Lojas Quero-Quero S.A. (LJQQ3) Earnings Call Transcript & Summary

Good morning, everyone and thanks for waiting. Welcome to the presentation and discussion of the results of the second quarter of Lojas Quero-Quero. I'm Flavio Abrantes, IR Officer. And today with me are Peter Furukawa, CEO; and Jean Mello, CFO and IR Officer. To start the presentation, we are going to start with Slide 3 with the agenda of our meeting. Our agenda today, we will approach our pillars, then expansion and projects and then we are going to talk about the earnings of the second quarter 2014. Finally, we are going to open for your questions. I'm going to start with Slide 4 and I'm going to turn it to Peter Furukawa. Peter?

Good morning, everyone. It's always a pleasure to be able to talk to you. We are talking about the second quarter of 2024. Well, this year started a bit tougher but the second quarter a bit better. As most of you probably have read the released before, so there are no major surprises. So let's go to the next slide. We had growth in same stores of 10% at retail and the more accelerated growth as of the end of May and June, when we had the floods of Rio Grande do Sul. We had some -- we were one of the categories that were the most impacted. So that brought a bit of adversity in this quarter. We opened 10 new stores. I'm going to be talking about that. We continued with our focus on credit and collection. You see that we had an increase of 0.5 percentage points. Most of it because we forgiven some delays. We did not collect the regions that were most affected by the floods, obviously. And so we ended June basically with this problem and that made the rate go up but July already performed well as well as August going back to normal levels. So no particular concern with regards to credit and collection in Quero-Quero. To do more with less, you see that when we have an improvement in gross profit, leverage, we want to improve our macro scenario a bit better to sell more and, therefore, generate the results that we want and so phygital sales, already 24% of our sales. It's growing slowly and steady. It's a great platform for us to continue to explore our sales without increasing our stores too much. A culture of high performance. We have 5 managers ready to takeover store, other 67 under training and 360 people in our Desponte program that are being prepared to be stores trainees. So no news with this regard. We are focused on gaining market, excellence in credit and collection, do more with less, phygital sales and a culture of high performance focused on cash flow. Next slide. Here, it shows where we open stores, 562 altogether, 26 in the last 26 months, 472 cities in operations. The stores we opened are according to the size of cities. We are focused on smaller cities. There are 2 things, a smaller city gives us a faster payback. But with time, it does not grow as much. Whereas in larger cities, payback takes longer time but then it's almost limitless. Because this is a harder period, we are focused on where we can generate faster cash, which is smaller towns. And that's why we are opening in these 10 towns that you can see. And our focus continues to be this because we are still looking into our cash flow. Next slide, I cannot fail to mention about the floods we had in Rio Grande do Sul, a major tragedy, a disaster. Lots of people affected. We had 12 stores, 10 completely flooded by the floods but 12 were affected. Other 29 that had some water through the door or slightly inside. We had to change our routes, paths to be able to get to these stores. We were very much blessed, I would say. Given the number of cities in which we operate, we were less affected, I would say. And more than that, I think it's hard to say, our distribution centers were not impacted, the city in Sapiranga, with a route that would lead to it. So no major impact because of the floods themselves. So I would say one of the few operations that we were able to operate, if not smoothly, at least serving our stores. You see we had 57 stores that were supplied by the Santo Cristo and Sapiranga distribution centers. The roads were slightly harder on one side of the sites but we were able to serve the stores. And we did a lot in the communities in which we operate. I'm really proud of what people did. Donating themselves, not only as a company but as human beings of excellence, more than 120,000 liters of water when, you know, in the very beginning and then 1,100 tonnes of products that we delivered. And it's not that we used an agency that delivered the product. No, we delivered the products to the people. I'm even moved to say that our stores, where people worked through the day and at night, they went home to cook, to donate food for these people. So I'm very proud of -- be part of this company. We also helped our employee. We had 110 employees that were affected and we donated them products for them to be able to rebuild or refurbish their stores, more than BRL 1.2 million in products. We did something that we did before but not as large. We sold products, of course, to the end income class, products at cost price because that was important, 180 products until June 30. 16,000 customers were benefited from that with BRL 19 million in products and at cost price and also the exemption of penalty and extra taxes for customers in cities in calamity. This is our mindset. We don't want to benefit from catastrophes. There were large companies that were selling water at higher costs at this period. We think this is absurd. We really thought we should help communities and we did it right. I think our stores really served people right. Soon after the mud was removed and this is not a state company. This is our employees removing all the water and mud from stores. I'm very proud of this team. I asked to help for some people to send money to the stores, to the people, so that people could take food for those who need it. So very, very much proud of being part of this company. I'm almost finishing now. We are going to talk more about the macroeconomic scenario but we were better in the quarter. The second quarter was already better than the first quarter, especially in states outside Rio Grande do Sul. I think that you see that in our pipeline. I think this is what I can tell you for now. Later on, I can answer any questions that you might have. But I thank you for your attention and I'm going to hand over to Jean to talk more specifically about numbers. Oh, just one thing that I forgot to mention. We had a credit of BRL 200 million of that [indiscernible] lawsuit and we had a reversion, which everything was before 2017 saying that we could not use that. We could fight for that and see if we could have this BRL 15 million back. But I believe that it's best to have BRL 150 million in hand, than disputing the BRL 200 million altogether. So we already had the case completed. I thought that we would just benefit from that by the end of the year but we are going to start at BRL 150 million in cash, which is good for the company, of course. So now I'll hand over to Jean.

Good morning, everyone. I'm going to go to the next slide to talk a bit about revenues. So now go to talk about the results of the quarter and first half of the year of the company. As you saw, we had a quarter that in financial services and credit cards, very much in line with previous quarters of the 3 activities, that is retail, same-store sales and credit card, financial services continued with sustainable growth of 20% and credit card also grows 8% in revenues. The major difference that is following this trend but had extra leverage was retail stores. We grew by 13% with retail sales this quarter, especially leveraged by the growth in same-store sales. You can see at the right bottom chart of same-store sales that we came from consistent negative quarters in terms of sales that is drop of same-store sales. Just a reminder, last year, we had a substantial effect of deflation, that is the products we were selling were cheaper. And therefore, that lowered company revenues altogether. As of the second half of last year, we started to stabilize volumes. That is the amount of products sold. We're already almost breakeven then after stabilization of -- after 2 years of a drop but we still expected to see for some time, the negative effect of deflation. But at the end of the year, deflation started to normalize. The base effect you will still see in the first quarter, a minus 3% in same-store sales. So there was a trend of improvement because of volumes and because of deflation going to inflation but there was an increase in demand, especially in Rio Grande do Sul and, therefore, we had the growth in revenues for the second quarter '24 in same-store sales. And that's why we show a [ 14% ] growth in the quarter above previous quarters and this is sustainable growth and with very interesting performance, especially when we go to the next slide, I show you gross income, 14% of growth in revenue and 18% in gross income. That's because of better margins 30.1% and also better margin in financial services and relatively stable in retail. As a reminder, in the retail, as Peter mentioned, we had sales this quarter of products at cost price, which decreases our margin but also increase sales. And without this effect, the retail margin would be very close to what we had in the previous quarter. So gross margin over net revenue was 34.7% this quarter. So with 18% growth in gross income, we go to the next slide. And we are very much working on controlling expenses along the last years. Accounting speaking, we had growth of up to 5% of expenses this quarter. Without the nonrecurring effects and tax credits, we had growth of 9%. As a reminder, as Peter mentioned, we did have negative impacts of the floods in the second quarter from BRL 5 million to BRL 7 million extra expenses in the second quarter, which were the recovery of the 12 stores, losing inventory, logistic costs, cleaning cost, donations. So these were the costs that we had in the second quarter. And then more specifically, we have something that is very important for the company that we recognize partially, credits of the fourth quarter last year when we had the judgement of the 125 of the Supreme Justice Court when there was the sentence, we saw that the calculation was good for us. We saw that it could be the total period. So we had an extra credit this quarter. However, unfortunately, there was a modulation established as of 2017. So we reverse credit before 2017. That's the downside. But the upside is that our lawsuit already was sentenced now, subsequently in July. And so now we have BRL 150.8 million in credits that are going to be offset along the coming quarters. So the upside is that this amount of BRL 150 million is confirmed. And we are going to be able to do everything we can to offset this cash along the coming quarters. Going to the next slide, you're going to be able to see our adjusted EBITDA that is taking out this tax effects. So our adjusted EBITDA was about BRL 13 million, relevant growth vis-a-vis the BRL 5 million of the last year. We closed BRL 24 million for half year against BRL 9 million of last year. And when we see the credits, we have BRL 110 million vis-a-vis BRL 77 of the first half of the year last year. So we already show and we had done that in the previous quarter that we are going back to operational leverage, even in previous quarters when we were with negative same-store sales. Now that it is positive, we show growth of our adjusted EBITDA. Going to the next slide. And here, we are closing the half year with 1.7 -- I'm sorry, [ BRL 2.4 million ] negative against BRL 19 million in the previous quarter and adjusted net income that were positive. You're talking about BRL 25 million against BRL 19 million of the first quarter -- first half of year last year. I think it's important to compare the half year because of all the provisions and we are very comparable now. So again, we have the benefit of the increase of adjusted EBITDA expenses and all that, when we go to Slide 14, shows clearly that this growth comes from retail but also from our credit portfolio a long time and controlled delinquency rates. We are at 11%, 12% of delays above 90 days. That's slightly higher in the second quarter, 12.4%. We expected that given the floods and their impact in Rio Grande do Sul, remember in Rio Grande do Sul we have 54% of our stores. This is where the company started its history and the effect of floods was quite impactful in several regions and towns. We still believe with the data that we show here that we are in control of our credit portfolio and delinquency rate and we hope to continue to do so until the end of the year. On the next slide. You can see that the growth of portfolio comes from growth of retail but also the growth of utilization of our VerdeCard. This sustainable growth, as you can see, in the second quarter last year, it grew 15%, now 14%. So the credit card is a tool to make customers loyal and it is very important that we control delinquency rates and we have been able to prove to be efficient on that. And on the next slide, not least important, it's important to show that we continue to invest. Last year, we said we are going to open a bit less stores given the macro scenario but we still opened 11 stores already, BRL 27 million of CapEx which is less than the first half of '21 and '22 but in line with the company's plan of continuing expanding, continue investing. We believe in returns. We see that of the expansion that is being done and the potential for operational leverage when the company continues to grow in the coming years. And even with all the investments, you can see on the next slide that we are able to do that with a very controlled debt and cash management. So we closed at BRL 333 million against the BRL 303 million of the first quarter. So you can see even with everything happened, that continues stable compared to previous quarters. We always say that but it's important to say it again, historically, given the company's operational matter, we have a cash burn in the first half and cash generation in the second half of the year. This is what we hope will happen and this is what historically happens in the company. So the debt was already planned. It is part of seasonality. And in addition, in the second quarter, we've raised new senior shares of FIDC VerdeCard in the amount of BRL 400 million. It is FIDC that gives the funding for the company to grow its credit portfolio. We continue with the rating of Standard Poors. We had additional financing of BRL 100 million, raising debt this quarter to reinforce our cash, extend maturities but you see this additional funding is stated in the company's cash. With that, I close the details of our numbers and turn back to Flavio so that we can start our Q&A session.

Thanks, Jean. So now we are going to start our Q&A session. The first question comes from Victor Rogatis from Itau BBA. That is going to be answered by Furukawa.

I'd like to understand if in the coming quarters, you're going to have the sales in retail at lower cost to help communities and any expenses related to the floods.

Peter?

Well, thanks for your question. Our policy -- and it's not something that we have to explain to managers because they understand that when people are affected, it can be in 1 month's time, 2 months' time, we are going to sell them this listed products at cost prices. But I would say most of it has already happened in terms of expenses, so everything was booked in the second quarter. Sales, yes, we are past BRL 20 million year-to-date, BRL 19 million in the second quarter, perhaps BRL 5 million, BRL 6 million that we still will see but nothing significant. Costs, no, everything was booked in the second quarter. Jean is very thorough and has already accounted for everything. I hope I have answered your question.

Thanks, Peter. The next comes -- come from Gabriel and Jean that is for you.

Good morning. The credit portfolio continues to stable in the fourth quarter '23 to second quarter '24. How do you see your credit level of delinquency rates and the results of stores in Santa Catarina and Parana?

Jean?

I think there are 2 points here. I'm going to start with credit. As I had mentioned before, we had no major change in our policy. Last year or this year, in the use of the card or the credit portfolio. They continue to grow at a stable, sustainable level with very controlled delinquency rates. And we do not expect anything different for the coming quarter or months. I think that, yes, this year had some macro points that benefit us as the drop in financing costs with a more stable inflation that impacts our consumers. So I do not see any major change in our credit policies but we continue monitoring everything from very close and even talking about the macroeconomic scenario to go to the second question that refers to the performance of stores in other states. We had an expectation of improvement in the macro scenario. This is happening slowly and steady but not as much as we expected. For instance, the drop in interest rates is very important for the company because it decreases our costs and encourages new expenses and everything. And in the first quarter, it was what was expected. But by midyear, there was a shift in directions. So if you take a look at the Focus Survey from [indiscernible], the second half is not going to bring the drop that we expected in the end of last year. And that affects the macro consumption scenario. On the other side, deflation that was impacting a lot of us in the coming -- in the previous quarters, it starts to be more positive. This is one of the things that we had seen previous quarters and the trend continues. So the stores that were not affected by the floods, even in some regions of Rio Grande do Sul had growth in sales, as we had been seeing before, that is a more stable volumes with a lesser effect of deflation. And this is what we saw this quarter. So I would say that what happened in the company, apart from the effects of the floods was very much in line with the trends that we were observing in previous quarters.

Thanks, Jean. Our next question is also from Gabriel. And this is for you, Peter.

How do you see the results of Rio Grande do Sul for the third quarter? And how long do you expect a higher level of revenues?

Well, we cannot talk about the third quarter according to the current norms. Obviously, in July, we still had a carryover of the costs but that went down. And whenever you have this type of disaster, the first thing that people want to replace is furniture and electric home appliances. So that increased but now it's going back to normal. And construction takes longer. We had realized that in previous floods. We had some in September, October that construction takes a bit longer for people to have a more stable condition and be able to rebuild but that's all I can tell you about the third quarter.

Thanks, Peter Well, we are now closing the Q&A session. Thank you very much for your questions. The questions that we are not able to answer, we are going to answer them by e-mail. And so now I'm going to turn to Jean and Peter for their final remarks.

Well, just thank you, everyone. Thanks for your interest. Remember, our IR team are available to you.

And now Peter up to you to close our conference call. Thank you very much.

Well, everyone. I had [indiscernible] that was my idol and he said, better not -- no surprise or good surprises. So we are better than we were in the beginning of the year, even with the floods. The floods did affect us more than expected but I'm quite optimistic to see what the second half of the year will come. The news that interest rates are not going to go down are not fantastic but that's what it is. I'm very proud to be part of this group of people from Lojas Quero-Quero, wonderful human beings who had the opportunity during the floods to show what they are all about. I'm very proud of everything people did. We have fascinating stories to share. So I'm very proud of being part of this group, the people that work for Lojas Quero-Quero. And also publicly, I'd like to thank Flavio Abrantes, our IR Manager. The previous one was taken by a bank and Flavio is leaving us to also go to a renowned private equity. Congratulations to him. We like him a lot. We really want all the best for him. You voted him the third best IR manager for small caps in South America. So you know he's fantastic. I'm sure he will succeeded whenever he goes. So congratulations and let's -- you are going to have more interactions with Paulo that is going to take over part of what Flavio did. So thank you, Flavio. Good luck in your new undertakings. And all the best to you and thanks for all your interest in Quero-Quero. We are always to answer here -- to answer your questions. All the best.

Thanks, Peter. We are now closing the conference call.