Raia Drogasil SA

BOVESPA:RADL3

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, ladies and gentlemen. At this time, we'd like to welcome everyone to RD Saude Conference call to discuss its 1Q '24 results. The presentation can be found on RD Saude Investor Relations website, ir.rdsaude.com.br, where the audio for this conference will later be made available. We inform that all participants will only be able to listen to the conference during the company's presentation. After the company's remarks are over, there will be a Q&A period. At that time, further instructions will be given. 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 Saude 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 Saude and could cause results to differ materially from those expressed in such forward-looking statements. Today with us are Mr. Eugênio De Zagottis, VP of IR and Business Development; and Flavio [Indiscernible] 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, everyone. First of all, welcome, everybody to the first quarter '24 conference call. And I would like to start by saying that this was a very good quarter. This was a quarter in which after an end of last year in which we saw a market slowdown we are seeing now a normalization of the market. And this normalization has allowed us to get back to our normal levels in terms of top line growth, to get back to grow mature store sales ahead of inflation, which generated operating leverage, which diluted sales expenses, which expanded our profitability. So this was a very, very good start of the year. I'll now go to cover more specifically the highlights. But all in all, I think we're very happy and very optimistic with perspectives ahead. So to start here, the number of pharmacies, we reached 3,000 stores last -- during the quarter. We opened 62 stores and closed 5 stores. We had a celebratory opening of the number 3000 store in the countryside of Ceara during the quarter, which was a very special festivity for us. We reached nearly R$10 billion in gross revenues, R$9.8 billion. So we're talking about a company that has on an annualized basis close to R$40 billion in revenues, 15.3% growth with 6.9 percentage points from mature-store, 6.9% of Mature-store growth. So mature-stores are growing ahead of inflation as we have historically seen. Market share, 16.2%, very significant national growth with gains in every region. Digital was another highlight of the quarter. It reached R$1.5 billion, so we're talking here R$6 billion annualized revenues. If RD Digital were a separate company we'll be fighting for the #4 position in the market. So you can see the sheer scale that we have reached here, we grew 46.4% on top of a very strong comp base of last year and the retail penetration is 17.3%, which is also a record level for the company. Our contribution margin has also grown 18.5%. It reached 10.1% of gross revenues, 30 bps expansion, and the EBITDA reached R$680 million, 21% of growth with 7% of consolidated margin. If we look only at retail, we had an EBITDA margin of 7.4% in the quarter. Finally, when you look at the net income, then we see a small growth of 2.2% with margin pressure, and this is due to pressures related to the new law, the taxes -- tax incentive gains. So we're now paying income taxes over tax incentive gains. This is still a very controversial subject in Brazil. Obviously, we have been discussing this in the courts, we have even some preliminary injunctions on our side but we are a conservative company and we prefer to book it to assume the full tax impact that the law has set and obviously, if we are wrong, we will revert this either during the year or in future year as nonrecurring gains, but we prefer to be on the conservative side and to recognize that taxation here. And finally, cash flow of R$118.1 million negative, free cash flow and total cash flow close to R$180 million negative as well. The reason it's a negative cash flow is because we're comparing to the fourth quarter, which is a cash cycle vale for the company, so it's a seasonal element as well. Before talking more about the numbers, I would like to talk about some accounting reclassifications we are pursuing in order to better align our accounting criteria with the nature of the business. I would like to start by saying that none of these reclassifications affects the income statement, the EBITDA, the cash flow, the balance sheet, we're only talking about changing lines. And we're talking basically of 3 main points here: One is, when you talk about deliveries, digital deliveries for our customers, historically, we used to book delivery revenues that we charge as part of gross revenues, while we were booking delivery expenses as part of the sales expenses. In the past, there was not an issue because digital was very small. But over time, this means that we are pumping up the gross profit, and we're also pumping up the expenses. So now the delivery revenues are being booked as a sales expense reductor, so we will see the full net effect of the subsidy we give, meaning revenues, minus expenses or expenses minus revenue because it's a negative bill as part of sales expenses. This reclassification is 10 bps. So we have 10 bps lower gross margin and we have 10 bps higher -- sorry, lower sales expenses as a result because it's reducing -- it's a reductor to the sales expenses. But then by doing this, we'll see the full net effect in a single line. If the subsidies grow that line will go over time. If it doesn't, it will stay flat, but we eliminate this distortion. And then we have some reclassifications from G&A to sales expenses. We're talking basically of 2 lines here, marketing. Marketing means 20 bps and marketing, I'm talking about marketing related to our retail brands, Raia Drogasil, also marketing related to our private label products. So this is 20 bps that used to be booked as G&A, now we're booking at sales expenses because we believe it's related to the sales activity. In the past, our spending in institutional marketing was very small. So this distortion was also not meaningful as we have invested more and more in building our brands, this becomes a bigger distortion. So 20 bps of marketing migrate from G&A into sales expenses. And finally, there are some expenses related to technology like licenses related to products that we use for sales, either in stores or digital or cloud related to the digital sales. We are also booking those sales expenses. Obviously, cloud expenses related to our ERP, they are still corporate, just like corporate marketing, with the RD Saude brand, is also corporate, but anything related to the sales activity has to be booked at sales expenses. So we are doing these reclassifications. The important point here is all the comparisons of 2024 numbers with 2023 numbers, they are being compared on the same base exactly because we are adjusting the history here, as I'm showing. Back to the numbers. We ended the quarter with 3,010 stores. We opened in the quarter 62 stores and closed 5. Last 12 months, 277 openings, so we are very close to the bottom of our guidance already. Our guidance is 280 to 300 stores per year, both for 2024 and for 2025. Last 12 months, it's already 277, so we're very comfortable with this guidance. We are aiming for the top of the guidance but we are not sure that we can reach the top so this is why we have a range in this guidance. Right now, we have 99% of assertiveness, meaning only the number -- we closed last month, only 2 mature stores. This means 1% of the total store openings are being closed because they are mistakes, so 99% of assertiveness we have seen a huge demographic and geographic diversification in our expansion. Finally, 26.2% of our stores are still undergoing maturation, while 73.8% are fully mature. This is our updated national footprint. As you know, we are present in every single state of Brazil. We also have 14 distribution centers supplying our store base on 95% of our stores are replenished on a daily basis, 6 days a week. So we have the best supply chain management in the industry in Brazil. We have the lowest stock out as a result of this daily replenishing of our stores. When you look at the geographic presence, I mean, I think one important highlight is how fast we're growing the northern region. This is our latest frontier. We have already more than 110 stores here in the region. And Amazonas, which is the main state in the region, we started last year, we have already 21 stores up and running and doing really, really well. If you think about the Northeast, which is a state also that we haven't been there forever, it's a state that we started probably 10 years ago or so, we are reaching 500 stores there. I think now 456, if I'm not mistaken. In the South, we are reaching 400 stores. Sao Paulo is our stronghold, 1,200 stores, but still growing here and see opportunities. When we look at our market share, the growth has been very significant. We reached 16.2% national share in the quarter, 90 bps share growth; Sao Paulo, 28.2% with 130 bps share growth. If I'm not mistaken, this is a record year-on-year growth in a very long time and this is a very strong show here in our main market. But we are seeing similar trends all over Brazil. We gained significantly in the Southeast, Midwest and other highlights. Midwest is reaching 20% of share. This is not a native region for the company, but this is another region in which we became leaders in every state we compete. They are these 4 states, Goias, Brasilia, Mato Grosso, so Mato Grosso do Sul, we became leaders in every single state in the Midwest region. So our shares are over time approaching those that we have in Sao Paulo. So this is an amazing showing. And finally, South, Northeast and North, all of them are around 10%. South and Northeast already ahead of that North fast approaching that market. So we're very happy with how our operation is evolving all over Brazil. In terms of the capillarity, I'd like to highlight that the last 12 months, we have entered 38 new cities in Brazil. Of the 319 Brazilian cities with more than 100,000 inhabitants we are already present or we are in the final process of entering 308 of those, so there are only 11 pieces missing to our puzzle here. And you see here the degree of geographic diversification that our expansion has delivered. And something that I would like to point is Sao Paulo. If you look last 12 months ended in first quarter '22, Sao Paulo was only 18% of our expansion than '22 and now back to '27. Not to mention that we're talking 280 to 300 here, while we were talking lower figures back here. So we're getting to the same percentage of the expansion we had in the last 12 months ended in first quarter '21, so basically 2020 here, but bigger absolute number of openings because it's a bigger expansion that we had before. And we are seeing a lot of opportunity in Sao Paulo, and it's easy to understand why. When we look at our comp -- our comps in Sao Paulo are showing very strongly. When you look at the internal rate of returns of the recently opened stores, especially in the metropolitan region of Sao Paulo, we are seeing very, very strong figures significantly above the average of the company. So in a market in which a lot of what happens in terms of share is determined by supply and demand, how much supply growth in terms of new stores being opened, there is to meet the growing demand based on the age of the population. We are seeing a very good outlook in Sao Paulo because they are no longer relevant newcomers opening a lot of stores here. Us and our peer in Sao Paulo, the DPSP, we're opening all a reasonable number of stores, but the market keeps growing and the figures are showing very strongly. So we see the opportunity to open more, and this is what you see here. And also, when you look demographically, only 17% of our stores opened last 12 months have been premium stores. The bulk have been either hybrid or popular stores and the premium stores account for only 41% of our total stores, 59% is hybrid or popular. So more and more of our business is taking place here. Talking about revenue growth, we posted 15.3% growth versus first Q '23 for Bio contributes with 30 bps of this growth. So retail is 15%, very healthy figure for a company our size. And when we look at the mix, there's a big highlight, which is HPC, we have sustainably been growing at north of 20%, HPC did 20% once again, very significant growth in our mix and then more similar figures for all of other categories. It's important to mention that when you look at OTC, the comp base is still influenced by COVID. So in the end, this 13% is a better number than it looks like. Comp growth, obviously, our focus here on the mature-stores, our mature-stores grew 6.9%, this is 130 bps ahead of the CMED price adjustment and this is what drives our efficiency gains, our operating leverage gains and our margin expansion in the quarter with revenues growing ahead of expenses, we were able to dilute sales expenses and to improve our margins. Digital was another big highlight here. We reached a record penetration of 70% for digital, 17.3% in the quarter, 46.4% of growth over the very strong home base of the first quarter '23. And something that is also very important is that how fast the app penetration is growing and how high it already has become, 70% of all our digital sales, and we're talking north of R$6 billion annualized sales is done through the app, and this is very meaningful. I mean, a transaction done over the web is completely different from a transaction than over the app because the over the app is much more of an opportunistic relationship with the customer. It's a customer searching for a cheap product, buy on an eventual basis with a more limited capacity for us to engage that customer. While a customer who downloaded the app and is buying through the app, this is a relationship that we're building. This is engagement that we are fostering. We can better serve this customer, we can manage the [Indiscernible] the treatment, we can send offers and communication. So it's a completely different ball game. And when we talk about where we are in terms of our digital versus our peers, nobody else even dreams of having 70% of app penetration in digital sales. Actually, the other listed pharmacy don't even publish the relevance of their app. We are very, very far away here, and this is a consequence of all the IT investments that we have done over time, and this is materializing, and this is driving the whole performance of the company at the end of the day. When you look here in the middle of the chart, we are seeing, of course, the same 70% penetration. This is a picture in the quarter, but then we see the other elements as well. Mobile site, 9%; social which is basically WhatsApp 6%; desktop 9%; and third-party super apps 6%. What's also important is that the penetration of third-party super apps has been limited. It's actually going down over time as our app and as our delivery services become stronger. When you look at the delivery service -- delivery mix here, I think we have 2 highlights. First, you know Click & Collect, 61% of all digital sales fulfilled through Click and Collect, this means 0 marginal fulfillment cost. Is the customer coming to our stores to collect the item and in the -- during that, very often, still remembering to buy something else that was not in the digital order so this is very accretive for us. And the main reason behind the healthy economics of our digital channel, I think the 2 reasons are the inexistence of the customer acquisition cost because the customer is coming through the store and then the fact that 61% of the transactions doesn't generate a delivery expense, and a fulfillment expense. Having said that, fast delivery is more and more important for us, and we are focusing a lot on improving and revamping this. Right now, 25% of our deliveries are done in less than 1 hour. We are starting to promise even less than 1 hour and starting to doing even less than that. And this is very important because very often, the customer doesn't want or can't come to the store to pick up so we must have the best delivery service possible, the fastest delivery possible. And this is one of the reasons why we are containing the growth of the super app. The super is a frenemy, it's someone who, obviously, we operate through them, we offer that possibility but in the end of the day, it's an intermediate area who's trying to get our customers for them. So we allow the customer to buy through super apps, but in the end of the day, we do all the efforts for the customer to use our proprietary platform and to maintain the relationship with us without no intermediary in the middle. So we always look at this penetration and this number, we want it to be as low as possible. In the end of the day, 95% of the deliveries, they come out of our pharmacies and 92% of the deliveries they happened in less than 1 hour, including Click and Collect. Talking now about gross margins here. The gross margins in the quarter were -- they amounted to 27.2%. So this is uneventful. this is a 10 bps lower margin than same period last year. Retail margin has been flat in the quarter. 4Bio has contributed to a negative mix effect of 10 bps. The other aspect that is important to consider in this figure is that we are already booking PIS/COFINS over tax subsidies in our gross margin. They account for 10 bps. This means that for us to maintain the retail margin flat, we generated 10 bps other gains that have paid for this taxation. This is a big confusion now in Brazil because everybody, including us, is disputing discharge, but we recognize that this charge exists. We're talking PS/COFINS over tax subsidies, which goes directly in the EBITDA through the gross margin and we're also talking income taxes related to the paying over tax subsidy gains. So again, we are disputing those like everybody else. We have some injunctions that we have gained, but we still prefer to take a conservative stance and assume that these taxations they do exist. If over time, we are convinced that we are right and we shouldn't be paying them, we will revert it either during the year if we have evidence or in future years, we can revert this as a nonrecurring gain. We prefer to do that instead of pretending this doesn't exist, not considering this in our figures and then having a terrible surprise that we have a big tax bill to pay and our cash position is not what we think, and our profitability is not what we think. So we always prefer to [supprehend] nonrecurring gains then with nonrecurring losses. This is how we operate. But what's important is that it doesn't matter if you believe that we are right, that this charge should exist or that we are wrong and this tax will disappear and will be overly conservative. What's important is to treat everybody in the same basis. So if you think we are right, compared with the rest of the companies in Brazil considering that they should be paying this bit as well. If you believe we are wrong, just take them out of the calculation, increase the EBITDA by 10 bps increase -- reduce the tax -- the income tax burden by 40 bps and compare us with a level base. What's important is not to shoot the messenger, is not to pretend that this is only pertaining -- this is pertaining only to ourselves because we are taking a more conservative stance here than anyone else. Finally, we have a slight pressure of 3 days in cash cycle. This is transitory. Today, it is related to our peak in receivables because the quarter ended in a holiday. Well, one day is a normal movement related to inventory minus accounts payable. So the receivables will normalize in the coming quarters. Finally, selling expenses, as I mentioned, the main highlights of the quarter, 30 bps dilution and because of the operating leverage gains. This is basically revenues at existing stores growing faster than expenses, which drives also a contribution margin of 30 bps gain to 10.1%. G&A, 3.1%., this is a 10 bps gain versus last year. This is a 30 bps gain over previous quarter. And just to be clear here, if you were talking on the previous account classification criteria, the 3.1% here will be 3.4% here. The 3.2% here would be 3.5% here. So the data doesn't change because of the reclassification, but these are now the new figures, and we'll be talking about under this new criteria. But -- so I think this was a very successful quarter in containing G&A. I think we won a battle, I don't think we have won the war. And my point here is, don't over-obsess about G&A. I think the market sometimes even such a size as G&A and the line where we will gain the war is not on G&A, is sales expense dilution. Sales expense is 17%, G&A is 3%. The opportunity to better dilute sales expenses through operating leverage gains is way bigger than the opportunity to contain G&A. And very often for us to generate big sales expense dilution, we have to invest in G&A, we have to have more people doing better pricing or better negotiation with our suppliers or driving our digital to be better than competitors. So G&A reflects the execution capacity of the company. So very often, we have to invest here to gain on the sales expenses. But right now, we have diluted this and this is a good news as well. With this, EBITDA on a consolidated basis amounted to 7%, 40 bps expansion. Retail EBITDA was 7.4% also for 40 bps expansion. Finally, net income. This is where we see a pressure here. The main effect in this pressure is the income taxes line. And here, it's a mixed bag. There is first some things that are either transitory here or cyclical so we have 90 bps higher income tax here than here. But the thing is something like 50 bps are things that are either onetime or they are transitory in nature. 40 bps is related to the tax effect here that we are recognizing the effects of the new law. And again, when I see the note from the sell side, it looks like just we have an income tax pressure and nobody else has it. I mean you have to be careful, as I said before, not to shoot the messenger. We take a conservative stance. If we believe we are over conservative then add 40 bps back here to the net income or 50 bps actually because there's also a 10 bps gross margin effect. If you think that we are right, you should compare every other pharmacy, every other retailer and even every other company in Brazil also considering these taxes. So it's important to look this not as a company-specific event, but as a systemic event, which is a big mass right now, and we expect that to get more clear. If nothing else, I think we are at the company with the lower tax incentive base in the whole industry because every wholesaler has tax incentives over 100% of the products they sell to pharmacies. We buy very little from wholesalers and we have almost -- we have also much lower tax incentives than the companies who buy from wholesalers and even other large retailers who do these tax operations themselves. We don't have a drop of tax incentive in Sao Paulo in the Southeast, in the South. We have tax incentives on the north, northeast and part of the Midwest. Something like 23% of our sales, they are benefited from tax incentives, 77% is not benefit from tax incentives. So this discussion here is not a bad thing. This is a good thing. The -- what makes things complicated is the lack of clarity in terms of the application. But what we see here is like an appetizer for what will happen in the tax reform in Brazil. So if the tax gains disappear, this is not a small net negative, this is a big net positive because all our competitors will have to increase prices over time way more than we will. So we see this is a very good news. Again, this is only the icing on the cake we're discussing about the taxation of this incentive. We're not talking about the incentives themselves, but the tax reform, we will address them. So this would be a very important competitive gain for the company over time. Finally, we have in the quarter, R$1 million of nonrecurring expenses, very small number. Looking at the cash flow, we have negative free cash flow of R$118 million total cash flow of R$180 million, but we are comparing versus the fourth quarter of last year and every fourth quarter is a cash cycle vale for us. So this is a good number to have. Leverage is very controlled, flat versus previous quarter at 1.1x EBITDA. Finally, we have seen negative performance by our shares of 6.9%. The IBOVESPA has gone down by 4.5% in the period. So the Alpha is 2.4% negative here. Our average daily trading volume has been very solid in the quarter, R$214 million. And again, as you know, we have been able to generate very strong and sustained returns over a very long time horizon. So I'll now pass to Flavio to summarize on some of those highlights and point of some elements of our strategy and execution. Flavio.

[Flavio Correia, executive]

Thank you very much, Eugenio. So moving on, follow on with some key messages here. I'll start with a quick summary about our operations in the [Higano] State, considering the floods that are now in the region. So difficult times are more frequent lately in Brazil than ever, but this makes us more prepared. So it started some years ago with landslides in the Rio and Sao Paulo, and now it's the flood on this stage. So the [Higas] State accounts have nowadays 130 pharmacies there. We have 21 pharmacies that are closed as of now and another 70 pharmacies that are somehow affected either by not having water or energy or by having a disrupted inventories on their floor. So we have pretty much half of our stores impacted considering these floods. This accounts for pretty much like 2,000 employees. Good news is that our distribution center is not impacted. So it is fully operative, but it's not replanning -- it has impacted the replenishment capacity of the distribution center to the stores because more than 150 roads are either broken or disrupted somehow. So we put together an emergency fund. So this is -- this emergency fund already exist in the company, but we drove the funds to help our people and our employees. So now we have more than 100 employees already making use of this -- the means of this emergency funds. And so this is why we are taking care of our people and making sure that our people can then take care of the population. So we are providing special care for our employees, considering advancing salary payments like the 13th salary and giving them free access to telemedicine or mental health services that are needed, but also providing goods as water or basic goods for whatever they need. And we are also taking care of our customers. So we are increasing inventories especially in antibiotics and selling solutions among other kind of medicines. We drove our solidarity change program to this population, considering that if each -- each R$1 given to this product to this project is matched by the company, so increasing the means of this kind of donation, solidarity that we are doing. So we are also in constant communication with our suppliers to support the region and to improve inventories and improving access for the projects we have but also we are together with Abrafarma participating on the flex -- trying to flexibilize the Pharmacia popular rules and also the RX dispensing for the region. Okay. So Eugenio already mentioned many of the quantitative numbers or relevant information we have. I would pinpoint here some qualitative information, which is the second part of the slide. So considering that we are a very fast-growing -- a very big company with 16% market share, but also growing very fast with this 15% growth year-on-year. This -- this is roughly like we're talking about R$4 billion to R$5 billion per year in additional sales. So this is important, but also important is the quantitative part because we are able to maintain and grow this company with a very strong NPS, keeping this 90 level of NPS, which means that we are really providing our -- giving our consumers a very good experience, and we maintain our app NPS on the 68-70-ish index and for the delivery 76 index. So our digital channels reached 17% of the participation on our sales and maintaining a growth close to 50% year-on-year, which is super relevant, but also our health services are now present in 2,000 pharmacies and with vaccination as an example, in more than 300 pharmacies. We are now the largest private provider company here in vaccinations such as [airizosters] and others. So this is a relevant positioning for this company that is now changing even its corporate brand. So we launched this quarter, the new corporate brand of the company, which is now called RD Saude or RD Health, so -- and meaning for this healthier society. So -- and this is based on 4 pillars that sustain this position in considering a scale that impacts the environment that we are in. So we are this company that provides services, more than 1 million services per day for our consumers. So this is the kind of relationship or engagement we built with the population here in Brazil. So really taking this vocation for taking care of -- closed care with people, building the future, but also taking care of the sustainability and having sustainability at our core. And this changed a little bit our strategy, putting health at our center. So everybody knows that we are not a pure retail player, we are in health, we are a health player. So we have health at our center, so now having these new pharmacies that you are already aware. So it's both the physical and the digital assets of this company together with the marketplace and the health hub and moving to the health platform providing services to aggregate on the pharmacies that we already have. And here, having 4 different pillars for this activity to be provided to the consumer. So with health promotion, so developing health habits for the population, considering prevention, considering protection as vaccination or immunization and really taking a very strong approach on a primary care to the population. And this correlates to all the companies and the business we now have in our ecosystem that somehow drives their attention to the different -- for these different pillars. And this is it.

[Operator]

Thank you, Flavio. Thank you, Eugenio. And now we'll start the Q&A session. We have one question from Irma Sgarz from Goldman Sachs.

[Irma Sgarz, analyst]

Marcilio and Eugenio, just a [quicker] Eugenio. Just a quick question as a follow-up from the prior call. When you think about sort of the working capital dynamics from here forward, it's been, I think, pretty clear from your comments that the rise in the -- in the first quarter was more temporary and to do with the calendar effect. But when you think sort of more structurally about working capital cycle from here, what are some of the opportunities, if any, that you still see from here in terms of maybe optimizing further or maybe there's some structural shifts that we should think about that maybe make for some lengthening? And then one of the really sort of small question about 4Bio. As you pointed out, again here on this call and the prior call, really strong growth and congrats on also taking it fully in now. When you think about sort of the impact, I know it's just really a mix impact on the margin, but is that still something that we should think about for the coming quarters? Or is it really sort of do you expect much more line growth for the coming quarters from here? So really sort of a mix effect that we can ignore again, appreciating that the mix effect was even small this quarter.

[Eugenio De Zagottis, executive]

Irma, thank you for the questions. In terms of the working capital, I mean, the first point you mentioned yourself, this is a transitory, but you have 3-day pressure. I think one day is the dynamics between inventories minus accounts payable, this is the normal things. Then we have 2 days of receivables, which is related to the fact that the quarter ended on a holiday. And when this happens this affects the accounts receivable, this postpones our -- us receiving credit card money. So this vanishes in the next quarter, so nothing structural there. I think it's a very good question because we are starting to question ourselves within the company and starting to review how we do our supply chain. I think we have operated with 14 DCs that operate -- with the exception of the DC in the Amazon that relies on another DC all the other DCs they complete -- they operate completely independent from one another, buying directly from manufacturers, et cetera. And we're starting to have initiatives inside the company to think -- to ask ourselves if this is the correct model or if there are any optimizations that we can do that could improve our operations, including costs, including working capital investments. So I have no news for the time being, but this is a line we're certainly looking at. In terms of 4Bio, I mean, we have seen amazing growth 4Bio. We bought 4Bio 9 years ago. 4Bio was a tiny company selling R$120 million, last year 4Bio sold R$2.8 billion. So major, major growth. And by the way, we have just completed the acquisition of 100% of 4Bio in May, so this month. Andre Kina, who was the founder and previous CEO, he had already left as CEO at the end of the year. He's now being -- became a member of the Board, so Andre continues supporting 4Bio very close to us. He will be also in the board of another startup. Andre is an amazing operator, he is a guy who has built a fantastic company. But we have taken care -- we have an executive of [Hydro, Azul Luis Bay] as the new CEO since January. And now based on the contract we have with Andre, we concluded the acquisition and now we own 100% of 4Bio. When we look forward, for sure, I expect 4Bio to grow faster than [Hydro gaze], faster than the retail business. And why that? First and foremost, because of innovation. There are a lot of new products being developed, especially in categories like oncology. If you think about the big pharmas, nobody is spending money, thinking about the next cholesterol or blood pressure drug. These innovation is already saturated in the core categories that we sell in the store. I think the exception is really diabetes, is really the [Indiscernible] of the world, [Mujer], which is coming. So there's some funds still on that category, but not much besides that. But when you think about 4Bio, there's a very deep pipeline of new drugs that are being -- that will be launched in the coming years in Brazil and all around the world to address therapeutic needs that were not addressed before or they were not well addressed before. So I think this innovation element is very important to drive demand for 4Bio and for the category. The other element is the age of the population. The correlation between cancer and aging is even more stringent than between aging with the normal stuff that we sell at our stores. So as the population in Brazil gets older and older, the prevalence of this kind of disease, not only oncological diseases but all these things like autoimmune, et cetera, will be higher. So this is another driver. And also, what we're seeing here is a fast consolidation of this industry. And this is especially true as we are seeing the health sector suffering from higher losses, from higher medical expenses, from members of the health plans. And this pressure is going downstream to the whole value chain. It's going downstream to the hospitals and going downstream to our sector as well. So for example, we have to do it 4Bio that now more often than before with delayed payments and things like that. But we have the [Mascot] to take care of that. Having said that, we have at least 2 competitors, one of them listed who are very leveraged and who are suffering way more than we are with this. So in the end of the day, I believe there are 2 winners in the specialty market. One is Santa Cruz. The Santa Cruz Group owns [Oncoprod], which is the main company in terms of the B2B side and [hydroaco] 4Bio on the B2B2C side. And the B2B2C side in which we have for 4Bio is very different from the B2B. We are not talking here about is hospital, clinical logistics in which we're delivering a big box of medicines. We are doing drop shipments almost like in our e-commerce business to every single customer in Brazil, delivering 1, 2, 3 boxes of medicine, delivering on time, delivering products that very often require temperature management. We have a clinical team calling the patients to make sure they're taking the drugs to know of any undesired side effects, letting the physicians and/or the health operator know when it's appropriate. So there's a big clinical work involving 4Bio. And this is a service company, this is a G&A -- this involves G&A service. Well, the B2B is logistics, it's wholesaling, it's -- and our wholesale competitor, they have a cost minimization mindset, we have a service mindset, we have a quality mindset. And this might serve us well in this kind of market. So we are very optimistic on 4Bio. Last year, the growth was more than 50% annual growth. And in some quarters, way more than that. And obviously, I would expect this kind of delta versus the regular business. The first quarter was a soft quarter in top line. The second quarter 4Bio already started much stronger. So we expect 4Bio to outgrow [Hydro gaze] which will bring some mixed pressure, but nothing close to what we have seen into 2023.

[Operator]

Our next question is from -- our next question is from Alessandro Conti from Jefferies.

[Alexander Wright, analyst]

Thank you so much for your presentation. So I would like to ask you 2 questions. So first one, the same stores growth has recovered in Q1 compared to Q4 but if you look at the trend throughout the quarter, it was strongest in January and February, I would say, probably due to the leap year and then slowed down a little bit in March, partly due to Easter. Can you guys provide any details on this trend, both on the same-store growth and the retail revenue growth? And my second question, what have you guys seeing so far in April? And what do you think is the -- and what is going to be the impact of the price gap change from April on the same-store growth and the revenue growth?

[Eugenio De Zagottis, executive]

Alessandro, thanks for the question. I mean obviously, you're correct. January and February, they were stronger than March, and they were expected to be stronger than March. There are 2 reasons. First, there's a huge calendar effect. I think it was 200 bps in January, February. And that calendar effect disappeared because even though there's a leap year, we have the Easter Holiday taking place in the first quarter, which is not usual. So that leap year positive effect is transferred to the second quarter. And the other thing is that we had a huge -- the comp basis in March last year. March was a COVID peak last year. And January and February had been soft months last year. So in terms of absolute sales, January, February, March, they were all very, very comparable, all very good, all very healthy. But the comp basis were very different and the calendar were very different. So nothing structural there to be worried about. And we are seeing a strong beginning of the second quarter, we are in a very good pace with mature-store growth ahead of inflation as we expect for the whole year. And then in terms of the trend for the quarter, we have to separate the structural from the seasonal. So the structural expectation is very good. We are still growing mature-stores ahead of inflation, we're still growing digital. All these things are happening. So I think it's a very good quarter on the structural side. On the seasonal side, we have a price cap increase that is somewhat lower than last year. Is there a problem for the quarter? No, it was a benefit for last year, not a problem for this. The second quarter will be the stronger quarter of the year. It will be a higher margin of the year because we have that benefit, but that benefit is lower this year than it was the previous year. And this will certainly bring a pressure on the gross margin compared to the second quarter last year, but the gross margin will be higher than any other quarter you'll see this year. So there's nothing wrong about that. It's just a stronger comp base last year. So we are happy with what we're seeing so far, and we are optimistic for the year.

[Operator]

The Q&A session is over. Now Mr. Eugenio will present his final messages.

[Eugenio De Zagottis, executive]

Thank you all for attending this conference call, and I'd like to summarize some of the things we discussed. And when you think about this quarter, I mean, this was a very eventful quarter when you look at the business. This is a quarter in which the market normalized the growth. We had a low figure of market growth in the fourth quarter. That was a valley, the only quarter in a long time for that to happen and now first quarter business usual. So -- and when we see business usual, we have mature-stores growing ahead of inflation, which dilutes sales expenses, which translates into margin expansion for the company. So very, very good, very positive dynamics. I think in terms of the financials, the only point here is the taxation effect, the fact that we are considering the new law that introduces the taxation of tax subsidy gains, and we're fully booking that. I don't know if we're wrong, I don't know if we're right. But our mindset is we always prefer to deliver a good surprise in reverting something like this or having a nonrecurring gain next year or the other year because of what we did this year versus the opposite, pretending nothing happens. And then all of a sudden, you have a big tax bill to show everybody. Our leverage is higher than we think it is, our performance is lower than we thought it was. So that's not how we work. We -- today, we think the correct thing is to recognize the law. Having said that, we are disputing the law like anybody else. There are technical elements that justify the law to be disputed, and we are disputing, we have injunctions all like that, but we prefer to be conservative. But the thing here is if you believe we'll be overconservative adjust my numbers for the lack of this taxation or if you think we are right, just everybody else who are pretending nothing happened for this taxation. But don't shoot the messenger, don't pretend this is something intrinsical to [hydrogel], and therefore, our net margin was lower, where everybody else did so well. I mean, this is not true. So it's important to have a level playing field here. We are treating in different ways from the accounting viewpoint the same law, the same effect, the same impact. Actually, for us, it's even a lower impact. As I told you, we only have 23% of our revenues subject to tax incentives. All the rest of the market has 100% or close to that or the biggest part of the other players, either directly or through wholesalers, the benefit at 100% or very close to that. So this is a good -- looking longer term, this is a very good thing for us and not a problem for us. It's something that restores our scale and efficiency advantage. These tax incentives today, they are an inefficiency mitigator for our competitors. What we're seeing now is an appetizer for the tax reform. In 11 years, these tax gains disappear, and we'll be a better company because everyone else will have to pass prices in a significant way where we have a very small view to deal with. But leaving the financials aside, I think we've been very successful also in evolving with a strategy in how the health hub is becoming meaningful for customers, how vaccination is growing as a business. We're introducing new testings. The culture of using a pharmacy as a service -- as a health service place is building up. It started during COVID, now it's more and more happening. People understand we do things with the same sanitary standards of any lab company in Brazil. So there's a cultural change, just like there is digitalization. In digitalization, we are way ahead of the pack. The means we have in terms of management structure, in terms of IT investment capacity, the assets we already built, especially our apps who manage 70% of our digital sales, the fact that RD digital on its -- if it was a separate company, will be in the verge of becoming the #4 player in Brazil. So it's amazing how we are evolving on this agenda and how we're rewriting the rules of the game. Because what happens is if you ask any consumer what a good pharmacy means historically, a good pharmacy means a very convenient location, 9-store look and feel, great inventory availability, cheap prices, amazing service. That's no news. And I think we played that game better than the next guys. But the next guys are very good at that as well. If you ask today for the same customer, what being a good pharmacy means, having an app is certainly another element to that answer. The app becomes an intrinsic part of the customer journey. And we have, by far, the best and the biggest and the most fusion app in our industry. So -- and when we talk about app competition or digital competition, our -- which is the new game we're starting to play, our edge is much bigger than it is on the traditional game. And we have quite an edge in the traditional game. We -- the second player is 40% of our size. We have much higher sales per store than anyone else in the country. So we have a very good competitive advantage in the traditional game. But in this new digital game, it's even bigger. And the fact that 70% of digital sales happened through the app shows that for me in a very clear way. And finally, I would like to finish the call on a more personal level. This is my last call as Investor Relations Executive for Raia Drogasil. As we announced last year, I am now transitioning to the Board. So on May 10, I will step down as an executive and will be nominated to the Board of Directors. This is a personal choice. I think this is a time in my life in which I want to do other things as well. I want to have a new cycle, I have been 25 years as an executive for the company in 2 different iterations. First has higher a single-family company that then IPO. Then the second stage as Raia Drogasil having merged with Drogasil bring -- having new partners in our company and a completely different avenue as a company in terms of what we were able to accomplish. So I think this is a good time for me to do this transition. Out of these 25 years, 14 have been as an Investor Relations executive since Raia IPO-ed in 2010, and this is one of the things I like the most about my job. And I'd like to thank you all very much for the opportunity along all these years for the trust, for the conversations, for the provocations, for the constructive feedback and learning and everything that this relationship if you guys have brought to me. And I'm especially proud of the fact that we have still many, many long-term investors who invested in Raia at the IPO or even we had invested in Drogasil at the IPO, Raia Drogasil in 2007 and are until this very day, very important, relevant and long-term shareholders and looking for the next 10, 15 years, not only happy about the past 10, 15 years. But I will still be very involved with the company. I'll be a board member, I will be the leader of the financial committee, I'll be in other committees and other instances of our governance. So I'm not disappearing, and I'm looking forward to maintain contact with you guys. So thank you very much.

[Flavio Correia, executive]

What you didn't mention, Eugenio is that I'm now happier that you're not my boss anymore, you're my boss's boss. So this is very nice. So on behalf of the team here in the IR, we are very pleased to have been interacting with you for such a long time. You paved the way for this IR activity here at the company forever. So you have always been the guy close to the market and building relationships, building partnership, building engagement, so you created a benchmark for this company in the market, but not only for the company, but even for the market itself, so you helped to build or to shape this activity for the market. And this is very nice. You put the bar very high here, and I'm very pleased to have been interacting with you for up to now and moving on in your next step in the career.

[Eugenio De Zagottis, executive]

No. Thanks, Flavio. And I'm also proud to be able to leave a successor who is ready to take the challenge and to move forward with the whole communication of the market. So thank you, guys. I'll still be around.

[Operator]

RD Saude conference call is now over. We thank you all for participating, and wish everyone a good day.