Earnings Call: Q3 2023

Nov 14, 2023

Summary

Consolidated GMV grew 31% YoY and revenue 50%, with Elo7 adding scale and stronger margins. Integration synergies supported gross-margin expansion, while weaker consumer activity weighed on core-platform GMV; management is targeting efficient growth and 2024 franchising.

Good afternoon, ladies and gentlemen. Welcome to Enjoei's earnings conference call to discuss the results for 3Q23. This conference is being recorded, and you can access the replay in the website of the company. It is also available for download. All the participants will be in listen-only mode for the presentation, and then we will begin the Q&A sessions when further instructions will be provided. Before proceeding, we would like to clarify that any statements that may be made during this presentation regarding the company's business prospects, projections, and operational financial goals, are beliefs and assumptions of the administration of the company, as well as information currently available to the company. Future considerations are not guarantees of performance. They involve risks, uncertainties, and assumptions as they refer to future events, therefore depend on circumstances that may or may not occur. Investors and analysts must understand that general economic conditions, industry conditions, and other operating factors may affect the company's future results and may cause them to defer materially to those expressed in such forward-looking statements. Here we have Ana Luiza McLaren, President of the Administration Council, Tiê Lima, CEO, Guilherme Almeida, CFO, and Investor Relations Director. Tiê Lima will begin with the presentation. Please proceed. Good afternoon, everybody. in this quarter, we are going to share the first results of the strategy of creating portfolio and growth, consolidate the results of Elo7, our platform, a platform for sellers that has everything on fashion and much more. Our total GMV grew 31% against the previous year, reaching BRL 364 million. Numbers that were important were added to our active buyers, adding 5 million customers, 2.6 million active buyers. About 2.44 products have been sold in this quarter, one item at every four seconds, annual growth of 37%. We had an increase of 5.1 pp in net take rate. Since the profiles have similar features of the professional sellers of Enjoei, that indicates that we are advancing in the creation of an important profit pool. Considering the operation of Elo7 from August 10 to October 9, we had a gross margin of 49.6%, 13.6 pp higher than last year. Even with a capital of BRL 26 million used in the acquisition, the cash position is, or rather, we had BRL 6.6 million in cash generation. We thus maintain the cash availability around BRL 300 million, and most costs of one-off considering transaction have already gone through in 3Q23. Now I want to bring some points on the integration of Elo7 that we have been worked on in the last 50 days. In the beginning of October 2023, we adjusted a commercial policy that favored an increase of top line, indicating an increment of 30% in gross profit. Reduction in payment after changing suppliers at the end of the quarter also improved gross margin. Adjustment in corporate structure with significant reduction in the payroll ensures greater G&A reduction. We are capturing synergies, gradually reducing the freight cost in both platforms in the next few months. We also received a team that is quite talented with similar proposals, so the work of integration is happening successfully. It is important to recognize that this team that just joined is quite committed, and the team that welcomed them is quite welcoming. We reached a GMV of BRL 364 million, 31% increase, where fashion went from 31% to 59%, reflecting the expansion of lifestyle category after Elo7 was created. When we talk about fashion, we consider attire, shoes, et cetera. Lifestyle encompasses house decoration, electronics, parties, toys, among others. GMV was challenged due to external causes, with a deceleration of 5.1%, totaling BRL 247 million in the quarters June, July, and September. The consumer did not behave as expected, so the efficacy of our marketing was affected. We decided to postpone growth for October, where we have identified signs of a resumption. Two factors give support to this expectation. First, the campaign, Enjoei para Todos, is in the media already. With that, we intend to favor the presence of brands and capturing new sellers and new functionalities, advisement, et cetera, have given positive signs in the resumption of the inventory growth. In the last quarter, Enjoei maintained a stable take rate, 27.2%. Elo7 had a take rate of 30.3% in the same period, contributing in a positive way for the consolidated result that achieved 27.8%. In the year, we had a significant increase of 2.3 pp in the take rate and 5.1 pp in our net take rate. This advancement is attributed to the profile of the sellers for revenue generation. This reflects our progress in the construction of a profit pool that strengthens our objective of growth. We reached 2.6 million users, 1.5 million in Elo7. 51 active sellers in Elo7, many professionals contribute to strengthening the sellers of cash generation, and that increased a lot, reaching 22% in the third quarter, against 14% in 2Q23. In GNV, from 49% to 60% quarter-over-quarter. At the end of 3Q23, the total inventory available reached 3.4 million items, a significant increase YOY. Of this total, 6.9% correspond to Enjoei inventory and 6.5% of Elo7. Considering the contribution of Elo7 for the complete quarter, the total products sold advanced 37% YOY, totaling 2.44 million items. We are proud of our recent achievements. Since design experience are key for us, we got the Award of Design, Gold and Silver in typography and digital design. We are also top 10 in design craft, branding, and digital. In the ranking of digital accessibility, Enjoei is in third and Elo7 in seventh. That means that our apps are visually accessible. It reinforces our commitment of the creation of a platform for everybody. Enjoei has gotten an award, first prize, in Consumers in Retail Excellence. On the same, Elo7 achieved the Award Collaborators. Our reputation advanced from good to excellent. Now I give the floor to Guilherme Almeida, our CFO. Thank you, Tiê. Good afternoon, everybody. Now we will talk about the financial results, starting by net revenue that reached BRL 54.9 million in the quarter, representing annual growth of 50% and quarterly growth of 37%. Enjoei had a variation of 5% year-over-year above GNV in the period, reflecting the advances in commercial policy and efficiency of incentives acquired in this period. Elo7 added BRL 16.5 million in the quarter, considering results from August 10 on, showing the strong contribution of this new business for the revenue of the group. In the year of today, 25% year-over-year. Enjoei registered 9.2% in the period. BRL 4.7 million in the first nine months of 2022 to BRL 114 million in 2023. The cost of the service totaled BRL 27.7 million in the quarter, what represents 50.4% of the net revenue of the period, against 64.6% last year, showing consistent trajectory of cost dilution. Initiatives like adjustment of commercial policy and renegotiation of contracts of the acquired companies allow us to see additional benefit in the coming semesters. In the annual view, the consolidated cost reached BRL 67.4 million against BRL 60 million, a reduction of 2% in this period. The gross profit consolidated was quite strong, BRL 27.2 million, what represents an annual growth of 106% and quarterly growth 34%. Enjoei had a growth of 46% year-over-year, reaching BRL 19.2 million in this period, versus BRL 3.2 million in 3Q 2022. Elo7 contributed BRL 8 million in the quarter considering the results since August 10th. The consolidated gross margin advanced from 35.9% in 3Q 2022 to 49.6% in 3Q 2023, remaining stable as compared to the previous quarter. In the year, the consolidated gross profit grew 76% against 2022, and gross margin from 34.4% to 48.5%. The initiatives of integrated business after acquisition, extracting synergies on logistics and payments should reflect additional dilution of the cost of the acquired company, contributing to better cash in the coming quarters. G&A, excluding SOP and also one-off expenses, reached BRL 21.2 million in the quarter, what represents an annual variation of 59%. Considering a lower base of comparison in the previous periods, since the expenses of Elo7 are only in 3Q23. G&A, once again, not considering SOP and one-off expenses, was BRL 13.4 million in the quarter, same level of the previous quarter. In the percentage of net revenue, G&A 38.6% of the period, versus 36.4% in 3Q22. It's worth mentioning that the corporate structure of Elo7, as well as the capture of technology and synergies and operations after integration, enable us to see more dilution of G&A considering the revenue in the coming quarters. Marketing expenses reached BRL 14.2 million in the period in a consolidated view, representing annual variation of 75%, and in the quarter, 51%, considering more investment in branding in this period with out-of-home campaigns and a slower base of comparison in the previous periods. The combined investments of marketing incentives still present a reduction in relation to BRL 2 billion. 52% against 44.7%, showing that these investments are more efficient. Adjusted EBITDA reached BRL 18.9 million in the quarter consolidated view, Enjoei plus Elo7, and minus BRL 5.6 million in the parent company, just Enjoei. In the year, Adjusted EBITDA totaled BRL 16.6 million, a level 67% better than the previous year. The results of the quarter show efficient control of expenses and of the investment in marketing as so far, with space for improvement in coming periods with complete integration of Elo7. Initiatives that are being implemented, like adjustment in the commercial model, renegotiation of logistic contracts, and adequate of the corporate structure, show an improvement in the results of the group in the coming quarters. The cash position and cash equivalents closed in BRL 273 million, what represents a variation of BRL 21.4 million in the quarter, considering the impact of one-off, if we consider Elo7 acquisition that totaled BRL 9.8 million. If you remove such effect, the cash flow of operational activities was minus BRL 1.9 million. Considering only Enjoei, there was a generation of BRL 6.6 million of operational cash in the period. I give the floor to Tiê Lima to talk a little bit more about future perspectives. Thank you, Guilherme. We are enthusiastic beyond the results that we have been capturing. In the last two years, Enjoei implemented successfully the strategy, directing the focus to fashion. As we mentioned before in our last message, the vision of Enjoei is to be the largest and better community of Enjoei for these objects. As a group, we have a mission to increase capacity of autonomous revenue generation for our population. Elo7 is part of the construction of this trajectory that we are paving. With that, Enjoei initiates a new phase in its strategic cycle, exploring new possibilities to potentialize the community of sellers. In our portfolio vision, we have three cornerstones. The first one, expansion of categories. The first step has already been taken with the acquisition of Elo7. We are exploring categories and segments to potential for expansion on each platform. Second, business models. In Brazil, there are more than 120,000 thrift stores. Just as Enjoei became reference for online channel, creating value for a fragmented market, we see potential physical presence, which is in our radar. Third, value chain. In our view, improvement in payment and logistics capability is extremely important to enhance core value creation before we advance in the chain. In the core, search and discovery and user experience are cornerstones. At each cycle, we intend to ensure efficiency in resource allocation. We want ROI. We are quite proud of this construction, and we are going forward. Now we are available for Q&A. Thank you. Now we open for Q&A for investors and analysts. If you want to ask a question, please type your name, sorry, and company in Q&A. First question comes from Mr. Marcelo Santos from J.P. Morgan. Please proceed. Good afternoon, Tiê, Luiza, Guilherme. Thank you for the opportunity to ask questions. I have two. First one, if you could comment a little bit how GMV of Elo7 has behaved in 2023. We see the GMV of Enjoei has suffered some pressures. You have mentioned the reasons. Elo7, is it behaving the same way? Do you believe that this trend can change with the changes you have implemented? Second question, is strategic point one of the last lines you showed Physical stores. Could you further elaborate on the opportunities, what you could mention now, and what timeframe are we talking about to see something about that? Thank you. Thank you, Marcelo, for the question. I am going to start by your question on GMV of Elo7. I like to consider that it has a behavior that is becoming the core. Imagine that during a pandemic, the oscillations that we saw in e-commerce reflected on Elo7. Different categories, some had a boom, and that is passed. So where it is more potent, even it is behaving in a more stable way. But we here like to say that we have lots of room for the GMV to grow, and we have started many initiatives. First, we start to improve the margin of the company, and then we will start to use this additional margin to expand growth. I want to say something about how this profitability aspect of Elo7 is going. I would like to elaborate further on that if you allow me. I would like you to imagine how Enjoei was like in the last two months. Let us see some figures here. The net revenue of Enjoei, BRL 450 in the last two months. In the last two months, BRL 70 million. Now imagine, in a simple extrapolation, Elo7, it was making around BRL 10 million of net revenue. We added an increase of margin of contribution of 30% in Elo7, so it went from 44.5% of gross margin to 60%. Let's imagine these two figures combined, 10 million and just extrapolated, 120 million reais. There is a gross margin of 60%, so it's 70 million reais that we have here of gross profit. Both companies from 150 in the past from Enjoei, plus 120 of net revenue, that's 80% growth, and gross profit 70 million, if you look back at Enjoei, plus 70 million of gross profit for this new margin that we added in Elo7 from now on. 140 million reais in the year. With this growth, we have seen this growth, and we're going to see it even more. We have done simple tests in Elo7. Now that we have a better margin, we started to see how it behaves. That was kind of stuck in freight, et cetera, in shipment. I hope I have answered your question about Elo7. Actually, I want to say a few more words. We see that there is a large chance of increasing sales per seller in Elo7. We're going to increase the efficiency of the seller, focus on the core. We have 50,000 sellers and we want more. We have to stimulate the timeframe of production, so they receive the order, and they speed it up, and you increase the quality, and our focus is going to be that. Now, physical stores. Let me talk about that. What have you been thinking? Enjoei Franchising is a company that already exists. It exists already. We hired a consultant to help us, a specialist on this segment that helps operate and map. We saw that business model throughout six, eight months of study that we have been doing is very advantageous for the franchisee. We have companies out there that are different in the market. They are stable, better, they are stable in the market. In those companies, they trade more than 15 times EBITDA, which is the point of so much profitability this business has. The project is in phase of implementation. Our goal in the short run is to implement these stores in the beginning of the year. The project is already organized, and we will start selling our franchising soon, next year. We believe that for the fact that we have the brand Enjoei, that will boost this growth. We still remain on the same business model. In our scale of sellers, we have the one that generates profit, and now we have another share that generates entrepreneur business. This is another movement we are taking. We're quite enthusiastic about that, and we're going to make it public soon and give you more details later. Thank you, Tiê. Very good answers. Next question from Mrs. Danniela Eiger from XP. Good afternoon. Thank you. I have two questions. First is a follow-up of the comment that you brought on the Elo7 contribution margin. In the release, you mention many initiatives that you are implementing. Some have been implemented or will be implemented. I want to understand how much you have hired of margin expansion in the consolidated group. It would be nice to understand how much you have already done and what's the potential yet to come in this sense. And second question, relation dynamics of growth resumption. What we understand is that you are going to pick it up in the next quarter, and we want to understand if you are seeing signs of this market that is more favorable, or is it because seasonability of the fourth quarter that we usually expect that people buy more? I want to understand how you see this investment resumption in next quarter. Dani, thank you for your question. Let me begin by Elo7 margin. Aligned with what I answered to Marcelo Santos, we found a margin of Elo7 around 44% of gross margin as soon as we took the operation over, and now it is grown to 60%. The initiatives we took in cost and synergy captures have reacted very quickly. The investment that we did in the acquisition, which was BRL 26 million, and with the cash we got, we wanted to put everything to practice so that we will not affect the cash of the company. We invested BRL 26 million. In cash variation was BRL 20 million. We put this in practice very quickly. We are seeing this evolution of Elo7 margin. Something else that will affect as far as expenses are concerned is that we will keep seeing this dilution. If we look at the tip at the end of the quarter, we can imagine an EBITDA margin of Elo7 that is positive. I am saying two digits margin. We will see that soon thanks to this implementation. I want to invite you to understand how we see Elo7 plus Enjoei, considering the synergy and what we are entering into the operation very quickly to get a company that her EBITDA margin there was negative, and we transform it into positive. It is a synergy that makes sense at every level. We have to see this as a sellers platform and group. This is information that I wanted to give you. The resumption of growth now bringing this information on how we want to invest in some spots. It shows that actually we are making the capital more efficient. If you look back, everything we brought in IPO, the leveraging we use, they are the same. They can be used the same way. They work very well. Only we get the cash position that we have. We look at the investment we can make, composition of organic and inorganic. We attribute it to our cash, and then we make the decisions, meaning that all the investments and levers are there preserved, and we will choose the best moment to accelerate. If we think, what do we imagine for 2024? We have a plan of increasing physical stores that will improve our condition of user acquisition. It is going to be more organic. Our dynamics will improve, and we have put that in our planning. We have to choose what the timing will be and then invest in a more efficient way and according to the levers that we add in our portfolio. In the short run, we see that Elo7 still has room for growth. In Enjoei, we are improving the efficiency of the levers that we already have. For the next quarter, we see that the investment we did in global, in product to improve inventories and product already has given good effect. We can see that at the end of this quarter. Something important, we spoke about the conjecture. Some things that we notice and that are important to attribute to our business, not just macroeconomy that affects our business. We see that we are much more sensitive in periods of vacation or holidays. Our sellers are physical people. If they sell, if they travel, they won't be selling. The vacation period in this last quarter had much more impact than the macro aspects. This year, if we look, we had 8 holidays on Wednesdays. Now with home office, people are buying much more than last year. Next year, we're going to have 5 holidays, and they will be on Thursdays, and that helps a lot the dynamics of our platform. That gives us this opinion for the future. Okay, thank you. Next question, J.P. Andrade from Bradesco BBI. J.P., you may proceed. J.P., your audio is on. You can ask your question. To ask questions, please type your name and company on the Q&A icon. Hi, we got a question from Martinez, which is, are you trying to increase the basket size? What's the mean size today, and how do you see the future? Thank you for the question, and I'm going to answer you. This question was very important to clarify a few things. First, when we have a basket with more than one item, and it's only one freight, our GMV does not contemplate only one item. The more products, the less the person pays for shipment. The positive side is that we are increasing the size of our basket. We launched recently an option system in the platform, along with the system that we created, and we are seeing positive gains in the combination of these two strategies. 20% of the orders today have more than one item. This figure was 14%-15% in our previous figures. That had positive impact in profitability. When you look at GMV, it also impacts in the managerial top line. To ask questions, type your name and company in Q&A. Q&A session is closed. We would like to give the floor to Tiê Lima for his final considerations. We got a question from J.P. via chat. So before final considerations, I'm going to answer that. Question number one, how do you see the economic moment of these franchised stores from the view of the franchisee? How do you stimulate them? Second, do you see a future unification of platforms between Enjoei and Elo7? Would it be synergic for the consumer? Thank you, J.P., for the question. I'm going to start by the question on franchises. If we look at our platform, a physical person, they can get more than 2 minimum salaries a month, up to 7,000 reais. That's similar to consulted networks. That's their average gain per month. If we look through these lenses, we want the franchisee to gain much more than that. We studied a lot, we checked benchmarks, and we have the capacity for our franchisees to gain much more than that. They will have a model that's a little bit different. It is going to be a very important moment. They have the capacity of generating price in a very positive way. Also something else about that. We are born with natural demand traffic on the store. Instead of the person delivering a product or receiving a product in a point of sales that we have in our logistics partner, we can direct it to our franchisee and the person will go there. We can see this as a huge benefit for our franchisees. When we talk about merging the platforms, what we see is, for instance, search and discovery is going to be more and more unique. Both platforms were born for you to find unique products. If you stop and look, the products that are in Enjoei, the ones that are in Elo7, if I merge them, they won't be anywhere. Our key idea is for these products to be found. We create an expertise to have unique products to be discovered by people who want to be surprised by things that they did not have access before. Search is the engine for that. Logistics and payment will come afterwards. The initial model in the core is search and discovery. Now our final considerations. I would like to say that we, in this 3Q23, it is our third anniversary. The company grew 2.6 times in net revenue, and we found means to make this possible. We are working hard to deliver all the plans and commitment we had for our shareholders. We work for that, and we see the future just like that when we look forward. The message for the shareholders is that we will go on doing this work and count on us for that. Thank you. Enjoei earnings conference call is closed. We thank you all for your participation and wish you an excellent afternoon.