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Edited Transcript of LAME4.SA earnings conference call or presentation 31-Oct-19 5:30pm GMT

Q3 2019 Lojas Americanas SA Earnings Call

Saúde - Rio de Janeiro - RJ Nov 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Lojas Americanas SA earnings conference call or presentation Thursday, October 31, 2019 at 5:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carlos Eduardo Rosalba Padilha

Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board

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Conference Call Participants

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* Gabriel Seixas Disselli

Santander Investment Securities Inc., Research Division - Research Analyst

* Irma Sgarz

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Joseph Giordano

JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare 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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Good afternoon. Welcome to Lojas Americanas conference call to discuss the results of the third quarter 2019. Here today with us is Mr. Carlos Padilha, CFO and Investor Relations Officer with Lojas Americanas; and Mr. Fabio Abrate, CFO and Investor Relations Officer with B2W Digital.

We would like to inform you that this event is being recorded. (Operator Instructions) Also, it's important to remember that today's event has a supporting presentation that can be accessed at ri.lasa.com.br.

Before proceeding, we would like to clarify that any forward-looking statements made during this conference call regarding Lojas Americanas' business prospects, financial and operational projections and goals constitute beliefs and premises of the company's management as well as information currently available. Forward-looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions and, therefore, depends on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors could affect Lojas Americanas' future performance and could lead to results that differ materially from those expressed in such forward-looking statements. The company clarifies that the accounting information underlying the comments is presented in accordance with the international financial reporting standards, IFRS, issued by the Brazilian securities commission, CVM, and in real.

We would now like to give the floor to Mr. Carlos Padilha, who will present Lojas Americanas' operating and financial highlights. Mr. Padilha, you may proceed.

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Carlos Eduardo Rosalba Padilha, Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board [2]

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Good afternoon, everyone. It's a pleasure to be with you on another conference call to present Lojas Americanas' third quarter 2019 results. Faced with a rapid changing context of the physical and digital worlds, Lojas Americanas adopts an integrated strategy to retain and win customers, offering a variety of store formats, digital platform and Ame, fintech and business platform mobile.

On Slide 2, we will present some of the highlights of the quarter driven by the essential contribution of our team and investments on several fronts. Lojas Americanas has opened 70 stores in this quarter, reaching a presence in 664 cities and a total of 1,582 stores in all states of Brazil. The parent company's working capital improved by 10 days in comparison to the third quarter 2018, mainly reflecting the reduction in the lead time, better inventory assertiveness and most efficient means of payment.

B2W Digital presented cash generation of BRL 89.4 million in the third quarter 2019, an increase of 54.9% when compared to the third quarter 2018. Ame continues to expand rapidly, reaching 4.8 million downloads. Using the concept everything, anytime, anywhere, the combined O2O initiatives grew by 150% over the third quarter 2018, contributing to the consolidated GMV growth in the quarter.

On Slide 3, we will present the consolidated results. In the third quarter 2019, consolidated GMV increased by 19.8% compared to the same period of 2018, reflecting a 50.4% growth in the Marketplace, 8% in the physical platform and the contribution of O2O initiatives. The 1.2 percentage point gain in gross margin in the quarter is related to the growth of B2W Marketplace operations. In addition, EBITDA margin gained 0.2 pp due to the operating leverage. Lastly, net income grew by 54.5%, a total of BRL 48.2 million, driven by the growth in EBITDA, lower financial expenses and also cash generation.

On Slide 4, we will present the parent company's results. In the third quarter 2019, the parent company posted an acceleration of sales in relation to the first half results, despite the still challenging economic scenario. As a result, gross revenues increased by 8% over the third quarter 2018 with same-store growth of 6%, which represents 3.1 percentage points above the IPCA recorded in the period. In addition, the company maintained its gross margin and EBITDA margin stable at 40.4% and 23.3%, respectively, despite the pressure generated by the end of the Lei do Bem.

On Slide 5, we will present the balance of stores opened in the quarter. We believe that it's possible for our stores to be present in a much larger number of cities considering that Brazil has 5,570 municipalities. In the third quarter of 2019, we opened 70 stores versus 35 openings in the third quarter 2018. In addition, we expanded to 47 new cities. Out of those new cities, 66% are in the north and the northeastern portions of Brazil. By the end of the year, we will open 113 stores, thus concluding the 85 years in 5 program, Somos Mais Brasil. We are currently present in [22,000 and 12 million] inhabitant cities in all states of the country.

Moving on to Slide 6. We would like to highlight the company's [composition]. At the end of the third quarter 2019, the company had 1,582 stores, out of which 888 were traditional, 648 were express and 46 were convenience stores. In addition, we expanded our presence to 664 cities across all Brazilian states.

On Slide 7, we will talk about Local. Local is the convenience model of Lojas Americanas that aims to be 100% convenient, trying to be present in people's daily lives and to solve the needs of food convenience, consumption and services. Throughout the quarter, aiming to improve customer shopping experience, 2 stores were opened with a new layout, a differentiated visual identity reinforcing the model's independence from other store formats. The stores had to be organized according to the consumption needs of each customer and divided into 3 zones: food and beverages at the front, other convenience items in the center and seasonal items at the back of the store. The new customer experience in line with the ongoing experiments of new categories, pricing and services reinforce our commitments to be present in our customers' daily lives with vision of being convenient 100% of the time.

On Slide 8, we highlight Ame's continuous growth. Ame is the fintech and business platform which is mobile for Lojas Americanas and B2W Digital and is intended to simplify the customers' lives by making money more valuable. Ame's app, which has reached 4.8 million downloads since its launch, offers simplified payment via QR codes, cash back and access to a range of financial products, services and features that make customers' daily lives easier. Lojas Americanas continues to develop unique features for the physical world, accelerating the rollout to this -- our store chain. At the end of the third quarter 2019, Ame was already accepted in 1,337 Lojas Americanas versus 774 in the second quarter 2019. And by the end of the year, it will be present in all stores.

On Slide 9, we highlight Ame's worldwide expansion of us driven by strategic partnerships signed during the quarter. In September, we announced the partnership with Mastercard offering Ame's prepaid card. The card will have the concept of digital first, with the option of physical cards and will act as a mirror of the customer's account. The partnership will make it possible for customers to pay with Ame in all 7.8 million Mastercard-accredited merchants.

Important partnerships have also been announced with Linx and VTEX, which will enable Ame to be connected with more than 6,000 merchants and websites using partner systems. In addition to partnerships, Ame continues to expand its acceptance network in an organic level through Ame Plus platform.

On Slide 10, we would like to highlight the services launched in the third quarter 2019 such as games, meal vouchers and purchase of airline miles. By the end of the year, as part of our business plan, Ame will have several new features, bringing an important contribution to the future of Lojas Americanas and B2W.

On Slide 11, we will present B2W Digital's results for the third quarter. The total GMV reached BRL 4.7 billion, an increase of 28.4% in comparison to the third quarter 2018. GMV growth was driven by the expansion of 50.4% of the Marketplace, reaching BRL 2.8 billion in the third quarter of the year. 3P's share in the total GMV reached 61.1%, an increase of 8.9 pp over the third quarter 2018.

The accelerated growth of sales combined with operating leverage led to cash generation of BRL 89.4 million in the quarter, 54.9% higher than that in the third quarter 2018. B2W's cash flow evolution reflects the strategy of migrating the digital platform to a hybrid model, 1P plus 3P plus services. During the third quarter 2019, 7,700 new sellers were connected to the Marketplace, reaching a total of 38,700 sellers in September 2019. In addition, 8,100 new sellers were connected to the B2W Entrega Ship from Store, reaching 94.3% of the base.

On Slide 12, we would like to highlight the rapid growth of O2O initiatives. With the concept of everything, anytime, anywhere, O2O initiatives have been enhancing customers' shopping experience and growing at a rapid pace. Combined, these initiatives expanded by over 150% over the third quarter 2018. And over the past 12 months, more than 2.5 million people made their purchases through these initiatives. The LASA seller initiative continued to grow at a rapid pace with sales growth of more than 10x over the same period of last year. Throughout the year, we recorded customers' orders for more than 4,000 cities with expansion of assortment to categories of repeat purchase.

The Pegue na Loja Hoje Click&Collect Now, where the customer buys online with 1 hour to collect and with free shipping is also expanding and is available at 1,582 Lojas Americanas stores across Brazil. Now in the quarter, the Ship from Store operation was extended to 108 Lojas Americanas stores in 16 cities. In the third quarter 2019, the Pegue na Loja Hoje was available in 1,325 Lojas Americanas and 150 seller stores. In additional -- in addition, the Infinite Shelf, the store-assisted sales operation for 1P and 3P products, which allows for a complete customer experience, grew by 43% in the third quarter 2019 over the same period of the previous year. We are in an average ticket of 15x higher than those of physical stores.

On Slide 13, we highlight the launch of VOE app, V-O-E, the platform for crowd shipping from LET'S. The app was launched in August this year and aims to accelerate the O2O initiatives. The app connects delivery personnels to logistics platform, enabling to deliver products to customers within 2 hours through the Ship from Stores. In less than 2 months operation, the app has 500 registered delivery people and serves 40 Lojas Americanas located in Rio and São Paulo.

These were the main comments in relation to our performance of Lojas Americanas in the third quarter 2019. I would now like to open the Q&A session to clarify any questions you may have. Thanks in advance.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Joseph Giordano from JPMorgan.

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Joseph Giordano, JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst [2]

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My question is about working capital. It has improved this quarter. Can you further explain what you've done in terms of supply chain logistics? I have a second question about tests. You're expanding to new locations. So on top of the stores set up, what are the learning lessons with competing with local players?

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Carlos Eduardo Rosalba Padilha, Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board [3]

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Joseph, thank you for the question. Let me address the first question. We have been saying over the previous calls that we have been working hard. It's an ongoing effort in terms of inventory management. In other words, we want to have the right amount of inventory. That's the basic concept behind our strategy, and we have been working with LET'S very closely. LET'S has been reducing their delivery times from the DCs to store. That has helped us gain days worth of inventory. It's also an ongoing effort. We own LET'S. It's the logistics platform for both companies, and we have many opportunities out there. That's where the benefits come from. And we have -- we are very optimistic about the inventory levels, receivables as well, and we are very excited about the results we've had so far.

Let me talk about the local competitors now. We have this local competition both in São Paulo and Rio. For 2 specific stores, we have redesigned its layout. We want to provide customers with appropriate layout. We want customers to feel happy being able to navigate the store. They should come to the store several times a day. And that redesign at Local, we are trying to expand that to other places because it's been a successful initiative. We have 46 -- we have new -- 8 new, and we expect to open from 20 to 30 new stores this year, and we're very excited with the results we've had so far.

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Operator [4]

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(inaudible) from Santander asks the next question.

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Gabriel Seixas Disselli, Santander Investment Securities Inc., Research Division - Research Analyst [5]

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Actually, this is Gabriel. Congratulations on the result. My question is about same-store sales. What's your take for Q4 and even next year?

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Carlos Eduardo Rosalba Padilha, Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board [6]

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Hi. Thank you for attending our conference. When you look at same-store sales for the year, we've had important gains when we compare the first semester and the third quarter of this year. We had real gain when compared to inflation. It's 1.8% -- was 5.2% in the first semester, with the IPCA of 2.4% was actual gain of 1.8%. Q3 was 6%. IPCA was 2.9%. 3.1% was the real gain. In real terms, we moved from 1.8% to 3.1%, almost twice as much.

Again, we're very optimistic about this growth in same-store sales. There are several drivers behind it: assortment, pricing, customer service at the store. So we want to provide better service. We want to improve that even further so that customers feel as comfortable as possible in our stores, so they feel comfortable to come to our stores and purchase there. And that applies to the whole country. I cannot give you any guidance about the future, but we believe that in terms of same-store sales, we believe it will keep on growing in the fourth quarter. We have major events happening there: Red Friday, Christmas and other events. And we believe same-store sales will be -- will keep on growing. That's our expectation.

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Operator [7]

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Thiago Macruz from Itaú asks the following question.

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Thiago Capucci Macruz, Itaú Corretora de Valores S.A., Research Division - Research Analyst [8]

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You have been able to grow same-store sales numbers above inflation. That's a very healthy trend despite challenging economic environment. But we talk about operational leveraging. Could you share whether there's the one-off expense incurred in 2019? What explains that non-leveraging? Is there an upside in profitability if we do not see the same growing trend? Let me try to understand that dynamics a little bit further.

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Carlos Eduardo Rosalba Padilha, Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board [9]

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Thank you. Thank you for attending the call. There is leverage in our balance sheet. It will be more prominent. We should not disregard that we have 111 new stores opened when compared to 62 new stores last year. That carries additional expenses that we did not have last year. And that's an upside because last year, we opened many stores in the last quarter. And we're now opening stores sooner throughout the year, 111 stores by the third quarter compared to 62. This is very good. That will make these stores perform at the major events: Red Friday and Christmas.

As to the leverage, we have initial expenses, and it's in the margin. It's in the EBITDA margin. As these stores start to perform, that leverage will come naturally. This is because the fact that we made the decision to open stores earlier in the year unlike what happened last year. This is good for the business' sustainability. These stores will be operating at full speed at the end of the year. Thank you.

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Operator [10]

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Tobias Stingelin with Citibank asks the next question.

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

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As to convenience stores, can you talk a little bit about these convenience stores? Do you have any internal inflation measure? Because if you compare the same-store sales with inflation, you did better than inflation. What was your internal inflation? Can you measure that? Can you share that with us? What was ticket? What was traffic? What was the breakdown in same-store sales, please?

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Carlos Eduardo Rosalba Padilha, Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board [12]

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Thank you, Tobias. Let me answer the first question about convenience. We announced to the market there was a significant fact. We signed an MoU, and the negotiations are currently underway. There's nothing new on the rider. The conversations are ongoing until further notice. We're very excited. As to the internal inflation, we've made that comparison between same-store sales compared to inflation rates so that everyone can understand.

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

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Do you know what the number is?

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Carlos Eduardo Rosalba Padilha, Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board [14]

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Journalists are familiar with that number. We believe that our internal inflation is about half of that of the IPCA, maybe 50% or 55%, just about half of the IPCA. That's based on our internal price index.

As to the same-store sales, this is how we see it. It's a combination, ticket and traffic. Traffic is up by 50% in this third quarter. It's significant, and it will impact same-store sales positively. You are used to our average ticket, which is about BRL 45. Traffic is the main driver in a nutshell.

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

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50%, the bulk of the people that came to your stores, then they ended up purchasing something? Q2, it grew 50% when compared to last year?

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Carlos Eduardo Rosalba Padilha, Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board [16]

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Let me give you some more color. Half came from traffic, and I may say that almost half came from ticket. More from traffic than from ticket. Thank you.

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Operator [17]

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Irma Sgarz with Goldman Sachs asks the next question.

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Irma Sgarz, Goldman Sachs Group Inc., Research Division - Equity Analyst [18]

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I have just one question. When you look at the new stores in the latest expansion plan, when compared to the stores we opened at the beginning of the plan, then the middle and now more recently, and there may be some influence of the macroeconomic situation. But has something changed in terms of your marginal ROI?

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Carlos Eduardo Rosalba Padilha, Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board [19]

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Thank you, Irma. ROIC is based on several variables. We have working capital, CapEx, several other components. When you look at our CapEx, it's not data about stores only. You have all the infrastructure expenses, the DC, the way it is set up, stores as well. When you separate CapEx from stores only, you see that it's a growing ROIC. Our ROIC goes up. When you look at CapEx in-house, what we call it within the company walls, not including other external factors, we conduct frequent analysis and we present that assessment to the board as how these opening of stores evolve based on the payback. You know that we can only open store when you have payback up to 24 months. If it's a 25-month payback, we do not open it. We have been certain about this strategy. We are closing about 20 stores, stores that were opened 11 years ago. They were opened during the real estate boom, but we could not renew the lease. But we have a very precise analysis. As to the ROIC, it's going up, excluding everything that are one-off. I mean, when I say one-off, I mean, nonrecurring from other investments. Thank you.

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Operator [20]

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We now end the Q&A session. I would like to turn the call over to Mr. Padilha for his final considerations. You may proceed, sir.

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Carlos Eduardo Rosalba Padilha, Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board [21]

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Thank you for attending our 2019 Third Quarter Earnings Conference Call. We would like to invite everyone to take advantage of the offers on our website in over 1,500 stores throughout Brazil.

I take the opportunity to invite you to our Investor Day, which will be held on December 6 at Museu do Amanhã in the city of Rio de Janeiro.

Finally, our IR team is available to answer any additional questions. Thank you, and have a good afternoon.

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Operator [22]

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The conference call of Lojas Americanas has come to an end. We would like to thank you for your participation, and have a good day.

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