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Edited Transcript of HGTX3.SA earnings conference call or presentation 2-Aug-19 2:00pm GMT

Q2 2019 Cia Hering Earnings Call

Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Cia Hering earnings conference call or presentation Friday, August 2, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Fabio Hering

Cia. Hering - CEO, Advisor, Member of Executive Board & Director

* Rafael Bossolani

Cia. Hering - CFO, IR Officer & Member of Executive Board

* Thiago Hering

Cia. Hering - COO

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Conference Call Participants

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* Felipe Cassimiro de Freitas

HSBC, Research Division - Analyst of LatAm Retail

* Gustavo Piras Oliveira

UBS Investment Bank, Research Division - Head of LatAm Research & Latin America Consumer Analyst

* Joseph Giordano

JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst

* Ruben Couto

Santander Investment Securities Inc., Research Division - Research Analyst

* Thiago Capucci Macruz

Itaú Corretora de Valores S.A., Research Division - Research Analyst

* Tobias Stingelin

Citigroup Inc, Research Division - Director

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for holding, and welcome to Companhia Hering's Second Quarter 2019 Earnings Conference Call. (Operator Instructions)

Before we proceed, I would like to clarify that eventual statements, which might be made during this conference call relative to the company's business perspectives as well as projections, operational and financial goals, are forecasts based on the management's expectations. These expectations are highly dependent on the internal market conditions and the overall economic performance of the country and international markets. Therefore, they are subject to change.

With us here today in São Paulo are Mr. Fabio Hering, the company's Chief Executive Officer; Mr Rafael Bossolani, the Company's Chief Financial and Investor Relations Officer; and Mr. Thiago Hering, Chief Operations Officer. The management will make a brief introduction. And following that, they will answer the questions.

Now I would like to turn the floor over to Mr. Fabio Hering. Please, Mr. Fabio, you may proceed.

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Fabio Hering, Cia. Hering - CEO, Advisor, Member of Executive Board & Director [2]

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[Interpreted] Good morning, everyone. I'd like to greet you, and thank you for listening in to another one of Companhia Hering's conference Call, this one about the second quarter of 2019.

Our results were below expectations, but along with them our view is that we are having more energy and the path that we are going through in our business for all of our different brands and for all of our different channels is showing that we are, in fact, creating a better future for the company.

During the presentation, which will be carried out by Rafael, you'll understand why this quarter, we need to understand in depth what the facts were and what took place in order to have a positive analysis of the results we reached. Following that, we will have a questions-and-answer session, which will provide further clarifications.

So I'd just like to reaffirm that this is a quarter that needs to be well understood. And in order to do that, we need to analyze it in depth more so than what we usually do in our pipeline and in our margins -- our gross margins and our EBITDA. We have some facts, which created negative impacts to the quarter. These facts are non-reoccurring and some of them might be negative at first, but they will be positive in order to build our future business. And I'm referring here, for example, to the investments we made in communications for the brands, especially the Hering brand.

So after this brief diagnosis for the second quarter, I'd like to kick off the conference. I'm going to give the floor to Rafael for his explanation of the second quarter's results with his comments. And I insist once again that this is a quarter that needs to be understood. And in order to do that, we need to look at the details in depth. We need to understand what took place during this quarter.

I'd like to remind you that during the first quarter's earnings call, we said that some changes were ongoing, that they have begun at the end of February, early March. And these changes, in fact, were implemented, especially during the second quarter. There were some changes related even to the management in the company. There were significant changes to our Board of Directors, and all of this created a new dynamic, which is very positive, with a lot of energy. And on the other hand, there were some costs due to the measures that we took place.

So now I'd like to ask Rafael to continue with his presentation. And following that, Rafael, Thiago and I will be open to answer any of the questions that you may have. Thank you very much.

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Rafael Bossolani, Cia. Hering - CFO, IR Officer & Member of Executive Board [3]

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[Interpreted] Thank you, Fabio. Good morning, everyone. Thank you for listening into our conference call for the second quarter.

Well, this second quarter was marked by a high dispersion of our performance, some volatility, as we can see. There was an accelerated change after the second half of April, which lasted for the rest of the quarter, which is related to weather conditions in the South.

Some of the lessons we learned, we need to adapt our collections calendar in the first quarter and our product portfolio to reduce the risks related to seasonality. And it's important to highlight that despite higher sales, we are focused on executing our strategic goal, understanding, strengthening our brands and continuously seeking the operational differentiation.

So our purpose is to increase consumption or the desire to consume our brands through institutional communications that will accelerate our communications to our consumers through our value proposition. To date, the Hering brand is the first place among clothing brands, fashion brands that are at the top of mind of our consumers. So our efforts are this opportunity transforming this awareness into purchases.

This quarter, we had to change our structure for this transformation. So we are seeking to have a culture of entrepreneurship, more autonomy and meritocracy. And this created an impact to our bottom line in the first quarter. So I'm going to show this during the presentation, but it will generate synergies for the company in the next month and in the next year especially.

Moving on to Slide 3. Here we can see the company's gross revenues, which reached BRL 422 million, a 0.4% improvement. As I said, this quarter was a challenge, because we had higher temperatures than the historical average, which got in the way of our sales for the winter collections, especially the overtop, which includes knitwear, jackets and so on. On the other hand, the other categories such as pants, t-shirts and accessories had the same level of sales as we saw in the other quarters.

Our owned stores sales grew by 5.8%, a total of BRL 80 million in revenues. And this is a result of our same-store sales and our productivity per square meter, which came from a better execution of our point of sale, even despite the reduction in the number of stores. Online or webstores maintained their growing trend, up 36% to a total of BRL 15 million in revenues. And this was favored by the increased flow of visits to our websites and a better conversion. Not only did we identify marketing for this segment, but during this quarter, we also implemented several different functions to our platforms. The goal was to perfect the consumers' experience. So we implemented a chat box to interact with consumers through artificial intelligence. And there were several other improvements we made to search engines. So that represented about 4% of our revenues this quarter.

Regarding franchises, we totaled BRL 129 million in sales, a reduction of 1.6% in comparison to the second quarter of 2018. And this was influenced by a smaller number of replacement orders, because there was a lower turnover. It's important to highlight that sustainability for our network is maintained, and this was done through dimensioning our inventory and a better balance, which we can see from sell-in to sell-out.

With our multibrand sales, we had an expansion of 0.2%, despite having a challenging macroeconomic scenario, which means that we are engaging more with clients this quarter.

Continuing with the next slide, on the Hering network. I'd like to highlight a change that took place here. We unified our historical Hering brand and the Hering Kids brand, because both brands are now managed together. So they are managed in the same business unit from this quarter on. With that being said, total sales that is sell-out dropped by 0.5% in comparison to last year, and this was influenced by the sales area reduction of about 6%, which is because we closed 26 stores in the last 12 months. And I'd also like to mention that our revenues per square meter increased by 5.5% in the period.

The high temperatures impacted sell-out sales in colder regions, which represent about 80% of our revenues. And this was impacted by overtops having less sales, although we increased in the other categories at the same levels we saw in the previous quarter, as I said before.

So moving on to Slide 5. We can see that gross profit reached BRL 156 million or a bit more, which was a growth of 0.5% in comparison to the previous year. The gross margins also grew by 50 basis points, reaching 43.4%, and this is due to our expansion in our operations. I'd also like to highlight that this is due to a removal of the inventory of obsolete products.

Moving on to Slide 6. Financial performance or operating expenses finalized at BRL 132 million, a growth of 17%, which is related especially to a BRL 14 million increase in marketing expenses and also labor severance of about 8.4% in this area -- in this period. So if we were to isolate these 2 events, that is investing in marketing and the severance payments, all other operational, that is recurring expenses in the company, grew by 1.4% in this quarter.

We are investing in marketing consistently since the second quarter of last year, especially through institutional campaigns. And this is a part of our strategy to strengthen the brand and to make the public more aware of them and also to come closer to our consumers, as I've said before.

I'd also like to highlight that the reorganizations we did during this quarter aim to gain operational efficiency, productivity and to improve our operations. Besides optimizing our organization, we also concentrated some of the manufacturing activities by closing one of the units in Santa Catarina. So we are concentrating our manufacturing in a second plant in the same state.

The next slide shows that our EBITDA reached BRL 46.2 million, a reduction of 20.4%, while the EBITDA margin reached BRL 103 million, a reduction of 0.1%. So this was impacted by the reduction in operational expenses, excuse me, and this considers the ICMS effect over the EBITDA.

Slide 8 shows the company's net income, a reduction of 29%, totaling around BRL 40 million. And this is due to a reduction in the operating income. I'd also like to highlight our net margin, which was higher than the last period, and this is due to a higher interest rate that we obtained during the period and also the exchange variation, which was favorable towards our results.

Investments in the quarter are shown on Slide 9. It came to a total of BRL 9.2 million, which were used basically to develop our B2B sales portal, to develop our industrial plants and to automate our logistics processes and some acquisitions in some new points and to -- and expanding some of our stores.

The next slide shows our cash flows. We can see that the company generated a bit more than BRL 90 million in free cash. This is a reduction in comparison to the second quarter of 2018 due to a lower operating result. And this was combined with a greater investment in working capital, notably in inventories for finished goods. The cash conversion cycle, however, reduced by 10 days due to the actions we took to extend the deadlines with suppliers. I'd also like to highlight that BRL 50 million additional dividends were approved for payment in September, which means that we will have BRL 94 million dispersed during the second half of the year.

Finally, Slide 11 will show our outlook. We know that despite this downward trend in the economic activity and with the -- despite a decline in the consumer confidence this quarter, we are still optimistic about 2019. We are still focused on recovering our sales sustainably, in executing our strategic priorities and in balancing our operation as well as maintaining the network's health. We're also focused in increasing the desire to consumer brands through consistent investments in marketing, developing our product and focusing on consumer relation. We also are pursuing productivity gains by optimizing our plants and strengthening our network, our distribution network. Finally, we understand that consistent sales growth will resume along with the maintenance of our gross margins, optimizing working capital and high operating leverage, and these are important drivers for improving the company's results and for generating shareholder value.

I'd now like to give the floor to the operator, so we can begin the questions and answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Thiago Macruz, Itaú.

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Thiago Capucci Macruz, Itaú Corretora de Valores S.A., Research Division - Research Analyst [2]

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[Interpreted] I have 2 questions. The first one is regarding multibrand, what's your perception regarding share and the market growth? Is it reasonable to say that we can see the growth of this product again once the economy gets better? And you mentioned in the release that you're taking action to make sure this line can generate value and grow again? That's my first question.

The second one is more subjective. I would like to have more KPIs in terms of your new shop. I know you've been opening new shops (inaudible) mall. What is the purpose of this shop? Currently, it's a franchise, but I can see that it can become our own store. Okay? 2 questions.

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Thiago Hering, Cia. Hering - COO [3]

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[Interpreted] This is Thiago speaking. All right. So I'm going to begin by addressing your second question. We have been challenging our team regarding the conception of new business format, and Basic Shop falls within this concept. So in the last few years, we have witnessed a great expansion of the company, but with one single format. And part of that caused the new evaluation of the network. We see the importance of offering alternative formats. One, our country is so different in terms of regions and consumption potential. So the Basic Shop is one of these launches. And recently, we have also tried a new model, which is called the light franchise. And soon, our intention needs to launch new format.

So regarding Basic Shop, we currently have 4 shops in operation. The oldest one has been in operation since last December, and so far, it has been translating into interesting figures, going better than planned. And the franchisee who opened this shop is going to open another 2 shops this year. So that goes to show the effectiveness of this model. And the idea is to offer a shop that has a compact size, but our core business will be there, our key categories, but with great productivity per square meter. And we have been testing this model, especially in areas where we -- where the shopping experience is more about convenience. So we had a shop in the bus station in Rio, currently in the bus station in São Paulo. And also, it features an interesting solution for consumers who are more high end. They're more focused on our basic products. So I would say that these are the elements, but we're still fine-tuning the model and we're keeping track of the indicators and aiming to enhance them. And (inaudible) shop was opened last week, and it's showing some adjustments to that effect.

Now regarding your first question on multibrand, yes, we can acknowledge that we're up against a challenging scenario in the segment where main competitors haven't been growing substantially in this segment either. But on the other hand, we do believe that for -- why we fail to provoke new agendas in this segment or in this business unit. Therefore, in April, we started a journey of transformation. And we had new executives join us. And new members of our team, we redefined some roles. Our strategy now, although it's a recent one, it's based on 4 pillars.

So we are redefining our relationship model, aiming to bring a fairer proposal, more coherent that values frequency of shopping rather than just volume. And we are bringing all the stakeholders that made up this segment and with being -- having very positive exchange experience with them, which have been helping us enhance this model.

The second pillar, which is about broadening the showroom experience, because prior to that, it was very limited. But now we want it to be more relational, adding not only products, but services and content as well. So in the last couple of collections, we managed to revitalize the physical spec chains, and our products, they are better presented. We have added content services, lectures. And we are training our business partners, assisting them in terms of better managing their business, especially when we're up against a macro challenge in our economy. And we're aiming to better segment our mix for the channel. In the latest showroom, we released some exclusive items, they need to generate volume and productivity, and by doing so, to ensure there is more frequency in the shopping experience. And in our digital experience, it's not only limited to our B2B platform connector and it's been gaining a lot in terms of adherence.

But we've also been investing in better tools to generate leads and geomarketing. And we have a bigger project and CRM for the B2B customers, better customizing offers for them. So really offering them what will truly generate sales for them.

And last, but not least, we have been doing a stronger vision in terms of sell-out with our teams, our representatives with better expertise of projects and better managing the point of sales with more expertise from our members of the team. And so guarantee, there is more turnover, and that will ensure a virtuous cycle in our multibrand arena. And our ambition is to have a system that can read sales so that we can truly consolidate our sell-out vision, so all the interventions that we're implementing in the point of sales will be even more effective. And in terms of share, it's too early to draw any conclusions. We have commissioned some service, but the current agenda is the one to optimize, to transform our relationship model, aiming to be closer to our stakeholders so that we can be -- we can turn the game and bring more stability to the channel, so in the second wave, we can resume its growth.

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Operator [4]

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Our next question comes from Ruben Couto, Santander.

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Ruben Couto, Santander Investment Securities Inc., Research Division - Research Analyst [5]

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[Interpreted] Can you tell me how sell-out behaved in July, especially things the climate helped and in a more qualitative way? So it;s clear the importance of the sell-out intelligence. When you considered climate, it's only effective to a certain extent. So what have you learned from this quarter? So if the situation repeats itself again, how do you intend to act upon it?

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Thiago Hering, Cia. Hering - COO [6]

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[Interpreted] This is Thiago again. Well, what we can anticipate when it comes to July 30, we have managed to reestablish growth levels to the same levels that we could see in the last quarters. And this recovery and resuming growth can be put down by lower levels of temperature in cold regions, and we also performed well in areas that are not so affected by the climate, because we had a better performance in terms of sales. Historically, we would lose the rhythm of remarking prices, but we managed to focus that in the categories that generated better flow in the winter, at the same time, preserving price and margin in the other categories by ensuring the soundness of the network. And the results have been satisfactory.

Regarding the second part of your question, I believe that, yes, we have learned important lessons from the wintertime. We live in a tropical country, and we should not be so reliant on the wintertime. So we are implementing a short- and mid-term strategy in terms of some adjustments. Now we are about to start planning our autumn and winter collection for 2020, and we have implemented some adjustments to them. I would like to highlight also new categories. But in the mix core, I can mention the strengthening of our matrix of sweatshirts and knitwear, so we can be more assertive. So even against a challenging winter, these categories performed positively. We also have to ensure the whole portfolio is taken care of, but of course, we have to focus on the key categories. And we can have a new storytelling also that is not only so reliant on weather. So we have been making some adjustments to the collections, not only in the main collection, but we are segmenting the portfolio for hotter areas. We have evolved. So we still haven't reached the stages that we desired, so we can have a better penetration in hot areas from Rio de Janeiro going to the north. So that's all I can share with you at this point in terms of adjustments to our future strategy.

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Operator [7]

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Our next question comes from Joseph Giordano from JPMorgan Bank.

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Joseph Giordano, JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst [8]

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[Interpreted] I actually have 2. The first is about the consultancy you started with your franchisees. Looking a bit at the lessons you learned in the second quarter, what do you think could have been done differently on Hering side to have a better reaction and to turn our sales more?

The second question is about the brand activation that you are expanding. You started marketing more since last year. And I'd just like to understand if until the end of the year, we will see that picking up, considering that the execution at the end is doing so much better?

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Thiago Hering, Cia. Hering - COO [9]

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[Interpreted] Okay. Regarding -- this is Tiago again, by the way. Regarding the consultancy that we had with our franchisees, our convictions did not change. It's a part of the journey to go through these ups and downs. It was a challenging quarter. I think throughout the weeks, we were absolutely attentive and reactive. If you look at it closely, we had a great recovery, especially during Valentine's Day in Brazil, in June and in other situations. And we did come out as winners at the end. I think for next year, like I just said in the previous question, we have some important adjustments to make to our collections, to our mix assortment proposals. We had a meeting with our franchisees to plan the high summer collection. And there's a high convergence in what we think about what has been done, about what needs to be adjusted in the future and built up. So I think we are extremely confident. We've opened a powerful channel with them so that we can have honest exchanges to expand and perfect our models, and we know that the insights that come from that are very important. We have professional mature operators who definitely also understand that focus that we need to improve our execution at the stores' level.

Regarding marketing, we've planned, especially for the fourth quarter, to invest in line with what we invested last year. If we remember, last year, we already increased investing in marketing. It was the first quarter in which we had expressive growth in how much we invested in marketing, the last quarter of 2018. And this is not in isolation. Along with other initiatives, we saw very positive results. This was not only for the short-term pickup in sales, but for the long-term rebuilding of the brand, which is something that we really have always wanted. And we have always worked consistently on this. And consistency does not only come from constant investments, but also from the language we use and the attributes that consumers understand and associates the brand easily and with an always-on journey. So as the quarters go by, we want to have a single build and not some of initiatives that don't talk amongst themselves. So this is how the company's communication strategy has been laid out. Obviously, we always seek to reap some important results on the short term, but the important thing is not to get away from our convictions and the building of future results, which is what we're doing.

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Operator [10]

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Our next question comes from Tobias from Citibank.

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Tobias Stingelin, Citigroup Inc, Research Division - Director [11]

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[Interpreted] Thiago, I'd just like to talk about marketing specifically. We had BRL 14 million additional invested in this quarter. I know that you said that in the fourth quarter, it will be comparable. But I'd just like to understand what is the total amount that you will invest this year and how are you measuring the results you're getting from that? You had a much higher expense in a period where usually the weather helps. So what is the returns you're getting on the investments you're making on marketing? That's my first question.

Secondly, if the trend we're seeing for gross margins will continue, what should we expect? You said that some inventory was adjusted. So I'd just like to understand how gross margins may evolve. Finally, I'd just like to hear about your inventory on finished goods. How will that talk to margins or cash generation in the future?

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Rafael Bossolani, Cia. Hering - CFO, IR Officer & Member of Executive Board [12]

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[Interpreted] This is Rafael. I'll start with your second question and talk a bit about margins and inventory. These are things that are connected, but we are following throughout the year this information closely. We are interested in the profitability of our sales and the quality of our sales through gross margins. The trend we've been seeing over the year will probably continue during the second half. The levels of inventory, in fact, did go up by about 12 -- to about 12 days, but it's important to highlight that out of these 12 days, 8, give or take, that is 65%, are basic products. They have a higher growth expected now in the second half. And I also have 2 to 4 days on summer products, which are coming early 2 stores from July.

So when we look at the winter collections, we know that they are relatively aligned with the levels we had last year, which will probably exert some limited pressure in terms of sales and discounts in the future. We have a plan of action to split our inventory, which will include lighter items and that can be used, for example, in Black Friday events like we had last year or they can be sold through our outlets or also online. So we are confident in the maintenance of our gross margin trends over the last -- the second half.

Considering the investment levels in marketing, Thiago will discuss how we measure the returns. But what I can say is that we have 2 important waves of investments: first in the second quarter; and another one in the fourth quarter, as was said before. Considering the maintenance of these investments, they will probably continue at the same levels we saw in the second half of last year. So just to give you an amount, this entire investment that we saw during the second quarter will probably be maintained for the rest of the year.

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Tobias Stingelin, Citigroup Inc, Research Division - Director [13]

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[Interpreted] Can you repeat the second part? Is that about BRL 14 million? Or...

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Rafael Bossolani, Cia. Hering - CFO, IR Officer & Member of Executive Board [14]

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[Interpreted] Yes, exactly, Tobias. Our second half will probably continue in line with last year's in terms of investments. And we've had media campaigns and communications campaigns last year. So that's when we started investing more. So this delta will probably be carried out until the end of the year.

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Tobias Stingelin, Citigroup Inc, Research Division - Director [15]

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[Interpreted] So that's a comparative basis?

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Rafael Bossolani, Cia. Hering - CFO, IR Officer & Member of Executive Board [16]

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[Interpreted] Yes, that's right. And although there is no major variation with regard to last year, we understand that we have substantial funds that are important to maintain this always-on journey, which started in the last quarter of 2018.

Now talking about how we measure results, what we've done is a partnership with Ipsos, a multinational company that is widely known for its research. We do this every semester and we monitor brand equity, that is the value of the brand. And what we can observe and share with you is that this has evolved in terms of awareness. But what draws my attention positively is that the conversion is also going up. We have always been a well-known brand in Brazil. So we were notorious, that is we had a good level of brand awareness. But now we're seeing a positive evolution in terms of the second and third layers of the purchase funnel, consideration and conversion. This goes for the Q4 campaign as well as the campaign we used for the first half of 2019.

I just want to add one thing. We, as was said before, have 2 major investment waves in marketing and communications during the year, which are the second quarter, because we have some strong events, Mother's Day and Valentine's Day in Brazil and last quarter, which is usually the strongest of the year. This model was started last year. So we are investing more in marketing. In this quarter, our investments in marketing were not purposely to promote the company. We're not announcing prices. We're building up the brand through our investments. And what we did not have during the second quarter due to many reasons, which were explained before, among which were the lack of an actual winter, was following up on these investments. So I think it's important to highlight that we are maintaining control on how our expenses -- investments are made, as we always have. The company does have that in its culture. It's not a company that does not look at its expenses. But this second quarter had, besides marketing, nonrecurring expenses regarding our restructuring, as we said before. So that's it. Thank you.

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Tobias Stingelin, Citigroup Inc, Research Division - Director [17]

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[Interpreted] If I may, just one final question. You put a graph excluding the one-offs. I don't know if that was in scale, but there was a 8%, 9% level there that I wanted to know if it was normalized. Have we seen that before?

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Thiago Hering, Cia. Hering - COO [18]

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[Interpreted] Yes, Tobias, this is Thiago again. Yes, it is at a scale. The other categories grew by about -- well, at the low double digits. So it's in line with the previous quarters.

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Operator [19]

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Next question comes from Felipe Cassimiro, HSBC.

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Felipe Cassimiro de Freitas, HSBC, Research Division - Analyst of LatAm Retail [20]

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[Interpreted] So the first one is just a follow-up on what Thiago said regarding new format. I would like to understand how much of that you are discussing internally new brands in addition to book for, if there is a possibility of creating a new brand or acquiring another brand? And the second question is about e-commerce. So I would like to follow-up on the onboarding process in Mercado Livre platform. I understand it's early to tell, but I would like you to elaborate on your first impression, please.

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Thiago Hering, Cia. Hering - COO [21]

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[Interpreted] This is Thiago again. So regarding trying to expand our portfolio, we can consider 2 occasions that can run in parallel. So the most important one is about strengthening our sister brands. If we consider the figures of the quarter, it's still challenging in terms of book and design. And we have been discussing plan internally to reformulate these brands. And Fabio touched upon restructuring the model early on, but now we have new talents and skills on board with us to manage these brands, aiming to drive them. We're still frustrated, given the recent results. But now with this new approach and the new plan, we are optimistic and the company has the ambition to be a strong brand manager.

In terms of acquiring new brands or launching new brands, we have been reactive to that. We have been very little proactive, if you will. We're still trying to better understand what would be the element or the key features that should be recognized in a brand. Whether it is a new brand or an acquired one, we have to make sure the features and attributes are in tune with our company. And also, once these brands are within our ecosystem, they have to bring more efficiency to the model so that they in turn can also take advantage of our system and our distribution capacity. I understand that all these points have to be connected so that we can make the right choice.

Regarding e-commerce, I think the question was specifically about launching the official store in Mercado Livre. So we still haven't drawn conclusions, because it's a recent process. The figures of sales that we have, they've surpassed our expectations. But we understand that we have the double mission, if you will, of bringing more revenues to this business unit, but also to better manage this complex ecosystem, which Mercado Livre is all about. So aiming to convert that so that we can really take good care of the branding this ecosystem. So I'm afraid I cannot add any elements at this point, but going forward, yes, once we can have a better interpretation in terms of sales as of the next 3 quarters.

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Operator [22]

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Our next question comes from Gustavo Oliveira, UBS.

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Gustavo Piras Oliveira, UBS Investment Bank, Research Division - Head of LatAm Research & Latin America Consumer Analyst [23]

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[Interpreted] My first question is about sell-in, the evolution of sell-in in the recent showrooms in multibrand. You gave some details in terms of what you've been doing, but have you seen any impact happening in July? And also, I would like to understand, because you said that 2 collections have been discontinued, the spring and the vacation. So have they impacted the sales of the third quarter? And now considering the evolution towards the third quarter, I don't know how much of the collections would help in terms of sales. I'd like to better understand the sales dynamics.

And my second question is, if you have analyzed the potential impact of the Basic Shop impact when it comes to our regular shops, because you said that -- as if you were segregating the best inventories by placing them in smaller shops in the different format. So I wonder how that would be impactful to the regular stores?

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Thiago Hering, Cia. Hering - COO [24]

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[Interpreted] This is Thiago. Once again, regarding basic shopping, I am -- as I mentioned in my previous answers, it is a supplementary business format. And I understand that once we have the spinoff of such a strong area in our own store, we can bring our core to areas where more complex formats would not sustain. And it's worth mentioning that it's up to the company to address the best alternative according to the region, coherently of course. So Basic Shop also represents a lab for basics. And yes, it can bring innovation and it can enhance the execution of these areas in our full stores. So I do understand that we have direct benefits and also indirect benefits there the own Hering store can capture. And also, in the Basic Shop, we have been testing a format of automatic replenishment of 100% as of the beginning of the year. And regarding the collections, there is a sentence that I always say here, we must not manage based on the number of conversions, but rather we have to meet the demands of consumers and their insights. They ask us for assortment solutions rather than collection and the portfolio of products that meets their needs in different occasions.

So yes, I understand that by changing the calendar of collections, this does not represent an impact to our revenues, but rather it brings more efficiency based on the demands that consumers have, so much so that when we look at wintertime and springtime together, we can see a level of turnover and higher productivity, so more revenues and lower or smaller SKUs. So we are certain of our choice, but always pursuing new stories and new activations that can come as collections or capsules, aiming to meet the needs of consumers. So I repeat that the consumers inform our decisions.

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Gustavo Piras Oliveira, UBS Investment Bank, Research Division - Head of LatAm Research & Latin America Consumer Analyst [25]

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[Interpreted] Yes. I'm sorry to interrupt you at this point, but since there was no impact on sales, but if the sales improve in the third quarter, you can have a better leverage, right? What are your expectations in terms of margin gains? What can you tell me about that? I just would like to better understand the impact on sales?

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Unidentified Company Representative, [26]

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[Interpreted] Well, firstly, there is a direct impact on the network, because you can have a better location for periods, not for collections. Because at the end of the day, when we plan sales for a network, we have to bear in mind the 12 months of the year rather than just one collection. We only know for sure that a year has 12 months, and they have to be allocated the best possible way. And we didn't use to have this compatibility with the retail calendar.

In terms of the evolution of margins in the upcoming quarters, I think that by changing the collection calendar, if you represent just one element, but we have been working in a collaborative fashion. All areas and other elements will also bring more efficiency to the model and will represent the benefits and gains in terms of margins.

And now answering your first question regarding the sell-in of multibrand and showroom, what we could observe in the showroom that are translated in the revenues is, firstly, gains and productivity. So customers are buying more items now in more in absolute values, which shows the idea of having a bigger showroom, and transferring know-how and more content and a better presentation of the collections, if you will, it can be translated in bigger orders and bigger customer portfolios. In terms of the overall figures, I see this as a longer cycle that will be impacted also by the macro scenario. And of course, there are other measures that have to yield some results going forward so that we can consistently observe growth in the gross revenues of these channels.

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Operator [27]

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As there are no questions, Companhia Hering's Conference Call has now finished. Thank you for listening, and have a nice day. Thank you.

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