Earnings Call: Q4 2017

Feb 19, 2018

Good afternoon, ladies and gentlemen and thank you for waiting. Welcome Vir Badrios conference call to discuss the results of the fourth quarter of 2017. This event is being broadcast simultaneously our webcast, and it may be accessed at www.viovaresu.compo.pials/investorrelations With the respective presentation, the slide selection will be managed by you. The replay facility for this call will be available on the website. Firm that the company's press release about the results results were available on the IR website. This event is being recorded and all participants will be in this only mode during the company's presentation. Afterwards, we'll have a Q and A session when further instructions will be given. Before proceeding, we would like to clarify that forward looking statement that might be made during this call in relation to Via Farish's business outlook operating and financial projections and targets, 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 refer to future events, and therefore depends on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors may affect the future performance of the evaluation lead to results that differ materially from those expressed in such forward looking statements. Now we would like to turn the floor over to Mr. Peter Instrument, CEO of the company. Good afternoon, everyone. Today, we have Ms. Saiid, our CFO, our online IT And Marketing Director, Marcelo Lopez. Here for Stacker Logistic Officer of Natjato. Speaking of the store's officer, Vipo Fagal, Furniture Officer Isabelle, our sequencing ability. Manager. It's with great services that we announced today, the results of the fourth quarter and the whole year of 2017 of Via Vadiyushu. I would like to remind you that in fourth quarter, we completed 1 year of operations integrated between our brick and mortar and online stores after the process of integration reconcluded in 2017, a whole series of projects and initiatives that made it possible for us to achieve an important evolution in our financial indicators, operating indicators and also client service indicators. And as a highlight, I would like to mention that we closed the year with double digit growth in our sales in both channels. We expanded our market share gains based on the data surveyed by GSK, also in the 2 channels. We improved our EBITDA margin gradually and consistently in all the quarters of the year and the 4th quarter had a margin of 7% and the year with 6.1 percent margin, with an adjusted EBITDA of 1.58 1,000,000,000 and also a growth of BPS when compared to 2016. The company also delivered a net income of BRL197 million in 2017 vis a vis a pro form a loss of BRL1 1,000,000,000. In 2016. We closed the year with a strong financial and with the continuous evolution of our operating cash flow and the positive dynamics of our working capital, and Felipe will talk about the results of the fourth quarter soon after I end my opening remarks. And before giving the floor to Felipe, I would like to mention a few points that we consider as being fundamental in 2017, and that allows us to go in great stride in our digital transformation strategy. In 2017, we did a lot and we will be doing even more in 2018, we are very well prepared to guarantee the deliveries that are part of our planning the whole team knows their specific responsibilities, and we devoted ourselves in the last quarter. To detail our actions and guarantee all the necessary resources so that once again, we may deliver a year with many realizations and positive results. With the online channels and the brick and mortar stores now integrated, we permitated, we implemented a multi channel strategy that allowed us to adopt a pricing policy and the assortment policy that is much more assertive. Therefore, having a positive impact, not only on our sales, but also on our margins. Besides the integration of the channels allowed us to extend product portfolio that is offered to our clients increasing our volume. The volume. So then with an ever closer relationship with our suppliers, our click and collect that we have been mentioning quite often is implemented in 100% of our stores since February 2017. And it allows us to achieve very important increases in a big optimization in our logistic costs and the Click and Collect already represents over 27% of our online shopping marketplace continues to grow very strongly and we closed the year, growing 36% visavis2016. And with our strategy of newcomers, we will be using our competitive advantages in order to generate value. And make it feasible to grow when we are sure that we will be growing even more. We will be offering exclusive advantages to our sellers in a very accessible manner and a differentiated May 27, 2019 already some of them in the second half of twenty eighteen. And we firmly believe in this new platform because we will be able to offer our sellers, as I said during our last call, the credibility of our brands and our client base, which is the biggest in the Brazilian retail with over 60,000,000 clients, our credit expertise, our portfolio of financial services and the infrastructure and the penetration of our brick and mortar stores and also our logistics. Competitive address, it is that no other player in the market has still in this half year, we'll be finishing the roll out of the Movi 2.0 with 2 very important drivers that you are familiar with. But I would like to mention here again, which is the new incentive model for the sales team, which is already with 450 stores, and that will be in 100% of our stores by the end of April this year. The new selling system that will be implemented end to end in our stores by the end of the first half of this year. But the new incentive model and the new selling system will be contributing with the improvement of the shopping experience sold by the client and improving the conversion rate. So a higher volume of businesses and also improving the gross margin of the company. But all that, our expectation for 2018 is bullish. Especially because of our clear view of the strategy of digital transformation that we will be implementing. And by the way, I would like to inform that the 80 stores in the smart model that we talked about going very well. We already have 10 stores implemented with results even more positive than the business plan and the digital store in the Villolentia shopping store, shopping mall, and the learning curve for the other stores of the company with very good positive surprises and the end of the rollouts of the multi 2.0 and the long pay of internet. And they can lock the stores already in the second half of this year with a very good expectation for our sales people and the expansion of our premium stores, 67 stores to 100 by December 2018. And the acceleration in our marketplace platform. And just to conclude my part of the presentation this year, 2018, we will be concluding all the fundamental work for our platform so that in 2019, we may further accelerate our growth and become the retail. Now I would like to turn the floor over to Felipe, and he will be talking about the details of our results. Good afternoon. And thank you for your presence. Let's talk about our results and the business perspective. On Slide number 5, In the fourth quarter of 2017, we delivered growth and market share gains, both in the record brick and mortar and online markets in the physical brick and mortar, same store sales growing by 14.8% online 21.6% increase in gross Genv. And with a very important event. In this quarter, we gained market share with the lower investments in margin and even more important offering a level of service that no other retail company in Brazil can offer the guaranteed delivery we deliver the products. Either we deliver on time or it will go for free. And in 2018, it will be possible for us to have an optimized traffic in our stores by means of activating our communication and personalized campaigns for each one of our clients. The Click and Collect reached 27% of online sales in the main categories and important for us to have a more loyal and satisfied client with a lower logistic cost and higher efficiency. And our services making the transaction much more profitable. And we closed the year with 9 seventy stores. And in 2018, we will be opening about 18 stores, smart stores, technologically more advanced with multi function people and multi channel processes. On slide number 6, the evolution of integration of our activities is online and brick and mortar stores, led us to have a very good improvement in our gross margin going from 28.8% to 32.1% in the fourth quarter of 2017. The effect of our operating leverage and control of our expenses on the other hand reduced our SG and A as a percentage of our net revenue from 27% to 35.4%. As a consequence, with excessive improvement in our EBITDA margin from 2.2% to 7% visavis last year. Multi 2.0 will allow us in 2018 to obtain margin and conversion gains by means of making more information available to our people and a variable compensation also more aligned in order meet our objectives on Slide 7. In 2017, our gross margin went from 29.7% to 31.8%. SG and A going down from 27.5 percent to 26.1 percent, and EBITDA went up from 26% to 6.1%. This is a very important achievement for a company that integrated both operations only 14 months ago on Slide number 8, in the fourth quarter of 2017, net financial expense from 5.5% of net income to 2.6%, coming from the better cash and the lower CDI net income of the company was positive by BRL 129 1,000,000 vis a vis a pro form a loss of BRL251 1,000,000. In the same period 4.6% of the net financial result, growing to 3% in 2017. Net income from a loss of BRL 1,000,000,000 in 2016 going to a positive net income of BRL 195 1,000,000,000 in 2017. On Slide 10, the company keeps it Sound Financial Structure coming from a high cash generation and excellent working capital management Net cash adjusted by our receivables grew by BRL 677,000,000, reaching BRL 4,500,000,000. It's important to mention that we are working with the higher level of inventory in order to further decrease our And we are prepared for a good selling scenario for the next few months because we consider that the market is better. And also with gains of market share. I'd like to remind you that our inventory is financed by our suppliers. And now I would like to open for questions. Now we would like to open the Q and A session. And could you please ask all your questions at once and then wait for the answer from the company Joseph Giordano from JPMorgan would like to ask a question. Good afternoon, everyone, and thank you for the question. I have three questions in fact. The first one is the following. I would like to understand on the gross margin side, how do you see the competitive advantage and if the market is less cumbersome than last year, whether this has been helping. And as a potential driver for the year, do you believe that would be a healthier market, so to say. And the second question has to do with Marketplace Investments, I would like to understand, incremental CapEx, how much will you be needing to support all the initiatives that you mentioned at the beginning. And lastly, an update about our labor issues. You have a lot of provisions and they are decreasing. So when will we go back to a normal level for provisions? Judith, thank you for your questions regarding the market. If we compare the market with the beginning of 2017, the market was highly competitive. I think you remember that there were some players in the market that were sending worth facing La Jada's rate that over the year, the market started to adjust itself gradually. And today, we considered that the market is quite healthy. Except when made to one event that happened at the endoftheyear, with inventories and by one of our competitors that exited afterwards, the market is very calm. And Via Varez is very well positioned vis a vis our competitive capacity. So we have no concern whatsoever or significant concerns regarding any changes in the competitive scenario this year regarding marketplace. You asked about our investments in marketplace, and we said that we intend to invest BRL 506,000,000 in 2018. This is our estimates and of the 506, 250 more or less will be invested in IT projects. But these are the projects that will be sustaining the whole digital transformation and all this move that we are making in order to create this platform. This is very significant, and in our view, this project that are already very detailed we believe that the CapEx is enough in order to support what we're going to do this year. And the remainder 15,000,000 should go to the extension of our brick and mortar stores. And the main of the stores that we have already implemented and the remainder for some strategic projects that we have, especially in logistics. Regarding the labor question, Felipe will answer. 2015 2016. We had a situation that brought about the very high labor cost in 2017 and in 2018, we will still have this level of cost and but our initiatives in order to bring this down as of 2019. We had restructuring restructuring during 2015 2016, you know, and this will not happen, this did not happen in 2017. And of course, naturally, will be a reduction in expenses. And another point is that there is an improvement in all internal processes of the company in order to And the third point regarding our inventory, we have a task force in our legal department and all the work hands on on this. And, lastly, the new labor law, will help us a lot from now on. The workers can no longer bring a suit against the company for any reason. And this is a situation that will be better for the company. Good afternoon. My question is about online. We see GMV growing at 32% and the adjusted net income by the least of being is 10%. Could you please explain the main reasons for this gap between these two figures. This would help you a lot. Good afternoon, Marco. This is Rodriguez, online officer. In fact, we see this gap because there are many factors that come into play for this gap from one quarter to the other. They change in their combination, but most of that can be explained by the departicipation of the take rate and also by the variation. That the GMV has vis a vis the group. And there are other services that already come into play. So it's very difficult for us to make this correlation between one variable and the other, but most of the difference has to do with the difference in the Thank you. Good afternoon. I would like to ask a quick question. No, in fact, I have two questions. One has to do with delinquency that grew a little bit and you said that in the release that it is still as expected. Or acceptable, but I would like to know the mathematical effect of that on our portfolio? Was it because of that? Or are you taking more risk in terms of your approval? Credit approval, and the other one has to do with the inventories that ended the year at a higher level. And you said that this is part of your strategy for 20 because January is a month where you have some promotions and some of the players are very traditionally, promotional during January. So how do you see that? About delinquency. In the past, we didn't have the control that we have today. And today, we can work with a lot of control. And with a slightly higher level of delinquency, and this does not mean that profits are going down. If you take 2017, although we had a lower revenue, we had the best result in the payment book operations of the company. If you take the financial services, that's to give an idea, in spite of the recession and the crisis we had in 2014 from 2014 on, we improved. The result of our financial services by 50% from 2014 to 2017. So our situation is much better today in terms of delinquency than in the past. And I will give the phone out to to talk about inventory levels, high in math. Regarding your inventory, you remember that during the last call, we said that we changed our strategy regarding the first quarter of the year. Historically, we didn't have a very strong participation in the big sales of January. And in the first quarter, we usually were more cautious, I would say. And then we decided to have a quite different first quarter from the last ones January, and we believe that the first quarter will be in line with our plan. Head out plan is not only to grow top line, but also market share. And we made a decision at the end of last year. And in our view, it was a very right decision. Mr. Guillermois, please, from Good afternoon, everyone. Thank you for taking my question. I actually, I have two questions. I would like to hear from you about the growth, the services line and your revenue it has been varying a lot, but it did have an expressive growth in the fourth quarter. I would like to hear more about that, what's included in there. Considering that assembly is separated transportation as well. And so I would like to understand exactly what you have on the back services line, financial services and what else do you have there? And also what is the impact of that in your margin? I would like to hear from you because that, helps in the margin and the growth that you've had. And if we can expect that this will keep on contributing to the revenue and margin growth? And second question, you can talk a little bit more about what you have seen in the SmartSource, as Peter has mentioned briefly, that it is above your expectation and that you are even holding back to your expansion. Can you tell us a little bit more about the expansion performance of the Smart Store? That's it. Thank you. Good afternoon. Guilherme? Well, I'll talk about services. Here, we have several initiatives that improve the results of that line. And one of them is the operation, as a whole, we have been working to improve the services a share. And it's also very important for instance And that happens in the premium stores. Today, we are able to provide a much more adequate service that we used it to have before we have several services in those stores. 3rd, also important is Mavi that has been helping us in the service providing Mavis 2.00 is going to give us an even more significant improvement. We also had a starting of new services. You remember that by the end of the prior year 'twenty seeing, we did not have the right off selling services at Montefrio. That was an exclusivity fix. And as such as extended warranty. And we bought that exclusivity to sell those services. So we launched all the other services that we had at Casa Bay. We also launched them in Ponto 3. So, for instance, I think it's a good or safe space in the past. We only have that insurance for theft. And now we also have that insurance for theft and break down of the product and that also has increased the shares that share of services and, results. And so we are always analyzing studies to check the commission for insurance. So we have all these initiatives combined. We have a perspective of having more improvements. We work on that, both in the operation. And we still have a little bit of proximity. We have some new products there. We have new opportunities, and we are working on which products we should offer reach clients. And that's going to help us also. On services, still if you can tell me, what are the main products there, extended warranty, the staff and break down insurance. Are these the main ones? Do you have more? And you rolled that out to Tufarillo as well? And do you think that is also one of the main drivers for this growth? And what is the impact of that in your margin as well? I would like to understand what you are gaining. That's basically that pure margin. Is that it? Yes. That's it. It has a little bit of expenses. We have taxes at first, and then you have expenses as well. But we have sales expenses and commissioning. And these are the costs that we have with services. You see the impact from the gross margin And you should check the service net income, and you will see that. So Yes. These are the 2 main services. This is in the company as a whole. The warranties and the insurance. Now in the stores, in the premium stores, we also have a share of installation. And I think we have great opportunity there to analyze all these other aspects and which are the best services we are able to provide. We have a new product, which is called Figizaguuro. We say safety is very important, but we have a little bit of everything at the end. Really, the operation is much better. Today, we have something that we didn't have in the past. Cash services also very important. So it's important because it has grown the services share. And Guilherme, I will try to answer about the Smart and Digital stores. As I mentioned, the both models, both as March, we have 10 stores and a one digital store. They started with an encouraging performance, but on the other hand, It is too early to talk about performance indicators for these stores right now. We have stores operating with only 30 to 40 days. So I'm sure that by the end of the first quarter of this year, we will have a more detailed idea, and we'll be able to talk more about that. But as I said, it's positive. The fact that you start that operation with better indicators than what we had planned in the beginning. So I think the path is good. The fines are good, but we'll only be able to give you more information at the end of the first quarter, okay? Thank you, Peter. Fannie Zagrodi from Citibank has a question. I have two questions. One is about store clothing. I would like to listen more about that. So stores closed in 2017. And if you will have more towards closing. The reduction of SG and A as a percentage of the revenue in the year, or if this is going to be in line with 27 considering the rolling out of Mobi 2.0. That's it. Thank you. I will tell you a little bit about the stores closing and the stores that we closed in 2017. That was very little. It was really almost nothing. These were stores that We concluded that we're not worthwhile having them open because the results were not the ones expected way closed. During the whole year, only ten stores. And that was a year in which we had a strong involvement to have a profitability rebound of several other stores. So we were well succeeded in our work plan for most of the stores in the company. And we are not concerned about store closing. Because actually our objective is not to close the stores. It's rather to open the stores and to keep the stores that we have, profitable. So we look at 2018 with a lot of optimism regarding the performance of our brick and mortar stores. Good afternoon about SG And A. I'm sorry. We lost the sound. We could not hear the full price Okay, that's fine. So I would like to understand if there is a possibility of finding a reduction of SG And A as a percentage of the yearly revenue because Mavi to will be rolled out over 2018. Well, I will answer your question. Of course, that we have some expectation about Mavi 2.0 and the preliminary results are very positive And yes, we believe there will be some impact in the company's results for 2018. Because of the project rollouts for all sorts, but we do not have a clear measurement of the impact that we will find. Once again, we'll conclude the rollout of that no incentive model up to April. We will have a new sales force rolled out by theendofJune. So I believe that in the second half of the year, we'll be talk a little bit more about Ms. Gabriela from UBS has a question. Gusavo Oliveira, actually, from UBS. I would like to understand the gross margin. You mentioned that the effects of some services were passed positive for the gross margin. And you also mentioned that the environment was not as promotional Is there any other change in the mix that might be happening? And that is contributing to the gross margin. Or a trend that you believe that might be happening over 2018? Gustavo? Well, let me say something. It's not that the market is not promotional the market is still very competitive. What we said is that it's a little bit more calmer or it's, you know, good behavior, so to speak. But some things that happened privileged our group. You have seen what we talked about in the second half of the year about our sales recovery. In our Furniture BU in the beginning of the year, we had a negative growth in sales, It was around 20% in the beginning of the year. And we ended the year with 10% of growth. So there was a reversal. That was very significant. And you know that the furniture category, has a positive impact in the gross margin and also other categories it also have positive effect in the gross margin of the company, still have a strong growth, for instance, in smartphones. This is one of this group of products. So I think there is a mix effect that also contributed to the growth of our gross margins. And something else that we do have to take into consideration when we integrate the online channel to the brick and mortar channel, we were able to develop an adjusted commercial strategy that had a positive impact in the gross margin of the company. It's clear. Thank you. My other question, Peter, and thank you very much. But my other question is about the online area. Do you still have important initiatives there? This year. But in 2017, the store has grown at least in that revenue faster And do you believe that your online will be accelerated this year? Going over that possible growth of the brick and mortar stores. So what do you see there? Well, I will answer your question. And this is Flavio. We had a grow of the online stores if we look at our year of behavior, consider the invoice to GMV. This was 2 digits higher than the brick and mortar stores. So we still had an excellent growth in the brick and mortar stores. And in the online, and we gained market share, as we said, we use the GSK source and also on the online GSK and EBIT. We gained market share on both of them. But it's important to say that this was not our main concern in 2017. Of course, we wanted to grow. We wanted to grow more than the market and we did it. But since the beginning, we positioned ourselves. We wanted to recover the profitability in the online channel. We wanted to grow with profitability creating an environment that was good for a greater growth now 2018, 2019, but on a founder rate. And that has happened. We expect that 2018 will bring us double digit growth higher than the one that we had in 2017 because of what we have done last year, but the figures were higher. When just adding to your answer. If we analyze the 4th quarter, this is much better in the online channel. And at the end of the year, the online had a great impact in the first quarter. There was a drop in the first quarter. And we had increased our margin in that first quarter. And we had to do that type of movement in order to grow because to grow with a low margin or with losses. That was not our idea. So we wanted the business to be profitable. That's what we have done in the first quarter. And then we aim the greater growth. So that analysis over the year has an impact of the first quarter as well. Ms. Maria Paola Contuzzi. From DBI Investments would like to ask a question. You mentioned that we are working at a higher inventory levels and that you have started the HubSpot's pilot. First, I would like to know what is the rollout time for this hub source for the online unit? And if that is going to affect your inventory levels, if that's going to be an additional, impact to there, And I would like to listen a little bit more about services offers for sellers. If you are working with schedule with the date, in terms of services for sellers, in addition to what we have already been seen in the market? Because I want to understand, your strategy in terms of the sellers. Maria Paulo. There's a theater about the hub stores. We started the pilot project, you know, that we work with the pilot model. We developed the pilots. We come firm all our assumptions in the pilot. And then we quickly start with the rollout. We expect to expedite significantly the rollout during the second half of the year will end the year with that number of our stores or our many hubs, as you mentioned, 200 to 100 20 stores that we are going to turn into many hubs. So this first half of the year is going to be a pilot 1, we will roll out that pilot into a few other stores and then we'll come in with a more aggressive rollout in the future. Now I will turn the floor to Flavio. And then he's going to tell you a little bit more about services. We are working, Paula, to improve and to expand the services in the marketplace. We were able to do some advancement and progress in 2017 with cell services to the marketplace. We have a good penetration extended warranty. For instance, We included products from our sellers into our payment list. And this is important in terms of recurring revenue for the company in addition to be an important source to acquire customers. And we have no possibility, which is the sellers to sell their refurbished product in our Vadacator website, which is an outlet site It has been very successful. The seller sales in Barraquero already represent 15% of total sales of our business, we are working also to provide other services, logistics, transportation, and we are able to offer those to a small number of our partners. And we are working to extend that offer, we'll see that mature over the year. And also working, we are working over the year to meet include our competences of Click and Collect to provide that to our sellers going into finally, with a very important area, which is our payment book. First, we needed to turn our installment sales and turn that into digital so that we can offer that to our sellers. I think this will be mature and working to 100% still in 2018. This is a continuous process, but we are focused. And expedite in the process, we will see a lot of new things in the coming months. And that's what we are going to be offering to this segment. We have a large number of sellers and partners that are prospects that will come in into this full commerce, and that will mature a lot over the year. And I expect it to be able to share with you news and results and dates in our next conversation, but that's what we can tell you for now. Thank you very much, Vazian. Peter, I would like to go back to the Hudd store do you foresee any inventory impact because of this roll out of the hub stores or not? We don't see any inventory impact because at the end, we have that inventory for distribution. So the inventory impact is 0 and we will be improving with the federal stores is the delivery. We expect it to reduce the delivery time and basically in half of the timing of these stores, from 2 days to 2 hours, And then the remaining of the stores reducing the delivery time from 5 to 4 days to 48 hours. So the main competitive advantage of the hub store is the service level for our customers and cost reduction because we will have the decrease of that last item. Now we would like to close our Q And A session. And now we would like to get the floor over to the company for the closing remarks. We reiterate our optimism regarding 2018, considering that our team is better prepared than that is structured to deliver what we said that we would be delivering and I say this because we invested quite a lot of time and we placed all the necessary resources in order to go ahead with our strategy. We have been able to involve our whole team in this transformation model that we are living in the company. And we believe that the alignment is very good and everybody is highly committed. As we said before, this is a year of a lot of execution, such as what's the case in 2017, and our team made it evident that they have a very good execution and we continue because most of our projects for 2018 have already started in the last quarter of 2017 as they are in line with our deadlines and with our financials. So we are very confident and we started the ear on the right foot. And we will continue to be very focused, very disciplined in order to deliver a year with positive results such as well as the case with 2017. Thank you very much.