Vivara Participacoes SA

BOVESPA:VIVA3

Earnings Call Transcript 2019-Q4

[Operator]

Good morning. Welcome to the conference call of Vivara to announce the results of the fourth quarter of 2019. Today, here with us, we have Mr. Marcio Kaufman, CEO; Paulo Kruglensky, Operations VP; and Otavio Lyra, Investor Relations Officer, along with Investor Relations company of -- team of the company. This conference call is being recorded [Operator Instructions] The audio is being simultaneously presented at 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, operation 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 and lead to results that will be materially different from those expressed in such forward-looking statements.

Now we would like to turn the conference over to Mr. Kaufman. Mr. Kaufman, please, you may start.

[Márcio Kaufman, executive]

Good morning, everyone. Thank you for being with us in our conference call. In this completely atypical scenario, similarly to all our employees, we are working from home since last week. So remotely, we will be available during this conference call; and also Otavio Lyra, our IRO, and Paulo Kruglensky, our Operations VP.

Before going to the results, I would like to take a minute to give you some information on how Vivara is managing the pandemic. We have formed a crisis committee to have speed in making decisions and to preserve the health of our employees, partners and customers. The first important information is that all our stores have been closed since Saturday, 21, even for the malls that were still open on that date. So we started closing in the middle last week and everything was closed on Saturday. So this was a natural movement of the company because of the recommendations for isolation for everyone.

Along the last week, we have also shut our offices. And today, we only have people working in critical areas to keep our IT communication structures operating and logistics teams. During this period, we have implemented several actions. All our product inventory in transit between stores, they were redirected to our distribution center and e-commerce center for distribution and for our store organizing and be fast in replacement once activities start again.

One important point, we don't have any bottleneck in the factories, and we have enough inventory of all finished products to supply our stores over the next few days. For the time being, our Manaus plant is still in operation, but we will soon stop activities over there too. Another important point is, the features of our inventory is different from other industries. Our inventory is perennial, doesn't become obsolete and they can be used at any point once we open again. And 30% of our inventory is raw materials. The rest finished products can be turned back into raw materials, if necessary.

The expansion that was being conducted with excellence by our team is now interrupted. So far, we have opened 12 stores, and there were another 3 to be opened before the end of March, but the schedule is now on hold. Our contracts are maintained. And we have construction work in many sites. And obviously, the schedules will be postponed. We are paying attention at the opportunities that might arise at this time of turbulence.

For all contracts with stores, the company is in conversation with shopping malls to find a solution that will be appropriate for both sides. Moreover, we are also assessing the company's investment plan for the year, adopting a more conservative stance at this time of uncertainty to -- that is best suited to the moment. Other than that, we have a solid balance sheet that will make it possible for us to overcome the rough times.

Our cash is strong and is prepared for the entry of BRL 400 million from the IPO, also the cards, and BRL 350 million in stock. And I would like to conduct the exercise to go back to 2019. We cannot fail to celebrate the first annual quarterly financial statement as a result of the IPO. It was a year of consistent results, right products in the stores, well-trained staff, best customer service, challenging projects and innovation.

2019 demanded a lot of hard work from our team. We had important challenges to overcome and clear objectives to reach. Our IPO was successful. And today, we are here to report excellent results. We had the historical mark of BRL 1.5 billion revenues. On December 24, we set the historical record of sales on a single day for our chain. The gross margin was 77.6%, in spite of an increase of 40% of raw material. EBITDA, BRL 72 million with a 23.2% margin, in spite of a faster expansion and the reinforcement of our administrative structure.

The higher number of stores -- we opened stores at a fast pace. We opened 14 stores in the last quarter alone. We ended the year with 253 new sales outlet in all regions of the country. This year, we reinforced our structure, and we have another 3,400 employees and third-parties working for us. So we had 54 hours of training per employee. And our e-learning platform has gained new courses aligned with the consumer demands and focusing on our team of saleswomen to assure the best experience to our customers. We also advanced in sustainable practices and restructured our sustainability department. We have become members of the group for assurance of responsible mining and also in women empowerment of the UN. We are the only Brazilian company, which is part of Responsible Jewellery Council.

We made many investments, and we've had planned many investments for 2020. We are ready and prepared to deliver an excellent year. We have a resilient and engaged team to overcome the challenges.

Now I would like to turn the conference over to Otavio Lyra to give you the details. Otavio, you may continue.

[Otavio Chacon Amaral Lyra, executive]

Thank you, Marcio. Good morning, everyone. It's a pleasure to have you here once again. Starting on Page 3 of the presentation with the highlight of the expansion of the network, as Marcio mentioned. So we opened 14 new points of sales with 7 Vivara stores, 4 Life stores and 3 new kiosks, and we also closed 1 kiosk that was converted into a store. So 13 net openings, closing with 256 points of sales with the breakdown that you can see at the left. So 191 Vivara stores, 6 Life stores and 56 kiosks in the same period. So compared to the end of last year, 31 openings, 18 Vivara stores, 4 Life stores and 9 kiosks. Overall, 9 kiosks were closed totaling 22 net openings, and 6 out of the 9 shutdowns were kiosks that were changed into stores and 2 were absorbed -- and 2 kiosks were taken into Vivara stores.

On the right-hand side below, you can see the expansion of the company in this year as a whole of the 31 stores that we opened in the period. So we are still focusing on -- we still have a focus on the South and Southeast regions of Brazil, a little bit on the Northeast, and we are not really focusing on the center, West and North regions.

On the next page, you can see the evolution of our operating revenues in the fourth quarter and the year with 7.4% in gross revenue net of returns in the period. We have reached BRL 521 million. And for the year, BRL 1.5 billion, a growth of 9.8% as compared to 2018. In the quarter, the company's growth was driven by 8.9% growth of physical stores, and 14% growth of our e-commerce, which had the fastest growth throughout the year.

Total year, the stores grew 10.2%, and e-commerce grew 20.6%. In terms of same-store sales, within the quarter, within Q4 '19, we had same-store sales of 7.4%, considering our e-commerce operations of 6.5%, considering only physical stores. Now going -- looking at the year as a whole, it was 8.6%, considering e-commerce operations of 7.5%, excluding e-commerce, considering only physical stores.

Now we continue this quarter to grow and the dynamics focusing more on price rather than on volume. So we held the price adjustments in the first half of this year, growing a lot in volume and making the most -- and using the time to gain share in the market. After we had a stronger gold in dollar, we also started to adjust our prices. And in this manner, we closed the profitability gap along the year and reversing the growth dynamics and with a better balance and healthier relationship between growth and profitability. So this quarter, 90% of the company's growth came from prices and only 10% from volume. And this balance, the whole trend that we had been presenting during the year, for the year as a whole, price versus volume was 50-50. So we had a quite well-balanced absorption of growth, which made it possible for us to protect the company's profitability with a very good dynamic.

In the lower part of the slide, you can see revenue by category. So the products -- the company's growth was driven by jewelry, and we are gaining share 2.6 percentage points. During the period, we are retracting a little bit and taking a little bit of share of Life with a more moderate growth. And the highlight for accessories that gained share along the period, we got to 2.9%, almost 3% of the revenues. That is growing at a faster pace.

Now on the next slide, you can see the evolution of gross profit and gross margin. And this was the main highlight in the quarter. And I believe that this conveys a very strong message of how much the company is capable of adapting to hard times as this one, and we are seeing it in 2020, and we'll need to adapt.

But here, especially for the quarter, the company recorded a 4 percentage point increase in the gross margin in the period, and also seeing it again. In the beginning of the year, in the first half of the year, we had 200 basis pressure on the margin in comparison with 2018. But as we've transferred prices, we could close part of this gap with a difference of only 50 basis points after the third quarter. And a very strong pricing dynamic, especially for jewelry. We'll have higher prices with a very high compliance of collections that were launched by Vivara in its stores. We got a combination of profitability that was very interesting. The collections, as I said before our conference calls, that I was explaining the dynamics of new launches, it's very important for us, for our company to adapt to new scenarios. The collections were launched with fixed markup, and in specific years with more movements that are busier, and so there is a profitability again in the short term and it becomes very interesting.

So we are very happy here with everything that we could do during the quarter with BRL 294 million in gross profit, a difference of almost 15% as compared to the year before. And we closed the year very stable, 0 -- 3 percentage points in difference in the adjusted gross margin as compared to the previous year with a 68.1% gross margin.

And here, there was a good acceptance of new collections, when we are very effective in specific price increases in the categories where we saw that there was room for price increases. And within the same context, the ideal year for Vivara is not a year with a sharper increase in metal prices or in FX rate, but as this is negative for us, it's even worse for other players with a smaller scale. Right now because of the growth dynamics of our gold products and the collections that we have been releasing to the market, are slightly more fragile in this period. And we believe that in 2020, this will be an important factor when we see more clearly the recovery of sales after the whole lockdown is over everything that we are experiencing, especially in the shopping malls.

On the next page, Page #6, you can see our sales expenses. So here, we had BRL 133.4 million, a reduction of 6.2% as compared to the expenses we had last year. Once again, for comparison purposes, we adjusted IFRS 16. Looking again, the expenses with rent -- and once we do that, it's 31% in terms of the net revenue in the period in contrast with 33% in the same quarter in year before. For the year, as a whole, the company had BRL 404.6 million in sales expenses, 30.7% of the net revenue. And ex-IFRS adjustment 16, or if we adjust it back, it would be 34.8% in the period, very much in line with what we had in the past in spite of a scenario when the company accelerated the opening of stores. And most importantly, very much concentrated in the end of the year, which reduces even further the potential of operational leverage of the stores. A very interesting result as a trend in this short period of time.

On Page 7, you can see the evolution of general and administrative expenses, BRL 43.2 million in the period, a growth of 46% as compared to the year before here, especially. And as in previous quarters, with a higher contribution of services from third parties, especially consulting to support the implementation of our omnichannel strategy. So in the year of the IPO, we could already see the results of previous quarters with a partial effect of everything that the company has been doing along the year. And now in Q4, we can see that more clearly, with a fuller picture, when a solid basis of how we will evolve over the next few years. For the year as a whole, we had BRL 126 million expenses, accounting for 11.8% of the company's net revenue, almost 25% in contrast with BRL 110 million in the year before, which accounted for BRL 10.4 million of the net revenue in the period.

As a consequence of that, in Page 8, you can see an EBITDA that evolved from 28% to 29.2% in a period, a difference of 1.2, BRL 119 million, an increase of 13.2% over the year before. For the year as a whole, we are very much in line with our expectations. For the results in this period, BRL 272 million with a 10.7% expansion as compared to the year before, with an EBITDA margin that was stable year-on-year, 23.2% in the 2 years.

On Page 9, you can see the impact of that in net income and net margin. The highlight here is the net recurring increase of BRL 107.5 million in contrast with BRL 81.8 million in the same period last year, a growth of 31.5%. And once we adjust IFRS 16 to have a fair comparison basis, the net -- adjusted net income is BRL 105 million with a margin of 29% as compared to the year before when we had BRL 81.7 million. So this result -- so the additional expansion arising from here in this line in contrast with the expansion in operational results for the company were driven, especially for an important significance, so 3 percentage points in our financial result, how much it represents for the company. And here, especially because of a lower cost of our debt, either because of specific renegotiations that management conducted and, of course, because of the lower interest rate along the period and the lower cost with advancements of credit cards, the company closed 2019 with 0 balance of advances. And this impact in dynamic of working capital of the company had an impact. And there is a cash -- an average cash balance that is higher than in the period before. And obviously, because BRL 400 million net that came in due to the IPO on October 2019.

Here, on the next slide, you can see the evolution of the company's CapEx. We have invested in this period BRL 21.1 million, a significant growth as compared to the year before, especially because of the acceleration because we have more physical stores and investments in maintenance and renovations of our stores, investments in the factory and also investments in systems IT.

For the year, [ BRL 46.5 million ] were invested, once again, in contrast with BRL 13.2 million only in the year before, and this is very much in line with what we had planned to invest in the year.

On Slide 11, we have here the evolution of cash generation in the period. The company had a free -- consumption of free cash in Q4 '19 with a generation of BRL 144.9 million in the same period in the year before. So this difference of more BRL 200 million is due especially because of the different time of the company because of our change in policies for credit card. When the IPO funds that came in during the year were finalized, everything that we had reduced the cash of advanced payments during the period. In December, the balance was 0. The final balance for 2018 was BRL 180 million, approximately BRL 179 million to be more precise. And this provided a very important contribution to the flow of operating cash and this is very important for the Vivara. So excluding receivables for Q4 and the year, we can see that these numbers and this trend, they are much more comparable than they would initially seem.

So the fact that we did not advance payments in a period -- so there was a cash consumption of BRL 120 million in Q4. And so consumption by operating activities is BRL 35.8 million, and then we have adjusted here a generation of BRL 84 million in the period with the same adjustment in Q4 '18. It would be comparable to BRL 72.4 million in the same period in the year before. So a difference of 16.2%. So this reflects a trend that is more in line with the evolution of operational results that we are reporting. It makes much more sense with what you were expecting to see.

For the year of 2019, the consumption of BRL 3 million and the same effect because we did not advance payments for cards. So we advanced BRL 185.8 million as compared to BRL 157.5 million in 2018. Here talking for the year as a whole, with a difference of 18% in the period.

Here, once again, this shows how robust the Vivara is in the reporting of its financials, and how well prepared we are to deal with the challenging times we currently have and everything that COVID-19 may impact our operations.

On Page 12 are the relevant numbers for the same analysis. We can see the evolution of the net debt of the company now, net cash. So from BRL 192.1 million net debt in the 9 months of '19, the company closed the year with BRL 165.5 million net cash, which provides a very robust position for us to deal with this longer winter time.

So now I would like to reinforce the message. Vivara doesn't have only BRL 430 million in cash, but that is very much within what is acceptable considering our businesses. But we are not as negative in terms of cash, especially because of our shorter payment time. So as last year, we paid everything. So we continue until the end of February, and beginning of March, our cash was BRL 400 million. We have more BRL 400 million to receive in our inventory. Our product is also considerable, considering both raw materials and finished products, and they can be turned back into raw material. And all of this is net, which provides us a very solid position for Vivara to go through these rough times.

And now ladies and gentlemen, these were the results of our last quarter of 2019, and now we are open for questions and answers.

[Operator]

[Operator Instructions] Our first question comes from Thiago Macruz from Itau.

[Thiago Macruz, analyst]

My first question is, so the gross margin and we see that it's been gaining share. Could you tell us more about that? Did you feel along the quarter that the competition was weaker with more difficulty to take in the higher cost of gold? Do you think there will be a similar effect in your businesses in 2020? So any additional detail is helpful. And if you allow me, I would like to ask a question about M&A. The market is very fragmented. Do you think that this scenario that changes every day will lead to more transactions in your market? Do you think it's something reasonable to anticipate?

[Otavio Chacon Amaral Lyra, executive]

Macruz, this is Otavio speaking. Thank you for your question. I think that we can say in terms of additional details, yes, we see the competition losing share during the period. We saw that along the year, and we're still seeing it in the first quarter of 2020. Once again, it's difficult for us to say things -- something for sure. But once we go into more details, and we see the growth trend and the acceptance of the collections and the subcategories in Vivara, this makes us to really believe that the competition dynamics is slightly weaker, considering what we know in terms of transfer dynamics, absorption of short-term impacts and how players have -- players with lower scale work. So the effect here effectively shows that collections are very well accepted, and with good margins. And what we see is that even though silver has been losing share during the years, we gained profitability within the gold and in Life categories, which, by the way, also had a cost increase. So this is what we see here. And until a few days ago, when we were thinking about 2020 and we were seeing ahead of us, a very good growth dynamics until a week ago.

As to M&A. Within the COVID scenario and with great imprecision of how long this may last, I think that for the time being, we are not yet just talking about this in the company. First, we need to have a clearer picture of what will happen over the next few months before analyzing anything that might make sense. We are reassessing all contracts, the contracts for organic expansion of our network.

[Márcio Kaufman, executive]

Now Mr. Kaufman speaking. Right now, our focus is on the company's cash. Right now, we do not have the intention of having any M&A operation, and we will continue to see the evolution of COVID before we change anything in the evolution. As to your question about the gross margin, I think we should complement that right now, as we have seen in other crisis, this is a time when we can see -- so silver gaining shares compared to gold. And there are wide products to deal with crisis moments. We have a lot of inventory. We are the leading silver manufacturers in Brazil, and it may help to offset any pressure that we might have on the gross margin of gold, considering the higher margin we have for silver.

[Operator]

Our next question comes from Olivia Petronilho from JPMorgan.

[Olivia Petronilho, analyst]

Two questions actually. First, about the dynamics of gold prices. What do you see on the supply side? Commodity prices that is up, but at the same time, the market is not so heated up. So what do you see in terms of gold prices in the future?

And the second question is more about the short term, still considering the COVID scenario. You analyzed the recurring fixed cost of the company. We would like to understand which times of expenses would be possible to cut? And how much do you imagine that would be the company's run rate for the next 30 or 45 days?

[Otavio Chacon Amaral Lyra, executive]

Thank you for the question, Olivia, again. We are monitoring, obviously, very closely the effect of commodity prices, either dollar or the price increase of gold in dollar. And once again, we have considerable inventory, which gives us more time to react to this type of effect. Now with the effects of COVID, we have even longer, it doesn't make sense for us in the short term. We're still seeing a lot of instability in commodity prices for us to continue with the company's regular supply activities, buying regularly as we used to. We can wait slightly longer to have more rationality. In terms of what we can see in the next few months for us to start buying again, to resume activities, to resume business as usual. Marcio talked about our Manaus plant that's still operating and -- but this might change very soon. And we are considering what has been recommended.

As to the company's cost structure, what we can tell you right now, means that most of our sales expenses, as in other businesses, and the variable compensation that we pay to our saleswomen. And so almost 70% of this expense line is -- effectively varies with revenue. So this is related -- it also affects profitability and 30% is -- so our personnel line is 60% to 70% variable. Rent is 60% variable. Marketing is calibrated according to specific decisions of the company. Other expenses, such as card, third-party services, they are also variable on -- related to sales. And third party is too -- is 80% variable. And so we can adapt to any new level of sales that we might see over the next few months or weeks.

In G&A expenses, today, we have 80% of our personnel line is fixed. Rental line is completely fixed. And our third-party service line is 50% fixed. I hope that with this profile, I can give you slightly more visibility. We are right now working on the different scenarios in terms of what may come, in terms of effect. But in fact, we have a variable that is very determining, which is time. The time we are going to gain more visibility so that we may effectively have more precision. We are reanalyzing 100% of our contracts. We are negotiating and talking to shopping malls, trying to reach a balance, something that will be reasonable for both ends. And we will make the necessary adjustments to protect our business during this period.

And lastly, in our cost line, it's almost 95% variable. The part that is fixed is because we have expenses with the factory, which are classified there. And this is fixed expenses, which is more difficult to adjust depending on the scenario and on at times, we may adjust it too.

[Operator]

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

[Robert Ford, analyst]

Marcio, I am aware that this is a very unique period, but could you tell me of how Vivara recovered in past crisis? And what are your expectations once you open again your stores? And if I remember well, you're adding new production resources this year. Could you tell us more about that and what that means for product differentiation and margin improvement?

[Márcio Kaufman, executive]

Thank you, Bob. When I look at different technologies, so there are some machines and tools to improve productions, for example, silver bracelets, gold stamps and others, that help us to increase our gross margin without a third party in between. So in terms of opening of stores, we have been monitoring other countries and the news, and we are seeing daily changes. And what we are doing is to prepare our team to be ready. So soon as the malls are open again, we're structured that we'll be ready to deal with that moment. This might take a few weeks, but there is a daily change and we are trying to adapt to all changes. As to other crisis periods, a crisis period that we felt more strongly in Brazilian retail, 2015, '16 and '17. At that period, Vivara increased its silver production. Silver production, it was very helpful to us over that period when [ period ] were not so willing to buy more expensive items and our silver grew a lot, helping our gross margin.

And I believe that over that period, something very similar might happen. We are super prepared to allocate our silver production, something that will happen once the turbulence is over. I also saw this crisis in '08 in September. So back then, we didn't have a significant share of silver, but we could adapt our production to manufacture lighter gold items with thin plates that helped us to go through the turbulent times, once there was a recovery along '09 and '10, and then we intensified gold production again. So Vivara is going to use very much this production flexibility that we have and adapt our products. We -- our product is good. They're millennium all products that have gone through many centuries and many crisis that will help us to stand out in relation to the competition. Today, our competition is weaker, and Vivara is going to make the most of the moment to gain more share. Once the crisis is over, Vivara will be even stronger in comparison to the competition.

[Operator]

Our next question comes from Pedro Fagundes from XP.

[Pedro Fagundes, analyst]

I have two questions. The first one is, I would like to hear from you an overall diagnosis about the status of the chain in retail. What have you been seeing over the past few weeks? And what do you expect in terms of what might happen if what is going on with us today, if the situation persists for a longer time, like 1 month or more? And the other thing is the online performance. Could you tell us more about that?

[Operator]

[Operator Instructions]

[Márcio Kaufman, executive]

Pedro, can you hear me?

[Pedro Fagundes, analyst]

Yes.

[Márcio Kaufman, executive]

I'm sorry. Could you please repeat your question about e-commerce? I apologize. My -- I had a problem with my line. I didn't understand.

[Pedro Fagundes, analyst]

Of course. No problem. The question was, what are you seeing in terms of sales trends more recently, the net effect, so a slightly higher focus on the channel. What do you see? What do you expect for the next few weeks?

[Márcio Kaufman, executive]

So starting from your first question, I think that in terms of the status of the chain, when we look at our operations and impact we may suffer, we have very large manufacturing capacity, and this is an advantage for us. It's up to us. And where we source our raw materials -- we have very solid companies. So we buy gold from AngloGold, stones, too. We have a good inventory, not to be affected in this period, no matter how long it may last because of our coverage, dynamics and extension and how inventory works. So in fact, to us, for our operation, considering how we see the chain, various -- very -- firm stability in terms of how we may tackle with everything and the prospects or the outlook that everyone has been sharing like the government, for example.

Within our online business. We have seen a quite interesting growth trend. And during the year, and in the quarter, I can give you more information about what we are already seeing in the first few days in terms of the main effects, but we had a quite sharp growth as compared to physical stores based on volume. So we are seeing higher sales. And we also had a quite interesting conversion rate during the year. So the growth of this platform has become a cheaper a long time, which is super interesting. And when we look at products, we have also seen some similarity with the growth profile of our physical operation. So in the online platform during 2019, there was a growth that was quite stronger for jewelry, about 35% in Life, double-digit growth, too. And in watches, also very good growth. So a little bit less than 20%. So what we have seen is dynamics across the board in all categories. It was very nice.

Along the year, we saw so strong consistency in Life, jewelry. We saw a slight slowdown in watches from the middle of the year in the online platform. First to hold the profitability a little bit and a quite intense growth in terms of accessories. Online, although the basis is very small, the category has been growing more than 70% year-on-year. Now in the beginning of COVID, we are seeing and we are working on some specific actions. So part of the investments are online for us to make the most of it, but we are not yet seeing any more relevant movements. We're still analyzing the possibilities in home. But in terms of consumer behavior, we can already see higher sales as compared to previous periods. It's not yet major absorption from the physical channel. And we are expecting some problem due to the -- because of the physical stores to give you a more accurate numbers, still too soon for us to say anything, how customers are going to behave from now on.

And complementing what Otavio is seeing, what we can see online, is a slightly higher growth of silver as compared to watches and gold. Which is very much in line with what we can see from now on. And we have very sturdy inventory for online, which will help us through this period. We have no problem of product supply.

And as to our final considerations. Thank you very much. We are now ending our questions-and-answer session and today's presentation. I would like to thank everybody for your presence, for being with us this unique time in history.

I would like to thank everyone for trusting Vivara, which is a very resilient and strong company that has overcome other crisis. I think that our brand, our processes, our products, and our team that is very much driven will help us to overcome this challenging time. Thank you all very much.

[Operator]

The conference call of Vivara has now ended. We thank you for your participation, and we wish you a good day. Thank you very much.

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