Good afternoon, ladies and gentlemen, and welcome to CVC's conference call for the results of the first quarter of 2020. Today with us, we have Mr. Leonel de Andrade Neto, Chief Executive Officer, and Maurício Montilha, Chief Financial Officer and investor relation. This event is also being broadcast simultaneously over the Internet via webcast, which can be accessed at www.ri.cvc.com.br by clicking on the link, first quarter of 2020 webcast.
The presentation slides are available for download through the webcast platform. The information is available in BRL and has been prepared in accordance with accounting practices adopted in Brazil, based on the statements, guidelines, and interpretations issued by the Accounting Standard CPC. Before starting, we would like to mention that forward-looking statements made during this conference call regarding CVC's business prospects, projections, and operational and financial goals are based on beliefs and assumptions of the company's management as well as information currently available.
Forward-looking statements are not guarantee of performance. They involve risks, uncertainties, and assumptions as they refer to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions and industry and other operating factors may affect CVC's future performance and may lead to results that differ materially from those expressed. Such forward-looking statements. Now, I would like to give the floor to Mr. Leonel Andrade, CEO, who will begin the presentation. Mr. Leonel, you have the floor.
Good afternoon to everyone. Thank you very much for your participation. Today, we have the presentation of a balance of six months. Here, our company is being updated regarding its reports in terms of obligations and investments. This reflects our reality, and we will talk subsequently about this. There is a point that we want to show the public that we're being transparent.
Here we have on the bottom line, a bad result of entries that are not frequent in our financial statements, but they have been recognized only one time. On the other side, we have a different view because of the pandemic. Now we have a strong operating focus. All the executive committee is in place. We integrated our businesses together with our executives. Our main businesses are being integrated in B2B Brazil. This integration of the business is creating synergy and giving us competitiveness, and we are reducing internal costs. We have around 1,200 stores operating. Before the pandemic, we had 1,360 stores, so we have most of our stores working. Some have been closed because of the pandemic. Now we are 100% operational. There is no product, no partnership that has been interrupted.
We have had no reduction in terms of personnel and business. The other way around. In this period, we have our entire structure that is new. Today, we have a company of high standard with a high level of governance in its fronts of internal controls, auditor, and governance by and large. We will be an example of organization. We concluded the review of our values and proposals, and I would like to highlight the commitment in terms of governance, sustainability, a new model with both that is sustainable from environment and from the business point of view. We are reviewing our strategy with the support of McKinsey & Company, and this review is half the way done, and we will conclude it by the beginning and the middle of November.
This is an important effort so that we have all our business and all our people focused on the future. At the same time, we are reviewing our brands, carrying out a brand architecture effort in order to simplify the operation and to have a more relevant communication. We have over 10 brands today. Today we are going to rationalize and simplify this. This will be done together with our strategy. We are also reviewing our technology and process. We want to gain synergy scale process. We are integrating systems that were bought throughout the companies in the past years. This is something that is fully ongoing, and everything will be done this year so that we end the year with the new company's view and resume our business more focused. Sales are growing rapidly. The resumption in the domestic market is solid.
The company as a whole is 45% of sales compared to last year's. If you consider that international sales are weak, the sales in Argentina are also very low. The Argentine market is undergoing a more difficult situation, and the corporate sales are also very weak. So domestic is resuming, and the company has 40%-45% sales. We are growing positively. We continue with all the investments in the digital market, the digital transformation that will be done in the upcoming weeks and months, where we will launch things from the platform point of view and from the product point of view. We are investing a lot in innovation. We are going to launch five new products this year. All of them for customers too, and focused on the end customer. We are also building a new model of distribution.
We are investing in digitalization that we will see as of next year in our brands, in our stores, and we have a robust cash flow today, as we already announced. This cash flow allows us to face the crisis, and we continue sound, and we will be able to continue with the capacity of resumption and to continue leading the tourist industry in Brazil and with the support of our shareholders. This is something that we saw in the first stage of the capitalization. So we have support. We are going in the right direction. This balance sheet represents great losses, but these are losses that were recognized and in a transparent fashion that we can see the future. Our transparency is very strong in this management, and our commitment to the future is strong so that we continue leading the Brazilian and the Latin American market of tourism.
I will give the floor to Maurício Montilha, my colleague, that will give you a better view of our figures. Maurício, now you have the floor.
Thank you, Leonel. Good afternoon to everyone. It is a pleasure being here today. Very briefly, I will go through a presentation because I believe it is more interesting to have more time to answer questions. On chart number four. Leonel showed us that we have a resilient business. Our cash position is interesting and relevant because we are at ease, and we have time to adjust ourselves and to honor our commitments together with our customers, and we have the support of our shareholders that have invested more capital that has allowed us to create more funding too.
We have had a resumption of sales during the first quarter. The second quarter is very relevant in the volume of businesses because many destinations were closed. In the next chart is a highlight of our capitalization that was very successful. We also distributed an excess of funds. There will be another stage between December and January of next year. We believe that this will be an important process. The capitalization is to bring resources so that we can resume in the market. We have this for the company to survive and to fulfill all the commitments of the company. This capitalization has come in an adequate moment when we are resuming our businesses. We have the ability to finance these travels from here on.
When we go to the next slide, I would only like to mention something of the first semester. This is something that all the companies are undergoing. We had to assess the value of some assets that we had. We did have an impairment regarding our goodwill based on the increase of the discount rates. There is an extension of the cash flow when you include the COVID. You can see the value of the assets is lower than in the beginning. We also had a reversal of deferred tax assets. The company normally will be able to recover these tax assets. Due to the uncertainties, the company had to write off accounting. As soon as the uncertainty goes away, when we negotiate the debt with the capitalization, I believe that we will go back to our normal numbers.
We will be able to credit this in the future. The good accounting practices, because of the change that COVID brought to us regarding the economy, in terms of available income, unemployment, and for a portfolio, we have an estimated losses. We registered these losses that we believe that will go until the end of the year. This is in the balance of the first quarter. We recognize them as effects of the pandemic. These are extraordinary adjustments. There are other things. We repatriated passengers that were in Europe and in Asia and other credits that we lost. These are extraordinary adjustments. In this presentation, when we talk about adjusted net debt, these are extraordinary expenses that we believe will not appear in the future, as Leonel said. The market is resuming.
I would like to highlight the system. Leonel mentioned the booking of hotels. The resumption also means to us the importance of governance and control. We spent some time adjusting and representing the financial statements of the past and showing all the mistakes. We are operating at another level right now. We have an important plan of governance in the company that has already started. We have a management in charge of compliance. We have a relevant and detailed program to improve controls, processes, everything that supports the financial management of the company. To us, this is very important when we resume businesses. What is important is to maintain a sound company from here on. When we talk about the results in Brazil, we are on page eight. The pandemic is one of the most relevant impacts that we have had in our results.
The onset was at the end of the quarter, but we had a drop in volume due to the Northeast. That was the oil spill that reduced the season in the Northeast. That is very important to CVC, and there was a drop in prices, but it impacted the mix. This impacted the first quarter. It went from 33%- 43%, the boarding indexes. In the Northeast, it dropped from 22%- 18%, and international boarding, this also dropped a lot. It is important to remember the domestic market represents 85% of our new businesses. This is something that we see during the third quarter.
In terms of quality of revenue, this is very important for CVC, and this is one of our great strengths. On this next page nine, during the first quarter, we couldn't react, and the expenses of the companies were lower than what we see generally. Nonetheless, this is an important matter, and we are looking for operational synergies, commercial synergies in the businesses where we're present, especially B2B, and these operational synergies among the group. We're also reviewing the activities of the company, something that we will continue. This is very important. We believe that during the first quarter, we didn't see any effects, but this is a very important issue. During the second quarter, we had a significant drop of expenses, and we want these synergies and reductions to be permanent in our company. On the next chart, this illustrates our portfolio.
Here you can see that the provisions increase because of the additional provision that is an expectation in terms of loss because of the future impacts of COVID. Important is that we are taking new actions because credit risk has changed between post-pandemic and pre-pandemic period, even for risk scores. We have greater upfront than in the past, and we have also adapted our credit score to a new reality. So we are prepared for self-financing, and this is a better quality of what we saw last year. Brazil, during the next chart, when we talk about EBITDA and net income, the main component of loss, there was a loss. We could not offset the lack of boarding. Speaking quickly about Argentina, that is on page 13. Argentina is facing a similar situation than Brazil.
We believe that the pandemic is impacting them more because the economic situation in Argentina was already deteriorated because of income and unemployment. There was an exchange variation that was important, and this also exerts pressure over the sales of international sales. So here we see a more accentuated impact in Argentina in terms of businesses. The consolidated results. Here we see the impacts. Here we had bookings. We had -31% in net revenue, 36%, and there was a significant reduction of our EBITDA because we couldn't adjust our cost base to the new reality. When we talk about cash generation, this period was very important, and throughout the cash generation in March, during the beginning of the pandemic, when we realized that the pandemic was here to stay, we preventively had BRL 440 million of prepayment of credit card receivables.
The first quarter is a period of negative cash generation because we have all the hotel payments, the hotels that were used during January and February. The cash flow was according to what is expected, and even more positive because of the prepayment of cash. This, during a moment of uncertainty. We did not prepay anything anymore, and we had a positive working capital. The risk is not ours. The company, we did not see the impact of the pandemic at that moment. Our indebtedness has not changed. It is important to mention that in our opinion, the capital structure that we have is reasonable when we see our business in the mid and long term, excluding the pandemic. Because of the new curves of revenue and cash flow, we are renegotiating together with our creditors all of our contracts.
It is very important to highlight that we have been aligned with all the stakeholders of the company, be it investors in shares, variable income, be it our board. The company can resume soundly. Now we are focusing on becoming leaders to have a sound company, and this is the best pathway to generate value to all of us and for the future. Now my last comment. Of course, we measure the return over invested capital based on the EBITDA that was affected by the pandemic. During the first, which as you can see here, is way below the historic average of the company. Now, I will give the floor back to Leonel so that we can go to the question-and-answer session. Thank you very much.
I think that we can continue with our question-and-answer session.
Now we will have our question-and-answer session. We would like to remind you that to pose a question, you should press star 9 so that we can open your line. Star 9. We already have some questions in the queue, and we will start by Olívia Petronilho from JP Morgan. Olívia, good afternoon.
Good afternoon. Thank you for taking my question. I have two questions. One is of short midterm. When we see the take rate, the take rate of the first quarter was quite messy, but when we compare to the figures that you published in 2018 and 2019, do you believe that the take rate will normalize in the upcoming six months or 12 months? Now a strategic question. You are reviewing the marketing of your company. I would like to know what your next steps will be. I would like to know what the strategy of the company will be operationally.
This is Leonel. Olívia, thank you for your question. Regarding the take rate, the first quarter is very difficult. It was full of turmoil because in addition to all the operating matters, we had a drastic change in the end of March because of the pandemic. Today, we operate with a take rate that is aligned with last year, and I see no take rate pressure in the upcoming quarter. I believe that we have opportunities when it comes to reviewing businesses and action, and also favored by the domestic mix. As the market has a low demand, this favors us in terms of negotiations with take rate.
As the supply market sees CVC as a strong company able to resume, they have given us favorable and good prices. We have also created a pricing structure that has a view that is focused on margins and in opportunities, not only in products. We are analyzing channels, the customer profiles, and demand. This is an ever-growing effort that favors profitability. I see no pressures. I only see opportunities. The take rate is now a point of attention, but with the complete review of credit and collection and a strong review to have better operational capacity and better profit in our credit portfolio. Regarding our strategy, in brief, in a number of weeks, we will have another call to show the results of the second quarter that is also pending. In this call, I intend to shed light on our strategy, but I can say the following.
We have separated our businesses in B2B, B2C, and online. In B2B, the integration is giving us margin gains, and we have an ever-growing market share. The most fragile competitor does see us strong, so certainly we will spearhead the tourism industry and the market of small agencies. On the other side, we gained a greater competitive advantage because of the partnerships that we had with our suppliers, especially hotel chains and airlines. In B2C, we have a physical share that is significant. So we focus now on the domestic. Our CVC brand is top of mind. Our distribution is intact, and we are totally focused on transforming our stores in a point of sale, totally integrated, totally digitalized that is modern. This is what we will focus on the upcoming one, two, three years to transform the experience and integrate our customers towards their digital platforms.
This means what? Investments or strong investments in modernization. We have an online business where traditional CVC is not a leader. We never created a long-term plan. This is being done right now. All the investments and digitalization have been approved. Even more important, at least in my view, there is no use in digitalizing if you do not know in-depth your customers and you do not have a strong relationship strategy and data science and knowledge in pricing. The company has this, and now we are going to present in the upcoming weeks, novelties regarding this. We are working on our brand as well. So we will be one of the main players in the market in OTA, in digital transaction. This does not mean that we are changing the physical because we are the only agent in the market that can be omnichannel of tourism.
We will work this way so that our customer is integrated in any of our distribution channels or any platforms that they are using. We are going to work with market data in the future. I do hope I was able to answer your questions.
Thank you very much.
Our next question. Eric,
good afternoon, Leonel, Maurício. Regarding the take rate, we would like to understand what exerted pressure on the take rate during the first quarter. Could you give us more details about the take rate of the first quarter? The second question regarding expenses, because you have done a good job regarding the expenses during the second quarter, and I would like to know what the situation of the company will be until the end of the year.
I will give the floor to Maurício, and I can add something at the end.
Thank you for the questions, Eric. There are two aspects. In December, we had a complicated year, and the oil spill in the Northeast hindered the advanced bookings for the Northeast, and this impacted our results in August and September. That is a period where we fell a lot towards the Northeast. This was one of the main points. Now, obviously, the volume didn't materialize in great scale. The Northeast is very important. This is very important for our figures in B2C. The company sold more in mix. This was more in the international business where we have lower margins. When you book international hotels, our margin is lower. These were the two components that affected the margins of the first quarter, which is a quarter that has a high volume in Brazil, and it started weak.
We had good international sales, but it was difficult in terms of margin. Regarding our expenses, our aim is to have a more efficient company. We had to reduce during the second quarter our journey. This is our midterm objective. I'm going to give you an example of what is happening today, that although the pandemic diminish during the second quarter. We are operational, our operation to deal with the customers, to find solutions for our customers now that the airlines are coming back. We have a volume, a great volume of over 300,000 customers that we're taking care of. We're operating in order to find solutions for them. We have a midterm efficiency target, and we are going towards our target. The second quarter was intensive because of the drop of our journey.
Now we want more permanent reductions, and they're not automatic. Although we're working with low volumes, we have to work a lot in order to service our customers, especially now that we started resuming our activities in the market. We are strongly working to help our customers to travel because most of them still have the credit for the future. We see a curve of efficiency appearing in the upcoming quarters, maybe until next year.
Could you tell me what the take rate was month by month? In March, you had to deal with the repatriation of some passengers, so I believe that you suffered more pressure during some months.
Unfortunately, we do not publish monthly information, but I would say, well, generically, we did not have peaks on a monthly basis, and the cost of repatriation were taken from the take rate. The month of March wasn't impacted by extraordinary effects.
Thank you very much.
We have Gabriel Disselli from Santander.
Good afternoon. Could you give us more details? In terms of the financial soundness of the franchises, can we expect more franchises to close? Will they be able to deal with the demand? Could you give us more details?
Gabriel, good afternoon, and thank you for your question. This is a major challenge. These are business or entrepreneurs that were caught by surprise, and this was the sector that was hit hardest. In the beginning of the pandemic, we had zero in terms of revenues. What we did was, because of our situation, we're talking about the end of March, April, and May, we were strongly working in order to survive. The company, what we did for our franchisees was to give them logistics support.
We gave them legal support. We helped them. We intermediated debates with the market. I personally participated together with banks, with public agencies, with the ministries, with the Ministry of Tourism, with local agents, Sebrae, the works, and the Secretariats of Tourism to give them support. We were very successful with credits in terms of goodwill. We also restructured things here so that they could have a share in our business when they rebooked our customers, because the rebooking demand is strong. We transformed this in a competitive advantage where our customers could rebook their travels, and our franchisees supported this.
Now they are starting to recover with the new times. I don't believe that more stores will close. Perhaps 10% less. I see them encouraged. We have been talking to them frequently, and they are focused on sales and focused on growing. I see no risk in our physical distribution. I believe that the worst has already passed. I see our stores operating. Some of them are even investing and rehiring more personnel.
Could you give us more details regarding indebtedness? How have you negotiated your covenant? Can we expect some penalty because of the covenant or because of the ventures?
Maurício.
When you see the operations, all of them increased in value because the pandemic or the post-pandemic period brought another relationship between risk and return. The risk of the business increased, and this is natural, and this is something that we've seen in all the deals, and there was an increase of risk. The adjustment of these rates is included when you hold a new contract. We've been discussing normally with our creditors.
What we're doing is what the entire market is doing. The market has repriced the risk for everyone. What is important is that there is a positive alignment between us, investors, creditors, board, our franchisees, and our team. The best way to attain value is operating. That is something that we're seeing. We're operating independently. Our shareholders are investing in us so we can resume our sales, even our creditors. Yes, there will be a natural repricing movement, but this will not be different from what you see in the market in average because of prices and risks.
Okay. I think that this is clear. Could I pose one more question, a bit more optimistic? I believe that during the swine flu, some companies had to file for bankruptcy, and my impression is that CVC benefited itself because their competition wasn't as strong as them. Do you have a view on this, or you will be able to see the situation throughout the year? Do you believe that you will naturally gain more market share because of the soundness of the company and the size of the company?
Gabriel. Well, probably yes. We will probably gain. We are gaining more market share. This isn't something to celebrate because our mission is to transform our company in a better company, to be better every day, and for it to be sustainable. Of course, with profitability, with adequate controls. I don't believe that we should base our strategy based on the frail competition, because the tourism is an ever-growing market. It underwent a strong crisis. I believe we have very good prospects for the future. Everybody wants to travel more.
We're in the correct market, and I believe that new competitors are going to emerge, and the ones that leave will be replaced by a new source. Strategy should not be based on this. In the short term, it has advantages because we will survive. We have already survived. Of course, we will gain market share. When we talk about our strategy, we shouldn't consider the frailty or the weakness of our competitors. Thank you.
Here we have a question that was sent through our webcast from Daniela Redhauer from Talery. Her question is, what is the prospect of the take rate of the second semester of 2020? Moreover, if you could give us qualitative details for Brazil and Argentina.
Daniela, thank you for your question. It's a pleasure to answer your question. Currently, the take rate is sound. It is better. We are favored because the crisis gives us a greater bargaining power, and we have invested a lot in a policy that I practice at Smiles. We are modernizing our pricing because the margin has to be more important than growth. Although growth is fundamental between growing or having margin, we will focus on having more margin in the upcoming periods because this is a more sustainable vision. Our take rate prospect is favorable. I will not give you figures.
In Argentina, it is uncertain. Uncertain because the market there isn't as strong as the Brazilian market, and as there is no demand, you do not have margin to maneuver. I believe that the take rate is not a risk, it's an opportunity. We will not see spikes in terms of growth, but it will grow.
We would like to remind our guests that to pose a question or comment, please press star nine. We are in our question-and-answer session. To pose a question, press star nine so we can identify your line. As we have no further questions, we will give the floor back to Mr. Leonel Andrade for his final comments. Mr. Leonel, I hand it back to you.
Thank you very much to everyone. I would just like to say that I'm highly optimistic. The worst is in the past. We have shown transparently our problems and challenges. Our company is 100% operational, and we are stronger than the competition, and we have been favored by the domestic market where we are leaders. We've maintained the best tourism professionals that are here, and we have people that have good culture of governance, intelligence, and they have contributed with technology.
We have created a highly competitive and integrated team. Our competitiveness has grown significantly. We guaranteed the control of the pandemic. I've been six months in the company. I would say that during the 30 days and 60 days, our focus was to guarantee the well-being of our employees and customers, and we did this diligently, especially when it came to bringing customers to Brazil. We also focused on cash flow and the survival of the company in a transparent way. Although we faced uncertainties in April and May, we will be able to balance the company. We have a robust cash flow, and the company was able to weather the crisis, thanks to the support of our shareholders and board. We have been transparent, and we have worked to regulate our balance to put our company up to date with the market.
Now is the best moment. If when the crisis diminish and perspective improves, we want to sell, we want to have margins, we have better relationships with customers, partners, and this gives us good prospects. In the upcoming weeks, we will hold another call, and I will show you in a consistent fashion, products, novelties, and all the innovations of the company. With all of this, I feel optimistic. I believe that we will recover, and we will lead this recovery. Our company has the trust of its professionals and its shareholders. I do thank you for your trust. Continue with us because we will be solid in the future. Thank you very much to everyone, and have an excellent end of the day. Thank you very much.
The earnings result of the first quarter of 2020 has come to an end. We would like to thank all of you for your participation, and have a very good afternoon.