Earnings Call: Q1 2019

Apr 24, 2019

Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to Via Varejo conference call to discuss the results for the first quarter of 2019. This event is also being broadcasted via webcast, which can be accessed at www. Beavaresu.com.brir with the respective presentation. The slide selection will be managed by you. There will be a replay facility for this call on the website. We would like to inform you that the company's press release is also available at its IR website. This event is being recorded and all participants will be in a listen only mode during the company's presentation. After Via Varejo's remarks, our completed, we will initiate the Q And A session when further information will be provided. In case any of you need assistance during this call, please press star 0 to reach the operator. Before proceeding, we would like to let you know that forward looking statements made during this conference call are based on the beliefs and assumptions of Via Varejo's management and on information currently available to the company. Forward looking statements are not a guarantee of performance as they involve risks, uncertainties and assumptions because they are related to future events, and therefore, they circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Via Varejo and therefore could lead to results that differ materially from those expressed in such forward looking statements. Now I would like to turn the floor to Mr. Peter S. Simon to you of the company. Mr. Peter Esterman, you may proceed, sir. Thank you very much. And we do apologize for the technical inconvenience. And I would like to start by welcoming you to our earnings release call. I would like to start by highlighting some of the to these strategic pillars that we talked to you about earlier this year. The first topic refers to improvements in our top line, based on a commercial strategy, also marketing and category management, which has been more efficient. And I'll give you some highlights in a moment. The second pillar involves the improvement of our operating efficiency. You may recall that last year and early this year, our operating stability was quite improved, both in on brick and mortar and online operations. And the 3rd pillar refers to cost adjustment that would not have an impact on sales or even in the service level rendered to our customers. Now looking at our commercial strategy, I would like to say that all of the actions that have been defined earlier this year are being implemented according to plan. And in our brick and mortar stores, we already engaged in a process of fine tuning of the strategy. And when I refer to fine tuning, I mean to say that in April, we are implementing a well structured, regionalized plan that will help us to leverage our margins further. We also have a better competitive position in the market. This month. Also, we started operating with our category management focused in some categories that help us both in terms of customer traffic and margin improve then I would like to emphasize our furniture management approach. And you know that we do have Bakeda, which gives us a competitive edge. Our position is such as being the most important retailer in that category in the country, would also like to highlight that our planning to increase the share of this category in the company's total sales is something that has been happening according to plan. And this month of April, we began having some participation in the sales of furniture, in the total sales of Via Varejo at levels that were very similar to those that we had in 2017 when we experienced a significant recovery. And this is a category that has an important to expedite all of the initiatives that are being deployed at the moment and our expectation is very positive in the second quarter vis a vis the activities that I just mentioned. As an example, also, I would like to mention our more earmarked focus in terms of the management of our electronics and home appliance equipment because they generate more traffic in the store and more attractive margins. In April, we already experienced a very significant increase coming from that category. And we continue focusing on our white line category and telephony. Telephony is that category that will merit special attention still in the second quarter because we are still going through the adjustment phase, which will allow us to get better adjusted to the fact that we do not have the Laidu Bank anymore. And this is an important category, both online and in the brick and mortar stores. Another aspect that I would like to highlight in keeping with our commercial strategy is that as of now, we begin paying more attention to the fact that we want to add more categories to our base, especially those categories that not only will add more revenue but it will add revenue with a more positive margin. In term, this is what we have for operating efficiency. We been operating in brick and mortar stores as of March 15 with a better operating efficiency, which are at the same levels as in the at the end of 2017 early 'eighteen because at the time, we had to deal with the integration issues. But now I can certainly tell you that the brick and mortar operating efficiency is no longer a concern of ours in this quarter. Another important point that is no longer a matter of concern is the stock out. I think stock out means that we always have further improvements to make both online and in brick and mortar stores, but we reached a certain level today that this no longer affects our sales performance. And so this quarter, our inventory is much better adjusted and much better balanced and is more suitable to fit our offering strategy and commercial strategy. As for the online operations, as I mentioned earlier, this year, We still have more room for improvement in this quarter. The 1st quarter had important developments, but we are not yet operating at an adequate stability level in our view. But I believe that the positive message is that in the last weeks, we were able to see that our operating levels are much better and very good or much better than what we had in the beginning of the year. For this quarter, there is still other adjustments in progress. And some some are still in place, but we hope that by the end of May, we will be able to cover the aspects that are still pending. In June, we still have some additions to make. I would like to remind you that on 30th, we will then have the total integration of our online and brick and mortar platforms. And with that, a series of small adjustments that are still necessary will will be in place. So in the third quarter for the online business, we will be operating at a different level when compared to the levels of the last quarter 1st quarter of this year. Therefore, we are very positive in terms of the performance of this operation. We are well structured. We keep weekly tracks those all of the activities that are being implemented. And all in all, we were able to execute according to plan. In regards to operating instability, I must say that in the brick and mortar world, things are well in place and adjusted. And in terms of the online business, as I said earlier, this year, on 3rd quarter, we should see different figures when compared to the levels of the past. Another aspect I would like to mention related to SG And A or general expenses, our plan towards cost reductions. I think you may recall that we said that we will focus on cutting expenses. That would not impact our sales or would have no impact on customer experience. So all of the initiatives that we had mapped out for the 1st, half first quarter or mapped. And we are already seeing the results in this first quarter. We still have some more has been really good. Therefore, we are the G and A SG and A of the company is something that will bring very positive results. I would also like to emphasize to you that we continue focusing on our expansion plan for brick and mortar stores. We see a great growth potential. And this certainly reinforces our strategy because this year, we plan to open 80 new Storris, the 0 loan. And our schedule of new openings is following the schedule that we presented to you earlier on. I would also like to emphasize our strong growth in the last half year and in this first quarter. So we are at moving at the same pace of our business. And this improvement is mostly based on the fact that our new platform begins to work and operate at different levels when compared to what we had in our old platform. We made several adjustments in processes. And we also adjusted our relationship with our sellers. Therefore, marketplace, has been a very positive thing for our company. We started at the end of last year, but it is gaining momentum more recently. And to conclude, I would like to to say that our guidance for 2019 is still in place. And just as a reminder, we anticipate 2 percentage points of growth above inflation on our top line. And we also intend to grow online GMV between 15% to 20%. We worked very diligently in the past 3 weeks. And all of our team and everybody knows that this involves a major challenge, but this is a commitment that we firmly believe that we will meet the numbers, and this is all focused on continuous improvement quarter on quarter. Another guidance that we usually give you refers to EBITDA, according to IFRS 16, which is higher than 6% and CapEx between BRL550600 1,000,000. Some of the other guidances are still the same. I would just like to say that the investment guidance steel needs to be approved by our board, and this is something that should happen in the next coming days. And we firmly believe that we will be able to maintain the guidance. Well, I repeat, we know that the execution challenge is enormous. Now I'll give the floor to Filipenegro, our CFO, who will give you more details about our results. Good afternoon, everyone. Thank you very much for participating. Let's look at the results for the first quarter 2019 on Slide number 4. In the first quarter 2019, we reduced our consolidated growth revenue by 1.6%, reaching BRL 7,400,000,000. In Brick and mortar stores, we posted gross revenue growth of 0.3%. Online, gross revenue was down by 7%. Net income was still impacted by the end of May Duques, brick and mortar stores, growth, stems from all of the points already mentioned by Peter, and most of the problems have already been solved during the quarter. In regards to online as we anticipated before, we still need 1 quarter in order to have a for adequate operation, but this quarter ended better than it began on Slide 5. Invoice GMV grew by 1.7%, mostly impacted by 3P growth, which grew by 63%. The higher share of mobile phones impacted Click and Collect which reached 27.3 percent. And quick and collect remains a very strategic approach for approach for Via Varejo because it allows us to serve our customers better to have a better logistic cost and there is also the possibility of upsell and cross sell of both products and financial services which are all very important to our profitability line. We have about 7000 click and select points POSs, including stores, post offices and gas stations. On Slide 6, the end of Laidu Bank, and more and higher commercial, aggressiveness, better CDC rates in 2018, led us to partial reduction of 1.5 basis points, reaching 27.6 percent, 5.6 basis points. We had important expenses gains like, PDA, legal expenses and expenses with personnel. And As a percentage of net income, there was a reduction of 400 basis points reaching 20.3%. We still have several projects in the pipeline to increase the efficiency of the company with no impact to sales or customer experience. Some of them like the negotiation of MDF rates have been concluded at the end of the quarter. And as a consequence of this effort in the IFRS 16 that treats rent by depreciation and financial results, Our adjusted EBITDA margin reached 8.2 percent, much higher than what we posted the previous quarter. If we look at the same thing post last year, the adjusted EBITDA would be 9.7% higher than 1.4% in the last quarter of 2018. Slide 7. Here, we have the net financial result, which was 4.1% of net income. Also impacted by IRFS 16. During the period, the company posted losses of BRL 49,000,000. Slide 8. The company has a very sound cash position with net cash of BRL 2,200,000,000. And now I conclude my comments, and I open the session for Q And A. Now we initiate the Q And A session. I would like to ask you to please ask all your questions at once and wait for the response Ms. Olivia Petronelli from JPMorgan has the first question. Afternoon, everyone, and thank you for taking my question. I have two questions. They are more related to the risk restructuring of the company and what will happen in 2019. During the first quarter, the sales evolution during the first 3 months of the year. Maybe we could say that when we look at same store sales and growth as a whole in March, I think that the levels are better than earlier on in the quarter. And in terms of the commercial margins of brick and mortar, I think that we still have to do some more work, we had changes in late domain. But when we look at that 30% rule, how much do you think we would have by the end of the month as we don't have that commercial impact anymore. Thank you for your question. In terms of your first point about About same store sales. In March that we already posted some improvement and we see some evolution. And as I've been saying, this evolution, this improvement will be gradual, but consistent at the same time. We believe that By second quarter, we will have an improved same store sales when compared to the results of the first quarter. Now in relation to your second question, the margin adjustment, as I said, in Q2 will come not only based on the aspects related to Laidu Bank, Well, they they had an important impact because telephony, as you know, has a big share in online and brick and mortar. We there are other aspects, as I said, but we are now putting more focus in other categories that at also have improved margins like furniture and apply home appliances in I know that this will help us a lot in the second Q. So margin recovery will come based on other leverages, not only based on the fact that Mr. Richard from Bradesco has the following question. I have two questions about e Commerce. I just want to have a better understanding about that difference between 1P and 3P. 3P performed quite well, but there was a drop in, 1P. I just want to understand whether this reflects a change in the category or there was something in the 1P platform that is still more challenging. And the second question about e commerce is that I want to understand a bit more about your next step. You said something about the systems that will be more integrated by theendofJune. But are there other things that also that will also have an impact like pricing and other you clearly mentioned something that it still matters today and that refers to the platform because you know that throughout last year, we changed our marketplace platform. We made several adjustments during the second half of the year. And so today, the form operates at a much better level when compared to the old platform. Not only that, we review some of our processes And also, we changed the way we hire sellers. And therefore, today, we have a better relationship with sellers. We can bring them on board our platform and the relationship with them improved substantially. Therefore, I think it's a combination of things involving improvements in the platform, improvements in processes and better management of sellers. And all of that combined can give us much better results. And as I said before, the 1P platform, there are still some necessary adjustments to be made in terms of the operating adjustments. And we will promote the integration of our online and brick and mortar systems until the end of June. And with that, we will be able to eliminate the impacts and be able to make further improvements in the online platform. The expectation is that 1P should also, post a significant improvement in the third quarter reinstated that in Q2, In terms of operating stability, we will be operating at a much better level when compared to what we had early this year. We still have challenges to cope with online. We have the challenge towards making adjustments in competitiveness, in price competitiveness. And we already started looking at that very, very focused in April. Mr. Gustavo Olivero from UBS has the next question. Hi, Peter. Thank you for taking my question. Still related to gross margin. I would like to understand your credit and service evolution. These are products with higher margins. And you also said that your sales were not so good in the first quarter. But I think that credit and service is something that has been stagnated for over a year So what do you intend to do along these lines? Let us begin talking about the easiest part. Credit is evolving significantly. In Q1, in Q1 in CVC, our share increased greatly vis a vis the previous quarter. And we also continued our platform. You may recall that the credit platform by the end of last year was very and stable, and now it's fully stable again. There is an impact not only of the stability of the platform, but also initiatives that were made. In the operation in terms of bringing more proposals to the negotiation table. For CDC and also the efficiency of the credit platform. So there was a very positive impact. In other words, CDC is improving. As for financial services, there was a negative impact in Q1. And this impact is pretty much related, not only to operating efficiency, We have a very similar performance to what we had in the past. However, the category mix also had a significant impact on service efficiency in Q1. So it's nearly 100% related to the category mix. As you know, penetration of financial services in some category is different from the rest. We don't get into this level of detail in this call. But rest assured that the drop we saw in Financial Services in Q1 is related to product mix. So you are related to extended warranty basically? Philippi speaking. Like Peter said, and I confirm what he said, mobile, for instance, had a drop in share. And also insurance of theft and damage to mobile, which is also important to improve the place as well. There is a reduction in the share of services, but only owing to the mix. Today, in the industry. When it comes to service penetration, we are the best in the industry. We are a benchmark in the industry. So this change in the share It started back in 2016. Year over year, we are increasing our profitability Last year, we had a record income, and we are improving a lot compared to the record last year. If we think about the bottom line of the company, think about the money in terms of profit and money to the company. It is true there was an impact on gross margin. One of the things we did last year was the good down on credit. So in terms of gross sales revenue, whatever I got in credit last year, now we have lower increase this year. And that's why there is an impact on gross sales revenue, but that's very positive to the company. And once again, in the current quarter, we have the best CVC result in the track record of the company. There's reduction in gross sales revenue, but it's more than offset in PDA and financial and collection. As revenue and if we think about our share of CDC, it has increased. This higher share will bring results in the coming years. Based on previous experience, if we think about our current portfolio, we have models like no other bank. This is knowledge, our own expertise about these customers. As for new cases, It's right. We could improve our credit assignment operations, and we've been working hard in recent years. And our after pilot studies We managed to have a new credit model, and we also have the approval rate, which increased to our customers. And this will bring positive results down the road. And this is why one of the reasons why we have a higher share of CDC. In addition to stores, which also had an improvement in CDC. So we're better positioned in CDC overall speaking, and we are very optimistic about the future Thank you, Peter. Thank you, Felipe. My first question is a follow on to Richard's question. I would like to better understand the integration online offline plan to the end of June. Is it going to start at full speed? So by theendofJune, you'll be able to run all the DCs with these operations and everything that we mentioned before in terms of gains of synergy in both operations. In addition, I would like to have more color about brick and mortars operations that are pretty more stable starting mid March. So could you give us more color? About to what extent it has improved. It would be really helpful. Thank you. First point about integration of onlineoffline. Let me mention 2 core aspects. This integration that will perform by the end of June has 2 important parts. The first part is the capital integration. Capital integration, and it's immediately after the integration of the platforms. Then we have the operational integration. This integration will also happen immediately after June 30. It will start on July 1st, but it will also take adjustments to our own operations so we can really deliver 100% of the fully integrated operation. It doesn't happen overnight. It still takes further adjustments, but it's important to say that the capital integration should happen. This is the core point. It has to be 100% operational so the capital Integration happens involving inventories as well at the company level. And like I said, we have very much on schedule. And as we speak, we don't see any red lights with regards to any initiatives about this integration, but I repeat, integration of systems in a company as big as ours has to be followed up until the very last day. But up to now, everything is very positive. So the answer is yes. Full integration on the 30s. But in order to have all the initiatives of omnichannel, potential operations, it will take a lot of lesser to learn an adjustment in the second half of the year. We started at a very different level with peer manual interference compared to Brinken Motors. Brick and mortar stores. When it comes to integration of brick and mortar stores and also their performance, and our expectations for the second and third quarters. Everything is pretty much in line with our expectations. We have already eliminated, so to speak, important aspects related to operational instability. And we also brought to an end all the problems related to the stock and we are fine tuning our commercial strategy. The whole sales force is fully in line with our strategy. Therefore, we have to deliver better results coming forward. Tobias Stinglin, Citibank has a question. With regards to integration, online, offline. If we think about gains, potential gains to have anything to share with us or a curve of these gains, you mentioned that there is a capital aspect, tax aspect, maybe it's easier to reach. As for operations, it's only natural to expect a transition a challenging transition. Is there anything you might disclose about this? 2nd point, now about SG And A more specific I think we had a very great job here. Could you assume this is recurrent, not an one off event that will never happen again? The $108,000,000 for instance is off the account. I can't presume and assume it is one off. So I want to know about integration gains and then recurrent SG and A or not. And finally, if I may, a last question. If I think about the breakdown onlineoffline, when you think about net sales revenue, there is a significant drop online, more than 30% quarter over quarter, which is very different compared to gross sales revenue. Is it related to tax? Could you give us more color? Thank you, Tobias. Let me begin by addressing SG And A. You are right in your assumption. Excluding this one off event, which we had in the first quarter, it is a recurrent result actions implemented, and that will be recurrent in the future. No risk of not capturing it. SG and A is on the right track. As for integration. The main benefits and advantages that we'll reap spamming from the total integration of the platform is related to score take up. It will be fully integrated, and then we can expedite and accelerate store pickup. As for inventory management, today, it is common, but not systemic. So we still have some work to do. And at the end of the day, We need to transfer inventories between units. Sometimes it is challenging and it does bring stock out online. But that will come to an end immediately after the integration. Another key asset, we don't immediately capture right off of the integration. But it will move faster. It is the possibility of customers buying online and returning in brick and mortar stores. It still takes some processes and training. We are already working on this, and this will allow us to reap the results in a couple of months, not immediately after the integration. So everything related to Modi channel, everything related to Saltica, inventory management, all aspects related to category management and purchase of products everything will flow better and be faster. So the main impact as I see it lies in a more convenient channel management in our daily operations. So basically, it has a positive impact on sales on GMV and sales in general. Another point is that will be fully integrated when we refer to inventory, for instance, we can accelerate the long tail in Brick and mortar stores. Which is something we've been working on for a while. Today in Via mice, all systemic problems related to this are set. Fixed now. And now that we can deliver all inventories, we can be more agile and also bring more visibility for brick and mortar stores in order to manage online inventory. Philippe is going to Let me just add 2 things about SG And A. Except for 1 off events, the rest of recurring. We might have other one off events further down the road and other initiatives as well. We're still working on new initiatives to lower SG And A. We always have agreements with a fixed term with acquirers. Terminated in late March and then we had a big and a bid and had a very good reduction In Q1, there was a small impact because it was only a couple of days. But starting the next quarter, Q2, we began to see a positive impact on as G and A and a couple of other things as well so we can improve the picture. As for the integration, in addition to what Peter mentioned, without a key S about the core of the business. There are another 2 aspects. And financially speaking, they also have an impact One of them is tax monetization, once I integrate Cinnova with Via Varejo, in Via Varejo, I can have faster monetization, particularly these coffins, because Via Varejo has higher payment of fees and co things, and our credit would come to an end fast in a couple of months. And see nova takes all the credit we can use. As for personnel, expenses, administrative matters, we still have to include it in the systems. And at the end of the day, there'll be big gains. We're not only talking about managers, but also analysts, people who make less money, but they also imply some gains. Therefore invoicing, if we think about the integration for June 30, we are transferring more We have accounting methods. We have the origin and Cinnova, but using Via Varejo's inventory and invoicing eventually migrated into Via Varejo, and that's why you lower accounting invoicing at Cinnober and transfer to Via Varejo as a result. So this is the main impact we see in invoicing. You mentioned that considering the magnitude and the size of the company, it is not easy at all to work on integrations. We saw that last year, If I understood you correctly, online off line, if you consider all the projects you have now, and whatever you're monitoring. Do you think it will be tough to see something or hard to see something that will impair the operation. So what is the risk? I assume the risk will be lower. Every Monday, we spend 1 hour a half at least discussing all the abilities of systems integration and operational stability. When it comes to monitoring health and level of detail about these products, We are really, really keen on this. What I can tell you right now, absolutely certain right now As we speak, there is no risk mapped, which might affect any kind any type of operations in the company. This morning, we had a special meeting especially to talk about integrations and the performance of the systems platform. The system is very much focused. And I repeat, the confidence level is very high in the sense that we won't face any problems. And once again, we'll keep on monitoring We keep on monitoring it very closely. And obviously, if any rep light turns up, we will have to move our direction. But as we speak, I don't see anything that could change our plan. Wonderful. Thank you. Just one last question. You already answered about sales that the trend would be better now But at the same time, if you think about the macro view, it is not so stable. What about traffic? What is your feeling right now? Tough question, Tobias. Once again, we are bullish by nature. So we always try to think about the positive aspect of everything that happens. Like I said in the beginning, We'll always discuss our planning for the year. We assess every risk in terms of sales margin expenses. And it's come to the conclusion that now that we have additional initiatives, we can stick to our guidance, and there is an assumption in this scenario, macroeconomics in the country could be at least equivalent to what we see today. We are not working with a worse than macroeconomic scenario right now, Tobias. Great. Thank you again. Good afternoon. Thank you for taking my questions. My first question has to do with improved working capital for stockers. I believe this is something you consider to be recurrent, but I would just like to confirm it. On the other hand, we have accounts payable with a worse performance. To what extent is it related to specific deals and negotiations during the quarter? Or is there any other factor that we could what we should keep an eye on. What is the outlook in the future? And secondly, can you bring down this pressure in gross sales margin? And big lines considering all the drivers that you mentioned in today's call and also in the release. Lima, good afternoon. Felipe is speaking, answering your first question about working capital. I'd just like to recall that we started to increase our inventory levels slightly. We're just moving away from the crisis at that time. And we began to see better sales. Was part of it that we were afraid of, stock out any in the last quarter, we had a huge inventory drop. We believe today at least in the mid and long term, our inventory coverage is adequate Once you have the integration of Cinnova, etcetera, we expect to have seasonal items, but maybe for the second half of the year or next year. Today, we consider it to be a recurring inventory level as for accounts payable nothing has changed. The same terms, maybe just a slight effect from agendas when you do the purchase. That's why there was this nonrecurring increase. But short term, we don't expect to see any change whatsoever in terms of payment terms we are sticking to the same terms with suppliers, the same that we had last year, but no striking differences. The difference that was here is really owing to the procurement agenda, if you buy in January or in March. There is a very significant impact when we see the picture on March 31. As for gross sales margins, If you think about the impact, May Du Bay about 2.4%. That's the impact on gross margins. Competitiveness is another 1, 2.6% and services 0.6%. So that's about it. These are the main numbers so we can do the math. Thank you. This concludes the question and answer session. We'd like to give the floor back to the company's management for the final remarks. I would just like to close by saying that we are very confident about the performance of our results. In a sequential and consistent manner in future quarters so we can deliver the guidance that we disclosed to you. We are cognizant of the challenge ahead and also our need to have impeccable performance particularly over the next 90 days Our confidence is based on action plans that are crystal clear and very concrete. And we are constantly following up every week at the company. Like I said in the beginning, when I answer Tobias question, it's only natural that it all depends on the macroeconomic scenario. We are considering that the macro scenario will be stable. We are not considering a worst macroeconomic scenario in future funds. I would also like to highlight that Via Varejo's team is fully engaged. With these initiatives and also all the challenges in the future and I'm personally very confident that we will deliver the results that we promised to you. Thank you very much. This concludes Via Varejo's earnings conference call. Investor Relations department is at your service for any additional