Vivara Participacoes SA

BOVESPA:VIVA3

Earnings Call Analysis

Vivara anticipates strong growth and improved margins into 2025.

Vivara's earnings call highlighted a promising outlook for revenue growth and operational efficiency. The company plans to launch 12 new collections in Q4, contributing to approximately BRL 250,000 per store in sales. They foresee an expansion of physical stores, targeting 70 new openings in 2025 while continuing their focus on improving gross margins. Upscaling their workforce from 800 to 1,200 employees aims to boost production capabilities. The expectations for the coming year are optimistic, with anticipated benefits from improved inventory management and strategic investments. Overall, Vivara is set for enhanced performance driven by these initiatives.

Navigating Through Earnings: A Positive Outlook on Growth

In its third-quarter earnings call, Vivara showcased a resilient performance highlighted by strong sales dynamics and a strategic approach toward growth. The leadership signaled optimism for the upcoming holiday season, traditionally bolstered by events like Black Friday and Christmas. Last year's inventory management adjustments and recent expansions in product lines are expected to invigorate sales.

Sales Performance and Future Projections

Management revealed that the Life segment, which had faced challenges due to fewer product launches, is set to regain momentum with the release of 12 new collections in the fourth quarter and ongoing inventory adjustments. There is a solid expectation for sales acceleration, marking a crucial shift from previous quarters. The company anticipates continued growth with plans to expand store count by 70 in 2025, thereby capitalizing on increased consumer demand.

Gross Margin and Operational Efficiency

A focus on improving gross margins was underlined, acknowledging past pressures due to production dynamics and a growing workforce at their Manaus facility, which expanded from 800 to 1,200 employees. Future operational strategies are aimed at leveraging this increased workforce for enhanced output as the business grows, particularly in the Life segment. Adjustments are expected to yield margin improvements through better inventory management and efficiency gains.

Investment in New Product Launches and Brand Strategy

An emphasis was placed on launching new collections across the Vivara lines, previously limited due to delayed launches. The intent is to balance inventory with ongoing demand, particularly in the Life brand which has seen 35% of its stores mature recently—up from 18% a year prior. This maturation is projected to stimulate future sales as marketing strategies shift toward effective inventory allocation and maximized operational efficiency.

Market Expansion and International Pilot Projects

Vivara recently opened its first store in Panama, marking a cautious yet strategic foray into international markets. This pilot project is aimed at assessing potential future operations outside Brazil, focusing primarily on the Vivara brand. The management expressed confidence in this gradual expansion, which aligns with their long-term growth strategy, overseeing both market penetration and brand recognition.

Anticipated Adjustments and Cost Structure

Looking forward, Vivara is targeting a more disciplined approach to expense management, including a revised expenditure goal of 3% to 3.5% of revenue, promoting tighter controls and efficient resource allocation. The leadership expressed that upcoming financial returns from these initiatives might reflect positively in subsequent quarters, potentially easing margin pressures observed in the past.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, everyone, and welcome to Vivara's Third Quarter 2024 Results Video Conference. In this quarter, the company will dedicate 100% of the time of this video conference to the Q&A session. The video with opening comments and analysis of financial performance made by Otavio Lyra, the company's CEO, has been available since yesterday. It can be accessed at any time at Vivara's IR website. [Operator Instructions] Well, let me introduce the Vivara's team. Here, we have Mr. Otavio Lyra, CEO and Chairman; Mr. Icaro Borrello, COO; and Mr. Caio Barbuto, Investor Relations Manager. We will now start the Q&A session.

[Operator]

Our first question comes from Rodrigo [Indiscernible], sell-side analyst, Itau BBA.

[Unknown Analyst]

I have 2 questions. First, regarding sales. And I would like to break it down into 2 boxes. First, I would like to understand if you see any dynamics of this acceleration due to the macro scenarios, elasticity, something like that. How is your feeling about selling in November and October versus the third quarter? What can you share about this on sales? And second, also on sales, can you help us think about brands, about segment, let's say.

My perception is that assortment work at Vivara has been done for a while. But [Indiscernible], you give more traction now, increasing stock and inventory -- sorry, inventory in stores. Do you have any results of this increase in inventory in the store? And what about sale acceleration by segment or product? And I have a second question regarding working capital and inventories. Many people wonder what is the trade-off between the inventory in stores and the recovery in sales and acceleration in sales. I'd like to understand how you see inventories going forward. In the third quarter, you were flat more or less year-on-year in spite of the sequential growth you have discussed, and how do you see the modeling of inventory from now on?

[Otavio Chacon Amaral Lyra, executive]

Good morning, everyone. It's a pleasure to welcome you all here. So let's start. Rodrigo will answer your first question about this acceleration of stores and some feeling of lower sales during the macro scenario. We do not believe that -- we have grown in Vivara due to better allocations in terms of inventory. You can see this. In fact, your comment was pertinent regarding Life. Life segment had a structural problem due to smaller levels of launches, especially in collections and for male clients, especially we've been dealing with that. And now in the fourth quarter, we will launch 12 collections. Some of them are already going or getting to stores. You can check some of them in our website. And this will continue in the first quarter of the next year.

We will increase a little more to remove this gap regarding lesser or lower level of Life launches for the next year. And regarding working capital, we understand that the better or the best allocations here to eliminate rupture -- disruptor at Vivara Life will also go through an increment -- increase in inventory. It's lower in terms of costs if compared to Vivara. So it's a source of lesser concern to us. We understand that we need to launch new products, new things that the level of inventory will be dealt with. Just let me add, we are making some important bets. We extended in the -- from the second to the third quarter, we increased this and the expectation is to -- obviously, we always depend on seasonability. We are hoping for Black Friday and Christmas season. We have some flat days, and we have to take this all into consideration.

[Operator]

Our next question comes from Danni Eiger, sell-side analyst from XP.

[Danniela Eiger, analyst]

Congratulations on the results. I have 2 questions. First, regarding gross margin dynamics. Many people were paying attention to the drivers behind this margin pressure. It's clear the mix dynamics and also investments in the factory. I would like to understand the understanding -- check the understanding if you can expect improvement in these dynamics for the fourth quarter, both in dynamics because you have more Life participation, you have more launches of new collections. Is it -- does it make sense to think like this? And also regarding the use of the factory through time, this will decrease this pressure as you reduce this idle capacity. So I would like to understand this gross margin trend. And going forward, you have -- you are pretty optimistic regarding '25 in terms of profitability and growth. So I'd like you to explore the main leverages, the main drivers, maybe this Life inventory adjust is -- will be one of the drivers of this growth. And what else can you see in terms of opportunities moving forward?

[Otavio Chacon Amaral Lyra, executive]

Thank you, Danni, for your questions. Well, I believe regarding gross margin, and you're very assertive in your reading of these movements and the trends and your explanations, the reasons why are very clear to you. In fact, we continuously throughout the year, we see a dynamics of seasonability of sales that is pretty known by all of you. after we went public, you all know about that. And with the new hopes for life, the 12 launches and all of many opportunities in terms of inventory, we do hope to address part of this margin effect coming from this mix dynamics you mentioned. We can expect something of this for the fourth quarter and also throughout 2025, as we reinforce this additional inventory on top of the contribution of BRL 250,000 per store we've been signaling through the past few quarters.

The factory has gaining speed in production. We have some adjustments still to make. We will increase the number of people. It comes first, and we had a large increase of number in the payroll. You can see that -- it went from 800 to 1,200 people in Manaus. You can see that to deal with this increase in volume we're dealing. In the fourth quarter, due to the seasonability, we can see an offset of this pressure because the payroll will be the same, and we have more sales in this fourth quarter. And throughout -- next year, the expectation is that in the middle and long term, we will have some gains, but we will respect seasonability between quarters. Maybe we'll see some pressures concerning factory and payroll against -- if compared to the previous year in terms of comparison year-on-year. But it makes sense that this additional sales, not only for the fourth quarter, but with considering a healthy growth for next year brings another scenario for this line.

For the medium and long term, this line makes a lot of sense. So you get traction and growth margin. Life will represent a larger part of our business as we expand the number of stores and gain more and more number of sales versus other categories. I believe what has happened this year has to do with allocation of inventories we've been making so far. And in 2025, in general, we can expect that this will be pretty similar to what we have shared annually. The expectation is to have a continuous expansion in terms of physical stores, super based on Life as we've done this year. We've been looking at 70 stores in '25 to be opened. We do have a good pipeline for the first quarter.

It's possible that we can start next year in a more accelerated fashion as we did in this year in '24. But what we see is another year of accelerated growth, both considering the ongoing projects, we still hope to capture part of this benefit, we can see -- we already can see in the second and third quarter. And next year, we'll have benefits considering the movements of Vivara improvements in inventories and capturing benefits in the fourth quarter and throughout 2025 based on the improvements we want to bring to Life to this category.

And improvements in new products and not only that, but all of this disruptor movement we've been taking, and we have taken a long way throughout this year of '24. We redesigned in the past, and we shared with you these figures, very expressive figures due to the redesign of our mix, especially because of that. And we have taken a long way in this sense, but we still have work to do. It's possible to reduce this in our stores, and we will address more in the fourth quarter these issues, and we'll bring more improvements in this next quarter and next year. So before I pass on to [Eiger], I would like to tell you that we hope to have an expansion of operational margin. We've been disclosing good news regarding that. Adjustments -- corporate adjustments in terms of efficiency and expenses. We centralized purchases throughout the year based on synergies and gain that were captured throughout the year.

So for next year, this has already been hired, let's say. It's already done and expected.

Just let me complement on 2 very important pillars, especially Life. We've been working hard to increase this level of nationalized products to have a very good appearance in this final quarter and beginning of the year. And in terms of logistic mesh, we will gain in terms of taxation plan. This is very good promise for next year. We hope to expect this for the second half of next year.

[Operator]

Well, our next question comes from Eric Huang, sell-side analyst from Santander.

[Eric Huang, analyst]

Congratulations on your results. On our side, I have 2 questions. Regarding expenses, we saw a relevant adjustment in expenses in accordance, in line with what you said in market. And moving forward, this level we've seen in marketing expenses of this size? Or are you expecting some changes due to seasonability? And in terms of personnel and staff expenses in stores, we have a level that we can consider more normalized, more reasonable to carry this level moving forward, respecting also or considering the seasonability. And another question regarding the project on Life inventory. How are we -- for the beginning -- how are we positioned for this beginning of this fourth quarter? How to understand this ongoing project and the ramp-up of this project in this first stage. What is the level -- in which level are we right now? And how can we expect to evolve in the next quarter and also in the beginning of next year? How do we understand the effect on this for sales?

[Unknown Executive]

Thank you, Eric, for your questions. Let me start with your first question. Obviously, the marketing line called the attention on this quarter due to the operation all size. It's worth mentioning and highlighting the magnitude of this impact of this image and marketing movements in this quarter is affected by a higher level of marketing than normally expected by the company. I mean, the third quarter of last year. So last year, we had 5.7% of the revenue in the third quarter of '23 in this area. And this was an annualized level we have never updated. So we invested more -- so we had 3 additional points in the marketing side. We do not expect to have that moving forward. But what we do believe due to the work we've done, we've been carrying out through the past quarters is that it is possible to invest more efficiently, this capital we've been allocating to generate sales, especially.

So we do have some fronts we can capture, we can work in -- we can start working on right now ongoing, and we may -- we probably will go back to the previous level. So we can continue to see this operation moving forward. In terms of stores, in this quarter, we saw a first quarter that was cleaner in terms of events. And in the expenses with sales, there is administrative parts of sales, the business units that help dilute in this addition. But in fact, the highest impact comes from adjustments of commissioning during the second quarter.

In April and June, we completed in sellers and managers in life and also Vivara looking for a stronger maturation of the stores. And this was the first quarter that was cleaner in which this base was consolidated. We should see some pressure moving forward. We will continue opening stores, good part of our portfolio, the life portfolio, 35% of the stores are mature. And we will continue adding stores of this -- to this portfolio of this brand in a relevant way. So some pressure is to be expected, but we work to improve this moving forward as the portfolio matures, obviously. So the first question was well addressed.

Maybe we can move on to the second, on Life. Well, just let me complement something and Icaro can share this with you. We've been doing a movement to start improving inventory per store. We haven't seen this result on the Life sales up to now. We expect to have that in the fourth quarter, along with increasing the number of collections. What Otavio mentioned is important because when you look at the maturation, Life -- 35% of the Life stores has achieved maturation. Last year, it was 18%. So we expect to have a more complex -- and leverages are post, and we are working to have more collections to reap the benefits of this movement of this work in the next few quarters.

[Operator]

Moving forward, our next question comes from João Soares, sell-side analyst from Citi.

[Joao Pedro Soares, analyst]

Well, first of all, I would like to going back to what Eric mentioned, could we talk in a broader way about the staff? You are -- you've been investing in the factory staff on the factory employees because Life has a higher volume, it makes sense. But when we look at the other divisions, I would like to understand whether -- I mean, I understand that the marketing expenses were higher if compared to last year. But is there an optimal level in terms of additional investment? Maybe in a given moment in time, are you going to revisit these expenses? It's important to try to understand what is the optimal level for this business? This is the first question.

And secondly, I would like to talk about top management. Now we are going through a period of stabilization, but it's important because people have been asking about CFO and financial management. How is these processes?

[Unknown Executive]

Thank you, João, for your questions. To give you a little bit more information about this, the level we hope from now on is 3% to 3.5% of the revenue. In fact, we will remain in a lower level than in the previous years. Most of this has to do with a better efficiency in the management of this money. And we keep on working on the complementarity of channels. We keep on betting on this complementarity. This will be the focus of our investments going forward. Regarding the organizational structure and top management, especially, we've been sharing with you in the past few quarters that we've made the major changes we had to do. The structural changes have already been implemented. And now we will go through a period of regularity of normality. Any company has people who leave and who come in, in [CNTPs], and it's a regular movement. But now I believe this will happen to us, this regularization -- regarding the financial title, we're still looking for a name to work at Vivara.

We are in the advanced stages. We hope to have news for you soon. And the rest of the positions are already placed. We have very strong staff in these positions.

[Joao Pedro Soares, analyst]

Perfect. Just a follow-up. Icaro talked about efficiency of taxation, efficiencies last -- for next year. Could you talk a little bit more about this, please, about this topic?

[Unknown Executive]

Well, Joao, we cannot disclose so much about that. We're still building this strategy. But basically, we want to change our logistic mesh. Where are we going to make our deliveries in terms of store distribution? Well, yes, when we have this more -- this process in a more mature way, we can share this with you. We can disclose this with you, okay? For maybe 2025.

[Operator]

Our next question comes from Alexandre Namioka, sell-side analyst.

[Alexandre Namioka, analyst]

Congratulations on your results. Thank you for accepting my participation. I would like to go back to what Icaro mentioned in the beginning, one of the leverages you are working with to improve Life performance, specifically has to do with the increase of the number of collections, the launches of collections. You have -- you said that you started launching -- you start launching new collections in the fourth quarter. So -- and regarding the performance of these new launches, the launches you already made, how do you feel their performance -- about their performance? And moving into 2025, how much can you quantify in terms of improvements of Life sales performance coming from this inventory adjustments in stores? And how much will come from these new launches?

[Unknown Executive]

Thank you, Alexandre, for your question. Well, regarding the launching of new collections, what we have internally diagnosed, we have 50 to 60 collections so far, and they were old, kind of old because the lack of launches since the half -- the second semester of last year, we launched much less than we hoped. And now we are launching 12 new collections in this fourth quarter. And especially, they will be in stores more strongly from the first quarter of '25 on. And I mean, they've been going to stores in a very fast fashion. It's hard for us to keep up with the demand. But this inventory will work to be replenished for January and February, especially by February.

We will work to balance this demand with the inventory. So in Life, we identified that the sales of these collections launched less than a year ago was pretty relevant, last year with an important number and this relevance fell. So this is an important movement to improve our sales for this segment -- for the Life segment.

[Alexandre Namioka, analyst]

Perfect. And can I just make a quick second question regarding gross margin. I believe it's clear what you said about the pressure coming from the staff in the factory in Manaus, in the plant in Manaus, but we had an increase of almost 50% in the number of collaborators in Manaus. Maybe throughout 2025, will this increase be more incremental or in a given quarter, should we have another increase of that order of that magnitude?

[Unknown Executive]

Well, we do not expect to have another big increase like this. The increase of people comes before the increment -- or the increase in production. So the number of Manaus, we need to train all of these people, all of these employees, this goldsmith and they gain experience in 3, 4 months. We need this learning curve, this working curve. And so the expectation is that, especially for Life, we will produce more and more moving forward.

Yes. This is another minor aspect to it, Alexandre, but it's worth mentioning. This year, we feel there is 0, 2 points there. So this is why it's a minor aspect. But there is a pressure of higher investment made last year. So throughout this year, we see some pressure coming from that. But next year, this will not pressure results or earnings anymore. So this is another good aspect moving forward to contribute a little more for a slightly better margin in the future.

[Operator]

Moving on with our questions. Our next question comes from Guilherme Vilela, sell-side analyst from JPMorgan.

[Guilherme Vilela, analyst]

I had a question regarding penetration of watches. Thinking 1 or 2 years ago, maybe this category didn't have a high acceleration in terms of revenue growth. Specifically, this year, this is around 20%, 25% growth. So what is the most -- what is the strategy of the company regarding this category in terms of the mix and the penetration of this product? And regarding [RPJ credit] in terms of exploration credit. Can we expect this line in tax return moving forward? And from this third quarter on and how much?

[Otavio Chacon Amaral Lyra, executive]

Well, watches penetration, we have seen a very good performance of this category, not only in terms of sales, but also in terms of profitability. We've had good renegotiation with our dealers, with our providers. You see this in the next quarter. Our business is much more focused on jewelry, but we don't want to change this share, but we want to increase our sales, both in watches and accessories. In the past quarters, we have felt a specific issue in terms of that was already solved. Good assertive purchases, more and more, we understand that watches are relevant for Vivara and for Life, but we cannot have an idea in terms of share because we've been increasing the inventories for sale for Life and Vivara. In terms of the tax -- return on tax, it's smaller and recurrent, but it's smaller than what was presented this quarter.

[Operator]

Our next question comes from Wellington Santana sell-side analyst from Bank of America.

[Wellington Santana, analyst]

Congratulations on the results. I have 2 questions. First, one of the things you mentioned before was the possibility of increasing the penetration of Vivara's brand in areas, we do not have a strength of this brand, so to capture a higher level of sales. Have you completed this process? Or can you still see opportunities in this regard? And second question, you did -- I mean, you showed the performance of synthetic product. In terms of unit, economic performance of these products because they have a different margin if compared to other types of diamonds.

[Unknown Executive]

I'm sorry, can you repeat the second question? It was a little -- there was a little bit of a problem in your audio.

[Wellington Santana, analyst]

Well, you mentioned a collection of lab diamonds, right? What about the return of this type of product, the synthetic diamond products and their return and performance?

[Unknown Executive]

Well, regarding the penetration of Vivara's brand. In fact, we had a reclustering of these stores in the -- especially in smaller cities and some of them are the main jewelry store in the smaller cities. So we managed this in an expressive way. We do not expect big scale movements from this standpoint. Well, regarding your second question on lab diamonds, this is an initial movement. We have some products, just a few products launched in this line with an expressive sales due to the reduced number of items. Next year, we'll have collections to be launched. and the number of products that will grow.

We believe this has an exponential trend in the short, medium and long term and more -- they last longer if you compare to natural diamonds.

[Operator]

Now we will listen to Isabella Lamas from UBS.

[Isabella Pinheiro F. Lamas, analyst]

Congratulations on your results. I have 2 quick questions. First, going back to this reclusterization of Vivara, the reclustering of Vivara. Since last year, we've been working on the pipeline and revenue for the brand. In which point are you regarding the mapping and the evolution of how many quarters could we expect to see the results from this improvement? And now thinking about life, would you have any idea on when you wish to apply this project to reap these benefits also for the Life brand? And the second question has to do with the internationalization. In October, you opened a store in Panama. So could you share the first comments? We know this is a recent opening, but could you talk about the profile of this Panama store, the product mix there? And how can you see the step by step? We know this is a pretty gradual process made in a conservative way, very carefully. But can you tell us about this plan? Can you share more about this planning?

[Unknown Executive]

Thank you, Isabella, for your questions. Let me talk about the reclustering of Vivara brand. We can clearly see that this reclustered store, they pull a growth of the Vivara brand. We have a continued -- we will see a continuation of this effect in next year, and we have mapped all the opportunities they are in place. Now looking to the Life brand, it's a little bit different because we do not have a differentiation of clusterization of store mapping. In Life, we are studying this procedure. We are still understanding. We are beginning this trajectory for the Life brand, but we do not have a perspective for the Life brand to have an increase in performance, but an increase of performance for the Life brand coming from inventory and coming from new collections.

Regarding the internationalization, we opened our first store in Panama. This is a pilot project that will help us evaluate potential future operations. We are taking gradual steps. Our beginning is in line with our business plan with good sales. We know we have a maturation process that is natural. It's a new brand in the country, and we are in this learning curve. This is a process that is promising. As the operation gets or solidifies, we have more to share. Just a little more about the international stores.

In the beginning of Vivara, based on the idea of our founders, we launched the small stores. And in Panama, it's very important in terms of square meters. This is the main store in terms of square meters, in terms of size, maybe one of the largest. And based on our founders' idea, each time we launched the new store, we had to think about before launching new stores. So thinking gradually. We have a good number of sales, important inventory there, both in Vivara and Life brands, but it's -- that store is much more focused on the Vivara brand. So talking about your question about product mix and type of store.

Well, if we do not have further questions, we now close the video conference on Vivara's results. The Investor Relations department is 100% open to answer further questions. Thank you all, and I wish you have a great day ahead.