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

[ Welcome to our ] results covering the first 9 months of this year. I'm Gina Dipaling, the company's Investor Relations Officer. The panelists for this call are Ms. Robina Gokongwei-Pe, the President and CEO of RRHI; Stanley Co, our COO; Mylene Kasiban, our CFO; Christine Tueres, the Group General Manager of Robinsons Supermarket, Mariel Crisostomo, General Manager of Southstar Drug; Ted Sogono, the Group General Manager of DIY and Pets; Mina Quizon, the General Manager of Robinsons Department Store and Beauty; Suresh Ramalinggam, the General Manager of Uncle John's; Jovi Santos, Group General Manager of the Appliance business; and Edna Belleza, the General Manager of GoCart. This presentation will cover the company's financial performance in the first 9 months of this year and update on our store network and recent company developments. [Operator Instructions]. I will turn you over now to our President and CEO.

Good afternoon. Here are the highlight of our results for year-to-date September 2023. Consolidated net sales grew by 8.7% to PHP 138.2 billion, blended same-store sales growth of 5%, capital expenditures of PHP 2.5 billion. Gross profits increased by 9.4% to PHP 32.9 billion with gross margin expanding by 15 bps. EBIT of PHP 6.1 billion, up by 3.7%. Core net earnings rose by 4% to PHP 3.8 billion. Store network of 2,368 stores and 2,080 [ BGP ] franchised bankers. Our store count in the Philippines stood at 2,368, comprising of 341 supermarkets, 1,033 drug stores, 50 department stores, 230 DIY stores, 416 convenience stores and 298 specialty stores. We also have 2,080 franchised stores. For the 9 months ending, we opened 102 stores and gross margin for net store openings of 58. Bulk of the new stores came from drug stores and supermarkets. Note that most of our store openings happen in the latter half of each year. Meanwhile GoCart, our e-commerce platform continues to complement our offline store network. SSSG normalized to 2.5% in the third quarter due to elevated inflation in the high base last year, which emanated from economic reopening and election-related spending. Net sales for the quarter came in at PHP 47.2 billion, higher by 5.6%. For the 9-month period, SSSG came at 5% with net sales of PHP 138.2 billion, up by 8.7%. The dues have outperformed the supermarkets, drug stores, and department stores. In terms of revenue breakdown, the Staples businesses accounted for 78% of total sales, while the discretionary comprised formats comprised 22% products. This is a more detailed picture of our P&L. Net sales grew by 8.7%, driven by 5% SSSG and new stores. Gross margin expanded by 15 bps to 23.8% from higher Indigent penetration and improvements in category mix. EBIT rose 3.7% to PHP 6.1 billion as revenue growth in GBF expansion were offset by store expansion cost, higher utility expenses, elevated fuel prices and higher personnel costs. Net income from parent declined by 41.4% to PHP 2.6 billion due to equitized losses from minority start-up, start-up investments, which continue to ramp up. The derecognition of Robinsons Bank's net income under equitized earnings following the ongoing merger with BPI, interest expense from the appreciation, financing of the BPI shares that were purchased earlier this year and absence of past dividends from BPI in the third quarter. We note that BPI has historically paid dividends in the second and fourth quarters of each year. Recall that in the second quarter, the cash dividends related to BPI fully offset the interest expense of the financing of the bank shares. As such, the expenses, the expected cash dividends from BPI in the fourth quarter of this year should fully cover for the acquisition-related financing interest expense. Our core earnings, which include -- which exclude interest income from bonds, forex, losses from associates, interest expense and dividends related to the BPI shares rose by 4% to PHP 3.8 billion for the 9-month period. The next speaker will be Tin Tueres, who will discuss the supermarket segment.

Thank you, Ms. Robina. Supermarket net sales came in at PHP 78.6 billion in 9 months of 2023, which grew by 8.9% year-on-year. Revenues were driven by fresh contributions from new stores and resilient same-store sales growth, which continued to benefit from double-digit growth in transaction count. Gross margin increased by 17 bps to 21.6% in 9 months of 2023, which we attribute to the increasing share of business of GrowSari. If we exclude the impact of GrowSari, Supermarket gross margin would have increased by 22 bps year-on-year to 23.1%, largely due to the higher sales contribution of imported products. Meanwhile, EBITDA rose by 10.3% to PHP 6.7 billion on the back of healthy topline growth, while store-related expenses were kept in check. Now I turn you over to Mariel for the Drug Store segment.

Thanks, Tin. Our Drug Store segment revenues increased by 12.8% in the first 9 months to PHP 24.4 billion on higher SSSG store expansion. Blended SSSG of Southstar and Rose Pharmacy came in at 6.6% in 9 months, driven by prescription drugs and maintenance medicine. Gross margin expanded by 91 bps to 21.1% in 9 months due to increased penetration of house brands, coupled with the strong growth of prescription drugs. Our healthy topline growth augmented by gross profit margin expansion caused EBITDA to increase by 11.9% to PHP 2.2 billion in 9 months. Our next speaker is Mina.

Net sales of the Department Store segment rose by 11.2% in 9 months of 2023 to PHP 10.8 billion. Same-store sales continued to normalize to 9.8% after accelerating by 76% in the same period last year. Dropping the top line, the categories related to back-to-school activities. Gross margin increased by 38 bps to 20.9% in the 9 months of 2023 as a result of sustained growth of our higher margin categories. EBITDA grew by 2.6% in the 9 months of 2023 to PHP 717 million. Similar to the trends in the first half of 2023, double-digit topline growth in GBF expansion were offset by higher OpEx from manpowered utility spend rent. Passing onto Ted.

The DIY segment posted flat SSSG net sales in the 9 months of 2023. Stiff competition particularly in one of our top categories, pet food, affected the top line. However, excluding pet food sales, DIY's SSSG would have increased by 3% in the 9 months of 2023. Gross margin for the segment was slightly down from 31.7% to 31.6%, largely due to markdowns in the cookware category, which slowed down as said earlier. EBITDA decreased by 24% to PHP 925 million due to flattish or negative SSSG, while OpEx rose on higher utilities manpowered and rent. Turning over to Suresh.

Thank you, Ted. Net sales grew by [ PHP 6.4% ] in 9 months of '23 to PHP 4.7 billion driven by SSSG of 7%, which generated from the strong performance of [indiscernible]. Gross margin plus other income was steady for the 9-month period. EBITDA declined by 7.9% in 9 months to PHP 408 million on the back of increased CapEx as more store are now operating 24/7 times this year. Thank you. Next speaker is Jovito.

The Specialty segment net sales rose by 5.6% to PHP 10.7 billion in the first 9 months with SSSG of 4.5%. Mass merchandise, toys and pet retail posted double-digit topline growth for the period. Meanwhile, revenues of appliances and electronics were flat in the first 9 months due to slow demand for home entertainment, laptops and tablets and kitchen appliances, following increased face-to-face and out-of-home activities. Gross margin expanded by 123 bps to 27.3% in the first 9 months on the back of campaign and promotional support from vendors, higher DCPs and assortment changes. Meanwhile, EBITDA for the same period for the segment declined by 15.5% to PHP 764 million, which was dragged by the performance of Savers Appliances, which has been affected by lower demands in [indiscernible] channel. We note, however, that Savers Appliances is pivoting towards the retail channel, which is a higher margin business. Mylene?

Yes. Thanks, Jovito. Moving on to our working capital, RHI's cash conversion cycle is at [ 20.16 ] as of September versus 24.6 last year. This is due to lower payables since we took advantage of [indiscernible]. For our balance sheet, we are in a net debt position of PHP 9.2 billion with borrowings of PHP 22 billion, driven by acquisition financing credit of BPI shares. Now turning to net debt, position on our balance sheet remains healthy with a net debt-to-equity ratio of [indiscernible]. ROA and ROE for the trailing 12 months just came in at [ 2.8 and 5.3% ] lower than last year due to the decline in income to parent. Our CapEx for 9 months came in at PHP 2.5 billion: 56% of CapEx went to supermarket, 12% to drug stores, 11% for DIY and 10% for department stores, 6% for specialty and 5% for convenience stores. I'll turn you over now to Stanley.

Thank you, Mylene. For corporate development, Robinsons Retail has once again been recognized by the Institute of Corporate Directors with the Golden Arrow Award for our continuous efforts in improving our corporate governance standards and practices. We received a rating of 89.16 for our 2022 disclosures [indiscernible]. This is an improvement of our previous scores of 83.9 for 2021 and 66.93 for 2020. We'll continue to review and update our corporate governance standards and practiced to improve our scores. Rose Pharmacy, Inc. [indiscernible] run last July 16, 2023. This year's run raised PHP 1 million for the benefit of Cancer Warriors Foundation, a patient support organization for families of children with cancer. Southstar Drugs in partnership with Maxicare Healthcare Corporation hosted a south annual Run for Wellness, gathering over 7,000 runners. The Metro Manila leg was held at the UP Diliman Academic Oval in Quezon City on August 13, while UP Diliman University of Services for the maintenance of medical facilities and equipment and PHP 50,000 to [indiscernible] persons with Disability Affairs Office. Without [indiscernible]underserved community's access to vital information and health care services, TGP has intensified this [indiscernible] throughout the country. From April to August, the Caravan reached close to 13,000 individuals and communities in Metro Manila, Davao, Bulacan, General Santos, Sambales, Isiha, Isabela, Cebu, Laguna, and Cabilde. The caravan features a generics 101 forum, free blood pressure and sugar monitoring, and free medical consultations and generics medicines. Robinson Supermarket, in partnership with Century Pacific Food and Friends of Hope, bolstered it's 3s of wellness campaign as it enters its second year. Coconut seedlings were planted in century Pacific food and friends of hope bolstered its fleas of wellness campaign as it enters its second year. Coconut seedlings were planted in Barangay Agbon in Malungon, Surangani last August 31, contributing to the campaign's goal of 100,000 coconut trees planted in 5 years to benefit small, homegrown coconut farmers in Mindanao to foster sustainable livelihoods and promote environmental stewardship. In support of responsible seafood sourcing in the Philippines, we participated in the first responsible seafood summit, which is led by the United States Agency for International Development, with over 200 representatives from the public and private sectors. Since 2021, our supermarket segment has been a partner of the fish right programs with Fishta Seafood in USAID, bringing responsibly sourced seafood products to select first. Robinson Supermarket, Robinson's Easy Market Shopwise in partnership with Alaska Milk Corporation and the Philippine Department of Education turned over 91,473 glasses of milk from June to September, benefiting 762 school children for 120 days. It started in June during the Animal World Milk Day celebrations and with the help of our partners, AlasKaramay initiative benefits school children in Sinsayon Elementary School in Santiago City, Isabela, and Calawis Elementary School and Mayamot Elementary School in Antipolo City. Robinson Supermarket opened its 150th store at 1 Ayala in Makati City last August 3, while Romses GC Mart opened its 128th store at One Ayala in Makati City last August 3, while Robinsons Easymart opened its 120th store at PITX in Paranaque City last September 22. Both stores are in strategic locations, allowing daily commuters and local residents with a diverse range of options to purchase produce, grocery items, and undergo essentials with great ease and convenience. Meanwhile, Shopwise opened its newest store at Gateway 2 Mall in Araneta City last July 28. The new 4,000 square meter store features Shopwise wide selection of groceries, general merchandise, and home and kitchen essentials from well-loved brands from all over the world. The store also has an expensive wine collection and a well-stocked deli with an array of cold cuts and cheeses. True Value Philippines was recognized by True Value International as part of its [indiscernible] for 2022. The recognition was presented during the True Value Fall Reunion held in Houston, Texas last September 14 to 16. True Value Philippines has annually been a recipient of True Value International's 1 Million Club Award since 2014. The 3 Million Club Award is a significant milestone in our journey, highlighting our continuous efforts in establishing True Value as the go-to premium destination for home improvement in the Philippines. Moving on to our guidance for 2023. We are now looking at the net addition of 120 to 160 from 150 to 190 stores previously. A number of our projects may now slide to 2024 due to the late turnover of properties from investors, hence the lower guidance for store count. Meanwhile, we are now aiming for blended SSSG of 4% to 5%, from 4% to 6% previously due to the impact of high inflation with consumption. On margins, we are guiding for 10 to 30 bps GPM expansion versus 20 to 14 bps expansion previously. This new guidance takes into account the impact of lower margin gross value business, which is growing fast. Finally, we are earmarking PHP 4 billion to PHP 5 billion for organic capital expenditures, down from PHP 4 billion to PHP 6 billion previously. This is in line with the lower score additional guidance. This ends our presentation for our 9 months updates. We will now open the virtual floor for the Q&A session.

So we will be reading questions sent via the Zoom Q&A facility. [Operator Instructions] So our first question is from Philip Felix from Philippine Equity Partners. First question, may I know when the merger between BPI and Robinsons Bank could be completed? I remember end of this year from previous disclosures. And then second question still related to BPI and RBank on the balance sheet, what would be the account used to book this investment once completed, how many shares are you expecting after the completion of the merger? And last question, when will the debt used to fund the purchase of BPI made for repaying?

For the BPI, PCC has actually approved already the transaction. However, BPI has yet to secure the SEC and BSP approvals as of today. But even if BPI can obtain the approvals of SEC and BSP in November and December of this year, the merger can only take place at the first day of the following quarter, which is January 1. And if it happens in first quarter, then the merger will happen in April 1. So that's how -- that's the BSP rules actually. And number two, on the balance sheet of what will be the account used to book this investment, the shares that will be received from the BPI, our [ bank ledger ] will be booked under financial assets. It's similar on how we book it for the purchase of the 4.4% stake in BPI. And we will be getting around 125.6 million additional BPI shares. And total would be 341.6 million or equivalent to 6.5% of the [indiscernible]. On the third question on when will be the debt used to fund the purchase of BPI be fully paid, based on our forecast, assuming the -- depends on the performance of profitability and cash flow, we're looking at paying off the debt between 2027 and 2030.

Thank you, Gina. So the next set of questions would be from Karisa of Macquarie, all related to supermarkets business. First question, how much was transaction count versus ticket growth in 3Q and 9M '23? Second question, how much the GrowSari contribute to sales in the first 9 months. And third question, how much did private label contribute to sales in the first 9 months?

Karisa, so for the Q3 ticket size, it's down actually by 8% compared to the YTD of negative 7.8%. While for the transaction count, we're up by 11.4% for Q3 and up by 14% for YTD September. For the second question, how much GrowSari contribute, it's a little less than 10%. The third one, how much private label contributed to sales in 9 months of 2023 is around 6.6%.

Next question is from Nadie of JPMorgan. Which segments are driving the cut in the high end of SSSG and GPM guidance for this year? How about for the huge convenience store opening by I guess 2023? Can you also ask for the latest breakdown of store growth in [indiscernible]?

On the cut in the same store sales growth, it's mainly because they're coming from a high base and since 3Q were down in terms of our same-store sales growth, because of the high inflationary environment, yes, we think -- but it's still within our guidance. We were initially looking at 4% to 6% same-store sales growth for the year. Now year-to-date we're up 5%, except that in 4Q last year we're already coming from a very high base. It's around 10% same-store sales. On the store additions, there's a lot of delays in terms of competition and the store expansion. Now we're looking at 120 to 160. So in terms of breakdown, supermarket will be around 30, drug store 80, DIY is around 7, CVS negative 7, and then the balance will be specialty stores. On the high end, which is around 160, depending on how many projects can be closed hopefully, then we're looking at 25 for supermarket, 100 for drug stores and then 10 for DIY, 0 for CVS and then the balance would be specialty stores.

Thank you, Gina. Next question would be from Carissa from Regis Partners. Could you provide more color on third quarter SSSG trends across the various formats. For supermarkets, how is 3Q SSSG broken down between traffic and basket size? I think the second question was already answered, but maybe more on the 3Q trends and so on. Are you interested in taking that? Any indications on the fourth quarter SSSG trends?

Yes, for drug stores, it's positive 1.3% transaction count, basket size positive 2.2%. So they're one of the few where basket size and transaction count increased. For department store, positive 2% transaction count and 4.4% basket size increased, also positive growth, transaction count and basket size. For DIY, it's down 5%, so transaction count positive 4% for the basket size. And convenience store is 2.5% up, transaction count. Basket size is negative 0.7% and Specialty depends on the formats. I will get back to you on Specialty.

Yes. Carissa's next question is third quarter SSSG broken down in traffic and basket size just to reiterate, plus 11% consumption count in 3Q for supermarkets and negative 9.6% basket size for supermarkets. And her next question would be any indications from the fourth quarter SSSG?

I think so far positive for the quarter. The few that I saw are positive.

Okay, yes, thank you. Next question, shares of RRHI at an all time low. does management intend to increase and extend its share buyback program?

For now, there is no -- nothing yet on the buy back. I mean, no addition.

Thank you. Next set of questions from Stephen Oliveros. Number one, you mentioned the prior rental costs partly contributed to higher OpEx in the first 9 months. Can you share what led to this development? And just a follow-up to that, given OpEx figures, we expect operating margins to hold for the balance of the year. So that's his first set of questions.

Yes. I think [indiscernible]

[indiscernible] compared to last year.

Yes. There's no rental discounts now. That's why it's higher. But actually, in terms of rent per square meter is the same except that we were getting discounts last year and in also in 2020 and '21.

So yes, Stephen's next question related to Robinsons Bank and BPI deal. So do you have the option to acquire more shares despite this merger?

I think we will start at 6.5%. We already incurred loans for that.

Okay. Next question is from [ Dshang ]. What led to the lowering guidance of 2023, what you mentioned earlier?

The lower guidance on store addition is because there are projects that will slide to 2024, meaning delayed turnover by the lessor of the site and also delayed construction. And also, we have some issues on getting permits from FDA and other government agencies.

Thank you, Gina. Next set of question from [ Tonio Dhanare ]. Number one, how much interest expense related to financing in the third quarter, and how much do you expect in the fourth quarter?

Yes, around [ PHP 250 million ] this quarter. We expect it to going over this Q4 as we pay off some of our debts related to BPI.

Next question is still from Tonio. Can you explain why gross margin and EBITDA margin of the CVS format declined in the third quarter quite significantly?

It's because of the increase on high rental costs and OpEx went up because we are operating for 24 hours our stores compared to last time. And second thing, which is we have slow sales in the month August which is impacting EBITDA margins.

Thank you, Suresh. Next question is from John Te of UBS. Equity losses widened in the third quarter. What businesses are driving this? And are you expecting these to widen more in 2024? And second question is who's driving anincreased competition for the DIY segment?

For the equity losses that will come from our investment in GoTyme. However, we're doing something about it. That will lessen the losses and maybe eliminate some of those.

For DIY, the competition is in the dog food category. Without the dog food sales, our SSSG is up by 3%.

Okay. Our next question is from [ Anthony Atikera ]. Did you build a Robinsons supermarket in Vermosa in Cavite.

Anthony, no, we did not. It's a good development. But then again, we already had several stores within the area. So we opted not to go into Vermosa.

Thank you. Next question is from [ Han ]. Has the Supermarkets division seen any market share loss to hard discounters like DALI? Do you plan to reduce prices to protect market share?

This is slight effect where we actually saw the slight effect but we actually do not have any intentions of reducing our prices because that's not our business model. We, however, have wholesale that competes directly with DALI.

Next question [ Rainier Ivan ] can you give more color on the decline of EBIT margins? Is it coming from manpower again and will this trend be the same for the following quarters?

It's actually the 3 major costs, our expenses, our rent utilities and manpower. Those all 3, we're seeing higher increase compared to the increase in sales.

Thank you, Gina. Karisa from Macquarie has a few follow-up questions on the other segments. Her first one is related to the department stores. So what's the reason for the EBITDA margin decline year-on-year in the third quarter?

Similar to what Gina said. It's due to increase in manpower and the increase in rents.

Next question is for CVS. What's the sales contribution of RTE or ready-to-eat in the first 9 months?