Earnings Call: Q3 2024

Nov 8, 2024

Summary

Q3 results reflected steep Brazil revenue declines, restructuring costs, and continued pressure on adjusted EBITDA. Cash consumption improved QoQ, while debt restructuring and cost cuts underpin a target of positive cash generation by Q2 2025.

Good morning, everyone. Welcome to Infracommerce's Q3 2024 earnings conference call. For those who would like to listen to this call in English, please press the translation button. I'm Matias Michaelsen, the current CFO of Infracommerce, and joining us today are Bruno Vasques, who will take over as the new CFO as of next week, Mariano Oriozabala, our new CEO, Luiz Pavão, General Manager for Brazil, and Ivan Murias, who has taken over as the new head of the board of directors, as announced last month in a material fact. Before we begin, I would like to inform you that today's presentation, along with all supporting materials, is now available on our investors relations website. This content may contain forward-looking statements, which are based on the current expectations and projections of the company's management, and some of the data do not follow the IFRS standard and should therefore not be analyzed in isolation. Please check out the full material on our website for a broader and detailed view of the company. It's important to note that statements made during this call are subject to risks and uncertainties and are no guarantee of future results. Please bear that in mind, as well as other available information, when evaluating the company's financial performance. Should you have any questions, please send them in writing via chat. At the end of the call, there will be a Q&A session, and we'll take the questions in the order they are received. Now, let's start our analysis of the results. Over to you, Mariano. Good morning, everyone, and thank you for joining us in our earnings conference call. As Ivan mentioned in our last market call, the third quarter was full of great challenges, and today we'll focus not only on the results, but mainly on the actions that the company has been taking to stabilize its operations. In the last few months, we made some important announcements. I would like to give our investors an update on the status of those initiatives. First, let's talk about our debt restructuring. As we announced, we reached a binding agreement with our main creditors, covering approximately BRL 670 million in debt, which represents about 85% of the company's total debt. We'll explain the plan in greater detail later on. In addition, we secured an investment of up to BRL 70 million to reinforce the cash flow and ensure the implementation of our turnaround plan. As part of the operational restructuring, we are finalizing our customer portfolio optimization together with the resizing of expenses in line with the company's reality. Our main actions focus on implementing more efficient processes in the logistics and storage areas, in addition to reducing indirect expenses. Next quarter, we will reach significant improvements in expenses and cost levels as a result of the actions already implemented. Our goal is to stabilize cash consumption in the first half of 2025 in our Brazilian operations. The most important date in the market in the short term is upcoming Black Friday, and we are optimistic about our performance, about which we will share updated data in early December. Until then, we still have a few steps to take in order to complete the restructuring process. I'm happy to be here leading the company into this new phase, and I would like to thank you for the opportunity given to me as the new leader of the company. I'll now turn the call over to our CFO and IR officer, Matias, who will give you a highlight of the results of the quarter. Thank you, Mariano. In the last quarter, consolidated revenue performance followed a similar trend to the previous quarter, with a relevant effect on the mix of business entities. In Brazil, we had a drop in revenue of 37% in the quarter and 36% year-to-date, excluding the effects of revenue from the factoring of receivables, largely due to the exit of clients at the end of 2023 and the optimization of the client portfolio, aiming to improve our gross margin. In Latin America, we continue to face the impacts of hyperinflation, exchange rate variation, and consistent organic growth. Adjusted EBITDA reflects the impact of this drop in revenue, in addition to the pressure on costs and expenses in Latin America, which despite the reduction efforts, are not still fully in line with a drop in revenue, negatively affecting the results. Following the format we have been presented, we also included adjusted EBITDA's results considering invoice factoring, CapEx, and rent. This adjustment reflects more realistically how the company monitors its operational performance and results internally. Moving on to Brazil's result, Q3 already reflects the optimization of the customer portfolio, as mentioned by Mariano, in addition to the continued impact of customer churn at the end of 2023. An additional effect was the change in the contract with one of our main clients, which previously generated revenue through factoring of receivables. This change led to lower revenue, but had a positive impact on financial expenses. This effect will not be repeated in the coming quarters, and for the sake of comparison and transparency, we'll adjust the historical figures in this format. The quarter was also marked by the exit of customers that were still unaligned with the reduction in expenses and with high costs of exiting contracts renegotiated throughout the quarter. Starting the first quarter of 2025, we'll see the full impact of the reduction measures, since many renegotiated contracts have notice clauses and other impacts, which will be felt throughout the first half of 2025. To illustrate, our SG&A payroll expenses is down by BRL 12 million year-over-year, while the total cost reduced by approximately BRL 14 million. Although this reduction does not fully match the drop in revenue, it's moving towards the company's projected breakeven point. It's important to emphasize that our entire cost reduction plan has been mapped out, and the implementation process is at full steam. In Latin America, revenue performance remains positive even when we exclude the effects of hyperinflation and exchange rate fluctuations, in addition to the effects of the acquisitions made in Q1 and Q2 of 2023. Adjusted EBITDA in the region was negatively impacted by higher operating costs and a mix of less profitable contracts, in addition to exchange rate and inflation effects that have also impacted revenue. Latin American operations implemented a robust expense reduction plan over the last quarter, aiming to go back to the region's historical profitability level. Regarding net income, in addition to the impact of EBITDA on the year-to-date figures, the main factor contributing to these results continues to be the impairment presented in our last call and the increase in restructuring expenses due to the high volume of contract terminations. There was also a reduction in financial expenses because of the end of the receivables factoring model, as we mentioned earlier. The other lines remained stable compared to the previous year. With our commitment to improving cash generation and our focus on capitalizing investments, CapEx was significantly reduced. Our goal is to ensure that all investments already made yield returns for the company in the medium term, keeping the levels needed for maintenance of the technology and logistics areas. About cash flow, the company's efforts to improve cash flow management are quite clear here. Despite the impact of the restructuring costs, there was significant improvement in investment and financial flows quarter-over-quarter. The restructuring of our debt schedule and reduction in investments allowed for a consumption of approximately BRL 20 million in cash against BRL 98 million in the previous quarter. In addition, our investment flow is no longer being impacted by the Q1 and Q2 acquisitions. Moving on to the next slide, you can see the current structure of our debts. However, as we announced, we have signed a restructuring agreement, which I will detail in the coming slide. The company has been successful in restructuring its debt with the main financial creditors. This restructuring involved a total amount of approximately BRL 617 million, which accounts for 85% of the company's debt as of September 2. To facilitate this process, we have created an independent management entity known as NewCo, that will issue debentures that our creditors will subscribe to, and debts will be integrated into this new structure. Thus, NewCo will become the sole creditor of the company. As part of this process, the company will pay off BRL 420 million of its debt by transferring all of its shares to New Retail, a subsidiary that represents 83.6% of its equity capital to NewCo. This structure aims to consolidate liabilities and allow for the amortization of BRL 420 million through the transfer of shares. The remaining balance of about BRL 221 million will be allocated by NewCo for the subscription and payment of private debentures issued by the company. These debentures will be convertible into common shares issued by the company until their maturity date, which will be five years from the date of issuance. After conversion, the debentures will be canceled. In addition, a subscription bonus may be issued as an additional benefit to the debenture subscribers under terms and conditions to be agreed upon in due course. The creation of NewCo is more than an immediate debt structuring. It establishes a foundation for a more solid capital structure with the possibility of converting debt into equity, easing our leverage over the next few years and positioning our debt for the long term. As provided for in the restructuring agreement, the company will contract a new resource with Geribá in the amount of up to BRL 70 million to be disbursed in up to three tranches. The first tranche of BRL 15 million has already been released, and we're working on the release of the second tranche worth BRL 35 million. It's important to emphasize that the agreement provides for precedent and suspensive conditions. Some steps will only become effective and produce effects after the full and definitive verification of these conditions by the parties involved. The deadline for these checks is December 28, with the possibility of renewal for another 30 days. I turn the floor over to Mariano. Thank you, Matias. in Q3, we made significant progress in executing our strategy, which was presented to you in our last call. We're now in the final stages of capital restructuring, focusing on keeping cash under control and streamlining operations, reducing expenses and optimizing internal processes in order to gain efficiency. This effort aims to align our costs and expenses with the new size of the company, creating a leaner and more competitive structure. We're confident that the critical point in this turnaround process is now behind us, and this will ensure the company's operational continuity and the adjustments made have put the company on a more solid and sustainable path in the short term. In addition, we have been applying benchmarking practices that have proven successful in our operations in Latin America, especially with regard to cost management. This experience in the region has been paramount to enhance our strategy and implement operational improvements in an agile and effective manner. Our plan not only strengthens our financial structure, but also creates a solid foundation for us to grow in a healthier and more balanced way in the future. We will continue to closely monitor our performance and adapt our strategies so that we can maintain the company's financial and operational stability over the long term. I would like to thank everyone for joining us and for their trust in our transformation process. I am available to answer any questions that you may have and discuss the company's next steps with you and the rest of our team. Thank you very much. We have received three questions from MSX, Alex Andre, and Marco Saravalho have sent them to us, and also some similar questions sent to us by other investors. The first question is, "What will the Brazilian LatAm structure be like after the payments you mentioned?" Matias, the current CFO, speaking here. As we said in the material fact call, when it comes to the share structure, we have a structure now with two separate companies. Although they have all this operational synergy under the leadership of Mariano, both of them, they are separate entities. Once the process is completed, we have many precedent conditions to take place, and it will take at least a few months for this to happen. The second question: "Can you give us examples of synergies between Brazil and the rest of Latin America that will bring economies and efficiencies like you mentioned?" Hi, everyone. This is Mariano, the company's CEO, and we are now working on a benchmark between what is happening in Latin America and what's happening in Brazil. We are identifying the improvement points that we can implement here in Brazil in order to capture synergies and make the most of the knowhow of our team. We are taking the lessons learned in Latin America and applying them in Brazil. We're looking at technology, and that's where we can find most of the synergies. Next question: "What is the company's expectations to start generating operating cash?" As we mentioned during the call, this work has been developed since the beginning of the restructuring process back in April or May, and our main goal is to have a positive operating cash generation. We have been implementing cost and expense restructuring, as you can see, but their effect takes a while to be fully felt because we have many contracts with exit clauses, some fines to be paid, and we still need a few months for all of that to happen. The first quarters are always weaker in our segment, but we believe that we are going to start generating positive operating cash in the near future. Next question by Leandro Guerra. He's asking, "Good morning. What are the main customers in the company's portfolio now, and when do you expect to close with major customers in the coming months?" Well, we still have Epera, Mondelēz, Swarovski, Grupo BES, and many others that you can see on our website. They are all still our customers, and the main focus for our company in the Brazilian operations is to provide better service to our existing customer base. Though we do have a long list of potential customers that we share with the market, our focus now has been on maintaining customer service and margin with existing customers. Next question by Paulo Grabowski, "Will minority shareholders have a stake in NewCo formed by the company that is doing well?" This question is similar to the first one. After we finish the restructuring process that still has a few steps to be taken, the structure will look exactly like the one I shared with you on the slide. This presentation is available on our website for those of you who are interested. We have an anonymous question here that asks, "What is the contract with Banco do Brasil like?" Well, we have run all the test phases of this contract, and it's now maturing. This is a very important contract to us, and we expect it to perform really well. Next question by José Henrique Miranda. Good morning. How many employees and customers do you have in the Brazilian operations, and what is the revenue expected for 2025 in the Brazilian operations? We have about 2,400 employees right now, and Black Friday is coming up, which is a great date for us. In Brazil alone, we have about 1,000 employees. About next year's revenue, we are not giving any guidance, but we expect to see growth, especially in new contracts that have been signed, and consolidation in the company's current base. Next question by Carlos Veron. Good morning. Are you going to take any action to tackle the price of your shares that is now at BRL 0.14? We have been notified by B3, by the penny stock rule, and we have requested an additional deadline for any type of consolidation, and this deadline is now February next year, February 2025. Next question by Fabricio Martins. Can you give us a detailed explanation about the main investments in technology and personnel that you have been making or planning to make? In what specific areas will the resources be allocated, and what is the expected return of those investments? We've been investing in operations mainly to automate our whole fulfillment. Our goal is to make our operations more scalable and to provide services with lower costs, with good margins in-house. Our focus is on improving operations and to continue improving everything related to website conversion. Another question by Paulo Grabowski. What does the new CEO have to say to us, minority shareholders? What I have to tell you is that I am committed to working really hard throughout this whole process and to make things happen. I have over 20 years of experience in e-commerce throughout the whole of Latin America, and we're going to do whatever we can to make Brazil into operations with positive cash. That's my utmost goal. After we meet this goal, then we believe that we'll find a new future, and then we can focus on the next step. Right now, our greatest effort is to turn our company into a cash-generating company. That's the first thing we need to do, and in order to do that, we need to put things in order internally and adapt the size of the company to this new reality. This is what we're going to do in the next 3 months. I have joined the company 30 days ago, and I am committed to making things happen. As Matias said, in the second quarter of 2025, we no longer want to burn cash. We want to be generating cash by the second quarter of 2025. Next question by Anderson Vilela. Is the company interested in share repurchasing? No, not in the short term and not while the restructuring process is not completed. There is a very low likelihood of this happening before the restructuring process is over. If there are no further questions, we complete our Q&A session, and we put our managers available should you have any other questions. Have a great day.