Grupo Casas Bahia S.A. (BHIA3) Earnings Call Transcript & Summary

Good afternoon, everyone. How is it going? Welcome to our earnings call for the Q&A on the results of our second quarter of '23 and also our transformation plan. Before we open up for Q&A, we'd like to recap on the material that we shared yesterday. Our release and our presentation as well as the video where we go over the main pillars of the transformation plan. Please, we can move on to the next slide. First of all, I just want to make it clear, the change in Via's positioning and what we are at Via. There's always a concern and some issues related to new generic platforms or marketplaces that are coming into the market. And why this is not a concern to us? Well, Via is a company with a very clear I should say, a unique positioning, and we're really concentrated in our core. And in our 1P, we have our core categories, which are furniture, refrigerators, freezers, screens, portable devices and electric home appliances, et cetera. So the tail is complementary to our customer categories. So it's very different than our generic platform. VCVs as an opportunity. We even have some contracts we've signed, and we're starting to provide this kind of service. Next, so quickly we want to discuss the shift in the strategy. Our first 4 years from 2019 to '22 ever since we had a shift in the company's control, were essential for the construction of this mega platform, the expansion of our stores, new sales channels, marketplace, construction and even technology solutions. We are starting a new phase with a big focus on profitability, cash generation and returns on invested capital. Please we can move along. So this means that the main indicators in the company that we were to look at like GMV, the gross margin, the EBITDA margin, et cetera, and the main indicators are the free cash flow with the commitment to have a robust free cash flow with a good interest coverage. And the main indicator to measure performance the management and team is return on invested capital, the ROIC. We're going to work on this to deliver good spread on the cost of capital. Having said that, the EBITDA and GMV are just a consequence and not predefined targets that are isolated and they did not necessarily deliver a robust cash flow and return on investment capital that was that attractive to our investors. Moving on, here, we're sharing a slide that we think is fundamental, which is a bit of the mindset shift. We were looking at GMV and the gross margin, which included the variable expenses. And now we start including the direct expenses of each business and the product that we sell, the cost of the stock and the cost of funding to consumers. This changes the company's decisions, the governance, KPIs, and of course, it changes our targets and [ goal ] of the company. That was a new mentality that really lease what we have on our new slide that made it possible for us to bring levers and initiatives with a level of maturity that's a little more robust and others we're still working on. So we have over 100 initiatives in these 18 levers that go through our P&L and cash generation dimensions and capital structure, bringing this slide was non-exhaustive examples of these levers. So we already brought this. And some examples here add up to BRL 900 million, for example, and the renegotiation of indirect expenses that lease contracts brings in about BRL 100 million, and direct negotiations going on. So we have a plan for BRL 1 billion of improvements in P&L and improvements in the LAIR. So this shift in the culture and this process with the customization more granularity that releases BRL 1 billion in stock, that will be used for our cash, that's fundamental to bring a new oxygen the company and allocate value and use this cash for initiatives and business opportunities that have a really high tier in the company. Moving on. As we look into our capital structure, you've seen Elcio's presentation, and video with what we were doing, but I want to recap the main points here. The deployment of FDIC as a model an advance instrument for buy now, pay later is a structural change, we're talking about half of the cash debt that's going to be migrated to the capital markets, releasing room in our balance sheet with the banks for other purposes. So in the long term, of course, we will probably have a cost reduction and especially more stability unleashing our capacity to sell more of the buy now, pay later and increase penetration. So there's a transformational shift from a business perspective and also from a balance sheet perception, and from a [ patient perception ] in the credit areas and the banks, which is very relevant. We can move on. Beside this, we have other initiatives as we access our banks, other -- sorry, this in the capital markets, investment agencies and a lot of things that are going to extend the duration of the debt. So initially, we don't expect to reduce the cost but increase the duration. And then after we're going to start working on liability management constantly, which is the cost of capital and the spend as the company gains more strength and it becomes bigger. Besides this the monetization which is all accelerated. We already had this part but the tax credits expected is BRL 2.5 billion that were recurring for 2023, and '24. And then we brought some initiatives, so the stock, as I already mentioned previously, there's real estate assets that we're operating considered as sales is back actually up to BRL 200 million. And this is sales from subsidiaries that we have with fiscal credits that we can also sell. [indiscernible] about BRL 4 billion in monetization of the assets that we can try to work on also in the short term. We can move on. And then, I reached my last here, so we can get into Q&A where we reinforce the attributes of the company and our assets that our customer is the brand. Our leadership in these categories are unique positioning when it comes to logistics and commercial strength. And also the training of our team, our omnichannel approaches the iconic buy now, pay later and all of these will unleash major potential. So seeing a lot of growth and value creation but it won't be our focus in the first 2 years. Because first one, the generic value apply the cash since we already have an [indiscernible] return rates, without a risk of execution. Then as we generate more value and we have leftover cash we will play this into some opportunities. And when we have the appropriate time we'll present this [indiscernible]. This is a summarized the agenda that we presented in more details on the video yesterday in material, but now I'll pass the floor onto to Gabriel to start with the Q&A session and so we can get into more details that you guys consider to be important or maybe give you guys some more color on some points. Thank you all again for your presence. Gabriel?

Thank you, Renato. Good everyone we're going to start off with our questions-and-answers and the first question is from Vitor Pini at Safra.

I think I wanted to talk about this new plan. I think that by what we saw yesterday that you guys published and a little more details now. What I really like is that is relatively simple. It seems simple, it's not easy, but we have clear levers and they're all quantified. But I think the main point here now is how you're going to have the execution at the end of the day. It's going to be made by people. And I wanted you to talk about this and give us some more information on how you've aligned your incentives here at top management level, but also the guys at the commercial operations had sales target that maybe they would harm the working capital in the long term or even the negotiation with the suppliers. So I wanted to understand how in the short and long term, we have this alignment with incentives, so the plan can be well delivered.

We really have this transformation incentives and targets in the company. So when we look at the entire commercial team in the stores, the main indicators which were GMV and gross margins. And we change this and we create margins 1, 2, 3 and 4. Now you have a net margin that incorporates the cost of capital, so stock to the category kind of impacts the targets, and the same thing applies when you have stock exposed and incentive stores. So the shift in the KPI helps to change the culture, when we talk about the short-term targets. And when we talk about long-term targets, we're incorporating the ROIC with TSR -- still being reviewed and we're looking into all of the long-term compensation for the senior management teams. We have triggers that are compatible with the returns for all of the stakeholders. That's why TSR and ROIC has triggers but we're still declining and balancing out this proposal so that we can submit this to the Board and approve it, transforming it into the long-term plan for the company.

And last question here. I don't know if you can maybe give us some more details about the timing for the deployment or capturing of these gains that you guys described. That's the last question.

Great, Vitor. [indiscernible] has a timing. Now we try to illustrate this well in those little balls, but how advanced these are. Examples that are not complete, because they're all basically having decisions made, and the impact depends on the industry. When you look at the personal you have write-ups in July and August, and you start the saving in September. When you look at the stock we -- of course, it's going to be the stock in -- what's ever leftover in the fourth quarter, November, Black Friday will finish. So we're going to hope that by December, we can already capture the full benefits except for the FIDC. So since launching that, we'll start capturing this in the way of capacity to have BRL 500 million, BRL 700 million per month and this my migration take about year to have us full migration. From the moment when we start doing it, so we'll see no full benefits by the end of '24. Some will start noticing the beginning of '24, which will be announced. Other levers will start having more disclosure up ahead that will impact us a little more ahead because they take long and they have more complexity. We brought what's really low-risk to our execution and allow us to commit to them without risk of generating deployments and the rest of it more left the second semester 2024, that's why we consider the plan through 2025, so we can have this ramp-up of [ 2024 ] and delivering, exceeding the company and then by 2024, we would start this new cycle.

Our next question is from Pedro, Bradesco.

I'm going to ask 2 quick questions here. The first one is about suppliers. How have they been reacting to this new plan because it kind of consider a bit of a downsize. You guys are renegotiating terms? This negotiation kind of fall in the same track? I want to understand this a bit. And also another question is about the gross margin. So maybe it's a little bit early to try to establish the expectation but here we have some indications that are very important said in the 1P, 3P, buy now, pay later and categories. You guys think that you can already have an idea of what will be a reasonable level for this gross margin from now onwards?

First about suppliers is a good sign, which is we're still relevant to our supply chain that everyone is very -- has a strong buy-in to whatever is going to strengthen the company. So we have a lot of support normally from our management perspective. And our conversations with partners are really good. Of course, this is not going to match the short-term demand, right. Everyone wants to sell more, and we're trying to bring more discipline to this and being more selective and careful. So they're trying to find ways to make feasible because we have to deliver this return on invested capital. But we want to also have profitability in our operations. And it's important to say that our core product line that really engages as a company, it would have a much of a reduction. The reduction we have is normally a tail and other categories that are not core, and that were, in some way, destroying value. When we see this core products, we see opportunities. Now we'll be a little more selective on this case, because some give us more returns and others have a more optimized stock. And when you ask about the question -- sorry, what was the question? Gross margin, yes. So the gross margin will have this impacted in third quarter. It's going to be more impacted because [indiscernible] long term. We see opportunities to have this just as a past are a little higher with an incremental improvement in the gross margin. First not counting on shift in the market, we believe that the market is going to improve at certain point, but some categories kind of push the category upwards which is furniture et cetera. So this would help the gross margin get better. And without considering cost, we would the gross margin similar to we had in the past year with some positive incremental improvements, due to this pricing and mix reviews. But it's not going to be the main driver because -- the gross margin is just one more way for this. We can't tell not necessarily what's going to guarantee the profitability in the last time, so sometimes it better to have, smaller gross margin in an item that will deliver a lot of returns in the last line because there's low capital investment than the opposite. So this stock turnover is really important. And the EBIT or LAIR margin would be a lot better and easier to see the evolution of the company's profitability.

Now we're going to talk about a question from Felipe from Citibank.

We want to understand a bit more because as you talked about what is the plan and capital over quarter. So now looking at EBITDA margin, do you think we can imagine or how you've been looking at a double digit for next year maybe. Second point would be, you also highlighted the share gain in the core items, which is a share point for Via, and considering this vision in the market awareness. What do you guys thinking about in regards to a Black Friday in the second semester? Do you guys think you're going to invest in stocks more in the third quarter. This is something we wanted to understand more about regards to this core.

When we talk -- start off with the second one. We look at core and Black Friday. There is seasonality. We do hope to have a semester that's stronger, but we still have recovery in the market. And so it should be similar but there's still seasonality in the quarter and that helps a lot. We have some marketing initiatives. And we're using this new technology, and we do hope to have a lot of share points because, of course, this will help with our sales. But we understand that there's a market to do a lot about this. We're going to bet on the core. We're going to have growing stock and then in the third quarter, we have to compare and see how we're going to use this because there is seasonality that you buy to have Black Friday and this is going to be considered. When we're talking about the EBITDA margin, we're not giving you guidance. We're just saying that the company's target is not EBITDA. If you -- how much do you need to have a healthy free cash flow? So we look at the initiatives of the P&L. If you look at this on the ROIC above the cost of capital, you can see that there's an increment that needs to be delivered in the EBITDA margin, and it's going be what [indiscernible] mentioned. So we understand we're close to that. We're just not providing a guidance from an EBITDA margin perspective but there is an improvement we delivered and that's what we're working on. And it is significant.

Our next question is from Danny Eiger from XP.

My question is really related to the competitive scenario. Now you guys have this strategy on focusing on core categories. So you may be only this more competitive market generalist marketplace scenario. But even in these categories, there's a bit of competition, right, from some players whether omni or a little more physical. And we think some players also adjusting this discussion to categories that have higher average ticket. So it's important to look at the view of the competitive scenario and what you just considered to be the main different across Via. The second question is about the main risks that you've mapped out for the execution of this plan. And what you guys planning is really cool because you have a lot of transparency, and it's really clear to understand the [ report ] and they seem relatively simple when it comes to deployment relatively, right? Because nothing is totally simple, but it doesn't seem to be such an execution risk. But what have you guys focused on more and what should we focus on more towards this time?

First of all, on competition, we really have been trying to have the market for rational competition. Now we've seen the major areas of strength. If you look at the month of July, we've already tried to find ways to tighten up a bit of the payment methods, if you reduce the installments via interest, you really change profitability, and that's a huge lagger. And where else can we have maybe -- where would you see a little more competition? Well, when you have regional small players that are on the play, at front of the field, due to cash needs and the demand, when is that they have more aggressive special sales that are a little more irrational. We're not getting involved in this struggle because we think Via has competitive advantages that are very strong. Our brand is a destination. But an important lever is the buy now, pay later. So when we look at the buy now, pay later we have good conversion at online in the market with more competition where this issue of green picks with unique pricing, payments and installments, free of interest for different options, et cetera, which really have the last mile profitability. We're seeing the markets a little more rational and no doubt the industries pressure, because there's a lot of volumes stuff. If we need to adjust production, there's not time to adjust this in second semester. So eventually we'll see different conditions and when things get tight, this kind of brings in concentration of the special sales of our channel, which allows us to have prices that are very aggressive, but they also generate good margins and good value. So this is how we're looking at it. We haven't seen a big change in demand or overall scenario. This is going to help the market be more rational. About the risk of execution. As you mentioned, we wanted to show and take on as a commitment here that we'll have some simpler initiatives. We have a lot of operational work and execution but there's nothing that's too complex. It's really back to the basics and delivering what we know what to do. Then there is some other levers that are a little more strategic and have more complexity. So we're not considering -- this is the plan we disclosed because the involve external factors and negotiations that are more complex and that we need to attract the right partners to make those feasible and monetize some of the strategic assets, and these things we're going to consider. We just consider what we have -- what we believe has a low execution risk. We can have under promise and over delivery. And as we see mature these levers, we'll have a more controlled risk and disclose us to the market and that we can create this with a lot of consistency. And after a few quarters, we would really bring credibility and then we'd able to get into this new cycle with a lot of support from the market for everything that we have to do. That's a bit of our agenda.

Excellent. Good luck with the execution.

So here also, just I want to highlight that this plan was built and we discussed this in the video that it depends on our management and our action plan. It doesn't depend on an improvement of external scenarios to be able to execute and have the company financially sustainable and stable in the reality that we expect to achieve. So it just depends on our management. It doesn't depend so much on external scenarios.

Our next question is from Nicolas from JPMorgan.

I want to talk about the CDCI, which is one of the competitive levers in the company that now should operate under the FIDC. So how do you look at the penetration of this product up ahead. It already represents about 25% of the store, a little less online. How do you consider this product would be able to reach when it comes to penetration?

CDCI really has many opportunities. So having the buy now, pay later will use the funding from the FIDC. In the history when we had a bank limit exceeding this, we had 30%, 31% of the store. So we understand that at least recap of the 30% and 31% all we should. The second quarter was really impacted by the drop and this limit and it's kind of a little bit below this percentage you mentioned, of course it's really impacting profitability but recovered to the 30% really brings in the BRL 250 million in the last line, which is first line of that summary that we mentioned of initiatives in the P&L. Of course, we have initiatives to increase a bit of our penetration in the stores and online. We are not placing this commitment yet because these initiatives are not material to be able to take on. This commitment for penetration above this level, today what we're considering is resuming historic levels and keeping online at a very conservative level, we think we need to have an improvement in the market to have higher management -- without having credit risks. Today, we currently prefer to be more conservative. We don't have risks in the execution. So that's pretty much it getting back to the 30%.

Now I'm going to call Felipe from Goldman.

First of all, I had a quick follow-up on Nicolas' question. So with -- in regards to the buy now, pay later besides structuring and FIDC and understanding the market dynamics when it comes to most favorable. I want to understand what other measures besides the structure of the FDIC will be implemented, so we can get back and scale up on the buy now, pay later. Because as I mentioned, in U.S. I have always said this is a very important lever for the profitability and for sales in the company. So then, if I could submit another question, it's not related within the transformation plan, I understand that some categories that are going to go from 1P to 3P. So I want to understand from a market-based data, what's -- from the technological perspective, onboarding of the sellers and everything is pretty general consensus and it works but I want to understand that from the competition perspective of the sellers been kept on the platform. What's the churn of these sellers. If you could give us some more color on that?

Perfect. Thank you, Felipe. About the buy now, pay later to get back to the 30% it's a lot more about pricing, and then we'll reach 30%, and when we talk about increasing then we have some levers. First, we talk on the U.S. rate from the customer and the seller that affect us. So we're getting into this month, for example, we began the app 2.0 for the stores, and that really changes the customer service and facilitating the sale of the buy now, pay later and also the offering of additional services. This is already in certain stores. We improved conversion a bit, and we're rolling that out to all of the stores in the following months, that's one of the initiatives the website, you have the revision of a customer journey. So we have some deliverables which have to collection every 2 months we'll have this. So we can change customer journeys and really favor the hiring of these digital services. And so of course, when we have funding, it's a little more mature and we can bring in these additional offerings for funding. This will allow us to price things differently. A lot of what we did today, considering these elements have like a tiers that's up 30%. Eventually you can see that you have a tier that's a little bit more volume. So we're always going to maximize the bottom line and so this is a lot of room. I'm just giving you some examples. There is a team that's working to bring in other levers to improve the buy now, pay later. They are acquired just for the buy now, pay later services. When we look at 1P and 3P marketplace, you're right, it's really well structured and we can actually accelerate growth, but we were really concerned with the health and then how do we improve profitability? Well, competition is what it is. So the products become a little more commoditized. But when I look at our strategy here, if I consider investments in [indiscernible] to bring customers to go into my website and pick up 2P product profitability becomes harmed and it plus becomes really expensive when they use this to be complementary to those customers that already get into a site by another product then it becomes a lot cheaper and I make more money. So what we're doing is since we have a really big customer base and redirecting these investments in marketing and this costs 0.1% to 5% or 3%. So when you go to the open ocean, the best result is 2%. There's a lot of items that go up to 5% [indiscernible] if you look at the average ticket you can see like BRL 7 or BRL 8, but it gets really heavy. So the strategy will bring more health and it's already changing the health of the marketplace and as I was leading this transformational plan now it's a lot lighter, and I'm more focused now, and we're going to have smaller growth. So we do hope to have growth in the marketplace, but we think it's going to be more organic and not just bringing in new customers. So it's about recurrence. So with the salary churns, we have some negotiations going on and there is a bit but nothing that's going to leave the normal panorama. We're already at this level of 150,000 sellers. And this gives us a lot of granularity and diversity and the SKUs. So something with less competition and shorter turnover and then that's where we're going to really start making money instead of using money to build and make more, we want to [ profitabilize ] what's already done.

Our next question is from Eric from Santander.

On our side, we have a little more of the modernization of the assets and confident for the group, 2023 it's a lot more about understanding how your expectations are and what you guys think it's a little easier, what could be a little more difficult and what do you guys consider could possibly even have an additional potential. That's pretty much it on our side.

Thanks, Eric, let me take that question. So we mentioned BRL 4 billion invested in 2023, of which BRL 2.5 billion of tax credit. So we performed the second semester with BRL 1.2 million, and we're saying and reaffirming and confirming the performance and expectation for the second semester, which is going to be BRL 2.5 billion in a higher margin than what it was last year. So there's the crescent and the monetization. And this is also really important because now we started seeing -- when you look at the balance of the [indiscernible] we can say it's related to third quarter where the total bond is already at a reduction. We're monetizing more and the actual generation of the credits. And so stock was BRL 1 billion are already underway. And we began the nonpurchase of categories, so we're migrating. And so these purchases were already suspended. And now as Renato mentioned, we have the next few months where slowly but surely, there is cash flow come into the company. Of course, we have the seasonality. And structurally, after this period, we will reduce the company's stocks at this level and it's important to mention that the stocks -- there's a lot of benefits. We have the release of cash. There's a benefit of how we're doing things that will also improve the profitability since we're going from business categories that have low margins and this should improve overall and they'll bring, as we mentioned this migration and the shift in the mindset and we place the cost of capital in a very visible and relevant way for our day-to-day decision-making. We want to sell without losing the sales, so you'll be generating a healthy friction with logistical management and you have to position the stocks in the best way possible. And finally, the reduction in the stock will also lead to smaller accumulated credits in ICMS that we have here. So there are many benefits. Here we have assets and some stores here. We're going to have a lot of these processes already taking place. In the past and now we're at this phase where like a final stretch in the process. So we have these [ BRL 150 million to BRL 200 million ] to continue to monetize in the short term and the sale of subsidiaries, there is a company that actually has over BRL 500 million of tax losses. We actually discussed this in the financial statements. When we talk about income tax and when we talk about non-recognized tax losses, and this is something that we're going to be working on with the execution. So these are all levers that are under management, BRL 3.5 billion are the main ones, that we've already mentioned. The other ones we already mentioned as well, and we're working on them until the end of the year.

Now we are going to call [ Yago ].

Congratulations on the details. We had two questions on our side. The first one is about the closure of stores, those 5,200 stores Via estimated close. Is this closure is concentrated in a specific brand. We saw there's a lot of closures in the Via stores. So could we imagine that this would be more concentrated in [indiscernible]? And if it's concentrated, it may be in commercial space and shopping malls are more on streets. Could you talk about more details in regards to the closings and also -- and is there some examples of categories that you're going to go from 1P to 3P. So we can have more details about this.

The 1 to few grant had some adjustments to keep it in regions where we're stronger. So in some regions, stronger. So there wasn't a concentration of brands. In Rio, we didn't have any kind of utilization. And now we decided to do this a little more, but we try to look at opportunities, entities where we have stores open. So it's nowhere where we're going to leave the market and we can see the negative margin that we can capture product sales in other store. And so we see that the opportunity to close is the best solution. And the other 50%, we can possibly keep that open because we're negotiating with brands and also the reduction of the stock in stores, optimizing the working capital and depending on the performance, part of this can be more profitable. So we can keep the stores open. So when you go to 1P to 3P, we're giving a lot of granularity on the plan because we think that the company needs to conquer trust but this opening and breakdown brings some strategic decisions. So these are products with very low average ticket, and there's a lot of volumes per day so, we sell a lot but the cost of service was pretty expensive. And including the stock, we had BRL 150 million in stock [indiscernible] et cetera. At the 23 categories that we have a lot of granularity, tail items that customers buy frequently but it involves less than 5% of our customer base. I'm not going to just lose these clients because in -- the difference is that instead of having a gross margin of 15% but it cost may be 14, 15, 16 to meet average, I can make my 10 or 12 take rate, and then it's clean cash desires, this improves things a lot and without the invested capital, so when you look at the ROIC it gets healthier.

And I invite Andrew to submit his question.

Yes. Sorry about the difficulties. The 2 items I'm curious on is how you think about the impact to omnichannel sales as you close the stores; and then second, an update on full commerce, how the logistics as a service is progressing?

For the omnichannel aspects when the stores were closing, we're still having stores in the region or online. So there even be a migration maybe from physical to online, but we think the different markets. We believe that this tier will probably make more to a neighboring store than an online operations that are now under control. But about the second question, sorry, about full commerce, yes. So about full commerce actually fulfillment and the fulfillment plus, as we've been doing more of. So it's something that we really believed in. And this migration of categories it is actually seamless to bring in more sellers here. So it's a business that we're going to invest in, here we have margins and not much capital invested. So it's worth saying that since we having ideal capacity in our [indiscernible] which is the only one decide the [ 29 DCs ] all in Brazil we do plan to accelerate full commerce. So fulfillment to suppliers but also logistical services not necessary fulfillment, but that I can work on just higher logistics with the margins. Here we have retailers, fashion retailers, generic platforms for marketplaces it is and manufacturers, industry suppliers that are hiring our services as well as logistics. So yes actually full commerce that's operating with pricing and white label. We practically don't do, we have just a little bit of fulfillment plus where we performed, a little bit of the website operation. I hope that was clear. Let me know for any more clarifications.

So we do not have any other questions. I'll pass the floor to you, Renato, for your final remarks.

Thanks guys. Anyway, I just wanted to leave this last message here that we're really excited. One thing I have noticed that, I think was really surprising was the capacity of execution. We didn't expect to reach the 100 days but so many levers already at maturity. So we're working on this plan with a lot of feet and this is allowing us to have a deeper and anticipated perspectives to initiatives, which gives us comfort to understand that we have a solid transformational plan basics. Low risks, and we really reached the end of the year with a whole other company and maybe take 1, 2 or 3 quarters till the market starts noticing this and looking at the balance sheet cash flow and says, look here is the company, that's not only solid and sustainable, but there's a lot of capacity to capture other possibilities. So We have been profitabilizing the platform a lot. And we really want to thank you for your trust and participation, count on us. And especially, I want to thank the huge great team at Via that's delivering a lot and really I want to thank everyone with such full dedication. Let's go, guys. Thanks. Thank you. Special sales for Father's Day access our website and download the app.