Wilcon Depot, Inc. (WLCON) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome, and thank you for joining us today for our Second Quarter and First Half 2022 Earnings Conference. Joining us on this call are our CEO, Ms. Lorraine Belo-Cincochan; and our COO, Ms. Rose Ong. Lorraine will present our results, after which we will open the floor for your questions. [Operator Instructions] So without further ado, may I now turn you over to Lorraine.

Thank you, Jean. Let me just pull up the slides. So good afternoon, everyone. Let me share screen. So welcome. Thank you for joining us in the first half of 2022. For our second quarter performance, our financial summary. Our net sales for the quarter reached to 8.298 -- sorry, PHP 8.29 billion, a 22.8% year-on-year growth. Comparable sales grew 15%, PHP 1.006 billion net income after tax, which grew 56.4% year-on-year, and we have a 38.9% gross profit margin. The contribution to total net sales of our exclusive and in-house brands continued to ramp up, contributing 51% of -- sorry, contributing 51% of net sales after breaking the 50% mark in the last quarter of 2021. The company opened 2 new depots in April and May 2022, bringing to 76 the total number of branches at the end of the quarter. So I was just going to hide this, so you can see, great. So gross profit grew 29% year-on-year to PHP 3.226 billion with a gross profit margin of 38.9% due to product mix. Higher sales of higher-margin products, along with the margin effect of pass on inflation and other supply chain cost increases. Operating expenses, including lease-related interest expense amounting to PHP 1.967 billion, up 14.4% or PHP 247 million year-on-year, in due mainly of the increase in the volume of business from old and new stores and due also to inflation. Rent and net other income closed higher by 5.3% or PHP 4 million, totaling PHP 77 million for the quarter due mainly to the increased volume of business. Non-operating income mainly from interest on placements totaled PHP 3 million, down from the prior year's PHP 8 million as internally generated funds were used for capital expenditure and dividend distribution. Income tax expense increased by 58.1% or PHP 123 million to end the PHP 334 million due mainly to higher taxable income. And as mentioned, net income grew 56.4% year-on-year, 56.4% rather year-on-year to PHP 1.006 billion for the second quarter. For the total breakdown in sales for the second quarter, the depot format stores comprise almost all of the net sales, contributing 97.4% with the sales of PHP 8.078 billion. Home Essentials dropping to 1.8% contribution with sales of PHP 147 million, and project sales, PHP 65 million accounted for 0.8% of the total net sales. The depots grew 22.8%, the essentials up by 16.3%, while project sales jumped 49.9%. All product categories grew year-on-year, but building materials, plumbing, sanitary, paints and furniture and furnishing and houseware grew higher than the average company-wide groups. In terms of comparable sales. Comparable sales grew 15% since there was no further COVID-related disruptions during the quarter as compared to last year. The ramp-up in private construction activities we saw in March continued through the second quarter. The depot's comparable sales grew by 14.8%. The Home Essentials likewise increased by 14.9%, while project sales as earlier mentioned, rose 49.9%. Comparable ticket size grew 11.8%, driven largely by bulk buying by customers for bigger projects. Pent-up demand or advanced purchases and impact of pass on cost increases. Comparable transactions slightly higher by 2.9% as customers prefer to both buy. Now for our first half performance results highlights. Net sales for the first half amounted to PHP 15.942 billion, an increase of 18.7% year-on-year. Gross profit margin rate of 38.6% and net income of PHP 1.856 billion, for a 48.8% growth year-on-year. Comparative sales grew 11.8% with comparable transactions flattish to minus 0.4% and ticket size increasing by 12.3%. For the total net sales mix share of an in-house -- of in-house and exclusive brands was at 51.1% and the categories that grew above the average were building materials, plumbing, sanitary wares, paints and furniture, furnishing and houseware. The company opened 1 new depot in March 1 in April and another 1 in May, bringing our total stores to 76 for the first half. We also opened 1 Home Essentials in Tagaytay and 1 new depot in Bantay, Ilocos Sur this July, bringing our total operating stores to 78 as to date. Total CapEx for the first half amounted to PHP 1.347 billion, mostly for the construction of new stores. Thus, first half net income reached PHP 1.856 billion, up 49% or PHP 609 million year-on-year, driven mainly by higher net sales and gross profit margin, partly offset by increased operating expenses. Net sales for the half totaled PHP 15.42 billion, up 18.7% or PHP 2.516 billion year-on-year due mainly to the growth in comparable sales of 11.8% and the contribution of new stores. Gross profit grew by 25.3% or PHP 1.244 billion to reach PHP 6.158 billion for the half, traced mainly to the increased contribution of higher-margin products and the expansion of the gross profit margin rates of both the exclusives, including in-house brands and the nonexclusive brands. In-house and exclusive brands contribution increased from 49.3% in the first half of 2021 to 51.1% for the first half this year. Operating expenses, including lease-related interest expense totaled PHP 3.852 billion for the half, up 13.7% or PHP 464 million year-on-year due mainly to expansion-related expenses, higher volume of business and inflation. Rent and net other income totaled PHP 161 million, up 21.9% or PHP 29 million year-on-year due to increased collection and higher volume of business. Non-operating interest expense -- sorry, non-operating interest income and ForEx gain dropped to PHP 6 million from PHP 80 million due primarily to lower investable funds. Sales from depot format stores accounted for 97.5% of the total at PHP 15.538 billion, hence, driving company-wide results. Home Essentials format stores accounted for 1.8% and the product sales, the remaining 0.7%. As the expansion plan is presently focused on a depot format, the percentage share to total net sales of the Home Essential sales and of product sales are not expected to substantially grow. If at all, in the short to medium-term, categories that grew higher than the 18.7% company-wide average were building materials, plumbing and sanitary wares, paint, furniture, furnishing and houseware. The rest still grew but at a lower rate than average. In terms of comparable sales, the depot sales grew 11.8%, the Home Essentials grew 5.9%, while project sales rose 29.7% for the first half. Comparable ticket size grew 12.3%, driven largely by pass on cost inflation, while comparable transactions slightly dropped 0.4% as foot traffic picked up only on the latter part of the first quarter. For our balance sheet, improved operating performance for the first half generated substantial operating cash flows, which enabled us to continue to self-fund our store network expansion and other planned capital expenditure even as the IPO proceeds were fully deployed in March of 2021. We continue to remain bank debt free. Capital expenditure for the half amounted to PHP 1.347 billion spent mostly on the construction of new branches and warehouses. Our margins continue to improve with our deliberate strategy on product mix to expand gross margins as the main driver. For 5 years in a row, this is every year since we got listed. We have given our cash dividends. Even in 2020, I mean the first lockdown, when a majority of our branches were closed. We remain committed to distributing cash dividends consistently every year. And for the rest of the year, our store network expansion will remain as a main growth driver. We are adding -- we are planning to add a minimum of 9 stores in 2022, 8 depots plus 1 Home Essentials that we have already opened this month. We have 4 more to go. We budgeted close to PHP 4 billion in capital expenditure for this year. We have spent PHP 1.347 billion so far. Part of this budget are for branches that will open next year, but construction already started this year. Just to reiterate our key growth strategies, store network expansion, focused on increasing the contribution of our higher-margin products, continuous improvement of physical stores and online store layout, features and continued customer experience enhancements. We're on track to reach our 100 stores with 22 stores to go until 2025. We remain focused on increasing the contribution of higher-margin products to expand margins to enhance marketing efforts, improve supply chain management, continuous rationalization and introduction of new lines -- product lines. Which will continue to enhance our store layout and customer experience to keep our customers coming back to us, adding value to our relationship with them and consistently differentiating us from competition. And of course, continuous enhancements of our omnichannel platform as digital presence has become in must-have. That's it for our presentation. Thank you, and I may now turn you back over to Jean to open our Q&A.

Thank you, Lorraine. And we're now opening the floor for your questions. Anyone? Yes, Mr. -- sorry, some miss what?

Hi. This is Anum here from Consilium. Congratulations first of all for great numbers. A couple of questions. One was in terms of the fresh demand that you are seeing, the increase in footfall, the better same-store sales growth, et cetera. How should one look at the second half given that now there are some inflationary pressures also coming in? Do we see any change there? Do we see an improve the current trend sustain? That was one. And secondly, the nonlinear improvement that we are seeing from gross profit to operating profit in terms of expansion in the margins. Was that due to the increase in the in-house brands, et cetera? Or what led to that margin expansion? And is that sustainable? Thank you.

So margin expansion? So margin expansion, yes, we've been banking on as we usually disclose to increase the share of in-house and exclusives, primarily expanding more in-house brands that we carry. In terms of sustainability, we -- I reported earlier at 51% share. We are hoping to target 52, 52%, ultimately, at this point, 55% contribution of in-house and exclusives, which showed in everything equal increase the gross profit margins. So that's how we're in order at this time.

Got it. The 52% is by the end of this calendar year? Or how was it?

Yes, this calendar year, we're hoping we're targeting 52%.

Okay. Okay, great. And with regards to the growth, given that the commentary on footfall, the commentary on same-store sales growth, et cetera, have been quite strong. How should one look at it incrementally going forward in the second half and beyond? Do you see that the average ticket sizes are improving because of bulk purchases, et cetera, that demand will sustain, and we will be able to grow high teens as you have mentioned somewhere in revenue? Do you think that that's quite achievable? Or do you think there are any headwinds to that high teens or early 20s kind of a growth number?

Yes. For SSG, we're looking at sustaining it until the end of the quarter, third quarter. So we've seen indications of very active construction activities. So it might -- it will continue until probably, but we'll see it on the fourth quarter because we have a very high base. So we're looking at a high single digit or low double digit for same-store sales growth. Yes, as I've said, there's so much construction activity, whatever was stopped during the last 2 years. Everybody's continuing now. And we're seeing really a ramp in construction, especially for residential.

Got it. So how much would be the institutional sales here. I mean this kind of bulk sales. The overall change mix?

Our focus really is on retail. For institutional, these are the big developers. We are only focused on our private label and exclusive brands. So we don't expect much increase for institutional, we're at -- currently, we're at 1%, although many of the projects now, I mean, big projects have started to open up again, and we're getting a lot of inquiries for future projects. So it's still at 1%. Yes.

Got it. But your working capital has seen a change because of this mix change because of the higher bulk cases, right? So do you think that -- this is the -- in terms of credit period that you provide to your customers, it's not going to -- it's going to remain at these levels, there are it's just 1%, and that's where you would like to keep the bulk and focus more on retail, that's how one should look at it?

Yes. Because of the limited products that we offer were only limited for the private label and exclusive brands.

Wonderful. Wonderful. Congratulations.

Yes Paul?

Just on pricing increases. You mentioned the ticket size has grown, and I'm guessing a lot of that is due to price increases that you've instituted across the board. Can you give us a flavor as to how much of an increase that you've done right across the board in the first half? And where are we here? Is there a bit of a lag from the time that all this started about what, 12 months ago or so? Or is there a lot more sort of price inflation you see coming through to the second half of this year?

We don't actually do across the board price increases. We rarely do that. We only increased the prices of -- if there is a change in the cost of new deliveries or new purchases. Yes, new orders. So that's been the only time that we increase pricing. This -- maybe it's just really very apparent in the results because, of course, we order more of it -- the higher turnover, right? The products that are the fastest inverse, right? And you order more open those products. So the -- if the cost continuously increase, then you would see like a series of price increases over, say, a year. So -- and then that's what gets into the cost of goods sold, but across the board, we rarely do that, and that is why it's also difficult to say that there is like a certain percentage because, of course, every order depending on how much the cost moved the price would follow. So maybe a range of what Lorraine, a range of 5% to 25%? Yes, 5% to 25%.

5%, yes. Maybe 10%, some would be 15% around there.

A small portion of EBITDA, the higher end, whereby we cannot really order -- I mean, the logical volume to order is not as many as, let's say, the lower end or the more basic lines because, of course, the market not many can afford. So you cannot order really the volume -- the same volume, so the per unit price would be higher, right? So that the price increase would be [indiscernible].

Although kind of going into that -- the trend is more the local, the ship suppliers are doing a lot more increases rather than our own in-house. So just -- I mean, just when we dig into the numbers.

And do you think you're able to do that because of your buying power or your size?

Yes.

Size. Yes. Yes.

Well, because we -- before, when all these problems were not present, we often get like kind of counter proposal with a quotation from a competitor to price match. But we rarely get that in these days.

And then some of the categories which have seen higher price increases, you mentioned as high as 25%, whatever that was for. Do you see any pushback from consumers? Has there been a negative response? Or...

That's on a per SKU basis, right? Not a whole category. That's on a per a SKU basis. So...

So those -- you've seen a 25% increase. Do you see maybe some pushback and maybe some sort of fall off in demand there? I'm just trying to gauge really the Philippine consumer. I mean I understand...

They probably paid down. Yes.

Yes. There would be -- it depends on who would we inquire right? So...

Yes, the 25% usually applies to high end or more on the niche products, but basically, the loss leaders, the basic wants to, we don't implement a very high price increase. We still have to do some balancing act because this -- we're still sensitive because we don't want to be off the market, although everybody increases their price. So the 25% Lorraine mentioned, these are not so fast-moving items. So it's not really very significant because the volume is not that much. That's why we don't see a very significant price increase. Basically, what we saw really is the increase in the value of transactions or the volume of transactions because people, when they buy, they buy in bulk already. And they limit their movements. So they -- when they go to the store, they have a list already, they have a shopping list already, and they just buy. It's not like in previous...

Before they shop around.

Yes, they shop around, they will check prices. But I guess, because of the presence of our website also, I mean, it's easy to navigate. They can always check the items. And then they just go to the sort of validation with the list. So yes, that the 25% does not refer to basic fast-moving items.

Right. And maybe last question for me. Just on the house brand strategy. So which areas you see it going ultimately to 55%? Which areas are you going to be targeting next? What is the sort of house brand strategy? Which areas do you see a natural sort of move for you guys to move into?

Yes, we still we see big movements on building materials. Electric lighting. There's also a lot of opportunities there. Yes, electrical lighting, building materials. And also, we still want to continue appliances, built in usually appliances, air conditioning those kind of high value.

High value, yes.

Yes, higher-value appliances, not small appliance types to those categories. And maybe we were talking about it last -- I think last [indiscernible], health products, like a lot of people want to go to the gym and take care of themselves. So that's something we might expand some more. So we've been selling bicycles, things like that. So even...

But in terms of material impact that should be building materials and electrical and lighting.

Hardware, even hardware also.

Just maybe one last question. Just on logistics. Everyone's been complaining about challenges in supply chain, sourcing, shipping, et cetera. Your observations here?

So okay. So we do have some challenges, like sometimes there would be a special order like we would have challenges a customer would have a special order. So that might get stuck because there's like, I don't know what you call it like a lockdown on different cities in China. So depending on the situation of the city or the port were kind of we can't really do anything about it. So that's why, in general, we are cushioned by the stock out by not having any stock outs because we book a lot. We order quite a bit. So as you can see in our days inventory. So in that sense, we are protected or cushioned from just that when there are special orders that we have to kind of say, okay, you need to give us another 60 days or 90 days because 2 months lockdown in so and so city. So that's one challenge. And I guess -- there's still a bit of fighting over containers. There's still a bit of that. I think it's lessened, but not so much. It's still there. And so there's still a bit of needing to pay a little bit more so we can get container or vessels base for the shipments. But because we order in bulk, so we kind of connects -- it connects, right? So we order in bulk, so we have cushion. And then that means shipping lines can say, okay, fine, we'll give you -- because you have volume. And then the factories also will say, okay, we can give you volume. We can give you stock because you order in volume and so we'll say, okay, can we take that production line for the next couple of months -- over the next 4 months.

Before I get to you phone, may I just read the question of Francis, we will here in the chatbox. How does the current inflationary and rising interest rate environment impact demand for [indiscernible] products?

Yes. We're not seeing it on the ground.

Absolutely. Yes, buy from us, it's all planned already. So whether there's inflation or whether there's no inflation, they will still continue to buy. They will still continue with the projects. So hopefully, it will not prolong but yes, we don't see it's I guess marginal.

Remember, in 2018, we had 8% inflation, and we also had a good year there in 2018. So...

Yes. They just have to -- because they will not stop buying or they will not stop construction, if prices went up. So they could probably -- if they're not loyal to the brand, they would trade down or -- since they have a budget already, they would probably reallocate their funds and then just stick what they want to buy or what they prefer to buy. Like for example, if their aspiration really is this much -- this high-end product. They will still continue because that's their aspiration. So yes, they might reallocate their resources, but still, they will continue buying despite inflation, if there's inflation.

Yes, [ Paul ]?

Congratulations for very strong results. Just a few follow-up questions from me. The first one is regarding your inventory, right? I mean you have a very high elevated level inventory. And I think last time or last quarter, you mentioned that you have a superior bargaining power to secure enough inventory compared to the other competitors. So I'm just wondering, can you update on the situation of inventory between yourself and the competitors in the market right now? Are you still have that kind of like advantage over the inventory buildup?

Yes. I think so. We have the advantage because we're able to serve the market. We continue to ramp up our sales. So yes, I guess, the advantage of having inventory -- ready inventory because when the construction opened up already, so I mean it will very easy for them to source the items from the stores. So we don't experience any out of stock. If ever there's challenges on some stocks. So we always have alternative to offering.

I think anecdotally, I think it's also a very good example that as we mentioned earlier that we see less and less price matching requests from our customers because -- so meaning even if the prices from competitors are say, for example, lower what the products are not available, then you know.

Yes. A lot of times, they would say, "Oh, in this store, the price is this and that". And then Eventually, they will end up buying from us because [indiscernible].

Buying from us, because -- [indiscernible] either not available at all or not enough.

Or just distracting us.

Yes. But yes, we are.

In happened a lot of times.

Okay. Okay, sure. That's very clear. And just to follow-up on that. So last year, we see you have a high advanced payments to suppliers. But since the beginning of this year, that number seemed to taper down to this day. So can you help me understand the logic behind that? And what does it imply?

Because most of the advanced payment, they went to the inventory, right? So they started delivering already. That's why you'll see -- it was I think a little bit [indiscernible].

There was -- yes, really for a prolonged delay.

And delay [indiscernible] I think we need to secure. We need to secure. That's why we have to -- you need to book in advance. So we have to -- because everybody is like ordering so we have to have advantage.

So right now...

Yes, actually -- yes, maybe towards the end of the year, we're not pretty sure, depends on how, again, the shipping conditions in China will be going towards the holidays.

And that's also a combination. That's also a factor, right, Chinese New Year. We were ramping up a Chinese New Year. We were ramping up for supply chain issues, and we were kind of worried about the lockdowns in China. So that's like all of that, we were like, okay, let's just make the order, right.

Right. So right now, you're tackling with the inventory?

Yes, it's the also the thing.

Yes. But again, we cannot guarantee that like the advances will not again realize going towards the holidays.

And when you pay in advance, do you get any discount or same price?

Definitely we get discount.

We get better...

Most of the suppliers we pay in advance.

Even local supplier will pay in advance. And particularly now with the high interest rate, we get a like term discounts.

We will just being extra sure, right, like when that advance suppliers went up because we were just being extra sure, but not -- that's kind of the normal way we order. We have to kind of pay in advance or partially paying advance.

Sorry. And for your in-house brand and explicit products, can I get a sense of how much of them from China?

From our 51%, maybe around 80%.

Yes.

So about 40% of your total sales?

Yes. Correct. Yes. But the local items are all imported in China.

Yes. Local and also from -- mostly from China.

Yes.

Just that they have a...

These are national brands that are produced in China. Yes, like saying Philips, right? Philips Lighting made in China. So -- but that's a locally sourced product.

So -- but when China locked down, those items also get affected.

Of course, our suppliers will be out there, our distributors here would also be affected and importers.

And move on to my second question, sorry, so long. On inflation, right, you mentioned it. And I think in the first half, you see a decent increase in your cost salaries, transportation cost. Can we expect that to increase further in the second half?

Yes. Well, normally in the fourth quarter and especially in December, there should be or there would be a -- it's an update in the expenses, especially in salaries, [indiscernible] bonuses that we cannot accrue earlier during the year fall in that incentives and all the billings, the suppliers miss during the previous months, then they would -- because they will catch-up for the closing of the books for the end of the year. So normally, many of those billings get locked up during -- December. So there -- but it's year in, year out, it's always like that.

So what increased would be towards the end of the year?

Yes. Yes.

Can you update also on the online sales? Is it still less than 1% or it's picked up already?

Which one?

The online sales.

Yes, it really has -- it's the same. It really has not picked up because we haven't changed our strategy and the purpose really of the online it's an home channel strategy. And in fact, we did not really set up like a separate, there is any fulfillment is still in the store. So just we get together with how we operated our offline or I mean our brick-and-mortar. So it's not something that all of a sudden -- and in fact, we're not doing anything to make it like that, but it would suddenly turn into something like -- on the marketplaces.

Okay. Okay. And lastly, my last question. What do you think is the impact from the earthquake you have based on -- in the Philippines?

Well, in terms of our own, we have 2 branches.

We opened -- we just opened the one...

Which is opened last week.

The one we went last week and then it opened only because we were told to stop operation yesterday. That's the one we opened last Friday. But we were allowed to operate at 1 pm today. So I mean, that store is really doing good. We did not expect, it was really spectacular, the first, second day sales. However, the other one that was also within the epicenter, the Laoag is doing good. It's still open. We did not close yesterday, but we have a lot of increase because there's so many repairs going on. The establishment or most of the structures there are old buildings. There are like a lot of heritage houses there, heritage buildings there. So those were not -- they were not able to reinforce the buildings. So those were the ones affected. And because of what happened, definitely, we expect more sales.

Right. How do we...

It made an impact to us. Positive.

Okay. Okay. Understood. And how is it compared to the typhoon last year? I mean last year, you also get some tailwind from Typhoon Odette, right?

We have not assessed also the extent of the damages. But if we see the pictures I think yes, there's a big damage in that area where the epicenter is.

Okay, understood.

But for our stores, it was just really mostly merchandise that the [indiscernible] but not being structural or anything like that.

The structure is very sound because it's newly built. Daniel?

Daniel from Eastspring. Just 2 questions for me. The first question is around your pricing strategy. I think in previous calls, you did mention that what has been supporting margin somewhat is that you do have quite a fair bit of inventory that was acquired from last year. But in my mind, as we run down the inventory and we built up new inventories from this year onwards, I would assume that your cost of inventory would have been higher going into the year. So on that, are we expecting inventory costs to trend higher in the third quarter? And are we thinking of raising prices in the third quarter to pass on more cost to consumers? As you mentioned, they are able to absorb that? So I just want to get a sense around inventory costs as well as your pricing strategy there.

Yes. Purchases Lorraine, the cost of purchases. I think it's still continuing to increase as we speak. Every new order we have a higher prices and the strategy is still really to pass on.

Yes. So it's not really across, right? So like it's obviously supply and demand, right? So -- but for like, for example, a bulk of our purchases are tiles. So lately, it's stabilized. So we have good supply or our manufacturers or our factories partners. There they have capacity. So supply is good, and pricing is kind of stable. Also, the price of freight has also stabilized for tile. So it's not across the board increasing. There would really be some, and that's a bit commodity dependent. So the raw materials needed for the products that's usually the cause for the price increase. My -- the latest we were talking about was tiles, not so much as supply is steady, so that's a big chunk of our sales, commodity prices, maybe some of the brass like maybe for faucets. So it really depends on that. But on the other hand, we also have suppliers that always increase prices. These would be usually the name brand. Yes, the multinational brands, usually, every year, they would have price increases. And so -- as Jean mentioned, we will pass on the price increase usually, but that's usually delayed, though it's a price increase nonetheless because we have stock, so we average it out. And if the supplier increases price, it doesn't happen immediately until the goods arrive or the newly priced goods are right?

Yes, to add also to that, with tiles, it's very peculiar because -- it does not capture -- like, for example, if it's a new design, it is a different variation, even if it's, let's say, same size 12x12. If it's a different name or different -- from time to time, we come up with updated or more trendy designs. So this is in -- this capture it as a price increase because it's a very different SKU, right? So it's different SKUs. So it does not -- it does not form part of the price increase. So the price increase would be apple-to-apple or same SKU that we -- like we maintained -- so let's say, the same SKU, it's just an additional order. But from time to time, we would come up with some tweaking or some variation in designs.

Got it. Got it. The next question is on -- also on inventories, but I just wanted to understand your procurement strategy and your inventory management as well. The context of this question is coming from the fact that Walmart actually over ordered, right? So they built up a lot of inventory, and they realized that they couldn't clear it, and they actually had to divest their old inventory at lower prices than kind of hit the margins. I'm just wondering if there could be a potential risk here. Or the way you procure your inventory is pretty much matched by what you are seeing in terms of demand on the ground, and you are not that concerned of over ordering and having to divest your old inventory at lower prices? Just wanted to get some color around this.

Yes. Walmart sells entirely different [indiscernible].

[indiscernible] the type of products.

[indiscernible] we do ours.

Yes. There's no pressure. There's no pressure. Solvency [indiscernible].

Solvency, yes. Because -- in the construction -- finishing construction materials does not really changed as quickly as the other -- it doesn't spill, it doesn't go out of style that quickly. So yes, so there's very little risk of that. And it really is very demand dependent because we always say this, but even if we put on sale, let's say, sanitary wares, plumbing products or I mean what -- the people will not be pushed to buy just because it's 50% off, if they're not -- they're not constructing anything because what will they do with an extra toilet bowl or extra sink, right? So it doesn't really work that way or finishing construction supplies and home improvement -- a kind of home improvement products that we sell. So no -- it's not really going to -- it's not the same for us.

Great. Congrats on a good result.

Yes. [ Han ]?

Can I just follow-up on gross margins. We know that margin expansion from product mix looks very sustainable, but there's some concern about the gross margin on a nonexclusive brands. So could you give us a bit of guidance, whether you think there's a risk that those margins normalize?

Well, actually, for the nonexclusive, we -- there are the margins that we're having now this year improved from last year, but it's still lower than pre-pandemic levels. There is actually some margin shrinkage not really on -- not so much on supply, but because we've been selling the -- the growth of the less or the lower margin products have grown or outpaced the growth of the higher-margin products in the nonexclusive's category. So we have the paints and the appliances, the appliances that are not our in-house brands. So those 2 categories have -- the growth of those 2 categories in the last couple of years during the pandemic has really outpaced the other categories with higher margins. So those 2 categories are the lowest categories with the lowest margin for us. And yes. So in terms of actually the -- there is an upside in the nonexclusive in terms of margins because we are still not at the level of the pre-pandemic, at least for pre-pandemic period.

Okay. So if you get to the -- sort of the house brand mix that you want to, would that mean your operating margins might go up to above 20%? That might look a bit higher, right, relative globally, how sustainable do you think that 20% margin would be in the longer run?

OpEx -- we're actually investing in digitization process and system improvements. And hopefully, we could get some efficiencies, increasing efficiencies in -- from the investments that we're doing now in terms of managing our own in-house brands, [ move ] especially because that would -- that one really has -- it's kind of variable, right? And the more you sell, the more you have to spend in the overall in the inventory and all that. But yes, so we're doing some things that should and really push on expected increases in operating expenses, the corresponding increase in the volume of our in-house brands, the increasing the volume of our in-house brands. Well, and also because of the like very high SSG, right? So that's why our net margins, like our EBIT margin has increased so much also because there's a benefit of scale there. So meaning the bigger stores with a bigger volume where the percentage of OpEx is lower because of scale has really ramped up in terms of goods sales. So like the increase in EBIT now is higher than the increase in the GP margin, if you noticed. So yes, so while that is true that OpEx will correspondingly increase, we're hoping that the investments that we're doing and from the experience of like the old stores with scale whereby the benefits of scale has really trickled down to the net will happen also with the in-house brands.

Okay. And then my next question on competition. We've heard about some global house and Costco capital. So what are your initial thoughts about how much of a track there might be? Do you have a sense of put-up overlap, especially on a nonexclusive products?

We think it will be like more overlaps than those that are focused more on the soft lines. But well, if what they disclosed so far is through the expansion plans that we are thinking of are not -- I mean yes, not that aggressive -- I mean in our view with the other competitor that we had or would still have actually have more [indiscernible] more -- they have more like a couple of more aggressive expansion plans in this one. So we -- and how they're -- like they're doing in Thailand. Yes. We feel that they're not really that the greatest threat. Well, of course, we're not also sitting down and doing nothing to I mean cushion ourselves from that -- from their end.

We're keenly observing, we're keenly watching them because I think their situation in Thailand is they're connected to manufacturer -- so it's a locally -- they have locally sourced building materials. So they do a lot of like cement, steel. I am not sure how they would be...

It's going to be different. Yes, it's going to be different.

Able to translate here. So they might change a bit their product categories. And so because most -- everything here is imported. So I don't really know -- we don't really see it to be exactly the same as Thailand because they have quite a robust manufacturing sector, they manufacturer sanitary wares, they manufacturer tiles and all of that in Thailand, but it's not really the case here. So yes. We are watching very, very -- observantly.

Maybe it will be an outlet for their [indiscernible] and distant channel for their own manufactured products.

So it will be imported. It will be imported. Yes.

So we will see if they're open to say, carrying other branches as well or they're just going to focus or give...

To simply put it, Jean. We're still -- I'm a firm believer of first-mover advantage. Yes. We'll see.

Can I just squeeze there, final question on reopening impact? So we know that the malls are reopening now, is there any risk that some of the traffic goes back to the mall-based stores from depot stores? Are you seeing any impact from this reopening?

So many people are going to the malls now even during weekends. But of course, what they see in the malls is different from what they buy from depot.

We're a destination store. So it's -- they plan to come to us when they have a project when they need to build or innovate. So them going to the malls, not really that much of an impact, they go to them all, they have a meal, and they shop and then they come to us to buy building, home improvement products.

What were -- I mean the mall-based hardware stores will take back some of the markets that the online platforms...

Yes, that might be affected.

Yes. Maybe online versus mall in...

I was just looking at Shopify. They're letting go of 1,000 employees. So Shopify is a pretty big e-commerce platform in the U.S. So I don't know, maybe people are more interested in buying online. I mean in physical stores. So not so far for us, not [indiscernible].

We're just steady.

Yes, just steady. We've got Harry.

Before -- yes, Harry, can I just read the question that was e-mailed? This is related again to the -- can you give us some color on how the currency impacts our pricing given the peso has been weak, but the RMB has also been moving? Which one dominates more and what is the net effect on the purchasing and pricing? So the currency factor, I mean, the currency is factored already in pricing. We normally saw the cushion -- so that we don't have to like change prices because of currency changes every week. So anyway, so that's how it is. I thought we are still -- we were still -- I mean at least for our own imports before we are really RMB dominated, but now just heard from our founder and we had our [ NDR ] a month ago that now we are paying more in USD than the RMB, although RMB is a very close second. So we pay in U.S. dollars, number one. And then number 2 is the RMB and the third, I think we pays a few in euros. But all those -- I mean, regardless, whether USD or RMB-based payments, the currency, we factor it in our pricing and we normally cushion -- so the cushion on the currency factor that we use so that any movement will be covered by the price that we set. So Harry?

Great. Congratulations on the really quite amazing numbers. I don't want to labor too much on the margin point because I think people have asked you this question quite a bit. But I think before -- well, in the last few calls, we've talked about kind of margins possibly coming back down to pre-COVID levels. And I think initially, you thought this would happen. But over time, it's -- I think the view has changed and maybe the margins don't come back down as much necessarily as you thought they might. So I just want to try and understand like whether internally, you're rebasing your expectations and whether actually the kind of margins that we should be expecting going forward are probably a slight notch higher? Is that fair to assume?

Yes, it's fair to assume. Okay. It's fair to assume that because we're going to, of course, really in the focus release on the product mix and pushing the higher-margin products to increase their contribution. And that's going to be the main driver. We -- but the increments that we should expect will not -- should not be as -- and it will not be as high as that increments that we had, say, last year and even this year. I think towards the end of the quarter, the increment it should taper off because last -- the fourth quarter -- our fourth quarter GP margin, I think it was already in the 30% level last year. So we're just doing 38.9% nowadays, so it's not going to be 200 basis points or 300 basis points increase anymore, but definitely still increasing. The passive demand.

Okay. No, sorry, I lost connection briefly, but I think I got the message. The next question was on leases, and I know you guys are looking at altering the lease, the term of the leases. Has that happened now? And...

No, it hasn't happened. We ended up renewing the leases at -- I mean we still with the same terms as we had the last -- we had the last 2 terms -- in the last 2 contracts. So we're still at the 3-year term level. It was -- well, it was because we had to change a lot in the contracts of some existing leases. So we decided -- and then it's like 30-plus leases. So we decided that we'll just -- because we will just match it to the 5-year review of the 15-year leases instead. I mean so that it won't be in one go.

Got it. Okay. That's very helpful. And lastly, just in terms of like the -- I suppose the stores that you'd consider to be quite like mature now are the ones that have been open sort of 3, 5 years back. Are those still -- are you still seeing sort of good operating improvements with regards to the store yields there? Like, if I look at the transactions and the sales per store, the older stores, are you still seeing that kind of sequential improvement? Or do these stores start to plateau and they kind of reach the sort of medium-term expectations?

Well, actually, just one look at these stores in really seeing this year that there's a sequential -- there's still great improvement. But it's very difficult to say that it's because of that or it's just really because the effect of the opening up of the economy and the economy is recovering because we have the pandemic the last few years. But definitely, almost all if not all are really still ramping up very nicely or we have not plateaued at all this year. But yes, so we cannot still conclude if it's only because like not really good years in the past 2 years because of the pandemic.

Got it. And lastly, have you got any changes to sort of expectations with regards to guidance and do you -- I mean are you sort of sharing a view on what you think? Because last year, I think there was a mention of kind of expectations in terms of the like the kind of earnings you would expect on a quarterly basis during the Annual General Meeting. Is there a similar kind of number that you're looking at this year?

Well, of course, we always try to do the best what you've already done. So -- but there are a lot of factors to consider. We are just -- like we just guided the top line, the SSG, we were pretty conservative at the start of the year again because there was a lot, and our January wasn't really very encouraging. But as you can see, half of the year is over, and we're doing well, and we're not seeing any slowdown of -- and that's why we -- but as I mentioned, we have some expenses that we're expecting to be recognized or to be built to us once the end of the year. So maybe, but of course, as for targets, we always want to do better than our last performance. So yes.

Okay. Great. Great. Congratulations once again.

Hi [indiscernible].

Congrats on the strong results. Just a question regarding construction activity. Any color you can share with us on the nature of the projects behind the bulk orders? Are these mostly from past construction our innovations? Or from new projects? I'm just curious to know whether you're seeing customers who are deferring major renovations, given the spike in construction costs? And how different is construction activity in Metro Manila versus outside Metro Manila?

Well, Metro Manila is now back on track. We've seen really big activities in Metro Manila because most of the workers have come back to Metro Manila. As to your question on what type of construction, whether it's new construction or renovation or -- well, it really depends on the area. Most of the construction happening outside Metro Manila, they're mostly new constructions. For Metro Manila is mainly renovation. Well, we really don't track and ask because it's all finishing it. I mean, it's finishing materials. So we don't know whether it's -- it's really -- for Metro Manila, we really don't know whether it's new construction or renovation because when they come to the store, they are already in the midterm of their construction also, which is in the finishing stage already. But yes, most construction in Metro Manila are more on the renovation improvements and for outside Metro Manila is more new construction. If you've seen the Ayala Corporation, they're focused now in the South area, like they're developing a lot of residential's in...

Horizontal.

Mostly horizontal construction.

Well, Anecdotally, my friend sent me a picture of his new restaurant that he's building yesterday in Batangas with 2 Wilcon trucks in front of it. So it's like I bought your truck. I bought your tiles, so he's expanding restaurants. So that's a new build just anecdote.

Lastly, on my end. Are you seeing different trends in basket size and transaction count in Metro Manila and outside Metro Manila?

Yes, there is an option in terms of basket size. I mean people are buying in bulk.

Yes, people are buying in bulk everywhere.

Yes, everywhere, not just in Metro Manila. But what we've noticed is that they prefer pickups now than delivery. So majority would still be...

I think that's also one of the reasons of the because -- well, it's very -- it's a ministerial really because we recognize sales only upon delivery. And so sometimes, the invoice gets woken up, depending on what gets delivered. Sometimes not all of the orders are delivered at work. And now that there's more pickup. So they get to bring everything that they order. So it's just really one invoice. So the invoice count cannot get [indiscernible] because they already got everything in one go.

Everything in one go. Yes. So that would be 80% of the transactions, all pickups. Karisa?

Congratulations on the results. Just a quick question on the tiles category. Just wanted to get your thoughts on the lower-than-average sales growth in tiles. Is there a particular reason for this? And how do you see this trending moving forward? Do you expect an acceleration in the sales of tiles or demand of -- for tiles more following?

In terms of volume, I guess, we're still at that note. But it's not in the same broad rate as to other categories because some are really coming from low base, but tiles it constitutes around 30-plus percent of our production. So yes, we're still -- Jean mentioned that the recognition of sales is upon completion or upon unfulfilled. So we've seen many, many -- we call it customer orders. They book in advance, they pay in advance, and then they will -- because for tiles, you have to order it prior to the -- prior to use, right, because you have to coordinate it with your theme, you have to match it with your water closet, with your faucets. So it's really -- it's not that you buy this today, you will install it today. So yes. We -- actually, in terms of volume, I think tiles is still the #1 contributor to our top line. And considering that -- yes, maybe because we sell more of the China tiles now, which is a little -- that's a trade down that we're seeing because with tiles even if it's Spanish and Italian it's just your -- it's just your aspiration, but you can trade it down to another China product, which looks similar. Unlike when it's a faucet or a lavatory wherein the label is there. So that's probably -- but I guess in volume, volume-wise, because we're looking also at the volume because we sell in boxes. I think the volume it did not decrease actually. It's really more on the -- because what we're seeing -- in the numbers that we're seeing, these are the value. So maybe in terms of value because there's some sort of trade down for some. But yes, that is still one of our core, I mean, if not #1 or priority for us. There are still questions on the chat box, Jean?

Yes. The box I already replied also in the box because we're over time. Thank you, everyone. I think let me -- if you have any more questions, just e-mail Investor Relators or e-mail me directly you can get my e-mail. Thank you for joining us today, and see you in our next earnings call and hopefully, another blockbuster performance.

Thank you, everyone.

Thank you.

Thank you.