Grupo Toky S.A. (TOKY3) Earnings Call Transcript & Summary

Good afternoon, and thank you for holding. We welcome you to the video conference regarding Mobly's third quarter 2024 results. Present with us today are Victor Noda, Chief Executive Officer; Marcelo Marques, Chief Financial and Investor Relations Officer; and Mario Fernandes, Director of Operations and Logistics Systems. [Operator Instructions] The video conference will be conducted in Portuguese, and we have simultaneous translation into English. Before proceeding, bear in mind that any forward-looking statements that may be made during this video conference regarding the company's prospects, projections and operational and financial targets are beliefs and assumptions of the company management. They are no guarantee of performance as they involve risks, uncertainties and assumptions. They refer to future events and, therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operational factors could affect the company's future results and lead to results that differ materially from those expressed in the statements. We will now give the floor to Mr. Victor Noda, who will begin the presentation. You may proceed.

Well, good afternoon, everybody. As always, our intention here is to give you an update on the results and, of course, open the floor for questions. Today, we also have the closing of the transaction with Tok&Stok. I would like to offer updates for everybody and once again open for the question-and-answer session. First of all, let's speak about the main highlights for the quarter. Now we continue with the trend that we observed since the last quarter of growth. We have been able to speed up the growth. GMV ended 9% above last year, around BRL 197.4 million. The great highlight is the growth of the marketplace. Our marketplace channel continues to grow very fast. We grew 40% year-on-year, and we have a significant share gain as well as new partners and new channels. We will offer you more details. Another highlight is net revenue with a growth of almost 22% year-on-year, ending up at BRL 151 million. The difference between net revenue and GMV lies in the fact that we are back to reducing delivery terms in the quarter. This had a faster recognition of revenues with the return of Mobly Log with its full model that had been suffering since the first quarter. It also has a very timely effect on ABP. But of course, the news is good. Our gross margin also continues to grow. We ended the quarter with 44.2%, 140 basis points year-on-year. And on contribution margin II, we have more details. It is above that of last year, growing. And the main news is the normalization of our logistics cost in September with the return of Mobly Log. Now margin III, very much aligned with last year, 15.3%, minus 20 basis points year-on-year. We had an effect in July. We lost some of our marketing efficiency during the month for two reasons. One, the change of platform for e-commerce that contains our products and a change of Google Analytics which is the main result platform that feeds investments into Google. This generated instability that was redressed within the same month. When we look at the more recent results of September and October, the outlook for margin III is very, very positive. We ended with an EBITDA margin of 0.9%, negative 410 basis points year-on-year with a very significant evolution for Mobly this quarter, when we look at the adjusted margin of negative 0.7%, discounting the remuneration of stock options and, finally, net margin, closing at 14.9% negative with significant gains, vis-a-vis last year, 480 basis points better. These are more details and figures. I'm not going to go through all of this. What I would like to underscore here is how our contribution margin III has evolved with the recent changes in our marketing strategy. You must recall that at the end of last year, we carried out a change to enhance the assertiveness of investments in marketing, their impact online among different channels, especially the impact on brick-and-mortar stores. This enabled us to speed up our investments, do it more efficiently. And in these last few months, with this assertiveness, we have been able to work with significant optimization in our investments. If we look at the last month, there was a reduction of 20% to 30% in marketing investments, maintaining the general billing of Mobly at similar levels. We continue to grow, vis-a-vis last year, but generating higher margins than before. The future outlook, therefore, is very positive. I will speak about the other figures in the next slides. Here, we have the growth of the impact on the channels. When we look at the consolidated vision with the growth of GMV, the behavior is different among the channels. In webshop, it ran somewhat below last year because of 2 impacts: the impact of July, of course, with the turbulence that we faced and that was corrected during the month; and in September, the impact of the changes that we implemented in marketing investments, bringing about results for contribution margin III at the cost of billing. This has been a very challenging channel when it comes to growth because of the assertiveness of marketplaces during these months. Webshop is a channel where it is more expensive to acquire customers. But part of our strategy, it has played an ever more important role for the construction of the brand and the portfolio and to strengthen the consumer who also comes to our physical stores. So on our website, you will see a curated portfolio of products what we show the customer more, which are private label products that show the products of Mobly with a higher margin, with less emphasis in that fight for price, which is, of course, left for the marketplace channel with good results. We grew almost 41% in the last quarter year-on-year. Here, the growth is general in all of the platforms, especially in Mercado Livre, where we have gained market share month after month. With the enhancement of technological integration, we have been able to scale up fulfillment. We're now beginning to work with collections, so a great deal is happening with the potential for growth. And in September, we had the entrance of [ Shopee ]. Although we began the operation in July, August, it's growing at a very fast pace. And we foresee the potential that it will be our second largest channel in a few months. So this is a potential new channel that will drive the growth of the marketplace. Seller center did have growth despite the drop in webshop. It has gained share in our webshop platform. And this, thanks to new sellers and with a closer management, they are included in the promotional campaigns that we hold here. And the store channel, when we look at the closed figure, the growth was somewhat timid of 0.8%. But in the period, we have the closure of 2 stores, a mega store in Sorocaba and an outlet. When we look at same-store sales, the growth was 4.8%. This is a channel that is becoming more profitable for us. We have cut down on cost, increased the conversion rate and with a growth of profitability as well. Now let's speak about our margins. I have already spoken about the contribution margin I. It continues with a positive trend here. We ended with 44.2%. It was higher than last year. We had a margin gain here. The trend this year to increase margins continues, and this trend should continue on margins for Mobly on its own. With the scale of drop shipping, we still have some suppliers that need to be migrated and growth once the synergies with Tok&Stok come into place, which we will discuss further ahead. Speaking about logistic costs and the figure is still quite high, higher than it was last year of 13.9%, if you recall, we had already had a significant increase in the logistic cost beginning in March or April. With the changes we were forced to make in Mobly Log, we had a significant partner that went bankrupt. And until we were able to replace this operation, we migrated the operation to more expensive third parties. We have reestablished Mobly Log with a more resilient, robust model. We're no longer dependent on partners, and this happened in September. In the graph to the right at the top, this becomes very clear. The cost of transportation in September is significantly lower than in previous months. And this trend will continue going forward. We hope to have significant impact on Mobly's profitability in the fourth quarter and upcoming quarters. With this, we end contribution margin 25% above the figures of last year. Now to speak about sales and expenses with marketing, still quite steep, perhaps steeper than last year, around 15% of net revenue. Notwithstanding this, the contribution margin generated above last year, 20% higher, 18.5% above 2022, a significant resumption of this contribution margin. As I mentioned, here, you can see the month-to-month evolution and the growth of the process 2024 in September, although this is a month of low seasonality, because of the operational changes, they brought about significant profitability. In 2023, there was a drop. In 2024, there was a growth. We worked 50% more profitably than in the same period last year. And the outlook for October is of even greater growth. So we're quite optimistic with this profitability evolution. To speak about our costs, we have a cost under control. Our personnel cost is flat, aligned with the same period last year, BRL 11 million for the quarter, reduced as a percentage of revenue of 7.5%. And this is due to cuts that we carried out throughout the year, and we have been able to gain an efficiency. And the same has happened with fixed operational costs. There is a reduction in the closed figure, a significant reduction of 5%, vis-a-vis last year, but there were 2 timely and positive effects, one of which is a recovery of taxes -- of digital taxes representing BRL 1 million and the accrued effect from intercompany operations. What has changed is the way of accounting them. We made adjustments with BRL 1 million negative impact on the revenues and a positive effect on the cost. So the EBITDA effect is null, therefore. We do have that significant reduction. Were it not for that reduction, we would have been very flat, vis-a-vis last year's results. And as a result, we have a much better EBITDA than in previous periods. We ended at 0.7% negative, BRL 1 million negative EBITDA compared with BRL 6 million in this period last year, a significant evolution that has an impact on EBIT and net income. The trend quarter-on-quarter shows us this evolution. Even in periods that we call low seasonality, we were able to maintain that profitability under control differently from previous years. We're now in a period of high seasonality, the fourth quarter, the first quarter looking forward, and the outlook is for a positive EBITDA. Because of the evolution in marketing efficiency, the recovery and resumption of Mobly Log, we will no longer be working with a negative EBITDA. Going forward, we're going to work with Mobly with a positive EBITDA, and we're now going to seek a positive EBITDA throughout. Now as part of this quest, the significant news that we have received this week on Friday was the closing of the operation with Tok&Stok. As we have remarked, this operation will play a fundamental role for us strategically and financially because of the synergy it will bring about. We'll focus on the synergies, reminding you of the structure of the transaction. The more probable scenario nowadays is that the shareholders of Mobly will have a dilution of 12% that will go to SPX. The counterpart is that we take on control of Tok&Stok with 61% of their shares. Additionally, to that exchange of shares, SPX has a subscription bonus where it can acquire more shares at BRL 9 until a limit of 6%, if I'm not mistaken, and it has this option for the next 2 years. SPX has a 2-year lockup once again to sell their own shares as well. Now when we look at the debt, we have 2 different formats, the debt with SPX itself, where Tok&Stok had a debt corrected of BRL 122 million with SPX. This debt has gone on to Mobly, and Mobly will have a convertible debt with SPX. This debt will be convertible at BRL 9. This price of conversion will be adjusted just like the debt CDI plus 2. There is no risk of increasing dilution through time. And SPX can convert that debt at any moment at BRL 9 or Mobly can convert the debt at the end of the payment of its debt with the banks, which means that, going forward, we do have that option if SPX has not converted its debt in shares. And finally, we have the renegotiation of bank debt that was carried out through an extrajudicial recovery of Tok&Stok. When we look at the amounts of the debt with the banks, they have been corrected at BRL 399 million. And we remind you the format of the debt. It will not have interest rate for an entire year. Interest rates will not be paid in 2025, only in 2026, and amortization of the principal with a grace period of 2 years. The principal will begin to be paid in January of 2027 with a ramp-up of the amortization, 5% amortization '27, 10% in 2028 and then basically 14.4% per year until 2034. Now this design was created to give Mobly and Tok&Stok more than sufficient time to work on the capture of synergy, cash generation. And when the debt has a cash demand, we will be able to calmly serve that debt. In parallel, banks can also convert their debt in shares at the price of BRL 9, and that price will be corrected at CDI plus 2% to avoid variations in the dilution potential. Now the approval of that extrajudicial recovery plan was the last pending item in the precedent conditions that, of course, led to a closing on Friday, November 8. Everything is right. We have been through the antitrust agency, CADE. We have implemented the extrajudicial recovery plan, and we're now beginning to work and capture synergies. Now what we have attempted to show you here is which are the potential scenarios of dilution for Mobly present day shareholders. First of all, there are 2 scenarios for capital increases, which is how we structure the transaction. In a minimum scenario, SPX and a minority shareholder will contribute with their shares to capital increase. Both have already done so. In this scenario, we will issue 3.7 million (sic) [ 13.7 million ] of new shares. Now if they don't use the substitution bonus with a strike price of BRL 9, quite far from the real price of the share, if they don't exercise this option for the Mobly shareholders, it would represent 11.4%. If they do, it will go on to 34.67% in a scenario of maximum dilution of capital increase where Dubrule family and other minority shareholders and all the minority shareholders of Mobly decide to participate in the capital increase at the price of BRL 4, somewhat above BRL 4 per share, there will be a significant increase. If nobody exerts this option, we would be at 34.67%. If they all exercise the option, it will go to 40%. The most probable scenario in the short, midterm is that of the lowest dilution. 11.4% of dilution for Mobly's present day shareholders Tok&Stok will come into the group, and we will incorporate BRL 1 billion in invoicing with positive EBITDA. Therefore, this will be an advantageous transaction for Mobly. Additionally to this, this transaction will make it possible to capture a diversity of synergies that have been mapped here, working with the Bain & Company consultancy with Itau Bank, working as [ aid ] hands with the companies as well. Looking at all the broad lines, potential lines, we can capture all of those synergies during the first 6 months, another relevant part during a year and a part that depends more on technology or significant changes in the structure after 1 year. When we look at the short-term activities, we will optimize the administrative structure, service providers, contracts with third parties, costs with technology licenses and especially a reduction in the merchandise sold through negotiations, through the implementation of processing of Mobly for Tok&Stok and gains with fiscal incentives. We have a reduction of distribution centers and a reduction in freight costs and the use of Mobly Log for Tok&Stok and the Tok&Stok structure disseminated through the country for Mobly as well. In the second block, we capture gains with imports. Mobly will work with direct imports with an office from China with a significant cost reduction until the product reaches Brazil and has an impact. It will take more than 6 months. We have the unification -- full unification of logistics that will require logistics, optimization of infrastructure, servers, site optimization with integration. We will have a cost reduction at both parties and a marketplace strategy for Tok&Stok that will be quite different from that of Mobly, more focused on specific products, specific conditions and will become a new channel for us in 2024. Looking further ahead, projects that depend on technological integration or significant changes in negotiations with suppliers or more in-depth surveys, these synergies will be captured in a year and going forward. When we look at the combined company, we do see positive effects in all of the P&L line items of the new company. We're speaking about Mobly with gross margin of 41%. Presently, it is at 44%, as was shown before. Tok&Stok in 2023 was at 51%. Presently, it is higher. Only with this, we will have a significant increase in the gross margin of the combined company. The same holds true for logistics, strong enhancements in the indices and in marketing. When we look at the EBITDA of Tok&Stok '23, it was negative. It had more than BRL 100 million in one-off effects because of debt recognition with [indiscernible], the write-off of technology projects, the closure of stores. When we look at 2024, it is a company with a positive EBITDA. And in the combined company, we begin with a positive EBITDA as of day 0. So this is a significant effect you will be able to see in the future. Very well, that is the update that we had for you, simply to underscore that we have already begun the integration work since yesterday. We're bringing together the teams, aligning communication. We have defined the new flowchart for the leaders, and it is up to the teams to define processes and begin to work with a budget for 2025 and the plan to capture synergies. The idea is to speed up this process, so that the combined company can begin generating cash and to create sufficient debt when we have to begin paying for the debt. I would like to thank you for your attention, and we open the floor for questions.

[Operator Instructions] Now to begin with the first question, Alexandre Namioka from Morgan Stanley.

At our end, we have 2 questions. The first refers to the store footprint. We know that Tok&Stok has several stores. I would like to understand your mindset regarding that footprint, how much space you're going to need if you're going to open new Tok&Stok stores and which will be the Mobly format in 2025. The second question refers to synergies. From the presentation and the last presentation you made to speak about the deal, I would like to understand if you have room to reflect some of these synergies for Mobly.

Well, thank you, Alexandre. I'll answer your questions. First regarding the footprint, I remind you of the broad figures. We begin with 67 stores, 50 from Tok&Stok disseminated through Brazil, 37 from Mobly. Now if it's going to change next year, if this will increase, there is no outlook to increase the store footprint in the short term. In the short term, we're going to focus on capturing synergy. We don't want store investments. They require a payback of 3 to 4 years. That is not our focus now. But there are opportunities, even opportunities to, potentially within the areas of Mobly and Tok&Stok, create shared stores. We held a discussion on taking the Tok&Stok outlet to one of the stores at Mobly, divide the store in two. Now there will be these changes, but with a view towards gaining efficiency, not to expand the network. We will reinvest in speeding up growth, especially in marketing. So we're going to continue with growth. This year, we have had good growth. We're getting close to 2 digits. In the second half of the year, the growth will be 20% or more. This has happened. What we will do is make investments geared to growth, and our idea is to change the nature of the investments. We have sought out more efficiency on the online campaigns, and this has given us good results. You will see this in the fourth quarter results. But at the same time, we are going to begin to look at investments in the brand construction at Mobly. I spoke about the price war, the dependency on cheaper products, subsidies for freight, and we want to go to a brand that will be valued by the consumer, that will have the preference of the consumer. The consumer should be willing to pay more for this. And this depends on a good brand construction. We're going to create a product portfolio that is coherent, a store experience that will replicate this on the site and in the brick-and-mortar stores and marketing investments geared to that brand construction. This, we will do in the coming months.

[Operator Instructions]

We have 2 questions in writing in the Q&A. I will answer them. Or Mr. Alexandre Namioka has raised his hand. So we will unmute your audio. You may proceed.

Simply a follow-up. In your second answer, you mentioned that we should look at the result of the investments in marketing in the fourth quarter. What is it that you are already seeing in terms of performance, especially for November? When we look at the industry data, it seems that there is an increase in the pace. So what is it that you are foreseeing?

When we look at the industry, the segment, I won't say that there has been an acceleration. There has been a lack of raw material because of the increase in the dollar rate. The demand for export increases, and several suppliers of raw material will send their material abroad. And of course, the local market becomes ever more expensive. We have felt that significantly. Our suppliers, our furniture producers do have a lack of raw material because the material is being exported. It has been a great challenge for the segment locally. Despite this, October was a very good month in terms of contribution margin. November has not been different. These are record months for us with significant gains. We are testing that trade-off between marketing and sales. This has increased the profitability at Mobly. That is why we're optimistic we will have a positive EBITDA going forward. For us, so far, it has been a very promising quarter.

I will give the floor to Mr. Victor Noda to answer the questions in writing.

A question from [indiscernible]. The first question says the contribution margin III has been dropping. It was 17% at the beginning of 2023. If we have some points that have happened during the period, well, the first was that at the end of 2023, very consciously, we accelerated investments in marketing. We decreased the percentage of contribution margin III, but we increased it in absolute terms, different from your understanding. You should see how much we generated in contribution margin III in BRL, 20% above the figures of 2023. This is one of the effects. The second effect that impacted the second and third quarters of '24 are logistic issues. We were running with higher transportation costs, 11%, 11.5%, where it should have been between 8% and 9% to 2.5 margin points that impacted us and that we have recovered. When I look at the reduction and the marketing we worked within September and the reduction in logistic costs with the recovery of Mobly Log, we're speaking about 3 points of margin gains. So we are higher in contribution margin III in percentage terms and in absolute terms in BRL. The second question of [indiscernible] is which is the bottom line for the channel. As we're growing in the marketplace and dropping in others, we remind you that we're growing in the marketplace, growing in stores, in seller center. The only channel with a drop is the webshop, and that drop was precisely because webshop proved to be the less profitable channel. It's a direct cause of our quest for profitability and adjustment in marketing investments. When I look at the bottom line in the channels, the most profitable channel is the brick-and-mortar store. Brick-and-mortar stores are channels with positive EBITDA. They have been for some time. The conversion rate is of almost 20% in the stores. This allows us to have high store efficiency. 50% of what we sell in stores are not products that are exhibited in the store. Clients are buying through the store on our online channel. That's an efficient process. That is why we focus on strengthening that channel. The marketplace channel should be scaled up because the marketing cost is stable of 13% to 14% of net revenue, regardless of its increases, but it has a lower gross margin. It depends on discount campaigns and subsidies. And the webshop channel is a channel where we can control profitability. Now the channel is that -- it has its highest gross revenue, but it also has a very high cost that we can control. If we seek the growth of that channel, we will work with a lower marketing efficiency. And if we want to increase their percentage marketing, we have to increase investments. What we need to do is find that optimal point where contribution margin in absolute terms in reals is what will materialize. This is what we have done in the last month. If you could speak about the fact that Tok&Stok cannot be fully incorporated working with minority shareholders, does this increase difficulties? A question from Marcelo Cabral. No, we take on control of Tok&Stok, and the scenario, 61% control, not 100%. The management will be only ours. The Mobly managers will begin to manage Tok&Stok with full control for integrations and the capture of synergy. So there is no impact from having less than 100% share control in this synergy capture.

With this, we have answered all of the questions we had received. Thank you all for your questions. I will return the floor to Mr. Noda for the closing remarks of the company.

Once again, we would like to thank you for your attendance. In this quarter, we look upon everything with optimism -- greater optimism than in the rest of the year. Now during this quarter and the recent changes from September, October and November allow us to be quite optimistic about the future of the company, especially because the transaction with Tok&Stok has been concluded. We're going to work on the integration of business, on the capture of synergy. This is an opportunity to have a business with a much greater scale, vis-a-vis Mobly. We're speaking of a threefold increase in size and much more strength in this combined company. We will have a great deal of work and significant novelties to bring you in the coming calls, and we're very optimistic with the future. We thank all of those that have been with us for their confidence. And once again, we would like to thank you for your attendance.

The Mobly call ends here. We would like to thank all of you for your attendance. Have a very good afternoon. [Statements in English on this transcript were spoken by an interpreter present on the live call.]