Earnings Call: Q2 2023

Aug 9, 2023

Summary

Expenses fell sharply and adjusted EBITDA improved, while consolidated Q2 EBITDA remained negative. Management targeted parent-level operational breakeven in H2, with BV account and card growth and Picodi expansion supporting the outlook.

Good morning, everyone. It's a pleasure to be with you once again for another quarter to present the results of the second quarter of 2023. My name is Márcio Penna. I am the IR of Méliuz. This conference call will be held in Portuguese and simultaneously translated into English. All you need to do is to select the interpretation and your language. Select the preferred language by clicking on the interpretation button, which is located at the bottom of the screen. Here with us, we have Israel Salmen, Gabriel Loures, who is a growth officer, and André Amaral, strategy officer. This conference call is being recorded, and right now, all participants will be connected in listen-only mode during the presentation. Then we are going to start a questions and answer session. If you want to ask a question, please click on the raise hand button in English. All our materials have been filed at CVM and are available at investor relations website. Israel, the floor is yours. Good morning, Marcio. Good morning to everyone, all analysts and investors. It's a pleasure to be with you. In November 2020, today I stopped and think, and I was thinking how many times we were together, and these have been quarters of great learning. The company has transformed many M&As. We have improved our shopping arm. This is a different time, a time when we will be focusing on the company's operational efficiency and the cycle that I talk a lot very often. We always have major growth cycle in our nearly 12 years of life and some efficiency, which is happening in the first half of this year. The team is very focused on this mission. As you can see that what we are going to say today is an update of everything that happened, but we are still saying the same, that to increase efficiency, to reduce costs and expenses, to negotiate with suppliers, to improve our products so that we can do much more with less resources, for example, in marketing. The company is on the right track. I talked a lot about having control of everything, and this is increasingly more. Half of this year, we are going to start collecting the fruit of everything that we did in the first half of the year, and there are a few highlights. Number one, we signed the SPA with Bankly. Bankly is on the next phase of approval for the Bacen and CADE, the C-A-D. Last night, just after we published our results, we got D. This is another phase for the Bacen, the Central Bank of Brazil, for us to continue focusing more and more on building an asset-light business model, focusing on Méliuz and other companies of the group. Number two, another accomplishment in the first half of the year, we started obtaining value from our commercial agreement with BV. We are doing it with BV, and then we'll talk about this more towards the end of the year. This has been something very important that we did in the beginning of the year, to stop doing financial services in-house and with the help of BV, and they have great know-how on that, to have the penetration of financial services in our current customer base. Another thing that we did very well was to reduce expenses and costs. It's been falling quarter-on-quarter, just much smaller, much leaner that within half of the year, we will have the chance to make the most of the commercial agreement that we have signed with BV. We are going to start the second half of the year, as everyone knows, that it's stronger for e-commerce, not just in Brazil. We are going to start a leaner cost structure, and then we will break even, which is our mission. We'll talk about that on Méliuz Day. In addition to break even on Méliuz Day, we are going to provide a clearer vision of what to expect from New Méliuz in 2024. Without further ado, our presentation today is going to be led by Márcio, Gabriel, and André. I'll give the floor to them, and then I come back for the Q&A. Thank you so much. Israel. It's a pleasure to be here. My name is Gabriel. I'm going to talk a little bit about shopping, both in Brazil and international, and then André will talk about BV and financial services, and then Márcio will be talking about the financial aspects and the company's EBITDA. Talking about shopping in Brazil. We are still focused on optimizing our margins. We have a consistent work in improving our efficiency indicators of our core business. Once again, we have a quarter with an increase. We got to 2.3% in Q3 2023 versus 2.1% in Q2 last year. The consequence of this efficiency work in all verticals is related to the margin of Brazil shopping, which went from 3% to 19.9%, growing 53% in a year. Our focus is on improving the profitability. This is very clear, and this result is only possible for three reasons. I would like to talk a little bit about those reasons. I think that number one is the value that we create for our partners in our core business. In our relationship with partners that I manage together with the commercial team, it's very clear to all of them in all our conversations the importance of Méliuz to generate qualified sales at low cost and sales that really change their performance. Méliuz platform is highly competitive in a scenario that is increasingly more crowded. Many companies going to the digital channel. That increases the prices of traditional media. Within this context, Méliuz is a very efficient platform with good quality, low cost sales. This is very clear in all the conversations that I have with our partners. I think that the second main reason that has improved the profitability of our shopping business is to the renewal of our core business. Number one, they are small innovations, better adjustments that we make every day. We have great conversion, the best experience possible for our users, and the best sales for our partners. The second part are new modes of businesses, new ways of creating revenue. I think that we are growing significantly. This is a business vertical that generates exposure to brands, sales once we show our users, and increased exposure to each one of our partners. This is very good. We have selected offers. They are offers that are selected by the community, making sure that they are relevant of whatever we offer to our users. They choose the products that they are going to buy. We have campaign calendar. We create Méliuz dates that help balance the seasonal drop in shopping in the first half of the year and generates a quite relevant revenue increase for our partners in these exclusive Méliuz dates, in addition to other exclusive campaigns. Number three is what supports all others. We have been talking about our margin and cashback optimizations and everything that we do with a cashback percentage. We have been talking about the reduction in marketing investments and what we see on the other end are users that keep buying with optimal experience to buy and generate value with cashback. With the pleasure of gaining more and more gifts which makes it possible for us to do all the work of margin optimization. This is an evidence of the value that we create for our users. Talking about our international shopping business. This is a slide that is really nice. We see a movie with our team talking to everyone who was here already in 2014, 2016. This is a Méliuz very similar to what was back then. This is what we saw at Picodi. When we see new buyers, the total number of buyers and the growth that grew almost threefold from Q2 2022 to Q2 2023, which is almost equivalent to net revenue of our cashback operation. When we look at the financials, these numbers are not yet reflected in our bottom line. We buy a cashback revenue that has much more quality because this is revenue that users buy again and again, and it is a recurring revenue for Picodi. As we add new users then Picodi cashback revenues grows at a very high speed. This is very important for our business and we see a lot of value related to that. We monitor two basic metrics, number of buyers and acquisition of new buyers that has grown a lot from the second quarter of 2022 to the second quarter of 2023. We reached the landmark of 2.4 million much faster than we did with Méliuz in the past. The second metric is GMV, which is very much in line. We can make projections that as we include new waves of buyers on top of what we already have, there will be exponential growth of cashback. Our expectation for Picodi businesses is that it will grow more and more significant for the long term, and it generates a significant geographical variety or expansion that we have access not just to Brazil but also to other countries. This is it about the shopping business, and I am going to give it over to my colleague, André. Thank you, Gabriel. Good morning, everyone. A pleasure to be with you again. I am going to go over this page. As Israel mentioned, this is the current status of the partnership that we announced at the end of last year, our partnership with Banco BV. We have overcome a few landmarks, and I think that during the second quarter, we finished signing the SPA when we submitted it, and we approved the commercial agreement, and we submitted it to regulation agencies in Brazil. Just last night we heard the approval from the Brazilian antitrust authority, CADE. Now we are submitting it to the approval by the Central Bank of Brazil, which will take place in the next 6 or 12 months as estimated by the regulator. We also have the commercial agreement between Méliuz and BV that we had last year. Going to the next page, this is what we had in the first quarter. We talked a little bit about this in our last conference call. We have attained some very important landmarks. We started the first developments in the beginning of the year, as soon as we signed the commercial agreement with BV Bank. Just to make it clearer for everyone, everything related to the infrastructure of Méliuz financial services still exists in the banking services. But everything related to regulation affairs, we did the migration of the Acessopar bank to BV, the digital account, the credit card, and other financial services that we are going to build from now on based on what we agreed with the commercial agreement. We spent the first six months doing this migration. I think we exceeded our best expectations. We already had very good expectations in terms of what would be in the first phase of the project. Fortunately, we could work together in this process of integration of the technologies of the three companies. Even faster than we had imagined, we could make the New Méliuz BV Bankly structure operational. We did this along the second quarter as we evolved in integrations. For most of the existing accounts, we started opening new accounts. Once we finalized 100% of the integrations, which happened on July 4, 100% of Méliuz accounts were then opened at the financial organization of BV Bank. During the first half of the year, as we were doing the migration of technologies, we kind of slowed down the opening of accounts. We didn't invest in marketing because our focus was on the migration of technologies. Now we are going back to that growth as 100% of the accounts are being opened for BV. Thinking of July numbers, we already have about 60 at BV Bank, and these accounts are still made with 100% organic efforts of our team and our conversion efforts. We talked a little bit about this in our release and this shows our efficiency in the acquisition activation of users in our internal communication channels. We reduced our market investment and this is less than BRL 1 million per month. Even though we reduced, we could still grow in terms of accounts opened. In the second half of the year, there will be a phase of migration of the accounts that were opened until last year in Acessopar, Méliuz and BV. They will no longer be with Acessopar and will be migrated to BV. There's a migration phase that will take place during the second half and the escalation of the building of our credit card portfolio. We have already started doing this, but in the second half of the year, we hope that it will be at cruise speed and we are going to have BV team to escalate this operation. We've been super successful with users, with the team. We are very excited in terms of what we'll deliver from now on. Number three, one of the main important points is the agenda of new products. You are going to see or hear more about that on Méliuz Day. We have ongoing conversations about other products that are accessories to the digital account so that we can monetize more the account for the customers who have BV accounts. Now I'm going to turn it over to Márcio to talk more about the numbers of the second quarter. Thank you, André. This is the slide, which is a pillar, not just of this result, but for the year as a whole. We hear all the time talking about the market and F. We are collecting the results and seeing the results of what we've been doing since the beginning of the year. Between the first and second quarter, we have reduced expenses across the board in all lines and all expense lines. We went from a level of BRL 112.4 million operational expense in Q4, reducing 18% in the first quarter and getting to Q2 to the level of BRL 86.1 million in total expenses in a quarter. This is a significant reduction, 23%. This is not just due to the management. We are not the only ones to get credit for them. All employees get the credit. We have insourced some services. We talked to our partners, and everyone should get the credit for that because everyone really gave a contribution for us to get to this leaner cost structure. We see an upside for the second half of the year. This number, 86, is the basis for the second half of the year. As you know, there is a percentage, there is a variable cost related to e-commerce revenue because the cashback expense, but the fixed cost as a whole that is from this level down. When we see the numbers of the parent company, numbers are also significant. We went from BRL 92.4 million, and we got to the second half of this year with 61.5% with 33% reduction in the first six months of the year. The company is really doing its best for us to have a better cost structure, and by the end of the year, it should be a lot different and much leaner than we had in the beginning. Now considering revenue, as we said in the beginning of our webinar, we will be talking about revenue again because these cards and accounts that are being issued, as André has just said, they will be compensated by BV. Each count and card activated, we will get a compensation. The second half of the year seasonally is usually better. There will be improvements in the second half as compared to the first half of the year. Now going to the next slide, you can see the bottom line. The company's EBITDA, as we said in a previous slide. Here you can see that the company's efforts are being translated into numbers. If we look at consolidated numbers, we go from EBITDA of BRL 45.9 million in the second quarter last year to negative BRL 14 million this quarter. We haven't yet been able to get our objective of breaking even, but we are very close to that. We had a robust reduction. The reduction was not so robust as compared to the first quarter. As everyone know, Q1 is usually weaker for e-commerce and retail as a whole, but the expectation is that on the second half of the year, we'll break even, and then from next year on, we will be generating cash. Thinking of the parent company, numbers are even better. We went from a level of BRL 46.4 million negative in Q2 2022, going to a minus BRL 8.7 million in Q2 2023, an 81% improvement in one year. When we take out one-off events, we go in the same direction. We had a gain of efficiency in 77% in the adjusted EBITDA for the parent company and a 57% improvement of the adjusted EBITDA for the consolidated numbers. We are sure we will break even in the second half of this year. Showing it very clearly, this is the cash breakdown as compared to the last quarter. The first bar is the cash that we closed Q1 with a disclaimer that is slightly different from the picture you saw in our Q1 earnings release because we are excluding Bankly, because we signed the SPA with Bankly. It is an asset available for sale. According to our accounting standards and IFRS 5, we take it out and it's only shown after the net income in the balance in our earnings release. We had cash, excluding Bankly, would be BRL 422 million in Q1. We get to BRL 393 million in the second quarter. It's important to show that only BRL 8 million is related to cash reduction due to the company's operation. All other cash reductions are one-off events. BRL 7 million are one-off events related to billing amounts that we didn't receive in the first quarter, and we got in the second quarter. This has been reversed, and we have other one-off events due to the signature of SPA because we had to pay our legal and financial advisors. These one-off effects will no longer have an impact in the company's numbers in Q3. The reduction would be about BRL 8 million in operation, and it's likely to go to zero very shortly. This will turn in positive cash generation for the company. Going to the next slide. Our very famous Méliuz Day. We started working on Méliuz Day. We really want to have an event, not just about our core business, e-commerce, but also about our strategic partnerships with BV. We have a lot to talk about, Picodi. The numbers are very good, and we will be able to show you a little bit of the message on Méliuz Day. We haven't yet confirmed the date for our Méliuz Day because we still need to confirm the venue and time. It will probably be on the second half of September, and we will talk about strategy and numbers. Considering that the revenue expense breakdown of Méliuz has been changing so much during the year, we think it's fair to the market for us to give you a basis in terms of expectation for this year, next year. In terms of revenue, GMV, expenses, EBITDA, ramp up of cards, accounts, Picodi. So we will be talking about everything, and we are sure that the market is going to like it very much. With this, I end the presentation of our webcast, and we will open our Q&A session. If you want to ask a question, please click on the raise hand icon on the bottom of the screen, and I am going to release you and open your microphone. Our first question comes from Ricardo Spiegel from BTG. Ricardo, Gabriel Loures, André Amaral, and Márcio Penna, thank you for the presentation. I have two questions to ask. Méliuz had a loss of BRL 20 million, excluding banking and a one-off event. Thinking of the target breakeven, so this is implicit, a positive bottom line per quarter of BRL 10 million, plus the BRL 12 million down in Q2. Does it make sense to expect that from now on? Do you think we are going to see a positive EBITDA in Q3? My second question. You talked about new products that may improve customer experience and improve growth. In addition to the products that you have already mentioned, related to financial products, should we expect any other new products? Well, I am going to first answer your second question. Certainly, the main thing about the second half of the year, in addition to the shopping business results, because of the seasonality and recovery of the market, are likely to get better. So there are also financial services. The main thing are accounts and cards. We have started developing new projects that will be reflected in Q4. So in addition to accounts and cards, the new services will be seen in Q4. We are already seeing this for accounts and cards. We are issuing many more cards and opening accounts. We have already started this in Q3. Talking about the new products and services, we will talk more about this on Méliuz Day. Insurance and investment products too, and other account accessory products. So this makes sense as of Q4 ramping up next year. So, the first question, Márcio. Ricardo, thank you very much for your question. The goal is really challenging. You are right. That is it. We are working. Our internal goal is at the parent company. We want to have operational breakeven, of course, excluding one-off. We want to have operational breakeven. Yes, we are after this. So the trend here is to report results better in the second half of the year than in the first half of the year as a whole. Basically with increases in revenue. As you said, considering our strategic partnership with BV, we started opening accounts and issuing cards. There is a seasonality of e-commerce that will certainly help us. We are still working to reduce cost and expenses. Our goal, internal goal, which is bold and challenging, remains that we will operationally break even at the parent company. If you can allow me to ask a question. Which are possible uses that you have today once the Central Bank of Brazil approves, if we take the almost BRL 400 million cash and you get to Bankly. As you said, the company is very close to breaking even. Would it make sense to pay out to shareholders or would you use it for anything else for the cash that you already have? Hi, Ricardo. Thank you for the question. We are at a very convenient cash status. If we know to work with calm, knowing how to make decisions. At the same time, I've been talking to many investors. For us to get to this very comfortable cash position, it was hard work. We had to get capital. We haven't started just yesterday. It's been more than 12 years that we've been working very hard. The IPO and follow-on were very important to have the good position that we have today. This does not reduce the importance of having robust cash. This is very important to make it very clear. However, there are internal conversation, and we've been talking to internal conversations and maybe a capital reduction anchored to amounts close to the sale of Bankly. We've been talking about that in the board of directors. On Méliuz Day, I want to have something more concrete, closer to a decision on this topic. In September, in Méliuz Day, we will talk about that. We are considering that. The reason why we are not talking about this with the board right now, about an even bigger capital reduction than that, there are many other options that we are analyzing in terms of M&A, the growth of any other business line that is doing well, giving hints for us to continue to invest and generate cash. I think this is my priority, and I hope that I will be able to give you clearer information on Méliuz Day. Thank you, Ricardo. Our next question comes from Mirela Oliveira from the Bank of America. Mirela, you may ask your question. Thank you very much for taking my question. I have two questions about Bankly, if you allow me. How was the standalone cash burn in Q3, and what we should expect in future quarters? The second quarter is related to one-off costs related to the Bankly transaction. Are we going to see any impact in future quarters? I'll start answering your question. Thank you very much for your question, Mirela. Bankly, as you are well aware, it is an asset that burns more cash, operationally speaking. The same work that we did, we are doing at Méliuz along the first half of the year. It started being done at Bankly in the middle of the second quarter. According to our expectations, trying to avoid guidances, I'm going to save guidances for Méliuz Day. Along the second half, there will be a reduction in Bankly cash burn and a reduction that will be consistent. In Q3, there will be some cash burn with a reduction, and if we look at the second half as a whole, the reduction is going to be very clear. I'm going to try and avoid numbers, and I'm going to save the numbers for Méliuz Day. Your second question regards one-off items that might affect our bottom line. The main one dropped because we signed the SPA with Bankly. There are some amounts that might be due before the end of the year because you'll have all the approvals of regulation agencies of the operation. Our advisors are still with us, and they will be with us until the operation is completely finalized. The main amount thinking of the next three months in this quarter, they're over, they're past. I don't see any major disbursements in Q3 due to financial and legal advisors. Thank you very much, Matthew. Our next question comes from Andrew from Morgan Stanley. Hi, thanks for the question. We've heard a lot about the cross-border operators increasing in Brazil. I know you've done business with the likes of Shopee, Shein. I'm curious your view of how relevant this channel is, how the conversations are going, and the extent that further growth in these platforms can be a driver for your Brazil GMV over the coming quarters. Thank you. Thank you very much for answering the question. I'm going to answer in Portuguese. Yes, we've been monitoring very closely the growth of our cross-border players. For example, Shopee, AliExpress, our major partners, they're important to our business. We are obviously working to bring other players in. We see this with good eyes favorably, and the competition in the Brazilian market is very important for a player like us that generates sales for our partners. This leads to new marketing expenses, new sales. This is very positive for us. We've been talking and we've been negotiating with all of them. Great. Thanks for the color. We'll look forward to the Méliuz Day. We have no other questions for today. I talked a lot to analysts last night and this morning before the webcast. That said, we're going to move to our closing remarks. Thank you all. Thank you, Matthew. Thank you all for your presence. We are still very much focused on our objective. I think that we are on the right track. The company has been reducing its cost structure, has been working on new revenue lines. Some of them have been launched for Q2, the partnership with BV in accounts and cards. Everything else we said today about international shopping and other companies, all of this makes us very excited for the second quarter. The beginning of the year was difficult. We had to implement major changes in our business after the announcement of the partnership with BV. They were months of very, very hard work. But looking back in the last six months, it's mission accomplished. Our next mission now, as we've been saying, which is to make the company break even to start 2024 in the well-known margins that we had before our IPO. Thank you all very much.