Earnings Call: Q2 2023

Aug 9, 2023

Summary

Q2 revenue and gross profit advanced, gross margin reached 50.6%, and adjusted EBITDA improved to -BRL 2.1 million. GMV rose QoQ but remained lower YoY as gradual marketing investment resumed, with growth returns expected over time.

Good afternoon, ladies and gentlemen. Welcome to Enjoei's second quarter 2023 earnings conference call. This call is being recorded and will be made available on the company's IR website, where the slide deck is also available for download. We would like to inform you that all participants will be in a listen-only mode during the presentation. After the company's remarks, there will be a question and answer session when further instructions will be given. Before proceeding, we would like to clarify that any forward-looking statements that may be made during this conference call regarding Enjoei's business outlook, projections, and operational and financial targets are based on beliefs and assumptions of the company's management, as well as on information that is currently available. Forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions because they refer to future events and therefore depend on certain circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions, and other operating factors may affect Enjoei's future performance and may lead to results that differ materially from those expressed in such forward-looking statements. Joining us today are Ana Luiza McLaren, Chair of the Board, Tiê Lima, CEO, and Guilherme Almeida, CFO and IRO. Now I'd like to turn the floor over to Tiê Lima, who will start the presentation. Tiê, you have the floor. Hi everyone. Good afternoon. This quarter's results clearly show the commitment we have to our strategic direction and to the company's key indicators, especially those related to profitability, which brings significant and continuous improvements that we share with you in every earnings release. We would like to highlight the following achievement. Gross margin increased by 6.1 percentage points quarter-on-quarter and 15.2 percentage points year-over-year, reaching the mark of 50.6%. Our net take rate also registered an increase of 50 basis points in the quarter, with a total growth of 320 basis points year to date, reaching 17.2%. With regard to reduction in expenses, our G&A ex SOP reduced by 28% year-on-year and 8% quarter-on-quarter. Thus, our adjusted EBITDA followed its evolution trajectory, reaching -2.1 million BRL. Operating cash flow remains positive, up 1.1 million BRL in the quarter. Now talking about growth, as we mentioned in recent quarters, we plan to continue advancing in profitability in Q1 and Q2, and then resume the growth agenda in the second half of the year. This new growth cycle will be focused on strengthening the seller base and inventory. It's worth reminding you that Enjoei impacts two types of sellers. Those who, through a new seller habit, seeks to expand their purchasing power, and those who learn to operate the platform in a professional manner, making it an important means of generating income. When we talk about expanding the seller base from the first group, that is those seeking to expand their purchasing power, we plan to increase the strength of the brand through branding campaigns in order to strengthen this new habit. For the second group focused on income generation, we'll continue to work on improving services and management tools to increase the sales efficiency of those professionals. Regarding investments in base acquisition through branding campaigns, the first movements have already started with our out-of-home campaign, and even with an additional investment of 18% year-on-year, our EBITDA improvement and G&A coverage trajectories remain healthy. In addition, new commercial policies are already in the testing phase, and we now have two models available to users. The simple ad, where posted products do not receive incentives offered by Enjoei, and the full ad, in which products are posted with incentives. This approach provides more freedom to users, more competitiveness in our take rate, but that does not affect our net take rate. Well, as you know, Enjoei's vision is to be the biggest and best Brazilian community to discover and access finds, giving new life to everything fashion and a bit more. As a group, we have an even greater ambition to increase the income generation capacity of our population. When it comes to that, we're just getting started. Elo7 is part of this trajectory, which we have begun to pave. We remain committed to maintaining focus on our strategies to sustain growth and improve efficiency in all areas of business. We'll now give you a breakdown of the quarter's operational and financial indicators. The total volume traded in the platform, GMV, achieved BRL 262.2 million in Q2 2023, up 8.3% quarter-on-quarter. That shows a recovery of growth with gradual activation in marketing investments. We had -13% year-over-year showing the high levels we achieved last year. On the other hand, the fashion GMV is growing faster than other categories, up 15% quarter-on-quarter and 4.2% in the first half of the year compared to the same period the previous year. Aligned with the company's strategy in investing in product mix acquisition with higher recurrence, gross billing achieved 11% quarter-on-quarter and 4.2% year-over-year above the pace of GMV, which reflects the adjustments made in commercial policies in the last 12 months, which favors the advance of our take rate, which in the quarter went from 22.9% in Q2 2022 to 27.3% in Q3 2023. The net take rate, which is gross revenue over GMV, considering the effects of incentives and subsidies, had yet another quarter of sequential evolution. This shows better efficiency in allocating such incentives by segmenting users, reaching 17.2% in Q2 2023 against 14.1% the previous year. This quarter, 180,000 new buyers were added to the community, closing the month of June of 2023 with 1.2 million active buyers. In addition to that, 143,000 new stores were added to the platform, adding up to 977,000 active sellers at the end of the quarter. The group of sellers focused on generating extra income had a 3 percentage point increase this quarter, reaching a GMV share of 48% last quarter versus 36% the previous year. Considering the higher profitability of this group and its high capacity of adding new inventory to the platform, the growth of this group represents a strengthening of the platform as a whole. The new growth cycle expected for the coming quarters will be based on strengthening the brand and also reinforcing the user base that is dedicated to expanding their purchasing power. In terms of inventory, in Q2 2023, 3.5 million products were posted on the platform. The total of uploads of the group of sellers of extra income had an increase of 11% year-on-year, and the share of posted products of this group went from 41% to 53%. We have significant improvements of experience when the sellers are uploading new products to the platform. We have redesigned our seller center, and we are now offering more convenience in logistics, offering QR code rather than printed label to our users. In addition to that, flexibility of the commercial model that is adapted to the seller profile and branding campaigns that have already started and that will be accelerated starting in Q3 2023. Now I'd like to turn the floor over to Guilherme Almeida, our CFO. Thank you, Tiê. Good afternoon, everyone. Let's now share the financial results of Q2. Starting with net revenue that advanced 12% quarter-on-quarter and 7% year-over-year. We have exceeded BRL 40 million in the quarter. Year to date, there was a 12% increase when compared to the same period in 2022. GMV growth was boosted by the effort made to improve net take rate by optimizing our commercial policies and offering incentives to users in a more efficient way. We are working to be increasingly effective in the use of incentives by building mechanisms that enable greater personalization. That is, we are working to be more accurate and more efficient when offering incentives. The cost of service provider totaled BRL 19.8 million this quarter, down 11% year-over-year and at the same levels of last quarter, which favors the increase in gross margins because of the increase in top line. Cost, which is almost entirely variable with volume, has been suffering significant changes every quarter, going from 64.6% in Q2 2022 to 49.4% in Q2 2023. The freight shipping component had a 5.1 percentage points reduction quarter-on-quarter, showing the recent reductions in transportation prices with new suppliers that are now working with us for returns and other drop-off point operations. The accelerated increase in net revenue and the strong cost reduction this quarter led to an increase of 53% in gross profit year-over-year, reaching over BRL 20 million this quarter. Gross margin, in turn, achieved 50.6% versus 35.4% last year, a 15 percentage point increase, putting now the company in a more comfortable level of profitability, which is in line with the strategy shared with you in recent quarters. Now, we are more prepared and confident to resume investing in increasing our user base and volumes traded on the platform. Considering the current level of gross margin recurrence and user payback as a consequence, the increase in revenue is no doubt the best lever to generate value in the medium and long term. G&A, excluding our stock option plan, achieved BRL 11.8 million in Q2 2023, down 28% year-over-year and down 8% quarter-on-quarter. The 19% increase in salaries and benefits year-over-year reflect the headcount adjustments made in the beginning of 2023. The technology consultancy and outsourcing services also had consistent reductions in the annual and quarterly comparisons, showing the changes in existing contracts and the new suppliers for Technology and services. As a percentage of net revenue, we had yet another order of G&A reduction, going from 44% in Q2 2022 to 29.5% in Q2 2023. That shows the company's ability to scale operations without having to allocate an extra volume of resources. G&A per traded item totaled BRL 7.60 this quarter, and the gross profit achieved BRL 13, a coverage level of 172% versus 81% last year. Advertising revenue totaled 9.42% this quarter versus BRL 7.96 million in Q1 2023. There was a 10% reduction in the total amount invested in advertising this quarter. We have a combined effect here that delivers efficiency in our strategy. The traded volume in our platform is growing faster than investments in acquisition and retention of users. Investments in marketing and incentives remain below 50% in the percentage in gross billing this quarter. Adjusted EBITDA achieved BRL -2.1 million versus BRL -5.6 million the previous quarter and BRL -15.6 million last year. That shows how we have consistently reduced our operating loss in recent quarters. Our operational results show the effects of a better gross margin, dilution of expenses, and efficiency of the marketing investments made this quarter, now putting the company in a comfortable position to resume investments in growth in the coming quarters. It is important to highlight that we are not going to leave healthy profitability levels and cash dynamics that were acquired in recent quarters behind us. Now, cash position and cash flow totaled BRL 18.4 million this quarter versus BRL 322.5 million in the first quarter of 2023, so down BRL 4.1 million this quarter. The total cash consumption is going through a consistent reduction as we saw in recent quarters, boosted by better operational cash dynamics, going from a consumption of BRL 13.6 million in Q2 2022 to BRL 1.1 million being generated in Q2 2023. We are going to offset some of the investments made as tax credit in the coming quarters. Now we are available for the Q&A session. Thank you. We are now going to start the Q&A session for investors and analysts. If you wish to pose a question, please type your name and company in the Q&A box or raise your hand, and please wait while we pull for questions. Our first question is by Daniela Eiger from XP. Daniela, we have enabled your mic. Please ask your question. Good afternoon, everyone. Thank you for taking my questions. I actually have two questions. First, we have seen a significant improvement in the profitability dynamics in your results. This is related to your strategy of containing marketing investments in order to improve your take and optimize your commercial policies and logistic costs. My questions are actually related to each other. The first is: when do you expect to see a GMV growth recovery, total and also in fashion? I know that you have shown a quarter-on-quarter improvement, but looking at an annual comparison, do you think that in Q3 we can already see this growth? The second question is about the resumption of growth. You were talking about slowing down in the first half of the year and then speeding up in the second half of the year. I want to understand how you're thinking when it comes to profitability, because you mentioned having a healthier level of profitability with this recovery. I would like to understand what you mean by that. What is it that you're seeking in this new cycle of acquisition? Hi, Dani. Thank you for your question. I think your question is the key point here when it comes to our changes. These changes we're talking about are like a gear that you have to press on the pedal in order to change that gear. That doesn't happen overnight, but some signs can already be seen this quarter. We had 18% more investments in marketing quarter-on-quarter. When you look at the EBITDA operating results, we were able to reduce this number quarter-on-quarter, so improvements in our operational EBITDA. This shows that the margins that we have achieved already support this gradual beginning. Still talking about marketing, thinking about Q3 and Q4, we have a bonus that we paid last year, a total of BRL 7 million. Part of it will be used this quarter. Actually, at the end of the quarter, I'd say about 30% of this amount will be paid in Q3 and the rest in Q4. These results will be shown in our P&L, but they will have no cash effect. These are favorable circumstances for the movement that we are starting now. Once again, we are able to increase marketing investments without affecting our margins, and part of this acceleration, we'll use the money that was already allocated for this and that was already paid last year. I just want to clarify this, because when we talk about a new growth cycle, that doesn't happen overnight. It's about a mindset. When we changed the profitability cycle, we improved our contribution margins quarter after quarter. The same happened to our EBITDA and will happen now with this new growth cycle. Now, answering your question about what we can expect for Q3 and Q4 on an annual basis, I don't want to give you any guidance here, but that is related to a more qualitative agenda. In my view, Q3 will have a trend of higher results than the current quarter or stable results. Then in Q4, we can start to see better results on the annual basis. Marketing investments aim to bring on more sellers, which is what increases our assortment. Last year, we were able to keep a seller base of professional sellers in our platform, and they grow organically. We have the more professional sellers in our hand to make sure that our business is sustainable, to make sure we have margins, but they grow at a lower pace. Now we're going to continue investing in marketing to bring more sellers, and the results are not immediate. It's important to bear this in mind. We've been structuring a margin composition in our company so that the time between investment and return can be supported by the operational leverage that we have in place here at Enjoei. Great. Thank you. As a reminder, if you wish to pose a question, please type your name and company in the Q&A box or press on the Raise Your Hand button. Next question by Marcelo Santos from J.P. Morgan. Go ahead, Marcelo. Thank you. Good afternoon, everyone. Ana Luiza, Tiê, and Guilherme, thank you for taking my questions. I also have two questions. Can you give us an update about your CAC LTV after all the changes that you made, all the optimization? How is this metric working? My second question is, can you give us an update on the Enjoei Pro initiative? What is the scope? Have you reduced it or is it still going strong? Can you give us any news related to that initiative? Thank you for your question, Marcelo. First, I will answer your first question, then I have a question about your second question. About your first question, LTV, CAC. We did not include this here, but in the past, we have included references to this indicator saying that with 24 months, that would be the threshold or the cutting point for us to consider an acceptable LTV CAC ratio. We could reduce this rate to six to eight months for the payback time with the investments we made. That's a significant improvement. Although we did not mention the specific number, I'm using a reference of what we had included in the past. About your question related to Enjoei Pro, what is the specific initiative you're talking about? Well, actually, I want an update of the Enjoei Pro initiative as a whole. This is not a specific question. I just want to hear from you how this has been evolving in the last 12 months, what the penetration is like now. You talked about increasing the scope, taking Enjoei Pro to other regions. You were first thinking about women's apparel only, but then you were considering men's apparel as well. Just wanted to hear more about this initiative. Oh, okay. If we were to talk about Enjoei Pro here at Enjoei, it already has a positive EBITDA. We've been working to increase the company's profitability in all spheres. That is also happening here at Enjoei Pro. If we were to give you a pro forma update. It has significantly improved its profitability and take rate in terms of share. It has grown its inventory faster than Enjoei as a whole, but it has not led to an extremely relevant share of GMV at the platform. When it comes to profitability, it's becoming now more attractive vis-à-vis the second part of the question I mentioned, the second part of the answer. We improved all processes at Enjoei Pro. Backlog, time to post products, pictures. The core processes have been improved, and we started to run some tests in other categories, men's apparel and children's products. Children's products have had great results, and we are excited about this category here at Enjoei as a result. Great. Thank you, Tiê. Our next question was sent in writing by Douglas Pereira from Cactus Investments. "Good afternoon. Congratulations on your results. With regards to Elo7, I would like to understand the company's debt level and how the acquisition will impact your margins. Can you also tell us a bit more about the strategy for this acquisition? Thank you." Thank you for your question, Douglas. I will start by giving you a disclaimer. We are in a final closing phase. This is expected to happen in the coming days, and we will be able to give you further details after the closing. I can give you some qualitative information here. Your first concern is about the company's debt level. The company has no debts. No debts whatsoever. About assortment or the synergies and the strategy. In the market presentation, we talked about the importance of having sellers in both groups for Enjoei's growth strategy. What sustained our margins and revenue growth was very much the seller base that focuses on generating income. Elo7 is here to increase this professional seller base at our platform. It will accelerate the growth of our seller base. As long as we keep our growth strategy, we will be able to invest more in the seller base, which has a focus on the selling behavior. When it comes to shipping, payment lines, operational structure, customer base, these are synergies that we have identified. We worked internally together with a consultancy company, Heartman House, that helped us to collect, measure, and time all the synergies that we will have in a very specific timeline. What I can tell you in a qualitative way for now so that you can feel more comfortable, although I cannot give you all the answers right now, we clearly see that this is not going to affect the company's cash position in any way. We can accommodate this investment comfortably without any risks here for the company's cash. This is going to be clearer after we release all the information post-closing. Our next question was also sent in writing by Mr. Andre Ogliari from Alis Investimentos. "Do you see possibilities of making more money from the shipping cost?" You are talking about Enjoei operations as a whole, right? And shipping gains. We are improving our shipping operations because of the quality and recurrence of the new sellers in our platforms. We were able to reduce shipping cost because of volume. What would be then other factors that could interfere here? Greater scale and having other initiatives like the ones I mentioned in my previous answer help us qualify the possibility of reducing the unit shipping cost. It seems like we will be able to address that. Once again, if you wish to pose a question, please click on the Raise Your Hand button or send your name and company in writing to us through the Q&A button. Our next question is by João Andrade from Bradesco BBI. "Good morning. Congratulations on the evolution of your gross margins. Can you tell us about your recent GMV evolution with this gradual increase in marketing investments? Can we expect a GMV reaction considering these investments, or this marketing investment more focused on branding is something more for the long run?" Good afternoon, João. Thank you for your question. Dani, ask the question about GMV and growth. I will try to use that hook to give you a different perspective and try and answer your question. The investments we are going to make will be sustained by a contribution margin that we are working on, so that we can make investments in order to have medium term results. Medium term, as you know, in a 6 to 12 month horizon. In last quarter, we invested in marketing, but we sustained profitability, so it did not affect our operating results. That was a good proxy to what we would like to do now. Investments in order to resume GMV growth doesn't happen overnight. It's something that happens over time. We've been reducing marketing investment, but we kept a seller base in our platform, growing inventory levels, and now we're going to get this investment and put at a higher level. Like I said, we're changing gears. We left the operational mode that focused only on profitability, and now we're going to start focusing also on growth. The two types of ads that we mentioned, they were meant to address two things. We have the simple ad and the complete type of ad. In the simple ad, we don't offer any incentives. When you have an ad like that, the take is lower. The two extremes of average ticket had significant improvement. The lower average ticket and the higher average ticket. That was an item that had a major retraction in the past, and now we want to recover this based on this model. But this does not affect the net take rate. I want to make this clear to all market analysts here. You should look at our net take rate. Our net take rate will remain stable. With this new policy, we're going to have more inventory and more conversion. When we make marketing investments, we have to look at the time in which we have inventory conversion. I also want to make something very clear so that we know what type of short, mid, and long-term horizon we're talking about. Short term would be, I mean, in the short term, next quarter, we'll see no cash effect, and we've been talking about that for a long time now. We're going to work on this in Q3 and Q4, and more strongly in Q4. In Q4, we'll start to see significant quarterly variation because of the comparison basis and the movements, because we believe that the reflex of what we're doing now will be better seen in Q4 than in Q3. Okay, thank you very much. As a reminder, if you wish to pose your question, please type your name and company in the Q&A box or click on the raise hand button. Our next question is by Alexandre Sandoval from Ellis Group. About the acquisition of Elo7, you mentioned that there will be many synergies and similar businesses. Do you have other companies in your radar? Is that something that tends to grow in the company? Thank you for your question, Alexandre. We can say that now we're going to work on integrating Elo7, so this integration will be our priority now. We never said no to acquisitions. The answer will remain the same. Whenever there is an opportunity that we believe will add value to the company, to our ecosystem, and that will help our medium term and long-term plans, we will take into account. We'll analyze those opportunities, but that's not something mandatory for us. But yes, we'll always have our radar working. If you wish to pose a question, please send us your name and company through the Q&A button or click on the raise hand button. This concludes the question and answer session. Now I would like to turn the floor over to Tiê Lima for the final remark. Tiê, you have the floor. Thank you everyone for joining us for another earnings conference call. I was happy with some things that we shared with you today. First is that we have consistently been doing what we plan to do. We have been delivering and making it clear as we advance in our strategic cycle. We are happy to see that we are being able to deliver, and the perception of the value that we add here on a daily basis is being translated into results. Thank you all for joining, and have a great week. This completes Enjoei's conference call. Thank you for joining, and have a great afternoon.