President and CEO, Ms. Robina Gokongwei-Pe; our CFO, Ms. Mylene Kasiban; the Managing Director of the Supermarket segment, Mr. Stanley Co; the Group General Manager of the Drugstore segment, Ms. Christine Tueres; the Group General Manager of Robinson's Department Store and Toys "R" Us, Ms. Celina Chua; and General Manager of DIY and Pets, Mr. Ted Sogono; the General Manager of Uncle John's, Mr. Suresh Ramalinggam; the Group General Manager of Appliances segment, Mr. Jovy Santos; and the General Manager of GoCart, Edna Belleza. This presentation will cover the company's financial and operational performance in 1Q 2023 and recent developments of the company. A Q&A session will follow after the presentation. [Operator Instructions] With that, I will turn you over to our President and CEO, Ms. Robina Gokongwei-Pe.

Good afternoon. Here are the highlights of our consolidated results as of March 31, 2023: consolidated net sales grew by 13.1% to PHP 44.6 billion; blended same-store sales growth at 9.2%; capital expenditures of PHP 685 million; gross profit margin expansion of 60 bps to 23.6%; EBIT of $1.8 billion, up 14.8%, with EBIT margin rising by 10 bps to 4.1%; core net earnings surged by 20.5% to $1.1 billion; store portfolio of 2,327 stores and 2,149 TGP franchise branches nationwide. Our store count stood at 2,327, comprised -- which comprising of 329 supermarkets, 1,005 drugstores, 51 department stores, 225 DIY stores, 418 convenience stores and 299 specialty stores. We also have 2,149 franchise stores of TGP. We added [ 70 ] new stores in the first quarter, bulk of the openings came from the supermarkets and drugstores, and we also opened some for DIY and Specialty. Note that most of our store openings are done in the latter half of the year. Meanwhile, GoCart, our e-commerce platform now has 15 banners with the recent addition of Uncle John's. On a consolidated basis, we were able to sustain strong top line trends driven by high single-digit blended same-store sales growth and revenue contributions from new stores. Our supermarkets, drugstores, department stores and convenience store segment all posted double-digit revenue growth for the quarter. In terms of sales breakdown, our staples business continued to account our majority of the top line with a 79% share. The balance 21% was accounted for by the discretionary segments. This is a more detailed picture of our P&L in the first quarter. Net sales are up 13.1% to PHP 44.6 billion. Gross profit margin expanded by 60 bps to 23.6% due to assortment changes, higher private label and in-depth penetration and price adjustments. EBIT rose by 14.8% to PHP 1.8 billion, with EBIT margins improving by 10 bps to 4.1%, driven by robust SSSG gross margin gains and cost controls. Net income to parent declined by 54.5% to PHP 537 million due to high interest expense resulting from the acquisition financing of BPI shares earlier this year, ForEx losses and lower earnings from associates. Note that the higher interest expense for the purchase of the BPI shares should be offset by the expected cash dividends when declared. However, core net earnings, which excludes interest income from bonds, ForEx equity net earnings of associates, interest expense related to the BPI shares and others grew by 20.5% to PHP 1.5 billion. I will now turn you over to Stanley, who will discuss the Supermarket segment.

Thank you, Ms. Robina. The Supermarket segment posted net sales of PHP 25.6 billion in the first quarter. This is 14.1% higher year-on-year. Revenue growth was supported by the contribution of new stores opened in the last year and strong same-store sales growth of 8.7%, which benefited from higher transaction income. Gross profit margin expanded by 30 bps or 21.2% on the back of higher indent and private label penetration, coupled with assortment ships. Meanwhile, EBITDA surged by 16.2% to PHP 2.1 billion, driven by strong top line growth and gross profit margin expansion. These offset the incremental expenses from new stores and DC locations and higher freight costs resulting from increase in fuel prices. EBITDA margins increased by 10 bps for the quarter to 8.3%. Turning you over to Tin for the Drugstore segment.

Thanks, Stan. Net sales of the Drugstore segment increased by 12.5% in the first quarter of 2023 to PHP 8 billion on the back of resilient same-store sales growth and contributions from new stores. Blended same-store sales growth of Southstar Drug and Rose Pharmacy still grew by a healthy 5.9% despite the challenging base last year, which benefited from the Omicron surge. Prescription drugs, in particular, cardiovascular and antidiabetic products remained the same-store sales growth driver in the first quarter. Gross margins increased by 18 bps to 20.8%, which we attribute to the category mix improvement, price adjustments and stronger penetration of our own brands. EBITDA grew by 6.1% to PHP 691 million, due to positive top line growth. EBITDA margins, however, normalized to 8.7% in first quarter of this year from 9.2% in the first quarter last year due to new store operating cost and high top line growth last year. Now I turn you over to Celina for the Department Store segment.

Thank you, Tin. Department Store net sales grew by 27% in the first quarter of 2023 to PHP 3.2 billion. Same-store sales growth was robust at 26.4%, accelerating from last year's 22.4%. Both basket size and transaction count are up year-on-year in the first quarter of 2023. The business continues to benefit from reopening momentum. Apparel categories [Technical Difficulty] Let me turn you over now to Ted for the DIY segment.

The DIY segment saw same-store sales grow by a modest 2.9% in the first quarter of 2023, as stiffer competition cut the recovery in our SSSG. We also note that overall segment revenues were slightly lower by 0.9% to PHP 2.9 billion, mainly due to our exit and subsequent transition from Robinsons Builders to Handyman Do it Best big box stores. The segment saw a 90 bps recovery in gross margins to 32.8% in the first quarter. Recall that in the same period last year, GPM was affected by the move out of pandemic-related SKUs, such as cleaning supplies and gardening items. Meanwhile, EBITDA fell by 24.7% to PHP 316 million in the first quarter. OpEx rose faster than sales with a reinstatement of regular rental rates. EBITDA margin came in at 10.9% in the first quarter, down from 14.3% in the first quarter of 2022. I turn you over to Suresh of Uncle John's.

Thank you, Ted. We are able to sustain strong top line trends for Uncle John's for first quarter of '23, with net sales increasing by 20.8% to PHP 1.5 billion. SSSG rebounded from 4.4% last year to 21.7% in first quarter '23, mainly driven by the strong performance of our CBD stores. Gross margin plus other income was tracked year-on-year at 38.5%, but remains elevated with historical trends due to the continued push in the higher-margin RTE category. The recovery in top line arguments by cost control enabled EBITDA to grow by 27.2% to PHP 158 million. EBITDA margin expanded by 50 bps to 10.23% in first quarter '23. We also note that the rebranding of the Ministop stores to Uncle John's remains underway, with more than 60% of the stores already converted since we have started the initiative a year ago. I'll turn it over to Mr. Jovy from Specialty segment.

Net sales for the Specialty segment grew by 6.2% to PHP 3.3 billion in the first quarter, with segment SSSG coming in at 5%. Mass merchandise [Technical Difficulty] all delivered double-digit top line growth for the period. However, revenues in appliances and electronics were slightly lower for the quarter due to the slow sales of air conditioners given the late onset of the summer this year, which started towards the end of March versus the end of February last year. The segment's gross margins expanded by 200 bps year-on-year to 28.1%, owing to changes to product mix and campaign and promotional support from vendors. The segment's EBITDA declined marginally by 1.7% to PHP 245 million, with EBITDA margins easing to 7.4% from 7.9% in the first quarter last year. This is due to the reinstatement of full rental rates in malls, coupled with higher utility costs. The next speaker is Mylene for our working capital.

Thank you, Jovy. Moving on to our working capital, Robinsons Retail's cash conversion cycle was at 22 days in Q1 from 24.8 days last year. The improvement in our cash conversion cycle is largely due to the increase in payable days to 6.6 (sic) [60.6] from 57 days in the prior year's, coming from timing of payments. Moving on to our balance sheet. We are now in a net debt position of PHP 5.4 billion, with borrowings of PHP 23.1 billion driven by the acquisition financing for the BPI shares, which we bought earlier this year. ROA and ROE on a trailing 12-month basis improved to 3.7% and 7.1%, respectively, versus last year. The higher ratios for the period are also supported by the ongoing share buyback program. CapEx in Q1 came in at PHP 685 million versus PHP 835 million last year, which included renovation costs for Shopwise. 42% of CapEx in Q1 is from supermarket to support its store rollup programs. 15% is for DIY for store openings and for the renovation of the big box stores to Handyman Do it Best. Meanwhile, 13% each went to Drugstores and Department Stores and 8% each for Convenience Stores and Specialty Stores. So I'll turn you over now to Ms. Robina.

Now allow me to update you on some of our recent corporate developments. After 2 years, our Annual Trade Partners Night was once again held in person last March 2023. Our Supermarket, Drugstore and Convenience Store segments hosted this event to recognize partners for their continued support and excellent performance in 2022. Different business units of Robinsons Retail all conducted their respective store managers assemblies for February and March this year. With over 1,500 managers in attendance, the focus of these events is to bolster team spirit and thank all team members for a job well done, especially during the pandemic. Globe Telecom recently recognized Robinsons Supermarket Corporation as its most outstanding key account partner for 2022 during its recent Channel Management National Convention. The award singled out Robinsons Supermarket Corporation for its exceptional performance in meeting acquisition and sales targets and maintaining a strong standing for accounts receivables. Robinsons Supermarket also garnered second place in the Excellence in Ecosystem Development Award by GCash for fully integrating the different solutions of the app in our retail ecosystem. Meanwhile, Robinsons Department Store was given the top excellence in innovation award by GCash for their digitization efforts to improve overall business efficiency. Robinsons Supermarket, together with Universal Robina Corporation and Robinsons Land Corporation, partnered with Xavier School for Juan Goal for Plastic, a flagship campaign intended to achieve plastic neutrality. In this case, plastic waste were recycled into plastic chairs for school use and alternative fuel for cement kilns. The Xavier community through their San Juan and Nuvali campuses was able to collect over 11,000 bottles or 22.5 kilos of recyclable plastics. No Brand became the first retailer in the Philippines to partner with the food rescue foundation called Scholars of Sustenance, or SOS. As part of the pilot project, No Brand endorsed 27 food boxes to the foundation. The food donations were evaluated and delivered to select communities. TGP organized a 3-day summit in February, driven by the theme Transforming Greater Potential, dedicated to both pharmacists and franchisees. The pharmacy summit was attended by close to 500 pharmacists from all over the country, highlighted by learning sessions from representatives of the Department of Health and the Philippine Pharmacists Association. The annual summit helps equip our frontliners with the latest best practices and research in generics medicine, while also showing appreciation for the continued work. Meanwhile, the franchisee summit saw over 500 franchisees attend from across the Philippines. Franchisees also got to experience learning sessions, followed by 2023 plans and programs. The highlight of the summit was the TGP Founders Cup and Trade Partners Awards given to top franchisees and vendors. Through collaborations with corporate accounts and government units, Southstar Drug continues to provide a wide array of free medical services, including health screenings and medical consultations. The photos above are just some of Southstar's recent health fairs conducted this year in Pampanga, Pasay City and in PhilHealth offices. Rose Pharmacy joined the Cebu provincial government in formally launching its newest welfare program focused on indigent welfare. This -- helping indigents through medical support for Sugboanon aims to give free medicines to patients admitted at the Cebu provincial-run hospitals. Finally, Rose Pharmacy held its 3rd Cancer Warriors Run in Cebu recently, gathering 2,500 runners. The run is organized with the support of its partner suppliers for the benefit of the Cancer Warriors Foundation, a patient support group for families of cancer -- of children with cancer. The event was able to raise PHP 500,000 for the foundation. Finally, we are reiterating our guidance for 2023. Net store additions of 180 to 200 stores, with bulk of the store openings towards the second half of the year. Organic capital expenditures of between PHP 5 billion to PHP 7 billion, SSSG target of between 4% to 6% and gross margin guidance of between -- of plus 20 to 40 bps improvement. This ends my presentation on the first quarter update. At this point, we will now open up the call for Q&A.

[Operator Instructions] The first set of questions are from Karisa Magpayo of Macquarie. This is -- the first one is for the DIY segment. What was the reason for the EBITDA margin decline in the first quarter?

The reason for that is the higher OpEx and soft same-store sales growth.

All right. Yes. Thank you, Ted. Karisa has another question. This is, how are sales trending so far in the month of April? And are we seeing some slowdown or still a strong trend you saw in the first quarter?

For blended or DIY?

DIY.

I think this is for blended.

This is Gina. If it's blended, it's still high. So fairly strong in April.

Okay. Thank you, Gina. Next question is from [ Han ]. This is on the DIY segment again. Did higher competition come from mall-based or big box rivals? That's the first question. And then how will rebranding of your big box stores to Handyman Do it Best change your portfolio and pricing strategy?

Competition is from both mall-based and stand-alone big box stores. And we need to improve our product portfolio in terms of the builders categories. And I guess our pricing strategy is to be at par with the competition.

Okay. Thank you, Ted. This is a follow-up question from [ Yep ], still under DIY segment. Maybe more color on competition for this segment of the business and who are the competitors and whether you think the competition is temporary or will last long? That's his first question.

I think our competition is both mall-based and stand-alone big box stores. And I think it's a long-lasting competition. So we need to improve our product assortment.

All right. [ Yep ] has a second question. This is on BPI. So his question is, was the acquisition of BPI fully reflected in the balance sheet as of the end of the first quarter? I think he is referring to the 4.4%. Yes, the answer is yes to this one.

Yes.

Thank you, [ Yep ]. Next set of questions would be from Nadine Bautista of JPMorgan. First question is what was the basket size as well as transaction count breakdown for 9% SSSG of Supermarkets?

Can I take it? Hi, Nadine. Stanley here of the Supermarket segment. Transaction count is up 20%; basket size down 11%.

All right. Thank you. Nadine's second question is any sales indication -- I think this was answered already. Maybe the follow-up, which segments are trending ahead or below the respective sales target for the month of April?

We only have data up to mid-March for blended. But same-store sales growth, it's still between mid- to high single-digit same-store sales growth. Almost all, actually, are positive.

Okay, I'm moving. Nadine's other question, what was the main driver for the 46% EBITDA margin? I think this is expansion of the Department Store segment for the quarter.

Okay. So the main drivers for sales -- for the EBITDA expansion is mainly the same-store sales growth, driven by the shoes and bags category, especially for luggage, and also for the apparel categories.

All right. Thank you, Ms. Celina. Expansion.

Expansion. Yes. [indiscernible].

Next set of questions from Miguel Reyes of BDO Securities. He asked a question regarding the drop in the net income to parent. How much was the interest expense from loans for the BPI stake? Will this be recurring in the succeeding quarters? And when would the dividend start to commence?

Yes. Okay. This is Mylene. So the Q1 interest expense from loans for BPI is PHP 222 million for this quarter. This will be a recurring interest expense, but it will be lower as we -- of course, we will pay down some of the loans this year coming in, coming from externally generated funds. The BPI dividends will start in Q2, then another one in Q4 once they declare their dividends.

Okay. Thank you, Mylene. Next question is from Josh Generoso of SB Capital. How will we intend to finance our CapEx budget for this year?

Yes, we should be able to fund internally the CapEx through our internally generated funds. So that is, of course, EBITDA.

Yes. And then -- thank you. And Josh has a follow-up. When do we expect interest expense from BPI to taper off? This was answered earlier. Next set of questions, again from [ Han ]. What is your outlook for associate income for this year? Could you talk about expected contribution from BPI as well as your outlook, profit outlook, for other associates like GrowSari as well GoTyme?

We are not recognizing any more equity earnings from our Robinsons Bank, mainly because we are recognizing the dividends from the BPI shares. With that, we are -- our equitized earnings are going to be negative for this year, bulk of it will be coming from GoTyme.

Okay. Thank you, Gina. Next question is from [ Rainier Yu ]. Can you please provide the breakdown of other expenses, which amounted to 831 in the first quarter?

Right. So...

We'll just flash it.

You'll flash it. Okay.

That's the breakdown.

All right. Next question is from [ Vikram ]. Can you please speak on your capital allocation policy? What are the priorities in terms of debt paydown versus share buybacks and dividends? And is there a set of dollar amount that you are looking to -- or amount that you are looking to return to shareholders where share buybacks cannot be executed due to liquidity when dividends [ can be paid also ].

Yes. The balance for the share buyback is only 300 million, which we can fully fund for this year. The cash dividend, yes, we will continue to declare cash dividends. There will be no changes on our CapEx, so it will be funded from internally generated funds.

Thank you, Gina. Next set of questions, John Te from UBS. Of the 9% Supermarket SSG, how much is approximately driven by pricing?

John, I would probably say that's about half. Half is driven by price adjustments.

Okay. John has a follow-up question on BPI. Again, for the benefit of those in the audience, you may have missed this earlier. How much approximately is interest expense in the first quarter from BPI? And when do we expect the debt to be extinguished given that it's short term in nature?

Dividend from BPI -- interest expense for the BPI loan or the loans that we incurred for the purchase BPI share was like PHP 223 million. Actually, the loan is now [ PHP 15.5 billion ] from PHP 17 billion in January. So we're actually paying down the debt already. So as we generate more cash flow from operations, then we'll pay down the borrowings.

Thank you, Gina. Nadine Bautista has a few questions again. In food retailing, what is the difference between indent orders and purchase orders? What does indent order mean from the perspective of Robinsons Supermarket? Or is this an off-cycle type of order?

Indent are everything that we order on our own from anywhere outside the country.

Okay. Her second question is, how much was the debt incurred for the BPI stake? Can you remind us if the mark-to-market movements are reflected in the P&L? And if so, how much mark-to-market gains or losses are you expecting for BPI? Or did we have it in the first quarter?

Okay. As far as debt is concerned, we originally took a loan of PHP 17 billion, so it's now down to PHP 15 billion, as Gina mentioned. We should be able to service our debt -- pay down our debts on an annual basis. And it should be lower in the next few years. No, it's not -- the second question, can you remind us if the month-to-month movements are reflected in the P&L -- mark-to-market, sorry. No, it's not in the P&L. It's OCI, right? It's actually in the balance sheet, in the OCI line. The OCI increased by PHP 2.7 billion.

Thank you, Mylene. Karisa Magpayo has a set of questions again. How much did gross salary contribute to sales in the first quarter? I think this is for the Supermarket segment.

How much did...

Gross salary.

It's higher than last year, but it's below 10%.

Okay. And then there's a follow-up on the Supermarkets business. What was the driver for the decline in basket size in the first quarter? Is this indicative of consumers down-trading or economizing?

That's correct. It is because of belt-tightening resulting to downsizing. But then it's also a function of higher footfall and more frequent visits from customers, particularly in the CBD areas.

Thank you, Stan. Next question, again, from [ Yep ]. What is the definition of core net income, which is up more than 20.5% in the first quarter? Can you please share the slide on -- and share the slide on breakdown of other expenses?

So that part of the core income is the interest income from the bonds. The ForEx, we exclude that, the dividend income, the equity in net earnings of associate, the interest expense from the -- for the BPI -- the launch for the purchase of BPI shares and others. So those are the items excluded.

Thank you, Gina. Next question is from [ Don Adanagat ]. So for the remaining costs for Uncle John's rebranding and what is the margin outlook for this format?

Suresh here. The remaining cost for Uncle John's rebranding was -- balance less than PHP 20 million for total rebranding balance. And our outlook of margin was like 35% by end of year.

Thank you, Suresh. Next question is from Stephen Oliveros from China Bank Securities. I just wanted to ask what were the terms, like the tenor and the rates, of the loan used to finance the BPI shares acquisition? Thank you.

The rate is market, it's around 6%.

Yes. And it's a short term.

No, term loan. It's term loan.

Sorry. Term loan. Next is from [ Don Adanagat ]. How much is private label sales contribution for Supermarkets now? And is there a target for that?

The contribution is around 7%. There is no specific target as of the moment, but then we're definitely aiming for a significantly higher contribution.

All right. Thank you. Next is from [ Francis Subido ]. How much of the BPI-related debt principal are you targeting to pay periodically?

We should be able to pay a minimum of PHP 2 billion every year. Of course, it -- yes, that's minimum.

Thank you, Mylene. Next set of questions from [ Adrian ] of Sunlife. How do margins differ for GrowSari sales versus normal supermarket sales? And do you expect the contribution to sales to grow materially over the next year or so?

GrowSari's margin is single digit. So it's actually diluted to gross margin.

Okay. Next from [ Rainier Yu ]. Can you provide more color on the reason behind others from PHP 162 million to [ PHP 980 million ] in the first quarter of 2023?

Yes, it's just the conversion of GrowSari shares to G2M.

Next question from [ Annie Hussein ]. Contribution of GrowSari to Supermarket sales, we answered that earlier. That's about less than 10%. And then what is the negative PHP 129 million reflecting in equity and net earnings of associates?

Bulk of it is GoTyme.

Okay. Thank you, Gina. Next question is from [ Han ]. Do you expect the 20 to 40 bps expansion in gross margins to flow into operating margins? Or do you also forecast OpEx ratios would hit pricing? And what does it mean for your operating margins for this year?

Yes, we expect some to cascade to EBITDA.

All right. Thank you, Gina. [ Rainier ] has a few questions again. What is the consolidated e-commerce contribution for the first quarter? And what is the target for 2023?

For the quarter, it's 3%.

Target for the year?

Yes. It should stabilize around that level at this point.

Okay. Next from [ Yep ]. Again, for the benefit of everyone in the call. Are the losses from associates recurring? Again, what are these associates?

It's mostly from GoTyme, as mentioned by Gina.

Yes. GoTyme is a start-up company, so we expect the losses to continue for the rest of the year.

All right. Thank you, Gina. John Te from UBS has a few questions. Yes, follow-up on Supermarkets. As confidence on the 20 to 40 basis points margin expansion change, given prices are easing, that is, less protection orders, high days, et cetera. I think he's mentioning that supermarkets -- one of our competitors are also guiding for lower margins for this year.

In our case, no specific change in our margin growth guidance. While prices are easing up, that's not the only source of our margin expansion. Now with better sales, we're also getting better support from vendors, which will translate to income.

Thank you. We have a question from [ Mark Laranao ]. Are there plans to increase the budget as well as extend the share buyback program?

Our free float is -- no, I think we will not extend it for now.

All right. Thank you, Gina. [Operator Instructions] [ Kimberly Ng ] has a question. Kindly remind us what the segment breakdown is for the expected 180, 200 new store additions for this year?

Around 110 to 120 from our Drugstore. Supermarket will be plus 30 stores or more. DIY, they're looking at 15-plus. CVS will be plus 20, and the balance will be Specialty stores. [indiscernible].

All right. Thank you, Gina. So at this point, there are no more questions from the virtual floor. And I believe we can now end this call. Ms. Robina?

Okay. Thank you, everyone. I'll see you at the next earnings calls.