Lojas Renner SA
BOVESPA:LREN3
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Lojas Renner SA
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Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to Lojas Renner conference call to discuss the results related to the second quarter of 2018.
We would like to inform you that all participants in this conference call is being recorded and simultaneously translated. The slides of this presentation will be available on Lojas Renner's website at www.lojasrenner.com.br in the Investor Relations section at the webcast platform and the MZiQ platform. As a reminder, questions will be taken by telephone and through the platform.
Also we would like to inform you that this event is being recorded. [Operator Instructions] We would also like to remind you that questions from journalists might be taken by our press office through the phone number (11) 3165-9586.
Before proceeding, I would like to mention that any forward-looking statements that are made during this conference call related to the company's business outlook and operating and financial targets represent assumptions from the management of the company as well as information available to the company. Future considerations are not guarantee of performance as they involve risks, uncertainties and assumptions, as they refer to future events and, as such, depend on circumstances that might or might not happen. Investors should understand then that general economic conditions, industry conditions and other operating factors could also affect the future results of Lojas Renner and, therefore, could reach results that differ materially from those expressed in such forward-looking statements.
Now I would like to turn the floor over to Mr. Laurence Gomes, CFO and IR Officer. You may proceed, sir.
Good afternoon, everyone. We are here today to comment on the main highlights of the second quarter of 2018. Next to me, we have Galló, our CEO; Paula Picinini, our General Manager for our IR New Businesses; and Luciano Agliardi, General Manager for Controllership.
The second quarter of the year was characterized by a good pace of sale, even with the late arrival of winter and the flow of stores being significantly impacted by the trucker strike and the Brazil games and the World Cup. Despite all that, we were able to have a very consistent performance.
In the second quarter 2018, we posted growth of 2.5%. We grew 2.5% in same-store sales. This performance, when compared to the rates for the industry, really reinstate our recurring gain of market share. We believe that if we exclude the effect of the strike, our same-store sales would have reached 5%.
In terms of growth margin, I would like to highlight an increase of 0.7 percentage points. Also this was a consequence of a favorable exchange hedge, which was higher for imported goods.
In terms of operating expenses in the second quarter, we were up by 11.7%, mainly reflecting an increase in our number of stores with an increase in the sales -- in the area of sales, which was up by 10%. Operating expenses per square meter was up 1.3%, and this percentage was below the inflation increase of 4.4% in the last 12 months. As a consequence, retail EBITDA was up by 16.2% in the second quarter of '18. EBITDA margin went from 18.6% to 19.8%, growing 1.2 percentage points.
In the period, gross margin growth and lower provisioning of profit sharing also accounted for this performance.
Revenues from Financial Products totaled BRL 81.3 million in the second quarter of '18, up by 2.9%, vis-à-vis, the previous year, and that was a result of the growth of the cobranded portfolio of Meu Cartão. The quality of the portfolios and the delinquency levels are under control, even though the natural process of material of the cobranded and lower growth of the private label, percentage speaking, generated higher volume of provisioning. Therefore, total adjusted EBITDA totaled BRL 434.2 million, up by 13.4% in the second quarter of '18. Margin went from 23.5% to 24.4%.
Also I would like to highlight our net income that posted growth of 41.9%, going from BRL 193 million to BRL 274 million. This performance reflects operating improvement that we already mentioned, the reduction of the negative net financial result and lower growth of expenses with depreciation, in addition to the effects of a lower tax rate as a consequence of tax deductibility of amounts related to investment subsidies in the last 5 years.
And finally, as a consequence of our performance, we were able to move forward 1.3 percentage points in our LTM ROIC that went some 20.6% to 21.9%.
So these were my comments. And now we are available to take your questions. Thank you.
[Operator Instructions] Our first question comes from Thiago Macruz from Itaú.
I have 2 questions. This was a very unusual quarter because there were some nonrecurring items that affected the quarter, like the World Cup and the trucker strike. I just want to understand that if within the quarter you were able to make some adjustments to the fact that you sold less, I mean, what about the inventory? Is it correct to assume that you will see some pressure on the growth margin because there were things that happened in the second quarter? And the second question is about consumer finance. It's difficult to make any projections with a good degree of assertiveness. So as a concept, looking forward, it's important to us. So after the second quarter, do you still maintain that view that the growth of this business this year should be between 0% to 5%? I mean, still in a single digit. So these are my questions.
Thiago, thank you for your questions. This is Laurence. Regarding the inventory question, we believe that our inventory is well -- is of a good size. We do not believe in any impact of any additional markdowns going through the third quarter. So we still believe that, in terms of our gross margins, it is possible to -- we believe that we'll be able to deliver a higher gross margin in the second -- or the third quarter of 2018. The contribution of the exchange rate in the following quarters will be lower once you compare to the base of last year. But I don't see any major impacts or any concern related to the magnitude or the composition of our inventory or the assortment of our inventory. Now in terms of your second question, as we've been saying since early this year, we believe that there will be a drop in interest rates due to Central Bank regulations. There will be further stabilization in terms of growing the portfolio of Meu Cartão. And also we're [ shooting ] to the maturity of Meu Cartão portfolio because this maturity is bringing along further provisioning. I mean, the portfolio is healthy, but it's an older portfolio. Therefore, it requires an additional provisioning. So all in all, the answer is that we continue believing, and that is initial expectation of good financial results from low to average. I think this is what we should expect for 2018 in terms of Financial Products.
Our next question comes from Joseph Giordano from JPMorgan.
I have 2 questions. And my first question has to do with the average ticket or maybe also another question related to assortment. Average ticket grew about 1% to 1.5%. I -- all I want to understand whether you have any unusual promotional activities throughout the first half of the year in terms of your gross margin projection. Maybe you could have been higher. I just want to understand whether this makes any sense within that context. The second question is that we've seen growth in your E-commerce platform. I would just like to understand what was the E-commerce contribution to same-store sales and to the overall performance of the company.
Joseph, thank you very much for your question. This is Laurence. I think what we saw in the second quarter is that we anticipated some promotions because the weather was not very favorable from where -- started their promotions in April. And as we usually say, we take very good care of Renner's positioning, that's very crucial. Our value proposition remains very sound. And we had to make some adjustments due to the very competitive landscape. Maybe our gross margin would have been a bit higher than what we had. So that was the answer to your first question. The second question, given the fact that this was a very unusual quarter due to different reasons, we cannot yet talk about, I mean, same-store [ bonus ] share. What I can tell you is that we are growing 4x the growth of the fashion market in annual basis, right?
Our next question is from Mr. Guilherme Assis from Banco Brasil Plural.
I would like to elaborate a bit on your gross margin. I think all your comments and your answers were very clear when you talk about the quality of inventory and you also talk about the exchange rate. I understand that the exchanges in -- for this last collection was at BRL 3.30. But looking forward, and I think you already said that the foreign exchange now could probably experience some pressure or could put some pressure on the gross margin, so I just want to know whether you would transfer that to prices or whether there is some space in this competitive environment to do that. I just want to understand how the gross margin will evolve considering that foreign exchange item. And the second question relates to G&A. You presented a very good dilution in your selling expenses, even with the opening of new stores. The Uruguay stores are approaching maturity, but as -- but G&A didn't have that same dilution. I don't know whether your E-commerce investment and other initiatives related to logistics will have any impact, but I want to know whether we should expect a -- an early dilution of G&A looking forward.
Guilherme, this is Laurence. Thank you for your questions. I -- well, you are correct. The foreign exchange has a lower contribution and will have a lower contribution looking forward when you look at a like-for-like basis. But for the entire of 2018, the exchange is at BRL 3.32. And so we have a very competitive exchange rate because of our exchange hedging policy. But looking at next year, I think things will change just like it happened with previous years. There are ways of mitigating that with mix of products and negotiations. So I think we can only say anything more about that, till further down the road. Now about G&A, as we've said before, the investment cycle we have at Renner, not only in terms of CapEx investments, but also OpEx investments, we are certainly executing our projects and strengthening our structure in order to integrate physical and online. There are also projects related to improvement in purchasing experience, and we are also now getting closer to our customers, but all of that certainly depends on conditions, the environment and the base of sale. I think that there may not be a dilution right on the third quarter of '18, but it will be very close to the levels we experienced last year.
Our next question comes from Franco Abelardo from Morgan Stanley.
My first question, still revisiting the inventory subject. There was an increase of 24% in inventory levels. Does that impact your margins on the third quarter? Why did you increase your inventory? Is it inventory of finished goods or things that you have in the stores? I just want to understand how do you see the issue of inventory looking forward, looking through the next quarter. That was my first question. Second question is looking at the profit sharing line, we see that there was a decline. And the level now is much lower than what we saw in previous quarters. I know that this certainly depends on the results. So once we compare it to the total profit sharing that we had last year, could you give me some visibility in terms of what would be the level for this year? Would there be a drop around 40% to 50% as well or as results improve, looking towards to the second half of the year, we will see improvements in this line?
Franco, it's Laurence, again. Thank you for your question. In terms of the inventory, it is worth repeating what we said before. Our thought -- inventory assortment is very healthy, and this will not put any pressure in our margins. We do -- we already -- we will stick to what is already in our commercial plans. This 24% increase relates to an increase in the share of imported goods and also products that have a longer lead time, in addition to having a favorable exchange rate that favored imported goods. That's why there was this increase that was mainly due to the increase in the volume of imported goods. So that is the main aspect related to our inventory. Now in terms of PPR, it depends on sales pressure and adjustments and lower provisions. And this is related to the performance to date until June. We've seen, especially in the last 2 weeks, a return to normality. June still felt the impact of the World Cup, but we've seen in the past few weeks that things are getting back to normal. Now we -- in August, we will introduce some new collection, and we are very confident. And profit sharing will be adjusted according to the results that we will realize from now on.
Okay. If you allow me another very quick question. That investment subsidies of BRL 42 million, is that a one-off thing? Or do you think it will be recurring in the next quarter?
Franco, this amount refer to a 5-year period. And the recurring amount that will come will be much lower than the amount of this quarter. It should be around BRL 10 million on an annual basis.
I'm sorry. Could you repeat the numbers because the connection was not good?
It will be recurring, annually peaking, of around BRL 10 million.
Our next question comes from Mr. Luiz Felipe from BTG Pactual Bank.
I have 2 questions. The first is whether you could give me an upgrade on the push-pull systems and how your portfolio is performing and how that impacted your inventory that ended up with reactivity in the second quarter impacted by the truckers' strike. And the second question is whether you could give me more details on your E-commerce operations. And I know that you added artificial intelligence. You also went through the process of revitalizing the platform. So what should be expected looking forward?
Thank you, Felipe. This is Laurence. Now in terms of push-pull, we are still sticking to our plan. We are in line with our plan. We are already operating, like you said, 30% of Renner volumes or, better yet, although the stores are already operating through push-pull and then we are testing some [ model ] products in 2018. We already talked about the contribution of push-pull back in 2017. And I think that this year, we already saw that push-pull products are performing better when compared to other categories that are not yet in the push-pull system. We have 40% of the total volume of the company already operating per SKU. Therefore, I think we are just following our plans.
This is Galló, Felipe. I will add to the question because you question some of the improvement. In fact, the company is making a lot of things in that direction. We firmly believe that the future of the business is omnichannel. We are in the midst of a digitalization of what we are calling structural projects. And part of that is the question you asked. I mean, today, alone, we have a financial operation, and that financial company started fully digital. There are a series of good things that happened. And soon, we will have our Renner Day on September 28. And in a more structured way, we will present to the market everything you talked about and not only that, but also many other important tools that are being used now in terms of credit approval. And today, our customer already has the store card in their smart phone. We also have face recognition, which helps us to reduce losses. I mean, there are many interesting things in the pipeline, and we are now putting all of these things together. And all of that will be mentioned during our Renner Day. We also want to express our position very clearly and tell people what are we betting on, digital and all of the synergies that we see and that are possible also down the road. Click and collect is something that is already in operation in more than 6 stores. And so what do we -- what are we looking at when we see people in our stores? Where do they go to exchange their products? I'm not going to answer all your questions. Otherwise, there will be nothing left to say during our Renner Day. But I can certainly tell you that we are very active. And part of all of this investment also impacts our additional expenses because that relates to building up of this business platform and also the service platform. I would just like to take this opportunity to invite you to join us on September 28 when we will be able to give you more information.
Our next question comes from Maria Paula from BBI Investments.
I would like to take a closer look at the gross margin. This is another quarter when it's coming -- when it's dropping more than 200 basis points. I would just like you to shed some more light to what is, indeed, impacting the -- this operation. And secondly, could you please tell us a little bit about the competitive environment? You said that markdown would not be a problem for Renner. But if you could elaborate a bit more on your competitive environment and what is the behavior of consumers in the stores. Going a little bit beyond the ticket, when we look at this drop in [ making ] payment in this quarter, we already notice a reduction in cash sales, so maybe it's because consumers are taking up credit again. So what is your view?
Maria Paula, thank you for your questions. In terms of this drop in gross margin of Camicado in the quarter, our approach was to anticipate sales and promotion, so as to increase traffic in our stores. And this happened at Camicado. And we already talked about the impacts, like the World Cup and the truckers' strike, that wasn't able to push figures up. And so as to help us have a more satisfying result at Camicado.
This is Galló. Well, we -- what we see here is an environment going through a recovery process. On the other hand, we see some anxiety as well, vis-à-vis, the next coming election. Some confidence ratings are already giving positive signs. Consumers are not in debt, and that's something we see when we look at the performance of the market. But sometimes, we see some survey saying, "Okay. 60% of Brazilian consumers are buried in debt." Well, 60%, of course, they have debt because they are using credit lines. And the press usually conveys the image that 60% of Brazilians are in debt. But if we look at the results coming from the banks, the banks are showing that Brazilians are not buried in debt. I think that we have to be prepared because, usually, it is at moments like this that we can gain market share. Because we have less products, we will have products at competitive prices. We will have credit. We also have a large number of physical stores, the brick-and-mortar stores. And all of that is being supported by E-commerce. There are many synergies. And I think that until election day, we will have what you saw with a slight improvement. And so after the election, we may see 2 things that we have. If the election is positive, we will see an important move upward. But if the election is not very good, I mean, there won't be a total disaster. But considering the environment, we will do what we usually say whenever we are faced with a -- an unfavorable economy. If you have a value proposition -- a good value proposition, you will succeed. Even in moments that are not very good, you have the opportunity to gain market share. This is our position, and we've been through several crisis -- well, certainly, we are always very cautious in moments like that. We have to look at our inventory. We have to maximize sales. We have to be very stringent in terms of our operation expenses. But when you look at the expense line, you have to fit that into 2 things. You have to look at expenses that will generate new tools or that will introduce new processes or new methodologies or new technologies. And also, on the other hand, you have operating expenses. And these operating expenses, I can assure you, they are under total control. They've always been under total control because this is part of our job. We control our operating expenses because in a situation where the market is down, you'll have to be prepared to face a difficult economic situation. But when you have a market that grows very fast, you can generate results quickly.
Maria Paula, now concerning the third part of your question about the ticket, we see the -- an initial demand for credit, but we have to look at that with a -- like a grain of salt because this is an initial stage of recovery. And that is seen through our credit card and sales and how debit card is also behaving in terms of means of payment. And we've seen a more intense activity in the payment of past due installments. And I would also like to take this opportunity to mention that in the second quarter, we introduced the negotiations portal, and this was something very important. And so negotiations -- renegotiation of debt can be done digitally. Our customers can choose what kind of payment they want to settle their past due debt. And this is all done online. It is accepted or not. But if it's not accepted, we already schedule a call to that customer. And that was an important thing. Here, we were able to grow more than 30% in terms of agreements that were settled. Now still to answer your question, we haven't even seen a very strong recovery in terms of credit [ and debt ].
Next question is from Robert Ford from Bank of America.
Could you please elaborate on the impact in terms of your cobranded. I think there was a decrease there, but there was an increase in other products. What is behind that, please?
Bob, this is Laurence. In terms of the Meu Cartão portfolio, the cobranded, there was an important change in the portfolio with unification of the limits last year and also with the migration of purchases through the installment booklet. There was increased use of the credit card as well. And all of that caused the portfolio to increase. Not only that, but now, there was a change in the provisioning methodology because in the past, before we had Realize, the delinquency over 180 days were written off. But now, they still remain in the portfolio. They remain in the portfolio with 100% of the amount's provision. And that's why when we compare the number to previous numbers, this provision increase looks high. Also we had to increase provisions because of IRFS (sic) [ IFRS ]. And this also caused increases in our provisioning levels. Not only that, but there was the maturity of the portfolio, so the portfolio that used to grow a lot. Last year, there was a large increase in a young portfolio, but now, growth is not so strong, and when we have to make provisions for that portfolio because the -- there are still amounts that are delinquent for longer period of time. It's also important to say that the portfolio is very healthy. Delinquency levels are under control. And I think this just reflects the change in accounting methodology, IFRS. And now we, at Realize, have provisioning amounts that are about 23% higher than the minimum required provisioning required by the Central Bank.
I have another question. Then that BRL 41.6 million, are these taxes that you intend to recover or you have the opportunity to recover even more?
Well, that refers to a 5-year period. And this -- these are amounts that have been captured in the past. I think it's also important to mention that this legislation, I mean, this whole process resulted from this law -- this new law under a provision of that additional law that says that all tax incentives should be register as [ COFINS ] until June of 2018. So that was the fact that generated this tax deductibility.
Our next question is from Gustavo Oliveira from UBS.
I just want to get a better understanding about your SG&A expenses. So this 20% level is what you expect for the entire year or whether you will have to invest more in all of the projects you mentioned. I also want to understand if you can elaborate more on this incremental investment and what is it being used for. Is that something that is a one-off thing? Is this being allocated to a certain project? And I mean, where is this being allocated to?
Gustavo, this is Laurence. Thank you for your participation. In terms of the growth of G&A, [indiscernible] always said [ 0 ]. And if you look at our investment cycle and if you look at this -- this moment that Renner is adjusting itself to this business model and to the new behavior on the part of consumers, maybe this will still be a very challenging year in terms of delivering a dilution of expenses, vis-à-vis, last year. However, what we've said for this quarter is that this will be -- the number will be very close to that of last year. And in the fourth quarter, we believe that the figure should be very similar to that of the fourth quarter of last year in a like-for-like basis. But all tax investments, I think, there are 3 areas that are -- that may affect the inventory multichannel integration and also the improvement in the purchasing experience in all channels. So these are the main areas involving projects that somehow will bear good results.
[Operator Instructions] We now conclude the Q&A session. I would like to give the floor to Renner's management for their final remarks.
On behalf of everyone, I would like to thank you all for participating. Thank you very much, and I wish you all a very good weekend. And I'll see you again in our third quarter presentation and during our Renner Day. Thank you.
Lojas Renner conference call is now concluded. Thank you very much for participating, and have a very nice afternoon.