Grupo SBF SA

BOVESPA:SBFG3

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Pedro de Souza Zemel, executive]

[Foreign Language]

Hence, I would like to give the floor for the results of the second quarter to Jose Salazar.

[José Luís Salazar, executive]

Well, thank you, Pedro. Good morning to all of you. I'm going to speak in greater detail about the results of the second quarter '24. And we do have some highlights that were already covered by Pedro. We're simply going to underscore some of the details. The main point in terms of net revenues are the safe and responsible growth, which was one of the mottos of our strategic plan to reduce the number of risks we were facing. And it's very important to look at the half of the year and the quarter as well.

We had a good growth, significant growth, a growth that will guarantee that we will comply with our profitability goals without running any risk. We depend less on macroeconomic factors to be able to deliver our results this year because we're adherent to our plan. We also had accrued growth since 2019 of almost 26%. And from the viewpoint of gross profit, we see a strong recovery in the company's gross profit and within the goals that we have set forth in the second quarter of last year, making the company more profitable and deleveraging the company as well. So simultaneously in a more consistent way we begin to observe a recomposition of the gross margin of the company, especially at Fisia, and we see accrued growth of gross profit, very similar to the growth of our revenues.

We're extremely aligned. We have faith, responsible growth bringing about an ever-growing gross profit, which will enable us to deliver the results that we had foreseen for this year in a rather calm way without assuming too many risks. I believe this is the main message of this slide.

If we go on to the next slide, another significant pillar of our strategic plan. Without a doubt, I'm referring to the control of our operating expenses, which includes several factors. What is important is the reduction of inventory. We no longer have a surplus of inventory, which represents an excess of expenses related to that high inventory. We have resolved this issue, which has been very important since the second quarter of last year. We carried out an adjustment in all of the parts of the company to work with a company that is more fit for the amount of profitability that we would like to have. Several initiatives were carried out, which I will not reiterate here. Pedro has already mentioned some of these.

We begin to obtain some operating efficiencies. For example, the implementation and the operationalizing of the Fisia at the end of the last quarter last year, we saw the benefits of carrying out that operation, an operation carried out by our own team. And of course, this will doubtlessly lead to a significant cost reduction.

And I forgot to mention a very important point. When you adjust your procurement adjust inventory, you are also adjusting the royalties that we have to pay. So we're on a perfectly normal [indiscernible] at present, enabling us to reduce our operating expenses of 41.5% to 39.1% (sic) [ 39.5% ], maintaining that control of expenses, a very rigorous control of expenses within the company. This is a part of core that is under our control and along with a safe and responsible growth, we want to deliver our profit goal for this year. So this is now in our hands, which means we are running less risk.

A very important point, we go on to the next slide, and we see the reflection of all of this on EBITDA. We had a growth of 4.5 percentage points in terms of the company's EBITDA margin quarter-on-quarter, a growth of EBITDA of 90.5%, going from BRL 90 million to BRL 175 million (sic) [ BRL 176 million ]. And of course, we see the impact of all of this, a very strong impact, if we look at the last 12 months. We changed the level of the company's profitability with the growth of almost 48% of EBITDA in the last 12 months, going from BRL 485 million to BRL 716 million. Now this shows the impact of growth, sustainable growth, the recovery of gross margin after the changes that we carried out last year and a stringent control of expenses.

In the next slide, we see all of this reflected in the company's bottom line. obviously, with better EBITDA results along with an effective deleveraging to have a higher net profit. And I'm going to repeat myself a bit, but at the level of net profit, the company going from losses in the second half of the year to a profit of BRL 73 million in the second quarter of 2024. So we have had strong deleveraging, this helps us to reduce our financial expenses, along with an improved EBITDA and better cash generation due to everything that we worked on in working capital, all of this has aided and embedded the situation, and we have a bottom line much higher than we had in previous years and better results for the company.

What is more important perhaps is that we make adjustments in the capital structure of the company. As Pedro mentioned, in the second quarter last year, things were quite tight, and we now begin to have a very calm capital structure. We see the recompensation of gross revenue since 2022, and in EBITDA and net profit, we see that level of profitability that we have been able to achieve by following the strategic plan.

In the next slide, our cash flow. What we see here are 3 things. First of all, the operating cash flow for the company improving for 2 reasons. The company results have improved and the company's working capital have had an improvement. Now besides the inventory, which, of course, is important. We also have accounts receivable. We undertook some initiatives helping the company to generate more cash. We also add a significant CapEx. And the third point, which is important is that the market is open for us to roll our debt without the need of anticipating receivables besides having a market that is open for debt because of our very solid capital structure.

We also have a liquidity platform that does not require that we work with anticipation of receivables. Our average cost of net with this new issuance is CDI plus 1.4% a year. And because of the improvement of the credit outlook for the company, the last issuance that we did in the second semester happened with CDI at 1.4%. So the credit market is acknowledging the enhancement in the company's capital structure, and additionally to this, we paid out dividends referring to 2023.

We move on to the next slide. We have 2 important -- or 3 important points here, the inventory, which was the focus for all of us. We have been able to maintain our inventory completely under control. And when it comes to selling out the surplus inventory that has already been done. And from the operating viewpoint, we believe that we still have some enhancement that we carry out, especially in Fisia. It is our belief that there is a gap in Fisia and Centauro of 60 days. Centauro has a lower inventory level vis-a-vis Fisia. And in the next 18 months Fisia should head towards 30-day excess of inventory, which means we need to continue to work through better operating structures.

This year, we have begun with the migration of Fisia, brick-and-mortar stores through our own distribution center, they should enhance our number of inventory days. And when it comes to account receivables, we carried out excellent work here. We revised this constantly. It is an operating issue. We're enhancing these processes to reach that sweet spot, but we don't believe that we will have significant enhancement going forward. That level of 55 days seems to be quite acceptable, and we see the normalization of accounts payable.

When we adjust the inventory levels and adjust procurement to the levels we wish to have the average payable base return to the company's historical days. There has been no change in the contracts with our suppliers that would make this bigger drop. We saw that drop in some specific moments due to the inventory adjustment and procurement adjustment that we're funding less with everything adjusted at present, we do have that outlook that we will return to the normal level of accounts payable.

Another very important point to conclude in the next slide, we see that all of this is reflected in that positive evolution of the company's leverage, reducing the company risk as a whole. We do have a capital structure that is coming very close to what we had set forth as a call, a leverage of 1x. And this quarter, as Pedro mentioned, it is a special quarter in terms of results, but also in terms of cash. Historically, it's a quarter where the company is getting ready for the second half of the year, which seasonally tends to be stronger, and we consume more cash in preparation for the second half of the year because of the adjustment for safe and responsible growth and that additional, we have obtained an accounts receivable. The company has generated cash and has reduced the leverage vis-a-vis the first half of the year. Therefore, the capital structure will continue to improve. We are entering a better and stronger seasonal cycle for the company in terms of cash generation and the trend is to continue to reduce our leverage until the year-end. It has been a sound and robust quarter.

I would like to return the floor to our host so that we can go on to the Q&A session. Thank you very much for your attention.

[Operator]

[Operator Instructions] Our first question is from Pedro [indiscernible] from Safra Bank.

[Unknown Analyst]

We have 2 questions. Now if we consider the present day level of leverage of the company closer to 1.0x. If you can perhaps return to expand more stores in the fourth quarter, we should have a better level of leverage. That's the first question.

The second question, the increase in the exchange rate that we had recently. How are you preparing for this when it comes to Fisia, what will happen with your hedging? And what can we think about the Nike products going forward?

[Pedro de Souza Zemel, executive]

The first question, simply to make sure that we have understood it fully, refers to the pace of store expansion because of the reduced leverage on the better capital structure in the company. Now the answer for that is the following, Pedro. We have set forth, until the end of 2025, to focus on profitability, on cash flow so as to enhance the company's net revenue and to also enhance the company's capital structure. We must not lose our focus at this moment. It has only been 1 year since we have been doing this. We had planned for 30 months.

We began in the second quarter of last year, and it is not our intention to derail from this plan. We continue on with a very sound plan for the deleveraging and profitability as our primary goal. Of course if the spectacular opportunity comes about for a store opening, it will give us the comfort that we have the resources to do this. But in principle, our plan extends until the end of 2025 to enhance profitability and redo leverage.

The second question that you post refers to a hedge. As you know, we're speaking about the dollar here. We have a policy of approaching the exchange rate a year or 9 months beforehand to respect the cycle of this issue of how we work with our collections. Now we're fully hedged for this year. We're quite hedged for the collection of the coming year as well. And I can say that we're working on the hedging for the collection of the coming year. And for this, we have to observe the behavior of the dollar. There could be some volatility, and it is difficult to forecast. But relating to the year 2024, we have no risk whatsoever in our gross margin. Our collections for the fourth quarters have been fully hedged.

[Operator]

Our next question is from Vinicius from UBS.

[Vinicius Strano, analyst]

You spoke about an improvement of 7 points in full-price sale in Fisia. How do you look upon the evolution of this indicator going forward as this will translate into margins for Fisia? And if you could speak about the composition of gross margin for Fisia with the evolution of channels regarding the inventories, which have been the main drivers for the operational enhancement to reduce the gap between Fisia and Centauro when it comes to inventory?

[Pedro de Souza Zemel, executive]

Thank you for the question. I'll take it and then Salazar can complement anything. I'll speak about margin and Salazar will speak about the inventory. Now the margin of Fisia is quite simple. You will recall that last year, we had to offer a discount -- a somewhat larger discount than what we had planned. We'll be able to resolve that problem about surplus inventory. And this ended up with a gross margin below what we wanted. This was certainly not a strategy. The intention was not to sell more with lower margins. It was a consequent the inventory surplus that we wish we had not had, but it happened.

Now what we observe at present is that Fisia is returning to normalcy and to return to normalcy means to recompose margin. In the third and fourth quarters, you should see that same trajectory of a margin recomposition for Fisia. Now last year, of course, because of the lower margin, we had an exaggerated discount, we are now recomposing the sales. The decision is always taken to maximize gross profit. Now we have spoken about the channels and the mix which have an impact. And we have gotten to where we expected to get to in terms of share, truth is that our intention should be successful in all of the channels.

And the growth that we had a disproportional growth was due to the investments that we made and well, they have been made. What we are imagining now is that Fisia will go in a more balanced way among the different channels and that the wholesale channel will also be a vector for growth and not simply expectation that it will have to be diluted proportionately. This about gross margin. The gross margin should continue to increase, it is gradual and the rest of it will grow the coming year. And each quarter, we make some strikes and what we saw last year will appear in the P&L as a reversion.

[José Luís Salazar, executive]

Thank you, Pedro. Vinicius, there are several actions that we carry out. There is no silver bullet. I can give you some examples beginning this quarter, we're going to migrate our product delivery logistics to the Fisia stores. We're going to move away from our present day partner and deliver directly to the stores. Our present day partner, of course, renders excellent services. They will continue to render services for the wholesale market with smaller lots and they're ready to do this. But we do believe that we will obtain a better operating efficiency by distributing in our own stores, better than our partner because we have that knowledge of direct deliveries to our stores, something we have done for quite some time with Centauro.

Secondly, we're attempting to work to become qualified and to be able to clear merchandise from customs and do it internally for this, we have to work with an application to have that sale of quality of the income service, and this will help us reduce our custom clearance. Additionally to this, we have several initiatives underway to work with procurement more assertively in quantity. We are buying the product very effectively for products that have a good turnover. And we're investing to increase intelligence in this realm. We have small operational activities, no silver bullet, but it is daily work. We're speaking of 18 months ahead of us simply because we don't have that silver bullet. That is my answer. Thank you for your question.

[Operator]

Your next question is from Victor Rogatis from Itau BBA.

[Victor Rogatis Trevisan, analyst]

You have delivered a very strong same-store sales despite a drop in stores in some regions and good sales per square meter. We would like to understand the flow dynamic in stores if this has been maintained?

[Pedro de Souza Zemel, executive]

Victor, thank you for the question. To say that the flow has been a challenge for some time already. A challenge because we don't see a thriving flow and we have been working with other levers of course. Now we are mainly in shopping malls. We depend on shopping malls, but we also depend on people who come into our store. There are some things we can do to attract consumers to our stores. And jointly with us, we're working with a dynamic to work with the other parts of the retail dynamics.

What I highlight this quarter are our sales per client. Centauro has done a project to work with coupons so that whoever purchased the footwear can have another item. This has been successful. We have been working with the store team successfully and more than betting on a reversion of the flow dynamic. We're working on other parts of the retail dynamic. Now we're also working on the flow of course. And if there is a better market, wonderful. If there is no better market, we do have some drivers to work with.

[Operator]

Our next question is from XP, from Danny Eiger.

[Danniela Eiger, analyst]

I have 2 actually. The first refers to some comments that you have made. I would like some comments on the competitive scenario. Nike has faced some challenges in terms of innovation and new entrants here. We also have interest that have gained traction and that are competing with Nike, but with less intensity, but this also go through the flow of Centauro. How do you look upon this competitive dynamic at Centauro and Fisia? And what are you planning to do to address this in line with your strategy to transfer prices?

Secondly, the adjustment of expenses and company capital, something you have worked on very successfully deleveraging and a strong cash generation. Now what are you going to do internally? And how much do you depend on the market cooperation to bring in revenues and to continue to deleverage?

[Pedro de Souza Zemel, executive]

Well, thank you, Danny, for the questions. I will answer the first one on competition. Salazar will answer the second question. First point, which is important to underscore is that, we are in a market that is growing. It's a sports market, physical activities, a health market, people wearing more casual clothes, there are ever more people coming into that market. It's a secular trend, and it will accompany us.

Secondly, this is a highly fragmented market. with multiple possibilities of gaining share. And several can grow in this market without having to steal share from others. Now if we take into account that context, when I look at the group, the competition is highly active. Competition is very competent. And I think everybody is waking up early to see which states they will take. But everybody that is driving sports, driving brands, is doing a favor for the market. And of course, this ends up helping us indirectly. And the same happens when we foster a race or when another brand fosters a race, it's more people running, more people buying, running, wear more accessories. So we're activating the market, and this is positive.

We are positioned in the markets in which we compete with very strong brands. Nike is a very strong brand. Centauro is a very strong sports brand. So these of brands as other strong brands that will persist in the market. In the history of the market, we see that some brands appear, some are able to remain, but the large brands, the large players have been there for some time and will continue to be there. So these trends are important, but they are timely trends. Somebody appears in a market, everybody gets reorganized and we have to have that perspective that this is a constructive system and that Centauro and Nike will have longevity through this process.

Now there are challenges that were disclosed publicly regarding Nike. But it is the Nike brand. Once again, it's at the par of other large brands, and we have co-confidence that this will continue. It is one of the largest brands worldwide. In some specific markets at some point in time, it may rise or fall, but in the long term, we are in this partnership with Nike, and we couldn't have a better partner. We're extremely satisfied with that.

I will now give the floor to Salazar to answer the second part of the question.

[José Luís Salazar, executive]

Well, Danny, it's the following. I'm going to begin by answering, following what Pedro has just stated, this is a market that is growing. And we believe that this safe and responsible growth will continue to take place. We are in a thriving market where people consume sport in multiple ways. On the other hand, we have a strong focus on the control of expenses. We do not believe that we have attained the best possible position in terms of expenses. It doesn't mean that we have to make adjustments. But going forward, it means that we can continue to grow without enhancing expenses especially in those parts that render services to the business units.

We have artificial intelligence, digitation of processes, a series of drivers that we work with to ensure that we will not have a growth of expenses, and we do want to generate profitability. Once again, this is not a silver bullet. We have 8,000 people working night and day, working to obtain a greater efficiency. It is the retail market, and these things will happen through time.

Another important point from the viewpoint of profitability is what the company continues towards deleveraging, and we don't depend on a drop of interest rate. We have reduced our debt and by reducing the debt we will have less financial expenses. And of course, our results will lead to an improvement in our bottom line. In quotation marks, this is positive because these are things that are in our hands. They depend on our work. We have a great deal of workload, several actions, several activity, granular activities, and there is still work to do. There is no doubt about that. Thank you for the questions, Danny.

[Operator]

Our next question is from Goldman Sachs from Irma.

[Irma Sgarz, analyst]

I would have liked to ask a question about expenses, Salazar. But now that you have adjusted inventory, you will once again enhance the products at Fisia and the payment of royalties will increase once again at Fisia. How should we think about this line item going forward? There are some price increases that have been scheduled going forward. So how should we think about this line item? And if you could help us to see how this has helped you in your expenses in the second quarter?

[José Luís Salazar, executive]

Well, first, I will respond to the first part or the middle part of your question, which refer to the adjustments or the readjustments. We are already working with readjustments. We can confirm this later for the additional point for this year. This is an adjustment that we had in accordance with our contract. And in 2028, we have another adjustment of 40 basis points as well in terms of cost, because of the increase of royalties. These are the only 2 adjustments that have been scheduled.

Now how do we account for these royalties. They are accounted for on the delivery of the product and based on the stock turnover. You buy the product and you defer that product to calculate the royalty cost in a period of 180 days, so that it can be matched with the sale of the product in such a way that we will have revenues along with cost and that we can reflect the true margin of the company.

Now if we consider this mechanic, this dynamic, and if we keep in mind that we began working with adjustments in the second quarter of 2023, I would like to say that we're already operating in a situation of normalcy. What we are purchasing now has already been adjusted, and we're reflecting this correctly in those 6 months that we have to work with stock inventory or turnover in the company's P&L. This is our mindset on this. I don't foresee a significant impact in the reduction of royalties anything outside of normalcy for this quarter. Most of the expense readjustments that we had were in a situation of normalcy.

[Irma Sgarz, analyst]

Another question, if you allow me. Going back to the question made by Danny and looking forward, besides what you have at Fisia because of the volumes that are sold at Fisia through direct sales in the second half of last year, I would like to look at this and know what you are thinking in terms of innovation pipeline, categories that have acted as engines for growth, especially in the Fisia brand going forward?

[José Luís Salazar, executive]

Irma, thank you for the question. The sales comp is very difficult. It's simple in terms of margin while we're pursuing and this situation will rebalance. We see the margin growing, this has an impact on sales. But we're fully convinced of the capacity of Fisia to generate sales in the second half of the year. Now the world goes on, and it's not only because of these comps, there are 2 elements. We are quite confident and enthusiastic with the innovation pipeline of the products that we have seen, of what Nike is producing for this Olympic cycle. And subsequently, there are very interesting things coming up, we're quite optimistic in terms of this.

On the other hand, on the part of Centauro, the innovations and all of the brands, the new entrants and new technologies, Centauro benefits from this and can make the most of the sports brands. We have Adidas, Puma, Nike, [ Devin Booker ], I mean ASICS, hundreds of brands. So we are very enthusiastic because of all of this. First of all, because we see that Nike is enhancing the products with innovation, advances in soccer and running, racing and brand with a great deal of innovation for Centauro and that do belong to the sports market. We are in a good market where this volume of innovation can only be positive. Products and innovation will not pose a problem.

[Operator]

Our next question is from Vitor Fuziharo.

[Vitor Fuziharo, analyst]

I have 3 questions. First, regarding Fisia, if you could give us an update on the financial health and the inventory of Nike? And secondly, to understand B2C at Fisia, you have a very high penetration. Do you believe that it can maintain the levels of B2B? Or has this market grown? Or has there been a drop in this market?

[Pedro de Souza Zemel, executive]

Vitor, I believe that the chain -- the sports chain is becoming ever more robust. And as we use the inventories, we normalize margins, this entire chain of partners and customers can go back to purchasing and have healthy results. Process is quite lengthy, but I believe that it is gradually improving. The impacts will not be observed in the short term. Well, the truth is that Fisia has never looked down on the wholesale market. What happened was that possibility of growing at nike.com and the possibility of growing in stores. And we are going to continue with this.

Now the initial impact of the growth was very important. Proportionally, there was an 8-fold growth in the digit, and we doubled the number of stores that are performing very well. We're going to continue to focus on [indiscernible], and open selective products, especially for full-price stores. This is an important project with exceptional returns for the brand.

Now the shock -- the great shock is gone. And with the hotel channel returning to normalcy and with the growth of the direct channels, we expect that all of this will be more balanced so that it does not alter this proportion. This is our mindset. It is important to highlight that all the channels are healthy. What we needed initially was to compose the growth at nike.com and in-store openings to put the company into a more balanced position vis-a-vis where it is at present.

[Operator]

[Operator Instructions] The question-and-answer session end here. We will return the floor to Pedro Zemel for the closing of the earnings call.

[Pedro de Souza Zemel, executive]

I would like to close by thanking all of you, thanking the shareholders, who have invested and have had confidence in the group. I would like to thank our Board, our associates, our team, all of our partners, of course, for the group. And this quarter for us, truly was a landmark enabling us to conclude a first stage to end the year of the first phase and the confidence I have in the quarter is not due to the quarter, but because once again, the company is showing its strength and its capacity and its ability to deliver.

The company grew during the first year, almost 50% after the IPO with [ scanty ] investments, the company has shown the capacity of doubling what it does after began up having a growth of 8 digits, internalizing logistics and having a growth rate that practically doubled within the company. And now the company has reached profitability, good cash generation and very sound deliveries.

So the confidence that I shared with you is that this company can, of course, continue forth in different circumstances with different goals and we have a long journey. We will be going through several different stages and the company has to be able to navigate through all of them and the SBF Group has shown that it can navigate through all of these spaces.

Thank you for your interest in us. Thank you for the trust. My special thanks to the team for the results, for their deliveries and we're very enthusiastic in terms of the future. Thank you very much, and we hope to see you in the next call. Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]