Empreendimentos Pague Menos SA
BOVESPA:PGMN3
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Empreendimentos Pague Menos SA
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Good morning, ladies and gentlemen. Welcome to Pague Menos and Extrafarma's conference call to discuss the results of quarter 4 2023. This conference call is being recorded, and the replay will be available on the company's website, ri.paguemenos.com.pr, where the slide presentation will also be available for download. Right after, we will open the floor for questions.
[Operator Instructions]
Before proceeding, let me mention that any forward-looking statements made during this conference call are based on the assumptions and beliefs of the company's management as well as information currently available to the company. These forward-looking statements may involve risks and uncertainties since they refer to future events and therefore, depend on circumstances that may or may not occur.
Investors, analysts and journalists should understand that events relative to the macroeconomic environment. to the industry and other factors may lead to results that differ materially from those expressed in such forward-looking statements. Today, we have with us Mr. Mario Queirós, Jonas Marques, CEO; Luiz Novais, CFO and Investor Relations Director of the company. Now I would like to turn the conference over to Mr. Mario Queirós to start his presentation.
Hello. Good morning, everyone, and welcome to our conference call to announce the results of Pague Menos and Extrafarma. Today, I have with me Mr. Novais and Mr. Jonas Marques. Jonas Marques is our new CEO. You have the chance to hear from him and about his first impressions during today's presentation and during the Q&A. And we are here to announce the results of quarter 4 2023 and the full year 2023.
So I am here today because I was responsible for the year 2023 in the company. So on slide #4, we have quarter 4 highlights. The first highlight was our market share. In quarter 4, we were able to grow above the market average in the North, Northeast and the Midwest. You know that the North and Northeast are core regions for the company and the Midwest, as you're going to hear later from Mr. Novais, the behavior between -- the deferred between the regions, we saw a drop in the Southeast with a strong growth in the Midwest.
Another highlight was our digital channels, which reached 12.5% of our total sales, 2.6 percentage point increase versus quarter 4 2022, and this is as a result of our investment and navigability and constant improvement such as our new search engine and not just improvements in our app and our website, but also our customer service, our call center, our delivery channels.
So in our different digital channels, we took some improvements, and we've seen the results. Also, our cash cycle, we were able to reduce it by 6 days year-over-year. And with a partial recomposition of our accounts receivable, you're going to hear more from the Novais. We also did a lot of work to control our inventory, and we made a lot of movements in our commercial conditions with our suppliers.
Another highlight was the growth of Extrafarma. In quarter 4, we had a same-store sales increase of nearly 7%. And when we look at a 2-year base, we had an increase of nearly 20% in 2 years in our same-store sales. And this is -- this results from all the investment that we made, and we already knew about this potential when we bought Extrafarma. Another highlight is the synergies. All synergies are in line with what was planned. And looking at the data from quarter 4 2023, we have an annualized basis of BRL 130 million, which is nearly 60% on of the mapped potential. And finally, the adjusted net income of quarter 4, BRL 62.8 million. And this was very much based on the improvement in our indebtedness when we capitalized in September last year by reducing -- significantly reducing our financial expenses and also the distribution of our interest on capital, which impacted our net income.
So we had a total growth of nearly 22% in our sales -- of course, there's an impact of Extrafarma here. And when we look at the longer period, 2019 to 2023, saw a 4-year CAGR of more than 15%, a very sustainable growth rate. Looking at our digital channels. This has been a very strong growth lever for us in the past few years, BRL 1.4 billion in sales and nearly 50% increase versus 2022, which was a very strong year. Our indebtedness, we did our capitalization in September last year, and we were able to reduce our net debt-EBITDA ratio by 0.7x versus the peak of our indebtedness, which was in the second quarter 2023.
On the right of the slide, we see the growth of our EBITDA, an increase of 7% versus 2022. when we look at the longer term to 4 years, we see a CAGR of 16.4%, very expressive, very strong growth, a constant increase of our EBITDA. Our customer base reached nearly 21 million active customers in the year, 6.3% increase year-over-year, and this is due to our investments to acquire new customers. So we sponsored Big Brother Brazil. We continue to sponsor the Brazilian National Soccer Team. We made a lot of online investments. And also, we keep investing in our customer service capabilities and our conversion rate has been one of our greatest focuses. And finally, the integration of Extrafarma.
We completed it very successfully, particularly in quarter 1, 2023, when we finalized the integration of the 4 distribution centers of Extrafarma and all the systems. Today, it is running all the Pague Menos's systems. And now I turn the floor to Novais to share our numbers with you, and then I'll be back with you for the Q&A.
Good morning, everyone. So let's continue with today's presentation. On Slide #7, we have more information about the Pague Menos sales of the 1,250 stores. We had an increase of 8.6% in quarter 4. It was a decrease versus the previous quarter. In the previous quarter, we had an 11.5% increase. But in quarter 4, we saw a deceleration of the entire market. We actually increased above the market. We gained market share as you're going to see in my next few slides. So despite the drop in the market as a whole, we were able to keep a relevant position in quarter 4. So over the year, the total growth of the company was 10.3%.
We inaugurated -- we opened 20 new stores in 2023, the same-store sales was 5.5%, equivalent to the year's inflation rate. On the right side, we see that in our own stores, we saw a very distinct behavior in the evolution of our same-store sales. In the Midwest we closed the year close to 13%, 14% same-store sales in the North and Northeast, it fluctuated at about 5% or slightly less than that in the first quarter, but we had a relevant drop in our stores in the South and Southeast because in quarter 4 last year, the same-store sales in this region was close to 40%.
And in 2023, it was close to 4%. And we saw that in quarter 4 2022, there was an extension of the winter season, so the sales volume was higher in 2022. So this decrease is also justified by the strong comparison basis in 2022. Now the next page shows the performance of the 218 stores opened between 2021 and 2023. We have been seeing good performance in these stores. The maturation curve is evolving with planned. On the right side, we see that the 4-wall margin, which is equivalent to the direct expenses of the stores, we have in all the sales levels, we have for all margin superior to the margins of the previous cohort.
So these new stores, not just these ones, but the ones that we're going to open looking forward will be an important lever for us to improve the EBITDA margin of the company as a whole because they are delivering 4-wall margins better than the previous portfolio, the previous cohorts. And on the bottom, we see 76% of the stores are in the North and Northeast, 86% focusing on B2, C and D classes and 67% in the inner cities of the country.
On Slide #9, we have more information about the sales of Extrafarma. We see an important acceleration in quarter 4 2023. We had a same-store sales of 6.8%, double the number of previous quarters. In quarter 3, 2023, we completed 1 year of the work of integrating Extrafarma. We bought the company in August 2022. And in the first year, the volume of capturing synergies was much more concentrated in gross margin and SG&A. So we improved the commercial conditions, the gross margin of Extrafarma, we complete the logistic integration, systems integration, administrative integration.
So that's why the captures were more concentrated on margin and SG&A. Then starting quarter 4, we started to work more intensively in improving the sales of Extrafarma. So a lot of CRM actions. We also had some banner migrations. We're going to talk more about that later. A lot of work on assortment, stock outs, focusing on digital channels with a lot of improvements. We reached 10% share of our digital channels. Private label is also growing a lot.
Today, Extrafarma has a higher share of private labels than Pague Menos. So these levers started to more relevantly contribute to the sales in quarter 4 last year, and we have good prospects in the coming quarters. On Slide #10, we have information about the market share. We have good news here. So despite the fewer inaugurations over the year and no inaugurations on quarter 4, we maintained our national share and we gained share in our core regions, the North and Northeast and also the Midwest, both in quarter 4 and also for the full year.
So we see that we have a favorable market. We see a high volume of fold-down of independent stores and also some regional chains with some closedowns. And on the right, we see the components of this growth. So the whole market according to IQVIA grew 8.2% over the year between new stores and same-store and Pague Menos grew at 9.5% in Pague Menos at 0.8% with a lot of pressure by the volume of stores that were closed down. We closed down 32 Extrafarma stores, but looking at the dark blue bars, both at Pague Menos and Extrafarma, we had a better same-store performance than that of the market.
On Slide #11, we see our gross profit and gross margin -- this was the greatest offender of 2023. The consolidated, we had a margin of 29.6%, 50 bp reduction versus 2022 in quarter 4, 29.2%, very similar to the quarter 3. And here, the main offenders of our margin are basically concentrated on Pague Menos. As we can see on the right side. We had a 1 percentage point drop between quarter 4 '22 and quarter 4 '23, concentrated on the lower inflationary gain and the lower sales of COVID-related items in '23 compared to '22. And these 2 effects when combined represent a drop of 0.7 percentage point for Pague Menos. And in addition to these 2 elements, we also had a growth of 50% of the volume share of our digital channels and the digital channels have a lower margin than the portfolio -- brick-and-mortar portfolio.
Extrafarma also has a higher volume of stock losses. We received the company in August 2022 and with a very unbalanced stock level, and that has put some pressure on our loss level throughout 2023, also putting pressure on the year's results. we finished for Extrafarma with a margin of 31.1% and is expressive growth of 0.6 percentage points year-over-year and the continuous capture of the synergies and the improvement of the share of private labels, particularly for Extrafarma and all the other synergies on the commercial side that have been captured by the team in Extrafarma.
On Slide #12, we have our selling expenses. We had an increase of 5 bps year-over-year with closed the year at 23% versus 22.5% in 2022. Here, it's important to stress that in 2022, we incorporated Extrafarma in August. And because Extrafarma has a proportion of expenses over income much higher than that of Pague Menos because of the lower average sales per store and a much lower capture of synergies in terms of expenses.
On the right side, we see 400 bps as a difference in terms of the share of selling expenses over income over sales. So since in 2022, we worked with it consolidated. And in 2023, we had the 12 months. This also put pressure on the proportion of the selling expenses for the consolidated numbers for the year, but we have been consolidating synergies for selling expenses and also sales and Extrafarma. And this trend is one of the main levers and one of the main indicators for the year 2024.
We have a lot of opportunities here to reduce our expenses with freight, leases, services and also a opportunity to improve the productivity and the average sales per store. On Slide 13, as a consequence of the reduced margin and 1 year integration of Extrafarma in our selling expenses, we lost 1 percentage point of the contribution margin. We went from 7.6% to 6.6%. On Slide 14, here we have positive news and very important news One of the main synergies captured from the combination of Extrafarma during 2023 is that we reduced our G&A expenses by 40 bps compared with '22.
In '22, we finished the year at 3.1% of G&A expenses over our income and 12.9% in 2023. And in quarter 3 and 4, we were closer to 2.3%, 2.5%. So in 2024, there's still some room to capture more synergies due to the integration of Extrafarma.
On Slide 15, our adjusted EBITDA, there was a decrease from 4.5% to 4% and an increase of 7% from BRL 445 million to BRL 476 million. So in number numbers, the company grew, but proportionately or essentially a decrease, and this was due to the savings in G&A expenses, but the offender of the year was certainly the gross margin, and we have any typical results that were concentrated in the start of the year and an EBITDA margin of 1.9, and that was when we concentrated the logistic and systemic integration of Extrafarma in the start of the year.
And then in the second half of the year, nominally speaking, we had a growth of our EBITDA compared with the second half of 2022 of 17%. So looking from the start of the second half, looking forward, there was an important change in the company's EBITDA. So do we have good profits for 2024. On Slide 16, we have more information about the integration of Extrafarma. We finished quarter 4 at BRL 32.8 million in terms of capture of synergies in quarter 4, annualized is BRL 130 million that we show on the left-side chart. Of the BRL 32 million, BRL 26 million is linked with the negative evolution of the EBITDA -- of Extrafarma's EBITDA of nearly BRL 15 million with a positive EBITDA of BRL 11 million.
So BRL 26 million of growth in our EBITDA and the other BRL 6 million have a positive impact on Pague Menos. This is the effect of the logistic integration, freight reduction and other expenses that have a positive impact on Pague Menos. So annualized, we have BRL 130 million of synergies captured. We have an important evolution in the Extrafarma EBITDA margin. As we can see on the right-side chart, we go from a negative 2.6 EBITDA margin on quarter 3 last year to positive 2.1%. So 4.6 percentage point increase or 460 bp increase in 1 year, and there's still a long way to go throughout 2024, and we will finish '24 with this integration completed and Extrafarma EBITDA margin varies -- much more similar to that of Pague Menos because the gross margin tends to stabilize at a higher level than that of Pague Menos.
On Page 17, this is one of the greatest levers that we have been using to improve the performance of the Extrafarma stores. In 2023, we converted 54 stores that were originally Extrafarma to the Pague Menos banner in Tocantins, Bahia, Sao Paulo and Paraiba. And these stores, as we can see on the right side, grew by 17.5% same-store sales in quarter 4. So the banner conversion in these states where the strength of Pague Menos is much greater than that of Extrafarma. This is contributing greatly to improve the performance of the Extrafarma stores.
So that is why we decided now in the first quarter this year to convert another 47 stores in the state of Rio Grande do Norte, Paraiba, Pernambuco. So in all these states, we will only have Pague Menos stores and we will keep our Extrafarma stores in 4 states, Ceará and Maranhão, Pará and Amapá, which are states where the Extrafarma banner is very strong. And we're still monitoring and testing in these states. And we -- but we will probably keep the Extrafarma brand in these regions, but also trying to extract the best that we have in each of the banners in this region.
So we have great prospects for this lever here now in the first quarter of the year with the 47 conversions that I just talked about. On Page 18, we have the net result of the company. We finished the year with BRL 14.2 million income, an important reduction versus 2022, where we delivered BRL 161 million. We have an important effect of reduction of our financial expenses. In quarter 4, our financial expenses were BRL 25 million lower than quarter 2 and quarter 3. So looking at the BRL 25 million of positive effect in quarter 4, we have something close to BRL 100 million less financial expenses in 2024, just due to the effects of reducing our leverage and the reduction in interest rates.
And on the right, we see the bridge comparing the net income of 2023, 2022. We see that the main offender here is certainly the financial result, which was close to BRL 216 million in financial expense is higher than that of 2022, which put a lot of pressure on our results. And we will keep working. You're going to hear more about this from Jonas as one of the main levers for the company in 2023 that we will continue to use in 2024, which is reducing our leverage. We're working strongly to reduce our cycle, improve our EBITDA, capturing synergies from Extrafarma, monitoring the execution of fiscal credits and other things that can help improve our leverage,; and the financial soundness of the company.
This is our cash cycle and cash flow. The cash cycle on the left shows an important evolution of the medium stock term. We went from a peak investment of 129 days in the first quarter of the year, which was when we integrated Extrafarma, so the logistic and systemic integration occurred in the quarter 1. So we had an additional investment to ensure the supply of the stores in that period and also the price increase. And then we finished the year at 116 days and an important reduction but we can shorten further this stock time. And we recomposed partially the average payment term. The average term, the normalized payment term is about 25 days.
So we still have 10 days of anticipation of accounts receivable that we have been able to decrease and as we recompose our accounts receivable, and this has been reducing the financial expenses of the company as well. On the right, we see the evolution of our operational cash flow. This is one of the 3 main points of the year. We have been having record-breaking cash generation. We generated BRL 264 million of operating flow, 26.5% more than the previous year. And this is due to the reduction in our stocks, the improvement in the average premium time and other elements.
And on Slide #20, the last slide of this presentation. We see the company's indebtedness. On the left, we see a good evolution of our company's debt. We went from a peak of 3.1x net debt-EBITDA ratio to 2.4x, a reduction of 0.7x. On the right, we see the evolution of our net debt. We finished 2022 with BRL 1.167 billion of net debt with BRL 267 million of operational cash generation as we saw in the previous slide, an investment of BRL 125 million.
So free cash flow -- positive generation of free cash flow of BRL 141 million. But payment of the second installment for Extrafarma, close to BRL 100 million and the expenses with the debt service put pressure on the results, but this was compensated by the increase in capital that the shareholders made in September last year. So we finished the year at BRL 1.92 billion in net debt.
We know that we are above what's ideal one of the 3 main focuses of the company is to reduce its debt. We should finish 2024 with a net debt EBITDA ratio similar to what we had before we acquired Extrafarma, and we are striving to reduce the company's leverage. So this is the end of my presentation. Now I turn it over to Jonas. Jonas, please?
Good morning, everyone. Good morning, Mario. First of all, I would like to greet all our investors, journalists and analysts present here today, people who believe and show interest in our company. First of all, I'd like to introduce myself. So next page.
Let me tell you some of my background. I have 3 children. I married, I'm resilient. I have the chance to work in the past 30 years in the industry. But I started my company much longer on before 15 years. I became an entrepreneur, and I learned what was entrepreneurship in our country. I became a photographer and a filmmaker and I opened a company with a friend and this was something that I carried with me during my career, the initial stages of my career and my formal education. I graduated in psychology, I love people. I think this is my main passion and what really marks my trajectory. I briefly work with psychology, with autism and vulnerable children. And then I entered the pharma industry in '84 in Roche. Then I worked in Stiefel, GSK; ISDIN and Bayer where I worked for more than 12 years.
I feel very privileged because I had the chance to live and work and lead people in Europe, Oceania and countries in Latin America also when I lived in Brazil, but I had responsibilities in other countries. And this brought me the possibility of seeing a very striving retail from the most fragmented markets such as Europe -- e-commerce developed markets such as Germany and also Oceania. For example, Australia, New Zealand, as you know, is a more consolidated market, difficult to operate and where execution, operational excellence and the culture of retail is very important.
So I feel very privileged because I have seen all these realities always on the side of the industry. And before anything else, I'd like to thank you for your receptiveness, the receptiveness of -- of the [ kudos ] family and the Alvis family and particularly you, Mario, the way you receive me and the way you showed the company and the way we are carrying out my own board has been crucial for me to fill at home. So I feel free to look around and understand the moment that the company is going through and free to talk to the team about our future. When you hear the history of the company that was created in May 1981 by this visionary [ Dos Mar ]. We see that clearly, this exponential growth, this expansion that the company showed over the years conquering Brazil from 1981 to 2015.
This was marked by this vision, by the courage, by the strength and the energy of the [ Dos Mar ] and by the establishment of the company's culture. Then your office Mario, your administration Mario, was marked by points that are really striking such as the investment in GA, so how it helped in this journey, the IPO and the acquisition of Extrafarma. And also, I'd like to give a special highlight to the COVID pandemic because this is what humans are like, right? Because we love our pain, sometimes we forget about the past, right? And I remember I was living in Italy in my house was 40 kilometers from di Bergamo, which was the peak of the pandemic, the epicenter that pandemic in Italy. And we were tested in our humanity and the corporate resilience was also tested during that period.
So I have a lot of respect for Mario's management to pandemic. And I have a very clear focus on execution. I'm passionate about people, passionate about customer service, execution, operational excellence, and I don't believe in retail that works without that. And I've heard a lot of feedback. I think back is always a gift. It's I'm going to explain some of my journey until here, and the review of the strategic plan focusing on our capabilities.
So what are our capabilities? The systems, the processes that we have today and what we need to have in order to become a company that is a [indiscernible] rated winner. Next page, so let me explain to you this process. So I've always worked with a project of 90 days, not 100 days. This is a more cytologic not chronological. They are more about focusing on the quality of time. So the first 45 days about connecting and listening. So I listen to the people and their stores without trying to change the roots of anyone. So listening and connecting, understanding the culture, knowing the stakeholders with very deep interviews and understanding the capabilities of the company with the purpose of awakening and energizing the company at that side.
Then the 45 to 70 days will deepen this analysis, look for behavior patterns, look for a number of patterns. We have a lot of data. This is a very interesting part of retail. We have more than 21 million active customers. So we have the great possibility of looking at the data. We have data in our stores and looking at behavior patterns and can guide our strategic plan and also capture some quick wins, some low-hanging fruit. We are focused on our expenses. We're also reviewing the 2024 budget, which had already been approved, but we are reviewing it now. And I can tell you that we have opportunities, and the objective here is to raise awareness and engage the company for this new moment. 70 to 90 days, we will better structure a work plan, deepen our analysis, finish the diagnosis and evolve to come engage the company in our future pathway with the purpose of continuing to engage and continue to communicate.
One of the things that -- one of the most important assets in my career and with my mistakes, was that we have to keep the team together. The team has to work together. [indiscernible] used to say that it's not about what we say, it's about what others hear. So communication will always be key for us. On the next page, we'll give us some color and show you some pictures of the events that I had a chance to take part in the visits in the industry. And about this energy and what we see because retail, we have simple people in extraordinary missions.
The fact that product is produced in Denmark, and then it travels to Sao Paulo. And when it comes to our DC and Fortaleza and then it goes to our store and then it reaches the hands of a consumer patient at the right quality in the right time is an extraordinary mission. But we are simple people with extraordinary missions. So on the next page, I'll show you what I call listening, learning and feeling. So I traveled a lot in the past days, a lot of work, a lot of traveling, a lot of listening so more than 10,000 kilometers that I flew or drove 9 states, more than 200 stores, our stores and the competitor stores, 3 DCs Para, Maranhão, Ceará, 3 internal events of the company, the pharmaceutical forum, which helped me realize that we are an ever-changing company with mobility in its social architecture.
Most of our pharmacists were graduated with a scholarship offered by the company. And this is so strong. This is so powerful. We are the second largest chain in Brazil and where we offer the greatest opportunities due to the quality of the people we have here due to this change in the social architecture. And these structured conversations happened with more than 50 customers, more than 200 people when I say structured conversation, they last more than 1 hour, 11 CEOs were visited, came here to Fortaleza to our headquarters and were also visited in Sao Paulo with a clear work plan for listening to investors, our members.
On the next slide, I talked specifically about the continuity of some of the priorities that we have been working on, and we will continue to work on 2024 efficiency, integration and reducing our leverage. About operational excellence, I've been talking about this. This is my obsession. I can't use another word. It's my obsession to have world-class customer service and perfect execution. So a greater focus on execution and customer service, same-store sales because this is vital for retail to brew and more austerity in our expenses. About the extra farm integration, I am 100% committed since they want to capture the synergies, to continue capturing the synergies that Novais explained to you.
Also, the convergence of our operational standard of Extrafarma in Pague Menos with the rollout of the banners, ensuring that the conversion of the banners is successful in that we have a hypercare to know how this is being deployed and in deleveraging the optimization of our investments and reduction in our financial expenses. If you look at what we just published, we had BRL 470 million in EBITDA and BRL 445 million were consumed with financial expenses. So this is a vital point for us to be able to deleverage and so that we can invest in a more strategic way. And monetization of strategic credits, as you know we have an expressive amount of them, and we're working to accelerate that.
So this is what I wanted to share with you today, and now we can open for questions. And I'll also make some final remarks. So I'll turn it back to you, Novais.
We will now open the floor for questions.
[Operator Instructions]
The first question is from Ruben Couto, Santander.
Can you tell us more about your expected gross margin for 2024, considering the readjustment expectations for the year, also the increase in the ICMS and PIS, COFINS. A lot of moving parts. So can you give us some more information about what you're expecting for 2024 and how you're coping with all that?
Ruben. Thank you for your questions. I will ask Novais to help me with the answers. What I can tell you is that the ICMS increase was transferred to the price immediately. The prospects for the margin, we believe that it should be about 4%, 4.2%, so very similar to last year. There will be no major mismatch like we saw from 2022 to 2023. And Novais can answer your third question.
So Ruben, the gross margin will be one of the levers for us to grow our EBITDA margin in 2024. We are working towards neutralizing the pricing fees should be 4.5% for drugs, similar to that of last year. But the ICMS increase is that we made in the start of the year. We're like a pre price increase in the start of the year. So this should also help with our margin, and we also have other levers that we're working on.
The generics category is one that has been growing and also contributes to improve our margin. Our private label is -- also has been giving us some great news in the past few quarters in Extrafarma. We already have a private label share that is greater than that of Pague Menos. We are at 7.1%. So we're working in all these fronts with all these levers. And since Jonas worked for 25 years with the industry has a strong relationship with the industry -- the pharma industry as a whole, in these first days as is already working closely with these 11 companies, and we'll also be doing this with other pharma industries to generate promotions and campaigns to generate sales and margin, so very positive. The first quarter is always a tighter quarter, but our projection will -- is to have better margins compared to the same period last year.
And about the -- I think Ruben was asking specifically about the ICMS readjustment that we had in some of the states in the start of the year, but I can also talk about submission. Submission for us is all [indiscernible]. This is what protects us right now. There's 0 impact of the submission effect right now and also the PIS, COFINS effect, which was an advance of the rules that took place in the end of last year. So we're also looking for protections to rule out PIS and COFINS over subventions if that was your question. Otherwise, we can answer what we can provide you with more information later.
No, that was exactly what I wanted to hear.
The next question is from [indiscernible].
Just a follow-up. There was an impact of the Extrafarma inventory this quarter. Is this something we will continue to see? Or is this just a one-off event that we shouldn't see in the future. So I want to understand what will happen with the Extrafarma stock. Jonas said it, he is now undertaking a deeper analysis. So I want to know what he saw that's different from what I was expecting in terms of positive points in the company that could be helpful in this first year of his administration.
Let me start with your first question, and then Novais can add. Like we said, we already saw an impact in 2023 of the unbalanced inventory of Extrafarma. But in 2024, we will continue to see some impact of that because we made all those investments in stocks. We knew we had this opportunity in Extrafarma and the stocks take about 2 years to equalize, and the shelf life is about 2 years for those that were not -- for the items that were not sold. So we will still see some pressure in terms of stock losses for Extrafarma in 2024. I don't believe it will be as relevant as they were in 2023, but we will still be seeing an impact of that. I have nothing to add. You can continue, Jonas.
I want to start with the purpose. So what makes someone who's living in Australia come to Ceará to live in Fortaleza. I think what really convinced me to come was the mission to perpetuate this company to continue this work that was to smartstream. And working in a company like Bayer for more than 12 years, a company that is 160 years old, you see the beauty of repatriation. So this was the purpose that brought me here because all privilege brings also a lot of responsibilities. So I'm trying to pay back and come back to Brazil in a very unique moment and a moment of a lot of optimism. So what I thought that makes me very positive is the people. And I first and second week I didn't look at numbers. I had discussion groups at all the levels of the organization for at least 1 hour with the people in the room. And what was really striking to me was the psychological safety. I'm a specialist, and I love this area leadership and working with people.
So I saw this psychological safety and the people in the company talking about what's good here and what can improve. So this saves me a lot of time. and mobility in the social architecture, I think this is extremely powerful. We work in a country where we know in quality is very high. We live in a developing country. So seeing a company that with company -- people that have been working for 25, 30 years in the same company and have really adopted the company's culture is something that really make me happy.
Another thing is that we have efficiencies to capture, and this is very clear. So there's a lot of opportunities that are quick wins. Let me give you an example. And I'm being 100% transparent here. For example, the non-sellable you have, for example, expired products. Due to a systems-related issue or negotiations, we had difficulty receiving for them, and when we go to the industry, and I know about the industry, what the industry wants is that compliance is the right and they want to be bulletproof for the audit cost. But if you show them what happen, if you show them the documents, you can recover those amounts. And this is something that I am working on.
Also the diligence in our expenses, the austerity in our expenses. There's a paradigm that approved budget. Since it is approved, we can spend the money, but this is not my culture. I'm focused on expenses and costs. I don't like discussing costs. I like discussing value. So I saw a lot of bright spots that we have already started working on. We have a meeting with a team of directors and executives and by VPs to list the priorities. So we're working in the short term and focusing on the strategic discussion of what Pague Menos is and what it isn't, what we are and what we aren't because only by having a clear understanding of where we are and what we need to do, can we analyze the external scenario, the external conjuncture. It's a very striving market, but still very fragmented.
So that we can be very clear about the strategic positioning, how we have to work and what are the levers for the next coming months. I hope to have answered your question, but I'm very positive, very optimistic. And right after this call, we will be flying to the Midwest and the South because it is essential to talk to the people and to listen to the people when we will continue to do that.
The next question is from Clara Lustosa, Itaú BBA.
Good morning. Thank you for answering our questions. I have a quick follow-up about your gross margin, but you've answered a lot of my questions. but I want to further explore the point about your digital channels. I know it's an important driver. And in the short term, it makes a negative impact on your gross margin. So I want to understand how you will be conducting this in 2024, considering the effects that you talked about in your other answers. And if you can share your main initiatives to improve the profitability of this channel.
And my second question, a financial question about the recognition of your fiscal losses. You had -- you talked about this. About the adjustments that you made in your results. But if you can give us more color about the -- is it at the operational improvement in Extrafarma that is already generating profit. And then you can think of horizon to use these? Or you still have enough balance stock. And as you work on the operational part, you could still recognize this future. So can you share more with us about this?
Let me start with your first one. So about the impact of digital on our gross margin. Digital is a very important channel for us. It's a very competitive channel. But as for the margin, I think it's more about the mix. the product mix sold on digital are products that have a lower margin. We have been working on competitiveness we were very aggressive in a recent past to gain share on our digital channels. We have been improving the quality of the services provided, the navigability of our digital channels so that we didn't have to have price as our only differentiator. But we continue to be very competitive in prices.
Well, we have been making some adjustments to improve the profitability of our digital channels but particularly with expenses to be as aggressive as possible and to continue to be as aggressive as possible in our digital channels, particularly the app and the website. We are projecting a very robust growth of our digital channel with a gain of share in the total sales of the company. We're working today about 14% Extrafarma has been growing. It went from less than 3% share. And today, it's over 10% and Pague Menos is over 14%, and we believe that there will still be some pressure, but it's more related with the mix of product that is being sold online. And about the fiscal losses, [ ex ] losses. I'll let this one for Novais -- I'll leave this one for Novais.
Yes. Let me give you some more information about this first part of the answer. Based on the IQVIA data, we are one of the chains that's gaining more participation, that's gaining more share on digital in Brazil, and our team was able to improve the EBITDA margin of digital channels in quarter 4 versus the previous quarters in about 1 percentage point. So we're gaining share, and at the same time, we're gaining profitability. The 2 banners. So the company as a whole has the RA 1000 stamp, so the quality of service as measured by reclamate is considered really good. We have 86% of our deliveries in less than 2 hours.
So the operational efficiency of our channels is really good. As you heard from Mario, it is a strategic lever for us to continue to gain share in the market, but of course, it puts some pressure on the gross margin. But for the EBITDA margin, this is very positive. It contributes greatly and it brings us new customers. So the team is working to continue to improve the profitability and the share of the digital channels. And about the tax losses, it's about what you said.
Extrafarma, while it was administrated by the Ultra Group, it had a large stock of losses coming from previous years. And since in quarter 4 2023, we were already able to deliver some net income for the company. And we are only with 1 year, 1.5 year of capturing synergies, and we should finish 2024 at a level of EBITDA and net profit that is much more positive. Our projection for future results is good, very good. And consequently, there was no reason not to record the deferred income tax over the losses of previous years.
So we considered all this is nonrecurring because these are losses from previous years and not the current year. We don't have any more stocks to be -- we already reconstituted everything that was recorded as losses in previous years, and we will be realizing this deferred income tax as the profitability advances and as demonstrated, the evolution in 2023 was very positive. And in 2024, we're expecting a very positive evolution as well. I hope to have answered your question.
I just have one final addition from the strategic standpoint, omnichannel is the strategy for the future. And what we want to reach -- we want to be consistent in our investments, particularly for the app and digital as all because we want to be sure that we are future proof. That's what I wanted to add.
The next question is from [indiscernible].
We have 2 questions. Just looking at the short term, we have seen the cases of dengue and COVID increasing again in the past few months. So we want to understand what is the impact in your sales -- on your sales and profitability in quarter 1? And also what is the performance gap between the regions that you mentioned in your results? Should this gap remain in the first months of the year? And what is impacting this gap in the different regions?
And I have another question about the gross margin of Extrafarma. You said that you expect this gross margin to stay above that of Pague Menos but does it make sense to think of a reduction to encourage more sales or a change in the mix.
Yes, you're right. The dengue outbreak is impacting our sales. The sales in quarter 1 are above expected, particularly in February. We have seen record numbers in the sales of tests and vaccines, the few vaccines that we were able to offer. We've sold them really quick and record-breaking sales when -- and this has been a focus for our health hubs. Also, the stronger winter season is bringing more people -- brings more people to the drugstores. So this also has an impact in the traffic particularly related with the dengue outbreak. Novais and Jonas you can add if you want.
And your third question about the Extrafarma gross margin. I think this has more to do with geography. In the states where Extrafarma is present, we have a better performance. And when we look at Pague Menos in the -- when the states where Extrafarma is strong. We also have a better margin. But when we look at Pague Menos in the entire country, then the gross margin is lower. But yes, we're always paying attention to the opportunities to faster sales, but as you heard during our presentation, it's more about geography than competitiveness of Extrafarma. That's why we think that we will see levels higher than that of Pague Menos and about the gap between the regions, Novais, do you want to answer that one?
If I understand your question right, the difference between the regions was not that marked in the beginning of this year because in quarter 1, 2023, I think the comparison basis was weaker for everyone. But we saw an important improvement in quarter 1 this year compared with quarter 1 last year and less of a difference between the regions. So to add to what Mario said about the Dengue and COVID outbreaks, just 1 piece of information. The bug repellant category grew by 20% in January and February this year compared to last year. So yes, this outbreak has been bringing some incremental sales due to the level of contamination.
And about the Extrafarma margin. Fortunately, we have been able to foster sales in Extrafarma without touching the margin. We already did all the changes to the margin we did during the first year of integration. So all the CRM work that we did to reattract customers and to boost the banner are helping us now faster sales without us having to hurt our margins. And as you can see, our results is has seized a pressure in terms of margin, but we intend to maintain the margins and if possible, even improve it, so that we can reach a level of EBITDA that is more adequate in the midterm and much better than what we have today. and at the same time, maintaining the performance of our gross margin. That's it, I don't know if Jonas has anything to add.
I just want to say that we are a people company. We are made by people. We take care of people. So let's highlight the importance of [indiscernible]. We immediately came into contact with [ Takeda ]. We are now in contact with [ Takeda ] to make the second dose available to consumers that took the first shot with us. So the role of the health hub of having clinic pharma and our role of being close to the population during the periods of crisis, ensuring that communication is good and that we're taking care of the people. I think this is something that is essential for us, and this is part of the context of your questions, and this is part of the DNA of the company.
This question-and-answer session is now closed. Now I would like to turn the conference to Mr. Jonas Marques for his final remarks.
Thank you. First of all, I'd like to thank you all for attending our video conference today. And I want to tell you that feedback for being is always gift I think the main outcome of all these sessions, these conversations I am having with people and traveling around Brazil and talking to people is hearing about what is making us invest or not invest in our company. So we will do the home work we need to do. And if I listen to you and I make an intersection of everything I hear, some of this feedback is really harsh. And this is also part of it. This is part of the relationship that we want to build this long-term relationship that we want to build with you.
Transparency is crucial. So I can assure you that we will have full transparency. If you have good results, we'll announce the good results. If we don't have good results, we will not cover for it. We will show you what it is. And I think the clarity and transparency are initial and also numbers follow behaviors. And another thing that I heard from all of you is about our capacity to deliver. We need to deliver on our promises.
The first quarter, second quarter, third quarter, fourth quarter. It's not about coincidence. It's not by hazard. And I also want to talk a little bit about the future. I know I'm taking on some risk here by talking about the future. But what we want is we are what we deliver. We are what we deliver to all our customers in all our stores every day. This is really challenging when we think that we have nearly 1,700 stores and 26,000 people. But I truly believe that energy can transform.
And this is the energy that we want to re sparkle in our company because we are passionate about people, about taking care of people, about having a fair society, a fair country, and this is my commitment as a leader, the leader that I'll strive to be because I'm CEO of my family, I'm CEO of the company, but if I'm a true leader or not, this will depend on how I behave if I'm elected by you as a leader.
And I will finish this call now, and we are right after this call, we'll fly to the Midwest, and we'll talk to the CEOs of other companies, we'll talk to the leaders of our stores to really listen to people to improve the service to our customers because we can't improve the service to our customers if we don't improve what we do for our team. We have to listen to our team, to our people. We have to inspire people so that they can enchant our customers. So what I want to tell you is that it's been a pleasure to be here today with you. We also see you again in 3 months, and we hope to bring you even better news -- ever better news and please keep sending us your opinions, your feedback, feedback is always good. It's always a gift, and we want to work in close proximity with all of you. Have a great day.
Pague Menos conference call is now closed. Thank you all for attending, and have a great day.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]