Veste S.A. Estilo (VSTE3) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to the conference call to discuss the results of the fourth quarter 2019 of Restoque. With us are Mr. Livinston Bauermeister, CEO; and IRO, Jean Michel Passos. We'd like to inform all participants that the release is available for download at www.restoque.com.br. [Operator Instructions] This event is also being broadcast over the Internet. Before moving on, we'd like to clarify that any forward-looking statements that may be made during this conference call as regards to the business perspectives of the company, operating and financial targets are based on premises of Restoque's management team as well as information currently available. Forward-looking statements are no guarantee of performance. They involve risks, uncertainties and premises as they refer to future events, and therefore, depend on circumstances which may or may not occur. Investors must understand that general economic conditions, industry conditions, conditions and other operating factors may affect the future results of the company and lead to results that differ materially from those expressed in such forward-looking statements. I would now like to turn the call over to Mr. Livinston Bauermeister, who will deliver the presentation. You may proceed, sir.

Hello. Good morning, everyone. Welcome to our earnings results to discuss the results of the fourth quarter and also the full year of 2019. As we have been observing, 2019 was a year of transition for Restoque. Deep adjustments were required in the business model of the company to eliminate conflict in the sales channels with an expressive reduction in promotions and sales in the retailer channel and a significant reduction in sales to third parties who operate online. This movement impacted negatively the revenues for the year. This reduction in revenue was supposed to replace the sales into price and the recovery of the wholesale channel and the migration of sales online to third parties through our own online channels. In addition, the sales recovery at full price in the retail channels and wholesale channels and the growth of online channels was based in the cognizance of structures of collections and products due to historic parameters and the dimensioning and proportions of lines in products, markup, representativeness relative of the price range. Pricing which was directly associated to perception of the leftover of products and unification of online and wholesales channels as well as a strong technological uptaking. In addition, an intense work of construction of the foundations of the operating results of 2020, whose details can be found in our earnings results. This activity was implemented by means of optimizing the management of the company, our focus on priority products and with a strong alignment of products and collections with proven standards and success based on the history of the company and a deep review of the structure of cost expenses as well as implementation of technological projects. All these adjustments and measurement -- measures have been completed, as I mentioned. Therefore, in December 2019, we increased our capital in the amount of BRL 258.8 million. This strengthened the capital structure of the company, reducing our indebtedness levels and increasing our cash resources. In December, we made a decision to have provisions that amounted to BRL 264 million with no effect on cash on the results. And this decision was aligned with the adjustments we made in our business model of the company. This value includes provisions for losses in inventories for return of product sales in -- sold in wholesale and the completion of our international operations. The positive effects started to be shown along the fourth quarter 2019, and they became evident in December that concentrates the highest volume of sales of the company because of Christmas season. The sales in this month is important to mention, grew by 6.8%. There was an increase in the number of clients: 27% for Le Lis Blanc, 42% for Dudalina, 4% for Bo.Bô and 21% in Rosa Chá. And there was also an increase in the volumes of units sold: 24% for Le Lis Blanc, 26% for Dudalina, 3% on Bo.Bô and 44% of Rosa Chá. In John John, sales grew by 3% this month in spite of the comparative disadvantage in comparison to December 2018, when there were some days of sales. The sales using checkout mobile that was launched last year reached 27.4% in the total sales in retail. That shows a strong adherence in the sales model of the company, which allows an increase in efficiency in serving the clients and improving the customers' experience and efficiency, enabling the optimization of the sales force and reduction of expenses. The wholesaler channel had a reduction of 54.1%, a loss of BRL 207.9 million in its revenue in 2019. It's important to mention that this drop was basically caused by the reduction of sales to third parties who operate online in the amount of BRL 203.7 million, as we have already mentioned and as we can see in detail in our material. Excluding this effect, sales to clients for multi-brands and physical stores, which grew by 2.7%, with a growth of 9.5% of John John sales, growing 16.7% in the fourth quarter 2019 and 5.6% in Dudalina brand in 2019. The reduction of complex retail channels showed positive effects also in our own online channel, which grew 63.7% in 2019 from 2.2% of the total revenue of the company to 4.7%. The growth of this channel in the third quarter 2019 was 137.2% and 191.2% in the fourth quarter 2019. This was the growth in spite of the difficulties we faced implementing the e-commerce platform in this period. The problems have not been solved yet in spite of all the interactions we have been having with this provider. The positive effect of the adjustment intensified along the first quarter 2020 and became evident according to several indicators. I would also like to mention one of the indicators to show the positive effects that we recorded related to 2 main events of sales in the beginning of 2020, mainly the sale of Summer and Spring collection that has happened in January and February; and the launch of the Fall/Winter collection that happened in February. Le Lis Blanc even with a period of fall which was 17% had sales that grew by 5%, an increase of 27% in the number of clients. In the second launch of the collection, group sales grew by 2%, 27% increase in the number of items sold and a growth of 42% in the number of clients. On Dudalina, even with a period of sales, which was 3% lower, the sales grew by 47%, an increase of 42% in the number of clients. At the launch of the collection that occurred in February, sales grew by 4%, a growth of 5% in the number of clients. All those indicators show the assertiveness of the measures adopted in 2019 that even though they were severe, they were essential to correct the path of our business model and for the construction of a sustainable growth in the long term. The data related to the results of the fourth quarter '19 and also for the full year of 2019 are fully described in our earnings release. In summary, the company reached an ex-provision EBITDA, as I've mentioned in the beginning of my presentation, of BRL 137.1 million for the quarter. And for the year, the provision was BRL 352.6 million. Net income ex-provision of BRL 0.9 million. It's important to mention that the financial covenant of the company was complied with and the net debt-to-EBITDA ratio was 2.09x. I would like to inform that Rafael de Camargo, our Investor Relations Director, has left the company. His decision was personal as he will open his own business. The transition was coordinated along the last few months, as you have observed, and it has been implemented with the approval of the financial statements of 2019. I would like to thank Rafael for all the dedication he had for the company along the years. Jean Passos, our current Financial Planning Director, is taking over the Investor Relations position. He's been actively participating with contact with our shareholders, investors and analysts. And he will be here to observe all the needs that our shareholders and analysts will have. And we will be at your service for any need you might have. I would now like to open the Q&A session.

[Operator Instructions]

This is Carlos. First, I would like to understand if you have an idea of the scenarios of after all the stores have been closed, how is the -- online channel has been responding to it? And I would like to know about the CapEx, since we have been to be in lockdown and which is the worst-case scenario that you are expecting?

Carlos, thank you very much for your question. It's a very relevant question because it directly relates to the results of the first quarter. I can say that the result -- the effects are still being studied by us. The results are going to be seen after the pandemic has been declared. So first, we are -- our goal has been to preserve life and health and all of us who have active contact. We have a monitoring committee, which has been formed, and we monitor the situation on a daily basis. So how did this evolve? We have for -- our administrative team to work-at-home office. We made quick decisions, and our employees started to work on the 16th. And on March 18, we officialized this work, and this was the biggest measure. Our stores, because of the state's decisions, they -- their operation was suspended as of March 20, about 1 month ago, a little bit more. So all our physical stores are closed. We are selling online. Our online channel has been intensified. And we have recorded a significant growth in those channels, and this has been a fundamental channel for us to get in touch with our clients. We continue our contact with the social media. And from the revenue viewpoint, we are trying to minimize all the impacts. Obviously, the online channel would not replace the physical stores completely. So obviously, the online channel is not the perfect replacement for the physical stores. And the retail sector is observing what effects will be in the medium term. And we are on the lookout for the news and come to minimize all the impact on our activities.

Do you have any idea of the order of magnitude of this week after the physical stores have been closed for a quarter that was doing well? Or how would you consider the effect of this week of lockdown?

The first quarter was performing quite well. So we made it a point to describe this performance in our press release, mentioning all the positive indicators so that you could have an idea of the positive effects resulting from the positive measures we had adopted. So we had increase of sales in sales and promotions and the launch of our collections. And we also recorded a larger number of units sold. So -- and this was a very positive and one of the best indicators we can use. So this first quarter was performing very well. And now with all the stores closed, we understand the impact will be very important. We are not able to estimate what the actual results will be. And we understand that the whole month of lockdown will have an important effect on the results. And we are working actively, seeing more visibility of products. But what we can say for now is that we have to understand how the situation plays out and so that we can understand better how this is going to affect us.

Mr. Couto has a question.

Considering the cash via new issues and the allocation of new shareholders, how are you looking at the situation in the short term? Of course, this -- the lockdown of stores will have a serious impact in the operating results. In the short term, how are you going to look at the cash in terms of amortization and everything else?

Thank you very much for your question. Of course, this is a relevant question. We closed the year with this additional inflow with a stronger cash. So we had cash generation in the period. And at this time around, we were going to be weighed for the events to happen. All the companies are working in such a way as to reduce the impact on our cash. So we want to preserve the company. We are working, coming out with different alternatives. Our bank, individual vacations of our employees and even the termination of some employment contracts. We are doing our homework as everyone else. We have had interesting negotiations with the banks that have offered credit lines for this year. We have made good progress in this regard. And this makes us more comfortable. And it also shows the confidence that the bank has in our management and in our company as a whole. So sales and performance is a bit tight, but we are open to negotiations. And we continue negotiating with the banks in order to expand the payment terms. And we are also observing the -- help that the government can offer us. We believe that in the near future, we will have good news in relation to the debt rollout and along this year as a whole.

Figueiredo would like to ask a question.

I would like to know about the inventory position because it is produced from the products sold. And I would like to know if this was use of our cash. And what's your strategy for selling at full price? I would like to understand how you are going to go about it? I would like to understand this topic.

Figueiredo, thank you very much for your question. If you consider our study of last year, in 2019, we made several adjustments in our business model. After 2017, we increased the -- we invested in the positioning of our brands because it was a time of uncertainties in our economy. And at that time, we wanted to reach higher levels of clients. In spite of the positive results that we had as a result of our strategy, we also had some negatives that caused some imbalance in our operations. As we increased prices, we had mark-up. And in our stores, we had products sold at a higher price. We increased the revenue in 2017, and we maintained the level in 2018, but we sold fewer products. So we've had an increase in the leftovers of collections. And after the collections, if we need to sell all of our -- those leftovers and since this was not being successful, we had promotions during the collections. And on the other hand, we also increased the sales by online means. And you know many of them, of course. And they operate with selling products with promotion so that they can sell them out. In the past, we were selling products with a discount and we saw that leftover stocks were increasing, and we needed to increase the sales. So this became a cycle that increased the stocks, and it was causing some confusion in the heads of our clients because we had -- we were selling products at a higher price, and soon after, many of the products were being sold with a discount. In 2019 -- and this is a summary that you can clearly see in the release. In 2019, we have a severe movement of adjustments. So we dramatically decreased the promotions at stores. Even -- we've concentrated the promotions at the end of the collections. And we also decreased, in a very significant manner, the sale of -- to partners who are selling online with a discount. With this, we eliminated lots of channel complex and we -- since we sell in the physical store with a discount, online sales are also with a discount. So we needed to make a lot of promotions. So we made all the decisions that you can read in detail in the press release. Anyhow, since we reduced the products with a discount, we had a very large stock when these were leftovers of all those sales. And we also -- some repurchase has been made from those partners that operate online. So along 2019, we decided to do the following: We provisioned the stock so that, that would not be a hindrance to our strategy for 2019. And now we can see that the situation is normalizing in terms of collection structure, purchase of products, of using the collections and offering the collections at full price so that these stocks of leftovers wouldn't need to be dragged along with the year and be a hindrance to our strategies. So this is why we make those decisions. This has no cash effect. And some of the effects are very limited when we closed our international operation. So this really has no effect. Of course, the results of 2019 was adversely affected, but we have been having conversations with the shareholders and the analysts, and we had come to a consensus that this was the best decision. We would leave behind that cycle and make the necessary adjustments. This is the reason why we made this decision of having this provision.

Mr. Calvi has a question.

I've been trying to get in touch with the company for about 6 months because I have a question that is worrisome to me. 40% of the total assets is related to premium for the acquisition of Dudalina of BRL 1.6 billion. I can see the estimates that you mentioned. And this is during the current scenario and expectations in terms of recession for Brazil and for the world. So all those expectations are likely to be reviewed for this period. So it's such as likely that the lockdown, the recession effects and now the impact on the economic scenario will cause an effect on this premium.

Thank you for your question. This premium was materialized when we acquired Dudalina. And it was incorporated in our assets in 2017 by Restoque. And this is an accounting premium and this had an effect on the result of 2017. And we have an accounted -- accounting income that was recorded that represents 34% of the whole amount. This premium has been going on along this year. Hence, Dudalina has been showing very promising positive results, especially in relation to the strategies adopted. Of course, we do not have any plans to have any internal measures related to this premium. Of course, the situation may have some impact in the sale of 2019, but we're still in the first week. It's a bit premature to come into conclusions. We still have to evaluate. And at this time, we do not have enough impact to make any decisions in terms of changing -- making changes to this premium. We are going to continue our conversations. So we are available here -- are at your disposal. In the Investor Relations site, you can have our contact numbers. And we are going to talk to you and answer any questions that you might have related to our financial statements.

We are independent analysts, and this is something that we have been doing for a long time. And this rupture in our communication has been very noxious, very negative.

We close the Q&A session. I would now like to turn the call back to Mr. Livinston Bauermeister for his final remarks.

I would like to thank you all for attending our call. I think we completed our mission to describe what happened in 2019 and all the positive effects that was reclaimed at the end of 2019 and beginning of 2020. And I also had an opportunity to talk about the impact of coronavirus and all the effects on the economy and on the company as a whole. We are at your service. We are -- as everyone else, waiting for what's going to happen. We are here to exchange ideas and information and to understand what's going to be the outcome of all this. And we see that our partners, the banks have had very positive steps. And in the next few days, we are likely to share with you some important actions. And we're going to make -- continue making adjustments to our business model, and we are at your disposal for -- in case you have any questions using all the channels we have. Thank you.

The conference call describing the fourth quarter of 2019 and the full year of 2020 has come to an end. Thank you very much. Have a good day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]