InRetail Perú Corp. (INRETC1) Earnings Call Transcript

Good morning and welcome to InRetail Peru's First Quarter 2024 Conference Call. [Operator Instructions] 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 Peru are Mr. Juan Carlos Vallejo, Chief Executive Officer; Mr. Marcelo Ramos, Chief Financial Officer, and Mrs. Vanessa Danino, Investor Relations 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 Peru. Please be advised that forward-looking statements may be made during this conference call and they do not account for economic circumstances and 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 Peru for his opening remarks. Please go ahead, sir.

Thank you, Dave. Good morning, everyone. I'm Juan Carlos Vallejo. Thank you for joining InRetail's first quarter earnings call. Today, we will discuss the main highlights of InRetail first quarter results for 2024. Joining me today are Marcelo Ramos, our Chief Financial Officer; and Vanessa Danino, our Investor Relations Officer. I will start with a brief executive summary and then Marcelo and Vanessa will walk you through our earnings presentation. After a challenging 2023 with the lowest economic growth in the last 3 decades other than 2020, the Peruvian economy showed sign of recovery at the beginning of 2024, favored by the rebound of sectors affected by the social conflict and harsh climate condition last year. Additionally, inflation continued to taper off reaching the central bank's target range after 3 years driven by the normalization of food and beverage prices. Despite the slowdown in inflation and the early sign of improvement in private sector confidence, economic growth in the first quarter was still low. However, to the extent political conditions do not worsen, the lower inflation and interest rates environment should enhance product consumption, especially during the second semester, as the Peruvian economy continues to have solid macroeconomic fundamentals. InRetail continued to show strength and resiliency even in this persistently low growth environment reaching a 2.9% and 3.6% growth in revenues and in adjusted EBITDA respectively. Our food retail segment had another solid quarter growing 7% in revenues and 4.8% in adjusted EBITDA. Growth was mainly driven by our emerging formats, which operate with lower margins as part of their value proposition and by the new stores opened in 2023. Similar to previous quarters, we continue enhancing our leadership position in the modern food retail channel. As anticipated in our previous earnings call, our pharma segment experienced a challenging first quarter from a contraction in demand in both pharma and selected nonpharma categories, as well as from a decrease in revenues in our distribution unit, particularly in Ecuador. Revenues decreased 2.9% and adjusted EBITDA 0.6%, offset by an improvement in gross margin. The private pharma sector in general is being affected by a more active participation of public institutions in the purchase and dispense formations. Finally, our shopping malls segment had a strong first quarter with revenue and adjusted EBITDA growth of 10.7% and 8.6% respectively, improving occupancy levels and tenant mix. In terms of guidance for InRetail, we remain in line with the guidance given early this year in our previous earnings call of mid single digit growth in revenues and in adjusted EBITDA on a consolidated basis. With that, let me pass the word to Marcelo, and as always, we look forward to answering your questions by the end of this call.

Thank you, Juan Carlos. Good morning, everyone. Thank you for joining us on this call. Today, we will review the main highlights of InRetail's first quarter results for 2024. Now please turn to Page 4 in our earnings presentation to start reviewing our consolidated financial results for the first quarter for InRetail Peru. In the first quarter of the year, InRetail reported a low single-digit growth of 2.9% in revenues, with strong growth in our food retail and in our shopping malls segment offset by a decline in our pharma segment from a continuous weaker demand affecting both pharma and nonpharma categories. In terms of adjusted EBITDA, we recorded a single-digit growth of 3.6% in comparison to the same period of last year, mainly explained by the minor improvement in gross margin, the increased fixed cost dilution and operational efficiencies, resulting in relatively stable adjusted EBITDA margins. Moving on to net income, we registered a 5.9% growth in the quarter, mainly explained by improvement in performance and by the slight mark-to-market gain in our shopping malls segment that compared to mark-to-market loss in the comparable quarter of last year. These effects were offset with a lower net FX gain during the quarter. Overall, as already mentioned in our previous earnings call, Q1 '24 evidenced similar trends to those seen in Q4 '23. We continue to experience a slower economic growth environment affecting general consumption patterns across categories despite the milder impact from El Nino phenomenon. Our food retail and shopping malls segment confirmed the resiliency and defensive nature, while our pharma segment suffered from a continued contraction in demand mainly in pharma categories. Looking forward to the full year 2024, as mentioned by Juan Carlos, we remain in line with initial guidance given earlier this year of mid-single-digit growth in consolidated revenues and in adjusted EBITDA on a consolidated basis. Now please turn to Page 5 to review the financial and operational snapshot of our consolidated figures. In terms of contribution by segment, these have remained in line with recent quarters. Our food retail segment gained more participation in revenues relative to the last 12 months' figures in Q1 '23 due to its outperformance compared to our pharma segment. On a consolidated level, during the last 12 months, InRetail generated more than PEN 21 billion in revenues and more than PEN 2.8 billion in adjusted EBITDA. Now please turn to Page 7 to give you a short update on our continued ESG progress during the quarter. During this first quarter, we continue with our commitment to move forward with our sustainability efforts. First of all, we're extremely proud that all of the companies within InRetail have been recognized by ELSA for promoting work environments free of harassment, reinforcing our 0 tolerance policy in all of our operations nationwide. On the social front, our flagship program, Bueno por Dentro continued growing, promoting the reduction in food waste. During the quarter, we donated more than 4 million food rations equivalent to PEN 18 million. We also conducted several initiatives to promote good health and well-being. This quarter, we carried out health campaigns in our malls impacting more than 6,000 people. Through initiatives such as Peru Pasion and Placita del Emprendimiento, we remain committed to supporting SMEs, promoted economic growth and entrepreneurship within our communities. Thanks to Peru Pasion, we generated more than PEN 4 million of SME sales through our physical and digital channels for more than 400 sellers. Finally, on the environmental front, and in alignment with our environmental and energy efficiency goals, we recycled and reused 2,700 tons of waste in total and over 960 kilograms of organic waste was recovered in our Plaza Vea store in San Juan de Lurigancho, which was later transformed to compost. Additionally, we managed to reduce more than PEN 500,000 in energy consumption in our food retail stores due to the implementation of best practices in energy management. Now please turn to Page 9 to review our first quarter results for our food retail segment. Our food retail segment recorded another solid quarter expanding its leadership position despite the high comparison basis of Q1 '23 when we registered an 8.6% growth in revenues and the slower economic growth environment. Revenues increased 7% in Q1 '24 with a same store sales growth of 3.2%. Our food categories experienced a moderate same-store sales growth this quarter with a strong growth in fresh food categories and a more moderate growth in dry food categories amidst the lower inflation environment. On the other hand, nonfood categories experienced a moderate decline better than previous quarters given the low comparison basis from last year and a subdued consumption environment. In terms of performance by format, revenues were driven by a strong growth in our Mass format posting strong double digit same store sales growth and in our macro format posting a mid single digit same store sales growth. Our Plaza Vea format on the other hand posted a negative low single-digit same-store sales growth, an improvement from previous quarters but still affected by the continued decline in sales of nonfood categories which represent approximately 30% of sales in this format. Revenues were also benefited by the contribution of new stores opened in the last 12 months representing 47,000 square meters of additional sales area, roughly an 8% increase in our total square meters. This includes openings of 233 net new Mass stores and 1 Plaza Vea Store in Lima. As a reminder, our Mass stores operate with lower sales per square meter than our larger big book formats Plaza Vea and [ Makro ]. In Q1 '24 we opened 57 net new Mass stores, mostly outside of Lima. In terms of participation by format, our emerging formats Hard Discount and Cash-and-Carry now represent close to 45% of our total revenues. Our gross profit increased 5.1% with a gross margin of 23%, lower than the comparable quarter of 2023. As I have commented before, our gross margin is negatively pressured by the increasing participation of our emerging formats in the sales mix. Additionally, this quarter, our supermarket format experienced a higher than usual shrinkage rate mainly associated with fresh food categories given the warmer weather in the summer. This unusual effect has already gradually normalized in the last couple of months. This was partially offset by a changing category mix which includes an increase in sales of food categories and a decrease in lower margin in nonfood categories, namely [ Electro ]. In terms of adjusted EBITDA, food retail's adjusted EBITDA grew 4.8% in the quarter, affected by the decline in gross margin outlined before and by the incremental operational expenses from the new stores opened which are in the process of ramping up. These were partially mitigated by the dilution of fixed cost and by the execution of store operational efficiencies, mainly in our Supermarket and Cash-and-Carry formats resulting in a slight decline in adjusted EBITDA margin compared to Q1 '23. In terms of our food segment digital sales, we recorded a strong double-digit growth this quarter close to 20%, primarily explained by strong growth in food categories and a gradual recovery in nonfood categories which registered a low single-digit growth compared to the first quarter of 2023 given the very low comparison basis from last year. Our last mile platforms actively contributed with a strong growth in food categories representing more than half of our digital food sales. As of March, our digital sales represented over 6% of total sales in our formats with an active digital channel. In summary, our food retail segment registered another solid quarter with revenues and adjusted EBITDA increasing 7% and 4.8%, respectively, despite a persistently low economic growth environment combined with lower inflation. Consumers are still prioritizing proximity and price [ formats ], resulting in a generalized decline in average ticket sizes with an important increase in frequency. Now please turn to Page 10 to review our first quarter results for our pharma segment. Our pharma segment posted a decline in revenues of 2.9% this first quarter. Revenues in our distribution unit declined given a reduction in demand in Ecuador affected by the unfavorable political context and social unrest, and by the decline in public institutional sales as a result of the decision to reduce exposure to this channel given issues with profitability and collection. Top-line results were benefited by a recovery in Peru, primarily from public institutional sales and by a lower comparison basis in Q1 '23. Same store sales for our pharmacies unit decreased 2.7% due to a continued slowdown in pharma categories. Pharma category sales were affected by a more active purchase and dispense of medicines from public institutions which are gradually returning to pre-pandemic levels. Additionally, recent quarters incorporate declining sales of category 3 pharma products which by regulation are no longer allowed to be sold in Peru until the laboratories present before DIGEMID, the regulator, updated certifications endorsing their effectiveness from a high surveillance country. This has affected the market in general and there are no exact substitutes for these products. Finally, similar to other categories, consumers continue to prefer more economic alternatives in pharma categories affecting average ticket sizes. Nonpharma categories on the other hand posted a slight decline in same-store sales during the quarter from a drop in nutrition categories, namely vitamins, and supplements despite a positive growth in consumer categories that combines a strong growth in beauty and dermal with a decline in baby care products. More discretional nonpharma categories were clearly affected by the lower spending capacity of consumers. In the last 12 months, we opened 41 net pharmacies and during the first quarter of 2024, we opened 19 net pharmacies. We registered a gross margin of 31.7%, an increase compared to Q1 '23, mainly due to a change in sales mix towards higher margin products in pharmacies as customers continue to search value-for-money alternatives. Gross margin in our distribution unit remained stable compared to the same quarter of last year. Our pharma segment recorded an adjusted EBITDA margin of 15.6%, higher than the comparable quarter of last year. The increase in margin is primarily due to the improvement in gross margin outlined before. As part of an asset reorganization process and similar to prior divestitures, during the quarter, we sold our distribution operation in Bolivia to a nonrelated party. This was our only remaining operation in this country after selling our minor pharmacy operation in 2020. This was a non-core and non-strategic asset in a small market representing less than 1% of our pharma segment revenues. As a result of the asset sale, our pharma segment recorded a onetime write-off expense affecting our consolidating results. Excluding this onetime accounting effect, adjusted EBITDA would have grown 1.4% compared to Q1 '23 in the pharma segment. In terms of our pharma digital sales, we continue to record a strong growth of more than 30% this quarter. Moreover, our nationwide click-and-collect network now represents more than half of our digital sales as of the first quarter of Q1 '24. This delivery method helps us expand our digital offering in more districts of the country in a more cost-efficient manner, taking advantage of our capabilities and capillarity nationwide. As of March, our total nonphysical sales represented 5% of total sales in pharmacies. Now please turn to Page 11 to review our first quarter results for our shopping malls segment. Our shopping malls segment registered a solid top line growth of 10.7% versus the comparable quarter of last year. This growth was mainly explained by the increase in GLA by the improvement in occupancy in several of our malls, including Centro Civico and Salaverry and by the increasing inflation-linked fixed rents. It is important to mention that growth in revenues was also favored by a lower comparison basis in Q1 '23 due to the social unrest and subsequent coastal floods. As a reminder, during Q1 '23, Real Plaza Juliaca was closed for nearly 2 months while Real Plaza Cusco and Real Plaza Arequipa experienced intermittent closures. Excluding this impact from the base, our revenues would have grown close to 9%. Our tenants registered same-store sales reduction of 3.8% during the first quarter. Similar to prior quarters, the decline in same-store sales is still driven primarily by anchor tenants, in particular, cinemas, which continue to be affected by the lack of blockbuster content. Department stores and home improvement tenants posted a milder negative same store sales growth although it compares to an already low comparison basis from last year. Other non-anchored retail tenants, principally intermediate tenants, continue to be affected by the slow consumption environment. On the other hand, entertainment tenants such as food courts and restaurants showed a good performance during the quarter. Our gross margin was 65.8% this quarter, relatively stable compared to Q1 '23 despite the increasing costs related to mall services, namely energy and utility costs. In terms of adjusted EBITDA, we reached PEN 119 million with a lower net rental margin of 81.7%. The decrease in net rental margins comes from lower recoveries for doubtful accounts due to a onetime recovery in the comparable quarter of last year and higher personnel expense partially compensated by fixed cost dilution. Now please turn to Page 12. This slide summarizes our openings and same store sales performance for each business segment. I would like to highlight the continued increase in sales there in our food retail segment, of which the majority comes from the expansion of Mass. Additionally, despite the persistently low economic growth environment, we see a slight improvement in same store sales levels this quarter compared to the second semester of last year. Please turn to Page 14 to review our consolidated net income results. InRetail registered a gain of PEN 221 million in the first quarter of '24, a 5.9% increase compared to the same period of 2023. This increase in net income is mainly explained by the improvement in operating performance, resulting in an additional EBITDA contribution of PEN 24 million and a mark-to-market gain in our shopping malls segment compared to a mark-to-market loss in the comparable quarter of last year, offset by a significantly lower net FX gain. Excluding exchange rate impacts and mark-to-market from the valuation of investment properties, net income for the first quarter would have reached PEN 218 million, a 12.8% growth versus the comparable quarter of last year. Now I will pass the word to Vanessa who will discuss our CapEx, cash flow and financial debt.

Thank you, Marcelo. Now please turn to Page 15. During the first quarter of 2024, we invested PEN 197 million in CapEx for our 3 business segments, of which the majority corresponds to our pharma and food retail segments. In our pharma segment, CapEx this quarter was invested in the construction of our new distribution center and logistics platform, as well as in scheduled maintenance and in the new stores opened. Additionally, in our food retail segment, CapEx was invested in a store expansion plan, including the opening of 63 Mass stores this first quarter and in scheduled maintenance of existing stores. In terms of cash balance, we ended the first quarter with PEN 1,248 million of cash considering the PEN 147 million held in short-term liquid mutual funds for cash management purposes, higher than the end of last year's cash balance of PEN 1,142 million which also included short-term liquid mutual funds. This reflects a higher operating cash flow generation compared to the comparable quarter of last year, mainly from an increase in adjusted EBITDA. The distribution of an ordinary dividend of $90 million was approved by the general shareholders meeting, which will be distributed on May 15. This will be reflected in our cash balance for the second quarter of 2024. Now please turn to Page 16 to discuss our consolidated financial debt. As of March 2024, InRetail had a consolidated net debt of PEN 6,386 million with a net debt to adjusted EBITDA ratio of 2.3x, below the comparable quarter of last year and in line with the end of last year due to an increase in total adjusted EBITDA partially offset by an increase in total net debt, mainly explained by the increase in CapEx investments in our pharma segment as I commented before. In terms of the FX exposure of our financial debt, approximately 50% of our debt is U.S. dollar-denominated and the other 50% of the debt is in local currency. As you know, our entire U.S. dollar-denominated debt is related to our international bond issuances and has been hedged through different hedging structures until maturity, which are detailed here and in our quarterly reports. As of March 31, the Peruvian soles currency closed at 3.721 compared to 3.713 as of December 31 of last year. Now please turn to Page 17 to review our debt by segment. Supermercados Peruanos, our food retail segment, ended the first quarter with a net debt of PEN 2,977 million, slightly above the end of last year. As we have seen in 2023 and in previous years, leverage in our food retail segment historically increases during the first semester of the year and presents a faster deleveraging towards the end of the year. Net debt to adjusted EBITDA stood at 2.7x, slightly above Q4 '23 with a relevant reduction of 0.3x compared to the first quarter of last year despite the execution of our expansion plan. Total net debt decreased by PEN 116 million compared to the first quarter of last year. InRetail Pharma ended the first quarter with a net debt of PEN 1,963 million and the net debt to adjusted EBITDA ratio of 1.5x, below the comparable quarter of last year due to the company's efforts to reduce its short-term debt through 2023 and relatively in line with the previous quarter even with the pickup in CapEx related to the construction of our new distribution center. InRetail Consumer, which consolidates our food retail and pharma segments, ended the first quarter with a net debt to adjusted EBITDA ratio of 2x, relatively in line with the previous quarter and below the comparable quarter of last year. Finally, InRetail Shopping Malls ended the first quarter with a net debt of PEN 1,557 million with a solid cash position of PEN 500 million resulting in a net debt to adjusted EBITDA ratio of 3.1x, below the previous quarter and more than half a turn below the comparable quarter of last year, mainly explained by a strong increase in adjusted EBITDA and a reduction in debt from the scheduled debt amortization. Overall, for 2024, we expect to conserve a healthy consolidated leverage ratio while maintaining a diligent investment plan and dividend payments. As such, we anticipate InRetail's net leverage ratio to remain relatively in line to 2023 by year-end, combining a slight deleveraging in our shopping malls segment with a stable leverage ratio in InRetail Consumer. Now I will pass the word back to Marcelo.

Thank you, Vanessa. All in all, as we have seen in our consolidated financial numbers and as anticipated in our previous earnings call, the first quarter of 2024 was another good quarter for InRetail, despite the similar dim consumption trends to those seen in the last semester of 2023. Although this quarter was also affected by low economic growth, most of our business segments continue to perform, gaining grounds in their respective markets. As such, we feel confident in our strategy and in our ability to continue outperforming. This covers our presentation and now we will be glad to answer any questions you may have.

Thank you. At this time, we will open the floor for your questions. [Operator Instructions] The first question comes from Alonso Aramburu with BTG.

Yes, 2 questions on my side. Firstly, I was wondering if you can comment on some of the trends post the first quarter, whether you have seen any improvement in consumption both on food retail and on pharma? And my second question is on the Cash-and-Carry. You haven't opened a Cash-and-Carry store in the past year or so. I was wondering if you can comment on just the potential you see for the Cash-and-Carry business in Peru. If you have maybe an opportunity to grow more aggressively there in the next few years?

Sure. So in terms of what we're seeing in the weeks after the quarter, pretty much similar trends to be honest. It's been a quarter still with a depressed consumption environment. Remember as well that compared to last year, no Holy Week. And this year happened in March. Last year happened in April. April as well had 1 less week than what we had last year. So in essence, the April, both for food and pharma have been pretty similar trends, correct, with consumption and product consumption pretty depressed as well. That as it relates to the weeks after the first quarter. And in the second question for the Cash-and-Carry, look, we still believe there's huge opportunity there. As we mentioned in prior calls, the medium term, long term view that we have as it relates to the big boxes is opening roughly 2 big boxes per year, and those should be skewed towards macro, to be honest. The reality though is that building the big boxes requires more permits, licenses and takes a little bit more time. And that's pretty much what's going on with the opening of the big boxes. But we do still feel comfortable with the guidance we gave about of 2 stores on average on a yearly basis going forward.

And just to confirm, this year you're expected to open 1 big box, correct?

So we had 1 big box in plan, but it's been a little bit delayed in terms of the permits and licenses. So that big box, the opening is now expected in the first Q of 2025, but it has to do pretty much with permits. We do have the pipeline to build the 2 big boxes on average that we said before, but the 1 that we had expected to open this year, by the end of the year, it's now going to be open probably in the first quarter essentially because of permits.

[Operator Instructions] The next question comes from Carolina Ratto with Itau.

I just wanted to know if you can comment on the shopping malls business a little bit, if we will continue to see some pressure in terms of margin going forward? And how do you see the room for further improvements in terms of occupancy rates, or we have reached what we have seen like a normal level in this case?

Carolina, this is Vanessa. I can take this question. So with respect to your question on the margins, in line with Marcelo's explanation, we did register a slight reduction in our net rental margin income this quarter compared to the comparable quarter of last year, mainly explained by the slightly lower gross margin due to the increase in energy and utilities that Marcelo was commenting. As you know, we charge our tenants for these services and obtain a margin. And what we have been seeing in the last quarters is that, no, this has not been entirely passed through to the tenants. However, this was also partially compensated by an improvement in other aspects, such as publicity in our malls, right, where we have increased our revenues and improved our margins. And then additionally, as well, something Marcelo touched upon was the lower recoveries for doubtful accounts that we had this quarter compared to last year. But it was because last year we recorded a onetime extraordinary recovery associated to a particular tenant. However, in terms of provisions for doubtful accounts, when you see it compared to last year, we are slightly below last year. So overall, if we exclude these specific effects, net rental margin would have remained relatively in line with last year. So going forward, we could expect a little bit of compression in gross margin, but overall margin should be relatively stable. And then, with respect to your question on occupancy, as you mentioned, yes, we have been improving occupancy compared to the comparable quarter of last year. There was still some room now to improve occupancy in some of our malls, such as Centro Civico and Salaverry that Marcelo mentioned. We're already at high levels, yes, of occupancy, but there is still some additional room, for example, to improve occupancy in Puruchuco, which is our largest shopping mall. And that is still a couple of points below our average occupancy level at a portfolio level. And we're working towards that.