Ripley Corp SA

SGO:RIPLEY

Earnings Call Transcript 2019-Q1

[Operator]

Welcome to the conference results of Ripley Corp. First Quarter 2019. My name is Richard Southwich, and I will be the operator for today's call. [Operator Instructions] Please take into account this conference is being recorded.

From this moment, I leave the floor to Ms. Patricia Alvaro, the manager of relationship with investors. Ms. Patricia, please, you can start.

[Patricia Aspillaga, executive]

Thank you, operator. Good morning, everyone, and thank you for joining the call. We will be presenting results for the first quarter 2019. On our website of Investors, you may find a copy of the presentation of this conference call together with our report of -- statement report of this quarter and aggregated financial results.

During the call, the senior management may make statements about the future in order to help you to understand performance expectations. These statements are subject to changes, risk and future uncertainty [ or proper ] from the activity of the company, and the real results may vary materially from those stated. For further information about this risk, you can watch the financial statements and recent analysis of the company by March 2019.

In the conference is joining today Mr. Rafael Ferrada, Corporate CFO. I would like to leave the floor to Rafael, please.

[Rafael Ferrada Moreira, executive]

Thank you, Patricia. Thank you for all of you for joining. And we apologize for having started delayed. We had a few technical problems with connection, but we are -- everything's working.

First, we're going to do in this conference, we'll be commenting on results of the first quarter 2019, then we're going to comment on a few important and recent aspects so far. Then we are going to -- Patricia is going to help us with the operation segments of retail and banking, and then we're going to talk about the real estate business, and last but not least, we are going to talk a little bit further about the projects in progress and to what's the future.

Please move to the Slide #4 -- sorry, Slide #3. We are going to see aggregated results by the first quarter 2019. Ripley Corp. revenues reached CLP 390.789 billion for the first quarter '19, which is a 4.9% increase compared to the same period of the previous year. This increase is explained by an increase in revenues from all the operational segments of Ripley, which is translated into aftersales cost, we have an increase of net earnings in 1.9% during the first quarter 2019.

On the other hand, the operational results of the company dropped 4.2%, as we can see in this slide on the screen because -- mainly explained due to a lower performance of retail segment in Chile and banking segments in Chile, and all segments in Peru showed a good performance during the period. Net profit reached CLP 6.823 billion during the quarter, which represents a 32.6% drop compared to the profit we recorded during the first quarter 2018.

Another relevant aspect we want to highlight is that Ripley still taking seriously the development and transformation in terms of omnichannel and digitization of all its businesses. This way, the strategy we have pursued the last few years with retail allows us to increase sales through digital channels online, which was translated. At an aggregated level, we grew 43.5% compared to the first quarter 2018, reaching 14.3% of annual sales in the retail during the first quarter 2019.

Please move on to the next slide, Slide #4. We are going to see a few recent milestones we think it is important to highlight and remind. First, in the Aventura Shopping Mall in Chiclayo, Peru, in the Lambayeque district, we started construction of a shopping mall that will have 48,600 square meter gross leasable area with a great variety of shops, stores, playgrounds and parking spots. This is an estimated investment deployed of $55 million and is expected to be open by mid-2020.

Another important aspect to remind is that, in the regular shareholders meeting we held on 25th of April in 2019, it was approved to spread 40% of net profits from the 2019 -- 2018, sorry, exercise that was equivalent to CLP 11.64 dividend per share that was paid on 16th of May.

During February and March this year, as a support, we think it is important to remind how relevant it's for Ripley putting on the spotlight relevant commitments for society as a whole. That's why together with different foundations and the Ministry of Foundations, we once again launched a school campaign "Stop Bullying." With this purpose, we spread the campaign across a strong -- through a strong communication plan with media press and social media. The company was part of hot topics and national discussion topics. We also achieved the signature of a decree to establish the National Day Against Cyberharassment promoted by the Ministry of Education in alliance with different stakeholders and Ripley. They joined all schools along the country.

Another important topic we want to highlight is related in the next slide, please, the adoption of the IFRS 16 standard. As you know, this was adopted from January the 1st this year. In the note #4 of our financial statement, you can see in detail what the initial adjustments that have a few impact in our financial statements. This way, the assets, because of the adoption of the IFRS standard, grew 11.4%, liabilities on the other hand increased in CLP 400,732 million (sic) [ CLP 400,734 million ] or 20.4% and had a net decrease on our equity of CLP 61,976 million, 6.1% aligned to what we estimated by the closure of the financial statements 2018.

Since there are changes in the way of presenting financial statements, accounting effects have resulted in first quarter 2019, and as we already know, they replace expenses for lease liabilities by -- and financial statements on a minimal warranty. They had an impact, as you can see on the table, with a lower expense -- administration expense by CLP 3.709 billion, which is equivalent to the lower expenses for leasing and a high deposition of the assets for right of use.

On the other hand, the costs were increased by CLP 1.396 billion mainly due to financial expenses associated to liabilities for leasing. And finally, we had a positive change in EBIT of CLP 1.296 billion associated to the right of use. All this made our results to have a better performance in CLP 700 million in the quarter compared to the previous accounting standard we had in the previous year.

These were of the few most important elements we want to highlight, and I'm going to leave the floor to Patricia again for her to explain that's what happened in the different segments.

[Patricia Aspillaga, executive]

Thank you, Rafael. Please, if you are looking at the presentation, please move on to the Slide #6. Revenues of the retail business in Chile rose by 2.4% compared to the comparable quarter of the previous year, which was translated at equal surface sales or SSS of 0.5%. Despite this growth, sales were negatively impacted by the lower demand assumption due to the weak dynamism of the economy, lower purchases by foreigners and high promotional activity across the industry. This impacted the gross margin, which dropped 130 basis points, a lower impact showed to the industry -- compared to the industry as an average.

On the other hand, administration and sales expenses of the quarter decreased 0.8% with 1 store in operation more, Arica inaugurated on to second quarter 2018 and high efforts due to digital channels. There was higher financial costs related to liabilities because of the adoption of IFRS 16. The aforementioned made the net profits to drop in CLP 3.363 billion.

For segment level in Peru, please move on to Slide #7. Revenues of retail segment in Peru were flat in local currency with positive variation at same-store sales of 1.1% compared to the same quarter 2018. Along with that, it is worth to note the positive evolution of the gross earnings during this quarter compared to the last quarter -- the same quarter last year, which stood at 3.2% increase in local currency with gross margin increasing 93 basis points due to own brand market share -- high own brand market share and better stock management.

On the other hand, the segment still puts efforts in containing administration expenses out of which of the omnichannel retail channel the team expenses to decrease and isolate the IFRS 16 effect. There was a higher financial cost related to liability of the leasing because of the adoption of these new standards. As a consequence, as before mentioned, net profit on the retail business in Peru improved PEN 8.842 billion or CLP 1.506 billion.

Please move on to Slide #8 to review the evolution of the banking sector. In the case of Chile, the placement portfolio rose by 4.9% at closure of the quarter compared to the first quarter 2018. Total revenues grew by 3.6% due to a lower accrual rate along with evolution of the maximum conventional interest rate. In turn, cards with balance decreased 3% between comparable period. In turn, gross profit of the segment showed a slight decrease of 0.4% due to the high -- or driven by high operation cost that increased by 10.3% mainly because of an increase of expenses for interest and adjustments associated to the growth of the issuance portfolio and change in our presentation valuation of financial facilities from

[Technical Difficulty]

[Operator]

Conference connected.

[Patricia Aspillaga, executive]

Slide #8, please. The issuance portfolio rose 4.9% by the closure of the quarter compared to the first quarter 2018, and total revenues rose by 3.6% because of a lower accrual rate, along with the maximum rate.

In turn, cards with balance decreased 3% between comparable periods. In turn, gross profits of the segment showed a slight decrease of 0.4% driven by high operational cost, which increased 10.3% mainly because of interest and adjustments associated to the growth of the issuance portfolio to change of the criteria for valuation of the financial securities from net records and revenues to one separated between revenues and financial expenses.

In turn, administrations and sales expenses rose by 5.4% with a bigger portfolio because of the commercial agreements with retail segments and the high expenses of digitization and systems in line with the strategy of the system. This way, net profits reached CLP 7.339 billion during first quarter 2018 (sic) [ 2019 ], 21.5% lower to the same -- obtained same period 2018.

In order to review the valuation of the segment in Peru, please move on to Slide #9. In terms of KPIs of the financial business, as we can show on the graph in the right side of this slide, early delinquency rate lower than 90 days is kept at similar levels within the last 2 years, whereas, late delinquency rates or higher than 90 days shows a slight increase compared to the previous years. In turn, net punishments on portfolio are flat. Lastly, the cost of net risk -- monthly net risk is flat at similar level to the one shown during the first quarter 2018.

On the other hand, the banking business Peru, we can see the gross portfolio of the banking. Ripley Bank Peru rose by 7% measured in local currency by the close of the quarter. We've taken the gross after retaking the conservative strategy of the offer of longer-term loan offering early last years.

Revenues increased by 7.5% in local currency aligned to the growth of the portfolio. In turn, card with balance showed a slight drop of 0.4%. Net earnings increased by 8.9% while operational cost of the quarter grew by 4.48%, below the growth of the portfolio. The net risk cost increased by 10% as a consequence of the growth of the portfolio.

On the other hand, administration and sales expenses grew by 4.4% in local currency associated to big commercial efforts, portfolio growth and high expenses in systems and digitization in line with the strategy of the company. All the aforementioned once translated in the net profit reached PEN 18.2 million, which is equivalent to 19.6% increase compared to the first quarter 2018.

In terms of risk indicators of the financial business in Peru, early delinquency rate that means lower than 90 days is at similar levels to the ones observed in previous years. At the same time, late delinquency rate shows a slight decrease compared to last month of the previous quarter.

In addition, evolution of net punishments on net portfolio is consistent with the growth of the portfolio. This way, the cost indicated per monthly net risk slightly rose over the one shown the same period in previous years.

I would like to give the floor to Rafael Ferrada for him to comment about the results of the real estate business.

[Rafael Ferrada Moreira, executive]

Thank you again, Patricia. On Slide #12, please move on. We can see our real estate business continues to show a solid evolution through own shopping malls as well as the shopping malls from associated companies. Net earnings in this segment reached CLP 7.439 billion, which represented a 19% increase. This is due to the better performance of our own mall there, Aventura shopping mall, and the better performance obtained by the associated real estate companies.

Profits before fair value effect grew by 37.8% in our own malls. This is Mall Concepción and the 2 Aventura malls, Santa Anita and Arequipa mall, and 19% from our associated companies, Inmobiliaria Viña del Mar and Nuevos Desarrollos.

On the other hand, EBITDA -- on EBITDA means from Concepción Mall and Aventura Shopping Mall reached CLP 5.78 billion during first quarter, showing a 18% increase compared to the first quarter 2018. It is important to remind that the investment of Ripley in this business -- real estate business, is recorded in accounts of investment properties and associated company investments. And it is close to CLP 546 billion, approximately 16.5% of total assets of Ripley Corp. And it is comprised by 3 shopping malls owned by Ripley and 10 shopping malls through associated companies with a gross leasable area portion of about 340 square meters.

Please move on to Slide #13. Here we will remind where we are in the different development projects we have in this real estate business. Our investment portfolio in Chile is still growing through our associated companies. Currently, we have expansions in progress from Inmobiliaria Viña del Mar, which is expanding both malls, Marina Arauco in Vina del Mar, which will add 27,000 square meter of gross leasable area, of which 13,000 square meters are already under operation, and the expansion of the Curicó shopping mall, which will add 8,000 square meters, both with estimated opening date by the second half 2020, in the case of Vina del Mar, during the second half of 2019.

The focus of our business in Peru, where Mall Aventura branch has 3 projects of shopping malls under development and 1 expansion in progress. The expansion is in the Santa Anita shopping mall located in Lima, which will add 35,000 square meters, which is a 50% increase of the gross leasable area, and it has estimated opening by the second half 2018 (sic) [ 2019 ].

The other projects under progress, one of them started construction during last May, which is this shopping mall located in the Chiclayo district with a 48.6 gross leasable area that we mentioned a little bit earlier and which is estimated to be open by mid-2020.

The other 2 projects under development in this moment are the projects in the San Juan de Lurigancho district, which is the most populated district in Lima considering 62,000 square meter gross leasable area and a possible opening by 2020 -- 2021. The second project is the one in the Iquitos city, which will have a 56,000 square meters gross leasable area with estimated opening date by 2021 as well.

Just to go in further details of these new projects of the Aventura Shopping Mall in Chiclayo, we have further couple of slides detailing more about this shopping mall. It's a strategic location located in the best location of the Chiclayo city with good accessibility from different points and good connectivity with the city and project consolidated as a commercial hub with the best -- in the best consolidated area of the Chiclayo city. In turn, as we saw earlier, this will be a mall with 48,600 square meter with a wide commercial offering in restaurants; shopping stores; department stores, including Ripley; other smaller stores; 1 supermarket; et cetera -- gyms and playground. We think this is going to be a very successful shopping mall in the Chiclayo city in Peru.

Lastly, I would like to remind just what we had is aligned with what we did during the Investor Day a few weeks ago in our retail business, real estate and banking. We're still focused in our omnichannel retail business with physical and online presence. We are focusing on brands and everything supported by logistics and digitization. On the banking side, we're still focused in digitization, payment methods, loyalty and use of the applications. All this with a controlled risk growth concept. In the real estate business, we continue with the expansion of our existing malls, whether own malls or through associated companies and the development of selected projects.

With this, we want to give the floor for the operator to indicate whether we have questions.

[Operator]

[Operator Instructions]

[Unknown Executive]

Thank you, operator. And thank you all to you for joining our telephone call today.

[Operator]

Thank you, everyone. We've finished today's conference. If you would like to listen to this conference once again, please contact the company. Thank you for your participation. You can hang up now.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]