InRetail Perú Corp. (INRETC1) Earnings Call Transcript

Good morning, and welcome to InRetail Perú's Second Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. And please note that this call is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Rafael Borja of InspIR Group. Sir, please begin.

Thank you, and hello, everyone, and welcome to InRetail Perú's Second Quarter 2021 Earnings Conference Call. Before we begin, I would like to remind you that today's call is for investors and analysts only, therefore questions from the media will not be taken. Joining us today from InRetail Perú are Mr. Juan Carlos Vallejo, Chief Executive Officer; and Mr. Gonzalo Rosell, Chief Financial Officer. They will be discussing the quarterly report distributed by the company yesterday. If you have not received a copy of the earnings report, please visit www.inretail.pe on the Investors section, where there is also a webcast presentation to accompany the discussion during this call. If you need any assistance, please contact the Investor Relations team of InRetail Perú. Please be advised that forward-looking statements may be made during this conference call, and they do not account for economic circumstances, industry conditions, the company's performance or financial results. As such, these forward-looking statements are based in several assumptions and factors that could change, causing actual results to materially differ from the current expectations. For a complete note on forward-looking statements, please refer to the quarterly report, which was issued yesterday. At this point, I would like to turn the call over to Mr. Juan Carlos Vallejo, Chief Executive Officer of InRetail Perú, for his opening remarks. Juan Carlos, please go ahead.

Thank you, Rafael. Good morning, everyone. I'm Juan Carlos Vallejo. Thank you joining InRetail's Second Quarter Analyst Call. Today, we will discuss the main highlights of InRetail's second quarter results. I will begin with a brief introduction on current market conditions. And then Gonzalo will walk you through on our analyst presentation. InRetail posted another good quarter with double-digit growth in revenues, EBITDA and net income due to a solid growth in our Food Retail segments, helped by the incorporation of Makro, the positive trend in our Pharma segment that compares with a slow second quarter last year and the progressive recovery in our Shopping Malls segment. Having said that, as you all know, Peru is still facing uncertainty after the presidential election. Concerns have not dissipated after Pedro Castillo inaugural speech a couple of weeks ago and the appointment of his first cabinet, whose members' background and experience are being evaluated. On the other hand, although Julio Velarde's willingness to remain as President of Central Bank is very good news. And Pedro Frank's stated objective to promote private investment to reactivate the economy is positive, too. Government's stated intention to push forward a controversial constitutional assembly, the tense relationship between the government and Congress and the lack of a clear agenda to support the economic recovery lead us to being cautious about our CapEx plan for the remainder of the year. In this context, we are reducing our CapEx plan for the year by 25%, equivalent to approximately $60 million, mainly postponing new landlord acquisition, prioritizing our existing land bank for further sales area growth without affecting our store opening plan for 2021 and 2022. With those funds and with our available excess cash, the Board of Directors of InRetail has agreed to propose an extraordinary dividend of $70 million to be distributed by the year-end. We expect to maintain a deleveraging trend and a healthy leverage ratio after the distribution becomes effective. An extraordinary shareholder meeting will be called in the near future to discuss and approve that proposal. This decision should not have an impact on the regular dividend distribution expected for May 2022. Despite the political uncertainty, the expected expansionary fiscal policy over the next few months should support positive consumer trends. For that reason, we remain optimistic on our ability to continue growing and improving our performance metrics, thanks to our consolidated business model, the continued development of our e-commerce and omnichannel strategy and the resilience of our 3 business segments. This translates into maintaining our guidance for the full year 2021 for InRetail of a double-digit top line and EBITDA growth of above 15% on a consolidated basis. With that, let me pass the word to Gonzalo. And as always, we look forward to answering your questions by the end of this call.

Thank you, Juan Carlos. Good morning, everyone. Thanks for joining us on this call. Once again, before starting, I would like to briefly remind you that the numbers we will be discussing today are presented under IFRS 16 and are fully comparable to numbers reported in our financial statements since 2019. Moreover, I would also like to remind you that our 2020 results did not incorporate Makro's results in our P&L since it was acquired on December 23, 2020, towards the very end of the year. We have started to incorporate Makro's numbers as of 2021. Now please turn to Page 4 in our earnings presentation to start reviewing our highlights and consolidated financial results of the second quarter for InRetail Perú. In the second quarter of the year, InRetail reported a double-digit growth in revenues due to a strong growth in our Food Retail segment, which includes the incorporation of Makro, a solid growth in our Pharma segment and the progressive recovery in our Shopping Malls segment. Revenues reached PEN 4.2 billion, a 26.2% increase versus the second quarter of last year. And gross margin stood at 27.9% in the quarter, showing a slight improvement in comparison to the previous year, mainly due to the improved performance of our Shopping Malls segment, which compensated the effect of incorporating Makro's Cash&Carry stores that operate with a lower gross margin. In terms of adjusted EBITDA, we recorded a double-digit growth in comparison to the same period of last year, reaching PEN 514 million and an EBITDA margin of 12.1%, which is in line with the first quarter of this year, but higher than the second quarter of last year due to the improved performance of our Shopping Malls segment, which compares to Q2 2020 when only essential retail was allowed to operate. Finally, our net income this quarter was positively impacted by the strong performance in our 3 segments and a mark-to-market gain in comparison to a mark-to-market loss in the same quarter of last year, which compensated additional FX losses. As Juan Carlos mentioned, in terms of guidance for InRetail, despite the challenging context, we are going through -- we continue to reaffirm the guidance given in February where we expected to achieve growth of at least 15% in both revenues and adjusted EBITDA for 2021 at InRetail consolidated level. Please turn to Page 5 to review our consolidated net income results. InRetail registered a gain of PEN 80 million in the second quarter of 2021 compared to a gain of PEN 12 million in the same period of 2020, mainly explained by an additional EBITDA contribution of PEN 140 million in the second quarter due to the incorporation of Makro and a strong performance in our 3 segments. Excluding FX and mark-to-market in the quarter, net of tax effect, the net income for the second quarter would have reached PEN 129 million. Now please turn to Page 6. On July 1, we replaced $100 million of InRetail Shopping Malls call spread over its U.S. dollar bonds for a $100 million full cross-currency swap. In addition, we remain with a $250 million call spread in the range of PEN 3.26 to PEN 3.75. The strike price of the full cross-currency swap is PEN 3.887. And we have swapped the 5.75% U.S. dollar bond coupon to a swap rate of 8.75% in local currency. The full cross-currency swap is back backstarting and will be in place until maturity of the bonds. Finally, as additional information, we have not made any changes yet to the hedging strategy of our $600 million InRetail Consumer USD bonds. Thus, we remain with a $600 million call spread in the range of PEN 3.70 to PEN 4.20. However, we will continue to evaluate the different available hedging strategies in the context of an increased fluctuation in our local currency. Now please turn to Page 7 to review a financial and operational snapshot of our consolidated figures. In terms of contribution, considering last 12 months as of June 2021, our Food Retail segment accounted for 49% of consolidated revenues and 35% of consolidated adjusted EBITDA with an adjusted EBITDA margin of 9.3%. Our Pharma segment accounted for 48% of consolidated revenues and 53% of consolidated adjusted EBITDA with an adjusted EBITDA margin of 14.3%. Finally, our Shopping Malls segment accounted for 3% of consolidated revenues and 11% of consolidated adjusted EBITDA with a net rental income margin of 73.8%. These last 12-month figures only include 2 quarters of Makro's operations. However, as I commented during previous earnings calls, when we consider pro forma numbers, including Makro, for a whole 12-month period, the contribution from each business segment do not vary significantly. We will now continue with our results by segment. Please turn to Page 9 to start with our second quarter highlights for our Food Retail segment. Our Food Retail segment recorded, once again, a strong quarter despite the high comparison basis to last year due to the peak in demand during the first months of lockdowns. Revenues increased 28.2% in the quarter, mainly explained by the incorporation of Makro's 16 Cash&Carry stores, 1 new Plaza Vea store inaugurated at the end of last year, 98 net Mass stores incorporated since Q2 2020 and a same-store sales growth of 5.6%. Same-store sales growth was positively impacted by an increase in both food and nonfood categories despite the high comparison basis of last year and a strong performance of the Cash&Carry format this quarter. Our gross margin decreased 190 basis points this second quarter, mainly due to the incorporation of Makro's Cash&Carry stores and, to a lesser extent, due to the higher penetration of electronics categories, both of lower gross margins. In terms of adjusted EBITDA margin, we registered a decrease of 118 basis points in the second quarter, with improved fixed cost dilution partially compensating the decrease in gross margin. Overall, we registered another quarter with good trends with a solid performance in all our formats, which reinforces our multi-format strategy. In terms of sales performance for the second quarter of 2021, our flagship format, Plaza Vea, represented 63% of sales. Our high-end supermarket format, Vivanda, represented 3% of sales. Our high discount format, Mass, represented 9% of sales. And our Cash&Carry format, which has now finished rebranding its Economax stores to Makro, represented 25% of sales. In terms of e-commerce sales, this quarter, we continued to experience an important demand for food and nonfood categories versus pre-pandemic levels. In terms of synergies related to the acquisition of Makro, as I commented last quarter, we're well advanced in the identification and execution of the different synergies. And these will have more relevance towards the second half of the year, with a full year effect in 2022. Finally, for Food Retail, we maintain our guidance given for the year, which considers a higher than 25% growth in revenues and 20% growth in adjusted EBITDA. Now please turn to Page 10 to review our second quarter highlights for our Pharma segment. Our pharmacies unit registered a top line growth of 19.1% in the second quarter with a same-store sales growth of 16.7%, which was positively impacted by an increase across all categories. This quarter, we opened 18 net pharmacies. Our gross margin reached 35.4% this second quarter, above the previous quarter and above the comparable quarter of last year. In terms of adjusted EBITDA, we recorded an adjusted EBITDA margin of 16.9%, above the comparable quarter of last year, due to a higher gross margin and fixed cost dilution. Finally, in terms of e-commerce in our pharmacies unit, we also continued experiencing a strong demand versus prepandemic levels. Now moving on to our distribution unit. This quarter, we reported a revenue increase of 27.4%, mainly due to a strong demand from pharmacy chains and independent pharmacies and due to a lower comparison basis in Q2 2020 when certain channels were closed due to COVID-19 restrictions. Gross margin was 11.9% in the second quarter, slightly below the previous quarter and 2020 levels due to a change in client mix in the distribution unit in the context of COVID-19. Finally, in our distribution unit, adjusted EBITDA margin reached 4.5% in the quarter, above 2020 levels due to a higher fixed cost dilution. All in all, at a consolidated level, our Pharma segment's revenues registered an increase of 20.1% in comparison to the second quarter of last year, with an adjusted EBITDA growth of 30.2% and a consolidated adjusted EBITDA margin of 14%. Finally, in terms of guidance for InRetail Pharma at a consolidated level, we expect to register a slightly above 10% growth in revenues and adjusted EBITDA, above the mid-single-digit growth that we had initially guided for full year. Now please turn to Page 11 to review our second quarter highlights for our Shopping Malls segment. During the second quarter, our Shopping Malls maintained an average 81% of GLA opened, closing the quarter with 82% of GLA opened. Within this context of progressive recovery in GLA under operation and with a low comparison basis in Q2 2020 when malls only operated at 20% of GLA, our Shopping Malls revenues increased 150.2% versus the comparable quarter of last year, registering continuous improvement quarter after quarter. Adjusted EBITDA reached PEN 68 million and a net rental margin of 73.7%. During the quarter, we were also able to maintain high occupancy rates of 94% above the first quarter of the year. In terms of mark-to-market, we registered a gain of PEN 9.5 million this quarter compared to a loss of PEN 36.4 million. In terms of liquidity, as of June 30, our Shopping Malls segment had PEN 201 million in cash and equivalents and an investment of PEN 185 million in InRetail shares as additional sources of liquidity. As an update, since July 12, restrictions of mobility on Sundays were lifted, capacity in malls was increased to between 40% and 50% and opening hours of our malls were increased until 10 p.m. Overall, restrictions related to COVID-19 have been reduced, and only fewer regions remain with strict restrictions today. Additionally, since August 5, cinemas have begun to reopen within our malls. However, education tenants are still not allowed to open. Finally, in terms of guidance for InRetail Shopping Malls, we continue to expect revenues and EBITDA to grow between 35% and 45% full year, in line with what we said at the beginning of the year. Now please turn to Page 12 to briefly comment on some of our recent openings in our shopping malls. During the second quarter, in June, we opened H&M in Real Plaza Centro Cívico in Lima, which has strengthened our tenants offering. And additionally, we opened the Smart fit fitness center in our Real Plaza Arequipa mall. Finally, early July, we finished the expansion of Real Plaza Cusco mall, adding approximately 19,000 square meters of new GLA, which was inaugurated with the opening of another H&M store in our chain and with the opening of several new tenants. Now please turn to Page 13. This slide sums up our Food Retail sales area, number of Pharmacies and Shopping Malls as well as our same-store sales by quarter. In the Food Retail segment, in the second quarter of 2021, we opened 22 new Mass stores. With this, we closed the quarter with 109 supermarkets, 494 Mass stores, 21 Cash&Carry stores and 476,000 square meters of total sales area. In our Pharmacies unit, we opened 19 stores and closed 1 store, opening 18 net pharmacies in the quarter. With this, we ended the quarter with a total footprint of 2,198 pharmacies. In the Shopping Malls segment, we added a small amount of GLA, ending the quarter with 812,000 square meters of GLA. In terms of same-store sales, we can observe the solid mid-single-digit same-store sales growth recorded in our Food Retail segment this quarter, considering the very high comparison basis in 2020. Additionally, we can observe the solid double-digit trends in our pharmacies this year, which compared to a lower basis in 2020 due to the reduced foot traffic linked to a strict lockdown in the country at the beginning of the pandemic. Finally, same-store sales of our Shopping Malls tenants have also recovered, recording same-store sales of 11.6% in the second quarter, which generally considers tenants which were allowed to operate their physical stores in both comparable periods. If we compare same-store sales of the second quarter of 2021 versus the second quarter of 2019, we are already at positive levels of approximately 4%, meaning that on a consolidated basis, our tenants are selling more than in 2019 already, explained by a strong comparable growth in anchor tenants and a continuous recovery of other mid- and small tenants. Now please turn to Page 15 to discuss our CapEx and cash flow generation. During the second quarter of 2021, we invested PEN 125 million in CapEx for our 3 business segments, mainly for the construction and remodeling of stores for Food Retail and Pharma. In terms of cash balance, we ended the second quarter with PEN 1,085 million of cash, above the end of year cash balance of PEN 936 million, having incorporated the operation of Makro and having performed the associated liability management post acquisition in the first quarter of the year. Please turn to Page 16 to discuss our consolidated financial debt. As of June, InRetail had a consolidated net debt of PEN 6,502 million, with a net debt to adjusted EBITDA ratio of 3x, slightly below the previous quarter and in line with the end of the year. This leverage ratio only considers 2 quarters of Makro's operation, since Makro's results are not considered in 2020 EBITDA figures. In terms of the composition of our debt by currency, as of June 2021, 52% of our debt is in soles, 46% has been hedged, and only 2% of our debt is exposed directly to the dollar. For InRetail Consumer, we have a call spread structure that protects us from exchange rate depreciation between PEN 3.70 to PEN 4.20 for 100% of the notional amount of $600 million until maturity of the bonds. For InRetail Shopping Malls, we have a call spread structure for a notional amount of $250 million that protects us from exchange rate depreciation between PEN 3.26 to PEN 3.75. And we have recently entered into a $100 million full cross-currency swap, which replaced a $100 million call spread, as I commented in detail at the beginning of the call. Now please turn to Page 17 to review our debt by segment. Supermercados Peruanos, our Food Retail segment, ended the second quarter with a net debt of PEN 2,454 million, which includes the intercompany loan with InRetail Consumer related to the acquisition of Makro. Net debt to EBITDA reduced to 3.2x, explained by the continued increase in EBITDA. On the other hand, InRetail Pharma ended the second quarter with a net debt of PEN 1,865 million with a net debt to EBITDA ratio of 1.6x, slightly above the previous quarter due to a dividend distribution, which was used for InRetail's annual dividend distributed in May of this year. Finally, InRetail Shopping Malls ended the second quarter with a net debt of PEN 1,938 million with a net debt to EBITDA ratio of 7.3x, a significant reduction versus the 2 previous quarters, mainly explained by the improvement in the LTM EBITDA, as we leave behind Q2 2020 in the LTM numbers and as we continue to increase GLA under operation and tenant sales recover. We expect to continue this averaging during the year and going forward. This covers our presentation. Now we will be glad to answer any questions you may have.

[Operator Instructions] Our first question is from Chelsea Colón with Aegon Asset Management.

I just have a couple of quick questions, the first one related to InRetail Shopping. I noticed that you took a portion of your investments through -- at -- I believe it's at fair value through profit and loss and shifted those into dollar-denominated deposits. I was wondering if this is like a strategic decision related to the political uncertainty that you mentioned on the call or if there was some other reason behind that. And then also related to that, I was just wondering if you're seeing any impact, you think, to foot traffic in the second half of the year across any of your segments related to this political uncertainty that you're discussing.

Thank you, Chelsea, for the 2 questions. With regard to the first one, we haven't done anything extraordinary with regard to our investments or investment policies. What you have seen in the cash flow has to do with mutual funds that we simply reallocate and move to look for incremental yield as part of our day-to-day treasury policies. But there's been no change related to the current political context or anything different than the way we've been operating our treasury historically. With regard to the expectation of foot traffic, we have seen foot traffic recovery since the beginning of the year, consistently in all our formats. And that's translated as well in our Shopping Malls business. And we are not feeling a negative impact by the political context in foot traffic in any of our formats. And therefore, we expect the second quarter to remain strong and with positive trends for resilient business segments like the ones we operate. So in general terms, there are no visible changes or changes in trends that we have seen yet at least.

Great. And I missed it at the beginning of the call, you mentioned a 25% reduction in your CapEx plans. What exactly are you cutting from the plan? Because I believe it was also stated that you would maintain your store openings for the year regardless of the cut in CapEx. So what is it that you're cutting exactly?

Yes. Well, we are basically cutting -- postponing this land bank acquisition, Chelsea. We're putting more focus on our existing land bank utilization. And that's the reason behind the fact that despite reducing 25% our CapEx for 2021, we are not going to affect our new sales area expansion for 2021 or 2022.

Got it. And just lastly from me, regarding your hedging strategy, particularly I'm thinking of the InRetail Shopping bonds, which I believe are the ones that you executed the cross-currency swap for. Do you have plans to increase the cross-currency swap?