CVC Brasil Operadora e Agencia de Viagens SA

BOVESPA:CVCB3

Earnings Call Transcript 2018-Q4

[Operator]

Good afternoon. Welcome, everyone, to CVC's Fourth Quarter 2018 Results Conference Call. Today with us, we have Mr. Luiz Fernando Fogaça, Chief Executive Officer; and Leopoldo Saboya, Chief Financial Officer, Investor Relations Officer. Today's live webcast and earnings release may be accessed through CVC's website at www.cvc.com.br/ir. We would like to inform you that this event is recorded. [Operator Instructions] We have simultaneous webcast that may be accessed through the company's website. The slide presentation may be downloaded from this website. Please feel free to flip through the slides during the conference call.

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of CVC's management and on information currently available to the company. They involve risks and uncertainties because they relate to future events, and therefore, depend on circumstance that may or may not occur. Investors should understand that conditions related to the macroeconomic scenario, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements.

Now I'll turn the call first over to Mr. Luiz Fernando Fogaça, Chief Executive Officer. Mr. Fogaça, you may begin your conference.

[Luiz Fogaça, executive]

Good afternoon, everyone. We are pleased to begin our conference call to discuss fourth quarter results. Regarding today's agenda, we look over the main events in the fourth quarter; then we will present the financial results; and lastly, we will begin the Q&A.

Let's move to Page 4. In fourth quarter, bookings grew 34% compared to 2017 and 15% on a pro forma basis. Excluding Argentina business units, bookings growth was 17% as disclosed in the operational release. The online channel posted strong growth of 114% in the quarter, driven by the good performance of Submarino Viagens, CVC.com and [ Revel ]. In 2018, online channel grew 70%. CVC Corp grew 32% in net revenue compared to 2017 in the quarter and 13% on a pro forma basis. Take rate, excluding operations in Argentina, was roughly stable, down 10 basis points, with 50 basis points decline in the [ leaner ] on-boarding segment and an improvement of 116 basis points on corporate and online. Leopoldo will look over those effects in detail later.

Adjusted earnings grew 17% on a pro forma basis with operational cash generation of BRL 92 million, almost BRL 70 million higher than fourth quarter 2017. We view the third consecutive quarter with cash generation. Return on investment capital grew 260 basis points reaching 23%. In January, I conclude the transition with Falco, who assumed the role of Chairman of the Board. The Board of Directors was reviewed in the fourth quarter of 2018, reinforcing the company's digital and innovation skills. We have completed 2 acquisitions previously announced: Esferatur, which was approved with no restriction by the antitrust authority, CADE, in early February; and Ola Transatlántica. Evaluation of the synergies of the new businesses set up with [indiscernible] will be finished next month.

In our digital journey, we launched the notify tool that inform the [ pay users equities ] about offers available on all CVC Gateway and online connections on a real-time basis. We also launched the Submarino Viagens brand, with the airline ticket offer and we are in the final stage testing the new module of hotels sourcing in the Submarino Viagens website. In November, CVC brand was up again, ranked as 1 of the top 25 most valuable brands in Brazil, making it the 19th, and the second highest growth among all others, 21% compared to the previous year.

Moving to Slide 5. We hosted in February the annual sales conventions for RexturAdvance and Experimento and trained CVC business units, in which we presented the strategies and news for 2019. We returned from the conventions with high levels of energy in all teams and ready to achieve 2019 goals.

Moving to Page 6. In January, we held the first Google Blast campaign, a large scale customized digital activation that takes place simultaneously on various -- multiple platforms in a short time, resulting in almost 90% increase in the number of consumers who had interactions with one of our digital platforms before visiting a CVC store. CVC.com website had its biggest or largest day of visits even comparing with the period of Black Friday during this campaign. We announced some news at the CVC sales convention this month, which will be available during 2019, such as digital table for consult, destinations, consultant, hotel destinations, hotel rooms, tours, parks and we also introduced the VR goggles that will be available in some of our stores that will be helping the customer to have experience of a destination, hotel room, cruise cabins, parks, et cetera.

Moving to Slide #7. We -- last week, we finished the best hotels for Submarino Android app for airline ticket, which is now available for download on Google Play and we will be officially launched in March. In the second quarter, we will also launch Submarino app for iOS users. With the new web, we will have differentiated tariffs for airline tickets. We will notify promotional tariff for the selected destinations, and we will also offer [ cheap fares ] for preferences for individual consumers. We will have hotels in the third quarter and dynamic packages in fourth quarter 2019 available for all consumers. We are also in the final stages of the test for the new experience research tool hotels in the Submarino website that will give more additional information, net navigation, photos, with complete and improved conversion rates. We will have this available for 100% of the users in second quarter this year.

Moving to Slide #8. We'll cover some of our people and culture initiatives, which are also core for the company. Last December, we held CVC team building, in which we cover the key events of 2018, and we also discussed the strategies for 2019. We are promoting several lectures of digitalization throughout the whole company. And we are maintaining the breakfast with employees to engage in the [ strategy ] of the company and also receive their feedback. We have just started the first MBA in company in partnership with Fundação Getúlio Vargas, a very well-respected institution in Brazil with 50 employees of the company, and we are in the process of launching the second class.

Now I will pass to our CFO, Leopoldo Saboya, who is going to talk about the financial results of the company.

[Leopoldo Saboya, executive]

Thank you, Fogaça, and good afternoon, everyone. So on next slide, Slide 10, we will talk about the main financial indicators of CVC Corp and also again presented double-digit growth in all its KPIs, even if on a pro forma basis. It is important to mention that I will always refer to our pro forma basis comparisons, and if not, I'll let you know.

So in Q4, net revenue grew 13.4%, adjusted EBITDA and adjusted net income increased by 9.2% and 17.5%, respectively. The quarter-over-quarter growth in Q4, now on an accounting basis, reached full net revenue, adjusted EBITDA and adjusted net income, 32.4%, 14.9% and 14.1%, respectively. For the year 2018, the growth was on a pro forma basis. Net revenue was 11.5%; adjusted EBITDA, 13.2%; adjusted net income, 28.7%, showing this incredible operational leverage starting in the double-digit in net revenue and finishing in almost 30% growth in the net income.

On next slide, I will talk about the booking dynamics in the quarter. But before that, it's important to emphasize that I'm not considering the business units in Argentina for -- is in our comparison for the well-known Brazilian businesses. I'll just make a comment and then -- how's performance going over there. The highlight in the bookings by channel, as already mentioned by Fogaça at the beginning of his presentation, is the online channel, which posted significant growth in the quarter, triple digit, in fact, reaching 114.5% in the quarter, driven again by the good performance of both Submarino Viagens and CVC.com in the quarter. In the year, the online channel achieved a strong growth of 17% midyear, much beyond what market grew. It's important once again to point out that this growth on the online channel came with an improvement in the product mix of Submarino Viagens and continued improvement in the conversion rate in the West side, reinforcing once again our speed to grow in the top line with generation of EBITDA and net income that happened throughout the year.

The Argentina business units, these are the country's economic turmoil, showed a decrease of approximately 20% in the quarter in reals. The business units, although declined in the period, performed better than the Argentinian tourist market, which, in the same period, fell by around 40% in reals as well.

On Slide 12, we will see the net revenue performance and the take rate variations among quarters and year. So the net revenue, based on boardings, so CVC, Esferatur, trained and visual, reached BRL 340 million in the quarter, representing a growth of 6.4% over the same period last year. The percentage of net revenue of our boardings, our take rate was 14.1% in Q4 '18 against 14.5% in Q4 '17 on a pro forma basis. This 50 bps approximately dropped -- is split in -- 7 bps in CVC business units and 20 bps in the recent acquisitions due to some adjustments that we did in the Q4 but is related to the year based on cutoff effects and some adjustments on cost that was necessary to be done after the acquisition of those businesses. At CVC, that explains the 30 bps of this drop, we -- among our other effects, we had also the mixed effects towards more international trips and [ sea cruises ] that has intrinsically lower take rates. But in the end, we grew our revenues significantly, showing an increase in our cash margin.

The next revenue based on bookings in that sense, rated BRL 94 million in the quarter, representing a growth of 67% compared to Q4 last year figures. So those units I'm talking about RexturAdvance and Submarino Viagens. That take rate was 7.6% in the quarter, mainly reflecting the greater rate of the online that works with a higher take rate than the airline consolidated business. But important to mention that in that consolidated total business, we worked pretty much in a flat take rate compared to last year and throughout 2018 quarters.

So with that, the CVC Corp net revenue, excluding the Argentina business units, totaled BRL 434 million in the quarter, representing a growth of 15.5%. In the year, the growth was 12.1%, reaching BRL 1.5 billion in net revenues, a record for the company. As a result, CVC Corp take rate was 11.9% in Q4, representing a slightly drop of 10 bps compared to Q4 '17 due to the combination of the factors that I've just mentioned.

On Slide 13, I will talk about the operating expenses. So in this quarter, the recurring operating expenses grew 15.7%. For the year, this increase was 8.4%. So in this very quarter, this higher increase was due to 2 main factors: one was that increase in marketing expenses in the online business division, but that grew more than 100%. But the marketing expenses grew less than the top line. Important information, first of all. And the second part of this acceleration of expenses in this quarter was due to provisions for special contingencies and an increase in allowance for doubtful accounts, the so-called [ PPD ] in Brazil. This is in accordance with the increase of the participation of our internal credit ask that grew the participation from 5% to 9% in the end of the year. That is the level that we are comfortable in working with, and that we envision for the foreseeable future. It is important to highlight that the delinquency rate remains pretty much stable and under control. Nonrecurring items related to the ILP CEO and CFO plan grew 41.2% in Q4, basically due to the appreciation of CVC share prices and consequently, the taxes on its growth. Mainly due to the capital synergies, general and administrative expenses in Q4 decreased 3.4%. Important to mention that, in the whole year, this drop was 6%, showing the efficiency being captured as planned.

On Slide 14, I will talk about EBITDA in the case, the CVC Corp adjusted EBITDA sought out BRL 196.5 million in the quarter, representing a growth of 9.2% versus last year. In accounting basis, the growth was 14.9%. In 2018, we reached 21.6% compared to last year in an accounting basis, and 13.2% in a pro forma basis, with a 70 bps expansion in EBITDA margin.

Slide 15 now, finishing the P&L with net income. So CVC Corp net income adjusted for the new criteria adopted from nonrecurring items, as explained in the second quarter of 2017, totaled BRL 98.5 million in the quarter, representing a growth of 17.5% versus last year pro forma basis. Adjusted net income for the year totaled BRL 319 million, representing an increase of almost 29%.

So now, on the last 3 slides, I will discuss cash flow, working capital and the indebtedness of the company. So regarding cash flow. In the fourth quarter, the company generated a net cash income, which is basically the net -- the accounting net income plus the noncash items of BRL 153 million, a result BRL 35 million higher than the figures reported in Q4 '17. In the year, this adjusted net cash income was BRL 583 million, representing an increase of more than BRL 106 million against 2017. The cash generation net of CapEx, another point that we've been discussing with you, had a result above Q4 figures, and generated BRL 51 million. This result was BRL 48 million higher than the cash generation in Q4 '17, especially due to the improvement in the working capital, which the change in working capital was BRL 7 million below last quarter figures.

So talking now about the working capital and the return of our invested capital. Just to -- back again to the very points that we mentioned last quarter that are pretty much the same for the quarter and for the full year. The company is pretty much advanced in working capital during this year, and the countercyclical measure due to the more challenging year that we faced in order to keep up with double-digit growth that we reached and a very sound growth in net income as well. So as we mentioned in the third quarter conference call, the reason why we invested was as following: first of all, a natural reflect of the bookings growth itself, the effects from the vacancy of collections and payments processes from the recent acquired companies; and the centralized depreciations with some airline companies that, in one hand, impacted the working capital. But in the other hand, those businesses' units, they were -- been officiated by one figure condition that we now have for the group. And some orders short-term and one-off effect that we had like fiducial deposits related to the stock option plan, for instance, and the important reduction in share of payments in cash against installments, they shared changed due to the tough conditions of the consumer that we faced. So all that together explain why we had to invest more in working capital, but this is in our system. That's the good news.

Then we can now go back to our cash as the market backs to a more normal situation. The ROIC, due to a whole lot of things, the improvement in working capital improved by 2.6 points, reaching 33.2% in short term. We also would like to present a new methodology for calculating ROIC that we consider to be more accurate. In this new methodology, we adjusted the EBIT or the note back with one, revenue from anticipation to suppliers, which is operational in a sense; two, the bank slips expenses that is in fact the operational expense as well; and number three, the effective cash tax income rate to reflect the tax shield due to the goodwill tax amortization. With that, our new methodology of ROIC was 23% in this quarter, and we will disclose this way from now on.

So finally, on Slide 18, we show that our leverage is slightly below the Q3 figures, 2.01x net debt-to-EBITDA ratio. And it's pretty much -- and it was pretty much stable through all the year. And even with the inclusion of the Ola Transatlántica's [ Adapt ] acquisition, we should maintain its -- in this 2x area.

So with that, I would like to thank everyone for participating in this conference call. And we are now available for the Q&A session. Thank you very much.

[Operator]

[Operator Instructions] Mrs. Olivia Petronilho from JPMorgan.

[Olivia Petronilho, analyst]

I'd like to focus a little bit on the recent acquisitions. I know you guys are still working on assessing the potential synergies, but if you could go through a little bit of what is already reflected in the results we've seen, and what we should expect in terms of basically SG&A gains for the next quarter or 2.

[Luiz Fogaça, executive]

Thank you for your question. So in terms of mapping synergies, we are almost there, just making some last analysis. So we have the plan. But no synergies has been captured already, and not even in the results we presented and they will take a little -- from a multitude to start the -- being felt out in our figures. We are pretty optimistic on those synergies, both in Argentina due to our conditions that we have here in Brazil, our capacity to offer, for instance, hotels -- Brazilian hotels, for instance, in better conditions for them. And also for a set of tools, the same way we did with RexturAdvance, not to mention some other optimization in their [ confidence ]. So we tend to start to see gains more towards second half of this year in all the recent acquisitions.

[Operator]

[Operator Instructions] Mr. Ruben Couto from Santander.

[Ruben Couto, analyst]

Very quick question on your recent investments in digital capabilities through the stores. Can you give us an update on how do you roll out your -- all the tools that you're trying to give to the salespeople at the stores, how they are behaving, how they're placing in positive ways in sales growth to the stores that have already managed to run the tools for some time. If you can give a sense if we can expect some same-store sales acceleration from the digital transformation already in 2019? Will it would be something that would be seen more clearly over the next couple of years.

[Luiz Fogaça, executive]

Thank you for your question, Ruben. To be very frank to you, those kinds of enhancements that the digitalization will bring to the off-line channel will be more a need to long-term gain. So we don't expect to change the needle in the short term for 2019. These very specific enhancements -- or all these applications of digital won't change the needle for our same-store sales. That's something that we are creating, paving the way for the mid- to long-term recycling and more movement in stores moving forward. Of course, as long as they are available in the bulk of our stores, not to mention in all of them, we may see some changes by year-end, but it will all depend on the speed of our implementation and our changes of those new features in our stores. So as you know, we are always very conservative. We tend to work with no changes in 2019, but working for better, let's say, results in the coming years.

[Operator]

[Operator Instructions] I'll turn over to Mr. Luiz Fernando Fogaça for final considerations. Mr. Fogaça, you may give your final consideration now.

[Leopoldo Saboya, executive]

In fact, it's Leopoldo speaking. The final considerations for all of you is very simple, though. We would like to thank you for having our conference call results. We are very pleased to present those figures. It was a very important year for all of us, not only in terms of results, but in terms of implementing in the new acquisitions and bring all this growth in the digital areas, in the online channel, and we start with a very good move for 2019 and going forward. So thank you very much, and see you next call. Thank you.

[Operator]

Thank you. This concludes today's CVC fourth quarter 2018 results conference call. You may disconnect your lines at this time.