El Puerto de Liverpool

Good morning, my name is Sofia and I will be your conference operator. All lines have been placed on mute to prevent any background noise. This is Liverpool's third quarter 2025 earnings call. There will be a question and answer session after the speaker's opening remarks and instructions will be given at that time. Today we have with us Mr. Gonzalo Gallegos, Chief Financial Officer, Mr. Jose Antonio Diego, Treasury and Investor Relations Director, and Ms. Nidia Garrido, Investor Relations. They will be discussing the company's performance as per the earnings release for the third quarter 2025 issued yesterday, Tuesday, October 21st. If you did not receive the report, please contact Liverpool's IR department and they will email it to you. Or you can download it at the IR's website. To ensure focused discussion, this call is for investor and analysts only, and we will be taking questions exclusively from them. Any forward-looking statements made during this earnings call are based on information that is currently available. They are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions discussed today. This may be due to a variety of factors, including the risks outlined in El Puerto Liverpool's most recent annual report. Please refer to the disclaimer in the earnings release for guidance on this matter. I will now turn the call over to Mr. Gonzalo Gallegos.

Hello everyone, and thank you for joining us for our third quarter 2025 conference call. Despite ongoing revenue growth, this quarter was once again driven by a combination of significant achievements and challenges. We acknowledge that the economy is growing at a cautious pace, and during this period, customer activity has remained heavily focused on promotions. We remain committed to factors within our control and are confident that our long-term strategy is headed in the right direction. I would like to mention the key achievements during this period. Sustained top line growth, commercial margin showing a positive trend, exploding logistics expenses, inventory levels maintained under control and well positioned for the peak season, and profitable expansion of the credit business. Let's now review our results. In the third quarter, we achieved a consolidated revenue of $48.1 billion, up 4.4% compared to the same period last year. This top-line result reflects the diversified strength of the portfolio, where the financial services segment led with revenue growth of 15.7%. The real estate division also performed strongly, increasing 7.3%. Retail revenue contributed to the result with 2.9% growth. In our commercial business, while some promotional efforts yielded positive results, overall the outcomes were mixed. One of our core events, La Gran Barata, delivered positive results, particularly at the start and closing, effectively clearing all inventory and setting the stage for margin improvement throughout the rest of the year. In contrast, the back-to-school promotion faced headwinds. encountering a challenging environment marked by ongoing customer caution. The mid-season sale delivered mixed results, but reaffirmed the success of our inventory clearance efforts. Throughout the quarter, the most successful categories were sporting shoes, mattresses, home appliances, and cosmetics. A part across the board was somewhat below expectation. Despite the continued headwinds in the Mexican retail landscape, Overall revenue achieved a 2.9% growth. By banner, Liverpool achieved 1.9% same-store sales growth, a performance primarily driven by an increase in average ticket value. On the other hand, suburbia's same-store sales increased by 4%, driven by a strong result during our Gran Venta de Liquidación in July and August, as well as throughout our Back to School campaign in August. Turning to margin, the consolidated retail margin excluding logistics was down approximately 100 basis points year over year. As previously indicated, despite this contraction, the trend is positive, especially considering that in the first half of the year, the margin had contracted by over 200 basis points. While we continue to engage in strong promotional activity to stimulate consumption and manage inventory levels, this improvement indicates a move toward a less aggressive promotions environment, a more favorable exchange rate, and a more prudent inventory management. Return margin, including logistics, was 31%, representing a 223 basis point decline. This contraction reflects not only the margin pressure, but also one-time logistics expenses and overall increased logistics costs, which temporarily impact the result. For further perspective, quarterly results include approximately 299 million in one-time expenses related to the transition to our new Arco Norte softline facility. The successful migration of the most complex portions of the operation, accounting for approximately three quarters of total, to the new site is now complete. We expect to transition the remaining parts of the operation over the next few months. Inventory health remains a key strategic priority. In the third quarter, we continued making progress in reducing overall inventory, which now reflects a 15.8% increase compared to last year. This increase is consistent across our two banners, both growing at approximately the same rate. Although these levels are higher than overall sales growth, we are satisfied with the reduction of inventory, particularly in suburbia, and the current obsolescence levels. Our inventory position ensures we are well prepared to meet the merchandise needs for the peak season. The strength of our unified commerce strategy is reflected in the performance of our digital channels, which continue to grow. Total GMB increased by 22% year-over-year. This growth was broad-based. Liverpool achieved a digital share of 28%, an increase of 3.4 percentage points, with its Pocket App user base growing almost 13%. Suburbia experienced significant growth, with GMB increasing by 35%, resulting in the digital share rising to 6.9%, a 158 basis point expansion. and the app user base expanding by nearly 14%. In Marketplace, we achieved a robust sequential GMB increase of 28% year-over-year. This growth highlights our successful efforts to expand the platform's reach and to better align with our core offerings, partially driven by a 36% increase in SKUs and an 18% rise in active sellers. We are encouraged by these results as they confirm the inflection point we identified in the second quarter and we remain committed to sustaining this positive momentum. Our focus on customer convenience has resulted in click and collect orders accounting for 40% of Liverpool orders, representing a 57 basis point increase in participation compared to the previous year. Furthermore, the speed of delivery also remains strong. 51% of Liverpool digital orders were delivered within 48 hours, a similar share to last year. The availability of merchandise at the store closest to the customer's home has enabled us to offer seamless options, with same-store pick-up and direct-to-home shipments reaching 38%. This highlights our ability to efficiently serve customers through local inventory accessibility. The financial services segment continues to showcase its strength, reporting a strong revenue increase of 15.7% year-over-year. This performance was primarily fueled by a 13.3% expansion in the credit portfolio, as well as a 6.5% increase in credit customers, which now reach 8.2 million. The segment also benefited from higher card utilization. Our own payment methods increased 200 basis points in Liverpool to 51% and 240 basis points in Swabia to over 35%. Additionally, Ofos purchases contributed to overall portfolio growth, increasing by 11%. Turning to credit quality, the non-performing loan rate closed the quarter at 4.4%, representing an increase of 34 basis points compared to last year. This movement is in line with our projections as it reflects our deliberate strategy of gradual risk expansion. We continue to adopt a conservative stance this quarter, increasing our general coverage index by 63 basis points to 10.7% of the gross portfolio. Our bad debt reserve remains solid, representing 2.4 times the NPL balance, reinforcing the strength of our position against potential asset quality deterioration. This prudence resulted in a credit loss provision of $1.3 billion, a 30% increase, which was driven by portfolio growth, the slight rise in NPLs, and the more conservative coverage approach. To note, despite the higher reserves, the profit impact was offset by increased financial segment revenue, preserving our overall profitability margins. Based on our year-to-date results, we anticipate that credit loss provisions for the full year 2025 will be at the higher end of the previously communicated range of 30% to 35% compared to 2024. This figure does not change our year-end NPL outlook, and we expect revenue growth will continue to offset the higher level of reserves. Our real estate division continues to perform strongly, with revenue growing by 7.3%. This growth was fueled by improvement in lease spreads and the reactivation of operations at Galerías Acapulco, which was impacted by Hurricane Otis last year. Additionally, early revenue contributions from the major Galerías Metepec expansion began to materialize. Customer traffic also reflected a positive trend, with parking revenues rising as 3.9 million cars visited our shopping centers during the quarter, up 1.4% compared to the previous year. The quarter's overall profitability picture reflects a gross margin contraction of 110 basis points. This result was led by a reduction in retail margin, although it was partially mitigated by the stronger contribution from the financial services segment's profitability. In Q3, operating expenses increased by 11.5%. We continue to manage the persistent impact of minimum wage adjustments on both internal payroll and external labor-intensive services. Furthermore, the required increase in bad debt provisions, aligned with our planned growth in the credit portfolio, was a key factor contributing to the overall rise in expenses. Given the points covered, EBITDA stood at $6.4 billion, representing a 14.8% decrease from the prior year. This resulted in an EBITDA margin of 13.3%, a contraction of 300 basis points compared to last year. Based on our year-to-date results, we are adjusting our expected EBITDA margin for the full year 2025 to a revised range of 15.5% to 16.0%. For the May-July quarter, Nordstrom's total net sales grew by 5%. The adjusted EBITDA margin contracted by 10 basis points, reaching 9.9%. Net income for the period was $129 million. For Q3, Liverpool's interest in Nordstrom reflects a contribution of 1.1 billion pesos. We continue reviewing the acquisition accounting entries under IFRS 3 and now expect to recognize the full effect of these entries along with our share of acquisition related expenses in Q4. Based on preliminary estimates of the fair value of assets acquired and other standard accounting adjustments in such transactions, we anticipate absorbing approximately $150 million in 2025. Since these are non-cash items, these adjustments do not represent a material change to the expected profitability of this investment. We have also reviewed our forecast for 2025 dividends from Nordstrom, and we now expect to receive approximately $9 million during the remainder of the year. We anticipate returning to the pre-acquisition dividend per share level in 2026. Additionally, during August and September, Nordstrom Inc. distributed dividends amounting to approximately $376 million to its parent company, which in turn repaid in full a loan issued by a subsidiary of Liverpool at the transaction closing. As of September 30, the cash associated with this operation is reflected in Liverpool's books. In terms of non-operating items, higher financial expenses resulted from the $1 billion bond offering completed in January, as well as a reduction in our cash position due to the Nordstrom transaction. This negative effect was offset by the previously mentioned $1.1 billion positive contribution from our participation in Nordstrom. The bottom line result shows a consolidated net profit after tax of $4 billion, representing a 10.5% reduction year over year. Turning to CAPEX, our cumulative investment reached $6.7 billion, a 19% decrease compared to 2024. This decline is mainly due to the previous year acquisition of the Altama Tampico Shopping Mall. Our investment program has been primarily directed toward modernizing our logistics infrastructure and executing renovations across our existing store footprint. Operating cash flow resulted in a positive $4.3 billion. Our balance sheet demonstrates sustained financial strength, concluding the quarter with $10.1 billion in available cash and a robust leverage of 0.8 times net debt to EBITDA. Now let me provide a brief update on some of our most important projects. In our new subline logistics facility at ARCO Norte, the migration of the most complex portions of the operation, approximately three quarters of the total operation, to the new site is now complete. The migration of Crossock local suppliers has been finalized, with all sorters and equipment now functioning as expected. In the coming months, we will finalize the remaining capabilities tune-up and transfer all important merchandise and a few other operations to the new facility, virtually completing the overall migration process. For reference, our former distribution center in Tutitlan will continue operating as a last mile hub for the north of Mexico City. This year marks the 100th anniversary of our credit business, making us pioneers of the formal credit cards in Mexico since 1925. Over the years, our offerings have expanded to include insurance and investment funds, reflecting Liverpool's resilience and our customers' loyalty. I thank our dedicated teams for their ongoing commitment and our customers for choosing Liverpool's cards as their preferred payment method, allowing us to celebrate a century together. To honor this milestone, we introduced a special commemorative card featuring our historic store in downtown Mexico City. The Financial Services Division remains a vital part of our ecosystem, significantly contributing to our financial performance. On August 21st, we marked an important milestone with the inauguration of the Galerías Metepec expansion. effectively doubling the property's footprint to nearly 98,000 square meters and positioning it as one of the largest malls in Mexico. This $2.8 billion investment not only secures one of our largest assets, but also reinforces our commitment to the economic and social development of the community, projected to attract 20 million visitors per year. This quarter, we celebrated the 45th anniversary of Perisur, one of our group's first shopping centers and an iconic destination in Mexico City. Over the years, it has welcomed more than 200 million visitors across three generations, underscoring the long-term value and ongoing market relevance of our assets. We remain committed to continuously enhancing Perisur and creating unparalleled shopping destinations. we expanded our partnership with the Walt Disney Company to open stand-alone Disney stores in Mexico. We launched the first two Disney store boutiques in Latin America, located in Paris Sur and Galerías Metepec. This move strengthens Liverpool's strategy and will complement the existing Disney corners within our stores by introducing items exclusive to Disney parks and a more extensive Star Wars lineup. This quarter, we have seven new Liverpool Express units, increasing the total number of these high-efficiency locations to 59. We opened seven live store boutiques across Mexico City, Estado de Mexico, Querétaro, Yucatán, and Tabasco. Live store function as a tech hub, offering the complete Apple product catalog backed by high-quality service from certified tech support. We are actively strengthening our commercial portfolio by integrating Fabletics into our ecosystem through a rapid rollout of four new stores. This move capitalizes on the high-growth athletic category by offering unique world-class fashion to the Mexican market. We are pleased to announce that we have successfully concluded the proceedings related to the end of our strategic alliance with BYD. Thank you for your continued support as we move forward. Regarding credit agencies, on August 11, Standard & Poor's reaffirmed Liverpool's rating at BBB for foreign currency, maintaining a stable outlook. On October 15, S&P also reaffirmed the company's rating on its national scale at MXAAA, MXA1+, with a stable outlook. With respect to rankings, Liverpool made notable progress in Expansion Magazine's Empresas Responsables 2025 ranking, ranking 53rd overall. The biggest leap was in the social component, rising from 79th to 17th place, validating our investment in people and policies. This underscores how a focus on social impact supports sustainability and performance. Finally, Liverpool has continuously ranked in the top 10 of Merco Empresas Mexico from 2020 to 2025, highlighting strong market perception. In 2025, it secured 9th place out of 200 companies, reaffirming the effectiveness of our long-term strategy and our strong position in the Mexican business landscape. As we wrap up, our focus is now on executing for the fourth quarter. This involves sustaining strong top-line growth, furthering improvement on commercial margins, executing a strategic promotional calendar, leveraging a healthy inventory position, and driving profitable expansion in our credit business. The ongoing evolution of our unified commerce strategy, combining digital acceleration, fulfillment efficiency, and our expanded store footprint remains a key driver of our future success. We appreciate your engagement and time this morning. With that, we have concluded our formal remarks and are now ready to take your questions.

We will now conduct a Q&A session. If you would like to ask a question, please press the raise your hand button located at the bottom of the screen. If you are connected via telephone, please dial star nine. We remind you that all lines have been placed on mute. When it is your turn to ask a question, you will be unmuted. If you have placed yourself on mute, you will need to unmute yourself to ask your question. Our first question comes from the line of Axel Giesecke. Please state your company name and ask your question.