Neogrid Participações S.A. (NGRD3) Earnings Call Transcript & Summary

Good morning and welcome to Neogrid's Q4 earnings conference call. I'm Augusto Vilela, Head of Investor Relations. And joining me today are Jean Klaumann, our CEO; and Aury Francisco, our CFO and Investors Relation Director. Before we begin, it's important to emphasize that the information and statements made in this presentation about Neogrid's outlooks, projections and goals reflect the information available. Forward statements involve risks and uncertainties that may impact and economic conditions can impact Neogrid's forecasts previously mentioned. After the presentation, the highlights and earning results, we are going to have a Q&A session where everybody can participate. The recording of the call will be available on the Investor Relations website as well as the presentation. Good morning, Jean.

Thank you, Augusto, and thanks, everybody, that is here with us today. 2024 was a very important year for Neogrid because we had investments that had been established in our strategic forecast, advancing in our go-to-market. We hired more than 170 professionals, reinforcing our development teams. With this new structure, we had a notable technological advancement, both in backend and in the update of new products. And the solutions that were launched, especially during Neogrid Summit, represent a strong advancement in our intellectual property. In addition, we advanced in customer success and got very close to our clients, acting more and more as a strategic partner, facilitating the adoption of new solutions with cross-sell. Even expanding our organizational chart, we had a very disciplined approach in OpEx and revised several processes. This has allowed us to finish the year with a more consistent way. So, even with the companies acquired in the last year, we had the same headcount at the end of 2023. To understand the relevance of the investments made, it's core to understand the virtual cycle forecast by our products, to understand the end-to-end, all the change from the consumer goods as well as products and CPG and including distributors. Our portfolio had significant benefits for the industry. And for the industry, we provided operational efficiency and the management of the productive chain. For retail, it is supported in a more assertive way of the -- and allowing the products to be -- so to sell more with more margins, so with a better experience and very competitive prices. So, with the investments that were made in 2024, I would like to highlight the main points of this virtual cycle that had significant investments. First, in Commercial Intelligence, where we grew substantially the offer of actionable insights and visibility of critical factors like share stock that is important for market share. It is an area with a very promising market with concrete possibilities for expansion, including in our client base. We did EDI Mercantil, and we also allowed the retail industry to have better distribution and use all the logistics. In addition, we launched PromoTrade. It's a tool that manages commercial budget, bringing significant changes, transparency and confidability and the evaluation of the return on the investment in real-time. And finally, I highlight the advancement of our own artificial intelligence, NIA. NIA is our direct response to the demands of the market that potentializes the value of our portfolio. NIA plays a role not only in democratizing information, but also in prescribing the action of each persona in the consumption chain. These investments have strengthened our capacity to generate sustainable value in the consumption chain, creating a virtual cycle in the innovation of solutions. In addition, our team that is even more senior and innovative, that also helped keep us ahead in anticipating market trends and innovations in this market. It's very good to know that all these efforts have generated concrete results. And we observed a growth in our annual revenues also reflected in Q4 in the segments that we prioritize in our strategic agenda. Our recurring revenue monthly represents a growth of 7.7% in 2024 compared to the same month of the previous year, which is the best result. Also, although we have recent launchings and we need adaptation for implementation and materialization of the results, we can already see a significant increase in the adoption, especially in Commercial Intelligence. We have several projects that we will share soon with you with relevant cases. And finally, reinforcing our commitment with innovation and growth, we want to highlight the leadership of Neogrid. Guido Carelli, Revenue and Customer Success, brings a very good and strategic view and assertiveness to our team. In addition, Leandro Murta is the Head of Business Intelligence Unit and has a recognized trajectory in the consumer goods sector, and it's fundamental to strengthen even more our capacity to deliver solutions that really impact and generate value to our clients. With that, I wrap up this first participation and give the floor to Aury. Aury, it's on to you.

Thank you, Jean. Good morning, everybody, and thank you for being here with us. I'll start my presentation showing the evolution of the net revenue. In Q4 2024, we achieved BRL 69.7 million, representing a growth of 3.6% compared to Q4 '23 and 1.5% compared to Q3 '24. It's important to note that recurring revenue mostly made of monthly fees for using our software grew 3.9% compared to Q4 '23, with a performance especially sound in the core segments like CPG and Electro in Brazil, like Jean has already mentioned. In the annual analysis, total revenue registered BRL 274.1 million, corresponding to 2.2% growth in relation to the previous year. The proportion of recurring revenues remained at a high level, reaching 97.1% in Q4 '24 and 97.6% in the consolidated of 2024. On the next slide, we see that in 2024, there was a marginal reduction in revenue. This effect is explained by the strategic decision to concentrate efforts in the Brazilian operation. Part of the decrease was offset by the positive effect of the exchange rate variation in the period. In the graph on the right, we highlight the representativeness of each business unit in composition of Neogrid net revenue. In 2024, in retail execution, the unit increased its share by 1.4 percent points, followed by Commercial Intelligence with an increase of 1.2 percent points. On the other hand, we saw a reduction of 0.8 percentage points in the integration and direct reflection above all of the international performance aligned with the strategic focus on the Brazilian market. On the next slide, we present the breakdown of the performance of the business units in 2024. And we call your attention for the gross margin, which reinforced the relevance of each segment. The integration unit recorded a high gross margin of 64.4%, reinforcing the importance in terms of -- its importance in terms of revenue and strategic potential. This unit concentrates a large part of our clients, and it's relevant for expanding our ecosystem. The retail execution unit achieved a gross margin of 49.7%, consistent with the stage of maturity and reflecting an expanding market with a high growth potential. Also on the support team and customer success, we recorded a decrease in gross profit year-over-year, totaling BRL 162.3 million in 2024 with a gross margin of 59.2%. On the other hand, we had an increase of 7.4% in gross profit compared to Q3 '24, which validates the increase in revenue and contributed positively to the expansion of the gross margin over time. OpEx represented 56.6% of net revenue in Q4 '24 and 58.3% year-over-year, equivalent to an annual decrease of 0.1 percentage points in the quarter, but an increase of 5 percentage points in year-to-date. Looking at the graphic, we start with R&D expenses, which increased by 4.9 percentage points in Q4 '24 compared to the Q4 '23 and by 2.4 percentage points in the comparison between '23 and '24. We kept P&D expenses at 22.8% of net revenue in Q4, and this resulted in BRL 15.9 million in P&D expenses -- R&D expenses in Q4 '24 and BRL 57 million in the annual view. So the R&D block would represent 31.9% of net revenue in Q4 '24 and 29.1% in all '24, showing the expansion of our innovation and development capacity. In general and administrative expenses in Q4, we saw a reduction of 4.5 percentage points compared to Q4 '23, but an increase of 1.1 percentage points compared to 2023. This movement is due to the combination of adjustments such as the reduction in infrastructure costs and lower provision in short-term variable remuneration, offset by the consolidation of Horus expenses from Q1 2024 onwards. Finally, sales expenses as a percentage of revenue fell 0.4 percentage points in Q4 '24, but rose 1.5 percentage points year-over-year. The reduction compared to Q3 '24 is mainly related to the peak of expenses incurred with the Neogrid Summit in August 2024. Now in the slide about operating profitability, we present an adjusted EBITDA of BRL 3.0 million in Q4 '24 and BRL 1.5 million in the consolidated of '24, with adjusted margins of 4.3% and 0.5%, respectively. The adjustments applied in both Q4 and 2024 are mainly due to the lower reevaluation of the total earn-outs payable in the amount of BRL 20 million forecast of the impairment intangible assets in the amount of BRL 27.7 million. Compared to Q4, we see the evolution of the gross margin and the reduction of operating expenses, especially in sales after Neogrid's Summit. Both the provision for the impairment of intangible assets and the revaluation, they come from the analysis that despite the growth in recent years, the business arising from the companies acquired by Neogrid between 2021 and 2023 performed not as well than originally expected. And that was used to assess the fair value of intangible assets. Details on the impairment provision are available in Note #16 of our financial statements. The details of the reversal of earn-out can be found by the company in the explanation Note 21. When we talk about cash flow, we had a consumption of BRL 21.4 million during 2024, adhering to the investments foreseen in Neogrid's strategic plan, which includes strengthening operational structures and increasing intangible CapEx with a view of boosting our long-term sustainable growth. It's important to highlight that even without the expansion of expenses, the cash generation was productive. The one on the right we show the availability totaling BRL 142.6 million with a drop of 7.4% compared to Q3 '24. This results -- the consumption of the free cash flow plus the disbursement of BRL 5.6 million for share buybacks in the period. Discounting the loan, we ended the year with BRL 134.1 million in cash, which also includes acquisition-related obligations, which was BRL 109.9 million, an increase in -- compared to Q3 '24 due to the lower evaluation and the earn-outs payable to the companies acquired between 2021 and 2023. We're coming to the end of the presentation, but I'd like to update you on the execution of Neogrid's share buyback program. I would like to remind you that the approval of our Board of Directors are repurchasing up to 10% of our outstanding shares. The program is valid until July 2025. And so far, 321,700 shares have been purchased with an average price per share up to BRL 26.72, an amount equal of BRL 82 million invested. This is equivalent to 79.2% of the total approved in the program and represents 3.5% of the shares held by treasury. And one thing that I wanted to highlight very transparently is the representation of 2026. The representation happened because together, with our auditors, we made an adjustment mostly in the presentation of tax revenues on the net revenue that are accounted for the intangible assets. As shown in the representation of the slide, when an intangible asset is recognized during -- to the differences between the fiscal and accounting basis, we have a difference in liabilities as well. With time, as the company moves the intangible assets and reevaluates that the liabilities connected to tax payments and contributions are modified to reflect the proper fiscal effects, it was at this point that we understood there was a need for adjustments. In the acquired -- the liabilities of social contribution and tax payment should have been compared to the liabilities. So the main effects was in the consolidated of -- in January was an increase of BRL 2.4 million in the assets and in the social contributions and consequently an increase of BRL 25 million in the profit reserve. So when we look at the end of 2023, the adjustments accumulated. The adjustments was an increase of BRL 8.2 million in intangible assets, a reduction of BRL 21.3 million in deferred taxes and social contribution and an increase of BRL 29.6 million in the profit reserve in shareholders' equity. Finally, in the consolidated results of 2023, there was a reduction of BRL 4.6 million in the negative effect of the deferred tax payments and social contributions. And this was a result of an increase of BRL 4.6 million in the result for the year. And there was no impact in the final balance of the company and the effects of these taxes are merely economic and do not impact the cash flow of the company. With that, we conclude today's presentation, and we'll be happy to answer your questions in the Q&A session that will begin right now. Now I'll give the floor to Augusto to start with the questions.

Thank you, Aury. Thank you for the presentation. First, I will start with the question asked by Fernando on the chat, and it's to Aury. Aury, the correction in the accounting practices regarding the taxes and social contribution have also affected the results of 2024. Is there any connection with earnings of intangible assets? We would like to hear how this impacts the final results?

Thank you for the question. In 2024, we identified the need for this adjustment along the year. So when we look at the results of the first and second quarters, we still had the older practice being applied and the material value regarding the result. And now in the end of 2024, when we understood the need for adjustment, we adjust both the balance of 2023, especially in the opening balance and we modified the practice for the whole year of 2024. So the answer is there's no impact in 2024, and there will be impacts in the future exercises because we deferred all the liabilities after the social contribution payment. Because this movement was created in an legal obligation due to the time difference between the accounting practice and the fiscal practice, every time we acknowledge that, we create a different economic movement. So there won't be disbursement nor via amortization or via applying the practice of lowering 100% the result of the period. So there is no significant impact now, and there won't be any significant impact in the future, not economically, okay?

Okay. Now the second question is to Jean. It has to do with some issues regarding strategy. So I will try to summarize like Jean. How do you evaluate the results of Q4 referring to the strategy? What has increased and improved according to the expectations? And where do you think you need to evolve?

Thank you, Augusto. Thank you, everybody, for your participation in our results call. I am very happy with what happened in Q4. I think that we start 2024 with an important decision aligned with our advisory board of increasing our investments in technology to rescue competitiveness in some products and launch new products. So when we look at the state situation that we have now in our net cash flow that was mentioned by Aury, close to BRL 10 million, I think that at the moment that we are now rescuing our organic growth. I think that it makes sense to invest in our products than increasing M&As. So when we look at our drop of profitability in this year, we know that this was something planned because we hired 170 people. So to invest in several segments, especially in artificial intelligence. So we did something very agile in August of 2024, which is to -- with this launching. So in 6 months, our architecture, our readiness to capture new insights has brought Neogrid an opportunity to renew its approach and increase its competitiveness in August. In the first quarter, we started to capture the first sales cycle of these new products. Now we have the opportunities to have the first POPs ongoing, validating our thesis in these growth avenues. So it's a growth that starts reacting. So we had in Q4 the best quarter in 8 quarters in a row. So the initial validation is very important. So another important growth avenue is the responsibility that we have to be responsible with cash flow. So we made a conscious investment, and we continue acting on operational efficiency avenues to make our processes more agile. And then we finished 2024 virtually with the same headcount that we had in 2023. But now we have a more technical term, a more savvier team with more senior people. So the investments that we made this year, we started to reduce the consumption of cash flow. And that converts to the growth of revenues and also to rescuing the margins that we had already had. So we are still working on our growth. So when I look at Q4 '24, the launching of new products, the expansion of our recurring revenues in our core markets, the reduction of our expenses and efficiency projects. And when we see it's virtually the investments -- the margins are just the same as 2023, we think that it has been very well-orchestrated and done in a very responsible way. So I think it's a very good start for 2025. Of course, that sometimes we have some disappointments with the macro environment. But when we see some problems in the technology area for the government reasons, but our agenda of 2024 is going to continue to focus on execution, on evolution and the results will come as time goes by.

Yes. I think this is a very good point that leads to the next question from Douglas that says, the year of 2024, I think it's critical for the consolidation of the investments of the new products. How is the organization structuring to generate the expected results? Could you talk a little bit about the initiatives that you believe can have a better impact?

Thank you, Douglas, for your question. Yes, in fact, I think that we're not going to have a year of launching of new products, but new releases of the product that have already been launched. So we're going to be learning with a lot of things. Like PromoTrade, we conquered now the subscription of 3 pilots with 3 leading companies in their categories. So we're going to invest in these first 3 months, but it's going to bring us an opportunity to validate the promotional budget and with companies that operate with a high volume, financially speaking. So another important point in the year is that last year, we launched our customer success team to be closer to retail. And like everybody knows, our consumption is virtually the commitment between consumption and retail is very important. And those that follow us more actively will know that the achievement of Pátria in the food service, so embracing Neogrid in its platform of data sharing and other platforms, potentializing our system. Another important achievement is that we became the first platform and the biggest operation of the Brazilian retail in 2024 with the case of Actalis that is a long-term client. So this agenda of proximity with the industry, with retail, expanding our data system and validating the products only 6 months ago will be very important to confirm our thesis for 2025. And for sure, it is that we have several avenues in these levers. And we're going to work to optimize our costs to try to rescue the breakeven of the operation and accelerate the expansion of margins as of then. And about the growth avenues, we are talking about a year that has an important change in the consumption basket in Brazil. And our main purpose that is to be the best supply platform is going to rescue other important opportunities for those that want to reduce inventory and have better opportunities on the shelf. So we're going to work on that so that we can have better cases talking about automated supply and those kind of things to help the Brazilian industry, especially the CPG chain, to run with smaller inventories consuming less cash flow in Brazil.

And now we have 2 questions from [indiscernible] from UBS. One is a more technical question to understand better the integration with the clients. He asks that if the solution that allows the client to see the inventory from the distributor to the supplier goes to this CPG solutions to see if the RP demands long integrations. And the second is he asks us to talk about the Rule of 40 and the target of reaching more than 50 points until 2027. So what -- he wants to know what are the main drivers to reach this goal.

Okay. Thank you for the UBS team for the support, for being here with us in this call. I think that this is a very important point about this integration point. When we talk about this market of data analytics and science data companies, we are really a company that has work developed over these 25 years to have this R&D data. So the companies that work with sell-out, they do that with the fiscal coupons. That is a quicker integration. But we -- in addition to having the RP coupons, the integration with R&D, even it's lower and more costly, it gives us the privilege to have not only the inventory, but also the distribution center also inventory. So this brings more efficiency for the supply inside the retailers. So if you have a sale that happened in the company, the product is in the distribution center, but there was not a supply cycle yet to the store. So this is, in fact, a competitive advantage that is important to Neogrid and the reduction of this ecosystem to more than 100 retailers in Brazil that we have connected every day puts us in a very strategic position. Regarding our ambition of growth and combined profitability, we have not been giving partial attention to this segment specifically. We are committed to the expansion of both lines, the expansion of the revenues. Aury also brought the visibility, how D&A has diminished its cost and increased its efficiency in the operation. We were celebrating internally today several self-services that we have been delivering to our clients, so they are more autonomous to solve their problems, and that will also reduce our headcount in works that demanded more people. So finally, I think that we are just looking at our 2027 agenda, and I trust a lot that quarter-over-quarter we're going to be celebrating the homologation of products and new products, and this will come in waves along 2025.

Excellent. With that, I don't have any further questions. And with that, I will wrap up our call today. Jean, if you want to make your final considerations, I want to thank everybody for the participation.

Thank you, Augusto. Thank you, Aury, for sharing this call here with me. I think that although our -- we did the publication without the conclusive report from PwC, but we showed results that proved our commitment with compliance and the final results. And I believe that in the next weeks, we're going to finish this commitment with the same quality that we have already done. So I think that the work of the management of Neogrid with Guido, we mentioned Guido that has very experienced in the industry, Murta that is also with us in the leadership of Commercial Intelligence. He has been working for over 20 years with that. I think that reinforces our competence, and this work is going to continue. It's a long journey and a very disciplined journey to continue working so that industry and retail have -- sell more by using our products. So I would like to thank all the Neogrid shareholders as well, and I reinforce our commitment to advance in our strategic agenda all over this year. And I hope I can come back here with better cases and better results for everyone. I wish you all a great week. Thank you very much.

Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]