Earnings Call: Q3 2023

Nov 10, 2023

Summary

Q3 revenue rose 35% YoY and GMV 18.7%, while lower CapEx and efficiency gains lifted profitability. Latin America growth and continued deleveraging are key priorities, with macro and funding conditions still uncertain.

Hello, everyone. Thank you for joining us for Infracommerce's third quarter 2023 earnings conference call. I am Fabio Bortolotti, Infracommerce's CFO, and the results that we announced yesterday, the audio of this call and the slides that we will reference to are available on our IR website. Joining me today are Kai Schoppen, Infracommerce's founder and CEO, and after the presentation, we will be here for the Q&A session. Should any participant wish to pose a question, please raise your hand to join the queue. You can also send us your question via chat. Before I turn the call over to Kai, I would like to caution you regarding our forward-looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives, and expected performance, constitute forward-looking statements based on a range of assumptions that the company believes are reasonable, but are subject to uncertainties and risks 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 relate to future events and depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions, and other operating factors may affect the future results of the company and lead to results that differ materially from those expressed in such forward-looking statements. Also, during the course of the call, we will discuss non-IFRS performance measures, which should not be considered in isolation. For a consolidation on these non-IFRS measures, please refer to the tables at the end of our earnings release. Now I turn the floor over to Kai, who will comment on the main highlights of the quarter. Kai? Thank you, Fabio. Let's get started on slide 4. This quarter is very special for Infracommerce. Our results show the strength of our value proposition in Brazil and Latin America, in the total of 9 countries where we currently operate in the region. In addition to the company's capacity of delivering profitability and cash generation without impacting growth, we are more than on track in our commitment to delivering a year with strong EBITDA generation with lower CapEx levels, as we promised to the market in the beginning of 2023. Before I give the highlights of the quarter, I want to thank Infracommerce's team, everyone who has been working really hard in recent months to deliver efficiency, profitability, and growth at the same time. As you can see on slide 5, our revenue grew by 35% this quarter, an organic growth of around 20%. An impressive result considering that the e-commerce and the retail markets in general struggled in Q3 with a drop of around 7%. Our adjusted EBITDA achieved BRL 65 million, up 164% year-over-year. This is due to our work to reduce expenses and gain efficiency. The EBITDA margin achieved the level of 22%, almost double that of the same period in 2022. Our GMV also grew. We went to BRL 3.8 billion, up 18.7% against Q3 2022. Even with the business growth above 30%, we reduced the total headcount by 8.7% against the previous quarter and by 17% compared to a year ago. On slide number six, I would like to give you an update on the break-even project that we commented on in previous earning calls. So far, we have captured 75% of the estimated savings for 2023, in spite of the fact that the project was only kicked off in May this year. As we explained in our Q1 earning release, the goal of the project was to improve annualized cash from BRL 120 million to BRL 140 million. Of this amount, to the end of September, we have already achieved BRL 118 million. As we said in our last release, we have already identified an additional potential BRL 36 million annualized that we expect to capture throughout 2024. Thus, the total potential saving target is between BRL 156 million and BRL 176 million, split between OpEx and CapEx. Fabio will provide you with further details on the quarter's financial results in a minute. Before that, here on slide number seven, I would like to highlight the trend of transforming the company. In adjusted EBITDA, we grew to BRL 75 million this quarter, and we more than doubled as compared to Q3 2022. This is even above Q4 2022, which is seasonally stronger due to the Black Friday and the holiday season purchases. With the M&As and the reprioritization of investments, we continue reducing CapEx, achieving BRL 23 million this quarter, a drop above 50% year-over-year. An important indicator for us is EBITDA minus CapEx, which is positive in BRL 59 million year to date, overcoming even our own expectations from the beginning of the year. Now, I would like to turn the floor over to Fabio, who will comment on the financial results. Thank you, Kai. Moving on to slide nine. Let's talk about the financial highlights. As Kai said earlier, even with a challenging e-commerce and retail markets in Brazil and Latin America, we were able to achieve 19% growth in GMV and 35% growth in net revenue, achieving BRL 290 million. A main highlight was Latin America with a strong organic and inorganic growth, but all of our business units had consistent growth. It's worth highlighting our expansion strategy in Latin America, which has been giving us the results expected, since the revenue share almost doubled since the IPO to about 40% and should continue growing in the coming years considering the size of the opportunity that we see in those markets. The main highlight of the quarter was the EBITDA margin that adjusted to the non-recurring termination and M&A cost got to 17%, almost double the same quarter the previous year and up five percentage points against the previous quarter. It's important to note the focus of our team and the leadership to continue seeking synergies and reducing expenses as part of the project scope, as Kai mentioned earlier. Moving on to slide 10. G&A over net revenue, discounting depreciation effects improved in 10 percentage points, going from 47.7% in Q2 2022 to 34.7% in Q3 2023, with a very positive trend. The CapEx continues being reduced with over 50% reduction against the same amount invested in the same quarter last year. Gross margin and adjusted EBITDA also had growth compared to the same quarter the previous year. Now on slide 11, we have some operational indicators to show the growth in efficiency and our scalability model. Net revenue per headcount is growing a lot. This quarter, it was 63% higher than the previous year, and our payroll expenses dropped from 56% to 35% of the net revenue. CapEx, in addition to the drop in absolute amounts that we saw in previous slides, when we compare this in relation to the revenue, we are having a more and more asset-light company. Now let's talk about net profit on slide 12. We adjust net profit to the non-recurrent M&A expenses and also other effects. This indicator would be BRL 22.6 million this quarter, continuing with our positive trend that we've been seeing in recent quarters. Of course, with a future consistent reduction in the interest rates, we expect to see a significant impact on this indicator, as we'll see in the next slide. Now on slide 13, we can see adjusted net profit of the company, excluding our current capital structure. We start to see a positive net profit in our operations this quarter. Now on slide 14, we can give you further details about our CapEx investments. As you know, our CapEx is basically split in two, logistics infrastructure and technology. The latter concentrates most of the proceeds since our logistics structure does not require such a high CapEx for maintenance. With the advance of the M&A integrations, CapEx dropped more than 50% to BRL 23 million, and the technology CapEx had the most significant drop this quarter since the projects for M&A integration are now almost done. Now moving on to slide 15, you can see our net debt and cash. In Q3 2023, Infracommerce closed the cash position at BRL 210 million, and we have been focusing on the assessment of net debt, which is virtually stable as compared to the previous quarter, considering the M&A debts. Because of our LTM EBITDA increase, so the last 12 months, the debt over EBITDA ratio has been dropping consistently, confirming the positive trend of deleveraging in the company, even in that scenario of high interest rates. Now I'd like to turn the floor back to Kai for his final remarks. Thank you so much, Fabio. Finally, on slide 16, we would like to highlight the main points that we addressed during this call. First, Infracommerce is experiencing a very important and transformational moment in its history. In addition to the organic growth and margin expansion, we see progress in our projects of efficiency and profitability, which makes us really excited to, much earlier than expected, achieve profitability and cash generation. Finally, we have a lot of work ahead of us to improve our capital structure in a more definitive way. In order to do that, and due to the operational results and positive prospects, we have full support of our shareholders and partner banks. They are supporting us with alternatives that allow for the company to wait for an improvement in the macro scenario of the capital market. We're very confident about where we can get with our business model and our amazing skills. Thank you very much. Thank you, Kai. Okay. Now we can start the Q&A session. In order to ask a question, please raise your hand, click on the Raise Your Hand button, or send your questions via chat. Questions will be answered in the order they are received. Please wait while we poll for questions. Okay, our first question is by Aneli from Itaú Equity Sales. She is asking us to provide more sensitivity about our net income in 2024 and 2025, and our carrying capacity with the pay-down of our debt and debt interest rates. Okay, I am going to answer this question. First, we do not have any formal guidance for 2024 or 2025 about our net income, but I will try to give you some color on this by talking about some issues. If you look at the amount we pay in interest rates in Q3 and multiply that by four, you would get more or less to the amount of BRL 100 million per year. This is what we pay in interest rates. At the end of the day, if we continue with this positive evolution of the company next year, we would be more or less on the same level of interest rates if we do not change our capital structure. In a simplified way, if we can reduce the net debt by half, then we will also reduce the amount of BRL 100 million paid in interest rates by half as well. Like we said in our Investors' Day in the beginning of the year, the goal for 2025 would be to deleverage the company so that the cash generation of the company can pay out the interest rates and the debt amortization in the future. We continue with this master plan, and at some point in time, we would need a follow-on to achieve that target. But when that will happen depends on the macro conditions of the financial market. We are taking a look at that, and we continue working on improving the business to have a better valuation of our company in the future. Okay, we got a question by Cleber Costa: What are your expectations for e-commerce in Q4 2023? Well, it is really hard to give an opinion on that, but I think that this year we are going to have a true Black Friday. What do I mean by that? In the past, many brands reduced or purchased assortment specifically for Black Friday because the sales was so large that they were no longer just selling out the inventory that accumulated throughout the year, but they actually needed extra assortment for that. The real discount was not like 60% or 80% that they had planned, but they were specific items that were produced for the Black Friday that on paper showed high discount rates, but it was actually a discount of 20%-30%. Looking at the retailers in general, I see that many of them have a very high inventory level because of the weakness of the retail market in general. I expect to see real and aggressive discounts so that these retailers can increase their cash position and start next year with a cleaner inventory. I think that the offers will be great for this year during the Black Friday, and I think that the e-commerce will have a strong moment. However, our population now has a lower purchasing power due to the high interest rates. I am not the right person to opine on whether this is actually going to help us change things around in Q4. I think that the e-commerce market is not going to worsen as compared to Q3, for sure. Now, it is hard to say if it is going to grow compared to last year because of the effect of the more attractive discounts. We will have to wait and see. But we were more conservative this year when planning for the expected volumes to be sold during Black Friday, because we said that, yes, consumers are interested in buying items on a discount, but they might not have as much money available as they had in 2022. Okay, thank you. Okay, before we go onto the live questions, we have another question in writing about the number of clients compared to the previous quarter, and if we have the complete list to be shared with you. No, we do not. And if the reduction had any relevant client. Actually, no. We included the churn in the release, which was 0.2% of the revenue of the clients that left us this quarter. So it is an exchange of non-profitable clients, and as part of our breakeven project, we also revisited clients that had a non-optimal or even negative margin. So we have been terminating the contracts with some of those clients, but we are including new, larger, and more relevant clients in place. So even without those customers, we had strong organic growth. Now a question by Carlos Sequeira from BTG. Carlos, would you like to enable your mic and ask your question? Hi, Berto. Hi, Kai. Good morning. Thank you for taking my question. So my question is about CapEx. We have seen a great effort to optimize CapEx at the company, and the reduction was quite significant this quarter. And something that we have been debating internally here with investors is that with a lower level of CapEx, this might affect Infracommerce's growth capacity in the coming years. Do you agree with that or not? And if not, why not? What is the structure of the company to continue growing even with a lower CapEx level? Thank you for your question. This is an excellent provocation. During our IPO, we said that we wanted to have a sustainable CapEx level at Infracommerce, and that would be from 50 to 60, up to 80 million BRL, and that was two and a half years ago. So we said that we would have two years of a very strong CapEx due to all the M&As that we had. I do not have the exact number, but in the last two years, I think we had five M&As. So why the technology, but also the logistics CapEx, is increased in a temporary way when you have a lot of M&As. We acquired businesses, unlike other M&As, but we acquired companies that had the same business models and that did the same thing that Infracommerce did. So we purchased an additional customer base so that we could gain relevance and scale for our companies, our clients, as compared to other marketplaces, such as Mercado Libre, Magalu, Amazon, and others. And in order to be efficient and innovative in the medium term, we were doomed to migrate all of these companies to our systems and processes. And we had five logistic centers during our peak in the state of São Paulo. Of course, it makes much more sense to have one large one than five spread ones, because you have fixed costs like cleanings, security, and so on. What we did in the last two years was to implement many technology projects to strengthen the systems and to migrate this customer base from the acquired companies to one single system and process. The same was done for our logistic centers and other infrastructure elements. In a temporary way, for two years, that created some noise about what the company actually needed to grow and be innovative in the future. We are talking now about BRL 20 million to BRL 25 million. We have a lot of millions from this money to invest in innovation, so this should not impact our future growth because we were just including those temporary effects related to the M&As that we had. As you know, our focus now is on profitability and organizing our capital structure without any additional M&A. This temporary effect should not be repeated in the short term. Great. Thank you very much. Maria Luisa from Citi. We can either read your question or you can ask your question orally. Okay, sure. I will ask my question then. Thank you for taking my question. I would like to understand where the additional savings will come from. You have announced some additional savings, so where will they come from? After the savings are captured, what is a sustainable EBITDA margin that you see for the medium and the long term? Thank you. All of these additional savings are more structure in nature in terms of productivity gain due to systems deployment. Integration of our WMS systems that manage our DCs enable us to have a much better productivity. The original savings calculated was just the license to operate and maintenance cost of the systems that were shut down. But now we have this second wave of productivity gain because now we have one single system, which is more efficient than the other ones that were shut down. This is related to efficiency gain. In terms of EBITDA margin, yes, we expect this to be in line with what we shared this quarter. Of course, there is seasonality throughout the year, as you know, Q1 and Q4. We think that the level of 20%-22% is a good EBITDA level for us to have as a baseline for the coming years. Great. Thank you very much. Now we have a question by Adam, but I think that we have already answered this about the churn of the last quarter, which is 0.2%, pretty much in line with what we saw in recent quarters. Now we have a question by Carlos about clients joining Infracommerce that did not use to have e-commerce, and if that explains such an adverse year for this market, and if we see any risk related to legislation with the changes in drivers' workday. Great question. Infracommerce has different scenarios in each client. We are focused on a business that helps industries to sell from the shop floor to the end consumer or to a small business, like a supermarket and a drugstore. This is what we call B2C and B2B e-commerce. In Latin America, B2C is really strong. We are starting to work on the B2B in the other countries of Latin America. In Brazil, the GMV of these two businesses are almost the same. The retailer that buys from the industry to resell is not our customer. Some of these clients do not have an e-commerce yet, but most of them, after the pandemic, have set up a structure to do that. In Brazil, we have many customers in which we do a scoring of an existing operation of around 80 KPIs, and we say, "Hey, what is your website conversion rate in the Northeast?" Or, "What is your anti-fraud approval rate? What part of the population can you reach in 2 days as compared to other market benchmarks?" We convince these executives that Infracommerce can bring more sales at a lower price and a better service level than if they did this in-house. This is what is going on in Brazil. Outside Brazil, in the rest of Latin America, where the market is lagging behind Brazil 3 to 5 years, there are still customers that are starting to do e-commerce, and the sales is easier there because you do not have to persuade them with KPIs or cost structure. You just have to take this customer online. You might ask, which of the two represent the greatest opportunity? Well, in the medium term, the company needs to be able to do the sales, like in Brazil, because new people going into e-commerce, and this is working well here in Brazil. We are ready to scale the company, migrating operations that are done in-house, but usually 30 to 40 things that they have to coordinate at a small scale to Infracommerce with this ambition. The second part of the question about the drivers, Infracommerce is not a carrier. We do have our logistics centers and our own TMS system. It is similar to Intelipost system where we have over 30 carriers registered, and then with an algorithm, we choose the right carrier. Because we have many luxury clients, like beverage clients and fashion clients, B2B clients that want to ship half a pallet to small retailers. We did not want to purchase or to lease cars and trucks and have a large payroll for this. We have a system that will choose the appropriate carrier for each transaction. The transportation cost is almost like a pass-through. If the driver costs increase, our carriers will charge more from us, and we are going to charge more from our clients. This can lead to a drop in the conversion rate in e-commerce, because if you charge more in shipping costs from end consumers, the purchase may be less attractive. But in our P&L, this is not going to have any significant impact. Thank you, Kai. Another question by Anna Lee about the GMV prospects for Q4, particularly in Brazil. If we have any color on the EBITDA less CapEx margin, the indicator that we shared with you during the presentation. About the GMV expansion, we do not have any specific guidance. I think Kai commented about the market a bit already. We expect greater growth in Latin America than in Brazil because the markets there are growing more. They are maturing more now than Brazil, because Brazil is already more mature, and we have expectations of growth on same clients compared to the previous year that had a good Black Friday, but they were still preparing. We also have a B2B business with a growing GMV without the same seasonality in Q3, but it also contributes to growth. About EBITDA less CapEx, we do not have the specific guidance for 2024. We told you what we expect in terms of sustainable EBITDA margins in the short and medium term. With the revenue growth, we can estimate EBITDA and CapEx, as Kai mentioned. Our goal is to have this below BRL 80 million. BRL 80 million would be the cap for a sustainable CapEx without impacts on growth, like Cadu asked. I think that maybe what we could add here is that we have our break-even project, and we made it clear that this project is not over yet, and there is still some potential to materialize. If it does materialize, this should improve cash generation coming from all lines in the future. In theory, this should have a positive impact in the future. That is all I can tell you for now. Now, a question by Renan about Latin America. He saw that Infra Latam was launched. We actually changed the brand. Up until recently, we were using the brands of the acquired companies, and starting this year, we are using Infracommerce in Latin America as a whole. He wants us to talk a bit about the plans for the rest of Latin America. We have always enjoyed the idea of Latin America. We started the first businesses in Argentina in 2015, 2016, with the following rationale. Brazil is very relevant in the region, but if you look at GDP and population, Brazil corresponds to about 40%. If you look at the e-commerce market, Brazil accounts for 60% of the volume. In theory, the next 5 to 10 years, we have at least twice as much this potential in the rest of Latin America for the company to grow if we can operate well in 9 to 10 countries. We started doing this work in a timid way, but we were preparing for the expansion. There is another highly strategic plan. Many of our clients are international brands, and international brands look at Latin America as a region. They do not want to have a partner for Brazil only. They want to solve the whole of Latin America, because since the other markets are much smaller than Brazil, together, they correspond to one Brazil, for example. It is very complex for an American, European, or even Chinese brand to run 6 to 10 countries from their headquarters. Our bet for many years now has been to sign umbrella contracts with those clients, also reducing the possibility of a churn. We have Nike. In addition to Brazil, where unfortunately they are leaving, we operate Nike in Argentina and Chile successfully and growing. This diversification of the client base and this higher recurrence was what we wanted. Now, in 2023, this market has gained a lot of relevance, and e-commerce in Brazil is a bit weaker in recent months. The rest of Latin America is booming, especially Mexico. This revenue diversification in each one of the countries is also helping the company a lot. That was the right path. We talked to a lot of executives from Mercado Libre in recent years to learn their strategies, since they are leaders in Latin America, having the synergies of a central operation, but behaving locally. I want to thank the people we talked to here. We were able to implement many of these concepts and ideas, and today we are number 1 in 9 countries of Latin America. Part of the investments of the past were also used to open up in new countries, to take technology from Brazil to those countries, and all of that together make us very optimistic about the operations in Latin America. I think that the market should give us credit because there are not many Brazilian companies that have expanded successfully, especially companies our size, that have expanded successfully to many countries in Latin America or around the world. If you look at our earnings and how they are increasing as the share that is coming from Latin America, it becomes clear that at some point in time, this can even be larger than Brazil in the future. Simply because at some point in time, their e-commerce lagging behind will probably catch up with Brazil. Okay. As a reminder, if you want to ask a question orally, please click on raise your hand and we will call your name. Okay, we got another question via chat about the proportion of revenue generated by logistics. We do not share the EBITDA margins by activity. What we can say is that if you look at our gross margin, we have a weighted average. What Infracommerce does is we have technology, we have payment, we have e-commerce management, and we have logistics with their respective margins, and the weighted average is of around 40%. Of course, the margin of a SaaS technology is higher than the logistics margin. You can assume that the logistics margin is below 40% and the technology margin is above 40%, but we do not have business units that are not contributing. We have profitability at the customer level, looking at all of the technology involved in a customer to see if the math makes sense. We also have an internal guide looking at each one of the business units, and we are doing a benchmark with the best individual players in terms of cash generation and profitability of the verticals that we have, so that we can be competitive with the rest of the market. Okay. Let us see if there are any other questions, either via chat or orally. Well, if there are no further questions, we would like to thank you all for joining us again. As a reminder, our IR team is available to you should you have any further questions. Thank you very much, and have a great Friday.