Good morning. Thank you for waiting. Welcome to Magazine Luiza's conference call to discuss the results relating to Q3 2013. We'd like to inform you that this call is being recorded, and all participants will be in listen-only mode during the company's presentation. After the presentation, we'll begin the Q&A session, when further instructions will be provided. Should any of you need further assistance during this call, please press star zero to talk to the operator. A replay of this event will be available at the end of the conference call for a period of one week. We'd also like to stress that any statements made during this call related to the business outlook of Magazine Luiza, projections, financial, and operating goals are based on beliefs and assumptions from the company's management and information currently available. Forward-looking statements are no guarantee of performance.
They involve risks, uncertainties, and assumptions, and therefore 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 performance of Magazine Luiza, and therefore lead to results that differ materially from those expressed in such forward-looking statements. To open the conference call, we'd like to give the floor to Luiza Helena Trajano, President of Magazine Luiza. Please go ahead.
Good morning, everyone. Thank you for joining us. All our team is gathered to talk to you. We have Marcelo, Beto, and we'd like to say that within our expectations, delivering our promise. We'll keep on growing, and we are really happy this quarter. We all know that we still have a long way to go. We are aware of that, and day after day, we are pursuing our goals.
This quarter was better than the media stated. Particularly our segment may be driven by the indebtedness that really went down with the population at large. Indebtedness really went down. Minha Casa Melhor, despite the cash effect, we really kept on growing in our program, and we had one of the best results. Usually, we have a dark September. We always expect to have a gap in September, but it was the best September ever, and we'll keep on delivering. I thank you very much for being with us. Now we have this to keep on threading our path, and you can be confident that we'll be delivering on our promise. Marcelo now will give you some explanations, and we'll be here and to say that we're really happy.
We check our delinquency levels, and now we have the best results in our history, in our company. We are selling well, we are profitable, we deliver, and we have lower risks. Delinquency risks, I can assure, is fully under control. One of the best rates we ever had for the last years, particularly in the short term, because when people pay the first and second payment, sometimes they stop paying. Every Monday, we work on credit approval. We check delinquency rates, particularly to this audience. We're really focused. Thank you very much for being with us, and I'll be here to take your questions over this call. We've been involved with the political parties of every nature and would like to say that we are fully positioned with the government, and we're moving forward considering the regulation, and we really work deeply in that direction.
We would really deliver our best with our customers and with us. Now I give the floor to Marcelo.
Good morning, everyone. I would like to start by addressing the main highlights of the third quarter of 2013. As an analyst mentioned yesterday in his report, this quarter was really sound. It is supported by improvement in every aspect of our business. Starting with gross revenue, our growth this quarter was 18.9% vis-à-vis the same quarter of last year, reaching BRL 2.4. It's very important to consider same-store sales growth. We achieved 17% vis-à-vis the same period of the previous years, 14% brick-and-mortar, e-commerce 33%. We understand the comparative base is very strong vis-à-vis the same period of the previous year. We opened eight stores, seven conventional, one virtual, including one in Heliópolis community in São Paulo.
It's our first experience in big capital city communities, we shut down a conventional store. In September, another important information is that we have the brand conversion of Lojas Maia in the Northeast into Magazine Luiza. It's a gradual process. Paraíba is the last state, because that's the state where Lojas Maia had their headquarters. That's why we really were extremely cautious and careful with the brand conversion on Paraíba. In addition to sales growth, we maintain our gross margin, even compared to the previous year. We preserved the margin in the South, Southeast, and Midwest. Gross margin in the Northeast has been growing vis-à-vis the integration process that we decided to conclude last year. This allowed us to have all processes and controls of the company, and gross margins are already beginning to be closer to other regions' numbers.
The effect of 0.8% of accounting reclassification. Later on, we'll get into details. It has to do with payroll tax deduction and also the effect of SG&A expenses. It's important to say that our efforts to lower operating expenses as a company is beginning to deliver results, reducing by point percent. Last year, it was 0.5%, and now it's 0.4%. Now, once again, addressing the payroll deduction with 0.8%. It's also important to highlight profitability at Luizacred. Results were just exceptional this year. We improved our gross margin. Luiza mentioned our delinquency rate is absolutely under control. We've been trying to lower operating expenses, as a result, EBITDA margin as Luizacred, moves from 4.2% to 9.6%, and the net margin is 5.1% from the first to the second quarter, which is very significant in our results. The company's profitability improved considerably as a result.
Consolidated EBITDA, recurrent BRL 122 million, reaching 6.1%. 1.7 better compared to the previous year. Due to sales growth in a very significant manner, streamlining our operating expenses, increasing equity income, particularly at Luizacred. Therefore, we had the best net result in recent years, particularly ever since the IPO. A level of BRL 25 million. Consolidated, it's BRL 60 million at nine months. If you follow the second quarter, you will see that we had part of our sales having an impact on the net results, but it's the best year to date ever since the IPO. Now, I'd like to give the floor to our CFO, Roberto Bellissimo, and he'll give you more detail on our financial and operating indexes.
Good morning, everyone. On page five, we show some operating numbers of the company, highlighting same-store sales growth at a level of 17%.
The greatest growth in this concept for the last two years, growing very significantly. On page six, we show some indicators for Luizacred. Billing at Luizacred grew over 15% vis-à-vis the previous year. It keeps on growing together with Magazine Luiza. On page seven, we show the performance of our client base for Luizacred credit card base, growing 9.9%, almost 10%. We highlight direct credit to consumer. It is a more profitable product. We also highlight the profitability of Luizacred as a whole, which is the fourth consecutive quarter in which Luizacred has high, consistent profit with return on equity of 19%, which is quite interesting. On page eight, we show the performance of Luizacred portfolio, highlighting short-term delinquency, which is at the lowest levels of recent years. Performance is therefore very important.
It makes us assume that provisions that went down this quarter, vis-à-vis the third quarter of last year, are expected to improve gradually. This has helped Luizacred to perform better, just as gross margin and dilution of operating expenses for Luizacred. Next, on page 10, we show our gross revenue performance. Here we also stress e-commerce, growing over 36%. Therefore, maintaining its profitability, maintaining its margins, very positive, and improving the company's result as a whole. On page 11, we show the performance of our gross income. Once again, on adjusted base, INSS reclassification effect, our gross margin is still at high levels, around 29% of the net revenue. Also, because we maintain the level for all the year, we expect to have a 52% expansion in gross margin, which has improved the company's result as a whole.
On page 12, we show this big highlight, which is dilution of operating expenses at 11.5 percentage points. Going through all the lines, personnel expenses, logistics, rentals, all lines were diluted this quarter. This shows our sales growth and also synergy after the integration of the networks or chains the last two years. On page 13, we show our equity performance improved basically due to Luizacred results, as we said before. On page 14, we show our EBITDA growth, 1.7 percentage point, BRL 122 million of recurrent EBITDA and growing over 60% vis-à-vis the previous year. On page 15, we show our financial expenses, which remain at the same level as they were last year, despite the higher CDI, due to a lower net debt this year vis-à-vis the previous year. On page 16, we show our net income performance.
I would just like to highlight that this net income of BRL 25 million, with a net margin of 1.3 percentage points, represent a return on equity also amounting to 14% or 15% of Magazine Luiza's numbers. On page 17, we show the performance of our working capital. Around 3.3% of gross revenue. This is also due to improved performance of our inventory turnover. The net debt over EBITDA ratio went down from 2.1 last quarter to 1.9 over the third quarter, and is expected to have this trend with an increase EBITDA and a reduction in net debt last quarter. Now I give the floor back to Marcelo Silva.
I would like to conclude our presentation addressing our expectations for the fourth quarter of 2013. We expect sales growth within the same levels that we had. We closed October figures well.
We are very bullish, extremely good expectations for November, December. As Luiza mentioned, Minha Casa Melhor will be stronger in 2014, and we expect to launch our participation in the World Cup as a global network sponsor. We also have many initiatives focusing on the increased participation of our customers, customer loyalty, and consequently improving our market share in the market where we already are. The gross margin is expected to be maintained in other regions, and we still foresee gradual growth in our gross margin in the Northeast stores. In our pricing project, we already had a rollout. We were in the pilot phase, and now we are rolling it out in all the company stores. Certainly, it will improve intelligence in the checking process in all aspects. We expect to have gains in streamlined cost and expenses. Maia and Baú stores are still becoming mature.
We have a multi-channel project that is about to be concluded. We already have 6 DCs with a multi-channel e-commerce project. We had zero-based budget in the first half of the year and in the second quarter as well. The full year 2014 will be more stringently controlled compared to what we had up to now. In addition, Luizacred maintains the operating efficiency project. Luizacred is also expected to have streamlining gains for cost and expenses this quarter and in coming quarters. As Luiza Helena mentioned, this is the beginning of what we've been mentioning so far. Due to the first and second quarters, it is a long path to take in terms of improving results. We want to have consistent, gradual results, very down to earth, being very much controlled.
We are confident that we'll keep on delivering positive and consistently good results in the coming quarters. Having said that, now I would like to move to the most important part of our call, which is the Q&A. We want to hear your questions so we can clarify them. Today, we have Luiza Helena, Frederico, our COO, Isabel, our Controller Director, Roberto, CFO, Marcelo Ferreira, Luizacred director, and our commercial director, Fabrício Garcia. We are all here at your service to clarify any questions. Let's move on to the Q&A.
We'll begin now the Q&A session for investors and analysts only. Questions coming from the web will be emailed back to you later on. Should you have any questions, please press star one. Marcel Moraes from Deutsche Bank has a question.
Good morning. My first question regards to sales. I understood very well, Marcelo said that the fourth quarter is expected to deliver same-store sales performance similar to the third quarter. Looking for the future, particularly 2014, how sustainable is this growth? What was the trigger to speed up growth in the third quarter vis-à-vis the previous quarters? What was the triggering factor to accelerate or move to 14% or the level around 1 4%?
Well, we've mentioned some aspects, actually. The market improved, and as you know, when we have signs of accelerated inflation rates, consumers, they tend to go down a little bit. This happened in the previous quarters. Maybe we had a hangover effect in June. Consequently, in July, we had a good month sales-wise. August, we had Father's Day, and August was a very good month.
In September, we had several initiatives at Magazine Luiza. That's our share. On the other hand, the market has also had a stronger appetite compared to previous quarters. Now we started the fourth quarter, and October was within our expectations, slightly above. Well, I cannot mention any figures now. November, in November, I would say we have the market effect, and we also have our teams impact. We have been heavily engaged on sales with our salespeople, sales managers, store managers. E-commerce also corresponding or meeting our expectations. The market, when the market goes down, it does have a direct impact. This is good to the good market performance, but also what we do with our customers, both on and offline. That's what I have to tell you.
Marcelo, was there any change in the commercial policy or any advertising campaign that was different from you did in the previous year in order to add to that?
Absolutely not. Our campaigns, well, it's the same thing that we've been doing for many months. Now, there's something I'd like to tell you. In the first quarter, when we have signs of inflation, there is a slowdown. There is a slowdown in the second one. Higher interest rates, inflation. Well, we have to consider Minha Casa Melhor and consumers trust. Minha Casa Melhor program is also becoming more prominent in the market for all the retailers, which includes us, obviously. These are the factors that, when added to one another, contribute to us. I also believe our team has a huge part to play in this growth.
We are very much engaged, very confident, being successful with the company's sales effort, the store personnel, the online personnel, and also enhancing our processes and our logistics that is becoming increasingly better. It's a set of factors. We cannot say that it's something so specific. We have the market from the outside and inside the company.
Luiza speaking. Nothing was different. About 2014. 2014, particularly the first half of the year, will be great, particularly in our segment. We have the World Cup being hosted in Brazil, and Magazine Luiza actually will be a sponsor of the World Cup. That's a dream we've been having for quite a long time. We already have a positive effect because of the World Cup. Just imagine January and February, not only TVs. People want to change many things, like refrigerators. They do many improvements to the house.
That's a big event in São Paulo. It's really amazing the impact on Brazilians. We also have elections. Nothing will be done to impair the economy. Considering reserve rates and inflation under control, I always said that the BRL would never be beyond BRL 2.20. Unless there is something global, a global effect that has an impact in Brazil, well, our team is fully engaged. This engages people to do more and more. The commercial area is always targeting the same results. Perfect. Thank you.
One last question related to improvement in the company's consolidated margin. Is it possible to have a breakdown of how much of this improvement is associated to improvements in the Magazine Luiza stores, and how much is associated to the integration of the Northeast stores like Maia and Baú. Can you identify what comes from each side?
After we integrated the company into a single one, we don't break down. We do it in-house, but not externally. There is no doubt that once we have the integration systems, processes, Magazine Luiza inventory control, and the commercial performance in a more uniform area, considering the Midwest, South, and Southeast, Northeast margins are gradually going up. Because we already have Magazine Luiza system, we managed to introduce, like Luiza said, salespeople are compensated by margin and profit. That does improve our margins, and we don't know exactly when, but probably gradually, Northeast stores, leaving some peculiar regional aspects aside, will get closer and closer to the margin in other regions.
Great. Thank you, and congratulations for the results.
Mr. Alencar Costa from Goldman Sachs has a question.
Good morning. I had a couple of questions. One of them is about the inventory level.
Even if you adjust by the reclassification or tax recoverable, there was good performance in the drop in level of inventories. Do you feel comfortable with the current inventory levels considering it's close to Christmas season? Do you consider any Black Friday event this year? Also considering your sales expectations for the fourth quarter in 2014, what are your comments?
We are ready for Black Friday and for Christmas season, and are ready for the fantastic big sale. Fabrício can even make comments on that.
Good morning, everyone. Here is the commercial director, Fabrício, speaking. We're very comfortable with our inventory levels. I believe the integration also helped us to have better performance in the Northeast. Inventory levels went slightly down, but our possibilities inventory-wise are much better, and this has a positive effect on our results.
We are ready for year-end, for Black Friday, and as Marcelo said, we are very comfortable, both with our inventory levels and expectations by year-end. Perfect. Thank you. Second question has to do with the coverage ratio. The Luizacred portfolio ratio. The ratio is going down dramatically, and it's lower compared to the last four quarters or from the levels that we see in Brazilian banks.
Do you feel comfortable with the coverage ratios considering the total delay level of the portfolio? Well, the most recent ones, there is a slight increase. Do you feel comfortable with this coverage level, or do you expect to maintain it in the future?
Good morning, Alencar. Roberto speaking. We do feel comfortable. The coverage ratio is not a goal per se. We have our projections. Provisions are improving. They're going down vis-à-vis last year because our portfolio is improving.
If the coverage ratio is going down, well, that's a reflex of the portfolio performance. It's not a goal per se. Expenses over portfolio are better. Expenses over revenues are better. Today, if the coverage ratio is lower than last year, that's because we already had provisions last year. That does not necessarily mean that they were timely last year and overdue this year. If you consider the portfolio performance and the expectation to improve, our provisions are maintained. Also improvement in internal processes, being conservative, and we improved our approval process since last year. Since the beginning of last year, we've been focusing on this, so we feel very comfortable with Luizacred's result, the level of provision. Even higher than the minimum required by the central bank. This quarter, for instance, we estimate our results, and provisions were BRL 172 million.
We also report results according to the law and the delay in the portfolio, BRL 2 million lower than IFRS. Our gap was BRL 20 million, even higher than what we reported in IFRS of BRL 19 million. We feel very comfortable, and the coverage ratio is not a goal per se. It's a result based on the calculation of provisions and expected losses by Itaú, which is very conservative. Itaú gives the final word. When we think about delinquency, Itaú is really conservative. It is even more conservative considering collections. You can be confident that we are very confident in our area, really confident. Our average term is seven or eight months, so there won't be surprises. When the first payment is good. It's different when we had 20, 25 months for other products. But our average term is 7.5, eight months max. It's highly predictable.
Really predictable. Thank you very much.
Now, if I may, just one last brief question about Minha Casa Melhor Program. You mentioned your expectations for the fourth quarter. You believe it will also help to maintain sales. However, when we talk to the company, it would say that it only accounted for 2% or 3% of your sales. Do you expect to see a much higher difference over the fourth quarter and down the road? Could you elaborate on the level? Do you think of your total sales, what percentage would it be?
We have. Well, Caixa is here to say we have more than 1 billion people with credit cards at hand. We were confident that it would happen gradually. The big moment will be next year, particularly in the Northeast.
For every 100 new customers in the Northeast, due to fast approval that (Roberto) and Marcelo mentioned, we have to consider all those customers that can really be approved considering Serasa. Sometimes we have contracts that cannot be closed with anyone, not only Magazine Luiza, but other companies too. These are customers that don't get in. In the Northeast, it's amazing when you check what happened last month. There is a potential for growth. Now we had a performance with the president. Now we have to consider products like microwaves. We added another three products within BRL 5,000, and we also worked on some prices, adjusted some prices on furniture. The problem was not exactly price, but we want to do things well because we do believe this program and the same ethics adopted by ourselves and Caixa.
I'm confident that next year, well, it will be a higher impact in 2014, and particularly in the Northeast, because they have a lot of Minha Casa, Minha Vida, not so much in São Paulo. Those who have Minha Casa, Minha Vida will really focus on it. It will just be outstanding. Not only myself, but several companies' CEOs have been involved for more than six months in this program. Now it's important that customers can buy anything for one year with a card. They don't have to spend BRL 5,000 at once. They have one year to buy or to spend this BRL 5,000 and 48 months to pay. That's a program that is absolutely great.
Thank you. Mr. Hugo Queiroz from Caixa Econômica has a question.
Good morning, everyone. I would just like to have an idea about internet competition. Compra Fácil and margins.
Retailers want to keep on improving results. What about you?
I would like to ask Frederico, our COO, to answer your question. Thank you for your question.
Good morning. I believe the internet scenario. Well, some companies have already published the figures in the third quarter. I cannot talk about Fácil because it's a privately held company. The numbers are not disclosed to the market, and it's a very specific participation. If you check our robust figures, growth-wise, we are growing at very sound rates in Brazil as a whole. The share is really growing. When the market is growing, competition is not so relevant. You have more people on the web, more people getting to data through mobile phones. We can mention smartphones, for instance, the impact brought by the reduction of taxes as of April by the government, the positive impact.
The base is larger. We have more consumers with internet access, and eventually it benefits everyone. I've seen very robust results. We don't break down internet results from others because we have integrated channels. It's a small project. It's included in the total result. Internet significantly contributes to an increase in EBITDA this quarter for the company. It is a very favorable contribution margin, and these margins have been maintained. Gross margins vis-a-vis the previous year. There was also lower expenses as if it had on same-store sales. Due to the impact of marketing back office, DC expenses, internet is highly productive in Magazine Luiza. I don't see competition as a threat.
The whole market is growing. Almost all players are growing above 30%, which is very healthy and productive number, with no signs of a predatory market. What about CapEx? Do you intend to focus more on operations, improving margins? Do you expect to see continuous improvement, or will you invest in acquisitions of one kind of chain or another?
We don't expect to acquire chains. We'll keep on growing organically, just as this year. We have 17 new stores, and we are even present in the Northeast, with special focus on the Northeast. In the next call, we'll be addressing what will happen next year. We keep on growing with all these stores, and this time focusing more on the Northeast region. This is our CapEx plan for 2014.
Okay. Thank you.
Good morning. Tobias Stingelin from Credit Suisse has a question.
Good morning. Congratulations on the great results. My first question is the following: What about the margin expansion process, considering that you have achieved so far? You were to check from 0 to 100 at where you're targeting for, where exactly are you now, and where can you get to? That's my first question. Second question. Now that we have Luiza and Marcelo, I know you mentioned this a lot.
What about the market? The beer market, for instance, is not growing. It's extremely inexpensive product, but with a very poor performance. Discretionary categories, on the other hand, are growing a lot. I know a lot was said about inflation rates, income, maybe credit. Could you give me qualitative numbers?
Luiza, she has a very good perception of consumers. Why is he free to choose and now is going for something more expensive, Luiza?
The fastest-growing categories are smartphones and tablets in all markets. As to white line and furniture, they are growing less. As to your first question, Tobias, could you repeat it, please?
I want to know about your margin progress.
Oh, okay. Got it. Okay. I remember your question now. Please go on.
I just wanted to know what is your status in the process, 50%, 60%, 70%, or you still have 30% to complete?
We have a pricing system that we set early this year. We had pilot studies in several stores and regions, and now we are implementing in all company stores, including the Northeast. So the full year of the pricing project is 2014. One of our assumptions is to have monitored freedom to the sales part.
Now, the impact or the process for EBITDA, we cannot estimate yet. Tobias, this is Roberto speaking. Are we referring to EBITDA or gross margin?
Well, there are two things. You have the pricing effect in the gross margin, but we also have gains, expenses that you have achieved. Do you still have a lot to expect? Or maybe if you want to focus on EBITDA margin or growth in EBITDA margin broken down is great for me.
We have several points for improvement to be tackled. Pricing is one of them. The gross margin in the Northeast. Initiatives to lower expenses that we mentioned this year, and will be further implemented next year. New stores are not mature yet. Almost 40% of our stores are not mature yet. We still have a big potential to improve. We have improved, but it's hard to tell exactly if it's 50%, 60%, or 40%. We did improve. We lowered expenses, and there is part to be captured next year and even 2015. Particularly the new stores.
On average, they take about three years to reach the EBITDA margin of more mature stores. They tend to put the margin down for now. 5% of average margin, recurrent average margin. In the fourth quarter, well, generally, the numbers are higher. The average margin for the year could be above 5%. More mature margins, more mature stores' margin tend to be higher. We still have some potential for this quarter, next year, and even 2015, considering all these factors. Okay, perfect. Thank you. Just one last comment, Tobias. We completed integration less than one year ago. There's still a learning curve so we can capture more out of these stores this year and next year.
What about the new stores in the Northeast? Do they also have a faster maturity curve?
The new stores, well, that's a region that we've been at for some time. It tends to be faster because they are in the same region. This is like organic growth. We have a new store in Ribeirão Preto. Also Sorocaba Mall, which is a famous region. It's easier, just as when we open in Sorocaba, a store in Sorocaba Mall.
Thank you.
As a reminder, if you want to ask questions, please press star one. If you want to ask questions, please press star one. There are no further questions. Would like to give the floor back to the CEO of the company, Marcelo Silva, for the final remarks.
Would like to thank you all for joining us for this conference call. We are really confident, and as Luiza Helena mentioned, well, this is the beginning of a new phase at the company after integration and consolidation, and now focusing on customer service and the company's results.
We're very confident for the fourth quarter and 2014. No doubt about it. Today, we would like to acknowledge our team for the intense effort, for being increasingly motivated, engaged. These are, well, they greatly support Magazine Luiza so we can have more and more loyal customers. At the end of the day, better results will come naturally based on what we do at Magazine Luiza. Thank you very much. Luiza Helena, your final remarks, if you please.
I only have to thank you all, and I'll be here. You can email with your questions. I have a lot of information about Brazil. As I said in September. I think technology has really helped people to go for changes. In higher incomes, we can see wine, for instance. Wine is really coming very strongly in Brazil, in all stores.
We have high numbers and high levels. At the end of the year, we have Christmas season, then the World Cup. Our area is very much affected by technology. Some people from Japan came and visited us. 40% of a company's, a Japanese company's sale is mobile phones. With a lot of potential novelties, and as they say, smartphone. Well, we sell 10 times more than what we did in the past. Now we started with broadband, which, well, the minister, the president will be tackling this next year with inexpensive broadband for everyone with technology. Thank you all, and we'll be happy to take further questions. We are really, really responsible with our business. We're celebrating, but in a very conservative manner. We know this is just the beginning of our cycle for all of us who have been working so hard. Thank you very much.
Magazine Luiza's third quarter of 2013 earnings result conference call is concluded now. You may disconnect your lines now.