Earnings Call: Q3 2023

Nov 9, 2023

Summary

Q3 reached operating break-even and positive cash generation, driven by improved margins and cost discipline. Priorities are profitable shopping growth, cautious scaling of BV financial services and a proposed BRL 210 million capital return.

Good morning, everyone. It's a pleasure to be with you once again to present our results for the third quarter of 2023. My name is Marcio Penna, and I'm Méliuz Investor Relations Director. Our conference call will be held. We've attained the main goals of the year, which is the break-even of the company. Our focus is to grow in a sustainable way, generating cash. Our conference call will be held in Portuguese and simultaneously translated into English. To do this, you simply select the language you want in the interpretation button at the bottom of the screen. Audience, please select the preferred language by clicking on the interpretation button where it is located at the bottom line of your screen. Also present with us today, Israel, founder and CEO of Méliuz, Gabriel Loures, Growth Director, and André Amaral, Director of Strategy. Before handing the floor over to Israel, I would like to inform you that this event is being recorded. At the moment, all participants will be listening during the Méliuz presentation, and then we will start the Q&A. To ask a question, just click on Raise Your Hand in Zoom. Israel, up to you. Thank you, Márcio. In the previous calls, we were reinforcing that we were reaping the fruits of all the efforts of our team related to optimizing costs and expenses. We came from a period of fast growth. We made several investments here in team, products, and several other fronts. In the past quarters, we have been improving this relationship of expenses and costs in general, of operating efficiency. We've been improving that in the past quarters, and now in fact, it is clearer to everyone, all the work that we have carried out throughout the year. Gabriel is going to talk a bit more about our results. He's going to go into detail, so will André. At the end, we are available to answer the questions you may have. Thank you. Good. Thank you, Israel. It's a pleasure. Well, I'm Gabriel, and I'm very happy to be here. We're here every quarter. It's very good to talk to the market, especially now because of the results we've attained. We've attained our greatest goal of the year, which was aligned in the market, the operating break-even of the company. We had attained the financial break-even. In this quarter, we report the EBITDA of BRL 4.8 million, reverting operational loss of BRL 25 million last year. When we put an adjusted EBITDA with the main line being one-off of actually collective bargaining or actually layoff of budget, we get BRL 23.1 million. In the consolidated view, we also attain break-even when we see in the adjusted EBITDA, we get BRL 1.2 million vis-à-vis a loss of BRL 22.6 million in Q3 2022. In any accounting view, we get close to break-even minus BRL 0.9 million. With the results we see here is the effort of the whole team. We've worked in all lines of the company from revenue to gross margin, operating expenses to attain this goal. I'll talk a bit more about the main impacts. When we look at margin or Brazil Shopping margin, we work with major levers. The first one is the commercial effort, the relationship with our partners, ensure that we can grow the number of campaigns, the most profitable fronts of the business, and we see the efforts of our partners with Méliuz showing our results and the concrete value we generate to them. The other great lever to increase the Brazil Shopping margin is to be more efficient, more intelligent in the distribution of cashback without impacting user experience, ensuring our optimization, the maximum point of sales and GMV, and the growth operating margin working in this elasticity margin of the business. The third key point here is to ensure a good shopping experience. These are the constant improvements of our services and products that leads us to attain 25% in the Brazil Shopping margin in the year-over-year comparison. The other leverage is reducing operating expenses, led by the financial team. All the teams have negotiated 100% of their contracts. We ensured operating efficiency with supplies and marketing. We ensured that we were working with the period of payback within our strategy, optimizing investments. We've also had to make a reduction of the personnel to adjust to the new real. That's a reduction of almost 40% of where we were in the fourth quarter last year, and a reduction of 17% regarding last year's third quarter. We reach a level of operating expenses result of all the efforts of the company, and we expect these results should be long-lasting, and this new level of expenses should be maintained. Here we see the result of all the efforts of the two major fronts, the growth margin and expenses. Our net results, we attain BRL 9.5 million net results in the controllers or BRL 7.6 million in consolidated variations and reversion of losses of BRL 8.7 million and BRL 9.1 million respectively, comparing controllers and consolidated and/or the parent company. The next page, we see what happened in the third quarter is that we were able to be, once again, a cash-generating company. This is a result of Méliuz, the parent company, the result of our financial results, and an effect of receivables we had this year. As we had commented in the second quarter, we have a line of BRL 7.1 million of receivables, which is a specific type of revenue. We came back to be a cash-generating company. We grew over BRL 20 million comparison quarter-over-quarter. This mostly because of the operating results of the company. We won't stop here. This is just the beginning. We attained the first goal that we had proposed, and we are very excited for the next steps. André is going to go into details regarding our strategic focus from now on. I would just like to talk about the Black Friday. It couldn't be different. We are in November, and we are very excited with the results we have been seeing so far. We believe we can have a very good Black Friday. First is engagement of our partners. Comparing year-over-year we see an increase of 30% in the revenue of Méliuz Ads and 15% more partners participating, showing the willingness of those that were here to keep on investing with us, proving once again our results. New partners that did not invest before are bringing funds to Méliuz to have a very good Black Friday on their side as well. Second great reason is the great innovations, great things we've done to our users on the part of shopping. In addition to the constant improvements we've had, conversions that have been improving. We launched new products this year, and the other one is the Méliuz Prime that we launched in October, which is actually a subscription system that we have with several benefits with invoices, purchase bonus. This program, it chooses to our partners to attain more engaged bases of those that are VIP. On the side of Méliuz, we ensure recurring revenue that we did not have with our users. An incremental GMV, that we create new opportunities for them to gain in shops where they were not used to buying. This is very good to it. At the same time, ensures more frequency offsets and cross-sales for other products. We're very excited about this product. The engagement of our users so far has been very good, and we believe it's only going to grow from now on. This is one of the reasons that makes our Black Friday to be special this year. I'm going to turn over to André, who's going to talk about structured ways of the midterm of Méliuz, our great focus from now onwards, now that we've reached the operational break-even of the company. Well, thank you, Loures. It's a great pleasure to talk to all of you, sharing what Márcio, Loures, and Israel have said. We're very happy with the results we're presenting today. Once again, it's not only this quarter, it's a year in which we've been talking and commenting that we were directionally moving towards break-even and resuming this cash generation from the last cycle of investments we had, and the past year we've had, and giving a bit more detail of what we expect from now on. Gabriel mentioned very well of everything we carried out and accomplished in the past quarter and how we intend to continue leading the company from now on the fourth quarter and a bit of 2024. I think we have four major pillars and principles that we'll certainly keep on focusing on, and we may expect the maintenance of all of this over next year. The first one is no doubt the maintenance of this operational efficiency. We may expect is cost basis in this line that we've been delivering in the past quarter. We have created internally a playbook that is very efficient to maintain this cost discipline. The idea is to have it maintained constantly and always. We should expect even more efficiency over the next quarters, and obviously resuming sustainable growth of shopping. We should expect that, and something we've been commenting as well over the past year is maintaining at least a margin of 2% of the net take rate. We've been able to do this with great discipline. Gabriel has shown the numbers. We've been able to grow consistently with the gross margin of shopping, not only with the core product and also with revenues and accessory revenues of new innovations we've been delivering, especially the Méliuz Ads and most recently, product we launched a few weeks ago, and we're very optimistic regarding it, which is Méliuz Prime. It goes into the third block, which is innovation of our core business. We haven't stopped this. Once we clean our cost basis, we should resume with great strength the part of growth in financial services and the core part as well. We should resume these with greater speed as of the fourth quarter and especially on 2024. Several things that have been happening in the shopping vertical and constant improvements, we should start seeing that users of Méliuz and partners in the part of our app, our website, and everything, how this communicates with new products and financial services that we should launch over the next quarter. In 2024, it should give you more details shortly. Within that, we have innovations that have been very important to our results as Méliuz Ads, as is being mentioned, Méliuz Prime, and all the derivations we can obtain from these two products. Lastly, but not least, the scaling of financial services. The strategic alliance with BV. We started the first part of this year making all the necessary integrations to put the product up and running, and we have actually a possibility of scaling. We have the cards and other products. We have new products. This is what we expect to deliver, especially late last year and over 2024. To recap how we reached thus far, we've been reinstating this in the past conference calls. In financial services, we spent the first half of the year practically making all the necessary integrations of Méliuz and Bankly with the structure of BV, of BV's technology structure, to enable us to open Méliuz accounts on the BV structure and card issuance, Méliuz card issuance, with all the funding credit part of BV Bank. Once we conclude that in the first term, in the beginning of the third quarter, we start opening accounts. We announced this in the previous conference call. We started issuing the first card and opening accounts within this new structure. The third quarter was a pilot phase, scaling up in a careful way, testing everything progressively with the end users, the card issuance. We were very successful at the end of the quarter in terms of number we reached with BV accounts, almost 300,000 accounts opened. The first cards issued on this new structure of new models of credit, a bit over 20,000 cards in this pilot base of the third quarter. What do we have from now onwards? First point, we actually stop and end the legacy accounts. We withdraw the access to the financial institution of the banking, and we drop the legacy card that we had opened previously, on BV, with a trust of having moved over this pilot of third quarter, with account opening and card issuing. This is the core of where we are going to build our ecosystem of financial services. We have several products being developed, and we expect them to be launched in the next quarter. New credit models just mentioned, Boleto, Pix, installment payment, insurance, we are developing it, and shortly we are going to launch new insurance, a part of investment that we have started designing and building along with BV and Bankly to allow certain options that are quite interesting to our users as of next year. I think I should turn over to Márcio, who is going to talk about the developments, and we can move on the development of the last stages of Bankly with BV. Well, thank you, André Amaral. As we do in every webcast, giving you a panorama as to how our transaction with Bankly is going. We got the news from the Central Bank of Brazil of the approval of the deal. It is very good. The expectation was not to have it as fast as it was. With this, we expect to conclude our deal by the end of November. We have several transactions, bureaucratic. We should complete the deal, get them, and receive the money. At the last board meeting, we decided, and the board approved the call for a general shareholders meeting with the conclusion of the deal with Bankly, and we have the decision on the approval of capital reduction of the BRL 200 million. That is over actually part of the commitment of the company, so the reduction process is BRL 210 million. We had governance agencies with the board of directors. The idea was to return the money that we would receive to shareholders. We fulfill our goal with great transparency, and we have a robust image of cash, generating cash now, and this amount that we are going to receive from BV regarding Bankly, we propose this capital reduction to actually compensate our shareholders. In terms of regulatory process, we expect to complete the transaction with Bankly by the end of the month. As I mentioned, early December, we should call the general shareholders meeting. It should happen by January, having quorum and approval, we should be approved. We should wait for 60 days, considering the corporate law. There is a point that the creditors of company can claim access to the amount, which is not our case. We do not have any debt in this case. We have to wait for 60 days, and after 60 days, we have the capital reduction effective. The expectation of the company is that by the end of the first quarter 2024, early second quarter 2024, we should complete all this capital reduction process. With this, we close our presentation, and I am going to open up for questions by analysts. I inform you that the first question is from Ricardo Buchpiguel from BTG Pactual. Ricardo, good morning. Your microphone is open. You may ask your question. Good morning, everyone. Congratulations on your results. I would like to ask about two topics. I think that first looking at the difference of consolidated EBITDA parent company, it draws the attention to the losses of the other subsidiaries. I would like to understand a bit, when would it make sense to wait for the break-even attainment in these subsidiaries, and which measures and dynamics would help with that. I know it is a case-by-case thing. You have certain things in there, but if you could give me some ideas to how you move the pointer, that would help. The other thing I would like to understand better is the partnership with BV. I understand you get a commission of BV by account and card enabled. On the release, you show the value issued of a card and opened accounts. I would like to understand a bit, what is this percentage of actually enabling cards in the BV case. If you could talk about the commission you get for each one of those products. Thank you. Thank you for the questions, Ricardo. I can talk about the difference of EBITDA and the consolidated EBITDA. The delta of consolidated EBITDA and the parent company EBITDA tends to go to zero, because we are improving results of the acquired companies, and the trend is to reach to make both EBITDAs to be at a trend of zero variation between them. Today, we have this variation because of Picodi. It is burning a bit of cash, a little, but it does burn some cash. We also have a process on our side of financial services within Méliuz, Fedic, that is transitioned because of our own products, because of BV. That impact a bit the EBITDA of consolidated in the lines of revenue and expenses, whilst in the parent company EBITDA, it impacts in the financial results. Having said that, the variation of EBITDA between parent company and consolidated is this impact that one falls in the financial results. That is why the parent company is a bit better than the consolidated. Gabriel, can you answer the second. I can talk about the second. Just a comment, I think the other ones going deeper into the Picodi part, and Marcio mentioned the other acquired companies, they are in a phase of cash generation. Picodi, as expected, is at a time that Méliuz lived in the first years of investment of this migration of the vertical of coupon to cashback. It was expected, but even so, just as we invested this playbook of operating efficiency in Méliuz, we have been applying this there and we have improved the financial efficiency and operating cost reduction. Even we have this investment considering this migration that was expected at this time of the company, just as we had at Méliuz in some cycles over our 10 years. Moving into revenue of financial services with BV. As I commented, the first quarter actually that we started, when we started scaling the account and card was over the first semester. We were on a pilot phase. We were consciously, together with BV, carefully scaling accounts and cards. We had a successful check there in the scale test with users. And then actually now what we expect is to get to sort of fast speed or full speed with accounts and cards. We have several other accessory products that are as important as the account and card for the growth and monetization, both for Méliuz and BV, for the vertical financial services. As to amounts, actually, considering the privacy agreement that we have with them, we cannot disclose their market values that we have negotiated at the time of the deal. Okay, that's clear. If you could have a follow on. I know it's in the very beginning in this partnership with BV. Is there any sign that you can see regarding the quality of this client from the standpoint of risk and engagement? If you could comment a bit on, I understand that you see now more ability to growth, greater scale for products. What is the appetite to risk of BV to issue more cards? Well, regarding risk, look, since it's a young portfolio, we started scaling it up in the third quarter. So the first seasons are completing the third month, which is the main indicator, three of cards. I think the first indicators we have is that the season's very good regarding credit, but as we've grown in a very careful way in the third quarter for BV to see what the base was like to start testing new policies. Although we are happy with the result we see. And considering all the market scenario all of you follow, we have had several things regarding banks as a whole. We are careful regarding credit. We actually do not expect a credit decision. It's a final decision of BV. We work together, we exchange data, so we provide a lot of information to our users to help in the credit decisions. But the final decision is theirs, and it's very much in line as we're seeing in the general credit market in Brazil. We don't expect to issue in uncontrolled ways, so to speak. We have evolved a lot in conversation optimizing credit models in a very well-aligned way to ensure it grows in a healthy way. So, the credit risk being a BV, it's not in our interest to grow in a way that the portfolio cannot be financially steady, and we've been doing it efficiently, ensuring gains to both parties. Great. Thank you. Apologies, I was on mute. Thank you, Ricardo. Our next question is from Matheus Guimarães from XP. Your microphone is open, Matheus. Hi, Márcio, Gabriel, André, Israel. Good morning. Thank you for taking my question. First, congratulations on your results. I am particularly surprised with the work you've carried out on the side of cost and expenses. My question is more on the side of revenue. We've seen GMV has been a challenge over the year, not only to you, to retail in general, but we see a slight reduction in the take rate. How should we look from now on? I think great part of the cost and expense part you've done, there should be something ahead. But overall, the company at the moment, is it more focused, still very much focused on the cost side, or is it time to go back looking at revenue, how to make it grow? Or should we expect some quarters to see a more positive revenue dynamic? May I take this one, Matheus? Thank you for the question. I think first of all, we have never stopped having focus on revenue. We are a relatively young company. Our goal is to keep on growing, generating more value to our users, have more users, ensuring greater retention of seasons and greater conversions at all stages. We actually have been through cycles of more investment as it's been the year of 2021, and cycles of cost reduction and expenses to optimize the financial results of a company as being in 2022, 2023. Our focus from now on, as André said, is sustainable growth of our business. We want to ensure that we maintain all the expense and cost lines under control. But yes, working hard to grow our business, our revenue, and obviously respecting the timing of the market in two verticals, e-commerce and financial services and the credit challenges. Our goal has always been to grow. Now the focus on expenses continues. We want to continue ensuring this pace of expenses under control, but the word to us is sustainable growth. Super clear, Gabriel. Thank you. Now you're talking about Prime. In terms of revenue recognition, how do you expect the evolution of it? Will this feature in the Brazil Shopping line? You have a component which is GMV, but you have recurring revenue. Do you have any expectations as to how to present the numbers of that looking ahead? Just the first comment, Méliuz Prime was not launched in the third quarter of 2023. We don't have the results in the report we've just published. It's launched in the fourth quarter on the accounting launch. I don't know if Márcio wants to take this. I may. Sure. This is it, Matheus. Most likely it will be on the line of revenue of Brazil Shopping, along with the other items of Brazil Shopping. And obviously, gaining representativeness in the results, we provide more information, et cetera. As Gabriel said, it's something that we've just started. It's not impacted the results of the third quarter, should be not very significant in the results of the fourth quarter. It will grow gradually. Okay? Okay, great. Wonderful. Thank you. Congratulations once again. Thank you, Matheus. I'm now going to turn over to Sophia Barbosa from Morgan Stanley. Sophia, your microphone is open. Hi, everyone. Actually, this is Alexandre Nabioc from Morgan Stanley. First, congratulations on your results. We've been stating it, we were surprised on the side of expenses, but I think the first question on my side is more on the part of cashback. I understand that this kind of policy is more under your control. And what drew our attention reading the release is that great part of, significant part of the cashback expense of the third quarter will be booked in the fourth quarter. The first question is trying to understand how much of cashback [Foreign language] Should we expect for the fourth quarter? And along with that, understand that there is this dynamic of timing mismatch. How have you seen the evolution of GMV over the quarter, and how do you see the growth? Or how do you see the performance GMV in the fourth quarter? And then I have some other follow-up questions. Thank you. Great, Alexandre. Thank you for your question. On your point on cashback expense, it's a good point. We're seeing the third quarter, we had more incidents of GMV than the previous quarter. This, because of the mismatch, the expense is considered, it falls into the fourth quarter, not the third. It's not very much. In terms of size BRL 1.5 million, that is not in the third quarter, and it will fall into the fourth quarter. So the drop reduction in the cashback expense is much more a result of our profitability strategy than actually the mismatch. The amount that should have fallen in the third quarter, will fall in the fourth quarter, is BRL 1.5 million, not very much. On the point from now onwards, Gabriel, would you like to talk about that? I think just to confirm the question is how we see GMV from now onwards. How do you see in the fourth quarter? Perhaps taking some color of what you have in terms of outlook for next year. Since in the previous question, Matheus commented, we see some of the data of GMV quite pressured. How do we see it now and from now onwards? Okay. First of all, this is the fourth quarter now. It's a period of stronger GMV that we have. We've been working hard with partners and users to generate as much GMV as possible. Still focused on margin and profitability of the revenue. Our focus on the fourth quarter will continue to be to ensure a net take rate that is healthy above 2% with a strong GMV, considering the season period and the great innovations that we've been making in the shopping business. For next year, we cannot share a forecast, but we can open up a bit what André mentioned. Our focus is sustainable growth of shopping from now onwards to ensure that we keep growing the business gross margin, and this makes overall for the company to grow its gross margin. So this is the main focus of the company from now on, fourth quarter and next year. Gabriel, if I may add to the answer. Alexandre, we've been carrying out studies to close our scenario, our budget for next year. As Gabriel said, we cannot give you guidance. We got many market numbers. We see that we have banks considering growth of e-commerce in Brazil of approximately 8%-12% next year. Some others consider 18%-20%, an average of 12%, 13% from the reports I've seen. I'd say that we are a bit more conservative. Our growth expectation for e-commerce next year is a bit below the market average. Obviously, what comes above that will be upside, but we'll be able to deliver without giving you numbers. We cannot give you guidance. We can deliver an EBITDA volume that will certainly be very well received by the market. Perfect. Thank you. Thank you, Alexandre. You said you have some other points. I don't know if you want to ask questions because you were the last person to ask questions. Well, I would then. Still on GMV, I'd like to understand whether you see some impact of Remessa Conforme to your GMV. At the end of the day, you operate with some players that do cross border and your GMV. It has a stake that is relatively big or significant. I think it would be interesting, too. Thank you. I can take this one. I think obviously it is a concern of other partners that do cross border in a more significant way. We have certain of those partners in our partner base. They are not as representative in the whole. We have seen they are working on the day-to-day to offset that in different ways. Several partners working with coupons that are much more aggressive, more aggressive price on websites, more promotions, intensifying marketing. We have seen this move on one hand. This Remessa Conforme impacts the final value for customers. We see those partners moving to ensure GMV and the results. These are two factors that one for each side. It is too early for us to say which one will be the final impact to the result of those partners. On our side, they are partners. The whole of Méliuz, they are little representative, both in our GMV and our generated gross margin. We have been working with them to generate as much sales and results as possible, as it is our role here. Perfect. I promise this is the last question. Actually, you have mentioned that you have some cross-border players that are more aggressive in terms of discounts. Do you see your customers at the end of the day, do you see them having more appetite in terms of spending more, in terms of coupons, CAC, whatever it is, to attract more GMV or increase the impact of the tax increment of cross-border? No doubt. This is part of the value we generate to our partners. We are a platform performance marketing that ensures higher results, quantified and proven. In this scenario, with greater pressure in the sales volumes of those partners, no doubt we become a channel that is even more representative, with greater focus to generate results. I believe this indeed favors us, and we have been working in a very close way to those partners to find alternatives that enable them to keep the same sales level or even grow despite this Remessa Conforme. Okay. Thank you. Perfect. Have a good day. Thank you, Alexandre. Well, since we have no further questions, I turn over to Israel for the final remarks. I would just like to thank everyone for your participation, for your questions. Say that November is a very special month to us. It has always been. We are moving on to another Black Friday. The team is really excited, and we see great demand for our products of the Méliuz Ads, where partners gain more exposure on our website. Our partners have done excellent work. We are very much focused. It is a super important month to us. We hope to bring news in the next conference call here. Thank you all very much. Thank you very much. Our conference call is closed.