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

[Interpreted] [Foreign Language] Good morning, ladies and gentlemen. Welcome to Pague Menos Third Quarter 2026 Earnings Video Conference. This videoconference is being recorded and the replay will be available on the company's website, ri.paguemenos.com.br. Please note that all participants will be in listen-only mode during the presentation, after which we will begin the question-and-answer session, when further instructions will be provided. The conference will be conducted in Portuguese by the company's management, and simultaneous translation is available by clicking the Interpretation button. The presentation will be displayed in Portuguese, and the English version is available for download at ri.paguemenos.com.br. Before proceeding, I would like to emphasize that any statements made during this conference regarding the company's business outlook, operating and financial projections and targets, as well as information on the potential of the market in which it operates, constitute beliefs and assumptions of the company's management, based on currently available information. These statements do not constitute guarantees of future performance and involve risks and uncertainties. With us today are Mr. Jonas Marques, CEO, and Mr. Luiz Novais, CFO and Investor Relations Officer of the company. I would now like to turn the floor over to Mr. Jonas Marques, who will begin the presentation. Mr. Jonas, please go ahead.

[Interpreted] [Foreign Language] Thank you, Thiago, and good morning, along with my partner, Luiz Novais, we're very happy to be here. And I would like to start by sending my regards to the 28,000 people that are part of our team, the Pague Menos team and all of their families, our families. At the end of the day, they are the ones who support us so that we continue providing services to all Brazilians. I would also like to greet our shareholders, those who invest on us and believe that we can provide the best results. Ladies and gentlemen, on November 5, 2026, live at 10:02 in the morning, Brasilia time. I am in Sao Paulo, Novais in Fortaleza. I would like to start this video conference for the third quarter. After all, I've been with Pague Menos for three years now, and we will soon celebrate the company's third anniversary. These are times of intense leadership. As you well know, in the macro scenario we're going through, this is what is needed of us. On the other hand, we have to remain optimistic. Speaking by energy today, we start with Black Friday's T-shirt. After all, it started on November 1. But once again, let's focus on the results for the third quarter. The word I would like to leave with you is consistency. From the beginning of the year, we've been saying that because the growth basis and revenue presented in '24 and '25, where in '25, we ended up above 18%, it was expected that we would grow slower after that, and this was to be expected. We did our homework from the very beginning of the year, controlled expenses with efficiency. We changed our procurement area in the second quarter, bringing some accounts, and we now have 90% of all of our purchases, providing more efficiency to our EBITDA. I would like to share with you the main highlights of the third quarter, which have to do with consistency, discipline, hard work and execution. So starting from right to left, our commitment from the very beginning after listening to the market in early '24 was to deleverage the company in face of everything that is going on with the interest rates. So, we decreased our EBITDA net debt, 68% of the EBITDA to cash conversion. This was greater than the expectations. and we had a robust cash generation, which is threefold what we had in the third quarter of '25. Looking at profitability, reinforcing what I said from the very beginning, we had a 6.3% EBITDA margin as we've been promising to the market, and this is the same level of EBITDA we delivered in the third quarter last year. I remind you that even though we had the same margin, we grew 1.8%. And when we talk about our net margin, it was 2.2%, reaching BRL 96 million of net income in the third quarter, a growth of almost 20%. Keep these figures in mind because they speak about our consistency. On the right side, you will see the strategic advantages. I would like to talk about Continuous Care Clients. You probably remember that in early '25 on January 1, when we launched our new strategy, the main focus was Continuous Care Clients, and we had nine leverages to capture value. And this strategy has worked really well. We grew 10.8% and they are a lot more profitable and are more frequently visited. Another aspect -- second aspect in the third quarter, we had many improvements to make. I would like to congratulate our digital team because we did beautiful work. You will see the indicators. They are extremely positive and the growth resumed the very good results we had last year. Can we forward, please? And here, we can see relevant evolution of key financial metrics. This is the beginning of the fourth quarter. I'd like to remind you that in terms of gross revenue, we had a 10% increase. It is extremely robust when we compare to previous years and the base. And we had an adjusted EBITDA growth of 16.9%. We are in line with what we have been saying from the beginning of the year with a lot of discipline and a lot of hard work. The net profit reached BRL 250 million, a growth of 6.5. So we continue growing and focusing on profitability, reaching 3.9x what we had last year. If I'm not mistaken, I've spoken to you and you told me, Jonas, this is a very important time of the year to be very mindful of the cash. And so we are delivering exactly what our commitment was. Novais, I turn over to you. Please bring some color to our results so that our shareholders can see what we achieved thus far.

[Interpreted] [Foreign Language] Thank you, Jonas. Good morning, everyone. As Jonas has already mentioned, we had another quarter with significant advances for three years in a row, the comparison basis is stronger and even so another quarter with good figures to share with you. We start on Page 7 with more details about our revenue. The company grew 6.9% when compared to last year. On the right side, we can see a three-year sequence. We went from 13.9% growth. So, we grew 14% and then 18% and now 7%. In other words, 43% growth in three years. It represents basically the same stores because we have inaugurated very few during this period. Our main leverage for this growth has been the improved sales experience for our clients. An important indicator is that we reached a record level in our service levels, and this is seen in the company growth. And then we can see our growth. We've had three years of very strong growth and also the contribution of GLP-1, which was a significant contribution in the past quarters. We can see that to the first quarter, the GLP-1 contribution was 7% and then it grew a little bit. Mounjaro was launched in May 25. In the third quarter, we had one month without the comparison basis and two months with the comparison basis. And now in the third quarter, you can see that the contribution for the growth of the company was two percentage points. On the right side, we can see the participation of GLP-1 share of sales. In this last quarter, actually, in the first quarter of this year, it was 9.1% in the first quarter, 8.2% in the second quarter and now 8.5% for the third quarter and in October, 8.6%. The supplies are being normalized, and we have a positive perspective. We know that GLP-1 is used more for aesthetic purposes. And so during the summer, this tends to grow as we saw last year. On Page 9, we have more information about semaglutide. Since April, we can see a cost reduction of the molecule with the loss of patent, and we can also see the daily sales of this molecule. And so the price reduced 58% when compared to the beginning of the year, but the increase in volume of daily sales was 267%. We can also see Pague Menos gaining share. Semaglutide in general in the GLP-1 category is increasing its participation. In the beginning of the year, it was 20%. Now it is close to 30%. It is becoming more relevant. We have the approval of the pills. And because Pague Menos also serves the base of the pyramid, it will be one of the players that will provide better results in terms of access to semaglutide as a whole. And this is why we have had so much increase in volume sales. Now we have information on market share. We have had very few openings. We only inaugurated about 10 stores, but we are still increasing our share. It was a three-point expansion. But here, we celebrate each achievement. So even though the growth was smaller, we still celebrate. We can see a reduction in the North and Northeast and growth in the other regions of Brazil. We explained why this happens, and we show the components of growth in each one of the regions. In the first graph here, you can see the opening of Pague Menos components. In the first column, we can see Brazil as a whole and then in the other columns, the other regions in light blue, the contribution of new stores, in dark blue, contribution of mature stores. On the first column, we can see that Pague Menos grew less than the market. We grew 9.6% and the market gain grew 9.1%. We gained share. In the Northeast, we grew a lot more than the market, but the contribution of new stores in the market in light blue was 5.7%, whereas in Pague Menos, it was 1.6%. And therefore, the contribution of new stores was not enough to offset the growth by means of the new stores. In the other regions, we were able to offset and grow more than the market as a whole. But this was very specific for the third quarter in the Northeast region. We've already seen a reversion. We gained market share in these two regions as well in September. And in weekly assessments for October, we can see the Pague Menos, I'm sorry, continues gaining share. On Page 12, we are very proud to share this piece of information comparing Pague Menos to the market, the average sales per store. In blue, you can see Pague Menos, in red, Abrafarma and in black, the total market. You can see that the evolution of the blue line is far superior than the other ones. So we had a CAGR of 11.6% and the other Abrafarma networks with 4.2%. So the basis, as we've been saying, remains stronger, and we intend to continue growing above the market as a whole. In the next page, Page 13, gross profit and margin. We grew when compared to the same period last year in generics and GLP-1 with better margins. We also had an important capture of tax efficiency in Paraiba, which was inaugurated in the middle of the year. Our inventories continue doing really well. And we have some pressure on the mix because GLP-1 continues growing, and therefore, there is some pressure on our mix. Another good news for the quarter. We had a reduction on company expenses a growth of 10 basis points, and we had a growth of 7.5% when compared to last year. There is a very specific impact of indemnizations and distribution centers because of the new distribution center, and that had an impact of BRL 9.6 million this quarter. But this is very specific for this quarter. We inaugurated 10 stores in the third quarter. In administrative expenses, we had a significant decrease when compared to the second quarter. Back then, we had a very specific expense with consultancy and also a reduction of contingency. In the third quarter, we did not have these effects. And then we also decreased our expenses with variable payments. We are below the target indicator, and that's why we had some reduction in this provision. Because of all of this, in the next page, we can see how our adjusted EBITDA. It is 5.9%. We do not have any information for the third quarter, but we delivered an EBITDA margin of 6.3%. It is a record for the third quarter. Last year, we also beat our record in the third quarter. The margins was smaller, but we were able to balance profitability with expense control, and we are focusing on what we can control to deliver good profitability. Next page, net income. It was BRL 80.6 million. If we had not had the expenses we had with indemnizations in the second quarter, it would have been better, a net margin of 2.3%. We had a growth of 37% in the profit per share when compared to the same quarter last year. And therefore, we are very confident that with continued improvement in profits and EBITDA, we will continue our financial leverage and have good expectations of profit for the upcoming quarters as well. Cash cycle, as we had already indicated, we want to decrease the mean inventory time. We decreased what we had planned to decrease. But this quarter, in the GLP-1 inventory, we tried to normalize and that offset the reduction we had because of the transition of the distribution center. This inventory will be normalized in the fourth quarter. because of the transition of the new distribution center in the third quarter, we bought a lot of stock, and we will now pay for the exceeding inventory we had bought, but it will go back to normal at the end of the year in the fourth quarter. We had an investment now in the third quarter, but it will be normalized in the fourth quarter. In the next page, the best news of the quarter, the cash flow and cash generation. When we look at what was accrued in the last 12 months, we can see the evolution and LTM for the third quarter of '26. We generated BRL 690 million, which represents almost 68% of the EBITDA for this period. Also, we can see the profitability improvement as a whole. There is a tax credit monetization. We want to monetize the over BRL 1 billion we have in tax credits, which has contributed for the cash flow. On the right side, we have the free cash flow after the company investments, we have a free cash flow of BRL 342 million, which is far superior than what we had seen in previous years. In the next page, because of this good evolution in cash generation, we continue the financial deleveraging of the company, and we end this quarter with 1.8x. We can see some improvement. And we are now in the 13th consecutive deleveraging quarter of the company. Furthermore, in the third quarter before the elections, we carried out important improvement in our debt profile. We had BRL 350 million extended to 2030, thus reducing the spread and the cost of the debt to CD1 plus 1.35%. So we had a decrease of 0.8% in the spread of our debt in addition to extending it considerably. In the next page, to conclude our ROIC, we can see that it remains greater than 20%, which is quite relevant. And now I turn over to Jonas for him to conclude our presentation.

[Interpreted] [Foreign Language][Interpreted] [Foreign Language] Well, thank you very much, Novais. I have received some feedback. I love feedback, Novais. You know that, right? I know that people come here and like our call because there is no script. Energy is high, and there is a lot of optimism. And this is what the market needs. I would also like to take this opportunity to make some advertisements. Allah said that we have Protex, liquid soap. Price went down from BRL 11 to BRL 4. Rexona deodorant. I know this by heart because I bought it myself at the store. When did you buy? I bought it yesterday. It was BRL 19-something. Yes, two units for '19, but the regular price since you're sitting and I'm standing is BRL 32.99. So I would like you to think about the following. The image that comes to mind was this. What do you see here? You see a glass. Is it half full or half empty? For us, it is half full. Now let's see what we promised and what we are delivering in terms of our strategy. Novais okay. Continuous Care Clients, just for us to have some fun and recover our energy from beginning to end. Continuous Care Clients today represents 28.6% to our business. As I had mentioned in the beginning of the call, 10.8% versus the beginning of '25 when we started with our strategy. And if you look at the bottom of the page, you will see that the continuous care client is the one that appreciates us more because it is 7x higher than the average client. And the most important thing is that we have had progress quarter-over-quarter. We increased 5.5%. The main initiatives for the third quarter way more attention to clinic pharma with higher adherence and frequency. It is at the core of our strategy. When client goes to our store, they buy twice as much. So it remains as the most important part of our strategy and keep your eyes for some new events. Expansion of vaccination rooms. We went after the clients who bought from us and no longer buy from us. So we have different actions, different patient journeys, aiming at these clients, and it's working really well. We also had an abandoned cart strategy. We identified those clients and offered them coupons. So it's very important that you realize that we never stop. We are observed about the front line. We focus on these strategies because retail has to do with strategy. We had a small base of stores. We expanded that with excellent results. So continuous care client remain as an important part of our strategy. We want to improve our EBITDA and keep your eyes for more news. Digital Channels. We responsibly admitted in the second quarter that we had some problems and some progress to be made. Today, we are happy to say that the participation of Digital Channels is greater than 25%. In other words, 26%, and we resumed growth. Also, removing GLP-1, growth was very strong, improving our Digital Channels. Where does it come from? It has to do with the improvement in the app, and it has a higher share. And we have the app conversion since January, which has been growing. So we're working hard to improve the app. We have some new things along the way. In August, we have with an excellent agreement with us so that we can personalize our offer. Wait for more news. We do not lose profitability while we grow. Once again, our strategy is to have different channels so that we can serve clients the best way possible the way they want to be served. Now I will talk about something very important, exclusive labels. We have declared our objective to work and understand the identity of brands. And Mari Coutinho has done beautiful work. After one year, everything is ready. Everything is at the store here on the right side. You can see the before and after we have had a total rebranding. We have a launch pipeline. Our objective is to double our share of our Private Labels. In the first nine months, it is beyond BRL 1 million. We truly believe in it. We do not want to compete with the industry. We just want to be an alternative for these consumers and these patients that prefer us. We are leaders in solar protection. Our brand is about 30 years old. It is available, and you will find it in our stores. Moving on. One thing we left for the end, but it's not less important. Yesterday, we had IDIVERSA B3 to receive an award for the third consecutive year. We have the main index. So we have four indices actually, and they make us very happy. We got the Gold Seal for the Brazilian GHG Protocol Program. We're very happy. They awarded 33 companies. But when we look at the four indices plus the IGPTW, there are only 11 companies in Brazil, and we also want to certify for Scope 1 and 2 so that we can consider all of these factors. So with this, I conclude and we can move on to the Q&A and then our final considerations, correct?

[Operator Instructions] [Interpreted] [Foreign Language] Our first question is from Rodrigo, Itau BBA.

[Interpreted] [Foreign Language] I have two questions actually. The first one, I think you mentioned very clearly the cash generation capacity, and I wanted to better understand what the perspective for the fourth quarter is. Novais, could you explain to us what is the level of comfort you already have today in the beginning of November of this improvement in providers and inventory that you mentioned with the normalization of GLP-1 sales in the fourth quarter. This is something that we were asked a lot. And so I think it would be nice if you could talk to us about the perspective for cash generation. The second question that called our attention was expense control. In the Northeast, as you showed, you tried to advance -- you mentioned almost BRL 10 million in nonrecurring costs with indemnizations and so on and so forth. Was this recurring really because that represents 4% of your EBITDA. This is something that was adjusted, but it would be nice to know if you have any other relevant adjustment that can be made so that you can capture profitability.

[Interpreted] [Foreign Language] Thank you for your question, Gastim. On cash flow and perspectives for the fourth quarter, we have very good perspective, Gastim. As we saw in the cash cycle in GLP-1, we have good supplies. Our inventory is reinforced to face the demand of the fourth quarter, especially in the line of payment deadline, which was reduced when compared to last year because we made the payments of stock reinforcement because of the Paraiba distribution center, and therefore, these four days will be adjusted and the perspectives are very good. Last year, we converted more or less 52% of EBITDA in cash for the whole year of '25. Today, we are at a higher level than this. We have two perspectives for this indicator in the fourth quarter. Also, we continue working with credit monetization. They were very helpful in the third quarter. Our tax team is focused on this area. We are interacting with our tax revenue agency so that we can accelerate because we have a lot of accumulated tax credit, especially ICMS. And now with the tax reform for the beginning of next year, we have about BRL 6 million in credit that we will monetize in a more expedited way with the start of CBS. In terms of expense control, the BRL 10 million were very specific for the third quarter. When you inaugurate a new distribution center, you have to mobilize the team in the distribution center. We migrated 350 stores from one year to the other. And then you hire a whole new distribution center and then you adjust everything. This was the main movement. We also had some adjustments in the stores. We are working hard to gain productivity. keeping the quality of service. And we understand that this was very specific. Also, we understand that our expenses will be balanced so that we can gain profitability.

[Interpreted] [Foreign Language] Excellent. And we do not adjust that in the EBITDA, Novais?

[Interpreted] [Foreign Language] So I think this was one of the questions you asked, right? For nonrecurring, right? Yes, we ended up making this adjustment because once again, we had a nonrecurring profile. It was very specific for this quarter.

[Interpreted] [Foreign Language] And that's why I asked you. It is the most reasonable way to do this.

[Interpreted] [Foreign Language] Our next question comes from Yan Cesquim from BTG Pactual.

[Interpreted] [Foreign Language] I have two questions here. The first one about GLP-1. I think that this was very complete in the report and now in the presentation to talk about price dynamics on volume, replacement in the category and some trends for October. But my question is more dedicated to supply and demand. You expect to have a strong cycle in the fourth quarter, anticipating the summer with a higher demand. But what is your perception in terms of supply? And the second one, perhaps combining the regulations with margin expectations, we also have the changes in the working schedule. We have the tax reform that was mentioned by Novais and the credits you want to monetize. And this has been a very positive surprise. So how do you imagine that this behavior will be in the tax reform taking into account these internal initiatives. So these are my two questions.

[Interpreted] [Foreign Language] Well, thank you very much. Well, first of all, GLP-1, yes, we have had some reinforcement in the third quarter. and the supply behavior is a little bit different. Some manufacturers have availability and others still have some erratic supply. But for the consumer as a whole, we already have a lot of options, and this tends to improve with the next presentations. And in the near future, we'll be seeing that. We have good perspectives to improve our commercial perspectives with these new presentations. And because we cannot offer all of our consumers all of the presentations, we will offer the ones that will give the best margins. So we have very good perspectives in terms of supply in margins for the category as a whole, not only because of the summer, but because of access, the molecule is being disseminated. Doctors are prescribing. Some people had some limitations. And now with the possible arrival of the fills that will help us with access and dissemination of the molecule as a whole. Less than -- some 5% of our basis has already tried it. And there is a very high number of people who will start using it, and therefore, this will continue growing. Well, if you allow me, and I thank you for the question. I would like to reinforce, and I thank you for the participation in different conferences. GLP-1 is indeed amazing. And it has become very clear that since penicillin, this was the main invention we've seen in medicine because it is a drug that changes the disease. You can see that the presentation in pills was approved and with 35 years of experience in this industry, this is a chronic disease and you have a mix of injectables and pills. Why does the pill have 25 mg, because most of semaglutide is degraded between the mouth and digestion. That is very important. And therefore, we have new treatment regimens. Three, four months ago, we saw and received different questions on what happened to GLP. It is changing its level because we have a larger number of consumers who have access to the drugs. 75% of them had never used any GLP in average, if you look at all of the brands. And therefore, our margins tend to improve for two reasons. We have more competition. The other one is that it is not possible to differentiate Ozempic from all these semaglutide, Saxenda, Wegovy. And so the doctors report, and we have seen a lot of prescriptions with the active compound, which is semaglutide. And this allows us to dispense the drug with the best price and conditions for our consumers, for patients. And therefore, it's very important for you to pay attention to this in the mid and long term. There's a lot to happen. We have different products to come in the next 1.5 years. And so the base expands, and we can see the benefits provided by the products and the results are very solid.

[Interpreted] [Foreign Language] Well, we're all looking forward to knowing what is happening with GLP-1. It's been very helpful.

[Interpreted] [Foreign Language] In terms of margin expectations, that was your second question. We do have a more challenging environment in terms of interest rate perspective consumption growth for the country as a whole.

[Interpreted] [Foreign Language] Also the 6x1 working schedule. However, at the company, we are still a catch-up company. We have an accrued at the margin of 6.9%. There are references in the sector, which are higher than ours. So we have a lot of opportunity to pursue. So in addition to the 6x1 schedule, we're working with other alternatives to offset, we have the employee schedule. And probably we will hire intermittent employees to work in different stores to decrease pressure a little bit. And maybe part of this incremental cost, not only for us, but perhaps the sector will have to increase some prices, but we will have a potential margin increase for GLP-1 with the arrival of new presentation. The company is also working with different levers. As you know, the company has an opportunity to improve the digital channel. It's improved, as Jonas mentioned, but we still have more opportunities. Our exclusive brands, we have an expectation to increase our penetration and therefore, improve company sales and margins. CRM, we already have something, but we can still improve a lot in terms of loyalty programs and so on and so forth. So there are different drivers that we're working with to continue improving the company's profitability.

[Interpreted] [Foreign Language] Novais, if you allow me, and yes, I would like to remind you of AI. We are obsessed by the front line. I would like to send my regards to our Manaus team. We were there two weeks ago, spent part of the week there and therefore, it's very important to be close to our team and close to artificial intelligence. Not this time to say, oh, artificial intelligence now. We do have some agents, AI agents already working. One of them is Damien, where we gave access to the industry. That will start in January, and this is something new. We are the only ones to offer it. I spoke to the Google team and Anthropic in New York. We are working with solutions to organize our recurring data, improve our offers, I'm sorry, in patients' journey. We can improve our assortment and improve cross-selling, improve the offers we make our customers, and that's where we have more opportunities. I'm not going to give you figures, but we are working hard on it. And part of my time today is dedicated to AI and how we can become exponential. We have two AIs. One is artificial intelligence and the other one is emotional intelligence. We are born caring for people, and we will continue doing that, investing in our assets, which are people. Novais, I just wanted to add this AI component, which is so important. And perhaps in the near future, we will have some novelties.

[Interpreted] [Foreign Language] Our next question is from Artur Alves from Morgan Stanley.