Good morning, and thank you for waiting. Welcome to Magazinha Luisa's Conference Call to discuss the results relating to the Third Quarter of twenty thirteen. I would 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 will begin the Q and A session when further instructions will be provided. 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 Magazinha Luisa, 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 Magazinha Luisa and therefore, lead to results that differ materially from those expressed in such forward looking statements. To open the conference call, would like to give the floor to Luisa Elena Tragiano, President of Magadinho.
Luisa, please go ahead. Good morning, everyone. Thank you for joining us. All our team is gathered to talk to you. We have Marcelo, Batu.
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. But 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. And particularly, our segment may be driven by the indebtedness that really went down with the population at large. Indebtedness really went down. And MIA Casa Melior, Despite the cash effect, we really kept on growing in our program, and we had one of the best results. Usually, we have dark September.
We always expect to have a gap in September, but it was the best September ever. And we'll keep on delivering. So I thank you very much for being with us. And now we have this to keep on threading our path, and you can be confident that we'll be delivering all our promise. Marcelo now will give you some explanations, and we'll be here and to say that we're really happy.
Our we check our delinquency levels, and now we have the best results in our history in our company. So 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.
So every Monday, we work on credit approval. We check delinquency rates, particularly to this audience. We're really focused. So 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 worked deeply in that direction. So we would really deliver our best with our customers and with us. And 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 twenty thirteen.
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 a vis the same quarter of last year, reaching R2.4 million dollars It's very important to consider same store sales growth. We achieved 17% vis a vis the same period of the previous years, 14% brick and mortar e commerce, 33%.
And we understand the comparative base is very strong vis a vis the same period of the previous year. We opened eight stores, seven convention, one virtual, including one in Eliofoli's community in Sao Paulo. It's our first experience in big capital city communities, and we shut down a conventional store. In September, another important information is that we have the brand conversion of Lo Maya in the Northeast into Magadine Luisa. It's a gradual process.
And Parava is the last state because that's the state where La Jozsemaia had their headquarters. And that's why we really were extremely cautious and careful with the brand conversion on Parahiba. In addition to sales growth, we maintained 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 a vis the integration process that we decided to conclude last year. And 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 and later on, we'll get into details, it has to do with payroll tax deduction and also the effect of SG and A expenses. It's important to say that our efforts to lower operating expenses as a company is beginning to deliver results, reducing by 0.1%. Last year, it was 0.5% and now it's 0.4 And now once again, addressing the payroll deduction with 0.8%. It's also important to highlight profitability at Luisa Credit. Results were just exceptional this year.
We improved our gross margin. Luisa mentioned our delinquency rate is absolutely under control. We've been trying to lower operating expenses. And as a result, EBITDA margin, as Luisa correct, moved 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, recurring R120 million dollars reaching R6.1 billion 1,700,000,000.0 better compared to the previous year. Due to sales growth in a very significant manner, streamlining our operating expenses and increasing equity income, particularly at Liza Kredi. Therefore, we had the best net result in recent years, particularly ever since the IPO, a level of BRL25 million. And consolidated is BRL60 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 Luisa Creti. Billing at Luisa Creti grew over 15% vis a vis the previous year.
It keeps on growing together with Magazine Luisa. On Page seven, we show the performance of our client base for Luisa Credit Card base, growing 9.9%, almost 10%. And we highlight direct credit to consumer. It's a more profitable product. And we also highlight the profitability of Luisa Credit as a whole, which is the fourth consecutive quarter in which Luisa Acredi has high consistent profit with return on equity of 19%, which is quite interesting.
On Page eight, we show the performance of Luisa Credit portfolio, highlighting short term delinquency, which is at the lowest levels of recent years. Performance is, therefore, very important. And it makes us assume that provisions that went down this quarter vis a vis the third quarter of last year are expected to improve gradually. And 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.
And here, we also press 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. And also, because we maintain the level for all the year, we expect to have 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. And 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 LISA CRE's results, as we said before. On Page 14, we show our EBITDA growth, 1.7 percentage points, 122,000,000 of recurring EBITDA and growing over 60% vis a vis the previous year. On Page 15, we show our financial expenses, which remained at the same level as they were last year despite the higher CDI due to a lower net debt this year vis a vis the previous year.
On Page 16, we show our net income performance. I would just like to highlight that this net income of JPY 25,000,000 with a net margin of 1.3 percentage points represent a return on equity also amounting to 14% or 15% of Magazine Luisa's numbers. On Page 17, we show the performance of our working capital. Around 3.3% of gross revenue. And this is also due to improved performance of our inventory turnover.
And 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 increased 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 twenty fifteen. 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 Luisa mentioned, NIA CAZMELLOR will be stronger in 2014, and we expect to launch our participation in the World Cup as a global network sponsor. And 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. And certainly, it will improve intelligence in the check-in process in all aspects. And we expect to have gains in streamlined costs and expenses. Maya and Baoyu stores are still becoming mature.
And we have a multichannel project that is about to be concluded. We already have six DCs with a multichannel e commerce project. We had zero base budget in the first half of the year and in the second quarter as well. So the full year 2014 will be more stringently controlled compared to what we had up to now. In addition, Luisa Credi maintains the operating efficiency project.
Luisa Cred is also expected to have streamlining gains for costs and expenses this quarter and in coming quarters. As Liza Elena 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 worse, being very much controlled. And 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 and A. We want to hear your questions so we can clarify them. So today, we have Luisa Elena Frederico, our COO Isabelle, our Controller Director Roberto, CFO Marcelo Ferreira Luis Accrais, Director and our Commercial Director, Fabrizio Garcia. So we are all here at your service to clarify any questions. Let's move on to the Q and A.
We'll begin now the Q and A session for investors and analysts only. Questions coming from the web will be e mailed back to you later on. Marcelo Morais 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? And what was the trigger to speed up growth in the third quarter vis a vis the previous quarters? So what was the triggering factor to accelerate or move to 14% or the level around 14%? Well, we've mentioned some aspects actually.
The market improved. And as you know, when we have signs of accelerated inflation rate, consumers out of well, they tend to go down a little bit, and this happened in the previous quarters. And maybe we had a hangover effect in June. We had many problems during fifteen days. And consequently, in July, we had a good month sales wise.
August, we had Father's Day, and August was a very good month. And in September, we had several initiatives at Magazine in Luizia. So that's our share. And on the other hand, the market has also had a stronger appetite compared to previous quarters. So now we started the fourth quarter, and October was within our expectations, slightly above well, I cannot mention any figures now.
But November in November, I would say, we have the market effect and we also have our teams. In fact, we have been heavily engaged on sales with our salespeople, sales managers, store managers, e commerce also corresponding or meeting our expectations. So the market, when the market goes down, it does have a direct impact. So this is good to the good market performance, but also what we do with our customers both on and off line. 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, but we have to consider MIA CASA MELLORE and consumers' trust. Mia Casa Melior program is also becoming more prominent in the market for all the retailers, which includes us, obviously. So these are the factors that, when added to one another, contribute to us.
And 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. So 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.
So easily speaking, nothing was different. Now about 2014. 2014, particularly the first half of the year will be great. Particularly in our segment, we have the World Cup being host in Brazil and Magazina Luisa actually will be a sponsor of the World Cup. And that's a dream we've been having for quite a long time.
So we already have a positive effect because of the World Cup. So just imagine January and February, not only TVs, people want to change many things like refrigerators. They do many improvements to the house. So that's a big event in Sao Paulo. And it's really amazing the impact on Brazilians.
And we also have elections. So nothing will be done to impair the economy. And considering reserve rates and inflation under control, I never I always said that the dollar would never be beyond $2.20. So unless there is something global, a global effect that has an impact in Brazil, well, our team is fully engaged. So this engages people to do more and more.
And 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 Magazine Luiz stores?
And how much is associated to the integration of the Northeast stores like Maya and Vau! 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, Magazin Iluiza inventory control and the commercial performance in a more uniform area, considering the Midwest, South and Southeast, Northeast margins are gradually going up.
And because we already have Magazinha Luisa system, we managed to introduce, like Luisa said, salespeople are compensated by margin and profit. So that does improve our margins. And we don't know exactly when, but probably gradually, non day stores, leaving some peculiar or regional aspects aside, will get closer and closer to the margin in other regions. Thank you and congratulations for the results. Mr.
Alincarro 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? And do you consider any Black Friday event this year? And also considering your sales expectations for the fourth quarter and 2014, what are your comments? We are ready for Black Friday and for Christmas season and are ready for the fantastic big sale. And Fabrizio can even make comments on that.
Good morning, everyone. Here is the Commercial Director, Fabrizio speaking. We're very comfortable with our inventory levels. I believe the integration also helped us to have better performance in the Northeast. So 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 Luisa CRE 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. So do you feel comfortable with this coverage level?
Or do you expect to maintain it in the future? Morning, Alenkali. Roberto speaking. We do feel comfortable. The coverage ratio is not a goal per se.
We have our projections. Visions are improving. They're going down vis a vis last year because our portfolio is improving. And if the coverage ratio is going down, well, that's a reflex of the portfolio performance. It's not a go per se.
Expenses over portfolio are better, expenses over revenues are better. And today, if the coverage ratio is lower than last year, that's because we already had provisions last year. And that does not necessarily mean that they were timely last year and overdue this year. If we consider the portfolio performance and the expectation to improve our provisions are maintained. And also improvement in internal processes, being conservative.
And we improved our approval process since last year. So since the beginning of last year, we've been focusing on this. So we feel very comfortable with Luiz Accretia'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 JPY 172,000,000. We also report results according to law to the law and the delay in the portfolio.
2,000,000 lower than IFRS. Our GAAP was 20,000,000 yen even higher than what we reported in IFRS of 19,000,000 So we feel very comfortable and the coverage ratio is not a go per se. And it's a result based on the calculation of provisions and expected losses by Itau, which is very conservative. Itau gives the final word. When we think about delinquency, Itau is really, really conservative.
So it is even more conservative considering collections. So you can be confident that we are very confident in our area, really, 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 twenty, twenty five months for other products.
But our average term is seven point five, eight months max. So it's highly predictable, really predictable. Now if I may, just one last brief question about Mina Casa Melior program. You mentioned our expectations for the fourth quarter. You believe it will also help to maintain sales.
However, when we talk to the company, they would sell it would say that it only accounted for two or 3% of your sales. So 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, Kaisha is here to say, we have more than 1,000,000,000 people with the credit cards at hand. We were confident that it would happen gradually.
But the big moment will be next year, particularly in the Northeast. For every 100 new customers in the Northeast, due to fast approval that Tatu and Marcelo mentioned, we have to consider all those customers that can really be approved considering Seraza. So sometimes we have contracts that cannot be closed with anyone, not only MercadoLuisa, but other companies too. So these are customers that don't get in. In the Northeast, it's amazing when you check what happened last month.
So there is a potential for growth. And now we had a performance with the President. And now we have to consider products like microwave. So we added another three products within 5,000. And we also worked on some prices, adjusted some prices of 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. So 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 Casa, Nia Vida, not so much in Sao Paulo. Those who have NIACADA and NIAVIDA will really focus on it. So it will just be outstanding, not only myself, but several companies, CEOs have been involved for more than six months in this program. And now it's important that customers can buy anything for one year with a card.
They don't have to spend $5,000 at once. They have one year to buy or to spend this 5,000 and forty eight months to pay. So that's a program that is absolutely great. Mr. Ugo Kedoz from Cache Economica has a question.
Good morning, everyone. I would just like to have an idea about Internet competition. Contra facie with 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 Basu because it's a privately held company. The numbers are not disclosed to the market, and it's a very specific participation.
But if you check our robust figures growth wise, we are growing at very sound rates in Brazil as a whole. So the share is really growing. So when the market is growing, competition is not so relevant. We have more people on the web, more people getting to data through mobile phones. So we can mention smartphones, for instance, the impact brought by the reduction of taxes as of April by the government, the positive impact.
Now the base is larger and 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.
So 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, but there was also lower expenses as if it had on same store sales due to the impact of marketing, back office, DC expenses. So Internet is highly productive in Magadine Luisa.
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 have no 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, but we keep on growing with all these stores and this time focusing more on the Northeast Region. So this is our CapEx plan for 2014. Thank you. Good morning. Tobias Stinklin 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? If you were to check from zero to 100 and 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 Luisa and Marcelo, I know you mentioned this a lot, but what about the market? The beer market, for instance, is not growing. It's an extremely inexpensive product but with a very poor performance. So discretionary categories, on the other hand, are growing a lot.
I know a lot was said about inflation rates, income, maybe credit. But could you give me qualitative numbers? Luisa, she has a very good perception of consumers. Why is he free to choose and now he's going for something more expensive, Luisa? 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. Okay. Got it.
Got it. Okay. Remember your question now. Please go on. I just wanted to know what is your status in the process, 50%, 60%, 70% or back to you still have 30% to complete.
We have a pricing system that we set earlier 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 price of 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. This is Roberto speaking. Are you 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, it's 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. But 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%. But 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, recurring average margin. In the fourth quarter, well, generally, the numbers are higher. The average margin for the year could be above 5%.
And more mature margins, more mature stores margin tend to be higher. So 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. So 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, but this is like organic growth. But it's more we have a new store in Hidden Onpreto. And also Surucaba Mall, which is a famous region, it's easier just as when we opened in Surucaba, a store in Surucaba Mall. Thank you.
There are no further questions. We'd like to give the floor back to the CEO of the company, Marcelo Silva, for the final remarks. We'd like to thank you all for joining us for this conference call. We are really confident. And as Luise Elena mentioned well, this is the beginning of a new phase of 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. And today, we would like to acknowledge our team for the intense effort for being increasingly motivated, engaged. These are well, they greatly support Magazine Luisa so we can have more and more loyal customers. At the end of the day, results better results will come naturally based on what we do at Magazine Luisa. So thank you very much.
Luiz Elena, your final remarks, if you please. I only have to thank you all, and I'll be here. You can e mail with your questions. I have a lot of information about Brazil. As I said in September, and so I think technology has really helped people to go for changes.
So 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. And at the end of the year, we have Christmas season, then the World Cup. Our area is very much affected by technology.
And some people from Japan came and visited us. And 40% of the company's the Japanese company's sale is mobile phones. So with a lot of potential novelties and as they say, smartphone, well, we sell 10 times more than what we did in the past. And 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.
And we are really, really responsible with our business. We're celebrating but in a very conservative manner because 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 Luisa's Third Quarter of twenty thirteen Earnings Results Conference Call is concluded now. You may disconnect your lines now.