Ripley Corp SA

SGO:RIPLEY

Earnings Call Transcript 2018-Q4

[Operator]

Welcome to the conference of result of Ripley Corp. fourth quarter 2018. I'm Sylvia and I will be your operator for today's call. [Operator Instructions] Please take into account this conference call is being recorded. From this moment on, I leave the floor to Ms. Patricia Alvaro, Investor Relationships Manager. Please Ms. Patricia, you can start.

[Patricia Aspillaga, executive]

Good morning, operator. Good morning, everyone, and thank you for joining the call. We will be presenting results of the fourth quarter 2018. In our website of investors, you may find a copy of the presentation of this conference together with our statements of result of the quarter and aggregate financial statements.

During the call, the management may make statements about the future in order to help you to understand the performance expectations.

These statements are subject to future [indiscernible] related changes, risks and uncertainties. The real results may change materially from those pointed out. For further information about these risks, you can go to the financial statements and recent announcement of the company by December 2018.

In the conference is joining us Mr. Rafael Ferrada, Corporate CFO; and Ms. Loreto Morena, Investor Relationships Analyst. I'll now turn the floor to Mr. Rafael Ferrada.

[Rafael Ferrada Moreira, executive]

Thank you, Patricia. Good morning. Thank you all of you for joining this conference. We will be explaining results of Ripley Corp. for fourth quarter 2018. In today's presentation, we will start with a brief summary of aggregate -- accumulated results by December 31, 2018, and we will comment some of the facts that happened within the last few months, then we will dig in what happened during the fourth quarter of the year in order to have a detailed outlook of the segments of the business. Please move to Slide 3. Ripley Corp. during 2018, in a challenging context for the whole retail -- financial retail industry in Chile and the region where almost every competitor suffered drops in the operational results and EBITDA, Ripley grew 1.5% in the operational results and by 1.6% in EBITDA, which shows the strength in the strategy it has been developed and the company has been developed within these few years. Net profits reached CLP 69.656 billion, which represents an 18.9% drop compared to the profits obtained last year. Nevertheless, it is important to mention that such a drop is fully explained by the lower nonoperational result. This lower nonoperational results are related to the high comparison base of 2017 that experienced higher earnings evaluation at reasonable value of investment properties from related companies and profits because of the sales of a plot in Peru by CLP 3.904 billion. Related -- earnings of related companies property investments -- investment proceeds, these were lower in CLP 14.053 billion in 2018, compared to what was shown in 2017. Why is this happening? Because according to the currency increase in Chile used by Ripley Corp., more shopping malls or shopping mall houses when they are under construction are evaluated at cost. When they enter into operations, they are evaluated at reasonable or fair value. This way it is expectable they impact in our financial statement given the malls that entered into operation from our related companies. Without those impact, the profits in Ripley would have been higher compared to the previous year. Clarify this point, if we go back to our operational results, as shown, a 1.5% increase compared to the previous year, reaching CLP 76,195 billion by December 2018. This result is explained due to the better performance of banking sectors in Chile and Retail segment in Peru as well as by the real -- aggregate real estate segment, which more than compensated lower results of the Retail segment in Chile. To these, we can add the efforts put by the company in higher efficiencies in SG&A expenses at aggregate level. Ripley has taken seriously the omnichannel digitization development and transformation of its business. This way, the strategy we've been pursuing within the last few years with retail has allowed us to increase sales through digital channels in a significant fashion.

By 2018, we grew by 37% in these channels and we reached over 15% within the last fourth quarter of 2018. Positioning this way one of the leading companies in Chile and Peru of the -- in the omnichannel strategy development. If we move on to Slide 4, please, we could see a few of the recent milestones we want to comment on. First, we want to comment our banks are still getting fund successfully. Within the last few months, they had made placements in the corresponding markets. January 16, Ripley Bank Chile issued a CLP 1.5 million 2.5-year term bond. The same way Ripley Peru Bank performed 2 issuance. The first PEN 45 million in certificates of negotiable deposits at 1 year term and the second, issuance of the bond for PEN 41 million at 2.5-year term.

On the other hand, Ripley Bank Peru appointed Mr. Samuel Sanchez as the new CEO, who up to that date performed as the Digital Transformation Manager of the bank, which is the purpose of driving our bank in the digitalization process we have already started. Regarding the real estate segment in Peru, I mean, there are shopping mall updated -- named under the development projects portfolio containing 3 shopping malls. One in Chiclayo city, another in the Lima district in San Juan de Lurigancho district and the third in Iquitos city.

We move on to the next slide. We can review in further detail what happened during the fourth quarter of the year. During the fourth quarter 2018, Ripley Corp. experienced the same pains the rest of the financial retail industry faced. Our net profits reached CLP 35.337 billion, experiencing a 35.5% drop compared to the fourth quarter 2017. Although this drop, CLP 19.43 billion drop is mainly explained by the nonoperational results and mainly because of the already mentioned reasons. But we also suffered detriment at operational level. Our operational results dropped by 18.1%, which is mainly due to lower result of the retail operation in Chile by CLP 4.740 billion, which was affected by high level of settlements during the quarter associated to a lower local consumption demand and boosted by lower purchases by foreign people and because of the consequence still of a warmer and drier winter than usual that affected the performance in Chile. The aforementioned was especially compensated by a better performance of Retail segment in Peru by about CLP 3 billion. Lastly, I would like to reinforce the positive evolution and strength in our real estate segment, that still shows good development in Chile and Peru and through our own shopping malls and from our related companies' shopping malls. Now in order to give further details in the evolution of the segment during the fourth quarter, I would like to leave the floor to Ms. Patricia Alvaro.

[Patricia Aspillaga, executive]

Thank you, Rafael. If you're following the presentation, please move to Slide #6. Revenues of the retail business in Chile grew by 1.5% compared to the comparable quarter of the previous year. This was translated into sales of areas equal or SSS plus 0.4%. We had a positive sales growth in a very challenging industry context. Our products, brands and offers under development of our omnichannel strategy has allowed us to keep on growing. Although this growth is lower than expected at earlier this year, which is explained by the aforementioned, the highest settlement amount observed in the industry during the quarter compared to the fourth quarter 2017, with what has lead among others to a lower demand of consumption mainly due to lower purchases by foreign people and weather effect. This also affected profitability on gross margins, making them drop compared to the same quarter of last year's. Lastly, SG&A expenses of the quarter increased by 4.5%, explained by the new shopping mall in Arica that entered into operations by April 2018, normal growth expense, which align to the inflation of the period.

Nevertheless, we would like to highlight that we have achieved efficiencies that allow us to implement development and growth of the omnichannel strategy. On the aforementioned, maybe EBITDA just dropped 25.1%, reaching CLP 3,947 billion. Please let's move on to Slide #7 in order to look at the performance of the retail business. Revenues of the segment kept flat in local currency with a variation of same stores at minus 0.4% compared to the same quarter 2017. This evolution mainly response to the lower sale of electronic products during the fourth quarter, associated to the sales in advance for the Soccer World Cup held in the second quarter of 2018. Despite the above, the clothing categories had good performance in the period, that almost compensated drop in electronic products. Along with the aforementioned, this was mostly the positive evolution of gross earnings during this quarter as compared to 2017, which showed a 7.6% increase in local currency or gross margins that increased in 236 basis points due to a better stock management and increase of sales in the clothing segment during the quarter. On the other hand, the segments continue with the efforts of boosting -- in cutting expenses of SG&A expenses and boosting the omnichannel retail, achieving expenses to keep driving local currency. As a consequence of the aforementioned, the EBITDA for retail business in Peru improved PEN 14.2 million or CLP 3.141 billion. Please move on to Slide #8 in order to review the banking segment. Regarding the banking business in Chile, the placement portfolio grew by 5.9% by closure of the quarter compared to the fourth quarter 2017. Revenues for interest rates on adjustments grew by 4.7%, whereas revenues for commission fees dropped mainly -- partly because of the recognizing criterion that moved from collected to approved, which are just comparison base. On the other hand, cards with balance slightly decreased between comparable periods. On the other hand, gross earnings profit has increased 2.7%, driven by lower cost of the operations, which dropped 7.8% in the quarter. Although we had an increase of the cost of funds by 12.6% linked to the higher market rate and higher -- larger number of placements, the risk cost dropped significantly decreasing by 15.2% compared to the previous year quarter due to a healthy portfolio and a better margin. On the other hand, SG&A expenses grew by 4.4%, aligned with larger portfolio because of the commercial agreements with retail segments and higher expenses of the systems and digitization are likely to destroy offset. Regarding the latter and as part of the detail development of the bank, during the year, we have successfully launched a new mobile app. This new mobile app has allowed improving customer experience and increasing usability and availability of banking products in a digital way. In just 3 months, it had over $300,000 and has been assessed by customers as one of the best applications of the financial industry in Chile according to the iOS and Android market rankings. This way, net profits reached CLP 6.296 billion during the fourth quarter 2018, 17.3% lower to what was obtained in the same period 2017.

Please let's move on to Slide #9 in order to continue with the indicators of banking sector. As we can appreciate in the graph in the right side of this slide, early delinquency lower than 90 days is kept similar within the last few years. Whereas, late delinquency of higher than 90 days shows a slight increase compared to previous years. On the other hand, net write-downs on the average portfolio are kept flat for several quarters. Lastly, the monthly net cost is stable and shows lower level to what shown in 2017, reaching 9.1% in 2018 or 30 basis points lower than during 2017. Please let's move on to Slide #10. On the other hand, in bank business in Peru, we can observe the gross portfolio of Ripley Bank Peru grew by 3.1% measured in local currency by closure of the fourth quarter. Retaking gross after conservative strategy in credit offers was higher duration during 2017. Revenues of the segment decreased by 2.7% in local currency and impacted by the drop in revenues for commission fees, which is mainly explained by the change in the criterion of acknowledgment of fees from collected to approved which fairly answers comparison base. On the other hand, cards with balance kept flat between comparable periods. Gross earnings increased by 4.5% due to lower operational cost of the quarter, which dropped 14.8% in local currency. This drop is mainly due to a lower cost of funds and a lower net risk cost. The latter decreased by 17.3% due to a good portfolio administration, which also have shown improvement in payment behavior. On the other hand, SG&A expenses increased 12.3% in local currency due to higher commercial efforts in order to make placement and higher marketing expenses compared to fourth quarter 2017 and efforts in digital transformation in progress. All the aforementioned was surfaced into the net profits reached PEN 18.2 billion, which is equivalent to a 19.7 drop compared to fourth quarter 2017. Please let's move on to Slide #11 in order to review risk indicators of the financing business in Peru. With early delinquency, let's say, lower than 90 days delinquency as well as late delinquency are at lower levels to the ones observed in previous years. In addition, the evolution of net write-downs on the portfolio is kept stable -- is kept flat. The aforementioned due to the credit scoring policies implemented by Ripley Bank Peru. This way, the monthly cost of risk net indicators shows improvements compared to what observed in 2017, reaching 9.3% during 12 months of 2018 or 150 basis points below what was observed during 2017. Now I would like to leave the floor to Mr. Rafael Ferrada for him to comment on the results of the real estate business.

[Rafael Ferrada Moreira, executive]

Thank you, Patricia. In the Slide #12, please. In the real estate business, Ripley keeps on showing a solid evolution through shopping malls as well as the strong related companies. Although, net profit of this segment reached CLP 21.399 billion, which represent a 32.8% drop, this is explained by lower result evaluation of investment proceeds from related companies as we have already mentioned. This earning by investment properties of the related companies draw CLP 14.063 billion in 2018 compared to what was shown in 2017. As I mentioned earlier, it's explained by the entry into operation of the shopping malls during the year.

Profit before the impact of fair value rose 14.8% in our own shopping malls, this is Mall Concepcion and 2 Aventura shopping malls of Santa Anita and Arequipa shopping malls, 139% in our real estate companies, Vinña del Mar and Nuevos Desarrollos. On the other hand, our own EBITDA that means from Mall Concepcion and Aventura shopping mall reached CLP 6.917 billion during the fourth quarter 2018, growing by 11.3% compared to fourth quarter 2017.

It is worth noting the investment Ripley has in this business, the real estate business, recorded in the investment properties and related is over CLP 545 billion, approximately 18% of total assets of the company and is comprised by 3 shopping malls owned by Ripley and 10 malls through related companies with a proportion of gross leasable surface of about 340,000 square meters. Let's move on to the next slide, please. We can see where we are in our real estate business. Our investment portfolio in Chile keeps on growing through our related companies. Currently, we have the enhancement in progress in Vinña del Mar real estate company

[Audio Gap]

which will add 27,000 square meters of gross leasable area; of these, 13,000 square meters are already in operation and the enhancement of the Curicó Mall that will add 8,000 square meters with estimated opening date by 2020. Regarding our business in Peru, the Mall Aventura related company has 3 projects and 1 enhancement in progress. The enhancement is Santa Anita shopping mall in Lima that will add 35,000 square meters, which is a 50% increase to the gross leasable area, and with estimated opening date by the second half this year. One more under development in the Chiclayo city with gross leasable area of 51,000 square meters and estimated opening date during the first half of 2020. Another mall under development in the most populated district in Lima, San Juan de Lurigancho, considering a gross leasable area estimated of 62,000 square meters and opening in 2021. Lastly, another mall under development in Iquitos city, which will have a gross leasable area of 55,000 square meters, with rough provisional opening date for 2021.

Lastly, if we move on to the Slide #14, we can see where we are. In our Retail segment, we are still focused on boosting our omnichannel strategy, working on higher and better interaction with our customers from Ripley's in all channels, all store and digital channels with ongoing initiatives in order to improve person experience and through the Internet and our mobile app with brands and offering products that identifies and differentiates us besides people working in logistics and efficiencies towards providing the best purchasing experience to our customers.

On the other hand, in banking, business strategy is focus being a simple comprehensive bank according to the needs of our customers in order to get their preference and offering best solutions to their needs. We're also working in the digitization process. Lastly, and as we saw in the previous slide in the real estate business, we keep on growing both with own shopping malls as well as with shopping malls from related companies. Now I would like to open lines for questions and answers.

[Operator]

[Operator Instructions]

[Rafael Ferrada Moreira, executive]

Thank you, operator. And thank you all of you for participating, for joining us in our conference today.

[Operator]

Thank you, everyone. We end today's conference. If you would like to listen to this conference again, please contact the company. Thank you for participating, you can now hang up.