Earnings Call: Q2 2024

Aug 14, 2024

Summary

Revenue fell amid Brazilian customer losses and contract pruning, while Latin American growth faced cost, mix, inflation, and FX pressure. A BRL 1.4 billion impairment and creditor restructuring plan define the turnaround.

Good morning, everyone. Welcome to Infracommerce's second quarter 2024 earnings conference call. I am Matias Michaelsen, Infracommerce's new CFO, and joining me here today is Ivan Murias, Infracommerce's CEO. Before we begin, I would like to remind you that this presentation we will be sharing today is already available on our RI website with the supporting materials. Please note that this material may contain forward-looking statements based on current expectations and projections of the company's management, as well as non-IFRS standard data that should not be considered in isolation. Please see the full material on our website. It is also important to note that these statements in this call are subject to risks and uncertainties and do not guarantee future events. Please consider this and other available information when evaluating the company's financial performance. I invite everyone to send their questions via chat. At the end of the call, we will take some time to answer those questions in the order they are received. Thank you for your understanding and cooperation. Now let us get on with analyzing our results. Over to you, Ivan. Good morning, everyone, and thank you for joining us for our second quarter 2024 earnings call. This was a challenging period for Infracommerce, marked by a number of factors that impacted our financial performance. However, these challenges are a part of the turnaround process that we discussed in our last earnings call. The results we are presenting today do not yet reflect the performance that the company's leadership and myself aim for the company's future. However, they reaffirm our commitment to transparency and to adjusting course in order to transform the company into a profitable, operating cash-generating organization. We continue to face a drop in revenue driven by the loss of customers in our Brazilian operations at the beginning of the year. In addition, the review of our contract matrix and the need to renegotiate or terminate contracts with less profitable clients also negatively impacted revenue. However, these actions are aimed at improving our bottom line in the coming quarters. In Latin America, despite a positive performance in terms of revenue, we faced challenges related to revenue mix, inflation, exchange rate variation, and rising costs. One of the most significant aspects of this quarter was the revaluation of our assets, resulting in an impairment of approximately BRL 1.4 billion. This revaluation was necessary due to changes in market conditions and the realization that some of our acquisitions did not prove to be as profitable as the multiples initially paid. This accounting adjustment reflects our prudent stance in ensuring that our assets are correctly valued and aligned with current market reality. In addition, we announced yesterday via a material fact announcement, the signing of a non-binding MOU for the restructuring of our short-term debts, as well as the binding standstill of our bank debts until October. This agreement is proof of the understanding, the sense of urgency and commitment of this management and our creditors to seek a definitive solution for the optimization of our capital structure, which will be detailed later. Despite the short-term challenges, we remain committed to the execution of our restructuring plan, which was recently refined in partnership with the Bain & Company consultancy and will be discussed at the end of this presentation. We are focused on rebalancing our cash flow, optimizing our capital structure, and implementing an operational turnaround that will allow us to increase profitability and improve efficiency in all areas of the company. I would like to turn the floor over to our CFO and investor relations officer, Matias Michaelsen, who will give you further details on the results. Matias, over to you. Thank you, Ivan. On this slide, we highlight the consolidated results for the quarter and year-to-date. In terms of revenue, we have a significant effect of the mix of business entities, with Brazil showing a drop of 45% in the quarter and 36% year-to-date, mainly due to the loss of clients that we previously reported, as well as the beginning of the effect of the client matrix review, which, as Ivan commented, improves our bottom line. In Latin America, part of the effect of the year's growth came from non-organic effect, but also from a significant increase in same-store sales, which accounted for a third of this figure, as well as the effects of hyperinflation and exchange rate variations against the previous period. The combination of these factors led to a drop of 11.6% in the quarter and 5.8% year-to-date. Adjusted EBITDA reflects this impact of the drop in revenue, as well as the pressure from costs and expenses in Latin America, in addition to the mismatch between the phasing of expense reduction initiatives and the drop in revenue in the Brazilian operations. In line with the format presented at the previous meeting, we also present here Adjusted EBITDA for the effect of revenue anticipation, CapEx, and rent, which reflects in a more realistic way how the company monitors the operating result and business performance internally. As we said in the previous slide, the Brazilian operations sees the impact of the loss of contract we had at the beginning of the year, combined with the termination of unprofitable contracts. This will also be felt in the coming quarters and as part of the operational turnaround project in which we have identified a series of loss-making contracts from a financial point of view. This drop in revenue is the main factor impacting EBITDA, and in the chart at the bottom, you can see that our expenses do not yet reflect all the reduction efforts we have made, such as reducing the headcount of directors, closing offices, optimizing warehouses, readjusting the service and back office structure, and important renegotiations with suppliers. In Latin America, we are able to see significant revenue growth, with a third coming from organic growth and the rest from a combination of acquisitions, exchange rate variations, and inflation effects in Argentina. Adjusted EBITDA in the region was negatively impacted by a higher operating cost, a performance mix of less profitable contracts, as well as the same currency and inflation effects that impact our revenue. The LatAm operations continue to focus on improving performance in the region, optimizing operations, and adjusting strategies within the context of each one of the eight countries in which we operate. As for the other lines of the result, the company carried out a reassessment of the internal cash, which resulted in the review of factors that impacted the company's revenue, expense, and cash projections. These factors include substantially high amounts paid at the time of the acquisition, but which proved to be less profitable than previous expectations, combined with a change in market conditions. For example, we had a significant drop in revenue caused by the churn of some key clients, coupled with a reduction of GMV transacted by some clients, which is reflected in the Adjusted EBITDA, less CapEx, advance against receivables and rent shown in previous slides. We also carried out a detailed review of our expenses given the new operating context, which had a significant impact on these projections. The combined effect of this review and the debt to third party capital ratio and the non-generation of cash meant that we had an adjustment of BRL 1.4 billion in our results. On the next slide, you can see that this was the main impact on net income, in addition to the smaller effects of restructuring expenses and a positive impact on the financial result due to the lower advances against receivables and credit card amounts. In keeping with the commitment to reduce and better focus on capitalizing investments, we brought a 68% reduction in technology compared to the previous year, totaling $8 million invested in CapEx. In addition, investments in logistics infrastructure were also reduced by 25%, adding up to BRL 3 million in the quarter. As for cash flow, this slide shows a breakdown of the first two quarters, with operating cash flow in the second quarter being impacted by a lower advance against receivables and a reduction in onerous contracts, despite the higher ratio of expenses to revenues. In cash flow from investments, we have a similar performance to the first quarter when we exclude the effect of the sale of investments that had taken place in that quarter. On the debt side, the net effect was BRL 49 million in the second quarter. On the next slide, we see that despite gross debt being in line with history, our cash was consumed by year-end obligations, debt repayments, and cash consumption in the operation. Combined with the short term of several of those debts and the challenge of renegotiating them with banks, the company has been working with the main financial institutions to draw up a restructuring plan, which was announced yesterday through the material fact together with the company's results. Next, Ivan will present the conclusions of the Bain & Company assessment as part of the review of our strategic planning and the details of this MOU. Over to you, Ivan. Thank you, Matias. During the second quarter, we made significant progress in our strategic reassessment, which allowed us to better diagnose the company, identifying its strengths, its gaps, and aligning key guidelines for the future. Our immediate priority is to rebalance the capital structure, focusing on restructuring capital allocation and debt management, as well as a more efficient cash management. In the strategic sphere, we will direct our efforts towards the core business, streamlining operations and seeking greater profitability. This will be done by optimizing the client portfolio, adjusting the pricing policy, and renegotiating or even terminating contracts with unprofitable clients. Adjusting the logistics park in order to capture greater operational efficiency is part of our directive to focus on efficiency and productivity, both in operations and in the corporate structure. We have also started to reduce indirect expenses, adjusting them to the company's current size. We have made significant progress in renegotiating our debts, resulting in the signing of a non-binding memorandum of understanding, or MOU, with our main creditors, which guarantees a standstill period until October this year. This agreement provides for, number one, the deleveraging of up to BRL 370 million through the sale of the company's stake in the subsidiary New Retail, and potentially the concomitant entry of at least BRL 50 million in new resources to reinforce working capital. Number two, the issuance of debt that must be convertible into company shares with an extended maturity for the remaining balance. This was a crucial step, allowing our management to focus efforts on improving operations, especially in Brazil, which is our most challenging geography right now. As I mentioned at the beginning of the presentation and on previous occasions, these are not yet the results we want to present, but they are part of the company's restructuring and recovery process. The silver lining is that we're clear about the work to be done, and we already know the internal benchmarks that are successfully applied in our Latin American operations. We are in the classic turnaround phase. A first quarter of diagnosis, which we are now completing and presenting to you today. The next quarter will be about implementing corrective and optimization measures, and at the end of this process, we'll begin to reap the fruits of this work. Thank you all for joining and feel free to send your questions via the Zoom chat. Thank you very much. We have a question by Ernesto Gonzalez from Morgan Stanley about the warrants of the company. Ernesto, good morning. These warrants are still open, and they can be exercised by the end of the year. This decision is to be made together with the board of directors of the company, always looking out at. The next question is by Paulo Grabowski. What does the new management have to say to investors that purchased the asset with BRL 1.2 billion over in equity? Well, the management is not supposed to judge the transactions of the past. Our role is to work together with our board of directors and our independent auditors and reassess, together with the work that we did with the Bain & Company consultancy, the current market conditions, the addressable market, and how it is expected to grow for the future, the status of the contracts we had in the past, and then make a decision based on this. The decision was made to make an adjustment through this impairment. So at that point in time, there were reasons for the investments to be made in the way it did, it was made, and now we have reasons to make this non-cash entry in our balance sheet. So that was the rationale that we had. We have a question by Renato Ambrosio. He says, "Congratulations on your results. What about the contract with Banco do Brasil? Does the contract continue under negotiation?" Good morning, Renato. The contract was signed recently. This contract is based on marketplace. The company is gaining momentum by exercising its ability to sign such contracts. But we prefer not to comment on any specific contract because we don't want to create any type of expectations or oversell for the future. This contract is gaining maturity within our structure, and we don't foresee any significant impact on our results coming from this individual contract. Although it is gaining maturity and momentum. We have a follow-up question by Ernesto Gonzalez. He says, "Thank you for your answer. Any possibilities that the deadline of the warrants is extended?" Well, Ernesto, this decision is to be made by the end of the year without the possibility to extend. If there are no further questions, I'd like to turn the floor over to Ivan for his final remarks. Thank you all very much for joining us this morning. I would like to make our IR team available as well as our management should you have any further questions after the call, and I'm also available should you have any other topics you would like to discuss.