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Edited Transcript of INRETC1.LM earnings conference call or presentation 16-Aug-22 4:00pm GMT

·32 min read

Q2 2022 InRetail Peru Corp Earnings Call Lima Aug 16, 2022 (Thomson StreetEvents) -- Edited Transcript of InRetail Peru Corp earnings conference call or presentation Tuesday, August 16, 2022 at 4:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Juan Carlos Vallejo Blanco InRetail Perú Corp. - CEO * Marcelo Ramos InRetail Perú Corp. - CFO ================================================================================ Conference Call Participants ================================================================================ * Alonso Acuna Aramburú Banco BTG Pactual S.A., Research Division - Strategist * Nicolas Larrain JPMorgan Chase & Co, Research Division - Research Analyst * Rafael Borja ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, and welcome to InRetail Peru's Second Quarter 2022 Conference Call. (Operator Instructions) And please note that this call is being recorded. (Operator Instructions) It is now my pleasure to turn the call over to Rafael Borja of Inspire Group. Sir, please begin. -------------------------------------------------------------------------------- Rafael Borja, [2] -------------------------------------------------------------------------------- Thank you, operator, and hello, everyone, and welcome to InRetail Peru's Second Quarter 2022 Earnings Conference Call. 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 Dañino, Investor Relations Officer. They will be discussing the quarterly report distributed by the company yesterday. If you have not yet 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, 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. Juan Carlos, please go ahead. -------------------------------------------------------------------------------- Juan Carlos Vallejo Blanco, InRetail Perú Corp. - CEO [3] -------------------------------------------------------------------------------- Thank you, Rafael. Good morning, everyone, and (foreign language). Thank you for joining InRetail's second quarter earnings call. Today, we will discuss the main highlights of InRetail's second quarter results for 2022. 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 will walk you through our earnings presentation. Unfortunately, during the second quarter, economic activities show some signs of deceleration. The rising and more generalized inflation, the increase in interest rates and the depreciation of the local currency started to affect growth expectations. Additionally, the country is experiencing a slowdown in private investments and consumer confidence due to a persistent local political noise. On the other hand, COVID-19 restrictions continue to be lifted for all businesses in spite of the increase in cases during the second quarter, favoring domestic demand and social interaction fully reactivated. Even during this weaker market condition, retail reported a strong double-digit growth in revenues and in adjusted EBITDA and top of industry profitability margins. Our Food Retail segment had another solid quarter, growing 18.1% in revenues and 24% in adjusted EBITDA, fueled by a healthy mid-single-digit same-store sales growth in supermarkets and a strong double-digit same-store sales growth in Cash&Carry and hard discount, advancing the consolidation of our multi-format strategy. During this quarter, we continued gaining market share, consolidating our leadership position in the Food Retail market. As for so in our previous earnings call, our pharma segment experienced another challenging quarter with similar market-wide trends observed in the first quarter of this year, including a slowdown in demand for COVID-19 related products and supply chain complication related to supply service levels. Our Pharma segment posted a growth in revenues of 2%, mainly due to a high comparison basis given a strong second quarter of 2021 and a decrease in adjusted EBITDA of 3.5%. However, this results do show a slight improvement in performance when compared to the first quarter results. Finally, our Shopping Mall segment showed a strong quarterly performance, consolidating its recovery from the pandemic, with revenue and adjusted EBITDA growth of 33.4% and 60.2%, respectively. Public health restrictions continue lifted. Our tenant recovered their operational performance and occupancy rates remain stable. During the quarter, we continued to strengthen our omnichannel strategy. Despite the strong comparable basis last year, the normalization of physical stores and greater mobility or live penetration in our different brands remain stable. We continue as the leading e-commerce platform in supermarket and pharma markets. As it relates to the digital services and solutions incorporated within retail, these are already integrated with our existing e-commerce platform and strategy. In terms of our guidance, we are updating our projection for the year, expecting to achieve a high single-digit growth in revenues in line with our previous guidance and a mid- to high single-digit growth in EBITDA, giving a slightly better expectation for our Food Retail and our Shopping Malls segment. We should partially compensate the underperformance in our Pharma segment. Our leadership position has a well-diversified platform with a significant portion of its share in nondiscretionary essential categories and our consolidated multi-format and everyday low price strategies allow us to be in a solid position and give us confidence in our ability to continue our growth and maintain our performance. In addition to our financial results, we want to highlight our continued commitment to move forward with our sustainability efforts. During this quarter, our Food Retail segment received its third start from the Peru and Environment Ministry for its carbon footprint management. We also received several awards in multiple rankings, such as great Place to Work, Merco Talent and Customer Experience Index, among others, evidencing once again our commitment to our employees and clients. 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. -------------------------------------------------------------------------------- Marcelo Ramos, InRetail Perú Corp. - CFO [4] -------------------------------------------------------------------------------- Thank you, Juan Carlos, and good morning, everyone. Thank you for joining us on this call. Today, we will review the main highlights of InRetail's second quarter results for 2022. Now please turn to Page 4 in our earnings presentation to start reviewing our consolidated financial results of the second quarter for InRetail Peru. In the second quarter of the year, InRetail reported a double-digit growth in revenues due to a strong growth in our Food Retail segment and a consistent recovery in our Shopping Mall segment, combined with a slight growth in our Pharma segment, which registered an improvement in comparison for the first quarter of this year. Overall, this was a strong quarter considering the high comparison basis from the comparable quarter of last year. Revenues reached PEN 4.7 billion, an 11.5% increase versus the second quarter of last year. Gross margin stood at 27.4% in the quarter, a slight decline compared to the second quarter of last year. This is mainly explained by a decline in gross margin in our Food Retail segment, reflecting the higher participation of our Makro and Mass formats in the sales mix, combined with relatively stable gross margins in all of our other segments. In terms of adjusted EBITDA, we also recorded a double-digit growth of 10.4% in comparison to the same period of last year, reaching PEN 567 million with a stable adjusted EBITDA margin of 12%, driven mainly by the top line growth, the continued operating leverage in our Food Retail segment and the improved performance in our Shopping Mall segment. This quarter, the consolidated adjusted EBITDA includes an extraordinary income in our Shopping Mall segment from a land bank sale as well as PLN 19 million of net expenses aimed to strengthen the new digital services and solutions incorporated in late 2021, which, as I mentioned in our prior earnings call, continue their development phase. These are incremental expenses when compared to the second quarter of 2021. In terms of net income, we registered a strong growth in the second quarter of 32%, mainly due to a strong performance in most of our segments as well as a lower net FX loss. Year-to-date, we recorded PEN 324 million in net income, a significant increase when compared to the year-to-date numbers in 2021. As a reminder, in Q1 '21, we had onetime noncash effects registered in the Pharma segment related to the sale of nonmaterial operations and liability management as well as structuring costs related to the bridge loan used for the acquisition of Makro. Now please turn to Page 5 to review a financial and operational snapshot of our consolidated figures. In terms of contribution, considering the last 12 months as of the second quarter of 2022, our Food Retail segment accounted for 53% of consolidated revenues and 40% of consolidated adjusted EBITDA with an adjusted EBITDA margin of 9.7%. Our Pharma segment accounted for 43% of consolidated revenues and 45% of consolidated adjusted EBITDA with an adjusted EBITDA margin of 13.4%. Finally, our Shopping Malls segment accounted for 3% of consolidated revenues and 15% of consolidated adjusted EBITDA with a net rental income margin of 82.2%. Our Shopping Mall segment has recovered strongly and consistently, reaching levels of contribution in retail close to prepandemic levels with a solid net rental margin. Now please turn to Page 7 to comment on our sustainability highlights. During the second quarter, we continue with our commitment to move forward with our sustainability efforts. On this page, we summarize our main progress and achievements during the quarter and how they align to the sustainability development goals that InRetail is focusing on. On the climate action front, our Food Retail segment received its third star from the Peruvian ministry, MINAM, for its carbon footprint tracking and management. Additionally, our recycling program with ReciclaConsciente, which promotes an education recycling, received an advertising ANDA 2022 award. As of June of this year, we recycled more than 46,000 tons of PET bottles through our recycling stations in malls, which were converted into blankets for donation. Finally, our Food Retail segment ranked #1 in Merco ESG ranking. On our 0 hunger efforts, we continue with our successful strategic partnership with a food bank, [Olof], Plaza Vea, Vivanda and Makro stores as well as our logistics centers participated in this partnership. Year-to-date, we have rescued 71% of our food waste, equivalent to 8 million food rations for over 78,000 beneficiaries. With respect to promoting responsible consumption and production, this second quarter, we initiated our sustainability trainings, focused on recycling, waste management and other environmental topics with a participation of more than 500 suppliers. Finally, in terms of efforts to promote decent work and economic growth, we delivered more than 300 hours of mentorships to SMEs that form part of our Peru Pasion development program. In partnership with Zegel Ipae, we also launched a dual training program, offering 70 scholarships to certify a pharmacist technicians and receive paid training in our stores. We also received several awards in diverse rankings, such as Great Place to Work, Merco Talent and Customer Experience Index, among others, evidencing once again, our commitment to our employees and clients. We will now continue with the results by segment. Please turn to Page 9 to start with the second quarter results for our Food Retail segment. Our Food Retail segment recorded once again a strong quarter despite the already high comparison basis of the comparable quarter of last year, when we registered 28.2% growth in revenues due to the incorporation of Makro. Revenues reached PLN 2.5 billion, registered an 18.1% growth. Same-store sales growth stood at 12.5% with a positive same-store sales growth in all main formats. We achieved a solid mid-single-digit growth in Plaza Vea and a strong double-digit growth in both Makro and Mass, for Cash&Carry, hard discount formats respectively. Top line growth was positively impacted by a strong increase in food categories, offset by a slowdown in nonfood categories. As I mentioned during our earnings call -- last earnings call, the nonfood segment has been negatively affected by a market-wide slowdown in the electronics categories, which had a very high comparison basis last year. The decline in the electronics categories was partially compensated by growth in other nonfood categories such as textile and [bazaar]. However, this second quarter, we still saw a negative growth in nonfood categories. Additionally, revenues were positively impacted by the contribution of approximately 29,000 square meters of additional sales area opened in the last 12 months, which includes 77 net new Mass stores, 2 new Makro stores and the remainder from Plaza Vea expansion. At the end of last year, we also reopened 2 Plaza Vea stores, which were close to the second quarter of last year. In Q2 '22, we opened 26 and closed 4 Mass stores, resulting in 22 net open. Our gross margin reached 22.8% this quarter below the comparable quarter last year, reflecting the higher participation of our Makro and Mass formats in the sales mix combined with the continued reinforcement of our everyday low price strategy, particularly in our Mass format. The only format that has varied its margins with respect to the prior year is Mass, given its new pricing strategy as part of its redefined value proposition, which is already showing important results. Gross margin in the second quarter was slightly above the first quarter due to a lower participation of the electronics categories in the sales mix. In terms of adjusted EBITDA, Food Retail's adjusted EBITDA reached PEN 227 million this quarter with a margin of 9%, an increase of 42 basis points versus same period last year, mainly explained by the continued fixed cost dilution and operational efficiencies despite an increase in personnel expense from the new minimum wage and in transportation costs, given the increase in fuel prices. Also, in Q2 '21, there were PEN 6 million of onetime expenses related to the acquisition of Makro not present in this quarter. All of this more than compensate the decrease in gross margin. In terms of sales performance for the second quarter of 2022 for flagship format, Plaza Vea, represented 58% of sales. Our high-end supermarket, Vivanda, represented 3% of sales; our hard discount format, Mass, represented 10% of sales; and our Cash&Carry format, Makro, represented 29% of sales. Compared to the revenue contributions from last quarter, our new formats, Makro and Mass, have increased in approximately 3% in the sales mix, evidencing once again, the consolidation of our multi-format strategy. In terms of our e-commerce sales, during this quarter, we recorded a contraction of 9% in sales for comparison for the second quarter of last year, mainly due to the market-wide slowdown in electronic categories, which recorded a high peak in sales in July of last year. Moreover, online penetration remained at approximately 6% of total sales in our formats with an active digital platform, in line with previous quarters. Despite the contraction in online sales, we remain as the leading supermarket e-commerce platform in Peru. Overall, our Food Retail segment registered another strong quarter, with a positive performance in our main formats, leveraging on our multi-format and everyday low price strategy. This second quarter, we continued to see a slowdown in certain nonfood categories, particularly electronics, mainly impacting our supermarket format, which has a higher representation in these categories. However, given a strong first half of the year as well as a continuous focus on operational efficiency, we expect our Food Retail segment to grow slightly above the high single-digit growth we guided at the beginning of the year for both revenues and EBITDA. Please turn to Page 10 to review our first quarter results for our Pharma segment. Our Pharmacies unit registered a top line growth of 3% in the second quarter, with a same-store sales growth of 0.4%. As anticipated in our previous earnings call, this was another challenging quarter for our Pharmacies unit. Similar to our previous quarter, our Pharmacies unit experienced a slowdown in demand from COVID-19 related categories as well as continued deterioration of our supplier service levels, particularly during the first half of the second quarter. This effect, combined with an already high comparable base of 2021, which recorded a high same-store sales growth of nearly 17%, resulting in a difficult quarter for our Pharmacies unit. In the second quarter, our Pharmacies unit experienced an overall decrease in Pharma categories despite a moderate recovery since late May, driven by the winter campaign and by the reactivation of social interactions. We continue to register a strong performance in personal consumer categories, fueled by the continuous execution of our category diversification and multi-format strategy. Finally, product replacement and inventory supplies to our stores improved towards the end of the second quarter, with fewer logistical challenges, which allowed us to better fulfill customer demand in comparison to the first quarter of the year. During the last 12 months, we opened 80 net new pharmacies. And during this quarter, we opened 18 pharmacies and closed 3, resulting in 15 net openings. Our gross margin reached 35.9% this quarter, slightly above Q2 '21 and Q1 '22, mainly due to a change in product mix. In terms of adjusted EBITDA, we recorded an adjusted EBITDA margin of 16%, slightly below the comparable quarter of last year, primarily due to an increase in store personnel expenses related to the minimum wage increase to new personnel required for the new stores opened in the last 12 months. However, our adjusted EBITDA margin showed an improvement compared to Q1 '22 due to an improvement in gross margin as well as increased fixed cost dilution from a slightly better top line. In terms of our omnichannel strategy in the Pharma segment, we continue with our efforts to grow our digital platforms. Despite the already high comparison basis in 2021, we registered a strong growth of 36% in online sales in the second quarter, including both our website and app. Online penetration of nonphysical sales in our Pharma brand stood at approximately 6% of total sales in NIM. Our click and collect alternatives also maintain its relevance and continue gaining share during the quarter, representing 30% of our digital sales in the second quarter. As a reminder, our click and collect networking pharmacies includes over 2,000 locations nationwide. Now moving on to our distribution unit. This quarter, revenues decreased by 3.7%, mainly due to a slower demand in comparison to the second quarter over the last year, which had a high comparison basis, including COVID-19-related purchases. Gross margin was 12% in the second quarter, in line with the quarter of last year, and an improvement from the previous quarter of this year. Given this quarter, we did not record a material FX translation effect. Adjusted EBITDA margin reached 4.2%, a slight decrease compared to Q2 '21, mainly due to the higher selling expenses related to the distribution of [lines] and the reactivation of marketing and sales efforts for our exclusive lines, which were postponed in 2021 due to the pandemic. Finally, on a consolidated level, our revenues registered an increase of 2.4% in comparison to the second quarter of last year, and our adjusted EBITDA declined by 3.5%, with a consolidated adjusted EBITDA margin of 13.2%. As anticipated in our previous earnings call, our Pharma segment experienced another challenging quarter, particularly during April and part of May, with similar trends observed in the first quarter of this year, including the slowdown in the bank for COVID-19-related products as well as continued deterioration of our supplier service levels. However, as I commented before, our Pharma segment experienced a recovery in demand towards the end of the quarter related to the winter campaign, resulting in a slight improvement in comparison to the first quarter of the year. Looking forward, and based on the initial results observed during the first half of the year, we are reviewing our guidance for the full year, expecting a low single-digit growth in revenues and a slightly negative growth in EBITDA given the lower fixed cost dilution on a consolidated Pharma level. Please turn to Page 11 to review our second quarter results for our Shopping Malls segment. In the second part of this year, our Shopping Malls segment continued with the consolidation of its recovery and growth, resulting in a strong quarter for the segment. Our Shopping Malls revenues reached PEN 159 million, registering a 33.4% growth versus the comparable quarter of last year. This growth was mainly explained by increasing GLA open versus the same period of last year, with approximately 92% of GLA opened versus approximately 82% opened in the prior year from the same period. The strong growth in revenues was also fueled by the reduction in discounts in comparison to last year as our tenants continue to recover their performance. Finally, we had additional G&A from the expansion of Real Plaza Cusco in the third quarter of last year, which contributed to revenue growth this quarter relative to Q2 '21. In terms of occupancy rates, we registered 94% of occupancy this quarter, slightly higher than the previous level of 93% due to the opening of new tenants, mainly in Cusco and our Pucallpa malls. In terms of adjusted EBITDA, we have registered PEN 109 million, registered a 60.2% growth and a rental market of 92.1%. This strong growth is mainly explained with a solid top line growth, higher fixed cost dilution and an extraordinary net income of PEN 12.9 million due to the land bank sales to related parties. Excluding the extraordinary income, adjusted EBITDA would have grown 41% with a net rental margin of 81.8% compared to 76.6% in the second quarter of last year. In terms of mark-to-market, we registered a gain of PEN 0.5 million this quarter compared to PEN 9.5 million in the comparable quarter of last year. As of June 30, our Shopping Malls segment had a solid liquidity position with PLN 177 million in cash and equivalents and an investment of PEN 135 million in retail shares as additional sources of liquidity. In terms of mall operations. During the second quarter, our malls operating with no restrictions on maximum visitor capacity nor operating hours. However, vaccinations and face mask restrictions inside establishments remains in place. Finally, in July, we acquired Molina Plaza Power Center. Molina Plaza has approximately 16,000 square meters of GLA, mainly composed of essential tenants, including Plaza Vea, entertainment tenants such as [Sina Planet] and well-known restaurants. Molina Plaza is located in the district of La Molina in the east of Lima, reaching a population of around 140,000 inhabitants, primarily in the A to B socioeconomic levels. We believe Molina Plaza Center complements our existing footprint, providing incremental value to our Shopping Malls segment. Additionally, in July, we returned the concession of Estacion Central 2,000 square meters of GLA located in the district of Cercado de Lima in the center of Lima. This was a small operation for us, which had lost relevance with a delay in the development of the train line and station and due to the reduced traffic in the area. The return on this concession has no material impact in our financial results. In terms of guidance for our Shopping Malls segment, given the strong performance during the first half of the year, we are reviewing our guidance for the full year, expecting a higher growth in revenues of around 20%, with some operating leverage resulting in an EBITDA growth of above 20%. In summary, this was another strong quarter for InRetail Peru at a consolidated level in terms of revenue and adjusted EBITDA growth. During the first half of the year, the performance of our different segments was mixed, a solid growth in our Food Retail segment, helped by the consolidation of its multi-format strategy and continued solid recovery of our Shopping Malls segment, offset by a more challenging first semester for our Pharma segment. As Juan Carlos mentioned before, in terms of guidance for InRetail on a consolidated basis, we expect to achieve a high single-digit growth in revenues, in line with our prior initial guidance and a mid- to high single-digit growth in adjusted EBITDA for the year, given a slightly better expectation for our Food Retail and our Shopping Malls segment, which should partially offset and compensate the underperformance in our Pharma segment. Now please turn to Page 12. This slide sums up our Food Retail sales area, number of pharmacies and shopping malls as well as our same-store sales by quarter. In the Food Retail segment, we opened 22 net Mass stores in the second quarter, accelerating the opening pace versus the previous quarter. Although we expect to further accelerate the store openings in the following quarters, our updated pipeline, such as [recruitment] stores, will probably end up being opening earlier next week, mainly due to administrative delays and obtaining permits, which leads us to update our estimate to open around 100 new Mass stores this year versus the 120 we have estimated for 2022. These openings will be complemented with 2 new Plaza Vea stores, 2 new Cash&Carry stores as we initially expected, which will be open towards the end of the year in November and December. Additionally, we're in construction of a third Makro store, which we expect to open during the first quarter of 2023. In our Pharmacies unit, we opened 15 net new stores this quarter. Despite the expected increase in the pace of openings in the following quarters, given the lower fixed cost dilution we are xperiencing , we will defer the opening of some stores for next year, opening approximately 70 new pharmacies by year-end compared to the 100 new stores we initially planned for. Additionally, during 2022, we will continue with the store reconversion plan for the year. Finally, in our Shopping Malls segment, there were no increases in GLA this quarter. However, as I commented before, in July, we acquired Molina Plaza Shopping Center and ended the concession of Estacion Central, which on a net basis, will add 14,000 square meters of new GLA under operation, and we also expect to pursue some minor expansions within our malls during the year. In terms of same-store sales, we can observe the strong same-store sales performance in the Food Retail segment during this first semester despite the strong basis recorded throughout 2021. As mentioned in Q2 '22, we experienced a positive same-store sales growth in all main formats. Additionally, we know the general slowdown in same-store sales growth in pharmacies in the first semester of the year, with a slight improvement in Q2 '22. This compared with a record same-store sales growth around 17% in the comparable first semester of the year. Finally, the slide reflects the strong growth and recovery of our shopping malls driven by a strong tenant of sales growth as public sales restrictions continued lifted and social interactions resume. Please turn to Page 14 to review our consolidated net income results. InRetail registered a gain of PEN 106 million in the second quarter of 2022 compared to a gain of PEN 80 million in the same period of 2021, mainly explained by additional EBITDA contribution of PEN 53 million, a lower net FX loss of PEN 32 million compared to the comparable quarter of last year, a lower mark-to-market of PEN 10 million and higher net financial expenses of PEN 13 million in the quarter due to an increase in our quarterly financial debt in both our Food Retail and Pharma segments. Excluding exchange rate impacts, mark-to-market from the valuation of investment properties, net income for the second quarter would have reached PEN 140 million. Now please turn to Page 15 to discuss our CapEx and cash flow generation. During the second quarter of 2022, we invested PEN 236 million in CapEx for our 3 business segments. This CapEx was invested mainly in the construction of our 4 big boxes we expect to [offer] this year in the opening of our Mass stores and in scheduled maintenance in our Food Retail segment as well as in the opening of new pharmacies, format reconversions and schedule and maintenance in our Pharma segment. Additionally, in our Pharma segment, approximately PEN 50 million was invested in land bank to further consolidate and develop our logistics network. Finally, there were minor expansions and maintenance CapEx in our Shopping Malls segment. In terms of cash balance, we ended the second quarter with PEN 619 million of cash, below the end of last year cash balance of PEN 917 million. This decline in cash was mainly due to the distribution of PEN 75 million in dividends in May of this year, the purchase of the noncontrolling interest InRetail Pharma, which resulted in a $35 million cash payment, the pickup in CapEx investments in our Food Retail and Pharma segments and an increase in inventory levels in our pharmacy unit. This increase in inventory results from a decline in turnover in certain specific categories, particularly baby products, combined with the selected incremental purchases of Pharma categories to counter the low supplier service levels observed partially through the quarter. Looking at the results in July, inventory days in our Pharmacies unit have already started to decline as demand recovered and the winter campaign began. As we have demonstrated in prior years, our CapEx budget is discretional, and we have the capacity to quickly react and diligently adjust our CapEx investments, including store expansions if deemed necessary, without materially compromising our operations and growth. Similarly, we're working to gradually bring our working capital requirements to more normalized levels. Now please turn to Page 16 to discuss our consolidated financial debt. As of June 22, InRetail had a consolidated net debt of PEN 7,448,000,000, with a net debt to adjusted EBITDA ratio of 3.2x, slightly above the previous quarter and end of 2021, mainly due to slightly higher leverage at our Food Retail and Pharma segments, offset by continued deleveraging in our Shopping Malls segment. Please turn to Page 17 to review our debt by segment. Supermercados Peruanos, our Food Retail segment, ended the second quarter with a net debt of PEN 2,889,000,000, including the intercompany loan with InRetail consumer related to the acquisition of Makro. Net debt to adjusted EBITDA stood at 3%, in line with the first quarter. InRetail Pharma ended the second quarter with a net debt of PEN 2,571,000,000 and a net debt to adjusted EBITDA ratio of 2.4%, slightly higher with respect to the first quarter. The company incurred short-term debt, finance incremental working capital requirements as well as incremental CapEx investments, as outlined before. The decline in cash balance reflects the dividend distribution to the parent company to fund InRetail Peru ordinary dividend. Finally, InRetail Shopping Malls ended the first quarter with a net debt of PEN 1,848,000,000, with a net debt to adjusted EBITDA ratio of 4.6%, and important reductions versus last quarter, evidencing once again the continued recovery in the segment. In 2022, we expect to maintain a relatively stable net leverage on a consolidated basis compared to 2021. This covers our presentation. And now we will be glad to answer any questions you may have. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) The first question comes from Alonso Aramburú with BTG. -------------------------------------------------------------------------------- Alonso Acuna Aramburú, Banco BTG Pactual S.A., Research Division - Strategist [2] -------------------------------------------------------------------------------- I wanted to ask you about the pricing strategy at Mass. You mentioned you were changing the price strategy. Can you give us some color on that? And also, can you comment on the differences in same-store sales growth in each of the Food Retail formats, Mass, Makro and Plaza Vea? -------------------------------------------------------------------------------- Marcelo Ramos, InRetail Perú Corp. - CFO [3] -------------------------------------------------------------------------------- Sure, Alonso, and thank you for the question. So in terms of pricing strategy, as mentioned in the prior call, in January, Supermercados started with this new pricing level in Mass, basically to increase the attractiveness all the formats, and the format is focused essentially on basic needs, closer to customers and needs to compete on a pricing mechanism. So if I compare to the Plaza Vea prices with the Mass prices, Mass stands at about 94%, 95%, and Plaza Vea stands at 100%. And that decline was actually included in January. So it's a new pricing strategy that we started in January, which as you see as the numbers and the same-store sale growth, it's bringing very attractive results. And as I mentioned in the call, if you look at the gross margins from the different formats, Mass is the only one that has a decline in gross margin, which is a result specifically on this new pricing strategy. Other than that, the other formats have stable gross margins compared to 2021. And regarding the second question in terms of same-store sales growth by format, as I said in call, Plaza Vea reported in the quarter mid-single-digit growth of about 5%, in terms of same-store sales, again, affected -- benefited by the food -- the growth in the food categories, but also affected more widely than the other formats, given the high representation of nonfood categories, including electro. In the case of Mass, Mass grew same-store sales of about 20%, 21%, and then Makro had a open growth of about 29% in same-store sales compared to the quarter of last year. -------------------------------------------------------------------------------- Operator [4] -------------------------------------------------------------------------------- (Operator Instructions) Our next question is from Nicolas Larrain with JPMorgan. -------------------------------------------------------------------------------- Nicolas Larrain, JPMorgan Chase & Co, Research Division - Research Analyst [5] -------------------------------------------------------------------------------- I had 3 actually. The first one on Food Retail. If you could comment just a bit on competitive environment. Have you seen the other guys behaving on this new pricing strategy that you mentioned on the stores? And also discussing just Makro, has the mix between B2B and B2C changed since you bought the stores? Are you focusing more maybe on worth on one side or the other versus what Makro used to be? And my third question is on more on the drug retail front. You commented about online adoption. I wanted to ask how is online adoption maybe on the Food Retail and in the drug retail outside of Lima, how do consumers adopt that new channel outside of the capital city? -------------------------------------------------------------------------------- Marcelo Ramos, InRetail Perú Corp. - CFO [6] -------------------------------------------------------------------------------- Sure. Thank you for the question. So in terms of the first one, the competitive environment, look, I think the benefit of having the different formats is -- one of the benefits of having the different formats is that it allows us to play with the different pricing strategies within the same formats. So even though we always mentioned that we're recognized as the everyday low price player in the market, we do have differentiated prices within the different formats. And another thing we haven't seen no competition as aggressive as us in those prices. And so still, despite the increase in inflation in the context right now, we're still recognized as the everyday low price player in the market. So we haven't seen much of a following from the different competition. The second question regarding Makro. So as we mentioned in prior calls, we've been focusing more in the B2B client, in the professional client as opposed to when we recently acquired Makro, where the strategy for Makro was actually to enter into the B2C client. In our case, we've been trying to focus more on the B2B client. Of course, the B2C client still remains important as we do have customers given the different purchasing alternatives and [journey] still go on buying to Makro. But overall, we've been focusing on B2B. And nowadays, B2B client is about 65% of sales, and the B2C client in June is about 35%, which is a slight drop compared, of course, to what we have during the pandemic. And then regarding online adoption, look, we've started first in Lima, of course, as many retail players that venture into the digital channels, adoption, of course, in urban areas, it's higher than in rural areas and provinces. We started penetrating provinces just a couple of years ago. So online adoption is still growing. There's a lot of opportunity here. I think the biggest challenge in provinces is more of a logistics network for us and trying to fulfill the value proposition that we can deliver in urban areas, in rural areas. But we're still having adoption, and it's growing importantly quarter over quarter. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- (Operator Instructions) That concludes the question-and-answer portion of today's conference call. I would like to turn it back over to Mr. Vallejo for closing remarks. -------------------------------------------------------------------------------- Juan Carlos Vallejo Blanco, InRetail Perú Corp. - CEO [8] -------------------------------------------------------------------------------- Thank you all for participating in our second quarter earnings call. As a final remark, I just wanted to underline that the second quarter ended up being a nice solid quarter for InRetail. Even with the persistent political turmoil and the more challenging economic environment, we remain confident that we are in a solid position with the correct strategy to continue our growth and maintain our performance. We will continue promoting the development of [modern] InRetail Peru. If you have any follow-up questions, please do not hesitate to contact any of us. Thank you very much. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- Ladies and gentlemen, that concludes InRetail Peru's Second Quarter 2022 Earnings Conference Call. We would like to thank you again for your participation. You may now disconnect.