Vivara Participacoes SA

BOVESPA:VIVA3

Earnings Call Transcript 2019-Q3

[Operator]

Good afternoon. Welcome to the conference call of Vivara to announce the results of the third quarter of 2019. And today, with us, we have Mr. Márcio Kaufman, CEO; Mr. Paulo Kruglensky, Operations VP; and Otavio Lyra Investor Relations Officer; along with the company's investor relations team. This conference call is being recorded. [Operator Instructions] The audio is being simultaneously presented on the internet at the address ri.vivara.com.br.

We would also like to say that statements made during this conference call relative to Vivara's business prospects, operational and financial projections and goals are beliefs and assumptions of the company's management and are based on information currently available. They involve risks, uncertainties and assumptions because they refer to future events and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions and other operational factors may affect the future performance of Vivara's and into results that will be materially different from such forward-looking statements.

Now we would like to turn the conference over to Mr. Kaufman, who's going to start the presentation. Please, Mr. Kaufman, you may start.

[Márcio Kaufman, executive]

Good afternoon to everyone. Thank you very much for being here in the first conference call of Vivara as a publicly traded company. Here, right next to me, I have Paulo, Operations VP, who will be talking about the expansion; and Otavio, our Investor Relations Officer, who'll be talking about our performance in the period.

As a brief introduction, Vivara is Brazil's largest jewelry store network with more than 240 points of sales spread throughout Brazil. We have a strong brand with almost 3,000 employees who do their best for excellence in service and a unique shopping experience with high-quality products and exclusive design. Vivara has an integrated model. We create a wide range of items, which makes it possible for us to have a wide mix of product in all price ranges. We own all our stores, and we operate 100% of our points of sales. This is very important because it makes it possible for us to be very close to our customers, anticipating their needs.

Vivara is a multichannel company, and we're going to strengthen our strategy in that area more and more. We have click-and-collect for all the stores in our network and we are investing in the unification of our inventory by implementing OMS. In this manner, we'll be able to make faster deliveries, making the most of our popularity in all regions of the country. With the improvement of our digital platform technologies and integrated inventory, we are going to offer more convenience and an even more seamless shopping experience to our customers.

Now I would like to go very briefly to one -- or some of the highlights of our performance. We were able to expedite the pace of our expansion, delivering 11 new stores this quarter. Considering all openings until November, there are 21 new points of sales this year. We have grown consistently in our revenue in all our channels, both in physical stores and online stores, too. We have kept the level of our gross margin, especially reducing the pressure that we had in the first half of this year, even considering the higher price of our raw materials. This demonstrates our capacity of managing our production costs. We have stabilized our EBITDA margin, our net margin, and we also delivered strong cash generation and annualized ROIC of 34%.

Looking into the future, we are doing our best and focusing our efforts to the last quarter of the year, which is very representative for Vivara. Typically, in our business, the fourth quarter accounts for more than 1/3 of our annual sales, a percentage even greater of our EBITDA and net income. It was like that in 2018, and we are expecting it to be the same in 2019. For Christmas, we have very commercial products with items to give as a present in all our product lines.

The combination of right products with an adjusted commercial strategies makes us very confident that we will deliver the results expected for this year. We are very confident that we will execute our plan for future years. I'm sure we will continue to grow, delivering the best experience and the best products to our customers, generating even more value to our shareholders.

Now I would like to turn the conference over to Paulo, who is going to give the details of the work of our expansion team.

[Paulo Kruglensky, executive]

Good afternoon, everybody. I'm Paulo. I'm operations VP of the company. I will be talking a little bit about the evolvement of our expansion plan. As Márcio said, we're focusing on executing our plan and are very confident about its delivery.

Talking about what we did until November, we opened 21 new points of sales in the year. We are monitoring all indicators, both of new and mature stores, assuring that performance of operations is aligned with our initial estimates. We opened 10 points of sale in places where we did not yet have operations in cities with strong economic activities, such as Anápolis in Goiás, Chapecó in Santa Catarina and Passo Fundo and Rio Grande do Sul. We opened 2 stores in Guarulhos Airport in São Paulo, one in Terminal 2 and another one in Terminal 3. And we have opened others in markets where we already operated, such as Ribeirão Preto and Curitiba.

We are now in the final phase of delivering another 10 stores that are going to open until December, including 4 live stores in Londrina, Salvador, Recife and Campinas, all in mature shopping malls where we already have Vivara malls. We are going to close 2019 with more than 250 points of sales in operation, exceeding our initial expectations.

Considering the 11 openings that we had in the third quarter, plus the 14 in the fourth quarter, we are going to reach the expansion speed that we need to deliver the 50 stores that we forecast for 2020.

Now we are working on formalizing contracts for the stores that we are going to open as of June last year. As to contracts for the new stores, we have already assessed former saleswomen of the network to assure that we will fill all leadership positions until next year. There are people who are familiar with Vivara's culture and values, committed to excellence in service.

These were my points. I thank you very much for your attention and now turn the conference over to Otavio, who's going to talk about our financial performance in the period.

[Otavio Chacon Amaral Lyra, executive]

We had BRL 308.7 million with a growth of 1.1 period (sic) [ 8.1% ] against the same period last year. We also had same-store sales of 8.5%, and this robust number as compared to the average of the retail. This quarter, we also had a better balance between the growth of price and volume as compared to what the company had in the first half this year. The growth was distributed throughout all the channels, as Márcio said, with a highlight on physical stores that grew 7% as compared to last year, and e-commerce that has been performing very well with 24% growth in the same period.

Gold and accessories have gained share as compared to last year this quarter. And this trend had already been seen in the quarter and continues for the year, whereas Life and watches have lost share in the same period, which will explain the trend of gross margin that we will be talking on the next slide.

Now on Slide #5. In this period, we have reported a gross profit of BRL 163.1 million, a growth of 8.5% as compared to last year, and a gross margin of 67.8%, a level that is very high as compared to the first half of the year. In a scenario with an increase of gold of 21.4% from BRL 160 to BRL 194.40 as yesterday, we are demonstrating that we can go through scenarios when there are increases of our main raw material without losing profitability and making our sales more profitable without losing in terms of growth.

Year-to-date numbers were still seeing some pressure on the gross margin, about 6 percentage points in the period, but we have already closed the gap because last quarter, it was 2.1 percentage points, maybe the main highlight of the period.

On the next page, you can see the evolution of our sales expenses. They have grown 11.4% in the period to BRL 89 million, adjusted here to the IFRS 16 effect and adding the expenses with rent that we had in the period. These expenses represented 37% of our sales with a growth of 0.7 percentage points as compared to the same period last year, especially because of higher headcount as an impact of more points of sales of the stores that we opened in the period and also higher freight experiences, especially because of the fast growth of our e-commerce channel.

On the page -- on the next page, #7, you can see general and administrative expense with BRL 21 million, a growth of to 12.8% as compared to the same period last year, representing 8.8% of the sales of the net revenue of the company, growing 0.3 percentage points as compared to last year, especially as a result of expenses with third-party services. We had a one-off payment of success fees of tax lawsuits, which we are not going to do in future quarters. We also had many different consulting services, especially related to our omnichannel strategy. Expenses with people also increased in the general admin expenses, especially as a result of strategic areas, a new corporate governance structure with the Board and committees and Board of Directors.

Now going to Page #8, you can see the result of these variations in the company's adjusted EBITDA and EBITDA margin. And here, they are adjusted to IFRS 16 in the quarter and year-to-date numbers, too. We are showing the effect of ICMs on the basis of PIS and COFINS with numbers that are comparable for you, too. We report BRL 53.6 million EBITDA in the period, a growth of 8.6% as compared to the same period last year, which represents 22.3% of the net revenue, stable as compared to the year before. Year-to-date numbers, we had BRL 153 million EBITDA, which represents 20.1% with a pressure of 0.5 percentage points.

On Page #9, we show net income and net margin. We report BRL 43.1 million of adjusted net income. Here, adjusted effect of IFRS 16 differently from the EBITDA. The contribution that IFRS 16 provides a positive contribution to EBITDA of the companies as a whole, and the net income, the contribution is negative. So we have BRL 3.5 million to make numbers comparable. And BRL 43 million that we reported in the period represented 17.9% of the revenues, relatively stable as compared to last year with a slight pressure of 0.2 percentage points. Year-to-date numbers, we have BRL 119 million, representing 15.6% of revenues, an expansion of 1.2 percentage points as compared to the same period last year.

On Page #10, we have Capex. The company's investments have grown threefold, respecting the use of funds with all documentations of our public offering. We increased the investments in new stores; in our factories especially; and in machinery for gold and silver lines of our Life line; and in systems for the current maintenance of our systems, as OMS; as Márcio mentioned, in our mobile POS system.

On Page 11, you can see operating cash generation. We had BRL 46.5 million and a significant evolution of almost BRL 18 million greater than in the same period last year. And during 2018, the company was recovering its inventory that along 2017, we closed the business here with lower inventory than the average cycle that we usually have of approximately 1 year.

And in 2017, we had approximately 270 days of inventory, and we recovered it to 1-year by the end of 2018. This effect takes place usually by the end of September, especially 2018. So here, you can see all this movement that did not contribute for the generation of operating cash during a few months of last year.

This -- as a result of this cash generation and moving to the next page, #12, you can see the evolution of our net debt -- reported net debt of BRL 192 million, falling 12.8% as compared to the year before, with a total indebtedness of BRL 280.4 million, about 63% in the short-term. And here, as we shared with you in the conversations that we have had during the roadshow of our IPO, we are working on that so that early next year, we can give you good news about that, too. We closed in the cash of BRL 88.3 million in the period, and so deleveraging as a result to 0.7x net debt over EBITDA as compared to the half year, reducing by 0.2.

This is all we had to say about our performance, and we are here available for the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Mr. Joseph Giordano from JPMorgan.

[Joseph Giordano, analyst]

First, congratulations on the IPO. So the change in mix, there is more sale of gold items when there is a pressure on gold prices and the macroeconomic scenario is still slightly difficult, so I would like to understand what has been leading to this growth?

And the second question is related to e-commerce. We see a significant growth. So what are the product categories involved in this growth, especially?

[Otavio Chacon Amaral Lyra, executive]

Joseph, thank you for your question, and everyone is seeing a good performance in the jewelry category in the period. This is what has driven the company's growth, especially in volume, during the first half of the year, and now slightly reverse in the third quarter. So as we said specifically along those lines, there are some product lines in gold with the aim of offsetting the growth of gold in BRLs and with a good acceptance with everything that we had. So there's a high level of growth overall in that category, so it has grown 12% in the period compared to the previous period in gold jewelry, and this contributed to the growth, but driven more by price and volume.

Once again, we have grown in all our categories, not just -- Life has grown, too, watches and accessories has grown as well. As to the growth in e-commerce, so it has been very much because of the long tail of products. So it's less on gold and more in other categories, still driven by the growth in bills. As the platform is becoming more robust, in e-commerce, we see growth is still based on marketing and performance investments that we make, so much more in volume than in ticket. From now on, we hope continuous performance in this channel, so we'll still invest in our multichannel platform. So OMS system is going to integrate inventories, and we will be able to improve customer experience a lot.

[Operator]

Our next question comes from Robert Ford from Bank of America Merrill Lynch.

[Robert Ford, analyst]

Congratulations on your results. Could you tell us more about your midterm goals? What are your average numbers in terms of jewelry stores, and your first experience with cannibalization of Vivara with the new Life Stores?

[Unknown Executive]

Thank you, Bob. So the malls we're going to -- we are going into have different profiles, some in large stores, other in smaller cities, or larger cities or smaller cities. So in these malls, in smaller cities where we have just opened or that we are going to open shortly, we see fewer jewelry stores than in the malls where we currently have stores. These smaller shopping malls usually have 2 or 3 jewelry stores. And as Vivara is a national network with a very strong brand, whenever we go to a new shopping mall, we have a short maturation period and the store reaches stable sales still in the first year. We believe that this strategy has been very good to provide good profitability to the new stores. Something very important that we note with some research that we have conducted is that much of what Vivara customers buy is impulse shopping. So customers that were not planning to buy something, and when they see our window or our stores, they decide to walk in and they end up buying. This is very much because our brand is well known and the low average ticket that we have, so that's why we have so much impulse shopping in our stores. I hope I have answered your question.

[Robert Ford, analyst]

Yes. But if you could comment the first experiences with cannibalization of Vivara stores with the new Life locations?

[Unknown Executive]

Today, we do not see any cannibalization when we open a Life store, which is usually distant from the Vivara store, so what we see is that Vivara store that is still selling Life, so they stop selling a little bit of silver and replace it by gold. So we increase the sales by square meter in Vivara stores because the average ticket of gold is much above silver. So customers are buying both gold and silver in Vivara stores because there's a higher average ticket. And when we have Life in other point in the shopping mall, we have a more appropriate experience for customers that seek Life.

[Operator]

[Operator Instructions] Our next question comes from Ms. Mariana Vergueiro from XP Investments.

[Mariana Vergueiro;XP Investments;Analyst, analyst]

Congratulations on your results. I would just like to get an update. Part of the funds that you have raised with the IPO are going to be used for a new brand focusing on class C. Do you have anything to say about that?

[Márcio Kaufman, executive]

Mariana, this is Márcio. Thank you. We are studying new markets. We're still formulating new strategies, and we are analyzing the different markets, the different possibilities. And yes, there is a very interesting market for us to operate on with a smaller average ticket. Our focus over the next few months are the brands Vivara and Life, and we are very confident of our growth. And of course, we will continue to study the possibility of a new brand and we're going to explore that. But right now, our focus is on Vivara and Life brands. This is where we are going to concentrate our efforts.

[Operator]

[Operator Instructions] Excuse me, if there are no further questions, I would like to turn the conference back to Mr. Kaufman for his closing remarks. Please, Mr. Kaufman?

[Márcio Kaufman, executive]

Well, thank you all very much for attending our conference call. And I would like to stress how confident we are that we'll deliver the results this year.

And I would like to thank you very much for your attendance of this conference call. Thank you all very much. Have a good afternoon, and see you next quarter.

[Operator]

Thank you very much. The conference call of Vivara has now ended. Please disconnect your lines, and have a good afternoon.

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