Earnings Call: Q1 2023

May 10, 2023

Summary

Gross margin rose to 44.5% and adjusted EBITDA improved to BRL 5.6 million, while GMV fell 11% YoY. Plans call for gradual, margin-supported growth investment, with fashion and non-transactional revenue among the key levers.

Good afternoon, ladies and gentlemen. Welcome to Enjoei's video conference to discuss the results for the first quarter of 2023. This video conference is being recorded, and the replay can be accessed on the company's website at the investors relations section. The presentation is also available for download. Please be advised that all participants will only be watching the video conference during the presentation, and then we'll begin the question and answer session when further instructions will be provided. Before proceeding, we would like to clarify that any statements that may be made during this video conference regarding the company's business prospects, projections, and operating and financial targets are based on the beliefs and assumptions of Enjoei's management, as well as on information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur. Investors and analysts must take into account that events related to macroeconomic environment, the segment and other operating factors may affect Enjoei's future results and may cause results that differ materially from those expressed in the respective forward-looking statements. Present in this video conference are Ana Luiza McLaren, Chairwoman of the Board of Directors, Tiê Lima, CEO, and Guilherme Almeida, CFO and Investor Relations Director. Now I will turn over to Tiê Lima, who will start this presentation. You may proceed. Hello, and good afternoon to everyone. The results for the first quarter of 2023 that we'll present today are the consequence of initiatives that were successfully implemented in the period. As we mentioned in our last message from management letter, the first step for 2023 will be to continue advancing in our gross margin. We advanced 13.3 percentage points year-over-year in gross margin and 7.4 percentage points quarter-over-quarter, reaching 44.5% of gross margin. This result reflected the net revenue growth of 17.4% year-over-year, combined with a 5.1% year-over-year reduction in the cost of services, reaching a growth of 67.8% year-over-year in gross profit. The net take rate advanced four percentage points year-over-year, while the take rate across billings over GMV advanced 6.6 percentage points in the period. In cost of service, we observed a reduction of 15.5 percentage points in the ratio between logistics cost and net revenue. In G&A expenses, we had a 31% year-over-year reduction ex-SOP. In the marketing line, we had a 49% reduction year-over-year and 16% reduction quarter-over-quarter. Our EBITDA adjusted by SOP continued to evolve with a significant increase of 78.3% year-over-year, which represents an improvement of approximately BRL 20 million. In terms of cash preservation, we continue to have a solid liquidity position. The company holds over BRL 300 million in cash and BRL 322.5 million when considering the net position of receivables. In the quarter, total cash consumption, considering both lines, was BRL 7.4 million, BRL 1.9 million in positive cash generation in our operating activities. That is initiating a process of covering investment activities. As expected, the total GMV remained stable vis-a-vis the previous quarter with a reduction of 10.5% year-over-year, although rising in the fashion category, growing 13% year-over-year as a result of our strategy of recomposing our mix of categories. We believe there is still room to increase our gross margin and resume our growth initiatives. In the fashion market in Brazil, we still have a lot of room to improve e-commerce that represents 20% share against higher levels of 30% or 35% in countries such as China or the U.S. We believe that the penetration increase in this market will take place by maintaining an affordable average ticket aligned with our population's purchasing power. The secondhand market has a huge advantage due to its reference price, which is naturally lower than the price of new products by around 60%-70%. Consumers who buy or sell secondhand products in their consumption journey also make better consumption, and that increases their purchasing power and recurrence. Our goal remains the same, to expand the community and inventory to be the main catalyst for this movement in Brazil. In terms of liquidity, we keep strong and we grew 8% in our active base of buyers, and we are among the largest apps in Brazil with a 14% share of monthly active users. That is one in every seven users of online fashion in Brazil use our app. In the last year, we grew 21% in the active buyer base and remained stable at a seller base. In terms of inventory, the biggest variation occurred in the entry of non-fashion products. We grew by 9% in the number of items traded per active seller and reduced by 14% the number of items traded per active buyer. These figures show that the increase in inventory is the key to reinforce the ecosystem. The increase in the buyer base with the stability of the seller base means that we can resume our investments to attract inventory and sellers. These investments, on the other hand, will find a platform with high liquidity and a robust contribution margin, which accelerates the return of these investments. At first, we intend to keep increasing the gross margin to accelerate the return on marketing investments dedicated to expand the user base, especially sellers. The first of these movements should start in the second quarter of 2023. Our LTV/CAC indicators demonstrate that marketing investments are more efficient, and we have room for expansion. In our commercial policies, we expect to create self-service commercial policies so that sellers can choose between an all-inclusive or a no incentives commission plan. We expect that the addition of new commercial formats will favor a greater variety of average ticket in the platform, maintaining our contribution margin. In the most recent tests, we noticed that it's possible to have balance in terms of discounts. In this version, we expect to move on even further in our commercial price table. The end game proposes to have products in different pricing ranges, as well as provide optional services that today are all included in just one format. In terms of profitability, we will keep on reinforcing the non-transaction revenue lines to complement the gross margin. We are also implementing proprietary algorithms capable of distributing subsidies in an individual, more optimized way. In terms of user experience, we are investing in our search tools and our checkout process. We have a proactive pipeline to apply AI in various aspects of the operations, such as enrichment of product posts, content moderation, image recognition, customer service, and so on. These points will be added to the SIE project, which aims to improve the UX of the platform already under development. In summary, we believe that the secondhand fashion market in Brazil has a high potential for expansion. We have assets that give us a huge competitive advantage, such as our leadership position, cash availability, and team. We are focusing our strategy to be the biggest and the best community in Brazil to find good deals, giving new opportunities. Our objective and vision remain solid. The route can and may be adjusted eventually, adapted to the scenarios we encounter along the way, but the destination persists. Now, we will briefly cover our operating results. Total GMV reached BRL 242 million in the first quarter of 2023, a variation of minus 11% year-over-year, considering the change in product mix with a greater share of the fashion category. There was a reduction of 46% in marketing investments. GMV from the fashion category rose by 13% year-over-year. Gross billings increased by 19% over the first quarter of 2022 in a pace greater than the growth of GMV, given the effect of the higher take rate. The take rate in the period was 26.6%, 6.6 percentage points higher vis-a-vis the previous year. The net take rate reached 16.7% versus 12.7% in the first quarter of 2022. That reflects the control of subsidies applied in the period. Now, talking about buyers, sellers, and inventory. 192,000 new buyers were added to the platform in the first quarter of 2023, reaching 1.2 million active users. On the seller side, we added 170,000 new sellers. Almost 1 million sellers, they are active in the first quarter of 2023. In terms of inventory, products added to the platform to 3.6 million, and the previous quarter was 3.4 million in a 6.3% growth, reflecting the resumption of activities that were impacted by the year-end holiday season and the positive seasonality of the start of the year. The number of items traded reached 1.52 million items in the first quarter of 2023, up by 3.5% year-over-year above the growth of GMV in the period. The total number of items traded per active seller also grew, 9% growth year-over-year. According to the UBS Global Research and Evidence Lab report published in March 2023, Enjoei maintained a relevant position among the apps with the more monthly active users in the fashion category, ranking first among domestic apps and ranking second cross-border. This result was obtained despite the lower investments in marketing in the period. Enjoei can respond to growth when we direct investments to that end. It can also stabilize its performance when you are pursuing profitability. We are navigating the challenges ahead of us so that we can achieve our goals. Now, I will turn over to Guilherme Almeida. Thank you, Tiê, and good afternoon. The net revenue reached BRL 35.9 million in the first quarter of 2023, advancing 18% year-over-year, above the pace of growth of GMV and reflecting the evolution of the net take rate with an increased share of the fashion category, commercial policy adjustments, entry of new revenues from Enjoei Bank, and lower incentives subsidies levels. In the first quarter of 2023, incentives reached 37.3% of Gross Billings. That is 2.44 percentage points below the reported in the fourth quarter of 2022, contribute to the 4.9% increase in the net revenue quarter-over-quarter. Cost of services reached BRL 19.9 million in the first quarter of 2023, down by 5.1% year-over-year and 7.5% quarter-over-quarter. Cost diluted sequentially in relation to the net revenue, moving from 68.8% in the first quarter of 2022 to 55.5% in the first quarter of 2023. Gross profit rose by 68% year-over-year, 26% quarter-over-quarter, reaching BRL 16 million, reflecting the strong growth of net revenue. Gross profit reached 44.5% in the first quarter of 2023 versus 37.1% in the fourth quarter of 2022 and 31.2% in the first quarter of 2022. G&A expenses total BRL 18.4 million, a reduction of 31% determined by the lines of service of technologies and also salaries and charges, also considering terminations in that year. In this quarter, operating expenses continued to be fully covered by the gross profit, reaching 125% coverage versus 110% in the fourth quarter of 2022 and 52% in the first quarter of 2022. The gross profit per traded item reached BRL 10.5, while G&A expenses, excluding SOP per item total BRL 8.4, widening the gap between profited expenses initiated last quarter. Advertising expenses totaled BRL 7.9 million, down by 46% year-over-year and 60% reduction quarter-over-quarter. Investments in performance marketing were 27% below last year's and 22% below the fourth quarter of 2022. Considering investments in marketing, the company delivered another quarter of efficient investments in acquisition and retention of users, reaching 49.6% in relation to Gross Billings, versus 54.5% in the fourth quarter of 2022 and 64% in the first quarter of 2022. Excluding SOP, adjusted EBITDA totals BRL 5.6 million in the first quarter of 2023 versus -BRL 25.7 in the first quarter of 2022, sustaining the trajectory of lower operating losses in recent quarters and also more efficiency in investments in marketing. At the end of the quarter, the company's liquidity position, represented by cash equivalents, and receivables, total BRL 322.5 million versus BRL 330 million in the previous quarter, a BRL 7.4 million variation in the period. In this quarter, the company had a positive result of BRL 1.9 million in cash generated by operating activity, versus a consumption of BRL 14.9 million in the first quarter of 2022, BRL 2.1 million in the fourth quarter of 2022. The balance of net cash and cash equivalents was -BRL 7.9 million in the first quarter of 2023, maintaining the trajectory of consistent improvement of cash consumed in the last quarters. Of this total, BRL 1.1 million refers to the payment of severance paid with a cash effect, but on a one-off basis. Now, we will move to the Q&A session. We will now start our Q&A session for analysts and investors. If you wish to ask a question, please type your name and company's name on the Q&A field. Our first question comes from Gustavo Sandai with XP Investimentos. You may proceed, sir. Good afternoon, and thank you for taking my question. I have two questions. You mentioned that as of the second quarter, you want to gradually expand marketing expenses. What will be a better level for this year? Could we expect these investments to move to similar levels as used last year? I would like to know more about the representative of the vertical Enjoei Pro vis-a-vis the GMV. Thank you for your question. Answering your first question, we do not want to go back to the levels in marketing investments we had last year. We will keep on investing and increasing the gross margin of the company so that we can make more investments gradually. We will resume investments to grow the platform with a better contribution margin, which will not lead to the increase of EBITDA at the end of the day, because one thing would offset the other. We are preparing ourselves over the year. If you can see our gross margin per item, our gross profit per item, you will see that our EBITDA has been considerably improved. Expense control has also been very stringent. We have been working on that over the year. Now, with the new setup of the company, we can gradually invest in marketing at higher levels to resume the growth of the company. We believe that there is a huge market to be tapped into. We want to conquer the market that is yet to be conquered. There are a lot of customers that we could reach in the secondhand market. You see that our operating indicators are very favorable. Our payback of seller is of about one year. We do not see why we cannot increase those investments, but without creating any damage to the results we have achieved so far. There is room in our margin and in our operation to do that consistently. What have we done over time? We had a growth period in 2021. If you look at the curve, there was a reduction in EBITDA in 2022. It grew very fast, but that was planned. We planned to do that maybe later, but because of the scenario we face, we could have this growth earlier. Now we can add growth to our strategy, but finding an operation with a return on investment much faster, with a very positive ROI. The levels we have of investment today will not be even close to what we had last year, but we need to resume our investments. As to your second questions, we see that there is now relevance in the platform. We made an adjustment that increased the profitability of Pro. Pro is not just a part of the services that we provide to our customers, but also a strategic asset. That is an asset we plan on using for future investments we will communicate in the future. We want to work closer with our sellers and to provide services to help them sell. Expanding on your question, we have a lot of sellers in the platform. It has not stopped increasing. When sellers join the platform, you will find this platform with high liquidity and high demand levels. Investing in supply right now is going to be very positive for us. Thank you. If you wish to ask a question, please type your name and your company's name on the Q&A field. Please wait while we collect the questions. Our next question is from João Andrade from BBI. Good afternoon, and thank you for taking my question. Could you comment a little bit more about the main leverages of gross margin that you expect to have from now on? Do you think there is still room for a higher fashion share with a higher take mix, or do you expect more contribution from new revenues such as ADS, Enjoei Bank, and so on? Thank you for your question, João. Let me start with the new revenues. 8% of our net revenue will come from non-transactional revenues. We already opened so that external partners can have ADS in our platform, but that is just the beginning. We are probably going to promote that to our base as well. In the case of Enjoei Bank, and also financial revenues are starting to grow, and we expect that they will represent 5%-8% of our net revenue this year. In terms of room for improvements in our gross margin, yes, we have space to control the level of incentives. We are checking algorithms and personalized solutions to understand more accurately what kind of incentive we should give to each user, and to whom, and how much. Now, with a much wider base of sellers, we have critical mass so that this accuracy will become more relevant in terms of the levels of incentive we give our users. We also see room to improve new lines of revenues, the ones that are non-transactional. In terms of category mix, we believe that the fashion category will keep growing. There will be more balance between this mix as of the second quarter, and then growth will probably be related to the fashion category just for the fact that it will grow within Enjoei. This is what we expect in terms of the growth of our categories. Mix of revenues of 5%-8% of non-transactional revenues in our net revenue, and a more personalized incentive approach. Next question is from Jessica from JP Morgan. Jessica, you may proceed. Thank you for taking my question. Good afternoon, everyone. I would like to understand how you see the expansion of GMV for the second half of 2023. There was another question that you already answered related to the fashion share and how do you expect that to grow. Thank you, Jessica, for your question. Quarter-over-quarter, we will see improvement in GMV. We expect to see growth quarter-over-quarter, and the levels of GMV of the next quarter will be higher than the second quarter of last year. You will see differences both year-over-year and quarter-over-quarter. We have had a different mix balance, and now we are going to have a higher share of the fashion category. We feel very excited, and we have good expectations for the second half of the year. We expect to have quarterly growth. Thank you. Our next question is from Victor Kietzmann. Good afternoon. Congratulations on your results. We have two questions. First, what level of net take rate do you expect to achieve over the year? Second question, could you give us more details about your strategy to get revenue from the site by selling advertising? When do you expect to start implementing this strategy? What categories will it involve? When will you be able to reach all categories with that strategy? Thank you for your call, Victor Kietzmann. I think that the net take rate and take rate levels will be stable. We will create new commercial policies that will favor the net take rate to improve the mix of products and prices and services overall. Today, users who advertise on our platform, they have one single take rate, as if it was all-inclusive. So there's a percentage for that ad, plus the discounts and freight, coupons that we also provide, and other incentives. This is already part of the commercial agreement. Now we are going to break down those incentives, keeping the take rate and the net take rate of the platform. How we're going to do that? We will allow users to choose the type of ads they want to make and the incentives that we will provide. So whether they want incentives or not. So users can maybe reduce the price of the ad because they sometimes may be away from the liquidity of the platform. In summary, other services will be added, but they work as add-ons, such as advertising. Our pricing model will become smarter without losing the profitability we have acquired so far and the take rate and net rate we've achieved so far. As to advertising revenues, there are two stages in the implementation of that strategy. First, to get profits from the audience and from external ads, and also services we will offer to our users as part of the commercial strategies. Our next question is from Eduardo De La Pena, from Alaska Investimentos. You may proceed, sir. Good afternoon. Tiê, I think you've already explained a little bit what I'm about to ask. You said fashion represented about two-thirds. So how much of the GMV you expect the fashion category to represent? Could you please give us more information on that? I'm sorry, I could not hear the last part of the question because this audio is very poor. Thank you for your question, Eduardo. Your audio was chopping. We couldn't understand all of your question, but maybe I got the gist of it. Talking about the evolution of the fashion category, in our release, you'll see that it accounts for about 80% of it. So the items that are the driver for growth is part of the beauty of our business. We don't concentrate ourselves in a small group of brands. Of course, 100 brands represent more than 50% of our business, but the rest of the brands is really varied. So we see that the share behavior and purchase of brands as we see in the share market as a whole. You see a concentration in the 100 top brands, followed by so many other brands. This is why I believe so much in secondhand market, and this is why our platform can increase the share because we have brands of all sorts, of all prices, and for everyone. We do not have a very specific concentration of brands that will be the driver of our growth. Thank you. Could you talk about the items that were responsible for the drop of the total GMV in the quarter-over-quarter? What lost relevance there? I think it had to do with a mix of categories that were not aligned with the core of the platform. Maybe they grew too much, such as furniture, deco, and electronics, something that grew during the pandemic. Now we are seeing drop because there are other players in the e-commerce scenario. Now in our planning with BCG at the beginning of last year, we moved our strategy to keep promoting the growth of the company. If you wish to ask a question, please type your name and the company's name on the Q&A field. Please wait while we collect questions. Again, if you wish to ask a question, please type your name and your company's name on the Q&A field. Please wait while we collect more questions. The question and answer session is closed. We would like to give the floor to Tiê Lima to make the company's closing remarks. I would like to thank you for your attendance to come here to discuss the results of Enjoei. We are very excited about our accomplishments. We proved that we are able to grow in favorable times. We are able to bring profit even when the scenario is adverse. We do not forget our long-term goal, which is to keep on transforming the fashion market in Brazil through the secondhand market. We still have a long way to go and a lot of room to conquer, and we are very excited about that. It was a pleasure being here with you. Thank you for attending. Enjoei's video conference is now concluded. We thank you all for your participation and wish you a good day.