Vivara Participacoes SA

BOVESPA:VIVA3

Earnings Call Analysis

Vivara Posts 25% Top Line Growth, 23% EBITDA

Vivara has made a significant mark on the jewelry market, largely creating its own space with an impressive 25% growth in top-line sales and a robust EBITDA margin of 23%. As it expands its store count beyond 100, the brand's influence on market growth is evident, with a particular success in its recent wedding rings campaign. The company stands out for combining strong profit margins and rapid growth, a distinction that sets them apart as a market leader.

Introduction to Q3 2023 Earnings Call

In Vivara's third-quarter 2023 results video conference, there was a strong emphasis on engaging with investors through a Q&A session, a practice continued from the previous quarter. The CEO, Paulo Kruglensky, and CFO, Otavio Lyra, had previously shared their comments, which were made available on the Vivara RI website. Kruglensky highlighted Vivara's contribution to growing the jewelry market, citing the brand's success in pushing sales outside traditional seasonal trends—particularly in wedding rings—following a successful campaign. Vivara has surpassed the milestone of 100 stores and is showing a robust top-line growth of 25%, with an impressive EBITDA margin of 23%, a result Kruglensky expressed pride in.

Market Dynamics and Competitive Landscape

In response to analyst questions about gross margins, the company representatives acknowledged a differentiation in margins within the subcategories of jewelry, such as wedding rings. Gross margins were indicated to differ by approximately one percentage point between collection lines and more commercial lines. When questioned about aggressive competition from Pandora, the executives were confident in Vivara's competitive positioning, especially with Life's performance. They noted that Vivara and Life have successfully reinvented their market model and that competition, mainly based on kiosks, is distinct from Vivara's store-based growth strategy. Despite the price of life diamonds decreasing globally, the company does not see immediate threats to its margins and is closely monitoring the market.

Financial Strategy and Outlook

Vivara is expecting to normalize sales behavior, particularly with Life stores outperforming traditional channels. The executives shared that mature Life stores have grown over 35%, and newer tiers have performed beyond expectations due to the company's comprehensive strategic approaches. This success emboldens plans to expand beyond 100 Life stores. Regarding SG&A, a recent accounting reclassification is set to simplify administrative expenses, and the company is aiming for profitable expansion with 5 to 10 additional store launches next year. They anticipate a stronger, more efficient structure heading into 2024, suggesting a future of strong growth coupled with operating rehabilitation and an enhanced focus on profitability.

Tax Credits and Impact on Operational Cash

An important fiscal development for Vivara, the interdependence regime, was highlighted, which enables the company to tap into BRL 85 million of ICMS credits for tax payments in 2024. This comes in addition to the consummation of PIS/Cofins credits recognized in the third quarter. Executives expect these credits to significantly benefit operational cash flow in 2024, making it a turning point year that balances strong growth with the management of increased profitability and cash generation sufficient to cover main investments and profit sharing. Looking ahead, they project accelerated growth of 15% to 20% in 2024 with an expansion of 5 to 10 additional stores, compared to 2023. Furthermore, improvements in working capital efficiency and reduced stock levels due to factory changes are likely to be reflected in future reports.

Closing Remarks

The conclusion of the call centered on the company's solid growth, EBITDA improvement, and stock composition optimally positioned for a robust sales period encompassing Black Friday and Christmas. Vivara executives expressed satisfaction with the quarter's results and confidence in the company's growth and margin strategies. The call was wrapped up with a reminder that the Investor Relations department remains available for further inquiries.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, everyone, and welcome to Vivara's Third Quarter 2023 Results Video Conference. This quarter, as in this previous one, the company will dedicate 100% of the video conference time to the question-and-answer session. The video with opening comments by Paulo Kruglensky, CEO of the company and the analysis of financial performance made by Otavio Lyra, our CFO, has been available since yesterday, can be accessed at any time on the Vivara RI website. [Operator Instructions] If your question is not answered during this video conference, the Investors Relations team will contact you later to respond to your concerns.

Introducing the Vivara team, we have gathered here, as usual, Mr. Paulo Kruglensky, CEO of the company. Mr. Otavio Lyra, CFO; and Ms. Melina Rodrigues, Investor Relations Director. [Operator Instructions]

[Paulo Kruglensky, executive]

Good morning, everyone. Thank you for being here with us with another results call with our Q&A session. Before opening our Q&A session, I would like to give you some initial messages. Well, Vivara has been creating a market -- the market of jewelry without Vivara wouldn't have grown as much as it grew without Vivara.

Vivara was responsible for 40% of the market, gaining space in all categories. Vivara is a company that creates its market. We managed to create an event of sales out the season. This campaign that you just saw was a campaign that pushed the sales of wedding rings. Life is here, that's a reality. We have gone up the mark of 100 stores. It's a young brand, full of potential with impressive results.

We are truly -- we firmly believe that we need to focus on other segments as well. And this campaign was very, very successful in terms of innovation, bringing sales performance in pushing the category of rings, wedding rings in our jewelry session in general in this period. The sale of this type of product is emblematic because it's a share gain right where it matters. There's no share of wallet discussion. This is a growth in the market of jewelry.

And then we are boosting the market of jewelry in Brazil, not only with Life, but with the whole Vivara brand with years of performance in 2 digits growth. This result we bring today, and we share with you today shows growth of top line, 25% growth and an EBITDA margin of 23%. We always talk about the [ role of 4 ] companies that show EBITDA margin above 20% and growth above 20% that combined create a market and are evaluated as a highlight in the market.

So I'm very, very proud to be here to show this result, this growth to the market and open the Q&A session. I would like to thank the team. They were amazing in this month, in this quarter, a little flatter quarter in which we prepare for the season by the end of the year. This amazing team helped us deliver such good results. So now we can open the floor for the first question, please.

[Operator]

Well, our first question is the [indiscernible] sell-side analyst from Itaú. [Operator Instructions].

[Unknown Analyst]

I would like to ask you about this margin dynamics. It's so clear to Vivara this effect on the wedding rings campaign, advertising campaign. It has an impact on the gross margin. But let me ask, in terms of product mix, is it going to be more focused on wedding rings campaign? Or could we think about this mix of products in a more structured way with a lower margin sometimes.

And my second question is that can you talk a little bit about your perspective on short-term sales? We know that Black Friday and Christmas are the main events. We still have some weeks to go. But what have you felt in the weeks preceding these events -- end of the year events, in terms of consumer behavior and sales dynamics. So that's it.

[Otavio Chacon Amaral Lyra, executive]

Well, I will discuss your first question, and then Paulo will tackle the second. Well, let me tell you that we've had a quarter with a quantity of trends that we were seeing, not only growth and expansion and also effects related to gross margin. And here, let me tell you that we've had this extremely successful campaign that pushed the growth of important subcategories in the jewelry mix.

Important points, let me tell you that Life has been growing well with product margin within this category in a reasonable and stable way contributing to the whole result. This will keep on going, not only in the following quarter, but also in the following years. This effect of the jewelry category and mix inside the jewelry category, I think Paulo discussed -- I mean, he said this in his opening presentation.

We managed to create this effect out of season. So in the fourth quarter and from now on, we will follow the seasonal events according to the behavior that the company has always followed. We entered a fourth quarter in which the seasonality of collections is bigger. And we have then bigger margins than only wedding rings, which are the main -- one of the main products that follow closely or more closely the prices of the competition.

So let me tell you that the focus pressure of this quarter on margin has been supported by the less relevant tax credit due to the change of factory and also due to the accounting reclassification of [ UEA/DIFAL ] that weighed BRL 8.2 million in the deduction group that squeeze growth of liquids income in this period.

We entered this fourth quarter in which one reclassification keeps on being done, and this effect will disappear throughout the year of 2024 and the tax credit effect might be less relevant in spite of the change of gold factory to be -- that is expected by the end of this year.

December is not a strong production month usually. December is usually a month in which we have already produced and delivered the stock for the stores and you have expectations for the beginning of the year, which is not very strong compared to the other seasons of the year. And then this will lead to a somewhat balanced situation.

So we expect to continue gaining Life mix growth, a margin that is concretely above. In 2024, we expect acceleration of 5 to 10 stores in addition to our portfolio. And we still have Life with the biggest opportunity in terms of return and also in terms of geography. And then nothing changed structurally speaking regarding what we expect for upside in our business in the opportunity of Life share gain for the next few years.

We still expect that part of our profitability or additional profitability in this long run comes from gross margin coming from Life mix and from other improvements. For example, in the Manaus factory, we have just opened, and we expect to gain profitability in the next few months. I hope I have answered your first question.

And now Paulo with you.

[Paulo Kruglensky, executive]

Thank you Otavio. Now talking about short term and seasonality in end of the year events, let me tell you that we started the quarter in a very good position in the same pace we finished the previous one, 40 days of sales with the same level of growth we've had before. And the expectation for the Black Friday event is very huge inside the company, not only considering our preparation, as I discussed with new collections Life and Tommy Watch positioning, but also with the growth of the market -- the jewelry market growth that we have seen.

In 12 months, we grew 7.1%. And Vivara is responsible or is accountable for 40% of this growth in this market. We have been creating demand, and this is very important. And in the beginning of quarter, we are encouraged to sell during the Black Friday and Christmas, I believe will surprise many people here.

[Operator]

Our next question is from Eric sell-side analyst from Santander. [Operator Instructions]

[Eric Huang, analyst]

I have 2 questions. One is a follow-up regarding this gross margin aspect. So in jewelry category, how much of a difference we have here? Is it relevant in terms of collection lines and more commercial lines? If punctually, we see a movement of what we could expect in terms of gross margin. And on the Life side in this quarter, you showed an evolution of sales in mature stores in the past 12 months, right?

If you could comment on how we have observed the evolution of this dynamic by start here in also our cluster and also in the most recent waves of expansion.

[Unknown Executive]

Eric, thank you for your questions. Well, I'm not going to talk about strategies of the company in terms of pricing or secrets of the company. But let me tell you that in the subcategory of jewelry, there is a margin differentiation between wedding rings, solitary rings. And in this category, we operate in the whole with the caps around 4, 4.5. And the difference between caps for collections and other lower categories is around -- the difference is around 1 point.

So disadvantage of growth that we've seen in the third quarter based on a successful campaign focused on the subcategories, then we started to see and felt this effect. And again, thinking about the fourth quarter and next year, obviously, we are subjected to everything new we do in our business.

But the Life and Vivara's average behavior will remain. Of course, there are different seasons and biggest events where we sell more the subcategories, not only in jewelry, but also seasonal events in which we sell more of Life products. This leads to this combination or mix of the fourth quarter, which is not only the largest one in terms of sales but also in terms of growth profitability in the level of gross margin -- or growth margin.

So we expect to see the normalization of these behaviors in terms of this sales, except there are new creations and the consolidation of the mix of Life category, a front of other sub-products of the company. This -- to give you a highlight, this is the first quarter in which Life stores surpassed the channel of Life within Vivara. So it's clear to see that we have created the perfect environment to sell this type of category.

So the stores are really nice, and we will open more of them. Complimented on what Otavio said regarding the surprising performance we have seen in the mature stores, we have looked at Life not only in the point of sales, but also considering a 360 strategy, marketing products, CRM evolving so much in the Life clients journey.

This will have a direct impact on sales. So we see these mature stores growing over 35%. And when we look at the companies we opened the second-tier stores, they have also had a performance above what we expected based on this strategy. And these strategies that we have decided to follow, they are good for the mature stores, and they are good for the second-tier stores as well.

This makes us feel comfortable to accelerate this growth. We want to have over 100 Life stores. We will reach 106 Life stores, and we still have on track launchings. But this moment, in which we want to empower the Life brand with new communications, new products to make this brand more relevant increase or enlarge, extend its awareness, it has brought results to us already.

[Operator]

Our next question comes from Danniela sell-side analyst at XP. [Operator Instructions].

[Danniela Eiger, analyst]

I have 2 questions. First, regarding SG&A, we -- it called our attention because the second quarter there was a little lower in sales. Let's think about the future. We -- can we expect them to be more relevant? That is more investment in marketing, like the campaign you have discussed. So let's discuss this SG&A dilution?

And the second question is regarding competition. We have seen on the media reacceleration of opening of Pandora stores, and they have a positioning above Life and below Vivara. So let me ask you, how do you see competition with this more aggressive dynamics presented by Pandora?

[Unknown Executive]

Thank you, Danniela. Well, first of all, I believe that recently, we have -- we've had an accounting reclassification round. So our results could be clearer with a clear trend showing where we were going or where we could see operating dilution in our business.

From now on, I believe we will add less weight in our business to this. We have prepared the structure. Most of our -- the structure we need to make this business happen in the medium and long run. But talking about more details on what we did in the previous quarter, good part of the seasonal operation in our business because they were below administrative areas.

They were accounted on staff expenses in general and administrative expenses. Thus, in seasonal events, it seems that the company were growing in overhead expenses, fixed expenses and more adhered to the increase of inflation in the period or even more because we were adding structure in that period. This explains 2 effects that we can see in the results of this period, a stronger weight or a heavier weight or heavier pressure on staff and sales -- related to sales.

This is heavier if compared to preoperational expenses in our company. This leads to more pressure on operational and administrative expenses due to these reclassifications that we did also. So areas like technical assistance, logistics and good part of the marketing department. We open this detail in the immediately previous quarter. This is weighing on top of that.

And this was not done a year ago in the third quarter of 2022. So from now on to sum up, we can simplify the administrative expenses of the company in general even in an accelerated pace of expansion, 5 to 10 additional stores to be launched next year. So we want to have this expansion with -- expansion in profitability. And next year, we have a better and more efficient structure, so we can enter next year like this in a more prepared way.

Now talking a little bit about the competition. Well, before I talk about the competition, let me talk about Life's journey positioning in the past few years and in our change of the mix. Today, Pandora's product competes with Life. It doesn't respond to 35% of our turnover.

Vivara and Life could reinvent themselves in this market model. Today, [ Manaus ] is a less relevant category for us. And the competition is growing in a different model -- different from our business model. We decided to grow more in stores and not so much in kiosks. And this competition expansion is primarily based on kiosks.

And my personal idea here in the customers' experience, I believe we have some competitive advantages that makes us feel comfortable concerning all of these changes in the market. You also talk about Life diamonds growth in what we see in the world is that the price is going down. If we did that movement before, we would suffer with our margins because the price which was too high is going down. It's becoming cheaper and cheaper. And we haven't seen any big movements of Pandora itself regarding turnover performance.

The [indiscernible] of the turnover. It doesn't call our attention. We will keep on following the market and the competition. We will see how the world will deal with that. But for the short and medium terms, we are not so concerned about that.

[Operator]

Well, we have no sell-side questions yet, but there is a buy-side question here before we end this call. Natasha [indiscernible] is asking us about PIS/Cofins credits that if we can have a larger opening of other revenues that appeared in the EBITDA consolidated movement.

[Unknown Executive]

Well, before talking about more details, it's important to talk about the transfer timing of these credits. We recognized this during this quarter and trying to be more efficient. By the end of this year, we will be able to make transfer regarding Black Friday tax payment, which are very relevant. So what comes from this will be used in the next period and we have cash operational gains that are higher.

And other events that are there and which haven't been adjusted as recurring events. It's because they are recurring events. We're talking about a mix of 3 main topics, which are rent allowances -- 3 recurring things in this period in which we are checking the results, which are the combination of allowances, rents agreements, rebates regarding the company's payroll agreement that's super usual and also import credits.

We've talked so much about that this year was a year of changes, changes in terms of factory, you anticipated the production to -- regarding also this import of the Life line. And it has different counter -- it may lead to lower markups regarding products and also allows us to have import credits here, which are obviously positive effects in this period. So these are 3 recurring events that distribute themselves through this number or in this number, this figure that you can see, the post-adjustment number after the event.

And we only adjust for events. There are material events and not smaller or -- not smaller events. So these were the details. To complement my answer, I would say some -- I would like to say something that wasn't said before, and maybe it's not related. But regarding the expectation that we have for 2024, we've had on the 7th, the happy news that our interdependence regime was approved.

Let me just remind you all what it is about. Well, we have BRL 85 million of ICMS already rectified or accounted for at Conipa in Sao Paulo. They buy gold and they transfer to Manaus and generates credits here in Sao Paulo. This credit couldn't be used even if they were accredited because Conipa cannot consume or make use of all of these credits.

Now with this interdependence regime, we have the approval so Tellerina makes the payment of taxes using this credit, this Conipa credits. And with that, we have the happy news that we have available the use of BRL 85 million in ICMS, this BRL 85 million in credits for the next month, along with the PIS/Cofins credits that were accounted for in the third quarter and will be used in the following periods.

So besides that, we have additional BRL 85 million that will be used in operational cash in the next year of 2024, in which we'll use up most of this BRL 85 million. This is something that also increases our expectation regarding 2024, a year in which we'll also discuss accelerated growth in the order of 15% to 20% with openings of 5 to 10 additional stores compared to this year of 2023. And 2024 will be a year in which we'll be able to balance strong growth and operating rehabilitation.

With all the events that already been described, this will be a year of more balance in terms of cash management. The increase of profitability will bring benefits to operating cash results, along with the events I've just described, the consumption of important tax credits. And summed, they will lead to over BRL 100 million to be used up not only in 2024, but most of them will be used in that next year.

And next year, we'll have sufficient cash generation to cover the main investments we'll do next year, and also profit share, as expected in the company. So we have this turning point next year. After the IPO, you are using this capital to generate growth. And for 2024, we will achieve a higher balance in our business as a whole.

I talked about -- I've also talked about our expectation to generate more working capital. This is a part of our business in which we all -- I mean to which we all pay attention. Maybe in this first quarter, it's not so visible, but it will be more efficient in terms of the use of inputs in the factory, less purchases in the period with due dates of important agreements that will appear in our cash flow management.

And this will reflect in stock drops. It's not still reflected because of the changes we made in the factory for watches and life and also the last part of the gold, which is still in the old factory.

Do you have any other question waiting in line? If not, we can end this call.

[Operator]

We do have 2 additional questions from buy-side questions.

[Unknown Executive]

They have just answered. They lose some working capital stock. I think Otavio discussed this in his final answer, I believe.

Well, thank you, guys. So our main -- the key takeaways, this is -- there's a very good growth, growth in the EBITDA, stock composition, so we can have a very good Black Friday and then Christmas here. We're very happy with the results, with the growth in margins. And thank you very much. Let's sell, okay? Thank you so much. Thank you for your participation.

[Operator]

So we now close the Vivara's video conference. The RI department is available to answer further questions and comments. Thank you all, and have a wonderful day.

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