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

[indiscernible] results for the first half of 2024. I am Gina Dipaling, the company's Investor Relations Officer. The speakers for this call are the following; our President and CEO, Ms. Robina Gokongwei-Pe.

Good morning.

Our COO, Stanley Co; our CFO, Ms. Mylene Kasiban; the Managing Director of Robinsons Supermarket, the Marketplace and Shopwise, Ms. Christine Tueres; the Group General Manager of the Drugstore segment, Mr. Joanne Arceo; the Group General Manager of Robinsons Department Store and Toys, Ms. Celina Chua; the Group General Manager of DIY, and Ted Sogono; the Group General Manager of our Appliances segment, Mr. Jovi Santos; and our Corporate Secretary, Attorney Linda Rivera. Last is the agenda for this afternoon. We will provide an overview of our quarter performance and highlights and we will also give the updates across the organization. As a reminder for the Q&A section after the presentation, please use the Q&A button on your Zoom dashboard for typing your questions. We would appreciate if you can give us initially the maximum of any questions, including follow-up so we can accommodate as many participants as possible. You may queue up into the Q&A box for additional questions. You may also use raise hand function if you would like to ask questions live. With that, I will turn you over to Stanley, our COO, to discuss the financial highlights.

Good afternoon. Here are the highlights of our results for the second quarter of 2024. Consolidated net sales grew by 3.1% to PHP 47.8 billion, and the same store sales growth of 0.5%. Gross profit increased by 5.2% to PHP 11.6 billion. EBIT of PHP 2.2 billion, up by 7.3% and core net earnings increased by 15.3% to PHP 1.5 billion. Net income to parent of PHP 1.7 billion, 36.2% higher versus last year. Meanwhile, here are the financial results for the first 6 months, consolidated net sales of 3% to PHP 93.7 billion. Blended same-store sales growth settled at 0.7%. Gross profit rose by 4.4% to PHP 22.5 billion, EBIT amounted to PHP 4.1 billion, higher by 5.5%, core net earnings grew by 4.1% to PHP 2.6 billion, and net income to parent came in at PHP 6.8 billion, 3x higher versus last year, mainly due to the onetime billing from the BPI-Robinsons Bank merger, which was booked in the first quarter. Blended SSSG came in flat in 2Q due to sticky inflations, stiff competition and the heatwave during summer months, which affected footfall in street-level stores. In June, however, we saw a pick up in blended same store sales growth in line with moderate inflation. In addition, spending in our stores in June was boosted by the pay day weekend for the month. First half blended SSSG registered at 0.7%, and revenue outperformance in the second quarter were Food, Drugstores and the Department stores. Gross profit rose by 5.2% in 2Q to PHP 11.6 billion due to improvements in category mix and vendor support. This pulled up first half tally to PHP 22.5 billion, up by 4.4%. EBIT rose by 7.3% to PHP 2.2 billion in Q2, driven by higher gross profit. This brought YTD EBIT to PHP 4.1 billion, up 5.5%. Net income to parent rose by 36.2% to PHP 1.7 billion in 2Q due to higher dividend income on BPI and lower losses from associates following the reclassification of GoTyme from an investment in associates last year to an equity instrument financial assets this year. YTD June net income to parent came in at PHP 6.8 million, 3.8x higher versus last year, driven by the onetime gain from the BPI merger. Core earnings came in at PHP 1.5 billion in 2Q, up by 15.3%. Year-to-date June core earnings rose by 12.1% to PHP 2.6 billion. In terms of segment contribution, the stable businesses, namely Food and Drugstores accounted for 79% of total sales, and 81% of total EBITDA, respectively, in the first half. Meanwhile, our discretionary formats namely the Department stores, DIY stores, Specialty stores comprise 21% of the store sales and 19% of EBITDA, respectively. Our store count across the Philippines stood at 2,401 as of June 2024, comprising of 755 Food stores, 1,082 Drugstores, 49 Department stores, 224 DIY stores and 291 Specialty stores. We also have 2,148 franchise stores of TGP. For year-to-date June 2024, we opened 8 new stores. We usually increase our store openings in the second half of the year with bulk coming from Food segment and Drugstores. Passing you over to Tin for the Food segment.

Thanks, Stan. The Food segment reported net sales of PHP 28.9 billion in the second quarter, a 4% decrease from last year, bringing net sales for first half by 3.7% to PHP 57 billion. Same store sales growth came in at 0.9% in the second quarter and 1.8% in the first half. Gross margin expanded by 30 bps in second quarter and 30 bps in first half due to scale, higher vendor support and sustained the Uncle John's high-margin [indiscernible]. EBITDA grew by 3.5% to PHP 2.5 billion in second quarter and by 2.5% per quarter of PHP 8 billion in the first half. The expansion in gross margins was mitigated by higher OpEx from new stores. I turn you over to Joanne for the Drugstore segment.

For the Drugstore segment, net sales of the Drugstore segment rose by 4.1% to PHP 8.5 billion in Q2 driven by contributions from new stores. Year-to-date sales increased by 7.2%. [Technical Difficulty] medicines caused by higher occurrence of flu. Gross margin expanded by 30 bps to 21.4% in Q2 due to higher vendor support. Year-to-date June 2024 GPM came in at 21.1%, 10 bps higher. EBITDA grew by 2.2% to PHP 700 million in Q2, slightly lower than top line growth due to store expansion and incremental DC costs. EBITDA for year-to-date June rose by 5.6% to PHP 1.5 billion. Turning you over now to Ms. Celina.

Net sales of the Department store segment grew by 5.7% to PHP 3.8 billion in the second quarter, driven by spending across categories related to the summer season, graduation and advanced purchases of back-to-school merchandise towards the end of the quarter. Net sales in the first half reached PHP 7 billion, up by 1.9%. The increase in vendor support from higher DCPs lifted gross margins by 30 bps to 30.8% in the second quarter and 30 bps to 31.1% in the first half. However, EBITDA declined by 2.9% to PHP 448 million in the second quarter of 2024, driven by higher rent and personnel costs. Year-to-date June EBITDA came in at PHP 390 million, lower by 1.8%. Let me turn you over to Ted for the DIY segment.

The DIY segment posted a net change decline of 3.3% to PHP 2.9 billion in the second quarter, with SSSG at minus 3.2% for the quarter. Stiff competition, rationalization of aging and duplicate items and fewer offsite mass selling events this year affected the top line. Net sales in the first half of 2024 came in at PHP 5.6 billion, lower by 4.8%. Gross margin expanded by 280 bps to 33.7% in the second quarter despite the move out sale of loan outstanding and discontinued SKUs. This improvement was mainly due to an ongoing replenishment program and in adoption of new items. Gross margin came in at 33.5% in the first half versus 31.8% last year. EBITDA surge by 54.2% to PHP 429 million in the second quarter, as OpEx declined due to cost-saving initiatives and closure of 7 underperforming stores. EBITDA rose by 23.4% in the first half to PHP 734 million. I'll turn you over to Jovi of Specialty segments.

For Specialty segment, net sales declined by 3.1% to PHP 3.7 billion in the second quarter with negative SSSG of 3.8%. This was due to the discontinuation of commercial account sales in Sabre's appliances and stock availability issues in Daiso. We continue to pivot to the retail channel for Sabre's appliances. Meanwhile, Robinsons Appliances delivered mid-teens growth in the second quarter due to strong demand in the hair care category. Net sales for the Specialty segment in the first half amounted to PHP 6.8 billion, down by 4.6%. Gross margins improved by 70 bps to 27.7% in the second quarter due to increased vendor support, higher DC fees collected and changes in assortment. This brought the year-to-date June 2024 gross margins to 28.3% higher versus the 27.5% last year. Despite GTM expansion, EBITDA declined to PHP 185 million in the second quarter attributed to lower sales and higher operating expenses. EBITDA in the first half came in at PHP 334 million, also lower than last year. Maylene?

Yes. Thanks, Jovi. Moving on to our working capital, RHI's cash conversion cycle improve to 20.3 days in the first half from 25.3 days last year. The lower cash cycle is largely due to higher payable days for the quarter. Receivable days and inventory days also slightly improved year-on-year. On our balance sheet, we are in a net debt position of PHP 8.5 billion as of June 2024, the total borrowings of 23.2% due to the acquisition loan for the BPI shares. And as of June 2024, our debt related to the BPI share purchased amount to PHP 13.1 billion. Even with a net debt position, our balance sheet remains strong with a net debt to equity of only 0.1. ROA and ROE, on a trailing 12-month basis came at 5.8% and 11.4%, respectively, in the first half, both higher year-on-year to the onetime gain from the BPI-RBank merger, which recognized in the first quarter of 2024. On our capital expenditures, organic CapEx for all segments in the first half came in at PHP 1.7 billion versus PHP 1.4 billion last year. 53% of the CapEx spent in the first half went to Food, 18% for Drugstores, 11% for Specialty, 10% for Department stores, and 8% for DIY. Now I'll turn you over to Ms. Robina.

Now allow me to update you on some of our key minority investments, namely O!Save and GrowSari. We have a 23% stake in O!Save, a hard discounter which was established in 2021. As of June, O!Save store count rose to 270 compared 122 stores last year. Sales have increased 2.6x year-on-year to PHP 97 million. The private label share of business accounts for 16% of sales in the first half versus 9% last year. Operations are currently supported by 3 distribution centers. G2M Solutions is the parent company of GrowSari, a tech-enabled platform that helps the broader Philippine population to gain access to products and services through the network of 2 million MSMEs nationwide. GrowSari currently has around 100,000 monthly active stores and operates in 23 key cities. Total platform value amounted to PHP 436 million in the first half to 25% in previous year-on-year. Current pre-money valuation of GrowSari is at USD 450 million, up 36% from the previous round which was valued at USD 330 million. Aside from being an investor in G2M, we procure 90% on GrowSari's requirements, which are sold to sari-sari stores. Now let me pass the floor to Lind Rivera, our Corporate Secretary. She will report on the leadership transition that we disclosed to the Philippine Stock Exchange last week.

Thank you, Ms. Robina. We would like to give an update on the recently announced organizational changes in the Board of Directors and officers of RRHI. On July 25, 2024, the Board of Directors of RRHI approved the following. As part of leadership transition, Mr. Lance Gokongwei shall step down as Chairman and Director of RRHI and shall assume the role of Board Adviser also effected January 1, 2025. Ms. Robina Gokongwei-Pe shall transition to the role of Chairman of RRHI effective January 1, 2025. And she will likewise be the Chairman of the Remuneration Nomination and Succession Planning Committee effective January 1, 2025. Mr. Stanley Co shall be a Director of RRHI, and shall be the President and CEO effective January 1, 2025. And he will take the place of Ms. Robina Gokongwei-Pe, who is the current President and CEO of RRHI. Lastly, Mr. Curtis Liu, the incoming Food CEO of the DFI Retail Group shall be a Director of RRHI, who will be a member of the Audit and Risk Oversight Committee effective September 1, 2024. He will replace Mr. Choo Peng Chee, who will be retiring from the DFI Retail Group. Let me just give a brief background on Mr. Stanley Co, RRHI's incoming President and CEO effective January 1, 2025. Stanley has been with Robinsons Retail for 21 years. Joining the company's DIY segment as Division Merchandise Manager in 2003 and appointed as its Group General Manager in 2008. He was appointed Managing Director of the Food segment on September 1, 2020, and Chief Operating Officer of RRHI on August 1, 2023. He earned a bachelor's degree in commerce from the University of Santo Tomas in 1998 and an MBA from De La Salle University in 2003. Let me also provide a background on our incoming Director, Mr. Curtis Liu, who will succeed Mr. Choo Peng Chee of the DFI Retail Group and our Board of Directors effective September 1, 2024. The DFI Retail Group recently appointed Curtis as their Food CEO effective September 1, 2024. He has over 24 years of retail experience in Mainland China and Taiwan. And he previously served as the merchandising and marketing director for Wellcome of DFI Retail and Walmart China. The Board of Directors were pleased to have Curtis to be one of its members. Next will be Stanley for more of our traditional corporate updates.

Thank you, Attorney Lind. Allow me to update you on the other corporate developments across our different sites. Last July 25, our Board of Directors approved a PHP 1 billion additional share buyback increasing the total amount allotted for the new purchase program to PHP 8 billion. Since the start of our share purchase and stock in March 2020, we have purchased a total of 132.8 million or 9.2% of the total outstanding shares of RRHI worth PHP 6.9 billion. Our pre-flow remains healthy at 29.8% and [indiscernible] to go down to -- just that would likely go down to 28%. We are happy to announce the inclusion of RRHI together with JG Summit Holdings in the inaugural of Fortune Southeast Asia 500. We are now 105 in the region, while JG Summit now is 55. We were only 2 of 13 Philippine companies included in the list. Lastly [indiscernible]. Southstar Drug opened its new 11,000 square meter distribution center in Pasig City, the company's fourth DC. This DC has a capacity of 3,300 product positions and can handle 8,000 SKUs. Meanwhile, TGP opened its new 4,500 square meter DC on June 21 in Consolacion, Cebu. This is TGP's second DC and has 1,400 product positions and can handle 1,300 SKUs. We recently brought together close to 16,000 individuals at 4 events. Pet Lovers Centre's inaugural Pet Wellness Walk in April, Shopwise's 1st Bike Fest in May, Southstar Drug's 13th Annual Run for Wellness in June and Robinsons Supermarket's 16th Annual Fit and Fun Wellness Body Run in July. The [indiscernible] were also made to various causes and organizations from proceeds based from all of the 4 events, including [indiscernible], our Philippine Olympians who are now in Europe for the Paris Olympics, based on climate action nonprofit for Philippines and Food Rescue organization SOS Philippines. 25 RRHI executives recently completed the leadership management development program of the Ateneo Graduate School of Business Center for Continuing Education last June 10, 2024. The course featured a comprehensive 6 module curriculum spread over 3 months that covers subjects available in regular MBA. Moving on to our guidance for the rest of 2024. We are now looking at an organic net store addition of 90 to 110, slightly down from 100 to 120 previously. Meanwhile, we are now aiming for a blended SSSG of 2% to 4% from 3% to 5%. On margins, we are raising our guidance from 20 to 40 bps GPM expansion from 10 to 20 bps previously. And finally, we are still earmarking PHP 4 billion to PHP 6 billion in organic capital expenditures. This ends our presentation for the first half results. We will now open the floor for Q&A. Thank you.

Good afternoon. So we will prioritize reading questions sent via the Zoom Q&A facilities. But if you would like to ask your questions live, you can do so using the raise hand option. If you prefer this option, please do not forget to introduce yourself and identify the company that you are working for before you ask your question. We have one question from the Q&A facility. This is from [ Carisa ] of Macquarie. What was the SSSG in the second quarter and in the first half for Food ex-Uncle John's? How is this broken down between transaction count and ticket size?

Hi, Carisa. Supermarkets same store sales growth is up 1% for the first half, plus 1%. And then if we look at the second quarter, it's plus 2.9% -- sorry, it's at 0.6% for that. Sorry, 6.6%. For the transaction count it's plus 14% while basket size is down at 13%.

Next question is still from Carisa. What was the net sales gross profit and EBITDA in the first half, excluding Uncle John's?

Net sales for the first half, it's at 53.7%. GPM is at 21.7% for the first half. EBITDA is at 8.4%.

Thank you.

Or PHP 4.5 billion.

All right. Thank you. Next question is from [ Natasha ] of CNSA. Can you give more color on why there was a downward revision on net store adds and same store sales growth targets? How about the upward revision on the GPM gains?

For the downward revision of the store addition for this year is mainly coming from closure of nonperforming stores. We announced that the margins of DIY actually were because of the closure of nonperforming stores. On the increase in GPM, as you can see for the first half results, our GPM already rose by [indiscernible] basis, 30 bps for the first half of this year. We think that can be sustained for the rest of the year.

Thank you, Gina. Thank you, Natasha, for your questions. Next one is from [ Christina Mulan ]. May I ask what is the meaning of the value of the platform shown on the GrowSari slide?

And that's the gross merchandise value the GMV.

All right. Thank you. Next question is from [ Nadeen ] of JPMorgan. What is the current breakdown of store addition targets for 2024?

For Soco Market, we're still looking at 25 same store additions. And then for ground store, combined we're looking at around 70. And some formats actually went up are negative at store addition.

Thank you, Gina. Carisa from Macquire has a few follow-up questions. This one on Uncle John's. What's the same store sales growth in 2Q and 1H? And how much did Uncle John's sales grow year-on-year in the first half? And third question, how much did RTE organically contribute to sales in the first half?

In terms of same-store sales growth, we ended the first half at plus 6%. Year-on-year, the growth is at about 4% and ready to eat now contributes 40% of our sales.

Next question from -- next set of questions from Nadeen again of JPMorgan. Can you share more color on what drove lower EBITDA margins for a dept store, Specialty and Drugstore despite higher gross margins? So what triggered higher personnel and rent expense for the Department store business?

Okay. For the Department store, EBITDA margins are lower because of increased rent expenses and rent car expenses. And what triggered it is because of the rent estimation we have. And building up more vacancies for rent car.

The same for Specialty segment, annual escalation of rent and the recently mandated salary adjustment in the -- especially in the provinces.

So for the Drugstore segment [indiscernible] this does mean all personnel from our new stores and also the mandatory, which increases in various regions from [indiscernible]. And also increase in recent costs because of the new warehouse.

Thank you, Mylene. Okay. We can see John there raising his hand. All right, John. Please go ahead and ask your question. We will open these e-mails.

So 2 questions. First is, maybe we can talk a little bit about the objective or the motivation for the leadership change, especially that, I guess this wasn't planned in the past. Second is maybe we can also talk about gross margin, especially in the Food segment. I guess, what was -- how is it increasing? And we even revised our guidance when competition has been tight and your peers have recently guided that their gross margins are under pressure. So I guess the question is, what's different between yourself and some of your competitors?

Since we are a multi-format retailer, we have some segments that are raising higher margins on our Food segment, we are also seeing higher margins because of the increasing share of indent and private label. And the exclusive brands, especially [ Manuel's ]. And then for the -- also lesser impairment so we're seeing better margins for RRHI business. And then on leadership change, the retirement age in RRHI is 60 years old. This will be nice actually to just turn 63 last June after [indiscernible]. Yes. Anybody want to add?

I would like to remember what the question was. Why is there a leadership transition?

The objective for the leadership.