Earnings Call: Q3 2022

Nov 8, 2022

Good morning, and thank you for waiting. Welcome to Pague Menos' earnings conference call for Q3 2022. Today, we have with us Mr. Mário Queirós, CEO, Mr. Luiz Novais, VP for Finance and Investors Relations, and Renato Camargo, VP for Marketing and Customer Relationship. We kindly inform you that all participants will be in a listen only mode during the company's remarks, after which we will open the floor for questions when further instructions will be given. Should you need any assistance during the conference call, please press star zero to reach the operator. This conference call is also being broadcast simultaneously online via webcast and may be accessed at ri.paguemenos.com.br. We inform that the questions sent through the webcast platform will be answered at a later time by the IR team. We also inform that this conference call will be conducted in Portuguese by the company's management, and there will be a simultaneous interpretation into English. Before proceeding, let me mention that any forward-looking statements that may be made during this conference call relative to the company's business perspectives, projections, operating and financial targets are based on beliefs and premises of Pague Menos' management, as well as on information currently available to the company. These forward-looking statements are no guarantee of performance. They involve risks, uncertainties and premises, since they refer to future events 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 may lead to results that differ materially from those expressed in such forward-looking statements. Now, I would like to turn the conference over to Mr. Mário Queirós to start his presentation. Mr. Queirós, you may proceed. Good morning, everyone. Thank you for your presence. Welcome to another earnings conference call of Pague Menos Extrafarma. Now we're going to go over the Q3 2022 results. Here we have some highlights, among which we have the resumption of the growth of our EBITDA margin after a few quarters, considering all our expansion dynamics, and now the bases are comparable. Also, the share of our digital channels in our total sales reaching 11% share. Renato is going to share more details with you about the evolution of our omnichannel strategy. Another highlight that we have here is the integration and the advancements and the integration with Extrafarma in these first few months. We're very happy with the delivery above expectations. We're going to have a first part about the financial and operating results that are going to be presented by Luiz Novais. Then in the second part of this presentation, we're going to talk about our Health Hub, our omnichannel strategy and the development and customer experience presented by Renato Camargo. Then I will join you again, and I'll be available for the Q&A session. Now I turn the conference over to Mr. Novais. Thank you, Mário. Good morning. Let's start the presentation on page four. Here we have a summary. This is something like we show every quarter with the development of the quarter. In this period, we highlight the development of the Pague Menos brand and the Extrafarma brand. Before starting, it's important to mention that we started to incorporate the Extrafarma numbers starting on August first. We will show this in this release in the presentation. We have the separate numbers. The operating numbers are separate for both banners. Then the financial numbers, the financial indicator, we are going to show Pague Menos standalone and the consolidated for Extrafarma starting as of August first. These are two months that are being consolidated for Extrafarma. Let's start with the highlights. For the Pague Menos brand, we had same-store sales of 7.2%, 8.4% ex-COVID, a sequence of four consecutive quarters of improvement in our same-store sales levels. 8.6% EBITDA margin, 0.7 percentage point growth compared with quarter three last year. We finished the four quarters of a comparison that was more harmed by when we compare the quarters with new openings and quarters without new openings. We complete this new year of the new expansion cycle that started in quarter three last year. We understand that this is a tipping point of our EBITDA margin, because when we compare periods with store openings, the comparison is fairer in this case. 11% in digital channels, another very important indicator. 45% growth year-over-year. In September, we reached 11.5%. The digital team is doing an excellent work in implementing the share of this channel for the company. In Extrafarma highlights, 13.8% same-store sales, a very ascending curve showing all the potential that the Extrafarma banner has. We're very happy with the first few months of operation, and this will motivate us for all the potential that we can release and realize in the future. BRL 474 thousand of multi-store sales. Most of the actions are still to be implemented, most of them, reinforcement of our stocks. As we heard from Mário, we had a lot of advancements in the integration of Extrafarma. Within these three months, a lot was done in terms of the organization charts, the systems, supply. The integration is going really well and a little bit faster than planned. On page five, we have more details on our same-store sales. For Pague Menos on the left, we have a 7.2% increase. Constant improvement since quarter four last year. On the right, we see the evolution by region. We also see, like we saw in quarter two, we saw an important difference in the growth rate between regions in Brazil. Our 200 stores that we have, or a little over that in the South, Southeast, they grew twice as much as our stores in the North and Northeast. This is mainly due to the demand for winter products, for products for the flu season. The winter this year was a little longer and more intense, so this is what caused our stores in the Southeast and South to grow at a level of nearly 14%. In São Paulo only, our same-store sales were close to 18%. This shows the difference of our growth by region. We have few stores in that 2-3 year interval. We started our expansion in quarter three last year, so we have some mature stores that are older than 3 years and stores that are younger than 1 year. This ends up affecting the same-store sales analysis because stores that are 2-3 years old, they have a more marked ramp-up of sales. The next chart, same-store sales for Extrafarma, 13.8% same-store sales. Very exciting results. A very positive trend within the quarter. July was the first month, 11.7%, and then August and September, close to 15% same-store sales with very few actions that we have implemented so far. We have a few activities related with assortment, pricing, and conversion of operating APIs. The main action here is in inventory. We started placing the orders to the industry, and we should have products coming to the stores in the end of quarter 3, and the impact will be more visible in the quarter 1 next year. On the right, we see our same-store sales in Pague Menos and Extrafarma showing that the difference between the two brands is decreasing. On chart number seven, we see our market share. With the acquisition of Extrafarma, which consolidated in quarter three, we grew importantly our market share, reaching 19.4% in the Northeast, 15.7% in the North. This is excluding the acquisition of Extrafarma, we are growing a little bit less than the rest of the market, similarly to what happened in the two previous quarters for two reasons. First, because as we saw in the two previous charts, the growth in the North and Northeast is much smaller than that of the South and Southeast because of the regional aspect and the influence of the winter season and the flu season. Also because we started our expansion cycle in quarter three, it's been one year since we started our new expansion cycle, and the new stores are contributing less than the market as a whole. In quarter three, just to give you some more information, due to the new openings, the market captured 6.2% growth in the market share, and our stores contributed with growth close to 2.9% in the market share. We are more or less in the middle of this growth that we are expecting for the market as a whole. This trend should be normalized closer to quarter two 2023, when we reach 2.5 years of our new expansion cycle. On slide number 8, we show our sales mix for the two brands. Very favorable evolution for Pague Menos, with highlights to generics. We reached 10.8% in the share for generic. The 25% increase more than double the growth of the company as a whole. For Extrafarma, this category has already reached 13%. The potential that we have in Pague Menos, we have a larger potential to grow generics and improve the profitability of the company. On the right, we show an excellent news, which is the evolution of our private labels. We reached 6.6% of our total sales in private labels, even with that important reduction for COVID-related items: masks, hand rub, and the self-test. Even with the drop for these products, we were able to grow our share of our private labels. The other items, the other 1,000 items of our private label portfolio have been growing above average. In Extrafarma, I must give special highlight to private label, which is less than half of the sales for Pague Menos, which is a very relevant opportunity in off-reference drugs. The RX here. This shows that there's an important need here to increment the assortment of drugs for Extrafarma, which could bring us a relevant turnover increment in the future in this area, which is the core of a drug store. Over here, gross profit and margin, we had a 10 basis points growth. We had an important contribution of the product mix that we saw in the previous chart, and also a residual effect of capturing the fee that has increased in July. Well, with these effects, we would have a 60 basis point increase in our margin. We also have an important growth coming from our digital channels and agreements and partnerships, which put some pressure on the margin, but it's all at the same time, very important for the company's EBITDA, because we have been able to improve the customer base of the company and in the growth margin, this has a pressure of 50 basis points. Consolidated, we finished the period at 29.4% gross margin. Because the gross margin of Extrafarma saw a reduction in quarter two. It went from 27.2%, which is a little below the average gross margin of Extrafarma itself, which is close to 29%. This was due to some effects related with the consolidation of the company. We had to make some adjustments in our inventory, some damaged products and expired products. We closed the wholesale operation for Extrafarma. We equalized the accounting mechanics of the commercial funds coming from suppliers. This ended up affecting Extrafarma's margin in quarter three. There's a trend towards improvement in the coming quarters. In selling expenses on page 10, Pague Menos consolidated another excellent piece of news here is that we decreased 30 basis points for Pague Menos from 18.8% to 18.5%. This is due to the work that our team has been doing to improve the productivity of our stores. We reduced on average one employee per store. We have nearly 100% of our stores with our new POS system already implemented, and this helps us increase productivity. In the next slides, we will see that this is also contributing to an increment in the average sales per month per employee, which improves productivity and helps us dilute expenses. Also, we are also executing. Since the second half of last year, we have been executing a procurement project. We have a consulting firm helping us with quotations and comparisons with the main services related to stores and supplies and also administrative. We have been capturing some important benefits from this project, which is also helping us reduce our expenses. In the consolidated, we finished the period at 18.7% of consolidated selling expenses. There's an excellent opportunity here for gaining scale and synergy with Extrafarma in the coming quarters. On slide number 11, we see our contribution margin. Here for Pague Menos, there was a combination of the 10 basis points, 10 basis points improvement in the gross margin and the 30 basis points in the expenses. We had an improvement of 40 basis points for Pague Menos for our contribution margin. As we said in the beginning of our presentation, this is a tipping point for us with an important trend towards continuous growth of our contribution margin and EBITDA margin in this new cycle after we complete one year of the new financial cycle of the company. We're growing our sales and we're growing our margins constantly and importantly. The consolidated, we finished the period at 10.7% contribution margin because Extrafarma has a contribution margin which is much lower than that of Pague Menos. It was 7.1 for Extrafarma with a lot of opportunity for improvement. On chart number 12, another piece of good news here. In G&A expenses, we were able to importantly reduce. For Pague Menos, we had a 20 basis points reduction year-over-year and 50 basis points quarter-over-quarter. This is also a result from the productivity gain work that has been done in our offices and also the procurement project that we implemented, which reduced costs with services, legal expenses, consulting services and etc. Consolidated, we finished at 3.1%. Overall, there's a lot of opportunity to bring synergy. Also in quarter three, in our consolidated numbers, there was an impact on Extrafarma of the organization chart adjustment, not just for Extrafarma, but Pague Menos as well. We had a large batch of dismissals that took place in September, particularly this negatively affected the indemnity volume in quarter three, and there will be some residual impact in quarter four. On chart 13, we show information about how we're gaining productivity in the company as a whole. In Pague Menos on the left, we see that we reduced on average one employee per store. The ratio went from 17.4 to 16.4. Of course, the new stores contribute positively here because they have a lower number of employees. Even if we exclude this effect, we have an improvement in productivity of our stores. On the right we see a 10.6% increase in the employee sales per month, going from BRL 34.7 to BRL 38.4. In Extrafarma also, we reduced the average number of employees per store, and we had a nearly 23% improvement in employee sales per month. We go from BRL 28.3 thousand per month to BRL 34.7 thousand per month. An important growth. Coincidentally, last year we had the same level of average employee sales per month. Here we also have an opportunity to improve these numbers similarly to what we did in Pague Menos. On chart number 14, we have our EBITDA. Here we finished the period in Pague Menos with 8.6% EBITDA, 60 basis points better than last year, quarter three last year. Here we have more than 130 new stores that were inaugurated in the end of last year and the start of this year. Even with the 130 new openings, with the lower EBITDA, we were still able to improve our EBITDA margin 60 basis points. We are in a very intense trajectory of improvements and profitability for the company after the quarters where we had pressure because of the new opening. We finished at 7.5% EBITDA margin because the Extrafarma still has a lower EBITDA margin than Pague Menos. We reinforced that our guidance for capturing synergies with integration BRL 180-275 million of incremental EBITDA after the completion of the Extrafarma integration, which will take place in the end of 2024. We have two more years of integration, and after this process, we believe we will have captured about BRL 180-275 million incremental EBITDA. This is going to occur in the first year. We will capture about 40% of this amount. After the first three or four quarters of integration, the profitability levels of the company will be much higher. On chart 15, we see our net income. We finished the period in Pague Menos with a net income of BRL 37.5 million. Year-over-year, it's at 5% improved. On the bottom chart, we see the component of the net income. It's important to highlight that in accounting terms, the increment was about 180% because we had an event which was the acquisition of Extrafarma. The fair value of the company is close to BRL 800 million or close to BRL 140 million more than the price that was agreed upon with the group. This impacts the accounting results of the company for quarter three, but we exclude this impact to look at the operating results of the company. For Pague Menos was an important impact of the margin expansion and sales expansion, as we see on the bottom chart. Our sales effects contributed BRL 18.6 million to the net income. The margin impact, nearly BRL 16 million, and we have an important offset with both our financial result due to a higher level of indebtedness of the company and also the interest rates, which is much higher this year compared to last year. It consumed nearly all the operational improvement of the company. We finished the period at BRL 37.3 million net income for Pague Menos. The consolidated for Extrafarma in the first two months of consolidation, Extrafarma had a loss of BRL 30 million. This is very atypical because of all the dismissals that were made and the terminations and the stock adjustments. We have some provisioning estimations. We utilize our provisions for the criteria that we use in Pague Menos, and there's also other moves here that made a difference. We finished the consolidated with a net income of BRL 7 million. Cash cycle on chart 16 for Pague Menos on the left, we maintain our stocks at high levels, reinforced levels, 116 average days of stock. The industry is still very erratic. We still have a very high level of stock out compared to last year. That's why we chose to keep our high levels of inventory to maintain our good levels of growth and sales. We do have an opportunity to reduce the cash cycle. As soon as the industry goes back to its normal supply levels, we should have about 8 days of stock above what's normal for us, which represents about BRL 150 million that we would be able to release with the normalization of the cash cycle. In Extrafarma, the last column of the chart, we see that we have a great opportunity here in the average payment terms. The payment conditions of Pague Menos are much more favorable than those of Extrafarma, 77 days of average term and 54 in Extrafarma. These 18 days of difference have been negotiated and adjusted. In the next coming quarters, we should see an average term for Extrafarma, which will be closer to that of Pague Menos, which will release about BRL 80 million in cash for the company due to this adjustment and the average payment terms. On page 17, we have the company's indebtedness. This is in line with what we planned. We have the payment of the first installment of the acquisition of Extrafarma in quarter three. This brought our indebtedness to 2.6x the Net Debt/EBITDA ratio. We will still increment this indebtedness further because now in quarter four this year and quarter one next year, we will have an impact of the inventory reinforcement of Extrafarma. Part of this is financed by the previous systems and the increase in the average term of payment, but we will also have an increment in the indebtedness level of the company. We estimate that in quarter one 2023, we'll start seeing a reduction in the indebtedness of the company. Our target and guidance is to reach 1.7x by the end of 2024, which is when we will complete the integration of Extrafarma. This affects our net income, as I showed in the previous chart. Finally, the last slide, my part of my presentation. Just to give you the status of the Extrafarma integration, everything is going really well. All the actions that we plan, we are implementing them at a faster speed than expected. We already implemented many of these activities. We already migrated the supply of the Extrafarma stores through the DCs of Pague Menos in Bahia, Pernambuco, and Ceará. We integrated the store systems in some states. We simplified the organizational structure. We normalized the company's organization charts. We expanded the assortment. Of all the inventory that we had in-house, we already expanded the assortment of Extrafarma stores, which certainly contributed to the increase in the store sales. We also leveled the commercial conditions, such as the payment terms, as I mentioned. We are finishing the work on the prices for generics, so we should see an improvement in the margin of the company soon in the future. We also started to optimize the footprint of Extrafarma with some stores closed and some banner conversions. The actions that are now in progress, we have now started to migrate the DCs of Extrafarma to supply to Pague Menos stores in Pará, Maranhão, and São Paulo. We're also working on one of the main levers, which is the leveling of commercial conditions for other categories, RX, H&B, and OTC. We also started placing orders for inventory reinforcement to send to our stores and decrease the stockout level in Extrafarma. We also started doing the SG&A dilution, leveling commercial conditions for supply and services to gain scale and improve the dilution of our expenses. Digital channels, we started unifying our telephone sales and expanding the click-and-collect network with the store portfolio of Extrafarma. This is the end of my part of the presentation. Now I turn it over to Renato, who's going to talk about the Health Hub, the digital channels, and CRM. Renato, please. Thank you. Hello, everyone. It's a pleasure to be here once again talking to you. On slide number 20, we talk about our Health Hub. Our Health Hub has been showing consistent advancements in all its verticals. It is our true one-stop shop in healthcare, as we always call it here in Pague Menos. In quarter three, we went over 1,000 clinics, and with the incorporation of Extrafarma, we have 160% growth year-over-year. This popularity is one of the greatest in the entire health ecosystem in Brazil, considering both banners, Pague Menos and Extrafarma. This position as the main choice for our customers in primary care, low complexity care in the most remote areas of the country. In the center, we have another important pillar, which is agreements and partnerships, one of the most consistent strategies that we have to bring new customers to our stores with a low effective cost and also retaining the current customers that we have. In quarter three, we reached nearly 32% share of the total sales for Pague Menos, and we see a very accelerated growth for Extrafarma as well, with good results already reaching 8.3% in quarter three. We still have a lot of opportunities to tap in the future. This is already the result of the one single negotiation for both banners, focusing on increasing share, but also bringing more profitability both for our partners and end customers. The last chart here, we have with specialty drugs that require special precautions due to high complexity. We had a significant growth of 72% year-over-year, reaching nearly BRL 21 million in sales. An interesting fact that we have in Pague Menos is the higher market share in the sales of many of these drugs, for example, Canabidiol. The Pague Menos share already accounts for 30% of all the sales of pharma sales in the country for that drug. On slide 21, I'm very happy to show the very strong results of Sempre Bem Saúde, our youngest child, which is already a teenager now. Sempre Bem Saúde is a program that offers unlimited telemedicine for BRL 9.99 per month with nutrition specialists and primary care physicians. It's a recurring subscription, and it's not a health center, but Sempre Bem Saúde is a very large program, and it covers the entire journey of the customer end to end inside the drugstore. Customers can talk to physicians in any of our 1,600 stores, either Pague Menos or Extrafarma, with support of pharmacists, with what we call teleinterconsultations. They can also have these consultations on their smartphone. If they are inside our physical space, the customer also has the screening services there of the pharmacists that are available there and all the services that we offer in our more than 1,000 Clinic Farma offices. We're very proud to say that today we're the only drugstore chain in Brazil that offers a complete B2C journey directly to the customer, putting the pharmacist and physician together to provide this service to the customer so that they can solve everything they need in one location, a one-stop shop without having to go to the ER or to a health center. This also links to our core objective, which is the sale of drugs and other supplies. This customer, the Sempre Bem Saúde customer, has a 38% higher average ticket than the rest of the customers of the company. We can't give you any guidance, but we will certainly be scaling up this program in the future. We're now offering it to small companies and micro companies that do not have the condition to offer a health plan to their employees. The informal economy, as we call in the country, and Sempre Bem, which would be the ideal solution for them. Now on chart 22, we have here our digital channels and our omnichannel strategy. I'm also very happy to announce that we had a very accelerated growth above the market average in quarter three. Comparing our sales in this quarter, we had a 52% increase year-over-year, reaching BRL 264 million in both banners. This number accounts for 11% participation of our sales in the Pague Menos brand. We had a 2.5% increase year-over-year and 3.2% for Extrafarma, and this growth is already visible. We're still at 2 months of this integration, of the very partial stage, of integration of our digital channels. As you can see, we're still growing even after COVID. The pharma, non-pharma retail, they have been reducing their digital sales, but we show a clear consolidation of pharma retail in our off-store channels, the digital channels that we're showing here. This number proves that our growth is not just in the regions where we have the largest share of physical stores, North and Northeast. When we break down by region and we look at the participation of our channels by region, particularly in those with a higher digital maturity, such as South and Southeast. In these regions, we're reaching 16% and 19% share respectively, which is well above the average of the market. This shows that our digital sales are growing due to a clear, consistent, consolidated strategy that we have been implementing over the past few years. Finally, we have the breakdown by channel, and we have 89% of our proprietary channels and 54% is from our e-commerce. The e-commerce includes our website and our app. Our app has been around for one year only and already has 1.5 million downloads. 24% telesales. Telesales is still a very important channel for Pague Menos and for Extrafarma because we have countless customers, such as the elderly customers, that are not very familiar with digital channels. In some regions in Brazil, they don't even have good internet connection to access digital channels. Telesales, it's fundamental and complementary to the strategy of the company because we must have all channels available so that our customer can decide where and when to buy. We don't want to lose any sales. It's not about focusing on channel A or B. We want to focus on all channels. Just one additional point. Customers that buy in one or more channels usually have a 28% higher ticket than those that buy using only one channel. On slide 23, we have the evolution of our active customers, another number that makes us really proud and happy. Here we have the results of a Pague Menos banner alone, because as you heard from Luiz Novais, we still have to integrate all the systems of the company. Talking about Pague Menos, the number of active customers in Pague Menos, those with at least one purchase in the past twelve months, reached its record-breaking level. We have nearly 17 million active customers with a 6% increase compared with December 2021. This is the consolidated view of our active customers. The most important question here is what is the capacity of Pague Menos to manage these customers by life cycle? What is the representativeness of new customers, existing customers, dropout customers? I want to show you a new piece of data that we have here on the right, which is very interesting for all of us. We're presenting this data for the first time. We call it quick ratio. A quick ratio is an indicator that is widely used by high growth companies or accelerated growth companies, usually by startups, showing the capacity of the company to retain customers because it looks at new customers, active customers, and inactive customers. It is the bucket with a hole, right. The analogy of the bucket with a hole. How can we put more customers and let some leave and maintain them inside the bucket? When it's below 1, this means we're losing customers. When it's at 1, we're maintaining. When it's over 1, we're gaining customers. We heard some questions from you until 2021 about Pague Menos capacity to retain its customers and not lose its customers. The answer that we have here is that until January 2022, losing a customer was something that was happening. Starting February 2022, we see based on this indicator that we started gaining customers constantly, consistently month after month, and this is gaining more speed in this last quarter. On the bottom chart on the right, even when we consider same-store sales, this gain is continuous and accelerated. Gaining customers only is not enough. This brings me to the next slide, the lifetime value of our customers. Here we see that we're not only attracting customers, but we're also attracting valuable customers. We're not attracting low value or low purchasing power customers. The lifetime value of the customer is an indicator that shows how much they buy, how frequently, and for how long. We see here that in addition to expanding our customer base, we see a significant improvement in their purchasing behavior. When we put this in a matrix with all the groups of customers that we classified based on lifetime value, we have high A, high B, medium, low. This is an internal classification based on this value and frequency comparison. This proves that the number of customers that are upgrading their profile, so they're going from profiles with lower profitability to higher profitability profiles in the company. They're 10% higher than customers that are downgrading their spend. Considering CRM and all our channels, the cross-category work that we have been implementing the past few months, this has allowed us to bring customers from lower profitability segments. Low customers migrate to medium or high B. Like, this is more than the high level customers that are downgrading their profiles. This is a positive result for us. We are acquiring new customers, we're retaining our current customers, and we are reactivating our old customers, and everybody's buying more and more frequently. This is the end of my presentation. I stop here, and I turn it back over to Mário Queirós, our CEO. Thank you, Renato. We can go straight to the Q&A session. Thank you. We will now open the floor for questions. To send a question, please press star one on your touch-tone phone. If at any time your question is answered, you can press star two to remove yourself from the waiting line. The questions will be answered as they are received. We kindly ask that you pick up your handset to ask your question to provide optimal sound quality. Please wait while we poll for questions. The first question is from Daniela Agra. She's Banco Investimentos. Daniela, go ahead. Hello. Good morning. Thank you for answering my question. I have two questions. The first one is about the market share dynamics. You lost a lot of share because of the Extrafarma acquisition, but in your organic reading, you are still underperforming compared with the market because of your expansion plan. I want to understand, when do you expect this to be normalized? When do you expect to catch up or even exceed the growth of the market to start gaining organic share? And my second question is about your stockout level. You said that this has been a challenge due to the supply chain. In last quarter, you also talked about some differences in the state of Ceará. When should we expect to see this looking forward? When should this be stable, and when should you go back to a stronger level from the standpoint of your operations? Hello, Daniela. Good morning. Thank you for your questions. I'll start with your second question about stockouts. Yes. Since the Omicron variant in the start of the year, we saw the industry suffering a lot in terms of the supply chain, particularly for some categories such as kids products, antimicrobials, amoxicillin, Clavulin BD. Some categories that suffered more than others. The supply chain has not yet been reestablished fully. There are some categories and some products that they were limited to a specific number for each chain. This continues now. This is still ongoing, and we're negotiating with our partners and our suppliers for the full replenishment of our stock. This is gradually increasing, improving in the past few months, but it hasn't yet gone back to the levels of 2021, which was already different from the pre-pandemic levels. In 2022, the situation was even worse. On the internal side, we had a problem, operational problem in our DC one, which supplies 40% of our stores. This problem is already solved, but there's a process to reestablish the lead time. It serves both stores in Ceará, Amazonas, Roraima. This should be normalized over time, and we believe that in quarter four, this operational problem of the DC in Fortaleza will no longer impact our stockout. As for the market share, I will ask Novais to answer, but you've been to one of our invest-- to some of our Investor Days, so you know the answer. There's an issue which is the maturity, the maturation curve of the stores that we opened in 2021 and 2022. These stores have a three-year cycle of maturation to start complementing our growth lines. Mathematically speaking, it's simple. The market is growing at 14%-15%, and we're growing at 11%. In order for us to stop losing market share, we have to grow above 14% or 15%. With the maturation of the new stores that we opened in 2021 and 2022 and a continuous growth of our same-store sales, we believe that this should solve the problem of the market share. Also, we made a choice. We could continue with our organic growth, but we saw that there was this interruption in our organic growth and now this resumption. This recovery, and we saw that this wouldn't be enough to allow us to grow in line with the market or above the market. That's why we chose to acquire Extrafarma. With the acquisition of Extrafarma within organic growth, we go back to growing our market share as we showed. This was a choice that we made. We bought the sixth-largest company in the industry with nearly 400 stores, with nearly BRL 2 billion in sales, and this will allow us to grow our market share significantly. Just to add and to summarize what Mário already said, since we inaugurated or we started opening stores in Q3 2021, we are only one year from the start of our new expansion cycle. Since the market has been opening new stores in a relevant number, we will need at least one more year to have two years of these organic new openings to be closer to the growth levels of the market as a whole. We should have some quarters still with this situation until we can normalize the effect of our organic growth compared with that of the market. The good news is that in Extrafarma, we have a very important tool. Today, we have our average sales per store is still very far from what we believe our potential is. We have a growth potential that is very important for same stores for Extrafarma. We will try to offset some of this growth in the new stores organically, even if lower than the market, with a faster growth of our same stores. Thank you, Daniela. Thank you. The next question is from Ruben Couto from Santander. Ruben, go ahead. Good morning. Just a follow-up to the previous question about the market share. When you look at the competitive environment, have you been feeling any relevant differences? Because the same argument that the new openings are not contributing enough to stop the share loss, this is something you had been saying for a while, and this had to do with your dependencies. Do you have other factors that are bringing headaches that you had not foreseen? The competitive environment, is it becoming tighter and more aggressive? Or any other specific players that are causing this? Also about what Novais said about Extrafarma already having a lot of upside in terms of store productivity. What are the quick wins regarding improvement in sales per store of Extrafarma, particularly about the stock, the inventory, because this is something you believe will make a significant difference in the short term. When I look at the number of employees, Extrafarma is lower than Drogasil, but don't you think you should add more employees to the stores? Are you planning anything in this sense? What should we expect in terms of quick wins for Extrafarma to improve productivity? Thank you, Ruben, for your questions. I will answer about the market share. Then Novais will answer about the quick wins. Our market is growing fast for some years now, and we stopped our expansion plan in 2019. We have to resume that level of growth. We have network A, B, and C. Networks A, B, and C, independent drugstores opening stores, and they're opening and closing, opening and closing with a positive balance. Every year, we see the number of stores increasing in Brazil, the number of drugstores increase in Brazil. One of our main competitors is opening at a pace that is higher than that of other brands for a few years now, and they've been in this space for a few years now constantly. Since we started from scratch, then we went to 80, then this year 120. For the next two years, we will keep our growth at about 180 because of our acquisition and inorganic growth. We don't have specifically one competitor that is more of an offender or is making the environment more complex. No, it's the market as a whole. The market as a whole had been growing at a fast speed, and we were below that speed, and we are now speeding up. This is what I have to tell you about the market share and competitiveness. I can't really. Well, I can tell you that it's not about it becoming more complex. It's just that the speed of growth of the market was well above ours. It's still above ours when we look at, well, of course, inorganic. In inorganic, we took a huge step and we're gaining market share. Ruben, just to add to what Mário said, we are monitoring every month. Every month, we're monitoring the evolution of the market as a whole. We saw during COVID in 2021, a number of the openings of independent associations was very large in this period. They gained momentum. People started consuming more in the peripheral areas. Since April this year, we are seeing a level of shutdown of these independent stores and associations, which is much higher than what we saw in the previous three quarters. Maybe part of those openings, maybe part of them were not performing well, and consequently, we're seeing these shutdowns a little more strongly now. Looking at the higher volume of inaugurations, the number of inaugurations decreased and the mortality of stores or the termination of stores increased significantly. This should help with our trend towards recovering our share. Some regional chains here in the North and Northeast, they're very stable in terms of store openings. We don't see a high level of competitiveness. If I understood your question right, we don't see a higher level of competitiveness in the past two years. I think that independent and associations were the highlight, but we don't see any other movements besides that. Now, going back to the Extrafarma, the quick wins for Extrafarma. Like, the main quick win is in stock. The stockout level of Extrafarma is very high, and we saw that firsthand in Pague Menos in 2016, 2017. We had a very low coverage, particularly for drugs. Our assortment was low compared to that of the market. We have an IQVIA survey showing the molecules that were sent brick-and-mortar, and we had 70% coverage of the molecules that were being sold in the market at the time. When we got closer to 100%, the same-store sales went back to normal levels. Extrafarma is in a very similar trajectory than what we did in the past for Pague Menos. We're very optimistic and positive that we will improve the assortment and the stockout levels. We also have an improvement in the assortment of private labels. We have momentum in the our share of our digital channels, which have been helping us gain acquired customers and expand our customer base to deliver faster. We go from a platform of 1,200 stores to 1,600 stores. This will optimize the digital channels as you heard from Renato. One important tool that we have is health services. By offering health services, we can obtain information about our customers and be much more assertive in the campaigns that we launch for products for these customers. We're very positive that we will be able to improve the sales per store, the average sales per store. We have a lot of levers that we can work on. We cannot underestimate the work of Renato with CRM and marketing activities and campaigns to acquire new customers. Extrafarma had been suffering in the past few years, losing some clients, and now we have the right recipe to go back to acquiring customers, and that's what we have been showing in Pague Menos. Thank you. The next question is from Mauricio Cepeda, Credit Suisse. Mauricio, go ahead and ask your question. Hello, Mario, Luiz, Renato. Thank you for answering my question. I have two questions. Looking at the same-store sales growth, would you please tell us if we should expect any losses in your product mix? You talked about the product mix and the different lines, generics, OTC, Rx. Is there any mix deterioration within any of these lines, and could this be related to the social class that you have as a target? The second question, since you talked about the pharma supply chain, what would be an ideal stock level after these problems are over? Can you please tell us if you're going to remain with the same stock levels that you have today, or if you plan to operate at lower levels of stock? Thank you, Cepeda, for your question. I'll start with the second one. We have been maintaining our stocks at about 115-118 days, as you heard from Novais, because the industry is very erratic now, and we have the quoted products, so it's better to prevent any problems than remediate. We should go back to investing a little more in stock for OPME because we are now supplying the DCs of Extrafarma. Looking at the consolidated numbers for the company, we should be close to 120-122 days at our peak because we can't transfer goods from our DCs to Extrafarma and only do that. We have to supply one and then wean the other DCs. We have to do this gradually. Also, today, I can't plug a Pague Menos store in an Extrafarma DC which is not at the same level of supply because this will deteriorate the sales of the Pague Menos store. We have to be careful before we plug the Pague Menos stores to Extrafarma's DCs. After this is normalized, we believe that we should go back to about 108 days. This is what we plan. For the size of the company and the capillarity of the company working with the new DCs, we should reduce from the 115 days that we have currently to 108 days. That's what we're planning. I don't know if Novais wants to add something about stockout. I'm going to talk about same-store sales. I don't believe in this switch. As we see the share of generics grow, the migration is very small. We are acquiring customers that were buying generics from other players and are now buying from us, considering all the commercial investments that we have been making, all the price, pricing investments that we have been making, adjusting our generics to the market price. Also, the mix of generics that we have, because we didn't use to work with some specific brands of generics, and now we're working with them because we wanted to compete in marketplaces where the independent pharmacies and associations have a stronger presence. This migration of branded generics, we don't see that. It's not significant. It does exist, but it's very small. In other products such as non-drugs, there's the issue of COVID. The COVID tests and other tests had an average ticket, which was a little higher than our average. When we stop selling these tests, this will have an impact on our same-store sales. This has more to do with the availability, stock count levels, products available in the store. I don't know if Novais wants to add something. Yes, I just want to add that we are under-shared now, Cepeda. For a long time, our sales area, we were focusing on other categories, and we didn't invest that much in generics, which is very profitable and important category for the company. We are under-shared. We are at 10.8, and we believe we can get closer to Extrafarma's share, which is 13%. We will end up stealing some share from other categories. This has been a very healthy movement, improving our private labels and improving in generics. Except for the point about COVID, which is very seasonal and hopefully because of the pandemic, there's no deterioration in any of the product categories because of that. Thank you. Perfect. Thank you. Thank you. The next question is from Gabriela Moraes, Itaú BBA. Gabriela, you can ask your question now. Good morning. Thank you for taking my question. I have two questions. The first one is about profitability. Looking at Pague Menos standalone, we saw an advancement in your EBITDA margin and profitability. You were able to dilute your expenses really well, which is good operational leverage for the quarter. Our question is about the outlook for this profitability. Should we continue to see these gains in EBITDA margin looking forward? Should we continue to see a good operational leverage in the next quarters? The second point is a follow-up regarding Ruben's question. You said that one of the quick wins, one of the most important points where we will start seeing results is the stock level of Extrafarma. So I want to understand if you have already been seeing some evolutions in quarter four, looking at Extrafarma specifically considering that you want to close this gap with Pague Menos. Thank you, Gabriela. Thank you for your questions. We can't give any guidance, so when we talk about closing the gap with Pague Menos, we're saying that the average sales of the Extrafarma stores will reach BRL 640 thousand-BRL 650 thousand. Well, we have the potential for that. That's all I can tell you, though. I don't know when that will happen. We are already seeing growing results in Extrafarma, particularly in the average sales per store, the main indicator, that it dilutes our expenses, it dilutes everything. As you heard from Novais, there's the negotiations, commercial negotiations with our partners. Those that are easier, for example, the average payment term, this is something that has already been helping us get to levels closer to those of Pague Menos. Of course, we have all the stock turns, so the negotiations that we have the first orders, it will take a while until we actually see the leveling of the average payment term. About stock outs, we are replenishing our DCs, and we now have a critical period, the end of the year and industry vacation. We're doing this very cautiously. In order to migrate, we see the Extrafarma stores of Pernambuco, Bahia, which are now supplied by our DCs there. They are significantly better already. We have to fine-tune the mix because, for at least for now, we are increasing the availability of the products that we already worked with, except for those 500 average activations, which were products that we already had enough stock to supply to Pague Menos and Extrafarma. That should take another 2-3 months because there's all the negotiation that's being done with the industry so that we can buy in the new commercial conditions and supply our DCs. Until it gets to the stores, we should start seeing this improvement in Q1 2023. About profitability, Gabriela, I didn't even answer Ruben's question completely, I think. About productivity, the two metrics are important. The number of employees per store and the average sales per employee per month. The most important is the second one. The more an employee sells per month on average, this means we are diluting our expenses. With the level of sales of Extrafarma increasing, we will probably need to increase the number of employees, provided this ratio of sales per employee is ever-growing. We have an average sales per employee of nearly BRL 39 thousand per month. The average ticket is a little lower than when compared with other players that act on more premium classes. The number of tickets per employee is already very good. We have a good level of productivity, but the average sales is still lower. We have an opportunity to expand the basket, expand the shopping cart of our customers, and dilute more our expenses. We still have room in Pague Menos and even more in Extrafarma. About the other levers you asked about the next quarters, we do have the expectation to continue. Well, comparing the pre-IPO period and the first 1.5 years after our IPO, we improved 150 basis points our EBITDA margin. We saw a stabilization and a small drop when we resumed our expansion cycle because the new openings put some pressure on our EBITDA margin. Now, comparing the period with new openings, we are resuming. That's why we say we are at a tipping point, because we're now resuming a trajectory of growth of our EBITDA margin. We still have a lot of levers that we can work on, which are about the same levers that we already worked on so far, but we still have potential to improve. Assortment, for example, we reached 10,000 average items per store, and we're working to improve that, the average assortment per store. This will lead to higher sales and higher average ticket. Stock-out, we improved. We had this problem that happened in the industry as a whole that harmed the stock-out levels. We now have a lot of opportunity to improve our stock-out. Private labels, we already have a high level of share of our private labels. We are leaders in our industry, but there's room to grow, and this is incremental sale for the company. Health services, we're also leading in health services, but we still believe there's a lot of potential to further expand these services, and this will bring additional revenues that will be captured by the company. Digital channels, there's a lot of tools. There's a lot of levers here. We are in the middle of our journey to capture all this value. We still have a lot to catch up. Thank you. Very clear. Thank you. The next question is from Guilherme Grespan, JP Morgan. Mr. Grespan, you may proceed. Hello. Thank you for taking my question. My question is about the dynamics of your non-recurring expenses that you had this quarter. Considering that you still have the transition of your DCs, systems, and some product mix adjustments yet to be made, how can we think about this for the next coming quarters, and how can we think of an Extrafarma that is not such an offender to the company's profit? Thank you. Hello, Guilherme. Thank you for your questions. Luiz Novais, would you like to answer that one? Yes. Good morning, Guilherme. Thank you for your question. In quarter four, we still have some adjustments to be made to Extrafarma. Now in October, November and December, we have the consolidation process of consolidation and adjustment of our payroll. We will probably advance further in the general adjustments that we're making in terms of inventory. In quarter four, we should still see some effect. In quarter one next year, we will have a cleaner base, and we will start seeing some small effects from the synergies that we're capturing. We will share this in our Investor Day. I'm sure you were present, so this was shown in our Investor Day. The capture curve for quarter one next year, we mapped about BRL 38 million of what was already contracted, so actions that have already been implemented and that will bring to us an annualized numbers, BRL 38 million starting quarter one next year. We start to see more positive effect in quarter one 2023, Guilherme. Thank you for your question. Thank you. This question and answer session is now over. Now I turn the conference back over to Mr. Mário Queirós for his final remarks. Mr. Queirós, you may proceed. Thank you all for taking the time to attend our conference call today. Thank you for your interest. I would just like to stress once again, as you heard in our Investor Day last month, that Pague Menos is a company that delivers. After the four quarters after which our basis goes back to being comparable, we went back to seeing increases in our EBITDA margin. We know we are the first option for primary care for the Brazilian population. Our Health Hub is now an option for primary care, and particularly our Sempre Bem, which now has more than 36,000 lives in less than six months of its launch or its relaunch, now with a better fit for our public. Has been showing results, resilient results, and the results that Renato showed, we are acquiring new customers at higher levels than dropout customers. Our level of engagement of our customers with the company is improving. Extrafarma and the integration with Extrafarma is now yielding results above what was planned and projected by us, which shows that we are on the right track. We thank you all for your trust, for your interest in our company, and we'll see you back in the next call. Pague Menos' earnings conference call is now over. Thank you all for participating. You may disconnect now. Have a good day.