CVC Brasil Operadora e Agencia de Viagens SA

BOVESPA:CVCB3

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to CVC's conference call for the results of the first quarter of 2020. Today with us, we have Mr. Leonel De Andrade Neto, CEO; and Mauricio Montilha, CFO and Investor Relations.

This event is also being broadcast simultaneously over the Internet via web, which can be accessed at www.cvc.com.br/ri by clicking on the link First Quarter of 2020 Webcast. The presentation slides are available for download through the webcast platform. The information is available in reais and have been prepared in accordance with accounting practices adopted in Brazil based on the statements, guidelines and interpretations issued by the accounting standard CPC.

Before starting, we would like to mention that forward-looking statements made during this conference call regarding CVC's business prospects, projections and operational and financial goals are based on beliefs and assumptions of the company's management as well as information currently available. Forward-looking statements are not guarantee of performance. They have risk, uncertainties and assumptions as they refer to future events and therefore, depend on circumstances that may or may not occur.

Investors should understand that general economic conditions and industry and other operating factors may affect CVC's future performance and may lead to results that differ materially from those expressed in such forward-looking statements.

Now I would like to give the floor to Mr. Leonel Andrade, CEO, who will begin the presentation. Mr. Leonel, you have the floor.

[Leonel De Andrade Neto, executive]

Good afternoon to everyone. Thank you very much for your participation. Today, we have the presentation of a balance of 6 months. Here, our company is being updated regarding its reports in terms of obligations and investments. This reflects a reality and we will talk subsequently about this. There is a point that reflects the record -- we want to show the public that we're being transparent. And here we have, on the bottom line, a bad result of entries that are not frequent in our financial statements, but they have been recognized only one time.

On the other side, we have a different view because of the pandemic. And now we have a strong operating focus. All the executive committee is in place. We integrated our business together with our executives, and our main businesses are being integrated in business-to-business Brazil. And this integration of the business is creating synergies and giving us competitiveness, and we are reducing internal costs.

We have around 1,200 stores operating. Before the pandemic, we had 1,360, so we have most of our stores working. And some have been closed because of the pandemic, and now we have a good -- we are 100% operational. There's no product, no partnership that has been interrupted, and we have had no reduction in terms of personnel and business. The other way around. In this period, we have our entire structure that is new. Today, we have a company of high standard with a high level of governance in its fronts of internal controls, auditor and governance. By and large, we will be an example of organization.

We concluded the review of our values and proposals, and I would like to highlight the commitment in terms of governance, sustainability, a new model with both that is sustainable from environment and from the business point of view. We are reviewing our strategy with the support of McKinsey and this review is half the way done, and we will conclude it by the beginning and the middle of November. And this is an important effort so that we have all our business and all our people focused on the future.

At the same time, we are reviewing our brand, carrying out a brand architecture effort in order to simplify the operation and to have a more relevant communication. Obviously, we have over 10 brands today. And today, we are going to rationalize and simplify this, and this will be done together with our strategy. We are also reviewing our technology and process. We want to gain synergy, scale, crosses where we're integrating systems that were bought throughout the companies in the past years. This is something that is fully ongoing and everything will be done this year, so that we end the year with the new company's view and resume our business more focused.

Sales are growing rapidly. The resumption in the domestic market is solid. The company, as a whole, is 45% of sales compared to last year's. If you consider that international sales are weak, the sales in Argentina are also very low. The Argentine market is undergoing a more difficult situation, and the corporate sales are also very weak. So domestic is resuming, and the company has 40%, 45% for sales, but this is -- well, and we are growing positively.

We continue with all the investments in the digital market. The digital transformation that will be done in the upcoming weeks and months where we will launch things from the platform point of view and from the product point of view, we are investing a lot in innovation. We are going to launch like 5 new products this year, all of them for customers to -- and focused on the end customer. We are also building a new model of distribution. We are investing in digitalization that we will see as of next year in our brands, in our stores, and we have a robust cash flow today.

As we already announced, this cash flow allows us to face the crisis and we continue sound, and we will be able to continue with the capacity of resumption and to continue leading the tourist industry in Brazil and win the support of our shareholders. When -- something that we saw in the first stage of the capitalization, so we have support. We're going in the right direction.

So this balance sheet represents great losses, but these are losses that were recognized and in a transparent fashion, now we can see the future. And our transparency is very strong in this management, and our commitment to the future is strong so that we consider -- we continue leading the Brazilian and the Latin American market of tourism.

I will give the floor to Mauricio Montilha, my colleague, that will give you a more -- a better view of our figures. Mauricio, now you have the floor.

[Mauricio Montilha, executive]

Thank you, Leonel. Good afternoon to everyone. It's a pleasure being here today. Very briefly, I will go through our presentation because I believe it's more interesting to have more time to answer questions.

On Chart #4, we have -- Leonel showed us that we have a resilient business. Our cash position is interesting and relevant because we are at ease and we have time to adjust ourselves and to honor our commitments together with our customers, and we have the support of our shareholders that have invested more capital that has allowed us to create more funding. And we have had a resumption of sales during the first quarter, and the second quarter are very relevant in the volume of businesses because many destinations were closed.

In the next chart is a highlight of our capitalization that was very successful. And we also distributed an excess of funds, and there will be another stage between December and January of next year. And we believe that this will be an important process. The capitalization is to bring resources so that we can resume in the market. So we have this for the company to survive and to fulfill all the commitments of the company, and this capitalization has come in an adequate moment when we're resuming our businesses, and we have the ability to finance these travels from here on.

Now when we go to the next slide, I would only like to mention something of the first semester. And this is something that all the companies are undergoing. We have to assess the value of some assets that we had. So we did have an impairment regarding our goodwill based on the increase of the discount recs, and there is an extension of the cash flow when you include the COVID. And then you can see the value of the assets is lower than in the beginning. We also had a reversal of deferred tax assets. The company normally will be able to recover these tax assets. Due to the uncertainties, the company had to write-off accounting and as soon as the uncertainty goes away when we negotiate the debt with the capitalization, I believe that we will go back to our normal numbers. And we will be able to credit this in the future.

But the good accounting practices. Because of the change that COVID brought to us regarding the economy in terms of available income and employment and for the portfolio, we have an estimated losses. And we registered these losses that we believe that will go until the end of the year. And this is in the balance of the first quarter. And we recognize them as effects of the pandemic. These are extraordinary adjustments, and there are other things.

We repatriated passengers that were in Europe and in Asia and other credits that we lost. These are extraordinary adjustments. In this presentation, when we talk about adjusted net debt, these are extraordinary expenses that we believe will not appear in the future. As Leonel said, the market is resuming. I would like to highlight the system, and Leonel mentioned the booking of hotels.

The resumption also means to us the importance of governance and control. We spent some time adjusting and representing the financial statements of the past and showing all the mistakes. We are operating at another level right now, but we have an important plan of governance in the company that has already started. We have a management in charge of compliance, and we have a relevant and detailed program to improve controls, processes, everything that supports the financial management of the company. To us, this is very important when we resume businesses. What is important is to maintain a sound company from hereon.

Now when we talk about the results in Brazil, now we're on Page 8. The pandemic is one of the most relevant impacts that we had in our results and this -- the onset was at the end of the quarter, but we had a drop in volume due to the Northeast. That was the oil spill that reduced the season in the Northeast. That is very important to CVC. And there was a drop in prices, but it impacted the mix. And this impacted the first quarter. This would be -- went from 43 to 33, the boarding indexes. And this -- and the -- and in the Northeast, they dropped from 22 to 18, and international boarding, this also dropped a lot. Now it is important to remember the domestic market represents 85% of our new businesses. This is something that we see during the third quarter. And in terms of quality of revenue, this is very important for CVC and this is one of our great strengths.

On the next page, Page 9. During the first quarter, we couldn't react and the expenses of the companies were lower than what we see generally. Nonetheless, this is an important matter, and we are looking for operational synergies, commercial synergies in the businesses where we're present, especially B2B and these operational synergies among the group. And we're also reviewing the activities of the company, something that we will continue. And this is very important. We believe that during the first quarter, we didn't see any effects, but this is a very important issue during the second quarter. We had a significant drop of expenses, and we want these synergies and reductions to be permanent in our company.

Now on the next chart. This illustrates our portfolio, and here you can see that the provisions increased because of the additional provision that is an expectation in terms of loss because of the future impacts of COVID. Important is that we are taking new actions because credit risk has changed between post-pandemic and pre-pandemic period, even for risk scores. We have greater upfront-s than in the past, and we have also adopted our credit score to a new reality. So we are prepared for self-financing, and this is a better quality of what we saw last year.

Now Brazil, during the next chart, when we talk about EBITDA and net income, the main component of loss there -- there was a loss. We could not offset the lack of boarding.

Now speaking quickly about Argentina, that is on Page 13. Argentina is facing a similar situation than Brazil. We believe that the pandemic is impacting them more because the economic situation in Argentina was already deteriorated because of income and unemployment. They -- there was an exchange variation that was important. And this also exerts pressure over the sales of international sales. So here we see a more accentuated impact in Argentina in terms of businesses.

Now the consolidated results. Here, we see the impacts. Here, we had bookings, we had minus 31%; and net revenue, 36%; and there was a significant reduction of our EBITDA because we couldn't adjust our cost base to the new reality. When we talk about cash generation, this period was very important. And throughout the cash generation in March, during the beginning of the pandemic, when we realized that the pandemic was going to -- was here to stay, we preventively, we had BRL 440 million of prepayment of credit card receivables.

The first quarter is a period of negative cash generation because we have all the hotel payments, the hotels that were used during January and February. So the cash flow was according to what's expected and even more positive because of the prepayment of cash. And this during a moment of uncertainty, we did not repay anything anymore, and we had a positive working capital.

The risk is that ours -- so the company -- this -- we didn't see the impact of the pandemic at that moment. Our indebtedness has not changed. It is important to mention that, in our opinion, the capital structure that we have is reasonable when we see our business in the mid and long term, excluding the pandemic. And because of the new curves of revenue and cash flow, we are renegotiating together with our creditors all of our contracts.

So it is very important to highlight that we have been aligned with all the stakeholders of the company, be it investors, in shares, variable income, be it our Board. So the company can resume soundly. And now we are focusing on becoming leaders that have a sound company, and this is the best pathway to generate value to all of us and for the future.

Now my last comment. Of course, we measure the return over invested capital based on the EBITDA that was affected by the pandemic. So during the first, which as you can see here, is way below the historic average of the company. Now I will give the floor back to Leonel so that we can go to the Q&A session. Thank you very much.

[Leonel De Andrade Neto, executive]

I think that we can continue and -- with our Q&A session.

[Operator]

[Operator Instructions] And we will start by Olivia Petronilho from JPMorgan.

[Olivia Petronilho, analyst]

I have 2 questions. One is of short, midterm when we see the take rate. The take rate of the first quarter was quite messy. But when we compare to the figures that you published in 2018 and 2019, do you believe that the take rate will normalize in the upcoming 6 or 12 months?

And now a strategic question. So -- and you are reviewing the marketing of your company. I would like to know what your next steps will be. I would like to know what the strategic -- what the strategy of the company would be operationally.

[Leonel De Andrade Neto, executive]

This is Leonel. Olivia, thank you for your question. Regarding the take rate, the first quarter is very difficult. It was full of turmoil because in addition to all the operating matters, we had a drastic change in the end of March because of the pandemic. Today, we operate with a take rate that is aligned with last year, and I see no take rate pressure in the upcoming quarter. I believe that we have opportunities when it comes to reviewing businesses and action and also favored by the domestic mix. And as the market has a low demand, this favors us in terms of negotiations with take rate.

As the supply market, CVC is a strong company able to resume, and they have given a favorable and good prices, and we have also created a pricing structure that has a view that is focused on margin and in opportunities, not only in products. We're analyzing channels, the customer profiles and demand. This is an ever-growing effort that favors profitability. I see no pressures. I only see opportunities. So the take rate is now point of attention, but with the complete review of credit and collection and a strong review to have better operational capacity and better profit in our credit portfolio.

Regarding our strategy. In brief, in a number of weeks, we will have another call to show the results of the second quarter. That is also pending. And in this call, I intend to shed light on our strategy. But I can say the following. We have separated our businesses in B2B, B2C and online. In B2B, the integration is giving us margin gains, and we have an ever-growing market share. The most [ fragilized ] competitor does see us strong. So certainly, we will spearhead the tourism industry and the market of small agencies.

And the other side, we gained a greater competitive advantage because of the partnerships that we had with our suppliers, especially hotel chains and airlines in B2C. We have a physical share that is significant so we focus now on the domestic. Our CVC brand is top of mind. Our distribution is intact, and we are totally focused on transforming our stores in a point-of-sale, totally integrated, totally digitalized, that is modern, and this is what we will focus on the upcoming 1, 2, 3 years to transform the experience and integrate the -- our customers towards their digital platforms. And this means that investments or strong investments in modernization.

And we have an online business where traditional CVC is not a leader. We have never -- we never created a long-term plan. This is being done right now, with all the investments in digitalization have been approved and even why important, at least in my view, there is no use in digitalizing if you don't know in depth your customers and you don't have a strong relationship strategy and data science and knowledge in pricing. The company has this. And now we are going to present in the upcoming weeks novelties regarding this. We are working on our brand as well.

So we will be the one of the main players in the market in OTA, in digital transaction. But this doesn't mean that we're changing the physical, because we are the only agent in the market that can be omnichannel of tourism, and we will work this way. So that our customer is integrated in any of our distribution channels or any platforms that they are using, we are going to work with market data in the future. I do hope I was able to answer your questions.

[Operator]

Our next question, [ Eric ].

[Unknown Analyst]

Leonel, Mauricio, so regarding the take rate. We would like to understand what exerted pressure on the take rate during the first quarter. Could you give us more detail about the take rate of the first quarter?

And a second question regarding expenses, because you have done a good job regarding the expenses during the second quarter. And I would like to know what the situation of the company will be until the end of the year.

[Leonel De Andrade Neto, executive]

I will give the floor to Mauricio, and I can add something at the end.

[Mauricio Montilha, executive]

Thank you for the questions, Eric. There are 2 aspects. In December, there were price -- we had a complicated year and the oil spill in the Northeast hindered the advanced bookings for the Northeast, and this impacted our results in August and September. That is a period where we sell a lot towards the Northeast. So this was one of the main points.

Now obviously, the volume didn't materialize in great scale, and the Northeast is very important. This is very important for our figures in B2C, and the company sold more in mix. And this was more in the international business where we had lower margins. When you book international hotels, our margin is lower, but these were the 2 components that affected the margins of the first quarter, which is a quarter that is -- that has a high volume in Brazil, and it started weak, and we had good international sales but it was difficult in terms of margin.

Regarding our expenses, our aim is to have a more efficient company so we had to reduce during the second quarter our journey. But this is our midterm objective. And I'm going to give you an example of what is happening today that although the pandemic diminished during the second quarter, we are operational. Our operation to deal with the customers, to find solutions for our customers now that the airlines are coming back. So we have a volume, a great volume of over 300,000 customers that we're taking care of or operating in order to find solutions for them. We have a midterm efficiency target, and we are going towards our target.

The second quarter was intensive because of the drop of our journey. But now we have -- we want more permanent reductions. And they're not automatical. Though we're working with low volumes, we have to work a lot in order to service our customers, especially now that we started resuming our activities in the market, and we are strongly working to help our customers to travel because most of them have -- still have the credit for the future. So we see a curve of efficiency appearing in the upcoming quarters, maybe until next year.

[Unknown Analyst]

Could you tell me what the take rate was month by month? In March, you had to deal with the repatriation of some passengers. So I believe that you suffered more pressure during some months.

[Unknown Executive]

Unfortunately, we do not publish monthly information, but I would say, well, generically, we did not have peaks on a monthly basis. And the cost of repatriation were taken from the take rate. So during -- well, the month of March wasn't impacted by extraordinary effects.

[Operator]

We have Gabriel Disselli from Santander.

[Gabriel Disseli, analyst]

Could you give us more details in terms of the financial soundness of the franchises? Can we expect more franchises to close? Will they be able to deal with the demand? Could you give us more details?

[Unknown Executive]

Gabriel, thank you for your question. This is a major challenge. This -- our business or entrepreneurs that were caught by surprise and this was the sector that was hit hardest. So in the beginning of the pandemic, we had 0 in terms of revenues. What we did was because of our situation, we're talking about the end of March, April and May, we were strongly working in order to survive in that company. What we did for our franchisees was giving -- was to give them logistics support. We gave them legal support. We helped them. We intermediated the base with the market. I personally participated together with banks, with public agencies, with the ministry, with the Ministry of Tourism, with local agents, [indiscernible], the works and the secretaries of tourism to give them support, and we were very successful with credits in terms of goodwill. We also restructured things here so that they could have a share in our business when they rebooked our customers because the rebooking demand is strong.

And we transformed this in a competitive advantage where our customers could rebook their travels and our franchisees supported this. Now, they are gaining -- they are starting to recover with the new times. I don't believe that more stores will close. Perhaps 10% less, but I don't -- I see them encouraged. We have been talking to them frequently, and they are focused on sales and focused on growing. So I see no risk in our physical distribution. I believe that the worst has already passed. And now I see our stores operating. Some of them are even investing and rehiring more personnel.

[Gabriel Disseli, analyst]

Could you give us more details regarding indebtedness? How have you negotiated your covenant? Can we expect some penalty because of the covenant or because of debentures?

[Leonel De Andrade Neto, executive]

Mauricio?

[Mauricio Montilha, executive]

When you see the operations, all of them increased in volume because the pandemic or the post-pandemic period brought another relationship between risk and return. The risk of the business increased, and this is natural. And this is something that we thought we've seen in all the deals. And there was an increase of risk and the adjustment of these rates is included when you hold a new contract. And we've been discussing normally with our creditors. And what we're doing is what the entire market is doing but the market has repriced the risk for everyone.

What is important is that there is a positive alignment between us, investors, creditors, Board, our franchisees and our team and the best way to obtain value is operating. That is something that we're seeing. We're operating independently. Our shareholders are investing in us so we can resume ourselves, even our creditors. So yes, there will be a natural repricing movement but this will not be different from what you see in the market in average because of prices and risks.

[Gabriel Disseli, analyst]

Okay. I think that this is clear. Could I pose one more question? A bit more optimistic. I believe that during the swine flu, some companies had to file for bankruptcy. And my impression is that CVC benefited itself because their competition wasn't as strong as them.

Do you have a view on this? Or you will be able to see the situation throughout the year? Do you believe that you will naturally gain more market share because of the soundness of the company and the size of the company?

[Unknown Executive]

Gabriel, well, probably, yes, we will probably gain -- we are gaining more market share. I do not believe this is something to celebrate because our mission is to transform our company in a better company, to be better every day and for it to be sustainable. And of course, with profitability, with adequate controls. So I don't believe that we should base our strategy based on the frail competition because the tourism is an ever-growing market. It underwent a strong crisis. I believe we have very good prospects for the future. Everybody wants to travel more.

We're in the correct market, and I believe that new competitors are going to emerge. And the ones that leave will be replaced for a new, so strategy should not be based on this. In the short term, it has advantages because we will survive. Well, we have already survived and of course, we will gain market share. But our strategy should not -- when we talk about our strategy, we shouldn't consider the frailty or the weakness of our competitors.

[Unknown Executive]

Here, we have a question that was sent through our webcast from [ Daniela Redhower ] from [ Telari ]. Her question is, what is the prospect of the take rate of the second semester of 2020? And moreover, if you could give us qualitative details for Brazil and Argentina.

[Leonel De Andrade Neto, executive]

Daniela, thank you for your question. It's a pleasure to answer your question. Currently, the take rate is sound. It is better. And we are favored because the crisis gives us a greater bargaining power, and we have invested a lot in policy that I practiced at Smiles. We are modernizing our pricing because the margin has to be more important than growth, although growth is fundamental between growing our having margin, we will focus on having more margin in the upcoming periods because this is a more sustainable vision.

Our take rate prospect is favorable. I will not give you figures. In Argentina, it is uncertain. Uncertain because the market there isn't as strong as the Brazilian market. And as there is no demand, you do not have margin to maneuver. But -- so I believe that the take rate is not a risk. It's an opportunity. We will not see spikes in terms of growth, but it will grow.

[Operator]

[Operator Instructions] Well, as we have no further questions, we will give the floor back to Mr. Leonel Andrade for his final comments. Mr. Leonel, I hand it back to you.

[Leonel De Andrade Neto, executive]

Thank you very much to everyone. I would just like to say that I'm highly optimistic. The worst is in the past. We have shown transparently our problems and challenges. Our company is 100% operational, and we are stronger than the competition. And we have been favored by the domestic market where we are leaders. We've maintained the best tourism professionals that are here, and we have people that have good culture of governance, intelligence, and they have contributed with technology. So we have created a highly competitive and integrated team. So our competitiveness has grown significantly. We guarantee the control of the pandemic.

So I've been 6 months in the company and I would say that during the 30 and 60 days, our focus was to guarantee the well-being of our employees and customers. And we did this diligently, especially when it came to bringing customers to Brazil. We also focused on cash flow and the survival of the company in a transparent way. Although we faced uncertainties in April and May, we will be able to balance the company. We have a robust cash flow, and the company was able to weather the crisis thanks to the support of our shareholders and board. We have been transparent, and we have worked to regulate our balance to put our company up-to-date with the market. And now is the best moment. When the crisis diminish and perspective improves, we want to sell. We want to have margins. We have better relationships with customers, partners, and this gives us good prospects.

In the upcoming weeks, we will hold another call. And I will show you in a consistent fashion, products, novelties and all the innovations of company. And with all of this, I feel optimistic. I believe that we will recover and we will lead this recovery. Our company, it has the trust of its professionals and its shareholders. I do thank you for your trust. Continue with us because we will be solid in the future. So thank you very much to everyone and have an excellent end of the day. Thank you very much.

[Operator]

So the earnings result of the first quarter of 2020 has come to an end. We would like to thank all of you for your participation, and have a very good afternoon.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]