Marisa Lojas SA

BOVESPA:AMAR3

Earnings Call Transcript 2018-Q2

[Operator]

Good morning. Thank you for waiting. Welcome to the conference call of Marisa to discuss the earnings concerning Q2 '18.

We would like to inform that this event is being recorded and is available on Marisa's website. [Operator Instructions]

Before proceeding, we'd like to clarify that any statements made during this conference call concerning the business perspectives of Marisa Lojas S.A. projections, operational and financial goals are based on beliefs of the company's board as well as information currently available. Considerations about the future are not guarantees of performance. They involve risks, uncertainties and assumptions because they refer to future events, and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operational factors may affect the future performance of Marisa Lojas S.A. and may lead to results that will be -- will differ materially from those expressed in future considerations.

Now I would like to turn over to Mr. Adalberto Pereira Dos Santos, CFO and Investor Relations Officer, who will begin the presentation. Please, sir, you may proceed.

[Adalberto Dos Santos, executive]

Good afternoon. Welcome to our conference call Q2 '18 for Marisa Lojas S.A. With me, Marcelo Araújo; Mr. Célio Lopes, Leader of Products and Financial Products; Marcelo Pimentel, Head of Operations; and Karina Lozano, Manager of Investor Relations.

As you observed, in our release, the scenario -- the company sees signs of recovery, especially in retail, and this can be seen in our transformation program that we have carried out in the last few months.

We'd like to stress sales, although slow, also show better acceptance with exceptional performance in e-commerce, gross profits high especially with adjustment in inventory in the period. We can see SSS more controlled, better investments in marketing internally, especially in sales, products and financial products, and service very resilient. Cash generation robust with the level of leverage and cash position that are comfortable. And finally, the conclusion of extending the company's debts that we concluded in the month of June.

Now going out to our presentation, Slide #2, we see the evolution of net revenue in upper chart and same-store sales at the bottom. We see a drop of 2.6%. This is a negative impact due to the World Cup and the truck drivers' strike and also the warmer climate during the beginning of winter. Also especially the effect of the World Cup and the truckers' strike. We can see the total impact BRL 20 million in the sales of the period. Highlight, good performance of the collections for Mother's Day, Valentine's Day with a growth of 32% in our e-commerce operation.

On Chart #3, gross profits dropped here as can be seen reflecting, therefore, weaker sales in retail. Gross margin drop of 53% went to 51.9% due to a correction in inventory. Still a healthy margin for the -- as compared to the past.

Chart #4, the SG&A see a drop of 1.7% due to the efforts of the company controlling expenses. So expenses with sales had an increase 2.6% with greater investments in marketing. Drop of 19% in G&A, since in the past, we had nonrecurring expenses concerning our transformation program. Excluding these expenses, we will have a small increase of 10% related to our efforts, especially in sales.

On Slide #5, here we see adjusted EBITDA and EBITDA margin. EBITDA here we can see BRL 12.2 million to BRL 14.6 million as we had great -- also we had expense control and also tax credits in the period in spite of the lower revenue.

Chart #6, we see here financial products, evolution of the results, a small drop from BRL 82 million to BRL 80 million and the impact, especially due to lower penetration of the Marisa Card and the product 0+8. Now in the upper part, contribution margin, a drop of 4.6%, reflecting there have been co-branded changes in regulations, especially the drop in interest rates, credit cards.

Now the next page, Slide #7, please. Here, EBITDA, very quickly, saw a growth from BRL 31.6 million to BRL 34.2 million, approximately 10% in spite of the drop in contribution margins, as I mentioned in the previous slide. Continuous gains in efficiency, expense control, and here, we see continuous gains in efficiency and costs and expenses that had a drop of 7.4%.

The next Slide #8, the evolution of the portfolio private label. On the upper graph, here we see a drop from 12% to 11.4% in the losses on the portfolio. And then an evolution here from 40.5% to 39.6%. So healthy portfolio as we can see the losses that are at comfortable levels. And we see here at the lower graph, EFICC, very healthy indicator. Here, practically stable number.

Slide #9. Personal loans. And we see here the dotted line shows the evolution concerning the past. So we have a positive evolution from 6.6% (sic) [ 6.8% ] to 4.1% in terms of losses. This is -- here, we see the losses in comparison with the portfolio. Here, those at the bottom chart, we see here a small increase. EFFICC very -- still very healthy and this is due to our portfolio and receivables.

Now Slide #10, consolidated number, adjusted EBITDA. So adjust -- consolidated adjusted EBITDA had an increase of 11.8% and had a positive impact due to retail and maintained good results in the operation of PSF (sic) [ FPS ]. So it went from BRL 43.7 million to BRL 48 million. This is due to the World Cup and also the truckers strike.

Page 11, evolution of net. Here, at the top, net results from BRL 24.4 million negative to BRL 37 million negative in this period. And due to an accounting effect, the -- and also suspension of credits from income tax that happened in June last year. Excluding these effects, these losses before income tax, social contribution, we would have had a positive evolution, a drop of 43.7% in the losses in the period. Positive impact due to the marginal improvement of the results in retail, a better operation PSF (sic) [ FPS ] and also better financial numbers.

At the bottom, the evolution of cash flow showing that in spite of lower adjusted EBITDA, we had a drop here. Cash generation evolved a lot in a positive way with better cash consumption for investments. We had a consumption in the previous quarter that was high, here only 19, improvements in working capital and inventory.

With this, we closed with a balance of BRL 540 million, a leverage of 2.8x.

These were our comments. Now we are available to answer questions. We would like to begin the Q&A session.

[Operator]

[Operator Instructions] Mr. Vinicius from Itaú BBA would like to ask a question.

[Vinicius Figueiredo, analyst]

We see here a significant amount in working capital due to inventory control. What are your initiatives in this area? I would like to know if you can maintain a healthy inventory this quarter, although the climate is not so favorable, and we know that the winter collections didn't sell as well as expected.

[Adalberto Dos Santos, executive]

Hello, it's Adalberto. The inventory adjustments began at the end of the year -- at the end of last year. We made adjustments in some categories. And the objective was to avoid rupture and this adjustment was sufficient for some categories, others, it didn't. So we have now a new level of inventory. Most of the adjustments were made in Q2. And this continues with promotions in July until we get to an interesting level. There is some space for adjustments, but we believe that the general level of inventory is very close to ideal in the current operation.

[Operator]

[Operator Instructions] Mr. Guilherme from Brasil Plural would like to ask a question.

[Guilherme Assis, analyst]

Please talk a little about the plans that you have for the stores, TOP, and I know that we had a difficult quarter, TOP and TOP stores, World Cup and also temperatures were not very low. But how do you see the evolution, excluding the short-term impacts? How are things evolving in the POP store and also Marisa 2020? Could you please speak about these points?

[Marcelo de Araújo, executive]

Guilherme, Marcelo Araújo speaking. Thank you for your questions, Guilherme. I will answer. I will give you an update about the supporting program for us. As you will remember, we had many developments within new store model and new service and new store management, new architecture. So everything that we did, and we intend this is the new go-to-market for a future growth cycle. It was tested in 34 stores, 15 TOP and 15 POP. We began to measure these results on January 15, right after the sale of the end of the year until April 15, 3 months of measurements. As I mentioned in the call in Q1, the result was very good for TOP stores and this motivated us to begin a second phase of expansion of this program in another 20 stores. So now in August, we will have an extra 20 stores with this model implemented, and we will begin the gradual process of expansion. Concerning POP stores, as you mentioned, where we still have a challenging periods for commerce in these regions that are more popular in Brazil, also hard hit by unemployment. So we haven't had conditions to conclude these programs in these regions, but this did not stop us from expanding from 19 to 30 stores and making some adjustments to accelerate the efficiency. We continue trusting that this is the right track, this is the right way to the future. This is a program that is not only layout or new sector, new communication, new architecture. It is a completely new model to take our value proposal in a democratic way at the right cost with very good service and financial services that will make feasible for our clients to have access to this fashion. While this is the right track to build the future, we continue to develop in parallel other pilot programs that will add more value and also that will help us to have more growth. New categories of product, a new category called Marisa [ Intimate ], Marisa [ Intima ], these are expansion programs. Today, we have 12% of our stores already operating under this new model with a very attractive performance.

[Guilherme Assis, analyst]

If I can ask another question. You already answered Vinicius' question about the inventory. One thing caught a lot of my attention is the results apart from the inventory being under control in difficult situations, gross margin also was strong, much better than in the last quarter, gross margin was much better. I'd like to understand how is the policy in relation to pricing -- prices? Can we expect that it will remain at these levels, above 50%, 51%, should this continue? Is this what we will see from now on?

[Marcelo de Araújo, executive]

Guilherme, supplementing Adalberto's answer, in fact, this involved a lot of discipline. We made the inventory adjustments gradually. We began this in Q1 and gradually, we did this during Q2 and with a minimum pressure in our margins. One thing we have stressed a lot since the beginning is that we would not go after sales at any cost nor would we really use heavy competition to compromise profit. So this -- we continue with this discipline. We are firm following this discipline with healthier inventory, and we are sure that we will continue maintaining our gross margin in a better way than last year. So we're in a very challenging period. We have challenging periods ahead of us. The macro situation has many challenges, and we intend to continue firm with this policy to manage inventory in a healthy way with adequate pricing. We had a small increase in the average price in Q2. So we should continue with these efforts in the next few months. This is our expectation, therefore.

[Operator]

Ms. [ Aline ] from Bradesco would like to ask a question.

[Unknown Analyst]

In reality, I'd like to understand, do you have an idea of -- can you quantify the lower flow due to the truckers strike and the World Cup that had an impact on all retail companies? Could you quantify the impact? The second question. I saw that e-commerce grew a lot, this channel grew a lot. So I'd like to know the project for omnichannel. What have you seen? What have you learned in this new project?

[Adalberto Dos Santos, executive]

Adalberto. I will answer the first part and then Pimentel will answer the second part on e-commerce and omnichannel. Our intelligence area really looked at the impact of the truckers strike and the World Cup. The conclusion is that an absolute number is around BRL 20 million, the impact, BRL 20 million. So BRL 10 million for the World Cup as an impact and BRL 10 million, the truckers strike. We saw this impact. These are the numbers. Percentage-wise, we had a drop of 2.5% and a growth of 0.2%. I believe we had already mentioned these numbers. Now Pimentel will talk about e-commerce and omnichannel.

[Marcelo Pimentel, executive]

[ Aline], E-commerce in Q2 has been an excellent -- a good surprise to us. It is consolidating itself since the end of last year. All the technology adjustments have been done. And with this, we were able to really have a stable platform. We have also been working with sales to make adjustments in the assortments of products for e-commerce. And with this, we have been having better and better sales, with an adequate assortment of products. So it has been very positive, and we've had better results than we expected.

Now concerning omnichannel, multi-channel, the plan continues in line with what was expected. We hope now in Q3 to begin test in stores. We have plans until the end of the year we should run the tests and have a pilot in 10 stores. This is in line with our plan and thus prepare a rollout plan for next year.

[Operator]

[Operator Instructions] We'd like to close the Q&A session. Now I would like to pass the floor to Mr. Marcelo Araújo for his final comments.

[Marcelo de Araújo, executive]

So very well, thank you for participating in our conference call for Q2. We'd like to close this quarter a little better in terms of results, but these results, as you all know, we mentioned, we had a strong impact due to external factors, strike, World Cup and winter, but we must recognize important points that have us better prepared for the next quarters.

Our TransforMAR program, as you know very well, which began in February 2017, in order to help our initiatives to recover the company in 3 years, continues being the backbone of our transformation, our recovery plan. The first part, the first pillar of the program, the initiatives linked to gains in productivity, efficiency are on track and on budget, and this has allowed us to capture gains in costs, expenses and especially, improvement in management processes. The second pillar, which was the last part with the support of [ McKinsey ] in the second semester of last year was focused on reviewing the processes in the commercial area and also development of new collections. With Marco Muraro, we have now the first and important result. Finally, the program also has strategic initiatives, levers for growth in the future, which continue with a lot of discipline and good processes.

As we said today, the review of value proposal, the reviews, the new communication language, the new service model that we began the M2020 model, we're expanding this model. So we'd like to highlight the launch of Marisa [ Intima]. Marisa [ Intima ], an important lever because of our strength in larger retail category and this is on the cover of our press release. We continue the expansion with new categories. We have a pilot with 15 stores selling cellphones. So this -- the first results are very interesting and this allowed us to expand this program. At the end of this year, we should have 55 stores selling cellphones. And in the same way, this category of cosmetics that we introduced in 10 stores on Mother's Day, also we're expanding this to 30 stores by the end of the year. These are important investments in this transformation, digital transformation effort. As mentioned by Pimentel, our e-commerce with a well-adjusted platform, allowing us to now accelerate and have a profitable and healthy growth, building our program for the future, and also our multi-channel program is also mobilizing resources and people in the different sectors of the company. And we will have this implemented in the first 10 stores in Q3 2018.

With this, with a stabilized capital structure, important gains in cost control and SG&A, much healthier inventory, especially a better acceptance of the collections that have done very well, we felt this in the winter collection and Valentine's Day and the pre-collection, the preview of the new collection that we launched a few days ago, has had an excellent acceptance. All these issues, all these points together with an enormous internal mobilization and a strong engagement on the part of the stores make us stressed in. Although this scenario is challenging for the second semester, we can say that we're cautiously optimistic with a gradual recovery of the company's results in a consistent way. This is our objective beginning next week when we will launch our new collection, spring/summer developed by Marco Muraro's team and a new team of style that joined the company since the end of last year. We have positive expectations concerning this new collection. We invite you all to visit our stores and this will be one way to evaluate the evolution, the consistency of our value proposal and the delivery of this program to Marisa's clients.

We'd like to close our conference call. Thank you very much for your participation. We continue to be available if you need more clarification during the next few months.

I wish you all a good afternoon and a happy Father's Day. Thank you.

[Operator]

Marisa's conference call has ended. We thank you all for your participation. We wish you a good afternoon.