Raia Drogasil SA

BOVESPA:RADL3

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, we'd like to welcome everyone to the RD People, Health and Well-being Conference Call to discuss its 1Q '23 results. The presentation can be found on RD's Investor Relations website, ir.rd.com.br, where the audio for this conference will later be made available. [Operator Instructions] After the company's remarks are over, there will be a Q&A session.

Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of RD's management and on information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events, and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of RD and could cause results to differ materially from those expressed in such forward-looking statements.

Today with us are Mr. Eugênio De Zagottis, IR and Business Development Vice President; and Flavio De Morais Correia, Director of IR and Corporate Affairs. Now I'll turn the conference over to Mr. Eugênio De Zagottis. Sir, you may begin your presentation.

[Eugenio De Zagottis, executive]

Hello, everybody. Welcome to the Raia Drogasil First Quarter '23 Conference Call. And I mean I would like to start by saying that this was another very strong quarter by the company. I think we are coming from a very strong year, which was 2022, a year in which we were able to expand margins to get back to the same EBITDA margin we had 4 years before when we started the digital transformation but with a much higher contribution margin, stock contribution margin and also a higher G&A because of the investments in structure, IT, et cetera, that we did. We continue this trajectory of this first quarter, posting very significant margin expansion, very robust top line growth.

This is a quarter, in my view, that underscores the defensiveness of our business. The fact that we are a business that feeds from the aging of the population, Brazilian senior population is growing 4% per year every year. We'll keep doing so for many, many years. We don't depend on GDP. We don't depend on consumer income. We don't depend on financing demand and things like that. So we are at an industry that keeps posting very good growth. And the fact that we have such a strong balance sheet allows us to maintain our operations, to maintain our expansion, absolutely untaxed while also leveraging the opportunities that the crisis brings from the fact that less capitalized players are suffering in terms of execution, are unable to maintain the growth. They have to cut costs, cut investments. And so this generates a ton of opportunities, and we're taking advantage of that.

So we ended the quarter with 2,746 stores in operation. We opened 55 stores and closed 6 stores in the quarter. We posted BRL 8.5 billion in revenues, 21.6% consolidated growth with mature stores doing 12.6%. Here, it's important to mention that 4Bio has posted 60% top line growth in the quarter, amazing performance, and this affects our numbers. It accelerates our top line growth in a very significant way, something like 2.5, 2.4 percentage points, but it also pressures our consolidated margins because 4Bio has a lower structural margin than [indiscernible] even though we have very sound return on invested capital, but as a specialty business, it has a different margin profile. So it helped a lot on the top line growth here, but it has an effect on the consolidated margin. I'll go there.

Market share in the quarter, 15.3%, 1.3 percentage point increase on a national basis, gain in every single region in a very meaningful way. Digital reached BRL 1.1 billion in revenues, 63% growth over a comp base that was already very strong in terms of digital penetration. And after a quarter of stable digital penetration, it's growing again now to 13.7%. So this is a very material figure. Contribution margin of 10%, 90 bps expansion versus last year, 35% of growth and an adjusted EBITDA of BRL 562 million, 45% growth with a consolidated margin of 6.6%. So the consolidated margin went up by 90 bps, but the retail margin went up to by 1.4 percentage points.

If we look only retail without 4Bio , we are talking an EBITDA margin close to 7% in a quarter in which seasonally, we have less sales because we have a short month in February. We have vacation in January. So first quarter is always a quarter of seasonally lower margin. And still, our retail margin is very close to 7%. And the consolidated margin was 6.6%, posting a very strong gain. Adjusted net income, BRL 204 million, 40% increase, 2.4 percentage point margin and free cash flow versus 4Q, which is always the best seasonal quarter for cash flow, minus BRL 42 million in free cash flow, minus BRL 98 million in total cash consumption.

Here, talking about our pharmacy count, we ended the quarter, as I mentioned, 2007, 46 quarters. We have opened in the quarter, 55 stores and closed 6. Of the 6 closures, 5 have been of mature stores. So this is like optimization of the store portfolio. And one closure is of a maturity store. So this is a correction of expansion mistake. If we look last 12 months, 47 closures. We're talking 263 openings. So we are fully aligned with the guidance that we are providing. Stock portfolio, 73% mature stores, 27% mature in stores, and we maintain this guidance of 260 stores per year from 2023 to 2025. We already performed at this level. This means 780 additional pharmacies over 3 years. But we are maintaining this broad geographic and demographic diversification. And we have a historical assertiveness of 98%, meaning maturing stores closed with a correction of expansion mistakes, account no more than 2% of the total openings every year. So this point of the quality of the growth we are doing.

Here, we see our geographic presence. We are presence all over Brazil. We have reached the milestone of more than 400 stores in the Northeast area. So this is a market where we have a very strong presence in all markets. We became the reference player in several main cities like Salvador and Recife, for example. So this is an amazing operation. We have also an enlisted leadership here in the Midwest region. We did it in all 4 states. And we just opened a new DC in the state of Mato Grosso to better service the area. We're opening 2 new DCs till this year, one in Para to serve these markets here. And then we are opening a small DC, which will be like an inventory buffer in Manaus. Manaus in the middle of the Amazon, it's very difficult to deliver by truck. We currently have air delivery, which is very expensive. The only land route is through to this side. So because of a very long lead time that this will take to do by truck, we'll have a local DC with an inventory buffer supplying the stores on a daily basis. but we'll be able to lower our shipment costs by leveraging this is as well.

Finally, market share, we reached 15.3% of national market share, 130 bps gain, very strong gain with gain in every market, Sao Paulo, getting close to 27%, Southeast 10.8%, Midwest, 18.6%, 200 bps increase here, South 9.9%, Northeast 10.8%, north 8.2%.So very strong performance all across the board. I think the main point here is when you think about our national expansion, we are swimming on the blue ocean because our brand is positioned all over Brazil. We grow in every single zip code of the country with the same margin and return expectation. And this is what allows us to have such a distinguished expansion versus everybody else.

Our competitors, they have a Blue Lake somewhere in the country, which is their native market, but the rest of the country is a bloody red ocean in which either they don't access or they do it very poorly because of very high entry bear. Our brand is already a national brand, and our growth is no boundaries these days. And the growth diversification gets clear in this picture. We are now present in 549 different cities in Brazil. We entered 48 new cities over the last 12 months. Sao Paulo, which is our native market, accounts for only 22% of our recent expansion, last 12 months expansion and only 42% of our store base.

Obviously, we are still over indexed in Sao Paulo. Sao Paulo generally represents something like 27% of the Brazil market, but not nearly as overindexed as we once were. Nowadays, it's 42 Sao Paulo, 58 other states. And this share will keep growing towards the other states here because we'll keep maintaining figures around 20% of growth in Sao Paulo. So the fact that we're able to expand margins with 80% of growth outside of our core regions shows the robustness of the national growth platform that we have defected, this is indeed a blue ocean.

And finally, when you look demographically, it's a similar effect. We have only 15% of upscale stores being opened. Only 39% of total upscale stores in our overall portfolio, 61%, they are either hybrid or popular. So they service the emerging middle class. And still, despite this huge diversification, demographic, geographic, new cities. And this is also very interesting here. There are 316 cities in Brazil with 10,000 to 100,000 habitants and more. We are already in 301 of those, obviously, including not only farmers and operations, but also locations that are in the process of being open. But still, this shows the level of horizontality we have built in this market. And regardless where we go, which economic class we serve, which geographies we serve, which city size, the returns are always kind of the same. And this is absolutely unique for Raia Drogasil market.

Talking about revenues, BRL 8.5 billion here, 21.6% of consolidated growth 4Bio helping by 2.4 percentage points. So retail is doing 19.2%, which is very healthy. And finally, when you look at the mix, the only news here is OTC because we are comping against the covid surge that happened, the Omicron specifically surge that happened in the 1Q '22 year. So we have a very tough comp base for OTC. And as a result, OTC is growing only 8.6%. But then the flip side, HPC growing a stager 26%. Here, there's a very interesting thing, which is the fact that despite the fact that, okay, all the defensiveness drivers that I mentioned, they relate to the pharmacy because the traffic in the stores is pharmacy-led, it applies to HPC as well because we are serving -- we have a lot of A class, B class steel, even HPC has shown to be very resilient. We're talking mostly target risk, some skin care, even skin care we do really well.

So 26% is an amazing number. And then we see both Brand and generics above 20%. It's also very healthy. And obviously, we're talking 21.6% consolidated growth with 14.8% same-store sales growth. This is retail only. There's no 4Bio and likewise, mature stores growing 12.6%, retail only, and this is way above inflation. We're talking almost 800 bps above CPI and 1.7 percentage points above the cement price increase. Obviously, here, the cement price increase helps a lot because we are still serving the 11% price increase. Next quarter, we will see a new price increase, which is 5.6%. Obviously, when you compare to the second quarter compares to be tougher, but we still expect to keep posting mature stores growth ahead of inflation and generating operating leverage at the mature stores and increasing our contribution margin. So this is something that we expect to see on a sustainable basis and even in the second quarter.

The #1 asset for the company is our customers. and this is very clear for us. We have 41 million active customers within the year. And 6 of these is what we call frequent customers. This is a classification in terms of spending, frequency, et cetera. These are the top customers of the company. So there are 6 million out of 48 million total customers. For us, the main strategy to delight our customers, to maintain the engagement of the loyalty of the customer is obviously the experience we provide. We provide the unique experience at the stores with a Net Promoter Score of 90, this is unmatched in the Brazilian retailing. And I know it's a benchmark on even on a global basis.

And here, we see the digital NPS, which is broken on 2 parts: evaluation of delivery and collection services in which we are at 81%, growing very steadily here and the valuation of our app is at 64% but this is still not where we want to be, but we have gone a long way to start here in the 30s and 40s, not that long ago. So this is progressing very well. There are a lot of advancements in our execution. Flavio will talk about them more towards the end of the presentation. Obviously, our aspiration is 90%. We have to admit, it took more than a century for us to get to the 90%. But even if we don't get that easily to the 90%, we want to be very quick at north of 70% at some point, north of 80% with our app NPS as well.

And finally, we talk a lot about digitalization. The main message here is that digitalization is not the end of the company. It's a mean to enhance. Digitalization exists as a leverage for higher loyalty and better experience of the customer. So out of the 6 million frequent customers, 1.4 million, they are both frequent and already digitalized customers. We're talking 25% of the total base. Over 100 years, our job has been turning casual customers into loyal customers. Casual customers buy 5x a year on average, a loyal customer buys 21x a year. Over recent years, we have found this new value lever, which is digitalization. So we are coming our frequent customer who's a digital buy at 21x.

A digitalized loyal customer buys 26x, 23% more frequently. So this is why digital matters because digital in the end of the day is a way to make the customer more loyal and spend more with us and engage more with us. That's why the growth of digital channels is so important, and it's been performing really well here. When we grow -- we see digital channel penetration after a stable quarter at 11.8%, we had another jump to 13.7%. We're talking 63% growth over a very meaningful Hong Kong-based here. So this is doing really well.

Our digital profile is completely different from anyone else. 91% of our digital sales come from channels that are both modern and proprietary, 80% which is mobile and 60% of which is our apps. So our app accounts for 60% of digital sales. This is a very important number, and I'll explain why. When you look at channels that are either not modern or not proprietary, we are talking about superapps, which is certainly modern, but it's not proprietary. Superapps has a very efficient delivery, very fast delivery, great app experience. But as our app experience improves and as our speed of delivery increases, we start to compete more effectively with superapps to try to keep the consumer within the reach of our channels.

We see that Click-and-Collect is 61%, but now we are delivering up to 2 hours 18% of the transaction. So this is amazing. And as we do this better and better, the customer will migrate from this 8%, probably here. So either we grow and maintain this percentage or even it can decline as we get more and more of customer share here. The reason the app is so important, you can see here, even a digitalized customer when you compare digitalized customer that buys only on the website versus the digitalized customer that buys primarily on the app, but it's also an omnichannel customer. We are talking 21 annual purchases versus 10 annual purchases.

This has changed our strategy. We were in the past doing a lot of digital marketing, but then we learned that the customer we get from digital marketing mediums like Google, Meta, et cetera, ends up being a customer that is very opportunistic, very price driven and not as loyal customers. So we are deemphasizing a lot the search for this kind of customer and focusing on this kind of customer. The customer who buys 21 times a year, not 10, whose service oriented and not only price-oriented. And even when you compare frequent to frequent, the frequent customer who is app-driven and omnichannel buys 28 times a year versus 17 from a frequent customer who only uses digital frequent who only uses the website. So this is why the penetration is so important. This is why we emphasized it so much. And here, we have a level of penetration that no other competitor has or even publishes their data for us to be sure about.

When you talk about gross margin here, shifting gears, we had 27.4% gross margin, 30 bps pressure because of the 4Bio mix effect. 4Bio has a lower gross margin, is growing 60%. So it pressures the overall margins by 30 bps here. And we have a very good cash cycle here in the quarter. Second quarter is generally a peak quarter for our cycle because of the forward buying before the price increase. But this time, we were able to do really well before our buying to negotiate better the terms to focus more on generics that had structured longer payment terms. So we have a very similar cash cycle in the heaviest quarter than the one we have in the best quarter of the year, which is the fourth quarter.

So this is, for me, a very good figure here. We're very proud of this. Talking about selling expenses. Sale expenses have been driven by real growth in mature stores. We generate a ton of operating leverage. So sales expenses go down from 18.6% last year to 17.4% this year. Obviously, when you look -- when you compare on a sequential basis, first quarter is a more challenging quarter because of less sales because of January being a vacation month and February having a small calendar. But still, we have a similar dilution to previous quarters, even though they were normal seasonality. And here, this is a more difficult seasonality. It shows the progress we're doing on selling expenses. And this is driving contribution margin growth of 90 bps, 10%, [ BRL 850 million ] in the quarter.

G&A, this is another highlight of the quarter. After a sequence of many quarters with G&A growth, we started diluting our G&A, very meaningful on a sequential basis, 30 bps improvement over the fourth quarter. Again, the fact that this is a seasonally -- this has a weaker calendar, means even more because we are diluting same expenses by a lower sales base. So it should even be slightly better than this. Significant sequential improvement, but an improvement also over the same quarter last year. And I think this is the beginning of a trend. We expect to see the G&A being diluted this year already. And this is showing we are in the right direction. And finally, 100 bps EBITDA expansion, 6.6% of EBITDA. If we looked only at retail, our EBITDA is 6.9%, 140 bps improvement over last year. So obviously, over lower sales volume because 4Bio pressures the margins on the mix side, but it helps a lot on the top line as well. So in the end, we're very happy that both things are happening. The development of retailing and the evolution of 4Bio as well.

Finally, net income of 2.4%, BRL 204 million. We have here a one-off that is included in this figure, which is booked on financial expenses, and it's related to the outstanding options on some of our investees. What happens is when we buy -- when you have control of a company, if there is a call or a put option over the remaining share of that company, the way we account is we consolidate 100% of the start-up, but then we booked the outstanding payment for the minority equity as a liability. And we do periodical revaluations. And because 4Bio is flying and is delivering much better performance than what we had forecasted, we have a correction of that amount payable. So these is accounted as a financial expense, it means 40 bps here. So everything else constant, we would have 2.8% of net margin in the quarter. And finally, we have some onetime gains here that are also excluded in the which are BRL 4 million that are related to previous years, especially tax effects here.

Cash flow. We have a free cash flow consumption of BRL 42 million, a total cash flow consumption of BRL 99 million. We are comparing this to the fourth quarter, which is always the best quarter in terms of cash utilization. So any quarter in the year that we compare to the fourth quarter gets penalized. We are not comparing fourth versus first year. But still, I think we did so well on the cash cycle side, that the free cash flow pressure is very modest here. And finally, we maintained stable net debt to EBITDA of 0.9%, sequentially stable, slightly better than some point last year. And this stability is very important because in a market with high interest rates, tightening credit, this leverage means we can maintain our growth program and touch that we invest our IT investment and tax and the number of people in the stores have touched our prices and touch, et cetera, et cetera, et cetera.

And we take the opportunity to grab shares from those companies who are overleveraged and we will have to cut investments, expansion, increase prices, reduce overhead -- reduce people at the stores, reduce inventory availability to clients, et cetera, et cetera, et cetera. So we see this crisis as a big opportunity. And finally, before passing to Flavio, we saw in the quarter a share appreciation of 3%, 10 percentage points above the IBOVESPA. And obviously, when you look at the total shareholder return since the higher drug IPOs, I mean, it only shows that we have an amazing capacity to compound returns. So I'll now pass to Flavio to summarize on some of the points here.

[Flavio Correia, executive]

So thank you, Eugênio, and Hi, everyone. So as you could see, our market and financial performance is decoupled from the industry. Our growth remain accelerated with a 21% growth on the whole company and mature stores growing 12.6%, which is 7.9 percentage points above inflation, okay? Market share reached 15.3%, which is an increase of 1.3 percentage points considering last year, and we opened 55 new pharmacies on the quarter, which means 263 pharmacies on the last 12 months with IRR consistently above 20% for all these vintages of stores.

And NPS still above or in line with this 90 index on the physical stores, okay? So we also have a very solid profitability performance with EBITDA margin of 6.6%, which is an increase of 100 basis points considering last period. G&A went down 0.1 percentage point, which is a sequential gain of 0.3 percentage points. So this is a very good improvement we have been doing here in the company. And our financial leverage is of 0.9x EBITDA. So it's a very stable and healthy leverage for the company.

So last comment here, considering our capital structure, we had this capital increase of BRL 1.5 billion this year, with a 4% bonus share issuance for the shareholders, okay? And all this -- the important message here is that all these KPIs or almost all these KPIs are related to the digital transformation we have been doing in the company for the past 4 years now, 5 years now. So since 2018. So those are seeds we planted 4, 5 years ago that were expected to come to life as it is coming now. So we can see that this digital transformation is helping us on gains with efficiency, leveraging the customer experience in our apps and the profitability on our digital channels, okay?

So the goals we defined in 2018, 2019, coupled with our proficiency in releasing more and more developments on our digital activity, which increased in ninefold on the last 2 years, so helped us increase a lot of the profitability of our digital activity. So think of these KPIs here, which are gross margin, marketing expenses or less Mioexpenses, logistic expenses, think of these KPIs as the nightmares of any e-commerce business here in Brazil. So we were able to capture in this year, a 1.5 percentage point increase in gross margin and on the -- sorry, on the last 2 years, not only 1 year. And also in the last 2 years, we were able to decrease expenses in marketing and logistics from 7% of our sales to 3.3% over sales. So this is again considering these 3 lines of roughly 5 percentage points only in our digital activity, okay?

So other impacts on this digital activity are related to digitalized frequent customers as Eugênio was mentioning before. So now our digital customers already account for 18% of sales in the company because they buy online, but they also buy offline. So this is a good indicator for us of engagement and loyalty and that over sales. And this digitalization keeps increasing and expanding okay? So this e-commerce activity is a healthy and sustainable activity and with a very good contribution margin for the whole company. So another KPI here or initiative is the fast deliveries that are already available in 258 cities.

And if you think only on the metropolis, the fast delivery already accounts for 80% of all the deliveries we are doing in those places. So this is very important. So we also have several back office digital initiatives such as credit analysis and micro services. So those are initiatives that the customer is not seeing, but that is helping the engine here inside the company works better in a faster way, in a more profitable way. And it's improved. So these kind of initiatives is capturing savings and improving also the customer experience. And finally, all these things together were responsible for us increasing our NPS in the app activity to index of 64 and on our deliveries for AT1, okay? And this is for me. Thank you.

[Operator]

[Operator Instructions] And the first question is from Igor Spricigo from UBS.

[Igor Spricigo, analyst]

I actually have 2, if I may. The first one is on the digital front. So in this quarter, the company has reported a considerable increase to almost 14% of penetration following a quarter of stability. So my question is do you think you're reaping the benefits of that? And also where do you think it can go? Are there any international benchmarks that we can look at that would be -- is on the competitive environment? This quarter, you have once again in market share or all regions at a strong pace. Where do you think the book of the share is coming from? Is it coming from the large things or smaller players?

[Eugenio De Zagottis, executive]

Igor, thank you for your questions. I mean, on the digital side, there is nothing different. I mean, I think it's the same execution, continuously improving with a turn of consistency. I mean, if anything is different, maybe is the acceleration of the delivery frequency. This is something that I think advanced a lot in the quarter. I think you can explain. I see this more as a correction because we had stayed flat in the fourth quarter. If you look over the third quarter, it's kind of a linear progression. So there is nothing, nothing too different here. But as we keep executing better, as the productivity ascribes improves the air quality and the experience as the delivery is every time better, I think all these executional elements they keep combining. I think the customer habit is building up. I think the stores keep adding new customers to digital. So I think the file keeps turning and the digital keeps growing. When you talk about benchmark, we have some regions in which we already have more than 20% of digital penetration.

And believe it or not, Sao Paulo is not among the top digital penetrations in the country. We have regions like in the South, Rio de Janeiro, I think even Manipulaê even higher just a penetration than Sao Paulo, even though the one in Sao Paulo is good. I think over time and likewise, there are a lot of markets with lower penetration capitals in the Northeast that we're still in the -- maybe in the low teens or something non-launching sorry, it's probably 7, 8, 9, 10 around that. So I think there will be a catch-up by these less penetrated markets. And I think there will be a sustained increase even if lower on the higher penetration markets. I don't know where this can take us. I believe we have at least this year and next year with a lot of digital growth. Maybe we go to 20%, maybe we go north of that, we will see where it grows.

In terms of market share, I think if you look historically, I think we're gaining more from chains as a whole. If you compare us with the other top 5 chains, there is a very sustained market share growth year after year, the fact that we grow faster than these guys on a combined basis growth that our comps performed better than their comps. So for sure, we are gaining share over the other top 5 players. Even though, I mean, I would say the tougher players are in most of them in good shape and they're healthy, et cetera. But then when you look at change below the top 5 or even below the top 10 position, then there is a lot of pain there, a lot of chains who are highly leveraged, several players who have gone out of -- even gone out of market.

We have a player in Goias to have who is going out of market, trying to do a chapter level, which is not easy. We have a player in the country side of Sao Paulo, the literal part of Sao Paulo, the show part of Sao Paulo that just got out of market. We have another player in a very popular areas of the capital that is also in that state. So I would say that the pain that these -- some of these need to change, they feel is the largest one in the market to the point of some of these guys going out of market. but we gained share over the top players as well. And we gain share over, I think, the independence for sure. And I think we can share also even over the associations. But I would say, outside of us, these associations are probably the player who are doing better.

[Flavio Correia, executive]

Eugênio, let me just contribute with this answer. So starting with the market share, just to keep up with your thoughts. There is a situation here that the more challenging the environment, the best we perform, the better we perform. So considering our company compared to the industry in general, we have a way bigger size than any other competitor, and we are also more profitable than any other competitor. So every time we have this challenging environment, we are able to capture the benefits of other companies that are not performing that well. So this is important for us. We have been capturing market share roughly from 50 to 100 bps every year.

So the more challenging the environment, the more it is close to this 100 bps gain of market share. And also considering the digital participation, Igor, you were asking about. So one thing is to think of this digital -- the digital sales we are doing in the company in this 13.7%, which are already good enough. This brings us to the most digitalized pharma in the accident of the globe on the accident part of the globe at scale, of course. But this is not important. The important message here is the digitalization of the customer. So remember that digital here for us is a business of engaging customers and of turning these customers more frequent and treated better by our company.

So if the participation of digital is 13, 15, 20 or 10 or whatever, the important thing here is to have the customer digitalized, digitalized customer means that these customers has our apps on their pockets or in their hands. So it can relate to these customers every day if we want, not as fast as or faster than the 20x 20-ish times we have with our frequent customers. But here, we can improve a lot this engagement and relationship and everything.

And this enables us to provide them the digitalization of these customers enables us to provide solutions for customers anytime they want everywhere they want and as fast as they want with this very fast, less mile activity. So digitalization here is related more to the customer than to the channel of digitalization. And important thing for us, you saw the numbers of marketing expenditure for digital. So they are very low because this -- our digitalization machine on the company is our store. So our store staff are the one teaching the customers in our app and helping the customers to understand the journey, the digital journey is here. So those are the important movements we are doing in the company.

[Operator]

Our next and final question is from Lucas Dias from Aster Capital.

[Lucas Dias, analyst]

The first one is regarding 4Bio. So the performance of this operation has been standing, right? Very, very impressive, the top line growth. I'd like to understand like what are the drivers behind this? Like why is this happening? Is higher -- is 4Bio view taking advantage of a good competitive scenario or has something changed in the operation? And if you see any changes going forward. So through the remainder of the year in the coming years, if we should expect such incredible growth? Or if there is something specific happening which has changed the level of this operation and now it should stabilize in terms of growth, but now in a new level of size, right? So first 4Bio.

And second, I found very nice the graph you showed on shipping and marketing expenses for the digital operation. I had never seen something like that. And I'd like to understand which other expenses are relevant for these operations? So besides shipping and marketing, which house matters. And I understand why both of these expenses are much lower than in other e-commerce players because you have a lot of capillarity. So logistics shouldn't take much of a tow. And regarding marketing, it's what Flavio just said. So the CAC is mostly the salespeople in the store, pushing the customer to download the app. But I'd like to understand why has it gone down so much in the last couple of years? Is there any explanation for such a dilution? These are the questions.

[Eugenio De Zagottis, executive]

Lucas, thank you for the questions. Let me start with 4Bio, then I'll talk about Dustan. Flavio for sure, we have some complementation is as well. In terms of 4Bio, I think this is a company we bought 8, 9 years ago. And in this period, the company is multiplying the top line by 20x. We're talking 4Bio, it was selling in 2014 or '15 when we bought it. I think we bought in '15, was selling in '14, BRL 120 million in sales. We'll do this year, I don't know, BRL 26 billion, BRL 2.7 billion, BRL 2.8 billion, something like that. So it's a staggering growth. It's not an easy business. This is because 4Bio is a business that it looks like more what an American pharmacy business looks like. It's a business in which there is payers. We sell to companies like SulAmerica, Bradesco, Amir, et cetera.

And we deliver to the customer home, and then we have to monitor the clinical state of the patients because it's an oncological product, mostly the people taking home. So we have to make sure they are due into the treatment. We have to be aware of any side effects toward the physician. So there's a big -- it's a high-touch business. It's a complex business to execute. Our competitors are mostly wholesalers who don't have this service DNA. I think where 4Bio wins is an amazing and very reliable logistics, being able to deliver the products on time. an oncological product cannot get related to the customer and then all this clinical monitoring of the customer. But it's a business with compressed gross margins because we are negotiating with payers. Gross margin over time, they decline. But then the scale has to make our costs go down, and this is what's happening as well. We have seen times in which we have difficult margins. It was not always amazing.

But now I think we are in a moment in which this kind of growth plus some efficiency gains that we had in the business are delivering very healthy margins for 4Bio are delivering ROIC at the high-teen levels. 4Bio is a completely different margin structure versus Hydro gaze. 4Bio has a lower EBITDA margin but 4Bio doesn't have working capital replicated over 2,700 stores. 4Bio doesn't invest every year, the CapEx to open 60 stores hydro as you does. So 4Bio is very efficient in terms of capital deployment. So it's less margin, but less capital invested, but getting to a nice ROIC.

What's happening to deliver this 60% performance, I think part has to do with the execution. We have increased regional bases as 4Bio that you make 4Bio national, this is helping. There are new contracts with important health operators that are coming up. This is also helping us a lot. And then there is a third factor that is related to this credit tightening. We -- especially, we have one competitor who is very large and owned by a private equity company, which is melting down. And obviously, they are losing credit of suppliers, and they are -- we are absorbing a lot of their sales. There are other players as well, but we are serving a lot of their sales. So we are seeing this amazing growth.

I think the revenue we have today is the fully sustainable. But at some point, we'll see a higher comp base. So the 60% in the second semester will decline. I don't know what -- what's looking like in the second quarter. But for sure, in the second semester, I expect to see a growth rate deceleration but because of the companies, not because of giving back what we are getting. So we're very happy with how things are playing out at 4Bio. And obviously, 4Bio, it harms our margins when you look at a consolidated side, but it has a meaningful impact on our consolidated top line as well. So in the end, both businesses are doing brilliantly. We see the retail business with an EBITDA margin close to 7% in the weakest quarter in terms of seasonality. So this is an amazing figure with huge margin expansion. And we see 4Bio with good healthy margins growing like never before and posting amazing growth.

Finally, on the digital side, I think Flavio was very precise to summarize. I mean if you look in the main challenges of a gist operation, and I would generalize here whatever gist operation, not only in pharmacy are: one, maintaining gross margins; 2, customer acquisition costs; and 3, delivery costs. What's happening here in terms of the gross margin is that our service is more and more a convenient service and less and less a price service. We still have a lower gross margin in the digital than in the pharmacies. This is still true. I'm not denying that. But the difference is shrinking up.

Nowadays, we're starting to have regional pricing for digital, which we didn't have in the past. So for example, we have a lot of competition for digital in Sao Paulo that we don't have in several capitals in Brazil, let alone in smaller cities. So with regional digital pricing, we are able to differentiate the prices. We're able to be very competitive and aggressive where we need to be, but we are able to monetize better where we are alone or have much lower competition. So this is what's driving the gross margin to increase over time. When we talk about the delivery expenses for me, the main factor here is Click & Collect. Click & Collect is growing faster than delivery. And delivery is using more and more the store capillarity and getting more efficient. But the main effect is the Click & Collect.

And finally, when you talk about digital, when we understand the economics of a web customer and see that a web customer is a guy who's searching online for prices is very price driven, way less loyal. We decided to invest less and less in terms of open ocean digital marketing, things like Google, Meta, et cetera. So we are cutting on purpose investment to bring customers through these channels and instead, we're focusing more and more and using the store as a customer acquisition machine because the customer who comes through store, the customer who uses the app, we have a much better economics, will be much more loyal. It will be more about convenience and less about prices alone. But in the end of the day, I think what these expenses and this figure show is the barrier of entry that we have here in the market as any player, any pure-play Internet player cannot replicate what we're doing.

First of all, if they rely on price searches, if they rely on digital marketing, digital marketing has to be combined with very low prices. So the first challenge of a pure-play player is the gross margin. To win the customer, the gross margin will be much lower. Second, on top of this lower gross margin, it's paying customer acquisition cost to Google Meta and other players, TikTok, et cetera, which is very high. And third, a pure-play motorized delivery is always very expensive. Moving to the store reduces but still expensive. What makes the overall number good is the mix between motorized deliveries and Click & Collect and a pure-play player doesn't have it. A marketplace won't have that economics. Nobody a pure-player pharmacy won't have that economics. So this shows that how important having the store base is for acquiring customers, for onboarding the customer and for using the stuff for Click & Collect and for faster and more efficient deliveries. Flavio if you want to add any more color on that.

[Flavio Correia, executive]

No, yes, just to add one additional index here on the profitability of our e-commerce activity. So an additional line is the investments and expenses on digitalization on technology, in general, to develop the app, develop the sites. That is not -- you can't not see this in the store P&L. So this is but yes. So this is hurting a little bit more the P&L of the digital activity. But once again, forget about the reading separated P&L, so store P&L and independently from the e-commerce P&L because we should read this P&L in the horizontal. So think about the customer P&L once we improve engagement once we gain frequency of this customer. So it doesn't matter if the customer buys on the store or online by any of our channels. This just keeps improving the engagement we have with this customer, the frequency, the share of wallet and everything. So this helps NPS. This helps a lot of indicators. So the e-commerce P&L, which is positive, sustainable and we can keep this in the future as part of our strategy to engage the customer.

[Eugenio De Zagottis, executive]

Yes. And when do you think in terms of contribution margin, obviously, technology, I think it's very important, but it's more like a G&A line than a contribution margin line. But the contribution margins, there are 2 other lines that we are addressing. One is peaking, when we shift from centralized speaking the DC and we're doing more and more store picking, we are using exists personnel, and we are also diluting personnel expenses related to digital. And finally, one other line that I think is very punitive for digital and we're trying to address is acquiring -- is the credit card. So it's a mix between acquiring fee, fraud and fraud prevention. So this is a highlight for everybody because of chargeback in digital is different from in the stores. So what we're trying to do is using our internal intelligence because we have a lot of frequent customers who are buying every month. We don't need third-party bureaus to tell us that this is a low risk transaction.

So if I know, Flavio's a recurring customer, if I know the purchases within the realms of what we generally expands, I don't need a credit bureau to clear this transaction out. But then if I have a new customer, I will use the credit bureau. So we used to take too much the credit bureaus. And as we use internal intelligence, I don't know if the charge back will fall down, but at least what we spend in credit bureaus, we have to fall down. So we're still looking for more opportunities. But the main point here is what Flavio mentioned, is the role of digital in the overall journey of the customer in making the customer overall more loyal and it's also, for me, amazing the fact that we came from 1% digitalization to 14% digitalization with same or higher margin than we had before. Nobody else, I think, has done that, and this for me is amazing.

[Operator]

The Q&A session is now over. We will return the conference call to RDs executives for their final remarks. Gentlemen, you may proceed.

[Eugenio De Zagottis, executive]

Okay. So just to summarize some of the things we said here and talk at some of the perspectives we see looking forward for the company. I think this was another amazing quarter. A quarter that underscores the resilience of this business, that underscores the strength of the balance sheet and how important a strong balance sheet is. And in the end, they both point to the fact that this is a very low beta business. A lot of people talk about high multiples, but I don't listen to people talking about low beta, which for me is one of the main reasons of the high multiple.

High multiple will relate to beta, and they relate to future value creation potential. I think we have both in a very, very exciting way. I think the quarter, in addition to the resiliency also underscores some of the competitive advantages that we have. And I think we have 3 very important and structural competitive advantages. The first is scale. I mean, we have a completely different level of scale versus any other competitor. We are 40% larger than the #2 player in the industry. The #3 player is only 1/3 of our size. So the #2 is 40% of our site, sorry, more than it's 40% of our size. The #3 is 1/3 of our size. We are gaining every year BRL 5 billion, BRL 6 billion in top line. Basically, it's like if we are adding more than the revenues of the #5 play in the market every year on our scale.

So one thing is the scale gap today, but a completely different ball game is if you look at where we'll be in terms of scale difference, 5 years or 10 years down the road. Because even if at some point, the percentage, the top line growth right now, it's been similar, higher, but even at some point, the percentage growth is not higher than the other guys. The absolute growth will always be higher and it will always be hedging scale. So this is a very favorable element. We play today for a scale advantage we never had in the past and will play in the future with a scale advantage we don't even have today. But it's not only about scale. It's also about efficiency. We have the highest performance in sales per store. In March, our mature stores sold an average 1,150,000 per store per month. None of our competitors is even close to this figure.

And what this means is expense dilution. Any pharmacy in Brazil who opens 8 a.m. and closes 11 or 12 p.m. will have a similar fixed cost base. All depending on -- regardless of how they sell, they have one store manager, they had 2 assistant managers, they have 3 pharmacists. So 2/3 of the store expenses are there are fixed. Obviously, if we sell more, maybe we have more cashers, have more people in the pharmacy counter, but the big expenses which are store managers, pharmacies, electricity, rentals, they are the same for everybody. So higher sales means higher operating leverage and higher operating leverage means higher margin, and means that we can be structurally cheaper than anyone else while still delivering a higher margin than anyone else.

If you read Microparter says that you have 3 forms of differentiating one company from competitors, niche, cost and quality. Obviously, we are no niche player, but we managed to do 2 at the same time, cost and quality. We are the highest quality provider. We have the best locations. We have more people in the stores. We have higher expenses per store because of the service we provide, but we dilute these higher expenses or a much higher sales per store, which in the end allows our expenses to be much lower, allows our prices to be cheaper than our home banks.

So this is a very efficient flywheel, more dilution, less expenses, lower prices and what is driving the order and the flywheel keeps starting. And the third competitive advantage is the capacity to replicate all these economics and multiply it very fast because of the high quality and very fast expansion that we have because the fact that we look at the whole map of Brazil and regardless of what zip code we open a store there, we have similar performance. We have same expected store returns. And nobody else has this. All our competitors have a pocket of profitability to do well in the native market and around, but they're a huge barrier of entry and a very bloody reduction besides those markets. So this is a very structural competitive advantage that we have.

In addition to this, I think we are executing in a very good way. Top line growth of 21%. We see huge market share gain. We see huge advancement in digitalization. We keep growing the store contribution margin because of digital, and we expect to keep growing this year and coming forward. We expect the contribution margin will keep increasing. And at the same time, we expect the G&A starts falling down. and this quarter showed an early signal of the G&A finally starting to come down. There was a big cycle of investing in structure, people, technology and now we're starting a cycle of harvesting the investments that we have undertaken.

When you look at the second quarter, obviously, we'll see a quarter of margin pressure. And there is nothing bad about the second quarter this year with a price increase of 5.6%. We have a very healthy quarter. We'll have a very good EBITDA margin compared versus the other quarters. But what's exceptional was the second quarter last year because the price was 10.9%. So obviously, we have an impossible comp base on the second quarter. But it's not that the second quarter will be weaker. It's that the second quarter last year was extraordinarily strong.

In our view, so we're growing margin in the first quarter. We expect to grow margin in the third quarter. We expect to grow margin in the fourth quarter. The blend for the year, I don't know, because we lose margin in the second quarter. But the second quarter will we always have -- we always be a specific quarter related to the inflation. What shows the efficiency gains and what you can expect and project for the future is the structural gain, not the seasonal gain. And you see the structural gain in Q1, Q3 and Q4. So regardless of where the blend points to the fact is that the structural margin of this company is already increasing. Obviously, that is also the 4Bio effector. We have to see what the 4Bio effect will be in the second semester. There will be less mix effect, I believe, because therefore, 4Bio start seeing a high comp growth. So I don't know what the consolidated margin for the year will be and how it compares to last year. But I know that the structural margin will grow up especially when you look at the retail.

And finally, when we think longer term, that's where I think the best is there is we are doing so many things that can be transformational for this company. First, we are in a market that feeds from the senior population growth that is growing 4% per year and need to be doing so for another 10 years. And after that, 3% for another 10 years on top of those 10 years. So we have a huge growth runway ahead of us. We keep growing 260 stores a year with amazing performance. We are seeing a sustainable margin improvement because of the contribution margin and because of G&A dilution. We are seeing that digital is getting better every year, providing a better experience, increasing loyalty every year. We have ads as a completely new avenue for growth and a very promising one. We have a health platform that we're building that is just in its infancy. So there's a lot of optionalities that will point to a very bright future in my view. So thank you very much for attending this call, and thanks for our long-term shareholders for their sustained support.

[Operator]

This conference call is now over. We thank you for participating and wish everyone a good day.