Earnings Call: Q2 2024

Aug 13, 2024

Summary

Adjusted EBITDA reached BRL 3 million for a third consecutive quarter as Q2 net revenue rose 9.7% QoQ to BRL 67 million. Platform growth and new store and franchise initiatives supported the outlook, while recurring operations consumed BRL 12.6 million in cash.

Good morning, ladies and gentlemen. Welcome to Enjoei's video conference to discuss the results of the second quarter of 2024. This video conference is being recorded, and the replay will be made available on the company's IR website. The presentation is also available for download. Please note that all participants will be connected in listen-only mode during the presentation. Later, we will begin the Q&A session, when further instructions will be provided. Before proceeding, we would like to clarify that any statements that may be made during this conference call regarding Enjoei's business prospects, projections, operational and financial targets constitute beliefs and assumptions on the part of the company's management and on information currently available. Forward-looking statements are no guarantee of performance and involve risks, uncertainties, and assumptions as they refer to future events and therefore depend on circumstances that may or may not occur. Today with us are Ana Luiza McLaren, Chair of the Board, Tiê Lima, CEO, Iuri Lima Ribeiro, Director of Growth, Joel Queiroz, COO, and Guilherme Soares Almeida, CFO and IRO. I now turn the floor over to Tiê Lima to begin the presentation. Good morning. It is with great satisfaction that I begin our presentation today. On this occasion, I will be pleased to share some of the main highlights of the second quarter. We are dedicated to following our growth guide, expanding avenues, and making our efforts profitable. I am truly pleased to know that we continue to adapt and respond effectively to diverse scenarios and challenges, but without ever losing sight of our ambitious vision for the future. With diligence, we move forward one line at a time. We start from the GMV line to net revenue, then from net revenue to gross profit, and now from gross income to EBITDA. With this, we celebrate our third consecutive quarter of positive results in EBITDA from recurring operations. We achieved this result through growth and efficiency. We are growing in GMV, net revenue, and gross income with consistent advances of 56%, 68%, and 87% respectively, thus increasing our gross margin to 56.4%, a 5.7 percentage point increase relative to the previous year. It is essential to highlight our online core, the Enjoei platform, which played a crucial role in our results this quarter, with a GMV growth of 9% relative to the previous quarter and 19% year-on-year. Part of this has to do with the significant increase by 42% in annual uploads to the platform, which surpassed 5 million new products listed in this period alone. This was enhanced by the launch of new features, which simplify and encourage the flow of posts, in addition to marketing campaigns focusing on our sellers. On the offline channel, we are moving forward quickly, exceeding the initial revenue expectations of the first stores and beginning to expand through franchises, a crucial step for our growth strategy. Furthermore, Cresci e Perdi had a 25% increase in GMV as compared with the first quarter of 2024 and totaled BRL 224 million. This attests to the potential of more than BRL 600 million in sales through our combined platforms in this quarter. These results reflect the effectiveness of our portfolio strategy, which we have already discussed in previous meetings and which opens up ways for us to continue growing. To talk a little bit more about the business initiatives we are developing, we have Iuri Ribeiro, Director of Growth, Joel Queiroz, COO, and Guilherme Almeida, our CFO and DRI. Iuri is now going to talk about some products and technologies that we had developed in the quarter. Good morning. Throughout Q2 2024, we launched a new pricing functionality on the platform to help sellers define the ideal selling price for products, thus balancing sales speed and profitability. Our position as the largest used fashion marketplace in Brazil puts us in a unique opportunity and position to help sellers extract value from their products. We have the best sales track record for this type of product, and we are using this data to help users price intelligently. The recently launched functionality already has support from our sellers with good initial results to improve the speed and sales value of their products. Additionally, we delivered significant improvements to Elo7 in terms of experience and sales conversion level, like the redesign of checkout flow and layout to reduce friction at the order closing and payment stage, speeding up the purchase flow through the automatic choice of shipping method, and the reduction in the need for interaction between buyer and seller at checkout by providing standardized attributes on the product page. These initiatives allow us to unlock opportunities on the platform, making the user journey hassle-free to increase cart size and purchase frequency. Now I turn the floor over to Joel, who's going to talk about our offline operation. Thank you, Iuri. We are making relevant progress in structuring our offline operation. At this time, we have three own stores implemented. Fradique, which has been operating for 120 days, the Campo Belo store, which has been operating for a month, and Freguesia, which is scheduled to open in August. The Fradique store has presented robust results with a revenue 30% above the plan for the months of June and July. We remain confident that the model can offer a lower payback period than the market average to our franchisees, which would allow us to further expand the store network. Relative to the expansion via franchises, we are progressing according to our ambitious schedule. We developed our sales capacity, we have mapped target franchisees, we have completed the COF, and we have begun negotiations with potential investors. We hope to sign the first contracts in the coming months and carry out the first openings by the end of 2024. An ambitious plan together with strong execution are fundamental pillars to consolidate our presence in the offline market and pave the way for successful expansion. Now I turn the floor back to Tiê, who's going to talk about Cresci e Perdi. Thank you, Joel. In recent months, we have made progress in exchanging expertise between the two companies, and we saw the strong performance of Cresci e Perdi in terms of store openings, volume, and royalty results. In Q2, Cresci e Perdi increased GMV by 25% relative to Q1 2024 and totaled BRL 224 million. Additionally, we accelerated the pace of signing new contracts, thus reaching 33 units in the period. As a result, we currently have 471 stores in operation and 141 under implementation. A highlight was the significant growth in royalty revenue, which has reached BRL 21.9 million in the first six months of 2024. We compare that with 33 million in the entire year of 2023. The royalties EBITDA totaled BRL 17 million in the period, a 77% margin. Operating income was BRL 8.7 million, and the consolidated results include 25% of this amount via equity pickup. Additionally, we received BRL 1.4 million in dividends relating to this interest in the royalty results for the months of February and March. Looking ahead, we see a high potential for synergy between the two companies. Knowledge relating to pricing, purchasing inventory, store operation, and selling Cresci e Perdi franchises should contribute significantly to improve Enjoei's offline channel. Meanwhile, we will continue to work to structure processes, improve governance, and pave the online channel for C&P franchisees. We are also going to develop financial services for the network. Now I turn the floor over to Guilherme. Thank you, Tiê. We are celebrating another quarter of sequential increase in adjusted EBITDA, which reached BRL 3 million and reflects our commitment towards a journey of profitable growth. This sound result reflects the strong revenue growth by 9.7% relative to the previous quarter, which reached BRL 67 million together with cost dilution. As a percentage of the net revenue, the cost went from 49% in 2023 to 43.6% this quarter, which was driven by the reduction in the value of Elo7's unit shipping with a better allocation of logistics partners, dilution of technology costs of a fixed nature, as well as control of the level of subsidies. Our increase in gross margin was also significant and reached 56.4% in Q2 as compared with 54% in Q1 2024. This is consistent with the trajectory we saw in recent quarters. With regards to G&A, we managed to reduce the percentage to 28.8% of the revenue as compared with 30.6% in the last quarter, excluding one-offs. In terms of investments in user acquisition and sales conversion, if we consider the combined volumes of marketing and incentives in the quarter, we observed a reduction in the nominal value in the period, which guarantees efficiency levels. That is, as a percentage of net revenue, combined investments in marketing and incentives totaled 41.5% in Q2 2024 relative to 43.3% in Q1 2024 and 49.9% in 2023. This way, we reached a positive adjusted EBITDA of BRL 3 million. In relation to the quarter's cash dynamics, the company posted a consumption of BRL 12.6 million in its recurring operations, mainly related to investments in the platform. Additionally, we posted BRL 5.7 million in fixed assets relating to the installation of the new offices and physical stores. At the end of June, cash and cash equivalents amounted to BRL 209 million. Now I turn the floor over to Guilherme, who will make his final comments. Thank you, Tiê. Looking ahead, I would like to stress that the profitable growth levers that we are implementing allow us to envisage a sequential improvement in operating results in the coming quarters. In other words, our initiatives focused on improving the operation of Enjoei physical stores and expansion through franchises, pricing projects to increase turnover and profitability. Three, increased sales conversion at Elo7 due to product improvements. Four, additional freight and logistics synergy gains, which are going to be captured in the next few quarters. These are some examples of our focus on execution on our exploration and development of growth avenue, while ensuring the levels of profitability that we have achieved so far. We are already preparing for 2025. We will now open for the Q&A session. Thank you all very much for attending this video conference. We will now begin the Q&A session to investors and analysts. To ask a question, please state your name and company on the Q&A feature. Mr. Santos from JP Morgan. Good morning to all. Thank you for allowing me to ask a question. I have actually two. I would like to focus on EBITDA, which is now positive. First, Elo7. If I think about the consolidation, we see that Elo7 had positive EBITDA this quarter. What about the sustainability of this return? Is there something one-off or temporary that drove it up, or are these levels that we could expect going forward? In relation to EBITDA of the parent company, there was a drop in Q2 versus Q1. What are the main causes? Is it because you opened brick-and-mortar stores? How did that happen? Why? Hello, Guilherme. Hello, Marcelo. This is Guilherme Almeida. First, I will take on the question regarding Elo7. We are very happy with the results we have been getting with Elo7 ever since we finalized the acquisition and the reorganization, the adjustment of operations, and the results are sustainable. That's our view. Going forward, we will begin to see some launches in terms of products. New brands under Elo7. I think the top line is going to improve even more. This is not just a one-off thing. This is sustainable and sustained. As regards your second question about the Enjoei core without Elo7, so it's the core EBITDA. It reduced relative to the previous quarter. What was the cause? Was it the physical stores, or what happened there? We have an accumulated of the first quarter, a contribution from the physical stores. We have this in explanatory notes, explanatory note number 10, which talks about the equivalences in each business unit. Yes, there is an outlay of BRL 1.5 million relating to the brick-and-mortar stores. Also, when you think about Enjoei, Elo7 brick-and-mortar stores, the expenses are all consolidated because the teams work in synergy. There is a relevant intercompany amount that has to do with the contributions of four different companies. The next question comes from XP, from Dani Eiger. Thank you for taking my question. It has to do with the positive EBITDA. It is the third consecutive quarter now where you deliver a positive EBITDA. Is this going to continue? EBITDA should remain positive and grow. Is that what you expect, especially in view of the new initiatives which will yield results in the next few quarters? In connection with this question, I would like to understand when you're going to deliver a free cash flow. A positive free cash flow. I would like to have this visibility. In terms of offline, I would like to have some more color about these first contracts with franchisees. Are prospect franchisees interested? What is their profile? Can you also talk about the payback period, which should be below other franchises, CapEx? That was it. Thank you. This is Tiê, Dani. Welcome back. I'm going to take the first part of your question, then I'm going to turn the floor over to Guilherme, and Joel is going to talk about the conversations with potential franchisees. The EBITDA is exactly as you saw. We are talking about the actual EBITDA in terms of equity pickup and equity income. This should be even better. These adjustments that we are seeing in terms of equity pickup are going to improve, and then we are going to generate free cash flow. Thank you, Tiê. We see, Dani, in the second semester, we can foresee that we will generate some cash. The sale of franchises should make a contribution, and Q4 is a stronger quarter in terms of sales. But on the other hand, we also have more expenses. There is going to be some free cash flow generated, but this should be more sustainable next year. Now I'm going to turn over to Joel to speak about the franchises. In terms of the franchises, we decided strategically when we designed the project, we wanted a multi-franchisee because this would help us format the franchise. We had selected 20 of these multi-franchisees, and in terms of location, we invited 15 multi-franchisees for this first conversation, and the results were good. They liked the case. They understand the business, and in the next 2 weeks, we are going to sign pre-contracts with 5 franchisees. In terms of the payback period, we see that the payback is 20-24 months, which is lower than the market, and the economics is very much what we saw in the case in terms of revenue. Not only that, we have seen our own stores perform 30% above what we expected, and also the costs are lower. In terms of acquisition of products and other costs, we are in line with the plan. From these conversations with the multi-franchises, we believe that there's going to be a lot of demand. Just to add about the economics of a store, depending on the size of the store, the location, the city, there are reasons to expect some variation. But in terms of the base case, we expect CapEx at BRL 750,000. We see results in our stores, and we believe that stores should have revenues in the region of BRL 250,000. So one-third of the CapEx is going to come in the form of monthly revenues. An EBITDA margin of 15% seems reasonable. That is what we are seeing in our own stores. So this is what we see from the point of view of the franchisee. Thank you very much, and congratulations for the results. The next question comes from Mr. Valadares from Arbor Capital. About the offline, what is the profitability of the first Enjoei store, and how does it compare with the maturing curve of Cresci e Perdi? Hello, João. In terms of the curve, this 30%, it was actually an accelerated curve, and there is a very simple reason that explains that. If we have a monthly revenue, which is one-third the CapEx per month with the EBITDA margin, the payback period will be very good for the franchisees. This is the direction we see the business going, a very fast maturing curve. When we open an Enjoei store, this creates an expectation on the part of clients. Our brand has this power, so the maturing curve is more accelerated with recurring customers who come back over and over again. Ladies and gentlemen, to ask a question, please state your name and the company name in the Q&A field. The Q&A session is now ended. I now turn the floor over to Tiê Lima for his final remarks. Thank you all for attending this video conference. On Thursday, we are going to open our store in Frei Caneca. You are all invited to come. I am very happy with everything that we have achieved. One line at a time, the operation is going to be increasingly profitable, so that next year, with everything that we consolidated, the results are going to be increasingly better. This is what we see for the company as a whole. See you next quarter. Thank you very much. Enjoei's conference call is now ended. Thank you all for participating, and have a lovely afternoon. Thank you