Earnings Call: Q1 2018

Apr 26, 2018

Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to Via Paris's conference call to discuss the first quarter of 2018 results. This event is being broadcast via webcast and can be accessed that www.viavaresu.com.brinvestorrelations. Or you will find the respective presentation as well as the slide selection will be managed by you. There will be a replay facility for this call. On the website after it is over. We inform you that the company's press release about the company's result is also available at its IR website. This event is being recorded and all participants are being listen only mode during the company's presentation. Afterwards, We will have a question and answer session when further instructions will be given. Before proceeding, would like to mention that forward looking statements that might be made during this call in relation to Via Varejo's business perspectives operating and financial targets and projections, our beliefs and assumptions of the company's management as well as information currently available. Forward looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions as they relate to future events and therefore they depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating may also affect the future results of Via Varejo and may cause results to differ materially from those expressed in such forward looking statements. Now we would like to turn the floor over to Mr. Pika Esman, CEO of the company. Please proceed. Good afternoon, everybody, and thank you very much for participating in our call. Today with us, we have Flavu Diaz, who, as of tomorrow, will be officially the CEO of Via Varejo Paulo, our COO and Vazamini, commercial, Mascelu, Infrastructure, Vazakhran Logistics Victor from is available from people and sustainability, Philippe Panugro, is temporarily absent due to specialization course that is taking abroad, and he will be represented by Rizbehdalala or IR. Before we get into the results of the company, I would like to say that tomorrow, We will conclude the process of transition in the command of Via Varejo. I would like to thank the Executive Board and the whole team of Via Varejo for the unconditional support that I have always received. And, you know, to implement our strategy and also the results that we achieved in the spirit that we were working together. And I am confident, and I am sure that under the leadership of Flavio, the company will continue. In an accelerated and consistent fashion with the implementation of the digital transformation that we are undergoing right now and the commitment to the whole team with all the strategic projects will be even bigger. Having said that, I would like to make a few remarks about the results of the first quarter of 2018 of Via Varejo. At the beginning of this year, we were able to deliver operating results that were very important with a net revenue of BRL6.6 billion. And our same stores, growing 10.6% and GMV build 7.3 percent increase. The gross income of the company reached BRL2.1 billion, with 14.8% increase. Our gross margin expanded by 121 BPS for 34.4 percent because of the continuity of our growth strategy in a sustainable fashion, mainly on the online business in this quarter, we decided to participate with a higher sales volume in a typically promotion period that is to say, generally, with the challenge of expanding our revenues with no impact on our profitability. Our EBITDA 24.1% increased BRL 407 1,000,000, with a margin of 6.1% And I would like to mention that is the 5th quarter in a row in which we deliver expansion in our EBITDA margin. Our net income in the period was BRL 71,000,000. No, I would like to talk about our operating activity. And we finished the rollout of the Mobitz in point 0 as on schedule in March for our 178 stores, and the first results are very encouraging. And we expect the ramp up of operating efficiency for the second half with the maturation of this model we are repositioning our brand with a high connection with the Castas Maria audience or buyers, and this will grow even further this category that is so important for our company, the budget of furniture, and we opened 7 new stores in this quarter. 6 smart stores and 1 digital. And I believe that most of you have had the opportunity of seeing it And we are on schedule to reach a minimum of 80 stores for 2018. I would like to mention that in April, we opened our first kiosk in Sao Paulo City. This is a disruptive model that will allow Via Varejo to make great strides in higher population areas and test new regions with a lighter operation model. Just to remind you, this model allows the client to have access not only to the products that are shown there, but also access by means of a totem all the inventory that is available with the company. And besides, the client can carry out operations involving financing and credit operations. And finalizing in March, we implemented the 5th unit of the hub stores and the 5 first units are located in many different regions of the country. And this is also a very representative test. We are right now testing the efficiency of this model, which is already delivering very encouraging results. We should reach 70 stores by the end of June. Completed to 120 by the second half of this year. So our expectation for the second half is to open an additional 150 stores operating in this model. And lastly, our Via Winica or Olita. Project that we are doing with Accenture is working very well. And we have already started to see an improvement in our conversion of sales. Due to the segmented sending of offerings to our clients. Now I would like to give the floor to who will be talking about results of the quarter. Good afternoon, everybody. I would like to start by slide number 4 where we talk come up. The sales performance in the brick and mortar stores, same store, growth, 10.6 and GMV online 7.3% increase. We are very pleased with the figures because we were able to expand our sales in a seasonably more promotional period, as Peter said. And according to the survey agencies, we grew market share in both Marketplace, an important segment for our platform, reached 27.5% of our total GMV. On the next slide, I will talk about our EBITDA for BRL 107,000,000, growing by 24.1%. Year on year with a 6.1% margin. And I would like to mention that our EBITDA is growing for the 5th consecutive quarter. Gross margin, 32.4 percent from the effort from the company to grow profitably and also the leverage impacted by the increase of the brick and mortar stores, growing more than the online stores. On the next slide, we are talking about the financial results. 10 BPS expansion and also our net income reached BRL71 1,000,000. And I would like to mention our income before tax before the net income. And have you said that? A bit, 51%, 727 bps. And lastly, we talk about our net cash with non sale receivables in line with last year. And I close my remarks here, and I give the floor to the operator to start the Q And A session. Now we would like to open our question and answer session. Please ask all your questions at once and wait for I would like to ask a question. Good afternoon. I have a question about working capital. And in this quarter, we saw the same offset by net net. And I would like to know the reason for that and if the client what we could expect for the next few quarters. And regarding sales, a very healthy sales result, with an expansion in the commercial margin. But after a quarter that had the same situation, So do you believe that your market share has been decreasing So was it the choice on your part in order to focus more on profitability? Could you give us some more color about that? Thiago, this is Peter, and I'm going to answer your first question regarding working capital. In fact, we had some opportunities in this period in the first quarter considering that we have very important, seasonable events that start in the second quarter, the 1st is Mother's Day, which is usually very strong, in all our stores. And the second event, important event is the World Cup. So the inventory increase is totally linked to these 2 seasonal events and with the opportunity that we see in terms of increasing our sales during this period. In order to talk about market share, we saw differently from what you said. Not only did we not have a reduction in market share, but also in the first quarter, we had an increase in market share. According to the research institutes, mainly driven by the difference regarding the brick and mortar stores according to information of the JetKey. So Market Care Market share expansion continues. Excellent. Thank you very much. This is Richard Kat from Bradesco DB. I would like to ask a question. Good afternoon. I have two questions in the first quarter. Growth of e commerce was quite slow. It was around 2%, if I'm not mistaken. And I think it was because of the very competitive market during the first quarter. So what is your expectation regarding the growth of this sector in the 2nd quarter and the app that you mentioned in the release. This is my second question. You said that you would be launching another app. And I would like to know your expectations about this app and ask what is the percentage of e Commerce sales that you already have to the we tried to have a sustainable growth. This was our aim growing with profitability in the two channels with market share gains. And we have been placing our bets on many initiatives that we are developing and really putting to work, many of them accelerating in the next few quarters, and they should be helping us maximize our synergy and integration among the channels generating businesses and growth, both of sales and share. No pressure from competitiveness. And regarding the second quarter, it's very hard to say yet during this 1st month. Especially with 2 important seasonal events ahead of us, the Mother's Day at the World Cup. So we cannot give you that line, but it's very difficult to say how the competitive environment will behave in this current quarter. Regarding the app, we are at Foods Team Developing the new technology and the new structure, that will give us more accessibility and performance very important. This is a very important channel for us. And there are a few things that we are estimating for the end of the second quarter. But we will be experimenting a very sensible advantage or at the beginning of third quarter, this is what we expect to have this. So we expect to make our app decide being much more efficient in terms of the shopping process itself, making it a very important to relationship to and also to provide information and services to our clients And also for the clients that are inside our stores, that is to say bring more information about our inventory communication based on geolocation, the management of the installments of the credit line, and augmented reality, expanded reality and interaction with the product that are on the shelves of the store, bringing added content that is to say information, videos for, so that the client can make the purchasing decision inside the store And this would be a very important center for relationship to improve the experience of the client whether he's outside the store or inside the store for a better shopping experience. We do not disclose the figures. But what I can tell you is that we have been increasing very fast. Overall, the number of hits to our e commerce already represents 75%. Or 10 percentage points increase. So the progress of these channels, and I mean, the accesses that come from the accent by our mobile access in the stores. So it is top priority for us. We will be guiding our whole team to focus on mobility, and our idea is very ambitious. And we expect to be able to present this at the end of 2nd quarter at the beginning of 3rd, and everybody will benefit a lot from these improvements. Our next question comes from Credit Suisse. Hi. Good afternoon, Peter and everyone. I would just like to take another look at the admin expenses for the quarter. I know that, I mean, in their release, I think you put everything together, but I just want to get a better understanding about what is in that administrative line because the numbers are above what we expected. Hi. This is Deliza. In that G and A, more specifically, we've reclassified some of the accounts in the first quarter of 2018. And most of it stem from the labor expenses we had because we we had we had it broken down, and now everything is under G And A. That's why the imp impact is higher due to an allocation factor. Now year on year, what was the evolution of this of this line. What was, you know, under sales or admin, there was a labor deleveraging in there for quartervisavis the year before. The numbers were higher earlier this year and has impacted our expense line. And I mean, last year, it was lighter. We didn't have so many entries. And this year, we have, more entry, there's a greater inflow. There are more, you know, labor suits. So there are more people filing, losses. Well, we we ended a lot of losses earlier this year, so that refers to payments. Hi, sir Joseph. This is Rodano from JPMorgan has the next question. Good afternoon, everyone. Looking at the expense line, Peter talked about Congenius operating leverage. I just want to understand a little bit more what happened in terms of provisions to cover labor suits. I just want to get a better understanding related to changes in the labor laws, whether that has changed somehow. And I know that you, the pressure must be large. And when should we expect to see a decrease in this amount of provisions? And once should we start seeing a more normalized situation looking forward? Hi, Joseph. Here is Bizalla again. You know, referring to the labor seats. We saw slight reduction as of March, but there is a backlog still very high. That's why We hope that this year, the impact should be very much in keeping with what we had last year because of the backlog, but we are already noticing a slight drop starting back in March. Could you tell us what would be a normalized level? Or what is recurring? I think today is 800 basis points at margin, but in a in a more normal regime where they're not too many, dismissals. What would be a normal level that we could work with? So we don't give any guidance about that. But this year, I think we would find ourselves in a situation very similar to that of last year. In 2016. We went through a restructuring process, and this process is now impacting 2017 2018. And we know that the impact was more relevant in 2017 rather than in 2018. Scott from Goldman Sachs has the next question. Good afternoon. I have two very quick questions about operating leverage. That was not materialized. I I know you you made some comments regarding investments, and expenses with with labor losses. But I just want to understand the evolution of your expense line looking forward because I know that you are working with a certain dilution. And so what would be the key drivers whether it's just a matter of sales, or what should we consider for the next coming quarters? In the next Next question relates to e Commerce. I don't know whether you have a goal or an idea of where you would find the best breakeven I think now it's slightly over 25% on Q3, but it's still growing. And high rates. When do you think you would reach a more balanced level between the 2? Irma, this is Paolo referring to expenses, we have a series of initiatives that we've developed in the past few quarters. You know, moving hand in hand with our integration process. And I said before, as I said before, they will gain momentum in the next coming quarters, and this should generate sales growth. And together with that, we will have better gains and efficiency gains, both on the brick and mortar stores and also online with new technologies. You know, productivity gains coming from the team. And this should be reflected in our figures looking forward. Now regarding the participation of, 13t, we don't give you any backlinks, but in fact, we don't have any goal, our strategy is having a a platform with a good assortment that serves our customers the pa the best possible way. And then on each category, they says we will then define the best for the company, but that's not a goal. Thank you. Luis Felipe Benoit from BTG Pactual. That's the next question. Good afternoon. My question relates to cash flow. Yesterday, you announced the approval of an advance of up to 400,000,000. I just want to get a better understanding about your free cash flow for the online channel. I know that in the first quarter, you have a relevant seasonal effect, but but looking at the entire year, I would like to share with us, how do you expect to see this dynamic moving forward? Well, we don't give this is bizarre, we don't give any guidance for cash generation. What I can tell you about that 400,000,000 of of Synovus that was an intercompany loan that we did only for cash effect for Cenovus. This in in the consolidated way, you don't see that intercompany loan, but we use that to pay the debt That's why you see that $400,000,000. Okay. And then just as a follow-up question, in relation to marketplace, Could you please tell us a little bit about the strategy? Because I know that you're growing a lot in GP. You're growing much faster. I just want to learn a little bit more about your fulfillment initiatives and what do you expect to see in the next coming quarters? This is Flavu. We are getting prepared to significantly grow our fulfillment offering. We already have a new client. It's not seller, but it's a manufacturer that began hiring our services. And we are just concluding some last minute adjustments to our system. And also making adjustments to our internal processes to be able to offer this service in a larger scale. So it's to encompass a larger larger number of sellers. In the maturity of the system should occur throughout the second half of the second quarter. And in the second half of the year, we will probably be able to to bring onboard a larger number of sellers. We already started our commercial approach and we hope that throughout 2019, we will be able to grow this number of sellers significantly and we will offer a larger range of services. Offering via Varejo's facilities or the services to all sellers because We have good popularity coming from our distribution centers because they are closer to the demand centers located in different geographies in the country. And, also, in terms of our own stores that can serve as a support point to this logistics network, And this will be very beneficial to those who will benefit from those services. This is not something simple to do. That's why it's not yet concluded. This is a design that requires great effort on the front of the company, but we understand that the value proposition that it brings into to the market really offsets all the efforts that we are undertaking. I think that this will be more visible in the second half of the year because we will have a larger number of sellers. And throughout 2019, this system should be more mature and more consolidated so as to bring more revenues to the company. It's from Brazil Rudolf. That's the next question. Good afternoon, everyone, and thank you for taking my questions. I would like to hear more about the gross margin. I know that you already talked a lot about your dynamics, but I just want to highlight a few things. You were saying that you're not letting go of your profitability just to, for the sake of growth, but we know that you're continuously gaining market share. And, also, you said that in this first quarter, unlike in like previous years, you were more aggressive commercially speaking. I just wanted to understand you know, with this gain in gross margin, whether this has an impact in the mix of products or mix of channels, I mean, your internal channels, and whether we should consider that this gain will be sustainable looking forward, looking towards the second quarter, you already said that you are well prepared to, you know, to face the world cuff. I mean, there will be fierce competition from other companies and companies are already starting promoting their TV sets. So getting this com competitive scenario, I just wanna know whether you will be able to maintain this same pace of growth in your margins. And my other question relates to retrofitting of the stores. And correct me if I'm wrong, but I think that you you started with 5 retrofitting and you your goal is to reach 220. So with these 5 stores, did you get already an some feedback about how the stores are performing and how the retrofitting has helped you to boost your online sales. Or whether, you know, you can share with us any results. Thank you, Jeremy. Thank you for your question. This is Marcelo. I will start with the MiniHub. Okay. These are these five stores are pilot stores in 5 different regions of the country, and they have different sizes. All the stores have different sizes. And this is just for the sake of a value evaluation. We are now initiating the evaluation, and we were able to notice that we were able to reduce the the time to serve customers, and we can access the information through our logistics plat platform and also through our brick and mortar operation. Just to give you an idea, in some faraway areas, we were able to reduce delivery time by 80% So chronometrics is increasing, and this allowed us to expedite the opening of the other 70 stores. And we will be able to have a better, you know, to reap the benefits by the end of the second half of the year, and then we'll move move forward to 2 120 stores. Okay. Just as a follow-up, we talked about reduced same time, delivery time, and that's something very important. But do do you have any other major impact Was there anything else that you noticed from, you know, that pilot project And what else can you tell me about that? Well, no. There were no surprises or no new things when we deploy the 5 stores. I mean, we were able to reduce time to market and also we had a significant reduction in cost of freight because we are reducing the gap between the DC and deliveries. And I am also utilizing the inventory available in the region. I mean, may if I if I'm allowed to add to that answer. We are still running some trials, and so it's too early to tell. We are still running things in March, and we expect to test other models, all the ways of collecting freight. And this freight, freight collection, I think we see possibilities of reducing the value even further. One of the stores, for instance, is in the state of POE. And then we were able to reduce delivery time they used to be 12 to 14 days, and we are able now to deliver either on the same day or within 2 days. This much more convenient to customers and the transportation, distance is much shorter. Therefore, we have great possibilities in terms of freight, freight collection. And there is also the benefit of the sale. We weren't able to measure that, you know, because This is still very new. It's one thing is to offer a a value proposition to delivering 14 days and in 2 days. But we weren't able to measure that yet because it's too soon, but there is an expectation to increase sales. What I can tell you is that we were able to promote a very significant reduction in delivery time. There was also a moderate reduction in the cost to serve. And we will also have gains in in the collection of freight but we don't know yet how this will evolve. But we are very excited with the early results. We were able to expedite the expansion of these 5 HUD stores into 70 stores in Certainly, this project will be a very important leverage to our results, particularly online in the next coming months. Tell me, this is Brizola. Now as for gross margin, throughout the channels, we, we engage in partnerships with some other companies, and we had some help from suppliers. We have an improvement in the furniture mix. So this segment continues to grow, and this has helped the company in 2017. That was an important ramp up. We start now with Move 2.0. There. This brought about some operating impacts to the company also because of the partnerships. Priscilla, if you could elaborate a bit more, given the competitive environment that you see has namely the World Cup, do you think that you can still maintain this this margin gain? Well, we don't speak about guidance for margins as I said before. We are constantly looking for looking to improve profitability and mix of products, you know, service and other initiatives that can help the company improve its performance. This is Peter Diveni. In fact, as I said, in my opening remarks, we are very well prepared in terms of our inventory, mix of products. And certainly, this strategy also has you know, our suppliers on our side. And this will certainly give us a more adequate competitive position. Therefore, I I reinstated that we are well prepared. UBS has been a question. Good afternoon, everyone. Now referring to MarketPlace. I would like you to set some light on the evolution of that on the on the next quarter and whether you could also give me an idea of the the same store sales in the first quarter. And the second question is about the evolution. I know that you don't give any of the closure about the numbers, but I would just like to have a qualitative idea in terms of what is the direction that you may take throughout the year or whether you're giving different conditions to your sellers or whether you're still keeping the status code? We did not understand your second point. You talked about this the number of sellers, the straight grade, but I couldn't understand your 3rd point. Could you repeat, please? The sellers. That have been in the platform for longer, how are they performing in the platform of the evaluation? I won't be able to help you much with the answers. Because this information is very strategic and we cannot share that with you. In terms of the number of sellers, we made some there has been some advances. Today, we have 33100 sellers. Based based on a a number of 31100 last year. We still have an important bias related to the quality of serving. And we are performing very strongly with our current partners, even though we are still open to welcoming other good sellers, and we are working in our processes to facilitate the onboarding of new sellers. And the management of the current sellers, making changes to our technological platform that facilitates the integration and management of sellers. But By no means, we are removing our focus on, you know, on quality. We've been reaping good results. We are able to grow sales at a good pace. At the same time, we are growing sales with quality. Therefore, we are betting on the assertiveness of this strategy. However, we are already doing or we are already accelerating the integration speed. We hope that we will be able to to expedite the onboarding of new sellers. But by no means, we We do that in-depth command of quality. The sellers are very pleased with us, and we've been Doing some very good work with the AAA sellers or sellers from you know, our A curve, and we understand that we still have opportunities to to improve the performance with sellers in the b curve and thesis. In these two seller groups, we will be able to leverage our work further. Therefore, I see good value ahead. Our strategy follows each player. Each player has a strategy that is very particular to them. We understand that by deploying fulfillment services, and other financial services that will be put at the disposal of our sellers, then we understand that this Edit value will also resonate with our take break because this will generate more value to sellers. And in turn, we will be able to collect more, but it's still too soon to tell. We are Very much convinced that we are moving in the right direction with our marketplace strategy. What I can tell you, Felipe is just that. Thank you. Welcome to see from BB Investment would like to ask a question. Good afternoon, everybody. Thank you for the question. I have a few questions, and I would like to start by talking about sales by means of payment, we saw a reduction in cash sales and an increase in the use of 3rd party cards. Could you please explain why do you think the quarter had this kind of dynamic in terms payment? Does it have anything to do with the change in the commercial strategy that you put in place and the participation in more promotional events in the first quarter? Or do you believe that there is really a change in the behavior of consumers that are going back to buy in installments. And in the first quarter, all the stores that you opened were in shopping centers. Could you talk about your plan for the future, is this a trend that we will be seeing? Are you mapping the number of shopping centers where you would like to be in that where you're not yet. And could you talk about the impact that we saw regarding income tax? It comes from the fact that you are not being able to use the deferred tech from because there is no history of profits still and are you expecting profits for this? Year so that you may use your deferred taxes. I will start by the taxes. Up to then, it is consolidated, but when income tax comes, you don't see the benefit of the deferred Tienova tax. And it has to do with the profitability of the unit, and we expect that this figure will covers so that we may evolve our online business in terms of profitability or to see today? Is basically the deferred tax. And this is necessary for the company to disclose the net income for certain period. And after that, Then you can use these credits. When you go back to profitability and then you can use it. So we expect for the profitability of this online operation to come back. This is Paulo about payment means we do not see anything relevant in terms of change of behavior of our clients in the first quarter. We already see the impact of a strategy to incentivize the sale of TV sets due to the World Cup. And of course, we encourage the purchase of higher ticket products. And because of that, this has a certain impact on the figure. That is to say the payments and installment regarding the opening of stores. We have freestanding stores and shopping center stores. We do have a plan designed, but, of course, we're not going to disclose our strategy, but our choice has nothing to do with being in a shopping center or freestanding or brand. We have to check the convenience in that micro market Whether there in that specific location, it would be best to have a street store or a shopping center store. But there is no preference that is to say, Answer your question. This is a strategy and this week, we opened street stores. So it's a very well planned, very well designed strategy. Thank you for the answers. I would like Now we closed the question and answer session. We would like to give the floor back to the company for the closing remarks. Once again, I would like to reiterate that we are very confident with the continuity of the execution of our strategy. And we wish Flavo and the whole Via Vadiza team a lot of success in this new moment of the company. And now I would like to give the floor to Flavio for his closing remarks. First, I would like to take the opportunity. Thank you, Peter, for your kind words. And above all, for everything that you did and that you transferred to us in these last two years. The whole executive team is fully knowledgeable, knowledgeable of the big challenge that we have ahead of us. But such as you, we trust that we will continue to implement the projects that will place via Parejo on another level and that will be the foundation of our growth from now on and also for the implementation of our business model, the platform model. Our trust in execution is very much based on the fact that our team besides having participated intently in the drafting of the strategy has already shown a huge capacity to execute, especially in the last couple of years. And I want to assure you, shareholders of Via Varejo that our commitments and dedication are total to continue this work that we started with, Peter, as I would like to thank the board of directors for their vote of confidence and for my appointment to sexy Peter in this ambition task. This is a great honor and a great responsibility. Thank you very much for your attention. For your time, and I wish you all a very good afternoon. The Investor Relations department of the Avarosa will be available to answer any further questions that you might have. We thank you very much for participating and wish you a good afternoon.