Falabella SA

SGO:FALABELLA

Earnings Call Transcript

[Operator]

Ladies and gentlemen, welcome to the Falabella Earnings Call. I'm Gigi, your coordinator for today's session. [Operator Instructions] Present with us are Alejandro Gonzalez, CEO; Juan Pablo Harrison, CFO; Juan Manuel Matheu, CEO Banco Falabella; Francisco Irarrazaval, CEO Falabella Retail; Benoit De Grave, Chief Transformation Officer.

First, Mr. Juan Pablo Harrison, CFO, will provide a summary of the consolidated results for the second quarter of 2024. Following his presentation, we'll open the floor for questions. [Operator Instructions]

Now we'll start with the conference with Mr. Juan Pablo Harrison.

[Juan Harrison, executive]

Thank you, Gigi. Good afternoon, everyone, and welcome to Falabella's Second Quarter 2024 Earnings Call. I would like to remind you that during this presentation, management may make forward-looking statements related to our company, it results, operations, expenses, strategy, potential restructurings and other matters alike. This will be characterized by the use of terms such as planned, pretend, expect, anticipate, estimate, hope and seeks.

Such statements are based on assumptions and expectations of future events that are uncertain and contain risks. Therefore, for the further information on this matter, I kindly refer you to the disclaimer on forward-looking statements that is displayed on the screen.

Also, the numbers presented during the call will be according to IFRS rules expressed in U.S. dollars and rounding to millions. Therefore, certain small differences may arise with the published financial statements. I will start the call by going over some key operational highlights of our physical digital ecosystem and its capabilities.

Let us begin reviewing from Slide 3 onwards. During the quarters, our retailers in the region continued to show sequential improvement with local currency growth across all consolidated formats and countries. Notably, since first quarter 2022, the 3 retailers combined have achieved sales growth and the 12% increase in same-store sales of Falabella Retail in Chile. Additionally, Plaza revenues have continued to grow across all 3 countries.

Now looking at the GMV graph. In e-commerce, both 1P and 3P channels demonstrated growth highlighted by a 17% increase in sales income improvement and a 12% growth among our more than 20,000 sellers. This reflects the progress of our e-commerce strategy.

On the financial services side, we continue to see a contraction in the loan book. However, it is worth nothing done that in June. The loan book in Chile grew compared to the previous month, a trend we expect to solidify during the second half of the year. Our risk levels have stabilized in Chile and improve in the region, and the use of our payment methods continue to grow, with nearly 40% of transactions now conducted through our debit cards.

Additionally, we have signed strategic partnerships with 3 prestigious international insurance companies in Chile and Peru to develop new products and enhance our digital offerings. Regarding revenues, consolidated revenue increased 8% year-over-year, in line with the improvement in the retailers despite a decrease in the banking revenue due to the lower level of loan book. The gross profit expansion, 25.4% year-over-year is mainly explained by Falabella Retail, which grew 18.8% year-over-year mainly attributed to Chile that increased its contribution followed by Peru due to better commercial proposition and inventory management.

Banking business -- businesses increased almost 50% year-over-year, mostly due to the operation in Chile, which improves 31.5%, with a lower level of cost of risk, minus 48.2% when you compare it with last year. In the case of Mallplaza, it grew 17.1% respect 2023, while Tottus in Peru grew 22.2%.

In terms of SG&A, we closed a quarter with SG&A contention, which decreases of 2% at a constant FX rate, which reflects our reports in operational efficiencies. Considering all these factors, we achieved an EBITDA growth of 2.3x year-over-year, reaching $344 million. Finally, we have closed the quarter with a net profit of $122 million or $87 million without considering the effect of the asset revaluation of investment properties.

In terms of financial strengthening plan, we have made significant process -- progress on the plan we announced in November 2023. Regarding asset monetization, yesterday, we announced the sale of Open Kennedy to Parque Arauco, a transaction that Alejandro will discuss in more detail later on the call. This adds to previous actions, such as the sale of Mallplaza and Open Peru in Peru, the strategic agreement with insurance companies and the sales of land banks and distribution center in Argentina -- additional -- in Argentina.

Additionally, our current results reflect our continued focus on enhancing the profitability of our business.

Lastly, the third component related to CapEx was already addressed in our investment plan, which is 24% lower than what was announced in 2023. Our strategy of focusing on the customer and improving profitability has yielded results with EBITDA reaching a margin of 11.2%, the highest since 2021.

Additionally, our operations continue to contribute to an improved cash position, which accounts for a significant part of this progress, highlight that out of the $1 billion in cash, nearly $800 million is invested in mutual funds and term deposits with over $200 million in Plaza. The operational improvement, combined with a stronger cash position has resulted in our leverage ratio reaching its lowest level since second quarter 2022, significantly below last year's peak. It's important to note that this does not yet include the process from Plaza's capital increase, which was completed in July. If we were to present the pro forma with June's data, including the capital increase, the leverage ratio would stand at 4.3x.

On another note, we maintain a balanced amortization profile. And again, this does not take into account the recent $100 million tender offer for the 2027 international bond executed during July.

I would now like to leave you with Alejandro Gonzalez, our CEO.

[Alejandro Dale, executive]

Thank you, Juan Pablo. Good morning, everyone, it's Alejandro. I'd like to start my remarks by thanking the entire Falabella team for their hard work and commitment. These results wouldn't be possible without you. Also special thanks to our more than 35 million customers that chose Falabella to trust and partnership drive our success.

Getting into the details, I'd like to start by sharing some updates on the Open Plaza Kennedy transaction we announced yesterday. This is a deal we've been working on for some time and are thrilled to have reached an agreement. The asset spans over 70,000 square meters and the agreement is valued at USD 200 million, roughly speaking, it's in U.S. by the way, reflecting a multiple of 15x enterprise value EBITDA. Due to [ lot of ] regulations the transaction must go through some approvals. So we anticipate completing the process during 2025.

The transaction is a continuation of our strategy to focus on activities where we can achieve the best returns for our shareholders. We believe this was a great transaction that is beneficial for our core retail businesses, Falabella Retail, Sodimac, Tottus and IKEA, I think helps reinforce our capital allocation framework emphasizing our core businesses and the assets and projects more strategic to our value propositions for our customers.

As Juan Pablo mentioned before, we closed the quarter with strong financial and operational results while sales growth remained below historical levels, we saw an improvement in sales and successfully multiply our EBITDA by 2.3x compared to the second quarter of 2023, reaching an EBITDA margin of 11.2%, a level not seen since 2021. The efforts we've implemented over the past year and half are beginning to pay off, and we are on the right track to motivate us to continue our customer-focused strategic plan. However, we have not yet reached the level of profitability we are capable of achieving as a company.

And now I'd like to take this opportunity to discuss 3 key concepts that summarize our results: first, profitability; second, financial strengthening; and third one, the opportunity.

First, our strategy focused on customer experience and profitability is yielding positive results. In a challenging environment, we successfully multiply EBITDA and net income driven primarily by a solid retail value proposition, inventory levels in line with historical levels, highlighting our strategy of shortening purchasing cycles and stabilized risk levels in our bank in Chile, which [indiscernible] can further discuss in the Q&A.

Additionally, the operational efficiencies we've implemented over the past 1.5 years has significantly boosted our EBITDA with over 90% of the improvements coming from gross margin enhancement and more efficient operations.

Second, in terms of strengthening our financial position, we continue to see improvements in leverage due to our sustained operational profitability. Undoubtedly, the last few quarters have required us to concentrate our efforts on delivering a stronger value position to our customers. During this period, we've took some difficult but strategic decisions such as closing FPay the digital wallet, we had exiting the Linio operations in Mexico and Colombia and discontinuing the on-time delivery app, Fazil, among others.

Additionally, we monetized assets including land and operations improve through our subsidiary Plaza and the strategic partnership of Seguros Falabella.

Lastly, I want to share some thoughts on what comes next. I believe that Falabella with its brand stores, omnichannel approach, digital capabilities and financial services is exceptionally well positioned to capture the opportunity with that life ahead. To give you a few examples, our omnichannel strategy must keep evolving, delivering the best in-store experience, offering products wherever our customers prefer and complementing our strong portfolio of brands with top sellers in e-commerce.

Our digital bank is well positioned to face the challenge of becoming the leading player in the [indiscernible] region, it's also -- while also continuing to expand in Mexico, a country where we also aim to grow with Sodimac. Additionally, our malls need to solidify their leadership position in the region by offering our customers the best combination of experiences. While we no longer have the strong headwinds we had last year, we also don't face significant tailwinds. As we mentioned earlier, sales are starting to grow though not at historical levels. Despite these challenges, we have achieved the milestones we've discussed.

We are the architects of our future, and we must continue to evolve and adapt to our customers' needs. I'm confident that Falabella has a promising future and will continue to strengthen its leadership position in the region, just as it has done over its 30-year history. Thank you, guys.

And now we'll open the line for any questions you may have.

[Operator]

[Operator Instructions] Your first question comes from the line of Alexandre Namioka from Morgan Stanley.

[Alexandre Namioka, analyst]

I just have 2 from my side here. First, I wanted to delve into the Chile consumption backdrop. I mean we obviously have seen your same-store sales continue to improve sequentially. So I just wanted to get your color on what you expect for the second half and maybe start looking at what you expect for 2025 as well?

And second question, more on the, I guess, on the accounting side. We already saw your EBITDA significantly improved on a year-over-year basis. But when we move that as your cash flow from operations, it actually seems that the cash flow from ops actually declined or didn't see as much of an improvement. So just wanted to get your color on what drove these -- sort of this gap here?

[Juan Harrison, executive]

Hello, Alexandre, it's Juan Pablo. I will start with the second question, okay, regarding the cash flow from operations. The mainly explanation is on the working capital. Unlike last year, this year, we have purchased more inventories. We are maintaining historical levels. But last year, during the first semester, I would say, we experienced a significant reduction mostly because were -- our level of inventories were very high. It's important to highlight also that -- no, I just said that in the first semester last year, we reduced the inventory significantly. This is the most significant effect and it explain the reduction in the cash flow from operations.

Francisco is going to take the first question.

[Francisco Irarrazaval, executive]

Okay. Thanks, Juan Pablo, and thanks, Alexandre, for the question. So forward-looking, how we see consumption in Chile and Colombia, I think our main businesses, though they have been growing. The macroeconomic environment remains quite challenging, with sales figures well below what has been the historical level of those 2 countries. In the case of Peru, we're still seeing the impact of the pension fund, which grow -- which grew again 3 different installments. So we still expect to continue to rest of the year. It is important to note that you notice that September is going to be the last month of the quarter, it's a very slow month for retail, particularly in Chile, the Fiestas Patrias, will have a 5-day holiday. So we may have a negative impact on September, a little bit higher than usual. I hope that's a good answer for now.

So overall, we're neutral about this quarter, I think. August has performed a little bit better than July but September is going to be, I think, below average.

[Operator]

Our next question comes from the line of Felipe Ballevona from Santander.

[Felipe Ballevona, analyst]

You can hear me, right?

[Alejandro Dale, executive]

Yes, Felipe.

[Felipe Ballevona, analyst]

Some questions regarding Banco Falabella Chile. This quarter, you had a net income from financial operations of $10 billion, compared to a net loss in the second quarter of last year? And kind of, I guess, similar thing applies to actually the first half of 2024 compared to the first half of 2023. You also reported about $15 billion less provisions compared to the data released by the regulator, the CMF.

So my question is, what's the reason behind these 2 effects? And most important, are they sustainable going forward or just temporary? Like are they structural or are they one-offs?

[Juan Harrison, executive]

Thank you, Felipe, for your questions. Here is Juan Manuel. I would say that in Banco Falabella Chile, we have been actually becoming more restricted in our credit granting policies and also in our portfolio -- loan portfolio management. We have done that for more than a year now and we are seeing the impact of those measures that we took more than a year ago. These measures have helped us to improve the health of our loan portfolio.

Today, we have less nonperforming loans. We have less early delinquency ratios. And also, I will say that we have a more healthier current loan portfolio. Consequently, that has improved significantly our cost of risk, and that has boosted our net income.

On the challenges, I think that we need to actually recover our growth in our portfolio. That is something that we expect to accomplish during the rest of the year. We are targeting a 4% growth in credit portfolio from June to December. So we think that with that growth with this health of our portfolio, we do believe our results will be strong in the future.

[Operator]

Our next question comes from the line of Irma Sgarz from Goldman Sachs.

[Irma Sgarz, analyst]

Just one more general sort of maybe philosophical question and a strategic question and one question an understanding, and I apologize if that's been answered before, I had some connectivity issues. But the first question is more about -- it's been an interesting journey in terms of initially uniting the digital properties and falabella.com. And now obviously, you have some stand-alone properties that you launched this past quarter.

Again, I'd just be curious, when you sort of compare how traffic is reaching your websites in terms of mix between paid and unpaid traffic, I would imagine there's some difference across the different properties. And I was interested to hear a little bit more on what you're hoping to sort of leverage in terms of lessons from some of the properties where the unpaid traffic or the organic traffic share is higher and what you're doing in terms of improvements to try and just bring more organically and more frequently, the customers back to the site, I know it's only to do with marketplace and delivery strategies, but I was hoping you could give some concrete examples on how you're thinking about this journey over the next -- not just next quarter, but next couple of years?

And then the other question is just a follow-up sort of on the macro backdrop, and you did highlight good demand from tourist flows. We've seen that in the past sometimes I think 2018, 2019, that was also a topic for Falabella. I was just wondering if you could shed some more light if it was more something temporary for the second quarter or something that could extend into the back half? And again, if you've already answered it, I'll look at the transcript afterwards.

[Alejandro Dale, executive]

Okay. I think I'll get that one. Irma, thanks for your question. It has not been answered previously. So you're totally fine with the question and thanks for asking this. In terms of traffic, which was your first question, I think the main strategy for us to reduce the cost of client acquisition and traffic attraction has been and will keep been the app. Today, the app accounts for the largest part of traffic, both in Falabella, and I'm sure it's going to be in the short-term for Sodimac as well. And in terms of sales, this accounts for much more than half of the sales as well. And as you know, it helped us to build stronger relationships with our customers. So that's something we're really pushing forward in terms that it both allow us to reduce the cost and increase the engagement simultaneously.

In terms of paid versus organic traffic, it was more like a precise question. As of today, the majority traffic is organic for Falabella site. And for Sodimac new stand-alone site, it's also -- we believe it's going to become the main source of traffic very soon because the world itself is very powerful. So it attracts a lot of additional traffic.

And for Falabella, since we are pivoting back to this one brand concept and putting more money on the [indiscernible] final part of the marketing. We are achieving a higher return, I think, on the investment and reducing the cost of the branding marketing that we were doing previously. So I think overall, the strategy has been very successful in terms of reducing the cost of the traffic and to really the benefit of the power of the brand itself.

You also asked about the tourist. This is true for Chile. Usually, Falabella Retail will be selling to nonresidents like between 3% or 4% of sales, which is basically tourists coming usually from Brazil during the winter to -- for ski season. That's the biggest part of it. This year, since April, we have seen many Argentinians coming. So the overall sales to nonresident has reached somewhere between 5% or 6%. So the increase is between 3% or 4% and it's impacting, of course, in a much higher level, on the stores that are located in the eastern part of the city and some neighborhood cities in the south of Chile. I'm not sure if that answers your question.

[Irma Sgarz, analyst]

Yes. And -- it really answers my question, and I think that's consistent with what we've maybe seen in some of those past cycles in terms of magnitude. And any early color on whether this is lasting into the third quarter? I know it's probably early to say but.

[Alejandro Dale, executive]

Yes, I think it's early to say. August has been keeping the same as July, but this effect is much, much minor than what it was in the year 2016. So it's not as important it was back then.

[Irma Sgarz, analyst]

Okay. Yes. But looking back at '18, '19, but yes -- great.

[Operator]

At this time, we will now turn over to Raimundo Monge for closing remarks.

[Raimundo Monge, executive]

We would like to thank everyone for joining us on our call. Our Investor Relations team will remain available for any follow-up questions you may have. Thank you, and have a nice day.

[Operator]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.