Ripley Corp SA

SGO:RIPLEY

Earnings Call Transcript 2018-Q2

[Operator]

Welcome to the Second Quarter Ripley Corp. Results Conference of 2018. My name is Anna, and I will be your operator for the call today. [Operator Instructions] Please take into account that this telephone conference is being recorded.

Starting from this moment, I give the word to Ms. Patricia Alvaro, Head of IR. Ms. Patricia, you may begin.

[Patricia Aspillaga, executive]

Good morning and thank you for joining the call in which we will present the results for the second quarter of 2018.

On our website for investors, you can find a copy of the presentation of this telephone conference alongside the results report for the quarter and the consolidated financial statements.

During the call, the administration can make any declaration regarding the future with the objective of helping to understand the performance objectives. These declarations are subject to change, risks and uncertainties of the company, therefore, the real results can differ from those signaled. For more information about these risks, you can see the financial statements and analysis for the company to June 2018.

Additionally, the declarations made during this call are based on the actual vision of the administration and they are expected for any future situations may cause for this vision to change.

In the conference today, I'm accompanied by Mr. Rafael Ferrada, CFO; and Agustín Letelier, Director of Finance; and Loreto Moreno, IR Analyst.

I would like to give the word to Rafael Ferrada.

[Rafael Ferrada Moreira, executive]

Thank you very much, Patricia, for the introduction. Good morning, all, and thank you for joining the conference today in which we will explain the results for Ripley Corp. during the second quarter of 2018.

In the presentation for today, we will begin with a brief review of the retained earnings for the 30 June 2018, then we will comment over relevant actions of the recent months. We will follow with a review on the second quarter results of the year to continue to a more detailed look of the results.

If you are following the presentation, please go to Slide 3. We can say with great satisfaction that Ripley Corp. has reached a net income of CLP 29.145 million during the first semester of 2018, which represents an increase of 19.6% in regards to the profit obtained in the first semester of the previous year. On their side, the operational results also show an important increase of 34.7% reaching CLP 35.902 million during the same period.

The improved company performance is explained mainly by significant improvements in the operation of the -- most businesses, but mainly bank businesses in Chile and in retail in Peru.

The business results from Peru were negatively impacted when expressed in CLP because of the sole depreciation in relation with the Chilean peso and approximately 6.5%. We also contributed through the good results of the company through the best efficiencies in cost, administration and sales at a consolidated level and the strengthening of our real estate segment in which the continuing growth of both operating countries and which we will delve into later into the presentation.

If you please go on to Slide 4, we will see some recent milestones which are relevant for Ripley. We will begin with commenting first of all that during June, the Feller Rate as classifier raised the classification risk of Ripley Corp. Chile to A+. This is a good -- this good news was achieved thank you to the positive evaluation that we've shown through the companies in this time and the maintenance of -- that has been shown by the company in operations realized in the last years. Also, the investment plans done through the company according to the strategy to capitalize through current businesses. In this way, the Feller Rate credit note aligns with the Humphreys classifier for Ripley Corp. and Ripley Chile.

With the second element that's important, we continue with the recent growth of the real estate business for Ripley Corp., which we will want to highlight at this point the beginnings operation of the expansion made in Mall Aventura and the Arequipa City which is the second-most important city in Peru. This expansion has new cities including the H&M chain, new restaurants, a terrace and entertainment area.

On the other side, until a couple of weeks, we began with the construction of the expansion of Mall Aventura Santa Anita with 30,000 square additional meters and which we will speak on with more detail in the last slides.

Lastly, we highlight successful emissions of bonds and deposits certifications through Ripley Bank Peru for a total amount of PEN 117.4 million while Ripley Bank Chile has a bond for UF 1.5 million.

Please go on to Slide 5 and we will review other relevant facts through the period. First of all, Ripley has shown a continuous importance in women as well as inside and outside of the company. In this line, the 28th of June, Ripley Chile received the Impulsa Talento Femenino 28th (sic) [ 2018 ] price in the retail category for their compromise and the promotion and the promotion and encouragement of female talent through a cultural change and hiring and development practices in the organization.

And in the same way and as a way of helping to reduce the use of plastic bags in our stores, Ripley Chile generated an alliance with an important foundation, Techo in Chile, which consists of training women of said institution to develop PVC bags which are used to recycle materials and giving them -- giving these women a skill. Whatever earnings are gained through this will be given to the institution.

If we go on to Slide 6, we will continue to revise the results for the quarter. Ripley reached a net income of CLP 19.018 million which represents an increase of 4.3% in regards to the earnings obtained in the last year. Regardless, our operational results grew a 39.4% reaching CLP 23.241 million during said period.

The best operational performance of the company during the quarter is also explained by the good performance in all segments, but, in particular, a significant improvement in the banking operations in Chile and retail in Peru and restraint on administrative cost and sales on a consolidated level and a strengthening in our real estate segment.

As we previously mentioned, the results of the businesses in Peru were also negatively impacted by a depreciation of the Peruvian sol in relation to the Chilean peso in approximately 6.4%.

Now that we have revised this generally, our results of the first and second quarter of this year, Patricia, now you will continue with the following slide.

[Patricia Aspillaga, executive]

Thank you, Rafael. If you are following the presentation, please go on to Slide 7. The revenues for retail business in Chile grew a 7.5% in regards to the comparable quarter of the previous year. This is thanks to a growth of 4.3% in the sales of the same and plus by a better management in sales and the commissioning of operations of the new stores in Los Dominicos and Coquimbo in the second quarter of 2017 and the Arica in April of this year. On the other side, the online channel maintains a positive evolution collaborating closely with the omnichannel strategy from Ripley.

Regardless, the gross margin was seen affected by the delay in winter following a 0.1% in regards to that obtained in the same quarter of the previous year in regards to the previous period, which was mitigated through a focus that the company has put on a fast on fashion on their own line.

Lastly, the administrative costs in sales increased 5.8%, less than the increase in sales, explained mainly by the 3 new Ripley stores and currently operating in regards to the second quarter of 2017.

All the previously mentioned made that the EBITDA increased for the quarter by 1.1% and that the net income for the segment reached the PLN 3.126 million.

Please follow to Slide 8. The revenue for the retail segment in Peru had a positive evaluation, growing a 6.7% in local currency with the variation of the same stores -- of same-store sales of 5.4% in regards to the same quarter of 2017.

The improved performance was achieved thanks to a better management in sales and to more sales associated to the World Cup during the months of June and July and a comparable base to the 2017 impacted by the flood provoked by the El Niño phenomenon that hit northern Peru.

Regardless, the revenues for this segment expressed in Chilean pesos were stable through the depreciation that was approximately a 6.4% of the Peruvian sol in regards to the Chilean peso.

On the same line, the gross profit for the quarter increased a 9.2% in local currency, a 2.3% in Chilean peso thanks to greater sales and an improvement in the gross margin which grew 8.6%.

On the other side, followed up with efforts put to restrain administrative cost, which shown -- which were shown increase by 0.2% in local currency and a decrease of 6.2% in Chilean pesos, which is much lower than the growth of sales. As a consequence to the previous, EBITDA of the retail business improved an 88.1% or PEN 12.6 million.

Please go on to Slide 9. As far as the banking business in Chile, the loan portfolio grew a 9.7% in regards to that of the second quarter in 2017, while the total revenue grew a 12.5%, with revenues through interest and readjustments growing a 9.1%, aligning with the growth of the loan portfolio. On their side, the clients with a balance increased a 3.1% within the comparable periods.

Therefore, the operational costs for the segment grew only a 3.5%. The previous is explained through an increase of funding cost of 11.3% and which were compensate, in part, through a decrease of the cost per risk and a 3.4%, thanks to the adequate administration of the portfolio.

On their side, the administrative costs and sales grew a 14.2% attributed mainly to the repayment of the new systems and applications put into operation in the previous months.

The launchings of new stores increased help or rebates through the retail segments according to commercial agreements in the retail segment. In the same way, the earnings by tax reached a CLP 15.191 million, which represents a significant increase by 32.5% obtained in the second quarter of 2017, while the net income reached a CLP 11.733 million in the second quarter of 2018, which is an improvement of 29%.

Please go on to Slide 10. In terms of the key indicators of the finance business, and as we can see in the graph to the right of the slide, as far as the early NPL, which is less than 90 days as well as late payments, or more than 90 days, were maintained at a level of 2016 and 2017. On their side, as we can see in the graph located to the lower left side of the slide, the net write-offs over the portfolio were maintained stable in regards to the previous year. In this way and as we have mentioned in the previous slides, the cost per risk was stable and at a lower level than seen in 2017, as we can also see in the graph in the lower right side of the slide. The previous is reflected in a stable trend and it is found in the lower levels of the previous years.

Please go on to Slide 11. On their side, the banking business for Peru, we can observe that the bank's gross portfolio for Ripley Bank Peru decreased a 1.3% in local currency at the closing of the second quarter. This decrease is explained through a conservative strategy in the offer of loans of longer duration during 2018. The origin of these loans has been normalizing in the previous months. In line with the previous, the revenues for this segment decreased a 1.9%, while the clients with balance also decreased a 1.0% within the comparable period.

The operational costs on their side decreased a 7.8% in local currency attributed to a less cost per risk and lower funding costs. A net cost per risk decreased in a 7.8%, thanks to a good management of the portfolio which is also compared to the portfolio of 2017 affected by the El Niño phenomenon.

On the other side, the funding cost decreased a 10.3%, thanks to a negative variation of rates and a good management in treasury. On their side, the administrative costs and sales grew only a 0.4% in local currency.

Everything expressed previously is translated into an increase in the net earnings of a 15.9% in local currency, reaching PEN 13.3 million, which is equal to an increase of an 8.5% through Chilean pesos.

Please go on to Slide 12. In terms of the indicators for risk of the finance business in Peru, as we can see in the graph to the right of the slide, the early NPL, in other words, less than 90 days, it stands at a lower level of those observed in previous years. While the debt is increased slightly in regards to what is shown previous years, but maintaining at healthy levels.

Additionally, as we can observe in the graph located in the lower left side of the slide, the evolution of these net write-offs over the net portfolio is maintained stable. The previous graphs are due to the policies of credit evaluation and credit implementations for Ripley Bank Peru. In this way, the indicator of cost per risk is showing an improvement in regards to what is observed in 2017 as we can see in the graph in the lower left side of the slide.

Now I would like to give the word to Rafael Ferrada who will comment over the results of the real estate business.

[Rafael Ferrada Moreira, executive]

Thank you, Patricia. Now we will go on to Slide 13, please. Now we will see the evolution that Ripley has had in which we see a solid evolution.

The net profit of this segment grew a 14.1%, reaching CLP 9.813 million, in which CLP 8.116 million corresponds to the Chilean business and CLP 1,697 million come from the real estate business in Peru. These improved results were impulsed through improved operational results of the malls in Ripley in Chile and Peru as well as the improved results of the associated real estate in Vinña del Mar and Nuevos Desarrollos.

All of the previous has allowed an offset of a high base for comparison of the second quarter of 2017 which includes the profit for the sale of a nonessential land in Mall Aventura. On their side, the own EBITDA, which is proportionate consolidation of investments for Ripley Corp. reached an CLP 11.573 million during the second quarter of 2018, growing a 33.2% in regards to the second quarter of 2017.

It's important to remember that the investments of Ripley in this business registered in 2 accounts for the property investment and associate investments and that are over CLP 500,000 million or 18% of the total assets of the company and this is composed of 3 malls of Ripley property and 10 malls through associates which have a totally leasing surface area of 327,000 square meters.

If we go on to slide 14, we will have a deeper look onto what we are doing into the real estate business. In Chile, we have the recent openings of the office towers in our mall in Concepcion with a leasing area around 11,000 square meters as well as our associated Nuevos Desarrollos as we mentioned in the beginning of the presentation, we have inaugurated the Mall Arica with a surface area -- with a leasing area of 34,000 square meters.

On the other side, our real estate in Vinña del Mar is expanding their 2 malls, Marina Arauco and Vinña del Mar which will add 27,000 square meters in leasing area and the Mall Curicó, which will add 8,000 square meters. Both expansions have an estimated opening date in the second semester of the present year.

As far as our business in Peru, the company through their associate, Mall Aventura, is expanding their 2 malls. The expansion of Mall Aventura Arequipa which is located in the second most important city in Peru, has already added a leasing area of around 7,000 square meters and has already inaugurated some of their first stores. Aside from this expansion, we include terraces, entertainment areas and restaurants.

On the other side, the expansion of Mall Aventura Santa Anita located in Lima will add 30,000 square meters, which corresponds to an increase of 50% in leasing area, and which we will analyze in the following slides.

Additionally, Mall Aventura also has a portfolio project which includes a mall in the City of Iquitos, with a leasing area of 52,000 square meters.

We will now go to the following slide where we will look more into detail the investments of Santa Anita. As we have mentioned a minute ago, Santa Anita has started their expansion located in a very important district in the City of Lima with an area, as you can see in this slide, of 1.2 million inhabitants and which are at a range of 20 minutes approximately. This is very important for the city located in this sector of the Panamericana, a highway -- a very large highway, which is very important for the city of the Lima.

In the following slide, we can comment that we will have in this -- very close to this mall, we have the Line 2 of the metro. This is a line that is very important for the city of Lima that we will hope to contribute the development to the city and that will have a flow of around 9,000 people. That is a very important flow of people that also our Santa Anita Mall will benefit from and as we can observe in this slide, we will have a connection that is direct to the mall in the second level.

In regards to some numbers in this expansion, it is important as we have mentioned that this expansion will increase the leasing area to 30,000 square meters. This is a 50% increase that we expect will be open in the second semester of 2019 with a total investment of around 135 million.

What are we going to do in this expansion? We are going to have new anchor stores, a new fast fashion store. We will have a financial sector. We will expand our theaters and entertainment areas, restaurants within others. We think that this will be very good news for Lima. We expect that it will be very good for our clients around that zone and very good news for Ripley and Mall Aventura.

Lastly, if we go on to Slide 15 -- from Slide 15 to Slide 19, we will comment about other topics that we are doing at Ripley. In the retail segment, we are still focused in the omnichannel strategy, working in improving and having a better interaction with our client -- with our Ripley clients in each of our channels with constant initiatives for an improved in-house shopping experience and virtual with our own brands which will be identified and differentiated. As well as, as we have seen, Ripley has made an effort to have campaigns that create social impact, for example, the anti-bullying campaign done in March of this year as well as other innovative initiatives that we will comment on with [ Mercio Anteta ].

On their side, we have other strategies and our main focus is on our client in order to have an objective to gain the preference through having a simple integrated bank as they require. With this objective, we are trying to work on having 1 channel for digitalization of our services and products.

All of us without forgetting about the growth and maintaining the portfolios at a controlled risk. And lastly, as we have seen in the previous slide, in regards to the real estate segment, we are still growing with our own drivers as well as associated investments, highlighting expansions of the operations in malls in Peru and as well as the construction plans of new malls through this driver.

These have been the results for the second quarter and now I give the word to the operator, so that she can please open up any questions if there any.

[Operator]

Thank you. Starting from this moment, we will begin the questions and answers. [Operator Instructions] At this moment, there are no questions. This concludes the section of questions and answers. At this moment, I give word to Rafael Ferrada for his final comments.

[Rafael Ferrada Moreira, executive]

Thank you, operator, and thank you for participating in the telephone conference for today.