Earnings Call: Q1 2024

May 10, 2024

Summary

Q1 revenue rose 2% YoY, while GMV was flat and EBITDA was pressured by lower factoring, integration dissynergies and lower-margin mix. New leadership is prioritizing cash, costs and debt; management expects seasonal cash recovery from Q2.

Hello, everyone. Thank you very much for joining us in our first quarter 2024 earnings conference call. For those who need translation, please click on the interpretation button below. The slides in English are available on the chat and on our IR website. I am Fabio Bortolotti, CFO of Infracommerce. The results we announced yesterday, the audio of this call, and the slides we will use as reference are already available on our IR website. Joining me today is our new CEO, Ivan Murias, and after the presentation, we will both be available for the Q&A session. Should any participant like to ask a question, please kindly send it through the chat. Before handing over to Ivan, I would like to warn you about our forward-looking statements. Any matters discussed today that are not historical facts, particularly comments on the company's business prospects, future plans, objectives, and operational and financial targets are based on a range of assumptions, beliefs, and premises that the company's management believes to be reasonable, but they are subject to risks and uncertainties that are discussed in detail in our CVM filings. Forward-looking statements are no guarantee of performance. They involve risks, uncertainties, and assumptions as they refer to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions, and other operational factors may affect the company's future performance and lead to results that differ materially from those expressed in such forward-looking statements. Also, during the call, we will discuss non-IFRS performance measures, which should not be considered in isolation. For a consolidation of these non-IFRS measures, please refer to the tables in our earnings release. Now I turn the floor over to Ivan, who will comment on the key highlights of the quarter. Please, Ivan. Good morning, Borto. Thank you. Thank you all for joining us in our earnings conference call. I address you today and this disclosure of the results for the first quarter of 2024, not only as the new CEO of Infracommerce, the position I recently took over in April, but also as someone who has deep admiration and respect for Infra's journey thus far. The history of Infracommerce can be summarized as innovation, entrepreneurship, and continuous growth. This growth trajectory of Infracommerce, which reached last year earnings of over BRL 1 billion and the completion of multiple strategic acquisitions, attests to the potential that this company has. However, we recognize that the challenges along the way were significant, sometimes macroeconomic, sometimes industry-related, and they impacted our stock performance since the IPO. This is a reality that demands deep reflection and also decisive action. Today, we stand before a new chapter, a chapter that calls us to embrace this change with the same audacity and the same determination that brought us here. The company's board of director has decided on a new leadership, recognizing that the complexity and size that Infracommerce achieved required an evolution in our management. I pledge to lead this transformation, having as top priority a relentless pursuit of greater profitability and value generation for our shareholders. The results we present today do not yet reflect the level we want to be at, but it is a necessary step of this journey. We will go through moments of adjustments and reprioritization, aiming at operational cash generation. In this sense, both this and the results of the coming quarters will reflect these short-term adjustments aiming at a sustainable gain, both operational and financial, which will certainly come in the medium term. Moving on to slide 5, I would like to share with you some of the most relevant points this quarter. Our operation in Latin America continues to show strong growth and has been a positive highlight for several quarters now. at the end of 2023, we achieved better levels of profitability, but it's worth noting the negative seasonality of the first quarter with a cycle that goes against that experienced in Q4, which has a higher consumption level because of the holiday season. These results are not yet compliant with the reporting framework we intend to implement, which is expected to come into effect later this year. They already include some cost and expense adjustments, which together with the lower margin revenue mix and a strategic reduction in receivables factoring, led us to results that are not yet at the levels we would like them to be. Our net revenue grew 2% compared to the first quarter of 2023. Another change that we'll bring to our results release will be to look beyond the accounting EBITDA, also excluding all effects of receivables factoring, rentals, and CapEx, thus providing us with a clearer indicator of operation profitability. By doing this, we can see stability in the figures presented in the first quarter of 2022, the first quarter of 2023, and the first quarter of 2024, despite the decrease observed when we simply look at the adjusted EBITDA. When we consider this comprehensive indicator, we can even see a slight improvement of a bit over BRL 3 million. Now I turn the floor back to Bordo, who will give us a more detailed account of the results of the quarter. Bordo, over to you. Thank you, Ivan. I'll get started on slide 7. As Ivan mentioned, this quarter already presents some significant adjustments to the way we are managing the company. Of course, we also have an effect of the business seasonality in Q1. As everyone knows, e-commerce volumes take a downturn in the first quarter, and this volume picks up throughout the year until Q4. Our GMV this quarter is in line with that obtained in the first quarter of 2023, and among the reasons for this result are the first, the exit of a large customer at the end of the year, whose GMV left 100% of the base, because unlike revenue, when GMV leaves, it leaves 100% of the base, and we also have FX effects from Argentina that impact GMV. Net revenue, on the other hand, increased by 2%, also impacted by the same factors mentioned in the case of GMV, in addition to the kickoff of a customer base review. This project aims to review customers with negative unit economics and may impact revenue initially, but it will bring profitability gains once adjustments to these customer services are made. The take rate, in turn, showed a growth of 0.4 percentage points compared to the first quarter of 2023, standing at 6.8%, indicating a stable level of our business. On the EBITDA side, as Ivan mentioned, we have several factors that led to a significant adjustment, but from a bottom line perspective, they did not have much impact. However, we can expect the impact to come in the coming quarters. Our EBITDA was mainly impacted by the reduction of our customer receivables factoring business volume, which does not impact the bottom line, momentary dissynergies in our Latin American integration plan, the non-capitalization of some investments that go through as G&A, and a sales mix with a higher proportion of pass-through services, which have lower margins than other types of solutions and services. Now moving on to slide number 8. Here, we show you some operational indicators that prove that despite the accounting result presented, we remain on a trajectory of efficiency gain and expense control. It is worth remembering once again that given the business' seasonality, we should compare this quarter with the first quarter of the previous year. Net revenue per headcount, which is a metric that shows our productivity, grew by 38% compared to Q1 2023. In Q1 2024, this indicator exceeded 65,000 BRL per headcount and should continue to grow with the business seasonality. G&A expenses improved by 1.2 percentage points over the year, decreasing from 48% to 47% with some effects of provisions we made throughout this quarter. Otherwise, it would have been an even greater decrease. CapEx, in addition to the absolute value drop that we will see later on, when compared to revenue, also continues in a downward trend and showed a drop of 8 percentage points compared to revenue year-over-year. Now moving on to slide 9. Here we can see our adjusted net profit, excluding non-recurring M&A expenses and the amortization of goodwill that has no cash effect. Net profit in the quarter was 90.3 million BRL, and the factors impacting this figure are described on the slide. Non-recurring expenses, which are also in the P&L, mainly with stock options and consultancies and demobilizations of the cost reduction project, amortization of identifiable assets from M&As which are non-cash, mainly amortizations related to brand, customer portfolio and software goodwill, and non-recurring financial results, which are also non-cash. Mainly the reassessment of subscription bonuses, which are the warrants of our follow-on that will be converted over the second half of the year with a positive effect of 10 million BRL, and also the reassessment of provisions for M&A installments, in addition to monetary correction and bank guarantee related to those M&As. Now slide 10, we detail our CapEx investments, which are basically broken down into logistics, infrastructure, and technology. With the progress in the integration of the acquired company, CapEx continues to drop down 52%, from 32 million to 15 million BRL in Q1, mainly due to the reduction in the amounts invested in platform and technology. Which is proof of our business reorientation and the increase in logistic CapEx as related to mobilizations carried out in the first quarter, still aiming at reducing our logistics park, aiming at greater logistics efficiency. With impacts that have non-recurring investment increases, but with associated savings in the short and medium term. On slide 11, you can see our cash and net debt details. We have the seasonal and results effects, which we explained throughout the presentation, which obviously affect the cash and net debt ratio. As you know, the first quarter is a quarter in which you have a cash swing compared to Black Friday and Christmas, and many pass-throughs to customers are made this quarter, but much of the cash is collected throughout the previous quarter. Our cash closed at BRL 202 million, with bank debt reaching BRL 475 million, up 17% year-over-year. Our total debt, considering M&A installments, reached BRL 500 million, down 16% year-over-year. As we observed in the comparison of Q4 2022 against Q1 2023, seasonality affects this indicator. Starting in Q2, we go back to a downward trend with better cash generation from quarters with peak seasons. Now I conclude the presentation and hand the floor back to Ivan for his final remarks. Ivan, please proceed. Thank you, Borto. To wrap up, I want to say that I have joined the company recently, but we already have a series of initiatives that are underway. What is important right now is to share with you what our strategic focus has been, at least in these first 100 days. We have established five clear metrics. First, total focus on cash generation. As we could see from the results of the quarter, there is a certain stability in our EBITDA results. Although the company has implemented some very strict initiatives to control cost, we recognize that there is room for improvement here, and that is what we are doing in the coming quarters. We have a review of fixed costs in place, a review of variable cost, and this is all running at full steam right now. Second, balance of the capital structure. At the end of last year, we did a follow-on, and the use of proceeds from this follow-on slightly reduced our bank leverage. But with the debt profile and the relationship with some banks, we still have some work to do to organize this front throughout the end of the first half of the year, but also throughout the entire second half of 2024. In parallel to this, taking care of revenue at a time like this is extremely important. Taking care of our customers, but also analyzing our customer matrix to check on pricing issues, delivery issues, and possibly even disruption issues so that we can find the ideal balance in our ICP, the ideal customer service profile. Fourth, as very common, when we have a new CEO and a change of culture and implementation of new metrics, we have to focus on retaining key talents. In this sense, making the transition gradually without pointing fingers, but at the same time recognizing the professional talents that will take us to the next chapter of our history, is extremely important, and we are looking at this human side with great attention. Finally, since the meeting we started having with analysts just 15 days after I joined the company, Peter and I announced that we had started a project with consultancy firm Bain for the completion of a 3-year joint strategic plan. This plan is ongoing. We are now at week 4, moving on to week 5 of this project. Soon we hope to complete this work and also to communicate to you about the conclusions of this work in a well-structured investors day, possibly happening between the end of August and beginning of September. I assure you that this is not going to be an easy journey, but on the other hand, I am fully convinced that we are capable of navigating it and delivering great results to our employees, our customers, but also our investors, especially those who trust us in this new phase of Infracommerce. Once again, thank you for joining, and now we are available for the question and answer session. If you wish to pose a question, please use the chat tool. Questions will be answered in the order they are received. Please wait while we poll for questions. Let us start with a first question, which is also related to other questions we have received, and this is also related to the last slide, the actions that are being taken to solve issues related to operational cash and EBITDA. At the end of the day, our focus is on the bottom line. Ivan mentioned that we are reviewing many issues here. A consultancy firm has been hired, and many measures are being implemented to address almost all of the lines of the P&L. We are reviewing revenue of customers that have a negative P&L effect, so we are reviewing those contracts, and this may impact revenue, but of course, that will always have also an effect on the bottom line and also cost adjustments. This has a short-term synergy but will soon show improvement in the bottom line and also receivables factoring volume. We have been decreasing this volume. This has no major impact in the bottom line, but this impacts gross profit and EBITDA mainly. All of these measures are being taken for us to improve our bottom line. That is why we did not want to show you only the EBITDA during our release, but also EBITDA and other IFRS measures such as rent and CapEx, which had a major reduction. In spite of the seasonality, we have been able to keep this indicator at a reasonable level, and this is expected to improve starting in the second quarter, since from now on, the season tends to pick up. Now we have a question about a partnership we have with Banco do Brasil that we announced earlier. Yes, this partnership is ongoing. It is going to go live soon this year. We were expecting to start this project last year, but it is actually going to be kicked off this year, and this will definitely be a project that may be able to offset the exit of a large customer that left us last year. But of course, that will require some time for the transition. Now, a question about cash burn and increase in the company's net debt this quarter. In Q1 2023, we had exactly the same behavior. We have significant business seasonality and also cash seasonality. Everything that we collect in terms of receivables in Q4 is passed through our brands in Q1. We also have suppliers from Black Friday that are only paid in January, February. We also worked hard to extend some terms last year. Many of these things are impacting our numbers in Q1. But starting in Q2, we have cash generation that will break even with our bank debt. We also have a question here about the receivables factoring of customers, if that was decreased because of the use of proceeds. Yes, we also used our own working capital to do that, but this business volume dropped and is expected to continue to drop with no impact on the bottom line, but with impact on some metrics before EBITDA. We also got a question here about some of the adjustments we made. We have SG&A and COGS adjustments, but the impacts were minor. They were also asking here about the review in our investments. Some of these investments have been reviewed since last year, and we will continue to review them. Some of these expenses will no longer be capitalized because we will no longer have an investment in future gains, but that is why we see this impact. But when you look at the bottom line, this actually has an impact on EBITDA, but not on the post CapEx bottom line. Now we have a question about debt profile. We did extend the duration of the debt since last year. There is still a short-term installment that is under negotiation now, but most is with a five-year term with the banks or with FINEP, which is a 10-year term line. We are at the final stages of term negotiation so that the debts will mature at the right time considering the joining of Ivan Murias and this whole restructuring project that focuses on cash flow. This is already ongoing and it is actually in the final stage of implementation. Now, a question about gross margin. We talked about this during the call, but I just want to reinforce this because this was the greatest impact we had this quarter. First, we have the volume of receivables factoring for customers that has a direct impact on gross profit. Then we also have a counteraction in the financial services. It does not impact the company much, but it does impact gross profit. Latin America is going through a process of integration of acquired companies, so there will be some quarters of adjustments before the synergies can be captured. Of course, we had an adjustment between SG&A and COGS, which also impacts gross margins. Finally, we also explained that this quarter we had a sales mix adjustment. It is almost like a pass-through, but with lower margins. These sales had a higher volume than other sales with better margins. That is also an impact that we felt in Q1. Another question here is about the savings reduction and headcount adjustment. We do not break down our payroll in SG&A and COGS, but indeed we have had relevant savings of almost 20%. You cannot see this fully because SG&A has some provisions that were made that increased the G&A amounts. We also had the CapEx capitalization, which offset a bit of the savings we had in headcount. However, since these movements, especially the provision movement, is non-cash, since these provisions will not happen in the coming quarters, we will be able to see cost reduction in a clearer way, especially in SG&A, which is fixed. We have some questions about debt, both short-term and long-term. When it comes to the cash to debt ratio, this is very similar to the profile we had last year. We have cash consumption in Q1, but then we have cash generation starting in Q2 onwards because that is very typical of our business seasonality. We always get this question in Q1, but just like last year, starting in Q2, you see improvement in the cash to short-term debt ratio. We are also revisiting all the premises of the business plan to have a better view, which will be shared with the market in a timely manner after the work with the consultancy firm is completed. Ivan will share that with the market, not only the annual plan, but also the three-year plan that will mention all of our KPIs, net debt level, debt levels, and leverage levels that we expect. This is being completed right now, and we expect to have the results in the coming weeks. Now, about warrant price. There is a part of the follow-on that has not been executed yet, and this is very important for the cash position and liquidity. We have a subscription bônus that was issued, whose exercise is between June and December. This is in hands of all the shareholders that anchored the follow-on. We still have the conversion of this cash for the company that we expect to do in the second half of the year, and this will also help in the cash to debt ratio. Finally, we also got some questions about future M&As and guidance. About M&A, we were very clear there are no movements planned right now. We want to focus in-house and on the company's operational cash, and also in reducing debt. Now we have Ivan joining the company, new management. We are reviewing the assets to see how much cash we can generate. We are revisiting our strategy and revisiting our assets. If we can, later, we will share a guidance linked to the new business plan that we will put in place. A final question here about the warrants, if we already have a timeline. Because of the price of the bônus, the board has been discussing this continuously, but we want this to happen later on in the year. But the board is still going to deliberate on this. This concludes the Q&A session. We have answered all main questions that were asked, so thank you all for joining and have a great Friday.