Raia Drogasil SA

BOVESPA:RADL3

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, ladies and gentlemen. At this time, we'd like to welcome everyone to RD People, Health and Well-being Conference Call to discuss its 4Q '22 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]

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 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. Eugenio De Zagottis, IR, Corporate Planning and M&A Vice President; and Flavio De Morais Correia, Director of IR, Corporate Affairs and Strategy.

Now, I'll turn the conference over to Mr. Eugenio De Zagottis. Sir, you may begin your presentation.

[Eugenio De Zagottis, executive]

Hello, everybody. Welcome to the Raia Drogasil 2022 Annual Conference Call. And I mean, this was a great year. And in my view, a year that underscores the success of the strategy of digitalization that the company has been pursuing.

I think that if you take a step back just from looking at quarterly or looking at yearly numbers, I think it's important to understand where we started and where we are today. We ended this year with the same EBITDA margin, 7.3%, that we had before digitalization that we had in 2019 when our digital penetration was about 1% or slightly more than that. So we were able to evolve from 1% to 12% nearly of digital penetration with stable margins, but while absolutely transforming the company inside out.

We had a G&A increase of 1.1% over that period, which is what I call acquisition of execution capacity, investing in technology, investing in management structure, investing in several enablers for us to really pursue this strategy the way we have been doing. But the good news is that despite the fact that the G&A increased 1.1%, the contribution margin also increased 1.1%. So this efficiency, this digitalization is already more than fully paying itself in the sense that we were able to sustain a very strong growth at our mature stores way ahead of inflation, generating operating leverage and diluting our sales expenses.

So, if you look on a percentage basis, we got back to where we started. If we look on an absolute basis, we have today BRL 1 billion more in EBITDA than we had in the beginning, and we have 3.5 percentage points of hike higher than we had there. So, this is a year in which the success of this strategy becomes absolutely clear, thing to everybody. I'll focus now in the year and then we come back to some more general statements about where we are and I think where we are heading.

We ended the year with nearly 2,700 pharmacies -- sorry. We ended the year with 2,700 pharmacies in operation, 260 openings, which is exactly the guidance that we had, 53 closures in the year. Our revenues increased to BRL 31 billion. But for me, the most impressive figure is this one. We have an absolute revenue addition in the year of BRL 5.3 billion. So, we added in this year alone something like probably the fourth largest -- the size of the fourth largest player in Brazil. We increased 21% in the top line for a massive company, the size, which is not easy, especially because our expansion in percentage terms is less meaningful today than it was in the past. We increased store base slightly below 10% now, but we still maintain a very strong top line growth, obviously that's some inflation here, but mostly a very robust growth at mature stores, 13.3%, way ahead of inflation. So, this is the digital transformation affecting our execution.

Market share increased to 15.1%, a 100 bps [ national ] increase gains in every single region. Digital, we got BRL 3.2 billion, 53% growth, achieving a retail penetration of 11.8% coming from almost nothing in 2018. The contribution margin increased to a record 10.9%. This is actually a joint record along with 2016, when I think we had the price cap increase of double-digit -- high double-digit, mid double-digit or something like that; 70 bps of contribution margin expansion in the year alone, plus some more in the previous years; 29% contribution margin increase, adjusted EBITDA of BRL 2.26 billion, 7.3% EBITDA margin, 25% EBITDA growth. And same with net income, which grew 26%, reaching BRL 992 million of adjusted net income. Finally, free cash flow was basically neutral, only minus BRL 8 million here, meaning that this whole program of IT expansion, et cetera, has been fully financed by the company. But when you look at cash consumption, then we have BRL 650 million because of interest on capital, dividends, M&A relating to startups, but we still maintain a very good and healthy and stable leverage at 0.9.

I think, again a step back, I think when we look the company year after year, when we compare quarter-on-quarter, sometimes we forget the big picture. And I think the big picture here is the capacity that this company has of compounding of generating improvements every year. Then when you look over a certain time frame, the company is a completely different company. So, today, we have 3x the store count we had at the merger. We're talking nearly 2,000 more stores that have been opened since the Raia and Drogasil merger with huge success.

We were back then a less than BRL 5 billion company. We are BRL 31 billion company, 7x EBITDA. And we have a company of -- sorry, 7x revenue and 8x EBITDA, BRL 2.3 billion in adjusted EBITDA. And we see that every single year, there is an increase here in absolute terms. Some years it has been slower, because we may have lost margin here and there. Then in others, we recovered margin accelerated, but I think this is compounding. And we have an unique capacity of compounding, not only in the Brazilian pharmacy market, but I would say maybe in the Brazilian stock market as a whole.

And when you look at what's happening in the market, this is a market share breakdown over a longer period of time. It's very clear that we are the main winner here. We came in 2014 from slightly more than 9% of share, and we reached for the average of last year, 14.6%. In the fourth quarter, it was already 15%. So this is a very meaningful share growth. And if you look what happened to the other top 5 chains, they lost share in the same period, from 18.6% to 16.1%.

It's important to mention that in this basis here of Abrafarma 2 to 5, there is also Extrafarma, which is not part of Pague Menos considered on a pro forma basis, so it's 16.1%. But if you only looked what they have -- what these guys have been doing organically, the number will be probably closer to low 15% -- 15.2%, 15.1%, something like that. So, we are the -- and when you look at other chains that are below the top 5 chains, they are melting from 22.5%, actually slightly higher peaks of close to 25%, all the way to less than 20%. So there is a very clear winner here.

And then there is a separate fight in the small formats, in the popular areas, in small cities, where generally we don't enter in which we see a significant migration from the independents to the association. And this is a normal movement that happens all around the world. And to some extent, this becomes a self-fulfilling prophecy because some of the better independents, they join these associations to get stronger. So you see this share shifting very quickly here, but this is almost like a separate battle from the one we have today.

Talking here about our geographic presence, we ended the period with 2,700 pharmacies all over Brazil, present in every single state of Brazil. And some highlights we already have in the Northeast region, which is a relatively new frontier. I think we started there in the Northeast maybe 7 years ago, but we have today more than 400 stores in this area, hugely successful operation. We are approaching the mark of 100 stores in Bahia and Pernambuco, where we're having both more than 90, even Ceara, which is a more crowded market, it's a market -- that is the native market of one of the leaders. We have 73 stores with amazing performance, selling in all these markets way more than the local incumbents, sell and way more profitability than anyone has in all these markets.

Same regards to the South. We already have more than 300 stores in the Southern region, more than 100 in Rio Grande do Sul, and we have amazing stores. We sell in all these markets more than the local incumbents. And I think it's important to highlight here that we are opening this year 3 new DCs to complement the supply chain that we already have. Due to additional DCs, when I say traditional, it's mirroring the existing format, 1 in Cuiaba, here in the Mato Grosso state, the other in Belem, the Greater Belem area in the Para state, because these are markets that -- for example, Para is a good example. This is the DC that will serve Para, Marajo and probably Piaui. So, [indiscernible] Para and Marajo, we're talking close to 90 stores, an increase in the count.

Same thing in the Midwest with Mato Grosso for example. And then, there is a new DC in Manaus, but this is a very interesting experiment because it's a completely different thing. Manaus is a city that is like an island inside the Amazon. There is no roads that can serve Manaus, for example -- from Belem for example. The only way to serve Manaus is through here, in a circular way. But this is very far away and very long delivery lead times by land. Today, we serve Manaus by air, but it's very expensive. So we opened a DC here. We will supply this DC either from here or from here. But we will have a buffer of inventory in the city to allow us to deliver by land, which takes longer. But then, with this buffer of inventory, we can maintain or even improve the service level of our stores. We are proud to say that we have more than 80% of our pharmacies all over Brazil that receive merchandise 6 days a week. So, growing the logistics is something natural to cope with the higher store addition and also to the fact that we want to be closer to more and more stores to guarantee the best service level possible.

In terms of market share, our quarterly market share reached 15.1%, 100 bps margin expansion, significant increase of 140 bps in Sao Paulo. What's happening here is, again, this is a game of demand and supply. Demand grows every year because of the aged population, GDP doesn't matter. So what matters is the age of the population, because this is a very inelastic market. In Sao Paulo, we are not opening many stores. Our main competitor, who is the co-leader here, is not opening many stores. And Sao Paulo has a huge entry barrier from players from outside who have tried in the past and failed miserably. So, there is demand growth like everybody else, but with less supply growth than we've seen in other markets. So this is translating into higher share. Not to mention digitalization, for example, and other factors that we mentioned further down.

So we gained share in all the other markets. I would like to highlight Northeast. We already have more than 10%. We reached the double-digit figures here, and we are about to reach them in the South. And the North is already moving the needle here with 7.5. At some point, all these markets will be low double-digits. And Midwest and Sao Paulo is where we have more entrenched leadership positions. And I think structurally they will have higher market share going on.

In terms of the expansion, we opened 260 stores. We closed 53 stores. 2 stores who were on [ Acre ] closed early in the year. 42 were mature closings. This is portfolio optimization. This is something that we're very happy to do, because it improves margins and improves returns. Because we're taking stores that with the pace of expansion we have overtime, sometimes they become redundant. So we are able to redeploy significant portion of sales, while completely eliminating our full cost base and also redeploying fixed assets like gondolas, computers, et cetera, to other stores. So this is a return maximizing strategy, and we're always looking for opportunities. And finally, there are 8 closings of maturing stores. These are expansion mistakes. They will happen every year, and they represent 3% of the openings. So this is a very healthy level, and we expect them to continue as such.

Finally, we see that even though our top line still grows a lot, we're still talking about the low 20s for a company our size, which is very unprecedented, I would say. The reality of the stock portfolio is maturing. We had 70% here of mature stores. Today, we are close to 73% of mature stores. So, the expansion is still the same reliable diesel engine that helps us in our growth. But the reality is that for us to maintain the top line growth that we have. There is a new efficient electric engine helping here, which is digitalization of the company that is bringing growth to mature stores and allowing us to sustain historic growth, even though the diesel engine is carrying a heavier boat than before.

And finally, we are maintaining the guidance of 260 stores per year for the next 3 years, 78 new pharmacies in this period, same geographic and demographic segmentation diversification, and the same 97% of assertiveness, which is related to 3% only of mistakes.

The capillarity of the company has grown tremendously with our expansion. We are today in 540 cities in Brazil. This year alone, we have joined 55 new cities in the country. And for me, a figure that is not here, but it's very meaningful is the fact that there are in Brazil 315 municipalities with more than 100,000 inhabitants. We have stores or locations signed for short-term opening in 301 of the 315, 95%. So we are truly a national player, not because we planted 1 flag at least in every market, but because we are really, really close to the customer on a countrywide basis. And we see that the ongoing diversification of the expansion and also of the format. We see Sao Paulo becoming only 20% of the total expansion. And today, we think about Raia Drogasil as a company from Sao Paulo. But Sao Paulo is only 42% of our footprint, all the rest is outside of Sao Paulo, and this figure is going down. We're not far from the data Sao Paulo be maybe 35%, 1/3 of the company. So it's a truly national company and a company that serves A class, but also B and C classes as this figure shows.

Talking about revenue growth here. I think that this is for me a staggering number, 21% annual growth for a company our size. We recognize we're talking about higher inflation, but obviously still on a real basis, this is tremendous growth for a gigantic company in Brazil with BRL 31 billion in revenues. In the fourth quarter, this growth was higher than this, it was 21.9%.

And there is something more that we have to talk here, which is 4Bio. We bought 4Bio in 2015. It was a tiny company. And this year, 4Bio is selling 20x more than it sold in 2015. We're talking about a company that should sell this year more -- it already sells more than BRL 2 billion. And why I'm saying this? Because 4Bio right now is growing more than 50%. The specialty pharmacy market is a more consolidated market than the retail market. There is a player in distress because it's over-leveraged because of the whole financial environment and we are draining sales here. And obviously, not surprisingly, it's a player controlled by private equity, once again. But 4Bio growth matters because, first, it's good to see that happen, but it has a negative mix effect because the margin in specialty are lower than the normal margin. So we are expanding margin and absorbing a negative mix effect from 4Bio.

When we look at our sales mix, I would say, is roughly an eventful here is very flat. I think the only difference -- probably, only point worth mention is fourth quarter is slightly less OTC because of COVID comp base fourth quarters last year, and very strong HPC performance all across the board. HPC was a challenging category at some point for us. We are flying here, and here in some categories, we compete with marketplaces, platforms and we are driving against them and against our traditional competitors.

And when we break this revenue growth, for me the important message is here. Our mature stores grew 13.3% in the year and they grew 13.5% in the quarter. Obviously, we're talking nearly 6% real growth, but, of course, that we are carrying into the first quarter this year, a cement price increase of close to 11%. But this is still 2.6 percentage points higher than the cement increase. So this is really performance. This is really digitalization of the relationship with the customer, increasing loyalty, increasing spending. This is the competitive advantage of the company. The sheer scale that we have versus all the others. Our closest competitors by the end of this year may become 1/3 of our size. We have BRL 1.1 million in sales per mature stores. Everybody else is proud to have [ BRL 600,000, BRL 650,000 ]. So this is scale. This is efficiency. This is expense dilution. This means price competitivity. This means investment capacity. And in the end, the answer is here. This is driving our performance and generating very significant efficiency gains for us.

Talking about digital. Digital in the quarter reached 11.8%, 54% of growth. It's stable versus the previous quarter. But when we look 1Q '23, this figure is already increasing again, and increasing at a meaningful rate. And why this matters again, because once the customer becomes digital, the customer will spend more than before because of higher loyalty and higher engagement. It doesn't matter how much comes in the channel. What matters is that the customer overall stores digitally will spend more than before and all drive our comps and will drive efficiency.

Not to mention that from 2019 to today, our digital penetration increased from 1% to 11% on a year-on-year basis. And I know no other company that has this much growth in digital penetration without suffering with the margins, which underscores the fact that our digital has tremendous overall. The channel has somewhat less margin than the stores, even though it's positive and, well, positive. But the effect of omnichannel over the total, the fact that the digital is a tool towards loyalty drives this kind of efficiency to be able to grow a lot, a lower margin channel, while maintaining overall margins and gaining a lot in absolute margins. And the reason is here, it's the store. The store is the basis of everything we do. The store is the customer acquisition machine, it's the digital onboarding machine, 2/3 of the downloads happen in the store, driven and assisted by our staff, and 94% of the deliveries are then out of the stores, 89% in up to 4 hours, of which 59% is Click & Collect with 0 marginal delivery costs. So this is the answer of why we grow so much digital without suffering on the margin side.

And another highlight here is our app. Our app means 58% of our total digital sales, no other pharmacy even publishes this figure given the edge that we have here. 89% of these digital sales come from modern and proprietary channels. We have 9% of Super apps, which is modern, but it's not proprietary. We give the customer the option. But our aim is to be better than these guys for the customer not to go there, but you haven't -- it will have to happen naturally. And finally, call center, which is like a Jurassic channel, is only 2% of our sales. But for many of our competitors, it is 25% of what they call digital sales.

And the basis for everything that we're doing here, digital stores is the customer satisfaction, is increasing our customer base, is making the customer into a more loyal customer. So, we ended the year with 47.5 million active customers who shopped with us during the year. This is a 5.2 million addition of customers. Of these, 6 million is what we call frequent customers. And the number of frequent customers grew 600,000 in the year. Why it matters? Because a frequent customer shops way more frequently than what we call a casual customer, 21x a year, 4x more. But out of the 6 million frequent customers, 1.2% or 20% are already frequent and digital. And the customers who are frequent and digital instead of shopping 21x a year, they shop from us 27x a year, not to mention that the average spend -- the average figure also goes up.

So, this is the wheel of fortune for us. Historically, it's transforming a casual customer into a loyal customer, more frequently also transforming a loyal customer into a loyal digitalized customer. And obviously, when we do that, the experience of the customer is very important for us. We have a benchmark NPS in our physical pharmacies of 89. And this is also the ambition that we have in the digital channels, but the digital channels are evolving too. And this is the first time we bring the metrics of -- the NPS metrics of digital. And we break into 2 parts here. The first is how the customers evaluate our delivery, our pickup. We started with 50 of NPS. We are now close to 80. But the most important one is this year.

We had in 2019, 42 only of NPS in our app. This is pure app experience. This is the robustness, the reliability, the UX, this is all about the app. It was 42. When we implemented the Magento platform, initially we suffered here. This is not -- this is a pain, but now it's 62. And we want this number to be, maybe close to 70 this year, and then year-by-year catching up with this 89. But it's clear that we are already providing a very good experience. It's not a state-of-the-art experience yet, but I think, today we're providing a very good experience. We're very proud about this. And this reflects the maturation of our investments of our -- of the product -- to grow productivity of our squads, et cetera, et cetera, et cetera.

And finally, when we talk about this journey of loyal digitalization. I'd like to highlight the importance that Stix has for us. Stix is a loyalty coalition founded by Raia Drogasil in partnership with GPA. Pharmacy and supermarkets are probably the 2 most relevant and highest frequency channels for the consumer. And we came together for coalition with a single point scheme for us, for Raia Drogasil, for Pao de Acucar and for the Extra brand as well.

And Stix already very important for us. It's very -- Stix is part of the digitalization journey, because the customer to participate in Stix has to enroll through the app. There are things related to the program like checking balance that they do in the app, it's important. And we have a very uncomplicated experience in switching points -- redeeming points in their purchase. They can do that in the checkout. The points count like cash and they pay less in their next purchases, if they have that. And what's very important is that Stix started only between Raia and GPA. And now Stix is starting to grow. So, we recently had the entry of Sodimac, which is part of the Falabella Group, and it's an important player in Brazil in the construction segment and also of Polishop. It's a local retailer of hardline products.

We are also very proud because we just signed a very important new partnership in retailing. I can't disclose right now the name of the company. This will be made public very shortly, but it's a national retailer in a complementary vertical with very -- which is very meaningful for Brazil. And yesterday, there was another partnership. And this 1 I am very happy to unveil here, we signed a partnership between Stix and Livelo. Livelo belongs to Bradesco and Banco do Brasil. It's their loyalty company. And we will have Livelo customers being able to exchange their points in Raia Drogasil [indiscernible] GPA through Stix. Livelo has 40 million members, in which in less than 6 years, it's the main loyalty program in Brazil. And I think we are doing a very significant enhancement of Stix with this very meaningful partnership.

Gross margin, we had an expansion of 40 bps in the year. This was driven by the second quarter because the 10.9 CMED price increase drove a high gross margin, like it always happens when you have high price increases. On a quarterly basis, we have a 50 bps pressure. This 50 bps pressure, 10 bps is retail, which is like a normal volatility. It would be in line with previous quarter. But then, there is 40 bps, which is the negative mix effect from the fact that 4Bio is growing more than 50%. So, this is a headwind that we have for the quarter. And despite the headwind, we're expanding margins very significantly.

Finally, cash cycle; 1.5 days higher than last year, which is exactly a higher level of safety inventories that we have been carrying in order to face the most -- complicated moment still in terms of supply chain disruptions happened [ in other world ]. But in our case, we don't see any disruptions in our stores. In our view, supply chain is a combination between capital, IT and management know-how. And I think we excel on those 3 items. And so, we see competitors complaining about supply chain disruptions. We don't see supply chain disruptions. We manage that with capital, technology and people.

Selling expense is another highlight of the year and of the quarter. Direct consequence of the operating leverage gain driven by the mature store growth, 40 bps gain in the year, and a very important gain in the quarter. It's important to mention that we have some tax effects here in the quarter that they fully relate to the years, but that is in this quarter a 50 bps benefit referring to previous quarters. So, the selling expenses will be 17.6%, which is still a very important dilution versus 18.4%. But when we talk about EBITDA, that's not affected because on the one hand it help, and then the other, we have the 4Bio margin headwind that they kind of offset one another. And with this contribution, margin reached 10.9% in the year and 10.9% in the quarter, very significant contribution margin gain.

General and administrative expenses. Our challenge this year was to control G&A. Our G&A has been growing very fast from 2.4% in 2018 to 3.5% this year. This is acquisition of execution capacity. This was then on purpose and with a long-term perspective, this is how we think. We're not concerned about the year. We're not concerned about the quarter. We're concerned about long-term value creation. So, we added this execution capacity in IT management and management structure to be able to deliver our transformation. The good news is that the same amount we spent in G&A over these 4 years, '19 to '23, came back in contribution margin due to gains in mature stores. So when you look at EBITDA margin, it's a 20 bps expansion this year and it's a 70 bps expansion this quarter. So this makes, in my view, a very strong quarter here.

Net income, similar dynamics, increasing 10 bps in the year, increased 60 bps in the quarter. Something that is happening here is a higher tax efficiency. Because of high interest rates, we are able to pay more interest on capital. We have a tax benefit associated with that. So this is helping our net margin grow in a meaningful way.

Finally, cash flows. Our free cash flow were neutral, minus BRL 8 million only. This means that all the CapEx in IT expansion, et cetera, that we're doing has been fully supported by our operations. But then, when we put acquisition of start-ups, payment to shareholders in the form of interest on equity and dividends, interest that went up, then obviously it's a seasoned BRL 50 million cash consumption. But with the profitability growing, we're basically stable in leverage at 0.9, which is a very healthy level to have in an environment like this.

We are entering a very difficult environment in Brazil, an environment maybe of recessionary environment with high interest tightening credit and we are very well prepared to this environment. This kind of environment is generally, where we shine, because not only we are, from the start, very different from our competitors, much higher scale, much higher store efficiency, more aggressive prices, better operation, better execution. But in a moment like this, with this kind of balance sheet, we maintain the same expansion as before. We maintain our stores with the same inventory and people than before. While several players who are leveraged -- and I'm not saying, it's every player, we have other good competitors who are in good shape as well and will benefit as well. But the guys who are leveraged will suffer a lot, because they have a huge cash from interest expenses. They will have to reduce inventories. They will have to reduce people in the store.

I see competitors bragging about store head count going down. I tell you something, if the store head count goes down without efficiency, you are penalizing your customer, and then the sales go down and the percentage goes up. So we never brag about headcount reductions, and we went to support a headcount that is comfortable to the consumer. This is a service business, this is not only a price basis.

Our stock fell 2.4% last year, while the IBOVESPA increased 4.7%. So we're talking about a negative of 7%. But when we look the long-term picture since the merger or since the IPOs of Raia Drogasil, we're talking more than 20% annual total shareholder returns.

And finally here, to sum up the financial part of the presentation, I'll next pass to Flavio for him to highlight some of the executional elements of our strategy. But this is a very important picture for us to take a step back from the quarter, and even from the year, and to see what's happening on the longer term. So, the green portion here -- the green bar is EBITDA margin, the red bar G&A, one plus the other is the contribution margin, meaning the store generates like 10.9%, you take 3.5% of G&A, we have 7.3% of EBITDA. This is how you read this chart.

So, the chart shows, first and foremost, 110 bps G&A increase over this period, brutal increase in structure, in IT, in acquiring execution capacity. And we have been saying this, it's funny because I think the market didn't take notice until we started saying that we had grown more than 100 bps, because what happened, and it started pretty soon, is that with this better execution, the contribution margin started growing. So, the contribution margin, that was 9.8%, grew the same 1.1% -- grew 10.9%, so -- because mature stores are growing way above inflation here. So we have today the same EBITDA margin that we had in 2019 when we started digitalization. The difference is, first, there was 1% of digital penetration here, today is 12%. So there is a channel that on a stand-alone basis, less profitable, pressures negatively, but provides a completely different customer economics to the point that even with so much more of this less profitable channel, we have the same profitability as before.

In absolute terms, however, it's BRL 1 billion higher EBITDA, BRL 2.3 billion versus BRL 1.3 billion, 68% absolute EBITDA growth. And the return on invested capital, it's 3.5 percentage points increase. We have an asset turnover, much more efficient today than we had back then. So, from any angle that we see, this is a year that in the end it's a testament to the success of our strategy and to the quality of execution that we have been able to pursue.

And to finalize, I think the best is coming ahead. Why? Because we have stable G&A. And starting 2023, G&A will go down. So, it will go down. And at the same point, all these efficiency gains that are happening at the store level of 10.9 of contribution margin, I believe they will persist, because we still grow mature stores ahead of inflation. So, this is opening the space for us to increase our margin in the coming years. When we talk specifically about 2023, because of the peak margin of the second quarter, I am not sure if we will see margin stability, margin expansion or we'll see. But the most important thing is that the structural margin goes up. And the structural margin goes up in 2023 even if the total margin may not -- may or may not, because of the second quarter, but for the rest of the year, we will be better than next year, which will plant a very good 2024 and ahead.

So, I'll now pass to Flavio for him to take some of our execution aspects.

[Flavio Fogaça, executive]

Thank you, Eugenio. So moving forward here and talking about our strategies. So, 2022 was a good year focused on bringing new customers, improving their experience and satisfaction, and developing our omnichannel capabilities. As Eugenio mentioned, we were able to grow annual sales by 21% and EBITDA by 25%. We also reached 15% market share nationwide and expanded it in every region we are present.

Main reason for this is our customer base made out of roughly 1/4 of the Brazilian population and who engages to us on average 7x a year. If we only consider our Tier 1 digitalized customers, this frequency goes up to 27x a year. So, our building of the new pharmacy concept was assertive. We count stores in 540 cities and in almost every city in Brazil with more than 100,000 inhabitants. Our stores NPS is 89. And this is the base for our digitalization, which now represents 11.8% of total sales, and is delivering goods as fast as 1 hour in 81% of the cases in main cities and, most importantly, with a sustainable and attractive profitability.

On top of this, we started to create this additional layer of the marketplace, which now counts more than 170,000 items, as well as our health platform with integrating several startups to promote health and reduce the systematic healthcare costs. All these activities are poised by the development of our technology with new systems and our way of doing things with a unique and integrated data lake and data science, but also by our culture, more agile and flexible, and by our management model and governance, counting 13 new positions of directors who are experienced in the new business and activities we are tackling, but also with an extended Board with new competencies.

Looking forward, the opportunities and challenges for 2023 relates to accelerate the customer relationship digitalization, improving experience and delivery time, engaging customers and improving our marketplace sellers' UX. All of this by increasing our squads productivity and scaling data science and [ martech ]. Second focus is on improving our health platform, launching complete and integrated solutions to promote health, scaling universe, our PBM, as well as the throughput of our invested startup.

Third is to develop our retail ads platform, maximizing the potential of our first-party data that counts with the identification of 97% of all our transactions online and offline. The installation of TV screens in our pharmacies will offer advertisers a broad selection of physical and digital channels with limitless audience segmentation and the possibility to personalize content. This will both better monetize advertisers' investments and offer more benefits to our customers. Fourth, we will keep growing fast, gaining share and start diluting expenses combining scale, efficiency and investment capability.

I would just like to remind you that all of this is part of our ambition to be by 2030 the Group that contributes the most towards a healthier society. To address this ambition, we launched the Walking Together program, divided in 3 pillars, 8 and 35 goals. Our focus on 2022 was on improving the health of our employees, developing women leadership and incentive our employees to advance in their studies and to guarantee our stores as conscious disposal sites.

We continue to be part of [ EC ], the corporate sustainability portfolio of B3 and moved 1 level in the MSCI Index to BBB, and 2 levels in the CDP Index moving to B. Thank you.

[Operator]

We have one question from Lucas Dias from Aster Capital.

[Lucas Dias, analyst]

I have a few. So first, if you could speak a bit about the ad strategy. So, how are clients -- what are clients thinking of your service nets? So, I know you have started to provide the service for a couple of months now for some big clients. And how has the feedback been? So that's the first question.

The second one is regarding return on invested capital. You didn't provide this information before, like you didn't share in the release. And now you are giving more focus to it, it's at 18.5%. And how do you see this number going forward, like thinking of 5, 6 years, what is the level that the return on invested capital could reach in the long term? If it's in the plans of the company to improve this number or you will reinvest in prices in order to grow more instead of having an even higher return on invested capital, which is already really at 18%? So, these 2 questions are more strategic. And then, I have a couple of doubts regarding some recent developments.

So the first one, I know it's minor, but what was the rationale behind the share bonus proposal to shareholders? Like it's pretty minor and it doesn't change much. So it would be nice to understand why do it. And second is regarding tax efficiency. You've talked a lot about that. And in theory, it's due to interest on equity, but there were also other helpful effects, especially this quarter, but in the full year also. Do you see these effects as recurring going forward? Do you see your tax rate at below 20% in the coming years due to a higher tax efficiency or maybe there were some one-off effects in 2022? These are the questions.

[Eugenio De Zagottis, executive]

Lucas, thank you for your question. I'll start with the more financial part and then leave the funny part, which is the ads part to the end, okay? So, in terms of return on invested capital, I mean this is a figure that we try to look on a yearly basis. But when you are in the middle of a cycle of transformation, sometimes you can get convoluted because we are investing a lot and the return is not there, but it's a figure that we always look internally. And it's obvious the improvement that we have. This improvement also results from the fact that we are becoming a more mature company. We have less stores in maturation than before. The CapEx in the expansion and, probably the total CapEx as a percentage of sales, is going down. So, the asset utilization, the asset turnover is improving a lot.

And we have an estimation in the company that if you forget anymore economic gains that we can make in the future from new things -- and just consider the maturation of all the store portfolio, if we had every store mature, because a store that is still maturing, it means that we have the full CapEx already made, the full working capital already sitting there, the full expenses or nearly full expenses already priced in, but we have sales and EBITDA that are below what they will be in the future.

Just if we apply the residual curve and see where this will bring the company, this will bring the company very likely to a mid-20s or higher in terms of ROIC. I'm not talking about G&A dilution, I'm not talking about contribution margin expansion because of new things, I'm not talking about ads, I'm only talking about store maturity. So, there's something like 100 bps of margin from residual maturation of stores to be recovered over the long term, which will drive our returns to the very least, to the mid-20s. So this is a metric that we like. But at the same point, this is an accounting metric. So, the decision about passing something or not to the consumer is not because of the ROIC, because the ROIC is an accounting metric.

Let's say that we had a terrible past, but now we've become the best company in the universe. I wouldn't have a good ROIC because of the past, but that doesn't mean that we are doing good today. So we have to look at ROIC as 1 metric in a big basket of KPIs, and drive our strategy from there, not only from this figure, increasing prices, decreasing prices because of ROIC in my view doesn't make much sense.

Thanks for the question about the share bonds. This is important to clarify. Under our bylaws, and I think also under law, we have a maximum limit for profit reserves. And once we exceed the profit reserve limit, we have to redistribute that reserve. There are 2 ways of distributing reserves, with cash and without cash. With cash, the first is interest on capital. We already capped the debt. We already do the maximum allowed by law, so no way to do it.

Could we have done it a dividend in cash? Yes. But in our view, it doesn't make any sense to take BRL 1.5 billion from cash, from the company with 0.9 net debt to EBITDA, which is very good, but in a time in which we have interest rate is very high and et cetera. So, it was never the plan to distribute more than we already do. We have a payout around 50%. That's a very good payout. It doesn't make any sense today with the strategy we have to take BRL 1.5 billion from our cash reserves and pay back to shareholders. So, forget any distribution with cash.

When you talk about without cash, we could simply redistribute from another -- for the social capital line or we could do what we're doing, which is usually a share bonus. The share bonus has the advantage of increasing the historical cost base of the shareholders. So, in the end of the day, these share bonus will generate a tax shield for our shareholder, right? It's minor, it's small, but it's good to have the opportunity to do it. And we have to reduce the reserve, the best way to do it is in a way that creates value versus [indiscernible] that wouldn't create an event. So this is almost like a free lunch to some extent.

Regarding the tax efficiency, you're correct. I think the main impact is interest on capital. And interest on capital -- when the interest rates go down, for sure that efficiency goes down, but there are other things as well that in terms of opportunities that we have. Brazil is a very complex country in terms of tax legislation. I talked during the presentation, and Flavio also stressed the way we have changed our structure, invested on our structure, we have a management team today that is much bigger and much deeper and more qualified than we had before. And part of that, we have the tax area as well. So, we are looking for opportunities.

We are always looking to jurisprudence being generated and we are a very safe company in terms of tax appropriations. I joke that we are the only company that has nonrecurring gains on a recurring basis, because we are conservative. We have -- while everybody else generally takes advantage of any fiscal thesis, and then if they have a problem later, they become nonrecurring expenses, we are very conservative. We generally have nonrecurring gains. But maintaining the same stance, we are able to find other opportunities that I think they are recurring. Obviously, the tax efficiency falls down every year because the interest on capital will be lower every year. And obviously, when the interest goes down, the impact will be even higher than that. But the other effects, they are structural, but it's normal that the tax efficiency should diminish every year.

And finally, the ad strategy that you touched, I mean so -- it's important to give a perspective here. I think we have a big -- when you look the advertising market around the world, the first phenomenon is a huge shift from traditional media to digital media. The second point that is happening here, I know you guys understand very well, is the death of the unique customer identifiers. So, if you look, for example at Apple, Apple doesn't provide a more unique customer identifiers because of privacy restrictions. So every media player, who relied on third-party data and several of the big media compositional media around the world, the unicorns et cetera, they rely on the turn of third-party data, they have their own first party data in their social apps, et cetera, but they had an ad network outside of third-party data and all of a sudden that network is running dry. So, all the companies rely on third-party data are losing signal, and the companies only invest in advertising. They're losing returns on the investment, and then we look ours. So it's a big shift from third-party data to first-party data.

You look at Raia Drogasil, we have a thorough first-party data. First of all, we are the #1 retailer in our segment by far. We are a referenced player in beauty, personal care, et cetera. Even if you include other platform, supermarkets and other channels, we are the only physical retailer in Brazil for sure and maybe around the world that has 97% demand visibility even in the physical stores. So, we have nearly the same customer visibility that Amazon has, the MercadoLibre has, another player, that Alibaba has, et cetera, and full ability to segment these customers. We have a wide array of media channels -- of digital media channels that include traditional stuff like paid search, like banners, like email or SMS pushes. We also do matching of our base with Facebook and Google, and we do posting on social medias. We have screens in the stores that we are now adding more screens to the store.

So in the end of the day, if you think about the conversion funnel, we are in all the stages. We have awareness media. We have conversion media. We have coupons that is really the -- when the customer is already inside the store, so we are organizing ourselves to tackle this opportunity. I believe this can be a huge driver of economics for the company in the future. We set a separate company named RD Ads. We are nominating in the coming weeks as CEO full time for this company. There is a team full time there. We are investing in technology, part of the IT investment we did this year was on Martech capabilities. And without Martech capabilities, this is only a dream. So, we are the only pharma retailer today talking Brazil about digital advertising, because we have the Martech enablers in place. All my competitors have a huge work to do before even being able to do that, not to management capacity to finance that, demand visibility and all the other issues. So this is very strategic. I mean we are -- we have started to do things before and we are gaining traction with our suppliers.

I don't think this is a life-changing number for this year. It may help, but I don't think it's a life-changing number for this year, but we have a lot of contracts secured. We are showing our suppliers that return on invested capital in our campaigns is better than in traditional digital media because, I mean, if you think about most digital media, it's behavior segmentation. I mean, in our case, we have the full visibility of the customer. We know who buys what, who doesn't buy what, who stopped buying something. So we can do things very targeted. We will reach them when they're surfing the web, but we also reach them inside the store, for example. And this is a unique efficiency and maybe this can become a major value driver for the company going forward. Thanks for the question, Lucas.

[Operator]

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

[Eugenio De Zagottis, executive]

Okay. So, first and foremost, I'd like to thank you all for attending this conference call. And I'll try to sum up some of the things that in our view made this year and the quarter very good and very strong and very significant period in the company history in the implementation of our strategy.

I think, the first point here is that this year underscores the success of our digitalization strategy. We got back to the same EBITDA margin we had before, but with much higher absolute EBITDA, BRL 1 billion higher with 3.5 additional percentage points in ROIC. And we have a very positive trend going forward of diluting G&A and continue to improve contribution margin, which should open the window for margin expansion going forward. I'm not individualizing this year, because this year we have to do the second quarter in which we know we lose margins. But regardless of what happens on the average, if we lose margin in the second quarter but we gain margin every single quarter, for me, this is a better company.

And our jobs as executives and shareholders is not to make pretty numbers that compare neatly across a sequence, it's to create value, real value and to make it a better company. So if you are a better company, even you had the headwind of the gross margin this year, this will make us for a better number next year, the other year and other year. So, the strategy is there, it's clear. The benefits are apparent. And for me, any doubts the market may have had in terms of the economics of what we're doing, I think at this point, they don't have any reason to exist. And the strategy is absolutely more than proven.

There is a second element that I think it's interesting to highlight. And this is something that we see a lot, but I don't know if people fully grasp, which is the extent to reach our company is a great inflationary hedge for an investor. We have a business model with an inflation hedge built into that. And I'll start by remembering that the first quarter this year, I mean, the published year, the '22 year, which is last year chronographically, the first quarter '22 was probably the most difficult quarter that I remember reporting since the merger of the 2 companies, because we had an inflation leg. If you guys remember that our prices go in steps once a year. Our expenses go continuously, like a ramp. So if you zoom first quarter this year, we had high expenses that had grown, but we still have the prices of 1 year ago, so margin pressure -- then comes -- for me it was never a surprise.

Then comes the second quarter, again, no surprise. We have the past inflation -- pass down to the prices, nothing happens of demand because demand is inelastic. We generate this big onetime inflationary gain on inventories, which even base for the first quarter and makes for the first semester that increased margin versus the first semester of the previous year, so -- and set a new price level in tandem with inflation, then inflation started going down and we even start to have an advantage in that regard, and we had a comp in the year much higher. So this year underscores really clearly how this dynamic of inflation hedging pans out. This is a business insulated for inflation. And I think we proved that once again.

And finally, and I think this is a very timely issue, is the resilience of the business. This is -- I say this time and time again, sometimes people don't believe, but this is a business that is not affected by GDP. When we do our budgeting, our forecasting, GDP -- there is not a cell in our Excel for GDP. GDP doesn't affect our demand. What affect our demand is the age of the population, the fact that the senior population is growing every year, 3% to 4% a year. And this is driving pharmaceutical market to grow every year 4% ahead of inflation in average. If inflation is 10, it will grow 14, if inflation is 6, it will grow 10, give or take. This is what happens every year. So this is a very resilient market. And this resilience is not only for us, it's also for our competitors and for the whole market. So this is a good thing about our segment.

Having said that, there are things that are pretty unique to us. First, I mean, I think the level of scale advantage we have today is something we never enjoyed in the past. I think, by the end of this year, 2023, we may become 3x the size of the #2 player in the market, and many times the size of all the guys that go below in the list. So this scale gives us a lot of buying power, this scale gives us management depth, the capacity to have all this, but it doesn't end of the scale, we have efficiency. Our mature stores sell BRL 1.1 million per store per month. Our competitors are happy sometimes when they sell BRL 600,000, BRL 650,000. So we have a level of sales expense dilution that nobody has.

This allow us to be at the same time the low cost provider percentage wise, but on absolute terms, the service provider because we have more people in the store, we have nice stores, nice allocation. So we provide more service for the customer, which cost less for us because of this huge expense dilution. And this allows us to be cheaper as well. Our gross margin is similar and even sometimes slightly lower than some of our competitors. Given our size, there is no doubt that we buy better than them. What happens is that we pass more to our consumers. And we see that with digital coming from 1% to 11%, we see that with a margin that pressures gross margin because money hasn't been down, because we have other things like private label, negotiation gains, et cetera, paying for that gross margin bill.

And finally, the other, I think the third element here is the balance sheet of the company. We have very low leverage, 0.9, at a moment in which bank interest rates are interior 13.75%, but in practice with the credit tightening that is happening, it's very difficult to raise capital today by paying less than 14% -- 16%, 17%, 18% depending on the company even more than that. So, we are in a very resilient market and we don't suffer with the credit tightening. We will be maintaining the same expansion regardless of where the interest rates are.

We are maintaining the same inventory in the stores, maintaining the same people in the stores, while several of our competitors that are very leverage, who have to suffer, who have to cut on expansion, who have to reduce people in the stores, who have to work with less inventory, et cetera, et cetera, et cetera. So we are very well positioned for the kind of environment that we see today in Brazil. This is the kind of environment where historically we shine. If you see an environment 2% interest rate, this is an environment than anybody does well anybody expense, obviously, the bill from the bad expansion comes later. But it's a tougher market for us, because the market with more competition. This kind of market, this is where we shine.

In the end of the day, when you talk about the inflationary hedge and the resiliency, what I'm talking about is low beta. We have a beta of 0.6, for which I don't think we get adequate credit. I don't see the sell side using our beta in our cost of capital. And we are the best diversification you can have because of this beta in the Brazilian capital market.

So, thank you all for attending the call. Thanks for all our long-term shareholders. We're very happy to be able to show how a cycle like this is working out because we have several shareholders who have been with us since the merger, even before the IPO of the Raia Drogasil and later in the IPO of Raia, and who have stayed with us during the cycle have understood what we're doing and have always maintained the focus on the long term, the same way we have. I'll also say that it's not a shareholder who chooses the company, it's the company who choose the shareholder. If you think about long-term returns and you are not concerned about this as much about the year or the quarter, you get a type of shareholder. If you think about quarters and doing things the way you can do in the short-term, you'll get another type of shareholder. And I think we're very privileged and very great for the shareholders we have. Thank you very much.