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Edited Transcript of INRETC1.LM earnings conference call or presentation 28-Feb-20 4:00pm GMT

Lima Mar 24, 2020 (Thomson StreetEvents) — Edited Transcript of InRetail Peru Corp earnings conference call or presentation Friday, February 28, 2020 at 4:00:00pm GMT

InRetail Perú Corp. – CFO

InRetail Perú Corp. – CEO

i-advize Corporate Communications Inc. – SVP

Good morning, and welcome to InRetail Peru’s Conference Call. (Operator Instructions)

It is now my pleasure to turn the call over to Rafael Borja of i-advize Corporate Communications. Sir, you may begin.

Rafael Borja, i-advize Corporate Communications Inc. – SVP [2]

Thank you, and good morning, everyone, and welcome to InRetail Peru’s Fourth Quarter and Full Year 2019 Earnings Conference Call.

Before we begin, I would like to remind you that today’s call is for investors and analysts only. Therefore, question from the media will not be taken. Joining us today from InRetail Peru are Mr. Juan Carlos Vallejo, Chief Executive Officer; and Mr. Gonzalo Rosell, Chief Financial Officer. They will be discussing the quarterly report distributed yesterday. If you have not yet received a copy of earnings report, please visit www.inretail.pe on the Investors section, where there is also a webcast presentation to accompany 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. I’m Juan Carlos Vallejo. Thank you for joining InRetail’s fourth quarter earnings call. Today, we will discuss the main highlights of InRetail fourth quarter and full year results for 2019. I will start with a quick introduction on general market conditions and overall results as well as share our view for 2020, and then Gonzalo will walk you through our earnings presentation.

As we will see over the following pages, 2019 ended up being another good year for InRetail, despite the weak consumption trends due to a slow macroeconomic context. In a year in which Peru’s real GDP grew only 2.1%, the slowest pace in 10 years, InRetail managed to experience a high single-digit growth in revenues, and a strong double-digit growth in EBITDA and net income with gross margin, EBITDA and net income margin expansions. As reported in previous quarters, as political confrontation between Government and Congress in Peru scale up throughout the year, ending in the resolution of Congress on September 30, consumption ended up slowing down, particularly during the second half of the year.

With this, we experienced weaker same-store sales in our 3 segments in the fourth quarter, although compensated by a very good margin across the board, allowing InRetail to still post a strong double-digit growth in EBITDA and net income in the quarter. Our Food Retail segment reported a high single-digit top line growth and low single-digit same-store sales in the fourth quarter with a double-digit growth in EBITDA. Despite the slowdown, our Food Retail segment is still managed to close the year with a revenue growth of 12% and EBITDA growth of 16.3%, a slightly better than the 12% and 15% guidance shared at the beginning of 2019 with a 25 basis point EBITDA margin improvement, despite the development of new formats.

Our Pharma segment, on the other hand, posted a 1.7% reduction in revenues, due to a low single-digit growth in pharmacy unit that experienced a slightly negative same-store sales and the contraction in revenues in the MDM unit as part of our organization to focus on more profitable business lines. Despite that, our Pharma segment EBITDA experienced a strong 23% growth in the fourth quarter, breaching an EBITDA margin of 11.8%, the highest quarterly EBITDA margin ever for our Pharma segment. With this, we reached an EBITDA of PEN 711 million in 2019, pretty much in line with the PEN 715 million of guidance shared at the beginning of the year.

Finally, our Shopping Malls segment reported a strong quarter with 11.2% growth in revenues and 9.1% EBITDA growth. Maintaining a higher occupancy rate of 94%, higher than by the contribution of Real Plaza Puruchuco, our flagship mall inaugurated on November 13, which is performing pretty well and in line with expectations.

Looking forward into 2020, we expect a slightly better macroeconomic and consumption backdrop, which should allow us to continue growing at a mid-single-digit growth in consolidated revenues and a high single-digit growth in consolidated EBITDA, supported by new sales area and GLA. The full year contribution of Puruchuco, positive same-store sales and the consolidation of our multi-format and omni-channel strategies, allowing us to increase the penetration of our successful new InRetail format. With that, let me pass the word to Gonzalo. And as always, we look forward to answering your questions by the end of this call.

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Gonzalo Rosell, InRetail Perú Corp. – CFO [4]

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Thank you, Juan Carlos. Good morning, everyone. Thanks for joining us on this call. Once again, before starting, I would like to remind you that since the beginning of 2019, our financial statements fully reflect the adoption of IFRS 16. However, the numbers we will be discussing in this earnings presentation and our management discussion and analysis report have been adjusted to exclude IFRS 16 effects in order for them to be comparable to our results of the fourth quarter of last year. The bridge and reconciliation of the accounting numbers with a pre-IFRS 16 figures are shown in the reconciliation of the — in the last section of this presentation, and there is also information in the notes accompanying our financial statements. As of 2020, when we report our Q1 results in May this year, we will begin to discuss our earnings presentation and our management discussion analysis under IFRS 16. Since they will now be fully comparable to numbers reported in our financial statements from 2019. As always, we will make our best effort to give the necessary information for an easy comprehension of our performance. For this reason, the guidance that I will be giving on today’s call for 2020, considers numbers under IFRS 16.

Now please turn to Page 4 in our earnings presentation to start with InRetail’s main highlights of the year. As Juan Carlo mentioned, InRetail showed strong results in 2019 despite a slower consumption environment in Peru, which intensified during the second half of the year. In our Food Retail segment, we recorded double-digit adjusted EBITDA growth, keeping stable margins, despite the development of our new formats, Mass and Economax and the growth of our e-commerce platform.

In our Pharma segment, we also showed double-digit adjusted EBITDA growth, improving performance per store. And in our Shopping Malls segment, we maintained high occupancy rates and increased traffic in our Real Plaza Malls. Additionally, we wanted to highlight the continued development of our physical platform to speed up growth.

In our Food Retail segment, we added 34,000 square meters of new sales area in 2019, which will allow us to continue strengthening our multi-format strategy. Furthermore, in our Food Retail segment, we expanded our main distribution center, which is located in Lima. Inaugurated a small regional distribution center in the north of Peru in Piura and consolidated the operation of our 3 transfer centers in Lima. These investments and initiatives will help us support our multi-format growth and further improve logistic efficiency. We also wanted to highlight the opening of Real Plaza Puruchuco, our new flagship mall and an important milestone in the development of mall InRetail Peru.

Real Plaza Puruchuco is the largest shopping mall to be constructed in Peru in a single phase with 126,000 square meters of GLA, and is the first mall in Peru to obtain the Green Certification, EDGE, for its sustainable design with efficient water, energy and embodied materials usage. Real Plaza Puruchuco was inaugurated with a secure occupancy rate of 83%, and with more than 250 stores from the best Peruvian International tenants in fashion, entertainment and restaurants.

The previously mentioned achievements allowed us to continue deleveraging during the year on a consolidated basis, mainly due to a fast deleveraging of the Pharma segment, maintaining relatively stable leverage ratios in the Food Retail and Shopping Malls segments, despite a temporary increase in CapEx investments in 2019. On a consolidated basis, we went from 3.5x consolidated net debt-to-EBITDA at the beginning of 2019 to 3.1x net debt-to-EBITDA at the end of 2019.

Finally, we would like to highlight the continued strengthening of our digital platform, which showed material growth in e-commerce sales. In our Food Retail segment, we ended the year with 70 click-and-collect stores for nonfood, 34 (sic) [4] click-and-collect stores for food and a 1-hour delivery express service in Lima as part of our omni-channel strategy.

In our Pharma segment, we continued consolidating our delivery center in Lima for e-commerce and call center sales. This sums up our main consolidated highlights for the year.

Now please turn to Page 6 in our earnings presentation to review our consolidated financial results for our fourth quarter for InRetail Peru.

In the fourth quarter of the year, InRetail reported a low single-digit top line growth, mainly explained by a contraction in the MDM unit of our Pharma segment. But with a high single-digit revenue growth in our Food Retail and double-digit growth in our Shopping Malls segments. Despite the weaker market conditions, which intensified during the second half of the year. Revenues reached PEN 3.4 billion, improving gross margin to 31% compared to 29.3% in the fourth quarter of last year. In terms of adjusted EBITDA, we reported a double-digit growth of 16.9% in comparison to the same period of the previous year, reaching PEN 429 million with an adjusted EBITDA margin of 12.5% compared to 11% reported in the fourth quarter of the previous year. Consolidated adjusted EBITDA growth is explained by a solid growth in our 3 business segments.

Finally, we reported a significant increase in net income, mainly due to a good operating performance, but also to the mark-to-market of Real Plaza Puruchuco and other investment properties. Expanded net income margin from 3.9% in Q4 2018 to 7.6% in the fourth quarter of this year. As Juan Carlos previously mentioned, in terms of guidance for InRetail, at a consolidated level, and making reference to financial numbers under IFRS 16, we expect to achieve mid-single-digit growth in consolidated revenues and high single-digit growth in consolidated adjusted EBITDA for 2020. Supported by new sales area and GLA, the full year contribution for Puruchuco, positive same-store sales in our Pharma, operational and logistic efficiencies and the consolidation of our multi-format and omni-channel strategy.

Please turn to Page 7 to review our financial and operational snapshot of our consolidated figures.

In terms of contribution, considering figures for full year 2019, our Food Retail segment accounted for 44% of InRetail’s consolidated revenues and 28% of consolidated adjusted EBITDA with an adjusted EBITDA margin of 6.9%. Our Pharma segment accounted for 52% of consolidated revenues and 49% of consolidated adjusted EBITDA with an adjusted EBITDA margin of 10.4%. Finally, our Shopping Malls segment accounted for 4% of consolidated revenues and 23% of consolidated adjusted EBITDA with a net rental income margin of 78.5%. We will now continue with our main highlights of the year by segment.

Please turn to Page 9 to start with our Food Retail segment. Our Food Retail segment experienced a strong revenue growth in 2019 with a strong performance in all categories and formats, and a fast growth in our e-commerce sales. We released successful marketing campaigns throughout the year, which contributed to a top line and ranked Plaza Vea 10th among the most valued brands in Peru. In 2019, we kept consolidating our multi-format strategy and continued our legacy of taking mall InRetail to unpenetrated cities and towns outside of Lima. We opened 2 new Plaza Vea stores in the year, which includes the first hypermarket in Tumbes, a Northern City of Peru and 1 store in Real Plaza Puruchuco in Lima, totaling 108 stores. Additionally, we opened 120 net new Mass stores, consolidating a chain of 405 stores and opened 1 new Economax Cash&Carry store in the city of Arequipa, totaling 5 Economax stores, which are still in process of maturation.

In 2019, we also expanded our main distribution center in Lima, adding 30,000 square meters of additional storage space and recorded higher automatization, throughput and productivity levels, thanks to the investments we incurred in 2017 when constructed our new main state-of-the-art distribution center. Additionally, in 2019, we inaugurated a new regional distribution center in Piura in the north of Peru of 1,600 square meters and continue consolidating the operation of our 3 transfer centers in Lima, specifically for the Mass format. These investments allow us to support our multi-format growth and help increase our productivity levels in our Food Retail segments. Finally, we feel pleased to share with you that our Food Retail segment was once again positively recognized by our employees, ranking 9th in the Great Place to Work Ranking in Peru, and 7th in the Great Place to Work Ranking in Latam. Additionally, we ranked 11th in the PAR Gender Quality Ranking, winning the Award for Diversity. Additionally, we also feel very proud to share that in 2019, we benefited more than 15,000 people daily with our food donation program, donating food from all our Plaza Vea stores, continuing to be a strategic partner for Banco de Alimentos.

Please turn to Page 10 to review the financial highlights for our Food Retail segment.

Our Food Retail revenues grew 7.8% in the fourth quarter with a same-store sales growth of 1.5%. In 2019, revenues increased 12% with a same-store sales growth of 4.1%. The slower quarterly same-store sales growth in our Food Retail segment relates to a slower consumption environment we have been observing since August of 2019, which continued through the third and fourth quarters as well as to the challenging comparison basis of the second half of last year, where we experienced a high single-digit same-store sales growth.

In the last quarter of the year, we added 10,000 square meters of supermarket sales area and opened 29 net new Mass stores. In terms of gross margin, Food Retail’s gross margin decreased 68 basis points in the fourth quarter, reaching 26.9%, mainly due to the higher penetration of new formats in the sales mix and lower rebates related to fewer store openings in comparison to the same period of the previous year. In terms of adjusted EBITDA, Food Retail’s adjusted EBITDA grew a strong 14.7% in the quarter, reaching 8.5% EBITDA margin, mainly due to higher employee productivity and fixed cost dilution despite the development of new formats and the growth of our e-commerce sales, which did not yet positively contribute to our EBITDA.

We continue strengthening our multi-format strategy in the Food Retail segment with our flagship format Plaza Vea, representing 83% of sales. Our high-end supermarket format Vivanda representing 4% of sales. Our hard discount format Mass, representing already 8% of sales, and our recently launched Cash&Carry format Economax, representing 5% of sales. Overall, despite the continued macroeconomic slowdown, which is negatively impacting consumption, we managed to surpass our 2019 guidance for Food Retail of 12% revenues growth and 15% adjusted EBITDA growth for full year 2019, which I shared with the market at the beginning of 2019.

In terms of guidance for our Food Retail segment for 2020, under IFRS 16, we expect to achieve high single-digit growth in revenues and adjusted EBITDA. Slightly improving our adjusted EBITDA margin due to a higher fixed cost dilution and to the maturation of our new formats in our e-commerce platform.

Please turn to Page 11 to review our main highlights of the year for our Pharma segment. Our Pharma segment registered significant EBITDA margin expansion in 2019 due to the annualization of synergies executed throughout 2018 and the operational efficiencies implemented in 2019 as well, despite the fine-tuning of the MDM unit to focus on more profitable business lines. Overall, the strong performance of a year in our Pharma segment has allowed us to continue deleveraging, reaching 2x net debt-to-EBITDA by the end of the year from 4.5x in the first quarter of 2018 post-acquisition of Quicorp. During 2019, we started implementing strategies to accelerate top line growth on the existing footprint, taking advantage of the strong traffic of our stores with the aim of increasing sales and profitability per store. More than 800 Inkafarma stores improved the display of personal care and consumer products with clear signaling of those categories and better product assortment. Additionally, approximately 90 Mifarma stores in higher-end neighborhoods in Lima and provinces incorporated small lines with personal care products, leaving us with a total of approximately 330 stores under the drugs reform, almost all under in the Mifarma brand.

Finally, we started piloting a new store format Mifarma Beauty. We currently have 2 pilot stores in Mall Lima in San Isidro and Miraflores districts. We intend to continue piloting these 2 stores before making a decision to roll additional ones. In terms of e-commerce sales, we continue to regular fast growth with 80% growth in number of monthly transactions in 2019. Our growth was accompanied by improved user experience and reduce delivery times with operation of our dedicated delivery center in Lima for our e-commerce and call center channels. Finally, during 2019, we put additional effort in strengthening the corporate culture of our Pharma segment after the acquisition of Quicorp in 2018. In the MDM unit, we completed the reorganization of our management and commercial teams with a lighter, better aligned and more effective structure. And reinforced a one-company culture to the almost 20,000 employees of the Pharmacies and MDM units. We also feel pleased to comment that InkaPharma ranked 15th among the most valued brands in Peru.

Please turn to Page 12 to review the financial highlights for our Pharma segment.

Our Pharmacies unit registered a slow top line growth of 1.9% in the fourth quarter of 2019, explained by a negative same-store sales of 0.5% and by a low number of store openings in the year, which I will expand on later in the presentation.

In 2019, top line increased 2.2% with a same-store sales growth of 2.6%. Orderly same-store sales in the Pharmacies unit deteriorated in comparison to previous quarters due to a slower consumer demand, which affected both Pharma and non-pharma products. Despite a slower top line growth, gross margin reached 35.7%, 115 basis points above Q4 2018, mainly due to rebate seasonality related to yearly volumes and sales mix as well. Adjusted EBITDA margin for the Pharmacies unit reached 13.8%, positively impacted by increased employee productivity at store level, which forms part of a second-generation synergies we implemented throughout 2019.

In our MDM unit, we reported an 11.7% decrease in revenues, reaching PEN 633 million in the fourth quarter due to a reorganization of the distribution business to focus on more profitable business lines, which we started implementing in 2018 post-acquisition of Quicorp, as commented in previous calls.

However, revenues in the MDM unit slightly picked up in comparison to Q3 2019, due to higher sales to public institutions and to our own retail chains. Gross margin was 13.7% in the fourth quarter, which considers a reclassification of logistic expenses related to the distribution of products from other operating expenses to cost of goods sold, implemented in the fourth quarter of 2018 as per IFRS 15.

Finally, in our MDM unit, adjusted EBITDA margin reached 4.9% in the quarter above Q4 2018, mainly due to the absence of onetime personnel expenses that negatively impacted margins in Q4 2018. All in all, at a consolidated level, despite a continued slowdown in the macroeconomic environment and the construction in the MDM unit during the year, we managed to close full year 2019 with a consolidated adjusted EBITDA of PEN 711 million for our Pharma segment, pretty much in line with the initial guidance of PEN 715 million we gave at the beginning of the year.

In terms of consolidated adjusted EBITDA margin for our Pharma segment, we closed full year 2019 at 10.4%, also in line with the 10% adjusted EBITDA margin we guided at the beginning of the year. The Pharmacies unit achieved an annual adjusted EBITDA margin of 12.1%, aligned to our initial guidance of the — and the MDM unit reached an adjusted EBITDA margin of 3.7%, slightly below the initial guidance of 4%, given the slower revenue growth related to a unit reorganization and the macroeconomic environment, but which we anticipated in our previous quarterly earnings call.

In terms of guidance for full year 2020 under IFRS 16, we expect Pharmacies revenues to progressively recover towards mid-single-digit growth rate due to a higher number of store openings and a reversion of a negative trend of same-store sales, supported by a faster growth in consumer and personal care categories and a better trend in Pharma categories as well, despite a still slow consumption environment. Pharmacies margins should expand more marginally and progressively throughout the year as a recovery in top line growth allows for additional fixed cost dilution at store level. For the MDM unit in 2020, we expect relatively flat revenues and EBITDA versus full year 2019. Given the higher comparison basis of the first half of 2019, when we still distributed business lines that we no longer represent. With that, on a consolidated basis for our Pharma segment, this should translate into a mid-single-digit growth in revenues and adjusted EBITDA for full year 2020 under IFRS 16.

Now please turn to Page 13 to review our main highlights of the year for our Shopping Malls segment. In our Shopping Malls segment, as I already mentioned, we feel very proud of the inauguration of our flagship mall Real Plaza Puruchuco and its high level of secure occupancy of 83% on opening. We expect Puruchuco to contribute with approximately $20 million in EBITDA in 2021. Its second full year of operation as we progressively reach the occupancy rates of the rest of the chain of around 95%. During the year, we also continued to improve our tenant mix and services across our existing malls, which included the incorporation of new tenants to increase our entertainment offering, the renovation of spaces, such as a new facade and banking sector at Real Plaza Primavera and improved food court and restaurant tenant mix at Real Plaza Chiclayo and Arequipa and with increased leisure activities inside our malls such as concerts, arts and crafts and open spaces.

In 2019, Real Plaza, our Shopping Malls brand modernized its brand identity with a new logo and branding, which reinforces our purpose of creating public spaces where all customers should be happy. We also feel pleased to comment that the Real Plaza brand ranked 7th among the most valued brands in Peru. Finally, our Shopping Malls segment was also recognized by its employees, ranking 4th the Great Place to Work Ranking in Peru and 7th in a Great Place to Work Ranking in Latam. During the year, we also continued with sustainability efforts offering, recycling stations across all our malls for tenants and clients and remain active participants in donation campaigns by providing space for a collection of goods.

Now please turn to Page 14 to review the financial highlights of our Shopping Malls segment.

Our Shopping Malls top line growth accelerated to 11.2% in the fourth quarter due to inauguration of Real Plaza Puruchuco in mid-November. In 2019, top line increased 6.7%. Tenant same-store sales growth experienced a lower quarter, registering a 1.6% growth, mainly due to a slower Christmas campaign for some of our department store tenants compared to 2018, which recorded a high single-digit same-store sales growth in December. For full year 2019, same-store sales were 3.3%. Our average occupancy rate maintained high levels of 94%, slightly below the previous quarter due to the inauguration of Real Plaza Puruchuco, which is in the process of maturation. Traffic in our malls platform continued to increase with more than 180 million people visiting Real Plaza Malls in 2019 and an approximate 4% growth with respect to 2018, considering same Shopping Malls.

In terms of margins, our net rental income margin slightly decreased to 79.6% in comparison to Q4 2018, mainly due to the absence of other income associated to insurance reimbursements received last year in the same quarter. We registered an important adjustment of fair value of our investment properties of PEN 157.7 million this quarter compared to PEN 6.6 million in the same period of 2019, explained by the inauguration of Real Plaza Puruchuco and the mark-to-market of other investment properties. In terms of guidance for 2020, under IFRS 16, we expect Shopping Malls revenues and adjusted EBITDA to grow above 15% due to the first full year contribution of Real Plaza Puruchuco and a healthy performance of our other existing malls and experienced a slight expansion in adjusted EBITDA margin versus 2019 due to a higher fixed cost dilution, thanks to Puruchuco.

Now please turn to Page 15. This slide sums up our Food Retail sales area, a number of Pharmacies and Shopping Malls as well as our same-store sales by quarter. In the Food Retail segment, we opened 2 new Plaza Vea stores, 1 Economax and 120 net new Mass stores in the year, adding 34,000 square meters of sales area. In the Pharmacies unit, we opened 30 stores during the year and closed 16 stores, resulting in the net opening of only 14 stores during the year. As I commented in the previous quarter earnings call, we experienced a slowdown of new store openings in 2019, mainly due to having prioritized changes in layout and product displays in a relevant number of stores, a task performed by the same team involved in-store openings. And also to an increase in the average time that it’s taking to obtain permits from authorities for new stores and the higher hurdle rate we established for approving potential new stores to avoid cannibalization of existing ones.

We expect to resume store growth in 2020, which I will comment shortly in the CapEx guidance section. In the Shopping Mall segment, Real Plaza Puruchuco contributed with 136,000 square meters of new GLA, representing a 19% increase over our total GLA base. In terms of same-store sales, on this slide, we can observe the slowdown in our 3 business segments, which translated into low to mid-single-digit growth rates for full year 2019, a trend we expect to reverse early this year.

Please turn to Page 17 to review our consolidated net income results. InRetail registered a gain of PEN 260 million in the fourth quarter of 2019 compared to a gain of PEN 130 million in the same period of 2018, mainly explained by a strong increase in EBITDA, a significant increase in mark-to-market from Real Plaza Puruchuco and lower depreciation and amortization, offset by an increased tax expense. Excluding onetime financial expenses, FX and mark-to-market from the valuation of investment properties, net income for the fourth quarter would have reached PEN 166 million, growing 30.8% versus the adjusted comparable quarter of last year.

Now please turn to Page 18 to discuss our CapEx and cash flow generation. During the fourth quarter of 2019, we invested PEN 263 million in CapEx, totaling PEN 847 million of CapEx in the year for our 3 business segments. Our main CapEx investments for the quarter came from the Shopping Malls segment for the development of Real Plaza Puruchuco from the Food Retail segment, for the expansion of our distribution center and the construction of our Plaza Vea stores. In terms of cash balance, we ended the quarter with PEN 740 million of cash.

Please turn to Page 19 to discuss our consolidated financial debt. As of December 2019, InRetail had a consolidated net debt of PEN 4,488 million with a net debt to adjusted EBITDA ratio of 3.1x, deleveraging from 3.5x at the end of 2018. We maintained a stable 2% exposure of U.S. dollar denominated debt lower than the approximately 20% exposure we had in previous years. For 2020, we expect to continue deleveraging at a consolidated level.

Please turn to Page 20 to review our debt by segment. Supermercados Peruanos, our Food Retail segment, closed the year with a net debt of PEN 1,124 million and with a net debt to adjusted EBITDA ratio of 2.8x, slightly higher than the net debt to adjusted EBITDA ratio from the end of 2018, mainly due to CapEx investments in the expansion of our DC Lima, new store openings and land back. On the other hand, InRetail Pharma ended the year with a net debt of PEN 1,468 million and with a net debt to adjusted EBITDA ratio of 2x, lower than the 2.8x net debt to adjusted EBITDA ratio at the end of 2018. And also significantly lower than the 4.5x net debt to adjusted EBITDA pro forma ratio post-acquisition of Quicorp in Q1 2018. Given the cash flow generation resulting from the good performance of the Pharma segment and its asset-light model, we expect to continue deleveraging in 2020. Finally, InRetail Shopping Malls ended the quarter with a net debt of PEN 1,712 million and a net debt-to-adjusted EBITDA ratio of 5.2x. Slightly above the beginning of the year despite the peak in CapEx investments related to the construction of Puruchuco.

For 2020, we expect the Shopping Malls segment to significantly reduce its net leverage throughout the year as Real Plaza Puruchuco contributes full year to the adjusted EBITDA.

Now please turn to Page 22 for our 3-year CapEx guidance for the period 2020 to 2022. In total, we plan to invest around PEN 2.1 billion in our 3 formats over the next 3 years, in line with our previous 3-year guidance. The Food Retail segment will incur an approximately 55% of our total CapEx budget. For Plaza Vea, we expect to open 2 Plaza Vea stores in 2020, adding 6,900 square meters of sales area and open 2 to 3 new Plaza Vea stores per year in 2021 and 2022. For Economax, we plan to open 1 new Economax store in 2020 and 1 to 2 Economax stores per year in 2021 and 2022, with an average store size of about 3,500 square meters of sales area per store. Finally, for our Mass format, we expect to open 100 new stores and close 40 stores in 2020, with an average store size of 200 square meters of sales area. For 2021 and 2022, we expect to open 100 new stores per year. The Pharma segment will incur an approximately 11% of our total CapEx budget with the opening of 60 new stores per year in 2020, ’21 and ’22. Finally, the Shopping Malls segment will incur an approximately 33% of our CapEx budget, the voting funds for the expansion of our Real Plaza Puruchuco Mall, adding approximately 23,000 square meters of GLA in 2020. Additionally, we will expand 5,000 to 10,000 square meters of GLA in 2021 and 2022, and hopefully, start a new shopping mall development in 2021.

In terms of type of investment, we will spend 66% of our CapEx budget increasing our footprint, 17% in the maintenance of our 3 formats, 10% in logistics and IT and 7% in refurbishing and expansions. We expect the CapEx budget to be evenly spread among the next 3 years at around PEN 700 million per year. This covers our presentation, and now we will be glad to answer any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

I will take our first question from Luis Pardo with Compass Group.

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Luis Adolfo Pardo Figueroa, Compass Group Peru – Co-Portfolio Manager & Head of Research [2]

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Gonzalo and Carlos. Congrats on the very resilient quarter. The world is falling apart, the numbers were very good. Just one quick question on the Pharma IPO clause that Nexus has when you did the Quicorp acquisition and they injected capital. Could you give us more color and what that is, what is going on there and what the plans are, if you have an idea?

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Gonzalo Rosell, InRetail Perú Corp. – CFO [3]

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Thanks for your question, Luis. Indeed, when we announced the acquisition of Quicorp in January 2018, we announced that we executed the M&A transaction with a co-investment of $150 million from a coinvestor, that allow them to own 12.98% of InRetail Pharma, which is a stake they own till to date. The only minority rights they got to participate in that transaction was the right to ask for participation and collaboration to go-to-market through an IPO as of the third anniversary and until the seventh anniversary post announcement of our transaction, and that starts in January 2021.

InRetail doesn’t have any financial obligations with regard to that minority stake other than collaborating with them if they call for the IPO right. For the time being, we don’t have any discussions with them. There’s still no asset potential in our part of business, as you know, mid to long term. And anyway, we as controlling shareholders of InRetail Pharma, we don’t have the intention to get diluted in the eventual case of them calling for their exit through the public markets. So for the time being, we have no discussions. Hopefully, we won’t have them in the foreseeable future, and — anyway from our controlling shareholders stake, we don’t intend to get diluted or dilute our participation in the Pharma business, if they end up going that way.

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Luis Adolfo Pardo Figueroa, Compass Group Peru – Co-Portfolio Manager & Head of Research [4]

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Okay. It makes a lot sense. And congrats on the results again.

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Gonzalo Rosell, InRetail Perú Corp. – CFO [5]

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Thank you for your question.

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Operator [6]

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(Operator Instructions)

Now we’ll take our next question from Nicolas Larrain with JP Morgan.

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Nicolas Larrain, JP Morgan Chase & Co, Research Division – Research Analyst [7]

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I had to — I wanted to see if you had some color on how have you seen trends performing over January and February of this year. Have you seen a market recovery in the customer sentiment? I wanted to get your sense on how things have been shaping up. And also, more on the drug retail business. Do you foresee any issues on supply chain that could stem from the coronavirus outbreak, and sort of this global supply chain theme that could be going around if this thing prolongs?

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Gonzalo Rosell, InRetail Perú Corp. – CFO [8]

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Thanks for your questions, Nicolas. I believe both questions apply to both the business segments. Answering your first one, with regard to color on trends in January and February, we have started to experience a moderate recovery already in the Food Retail segment. So that’s why we feel comfortable with the acceleration, which we should start experiencing since Q1 with regard to same-store sales, top line and EBITDA growth rates.

And in Pharma, we expect to see the recovery more lean towards mid-year and mainly during the second half of the year, during the comparison — given the comparison basis and sales mix as well.

So in general terms, we expect this to be a slightly better year in terms of consumption trends. And for what we have seen so far in January and February, we feel comfortable of that cautious optimism. And with regard to the coronavirus, as you all know, there’s no formal coronavirus case in Peru yet. And evidently, we’re preparing alternative plans in order — not to suffer from any supply chain eventual impacts in our different business segments. Not only in Pharma, but also in the Food Retail business, where we have some non-food categories coming from abroad as well.

And so far, we don’t anticipate any relevant impact to our business segments. We are looking to alternative sourcing from other countries different than China and countries that might be affected in terms of production capacity for — due to the coronavirus. But if things turn up normalizing over the next couple of months, we shouldn’t have any relevant impact in our different businesses. So we’re well covered already for the first half of the year, for the winter campaign in Peru. And if things normalize in terms of production capacity in Asia, in general, over the next couple of months, we shouldn’t have an impact in our summer season — the spring and summer season that starts at the end of the third quarter of the year. So hopefully, things get normalized, and we don’t get any impact in our business segments.

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Operator [9]

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And we’ll take our next question from Alonso Aramburú with BTG.

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Alonso Acuna Aramburú, Banco BTG Pactual S.A., Research Division – Strategist [10]

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Just a couple of questions on Pharmacies. Can you comment on the openings — the store openings that you expect in 2020? It looks, on the conservative side, for the next 3 years, really 60 stores. Is that really more related to the consumption environment? Or do you feel do you have maybe some upside to open more stores? And also in the case of Pharmacies, regarding private labels, do you used to have space to level up the level of private labels of Mifarma relative to InkaFarma?

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Gonzalo Rosell, InRetail Perú Corp. – CFO [11]

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Thank you, Alonso, for 2 questions. With regard to store openings, indeed, we’re, I believe, being somehow conservative in terms of our 60 new stores per year guidance. But mainly even that we missed the guidance during 2019, we don’t want to get there again. We have started seeing a recovery in the opening pace of new stores. We feel comfortable with the 60 — to get to the 60 during 2020, and hopefully, start accelerating again going forward. Now there’s plenty of opportunities to continue opening stores in different areas of Peru, where store density is low. So probably going forward, we’re going to give an update in a guidance increase in that sense. But for now, we want to be cautious and first get to the guidance of 2020. And then as we feel more comfortable with our ability to get there, increase a little bit that guidance.

With regard to private label, we stopped giving specific guidance on penetration of our guaranteed portfolio a while ago. I can give you some color in terms of the gap that there still is between penetrations in Mifarma and InkaFarma. There’s still a gap of slightly more than 5 percentage points between the 2 Pharma chains. So there’s still an opportunity to have room for margin improvement progressively going forward.

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Operator [12]

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(Operator Instructions)

It appears that we have no further questions at this time. And I would like to turn the program back to Mr. Vallejo for any closing remarks.

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Juan Carlos Vallejo Blanco, InRetail Perú Corp. – CEO [13]

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As a final remark, I just wanted to highlight again that 2019 ended up being another good year for InRetail, with a strong double-digit growth in EBITDA and net income. Going forward, in a country of strong macroeconomic stability, we remain optimistic about the ability of our resilient format to continue growing and improving profitability metrics, supported by new sales area and GLA. The full year contribution of Puruchuco, positive same-store sales, our permanent focus on operational efficiencies and productivity and the consolidation of our multi-format and omni-channel strategy.

You have any follow-up questions, please do not hesitate to contact any of us. Thank you all for participating in our fourth quarter earning call.

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Operator [14]

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This does conclude today’s conference. You may disconnect your lines, and have a good day.

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