Empreendimentos Pague Menos S.A. (PGMN3) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning. Welcome to Pague Menos' Conference Call to announce the results of the first quarter 2025. This call is being recorded, and the replay will be available on the company's Investor Relations website at ri.paguemenos.com.br, where the slide presentation is also available for download. [Operator Instructions]. The slide presentation will be shown in Portuguese, and the English version is available for download at ri.paguemenos.com.br. Before proceeding, let me mention that any forward-looking statements made during this conference call are based on the beliefs and assumptions of the company's management as well as information currently available to the company. These forward-looking statements may involve risks and uncertainties since they refer to future events and, therefore, depend on circumstances that may or may not occur. Investors, analysts and journalists should consider that events relative to the macroeconomic environment, the industry and other factors may lead to results that differ materially from those expressed in such forward-looking statements. Today, we have with us Mr. Jonas Marques, CEO; Mr. Luiz Novais, CFO and Investor Relations Director of the company. And now I would like to hand the conference over to Mr. Jonas Marques to start his presentation. Mr. Marques, you may now proceed.

Good morning, everyone. I'm very happy to start our conference call for quarter 1, 2025, in a month that is iconic for our history because, on May 19, 2025, we will be celebrating 44 years. And when we look at how much we've built so far and when we look at the horizon, we see our dream of perpetuity. We still have a lot to come in the future. And to talk about quarter 1 before, I would like to send our greetings to the more than 26,000 employees and their families who have supported us every day over and over again so that we can fulfill our mission to bring health with love to all Brazilians, also all our shareholders, the controlling family and especially to our more than 21.7 million customers. Yes, you heard correctly. We had an increase in the number of customers. And these people and their families are delegating to us the extraordinary mission of taking care of their health. So, let's talk about quarter 1 because we have a lot of figures to share with you today. And considering the feedback that we always get, we are bringing to you examples, stories and much more content at this time to share with you. So, let me start by putting things in perspective. There's a concept in psychology that is called figure and background, where figure -- where the figure though, the subject, is the main topic and the background puts everything into context. So, what was the background that we had in 2025 from January to March? It was extremely pessimistic. We had a global war starting. We had several examples of lack of reasoning, lack of negotiation. The economy was slowing down. Our GDP was growing at 1%. So, we had 2 choices. The first one was to be pessimistic to look at all the negatives and to play to avoid losing. And the second thing we could do was to look inward and pay attention to all the work that we did last year, fine-tuning what we did last year because we were looking at our strategy, we were taking care of our people, and we were striving and really putting a lot of effort into the perfect execution. And we made -- we chose the second option here, play to win, to have consistency, to have discipline and to keep on delivering great results. And why? Because this has everything to do with our perpetuity plan. So, the background was not positive, but we try to put the subject into a positive context. So, I'm going to show you the intangible -- our intangible assets. Please bear with me because our intangible assets are our people. When I was researching all the valuation rules of a company, I didn't find a chapter about people, teams, talent. And here at Pague Menos, we decided to do it differently. When I had the pleasure to join this company, I really found giants here. And this picture here is a picture where we have our construction and culture rituals. Those are the events in which we celebrate our results and in which we combine our strategies because the strategy, as we heard from a famous CEO, is that execution eats strategy for breakfast. So, these are the moments. This is the intangible assets that we have. And now I'm going to start naming them. We have Carlos Fernandes. Carlos Fernandes is an attack player. He's a [ fully ] technical engineer who takes care of people's agenda, telemetry, and he gives lives -- he gives life to the implementation of our strategy. And he has a twin. His twin is Wallace. Wallace is in charge of the commercial part with his team. If you have in a company, a commercial team that works really well with operations, you have the perfect combination, the perfect pair. And together with them, we have Renato Camargo. Renato Camargo is our marketing strategist with -- he's responsible for our marketing strategy with his team. And we have a lot of the same in the market. So, let's forget about that. And let's forget the -- and let's remember the initials that are dear to our heart. It's very easy to say we take care of people and we take care of their health, but it's difficult to really execute this. So, we have these 3 people. In technology, we have an excellent team with excellent deliveries last year with no idleness in our systems, no downtime in our systems. We have downtime -- we have Novais, who's going to talk about the context of our numbers, and we have Jose, who is in the foundation of our strategy. So, now let's talk about our consistent delivery of results. We had our fifth consecutive quarter of good results, a quarter that actually is the apex of all the strategies that we started implementing and adjusting last year. What makes us win the match is not the yeses, but the nos. So, we decided to focus on a few priorities. We have our same-store sales growth here. We had 17% same-store sales growth. When we decide to deleverage the company and improve the return of the assets that we have, we have to work better with what we have, and this is exactly what we did. For the first time last quarter, we started to break down what is the cement increase, the first bar here. So, in the first quarter, 4.5% and 13.2%, which is the growth above the cement, which composed at 17%. Our sales growth has been increasing and very consistently increasing even in this quarter, and we know that the market was suffering. So, sales very positive, mature sales, we grew nearly 3x as much as the market or the benchmark. When we look at our EBITDA margin, we had another excellent result. We were up by 55%, and you're going to hear the highlights later. And this is progressive. Look at these numbers. In quarter 1, it reached 4.8%, and the March results are even stronger. When we look at the net income in the past 12 months, BRL 178 million. This is 5x the LTM that we had in the first quarter 2024. I came here many times on behalf of the team to say that we were rationalizing our stocks. We were reducing our stocks because, every day, they cost us BRL 40 million. We are at 105 days. And what about stockouts? Stockouts improved and reduced in number. This is very important and very difficult to do because retail is in the details, right? And our ROI reached 25.9%. I heard from an echo in the market that we should focus on our ROI. When you're over 20%, we can talk again. And I sent him a text message today telling him that we are over 20% now. So, let's look at the highlights. We have the greatest highlights of the quarter, not just the numbers. You already saw the numbers, 70.1% increase in our gross revenue. And how did we do this? We have very strong execution, which worked really well. We have our promotional strength. We have our marketing and digital intelligence. You're going to see that in digital, we had an increase of 53.6%. We're talking about 17.6% -- a share of 17.6% of our sales. This is really strong. And this growth in sales is miraculous. And this is the main building block of our EBITDA. The EBITDA reached BRL 150.3 million, a 55.2% increase year-on-year. And here, I have another takeaway for you. We have 14 managers. We have frequent meetings with them. We look at our expenses in details. The expenses are just like that picture we have on the wall in our home. And then when we look at it every day and in the second week, we stopped seeing it and the devil is in the details. So, the EBITDA was one of the main growth factors for us this quarter. Now the net income comes from our sales with a 1 point expansion point in our adjusted EBITDA, which resulted in a positive net income. And I must remind all of you that we were able to reverse the loss that we had in quarter 1 last year. And now we have profit. And for quarter 1 -- for first quarter of the year, this is really remarkable. Now a very important topic is our cash flow. LTM, BRL 487 million, a 16% increase year-on-year. And here, we have the magic of stock reduction. Let me give you some numbers. We reduced by 50% all the products that had more than 90 days of stock in our stores, a 50% reduction in products with more than 90 days stock. So, this is a remarkable reduction. And finally, our market share. We grew in all the regions very consistently, particularly in the North and Northeast and the Midwest. In the North and Northeast, where we have nearly 21% market share, we grew more than 80 basis points. This is really impressive. So, let me go back by -- to saying that in the company's valuation, we should always have a chapter about people and teams. So, Novais, now I hand it over to you for you to show us these numbers in detail so that we can really show the great quarter that we had in quarter 1, 2025.

All right, Jonas. Good morning, everyone. Thank you for attending our call. I'm very happy to share the results of the quarter. Jonas already showed you the highlights of the quarter. In quarter 1, we really started the year really well. If we add the calendar effect because, in February, we had 1 day fewer than last year, we would have grown nearly 18%. So, the graph speaks for itself on Page #8. So, Jonas already showed you this in our introduction today. As you already heard, we are showing our fifth consecutive quarter of growth. We traditionally have been conservative. But after 5 consecutive quarters, we are really positive about the company's future because this growth is sustainable and structural. Now on the right side, we have the same-store per region. We already heard from Jonas that we grew more in the Southeast, Midwest and South, but also 3x the inflation rate in the Northeast. And in the third chart, we have the split by store portfolio. Our same-store sales by store portfolio has a balanced growth between the different stores, but Extrafarma is showing a slightly higher growth. So, team engagement, and we have 3 other very important elements. We have store execution. We have sales campaigns -- killer sales campaigns and our digital channel that is growing exponentially. Now on the next chart, we see the composition of our growth. So, all the important components in our sales growth, we see a lot of evolution in the customer base, and you already heard from Jonas, nearly 22 million active customers, the customers that buy -- that have bought with us, have purchased anything with us in the past 12 months. And here, we have the split about -- between average ticket and growth. So, we grew in all these parameters, customer base, purchase frequency, an increase of 4.3% due to the CRM team work. Also, the shopping card increased by 4.8% and a 2 percentage point increase in our positive mix effect in our RX mix, which is a key category for any drugstore. This is because of better assortment than better quality. So, this is structural, sustainable growth that will sustain our growth in the coming quarters as well. In addition to these factors, we also have our digital channel. The digital channel was essential for our growth in the quarter. We reached a share of 17.6%, which is remarkable, nearly 54% increase compared with quarter 1 of '24. And some of the record-breaking numbers that we have on the right, we increased 66% in our e-commerce sales, 78% in our app, more than 300% in WhatsApp sales. We have record-breaking share of 57% of our Click & Collect modality, and we had a daily sale that surpassed that of the Black Friday 2024, which means the digital channel is evolving consistently and strongly. This is also due to a lot of pricing intelligence, killer sales campaigns, beautiful execution, beautiful timing, delivery timing and assortment. As a consequence of this evolution in our sales, we see our evolution in market share, as you already heard from Jonas. So, we're seeing the sixth consecutive quarter of increase in our market share, even with only 7 new openings this quarter, and we're growing in all regions in Brazil, particularly in the Northeast, growing 81 bps. So, on the right, we see our evolution quarter after quarter, we are seeing the strong evolution since the start of 2023. Now on the next chart, we see the growth components with data from the IQVIA Group. In the first column, we see the new stores, mature stores and closed stores. So, the market increased by 11% in the IQVIA measurement. And the second bar shows Pague Menos and Extrafarma, 18.5% growth. What really stands out here is the dark blue block, which is the growth of our mature stores, nearly 18%, whereas the market grew less than 7%. So, we grew twice as much as the market in mature stores. That's really impressive. And compared with associations and independent drugstores, we also had a much higher growth rate. And compared with associations, independents and chains -- about half of this growth is based on new stores, and we are having a much higher increase even in our same-stores. And independents, which is the last bar here, is the player that is losing space in the market now. On the next chart, we have an average sales per store comparison, also comparing with our peers. Our column is the dark blue column. So, we are comparing by region, and we see that we have a much higher growth in all regions of Brazil compared with our competitors. In some regions, we are growing more than double the growth of our competitors. So, this means a great evolution for us. On Page 14, gross margin and gross profit. We went from BRL 903.6 million in gross profit for quarter 1 '24 to BRL 1 billion, a 15% increase, but the margin decreased by 50 bps year-on-year. And here, we have important structural elements because, even with this 50 bps decrease, we are really growing in our X, which is the main element in the 4 bullets that we put here. We had a 24% increase in this category, which, as I said, is a key category for drugstores, and it grows because our quality of customer service and execution is increasing in our stores. So, we're much more focused on chronic care customers that will bring better returns to the company. So, we're gaining their loyalty and serving them really well. Digital channel, the second important strategic lever for us. We had an increase of 53% year-on-year. That puts a lot of pressure on our margin, but it is how we will structurally sustain our growth in the future. The third bullet point here, we really work to decrease the working capital. But for deleveraging and working capital, these are excellent results and also price competitiveness contributed to this decrease with a much stronger cash margin with an increment in our gross profit and EBITDA and the results of the company as a whole. Next page, Page 15. In addition to sales, this is perhaps the main positive news that we have in terms of results this quarter that we were able to dilute by 1.2 percentage point our selling expenses, which is really remarkable. We are at our best level when we compare with quarter 1 to the previous years. So, we are equivalent to quarter 1, '21. So, the best number reached in the past 4 years. We had a nominal increase in our expenses of about 8% comparing quarter 1 this year with quarter 1 last year. And this 11% -- 7% of increase in our fixed expenses and 4% in our variable expenses. Since sales are increasing remarkably, we have an increment in our variable expenses. So, we are diluting our expenses and, at the same time, improving our customer service with no detriment of our NPS. And the main example is the growth in the RX category, as we already saw here. So, expense dilution is the main lever that helped us improve our EBITDA now and will help us keep improving it in the future. Next page, G&A expenses. We closed the quarter at 2.5% of SG&A expenses share in our revenue, the lowest level in the past 5 years. This means that we are controlling really well our G&A expenses, making adjustments and becoming more productive. We keep investing in technology. So, we're growing an average of 18% to 20% of technology investments, whereas we are gaining productivity in our personnel expenses. So, we're being very productive while controlling our expenses. On Chart 17, we have the company's adjusted EBITDA. We had an increase of more than 55% in our EBITDA, 1 percentage point increase in our margin, the fourth consecutive quarter of growth and the highest level for quarter 1 in the past 4 years. And on the right side, we see our growth components. We go from 3.1% to 4.1%. There's a slight decrease in our gross margin and a strong dilution of 1.6 percentage points in our expenses, both G&A and selling expenses. And this expense dilution, we have been able to do it because we continue to capture synergies from Extrafarma. We are no longer disclosing this separately, but we have a very positive momentum in the capture of synergies from Extrafarma. On Chart #18, our net income as a consequence of everything that we said until now, we ended the year 23 -- with BRL 13.1 million positive net income versus a negative BRL 23.1 million year-on-year. So, we had an increase of more than BRL 50 million, a strong evolution, particularly with the margin effect. We have an increase of BRL 7 million in our financial -- in financial expenses, and we ended the quarter at BRL 13.1 million, a very important reversion of the situation in quarter 1 last year. On the next chart, we have our cash cycle, another excellent news for the quarter. We reduced by 10 days our cash cycle year-on-year. And the main driver has been stock management. So, we were able to reduce by 9 days the average stock time compared with quarter 1 last year. Here on the right, we see an evolution of the inventory turnover in quarter -- in the first quarters of previous years. So, we are at a very good level. And comparing with quarter 1, 2023, which was a year when we made a lot of investments to adjust our stocks, we have reduced our stock time by 25 days, which is equivalent to BRL 750 million. And as you heard from Jonas, we also reduced by 55% our items in stock for more than 90 days. So, this is a very strong work to improve our launch policy. We're much;; more restricted now, closer to the industry and our peers, very restrictive in terms of our launches and correctly allocating the company's capital, a lot of reverse logistics, and we're working in close proximity with our suppliers. Also, we have been doing some strong work in assortment and our logistics system. Next page, we see the company's indebtedness and cash flow, one of the main focus for us this quarter. So, we are -- finished the quarter at 2.8x and 1.9x the banking debt over EBITDA. This was steady compared with quarter 4 last year, but a very remarkable reduction year-on-year of 0.7x in the net debt-EBITDA ratio and 1.1x the net debt plus over anticipations. On the right side, we see another record-breaking number for the company, which was our cash flow this quarter. Looking at the operating cash flow, excluding anticipations in the past 12 months, we are at our best moment in the past 4 years. We generated nearly BRL 500 million accumulated in the last 12 months. So, quarter 1, '25 was a record quarter for us, and we will keep focusing on deleveraging the company. And my last page, our ROI. So, resulting from this operating result, the deleveraging, reduction in our debt, we have a strong evolution of our ROI with nearly 21% in quarter 1, '25, a very healthy combination of operating results, margin expansion and reduction of employed capital. So, I stop here, and I hand it back to Jonas now.

Excellent presentation, Novais. So, as you heard, our results speak for themselves. They result from a lot of work, steady execution work, paying attention to details, paying attention to our people and ensuring that we are creating an environment where we can get the best of our people. And here, we are always challenging each other. And since I promised to bring some news from the backstage, our convention, the first picture that I showed was on April 26. It finished at midnight. That was a Saturday. Then we rested on Sunday and, on Monday, we called all our executive managers and directors and all VPs to talk. And the question we asked was the post-convention plan of sharing materials with people was no longer valid because, just like teenagers, the body grew more than the clothes that had been made for them. So, we decided to challenge ourselves. So, what would be the post-convention plan? And how could we bring this plan in order to ensure that this plan could reach our 26,000 employees? And the feedback that I got was, Jonas, please don't do that because we were expecting to have a day to rest. And I know it is very romantic to say that we're focusing on our people, that we want to get the best from our people, that we want to have the best environment. But here in Pague Menos, our motto is that we should never procrastinate. Retail is made of the every day. Women and men who work in retail, we celebrate, but on the same day, we have to start delivering. So, we still have a lot to come in the future. Looking forward, we are very intense in what we do, and we are intense because we want to give people the possibility to be their best version. Life itself is already a great gift. So, let's make a success history of this gift, success for the company and for each of us. So, let me tell you what happened in the backstage. When we look at the update of our strategic plan that we're going to show to you, so this is to tell you where we're coming from and where we're heading because nobody walks alone. So, I would like to thank Luiz Ribeiro from General Atlantic, who gives us a lot of feedback. He is a representative of our shareholders who has really been contributing to our success. Also, Patriciana Rodrigues, the Chairwoman of our Management Board. She's been my business partner for many years, and now we're working really in close proximity because I want to understand the cultural roots of everything. This is a true language that allows us to communicate well with people and bring the best results to the company and not at any cost. And also, our founder, who is always thinking ahead, 20 years from now, bringing a lot of energy to the team, always paying attention to what we're doing and seeing that beautiful [indiscernible] that was born so many years ago grow stronger. So, the quarter 1, '24 was a time of listening, a time of diagnosing and diagnosis is very important. The quarter 2 is a quarter of delivery, of operational missions with very clear priorities and the start of formation of our C-level. And we finish our C-level -- it's been more than 1 year. Wallace has been here for more than 1 year, Carlos more than 1 year. So, we are gaining substance in quarter 3 and 4. We accelerate our quick wins and reinforce our culture. And in quarter 4, we think to ourselves with this slowdown of the market, can we continue with the same growth rate? The answer is no. We have to grow even faster. So, the name of our convention was it's now. And it is now that we will further accelerate and speed up with more consistence, with more discipline, and with more optimism. On May 22, so 3 days after we celebrate our 44th year anniversary, we will celebrate our Pague Menos Day. So, save the date. And please, if you can be present with us, bring your questions, be part of this journey, we will have all the leaders of the company sharing with you many more examples of what we are doing and sharing with you also our main mistakes and the decisions that we made to fix them. So, what worked, what didn't work, how we were able to pivot and also explaining to you the importance of our intangible assets, our people. So, we expect to see you on our Pague Menos Day, bring your questions, bring your comments, and please be there with us. And visit our stores, buy at our stores, please trial this new sensation of entering a Pague Menos store. We have a new brand that we're going to explain to you on our Pague Menos Day. So, on Pague Menos Day, we want you to be energized, leave the room energized with a lot more knowledge after this experience. So, this is the end of our call, and we will now open for questions. Novais and I are available to answer any questions you may have.

[Operator Instructions]. Our first question is from Kelvin Daci from Itau BBA.

I have two questions. The first question is about your same-store sales performance. Your numbers are really striking even with the headwind of the calendar effect. Who are you gaining the share from? And what levers explain you outperforming the market? And do you think this is sustainable -- this improvement is sustainable for the future? And the cement price increase, how do you see the positioning of your suppliers? We have heard about some price adjustments over cement. So, I want to hear your opinion about that.

Thank you, Kelvin. A big hug to everyone in Itau, particularly Daniel. Kelvin, you see that the same-store sales, this is not just happening now in quarter 1, 2025. If you go back and look at our results since quarter 3 last year, quarter 4 last year, you will see that we were already seeing this acceleration. And in quarter 4 last year, we grew 13.6% in our mature stores. This is 3x as much as our main market competitor. And the key here is our promotional strength, execution, attention to details and team engagement. We have lives with our teams. We answer their questions. We want them to really feel like owners. Because what really makes the difference is the everyday work that we do. And we see that we never settle. Last week, we were the first drugstore chain in Brazil to offer Mounjaro for sales. We had a presales activity. So, this started in the last holiday. So, we are always implementing our strategy to improve people's engagement and always looking ahead, always thinking about the future. For our anniversary campaign, I can't really disclose this right now, but we are always reinventing ourselves. I think this is the secret. And it is a marketing law that leaders, the strength they generate, for example, the leading company same-store sales, they tend to keep growing with the same strength. So, stay tuned because we already started this month with a lot of activity, so that we can continue to deliver very high same-store sales. About cement, Novais, would you like to answer that one?

Yes. Kelvin, thank you for your question. Yes, we have been hearing when conversing with our commercial areas, some industries that are transferring not just the cement readjustment, but also reducing some discounts in order to offset the readjustment against inflation. Not all companies are doing that. So, I don't think the average readjustment was that affected, but I know that some industries and companies did reduce their discount levels in a few percentage points to offset for this effect.

The next question is from Laryssa Sumer, XP.

This is Danni. I have two questions. My first question is about the weight loss drugs, diabetes drugs. You even mentioned that you were the first one to offer Mounjaro. So, first, what is the representativeness of this category for you? I know that perhaps you haven't been exploring it so well and you're trying to improve that. But also, I have a question about the market. We know that you and at least one more company decided to provide Mounjaro -- anticipate the availability of Mounjaro in your stores. Was this a strategic decision? Because it really sounds like an important lever looking forward. So, I want to know what is your strategy in this segment. And my second question, so looking at the HPC dynamics, we are seeing a lot of debate about this category and the competitive dynamics between the players and different channels, so more horizontal players. So, I want to understand what is your take on this subject. You talk about hair and kids products and solar products. So, what is your perspective for this category? And are you starting to see a reversion of that slowdown that you saw? And what are the prospects for the coming quarter?

Thank you, Danni, for your question. I'm going to answer the first part. As you know, I have a bit more than 30 years in the industry in GLP-1 and all the products in this category are a big revolution. Nobody can tell what is the size of this market today in Brazil, of the repressed market that we have. We have some data showing that the compounding market is gigantic and you can find semaglutide now in pills, something that doesn't exist in the rest of the world. We don't have this presentation in the rest of the world. So, the market is huge. We don't even know what the size of this market is. And what I can tell you is that, in our business, we are seeing more than 30% growth. And this is consistent growth. And what will happen? We don't know. Our expectation is that it keeps growing, taking large leaps, because we don't know the size of this market. And Novo Nordisk has never been able to meet the real demand of the market. As I said -- explained this because of the compounding aspect of the market. Now in 90 days, we will have prescription retention, and we are preparing. We're anticipating this because we have more than 1,100 clinics. We have telemedicine, and we are starting to see how we can make this journey of patients who are treating obesity and weight loss to see how we can avoid having any impact. Now about Mounjaro, if there's another company, we don't know about it. We are the first and only to be offering Mounjaro to our customers since the last holiday. And this is not just a marketing strategy. A health company has to do things very seriously. As you know, a problem that we have in the market, we are the least affected by it, but we have a lot of problems with safety in Brazil -- sorry, security in Brazil. We have stores being robbed. So, we have a logistic plan and a marketing plan that will ensure a risk-free delivery to our patients and our customers. So, this is -- heads up to you, really pay attention to that because security is an issue in Brazil. And this has been something relevant for Ozempic. Our losses are lower than those of the market, but security is an issue, and we have to pay attention to that. Novais, would you like to answer the second part of this question?

Yes. The HPC this quarter increased by 7%. So, if the company increased by 17%, it's much lower in this category than others. But the surprise for us has been the branded drugs category because of the improvement in our customer service and store assortment. And in HPC, we see that there are 3 subcategories that had a lower performance and that actually pulled down this growth, which was solar as some screen that had a decrease of 5% in the sales volume this quarter compared to last quarter. And this is more because of the rainy season, and we are seeing some rainfall levels higher than those of last year for this time of the year. It's hard to tell if this is the only factor. When we look at the IQVIA data, we see that it is true for the entire market. So, the entire market had a decrease in sunscreen and 2 other important categories, facial care and kids. So, we have these other 2 subcategories that had a growth level that was much lower compared to first quarter last year. We see that this is not something exclusive of Pague Menos. It's something that we're moving, that we've seen in the market, but we're monitoring this, and we are discussing with our suppliers and the commercial team to try to pull these categories back up because, if we're able to pull them up, since the other categories are growing steadily, this will be really helpful for the overall results.

The next question is from Vitor Fuziharo, Santander.

Congratulations on your results. The first question is about the gross margin. You mentioned that there are different aspects that are impacting the gross margin, the categories and the sales mix and some one-off actions that you undertook. So, considering the operating leverage of this quarter, will we continue to see these numbers for the rest of the year? Or was this a one-off situation in quarter 1? And about your cash flow, considering the improvement that you had in your average stock time, I would like to hear about the potential that can still be captured looking forward and how this will impact your operation?

Novais, I will go first. We were very happy with this change in our margin in quarter 1 because this is the piece that was missing for us to be sure that our strategy is working. In quarter 4, I don't know if you remember, but in the second half of last year, we reviewed our strategy and one thing was really clear that we needed to focus on our continuous care patients, continuous care customers that we usually call chronic patients. We don't really like that term, people who need continuous care during their lifetime. Now when we look at these categories and when we look at the percentage of customers that fit into this classification, we had to change the mix in our stores because 1 prescription sometimes is for 3 cartridges or 6 cartridges. So, we use some artificial intelligent components even to adjust the assortment in our stores. And the result of this was that we gained 2.3 percentage points of penetration in RX in branded products, and they have smaller margins. Of course, when you increase the sales, there's a slight change in the margin. So, this is proof that our strategy is working. We really believe this because these patients that come up to 48 times to our stores in the year, they have a more complete shopping carts and they end up buying other drugs and convenience. We are one of the few drugstore chains that have a good mix in convenience. And Novais will now answer the second part of your question.

Yes, you're right. Just to add to what Jonas already said, the margin is slightly lower, particularly due to the strategic decisions made by the company. But in addition to what Jonas said, there's also the interaction with the digital channel that had very strong growth in the quarter, also low churn item. So, we had some sales campaigns with the support of the industry and not all price reduction was supported by Pague Menos. The industry really helped us sell these stocks. And also, what Danniela asked about, the HPC category had a lower growth rate in this quarter compared with previous quarters, and that also consumes some of our margin because these items have a slightly higher margin than other categories. But everything is in line with our strategy. And last year, we delivered for the year a margin of 29.7%. So, despite the pressure we suffered in quarter 1, we will be working to equalize or maybe recover some of this margin to maintain our margin in the similar levels in 2025. Now about our cash cycle, there's still room to improve. We even have an internal joke that we always sell in our stock discussion meetings with Jonas. We show an important reduction of about 50% of our stock losses and Jonas always says, what is the next target? What is the next target? And the next target is 0. Of course, it's very difficult to reach level 0, but we're always striving to be as close to 0 as possible. So, there's still room to be even better in stock management. We will have a new distribution center opening this year in Paraiba which will also help us be closer to our stores and to employ less capital. In receivables, there's still some pressure. The movement in the population is still a higher demand, but when we think about stock, we still have opportunities to improve. And as for payments, it's just like in expenses, we will continue to get better payment terms, particularly for the items that we're focusing on right now. We have a team looking at supply items. So, all the back-office items that have an important share. So, we still have room to better improve -- to further improve payment conditions in these categories. So, yes, we're working to further improve our cash cycle.

The next question is from Guilherme Vilela, JPMorgan.

My first question is about the leverage reduction trajectory. When we look at our leverage in adjusted terms, it is still at 3x the EBITDA. So, what is your expectation in terms of reduction of your leverage through cash generation or EBITDA? And what do you expect for the end of the year? And my second question is about the last point that you talked about when you talked about your gross margin. In your release, you showed a lower number for bonuses and budgets for this purpose in the industry. So, is this affecting retail as a whole? Or was this a one-off situation that applies just to you?

Thank you, Guilherme, for your question. Novais?

Guilherme, we are the first chain that published this. Others will come. They may start tonight. So, take a look at the other releases and compare because that can help put things into perspective. Thank you, Guilherme, for your question. About leverage reduction, when we compare quarter 1, '24 with quarter 1, '25, and when we add the receivable -- anticipated receivables, we go from 3.9x to 2.8x. So, it's a 1.1x reduction in our EBITDA in 1 year. This year, we will open only 50 stores -- 50 new stores. This was the guidance that we published. It's a low level of investment for us, considering our history. Since we're generating BRL 500 million in operating cash every year, the company is growing operationally. We have nearly 18% or 17% growth in our sales with much lower expenses. So, the operating cash generation has been strong, and that helps us fund not just the small number of new openings this year, but also all the company's actions. So, we plan to finish '25 with a much lower indebtedness level than in '24. We will not give official guidance or any guidance about the size of this decrease, but it should be much lower -- majorly lower. So, this is 1 of the 3 main priorities of the company this year to reduce our leverage. Now about commercial budgets. In quarter 1 every year, traditionally, in the industry, we see a lower appetite for campaigns, and it was no different this year, although slightly lower. In March, we had good raising and now the team is working in close proximity with the industry, recovering the support levels of the industry for sales campaigns. So, it wasn't anything striking. But yes, together with the other 4 elements, this was a factor that pulled our margin slightly down in quarter 1 this year compared with quarter 1 last year, but nothing that striking.

And Novais, last year, we promised to deliver another 2x, and we delivered 1.97x. So, a major reduction, both in terms of EBITDA increase and debt amortization.

Yes, talking about our banking debt, we had a very strong reduction to under 2x the banking debt over the EBITDA.

This question-and-answer session is now closed. I'd like to turn the conference back to Mr. Jonas Marques for his final remarks.

Thank you all. I'd really like to thank you for attending. I always say the feedback is the greatest gift we can get. If we are able to post this call 9 minutes earlier, this is also good feedback because numbers speak for themselves as just as some pictures speak more than a thousand words. This is the fifth consecutive quarter of good results. I trust our team. We have the best team in the market. And one thing is really clear to us. On one hand, we are very proud. And on the other hand, we're very humble because our greatest competitor is ourselves, right? Our greatest competitor is within. And you as shareholders who trust us, who have put our trust on us and who decided to invest in our company, and here, I'm talking about individual and small shareholders, we really have to work hard to honor your investment and your trust. And the first feedback that I got was delivery, delivery, delivery, delivery. So, it's our first -- our fifth consecutive quarter of delivery, and we will go on to the sixth consecutive quarter. We are very optimistic. Every day -- in our everyday work, we're optimistic. We're treating our customers well, and we are delivering the best and the most truthful experience inside our stores. Because here in Pague Menos, customers will never be numbers. They have a name and the last name and a history and they have needs. And we want to serve them with our hearts and with a resolution and assertiveness. Thank you all for attending. Thank you for your time. I wish you a great rest of your week, and we will see you in our quarter 2 presentations. Thank you all. Have a great day.

The Pague Menos conference call is now over. Thank you all for attending. Have a great day. You may disconnect your lines now. [Statements in English on this transcript were spoken by an interpreter present on the live call.]