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Edited Transcript of RADL3.SA earnings conference call or presentation 27-Feb-19 3:00pm GMT

Q4 2018 Raia Drogasil SA Earnings Call

Sao Paulo Mar 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Raia Drogasil SA earnings conference call or presentation Wednesday, February 27, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eugênio De Zagottis

Raia Drogasil S.A. - Corporate Planning & IR Officer and Member of Executive Board

* Marcílio D'Amigo Pousada

Raia Drogasil S.A. - CEO & Member of Board Executive Director

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Conference Call Participants

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* Joseph Giordano

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

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to RD People, Health and Well-being Conference Call to discuss its fourth quarter 2018 results. The audio for this conference is being broadcast simultaneously through the Internet on the website, www.rd.com.br/ir. On that address, you can also find the slide show presentation available for download. (Operator Instructions)

Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of RD management and on information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operation factors could also affect the future results of RD and could cause results to differ materially from those expressed in such forward-looking statements.

Today with us are Mr. Marcílio Pousada, CEO; Mr. Eugênio De Zagottis, Investor Relations and Corporate Planning Vice President; and Gabriel Rosenberg, IR and Corporate Planning Director.

Now I will turn the conference over to Mr. Marcílio Pousada. Sir, you may begin your conference.

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Marcílio D'Amigo Pousada, Raia Drogasil S.A. - CEO & Member of Board Executive Director [2]

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Hello. Good morning, everyone. Welcome to the presentation of results of the fourth quarter 2018 RD. As always, Eugênio will present the numbers and before the Q&A I'll talk about the 2018, 2019 progress for us and Eugênio will have some points about Onofre acquisition announcement. Eugênio, please.

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Eugênio De Zagottis, Raia Drogasil S.A. - Corporate Planning & IR Officer and Member of Executive Board [3]

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Well, hello, everybody. Thanks for attending our 2018 conference call. I'd like to start by saying that 2018 was a challenging year for us. Obviously, it was a year of softer growth with mature stores below 0, and this has resulted in margin pressures that obviously affected our profitability.

On the other hand, we have reached tremendous milestones in terms of our strategy. I like to mention, for example, we did a record expansion by opening 240 stores and entered 2 states. We were able to recover share through the year and in the EBITDA in the fourth quarter with very high market share.

We did a very ambitious price repositioning for the company, which obviously [has refreshed --] had an effect on the softer growth, but I think positions the company very effectively for the future.

And finally, I think we start with a very ambitious digital transformation. We launched, for example, Click & Collect for every single store, and I think we have more things being prepared for this transformation. We will be talking about all these things over the presentation.

So the highlight of the year here, we ended the year with 1,825 stores. We opened 240 stores and closed 25. We ended the year also with 12.9% of market share, a 90 bps increase, with stability in São Paulo, which is something that we are very proud about because we face tremendous competition here.

Our revenues reached BRL 15.5 billion, an increase of 12% versus 2.7% for same-store sales.

Our margin totaled 28.6%. This is a 20 bps loss due to the 4-Bio mix effect that we see (inaudible). We managed to defend our margins, which were stable. We did BRL 1,195.2 million of EBITDA, so an increase of 5.7% even though there is a 50 bps margin pressure.

Our net income also increase by 7%. We consumed BRL 140 million of free cash flow and BRL 340 million of total cash flow, but we still have very low leverage, 0.6 net debt to EBITDA, to be more specific.

And finally, yesterday, we signed an agreement to buy 100% of the capital of Onofre. This was an opportunistic transaction. I'll talk more about that in a moment. But this also has a very interesting strategic value in terms of accelerating our digital transformation. I'll be talking about that as well.

Okay, Page 4, I think here we can see 2018 under a historic perspective. We -- as I mentioned, we reached 1,800 stores. When we did the merger in 2011, we had then less than 800 stores. So over this period, we did 1,000 new stores and the fact that our EBITDA increased from less than BRL 300 million to nearly BRL 1.2 billion is the main advent of the quality of the expansion. The only way we were able to expand our profitability this way is because these 1,000 new stores are, at the very least, as good as the 800 legacy stores that we had back then.

On page 5, we can also talk about market share. So our store share has increasing -- has been increasing bit by bit. We did 2.3% store share last year. But when you look at market share in terms of revenues, despite the fact that we had softer growth last year, we still managed to make 40 bps for the average of the year and we still managed to end the year with a [9 bps] gain in the fourth quarter, which was very, very substantial, and which points to the success of our price repositioning.

We can also see on the right in the chart, the gap that we have over the rest of the market in terms of revenues per store, which is a main driver of profitability [in sales].

On page 6, we ended the year, that I mentioned before, 1,825 stores. We opened a total of 240 stores in the year, closed 25. And ended the period with 35.6% of the stores still undergoing maturation.

On page 7, we can give more color on the expansion. I think the first message here is that we entered to this space last year. We entered Maranhão with 9 stores in the Northeast and we entered Pará in the north region with 19 stores. We have at least 10 more stores in Pará to open in the next month. With the demise of Big Ben, there's a huge opening for us in Pará and we are committed to become the second brand in the state and the reference brand for the a-class. This is going really well. We have tremendous profitability in that market.

We know -- with these 2 new states, we have totaled 22 states where we have our brand positioned. This represents 98% of the Brazilian pharmaceutical market. And in all the states, we have -- obviously, the new states, we don't have much operate yet, but we see a tremendous initial results that point to mature store revenues in line with the rest of Brazil. And wherever we have a mature operation, we have very similar revenues per store. We have very consistent profitability per store.

So these growth platforms are very unique in the market. We have net debt -- we have seen tremendous pains in the past when we started moving out of São Paulo. But regardless of how difficult or easy each market was for us to date, there is no more pain. This is a growth platform that has supported 240 stores openings every year. This is what we did last year. This is our guidance for this year.

I would also like to highlight that if you consider the Northeast and the North regions, which has been the latest frontier of our expansion, we have more than 230 stores already in both markets that have been developed over the last few years.

Here on the right, in terms of market share, we ended the year at a very high point. We gained 90 bps of market -- of national share in the fourth quarter. We are able to maintain the share in São Paulo despite the increased competition we faced. I think this is a [prowess] for the company. We are very proud of this stability. It wasn't like that through the year. We were losing share over the year, but as our new prices strategy started working and as time relaxed to allow the results to happen, we have managed to recover the market share we lost through the year and end the year with stability. And then on [net way] of the market, we have increased that in significant way.

On page 8, talking about revenues. We increased our total revenues by 12% in the year, which is 11% retail growth with 37.3% growth for 4-Bio. In the fourth quarter, we already see a very different performance with 14.1% total growth, of which 13.1% is retail; the rest was done by 4-Bio.

Here on the right, when you look at the mix, there's a very distinct separation. We have seen tremendous performance in the front shop, both OTC and HPC, especially with OTC. There was riches in the market -- [earnest riches], I would say, because there's more to come, that have helped a lot in OTC. So OTC we did 18% growth in the fourth quarter, 16.6% in the year. And then the other interesting aspect is that we already see generics catching up with branded. The picture we have seen through the year has been generics way behind branded, which was a consequence of the strong pricing investment we did in generic. So early on, we saw a lot of price reduction and the volume was compensating that to provide for us something around 0 in terms of generics growth. As time elapsed, as we had more time for the strategy to prove itself correct, we had a point at which the -- due to relative price pressure that the volume growth has been so huge in generics that we already see generics revenue catching up with branded revenues.

So on page 9, we can talk about the costs here. And we are coming from an all time low 3Q '18 where -- of 3.2% negative for mature stores. And now, we reached 0.6% positive. This was the best quarter of the year in terms of comps. This is a result of the sequential improvement through the prices strategy as well as from the fact that our cost base is getting easier as we move forward.

So our expectation is that we will start the year where we ended. But over the next quarters, this comp should move up, so that if we can -- if we're successful, we will end the year with the fourth quarter around inflation -- or growth inflation something like [what's there]. This will be a consequence of continuous sequential improvement as well as easier comp base as the year progresses.

On page 10, we talk about margins and working capital. The total gross margins for the year went down by 20 bps, which is exactly the 4-Bio mix effect. 4-Bio growth factor was low in those margin, so there's a mix effect. But the retail gross margin has been flat. So compared with that, so much is pricing, but we still defended our gross margin. This happened as a result of a combination of things. I mean, first, we had a lot of price improvement in the front store. We committed a new pricing platform. Addition to that, we improved purchasing terms like we try to do every year, so this also helped. And then there's a fifth factor that also relates to cash cycle, which has affected. We have done a lot of opportunity buys to take advantage of such opportunities and this helped us maintain the margins. The consequence, however, is that the cash cycle has grown by 4 days. So as we enter in 2019, we will -- the margin that we have in the year -- the gross margin we expect for the year, has to do with the ability to maintain ahead of opportunity by there. It's too early to know. We should be able to maintain the same level opportunity buys to maintain the gross margin. There is an additional risk that with less opportunity buys with some normalization in the cash cycle, we could see same gross margin interaction in the year -- starting next year and as we move forward.

On page 11, we talk about the expenses, which has been the main source of pressure. We saw 50 bps pressure in the fourth quarter, 20 bps from personnel. This is directly -- a direct consequence of loss of operating leverage. We had 20 bps rental pressure as well. In the end of the year, the [IPDM] reached 9% or 10%, so we've seen tremendous pressure in rental renewals.

And then we had 10 bps of logistics pressure. We opened (inaudible). We opened so many stores in Pará, which right now an expected shipping cost because it's so far away. So this pressure logistics 10 bps and also 10 bps on new stores. We ended the year for a lot of stores ready-to-open in [2019], more than the previous year, and this has also pressured our expenses.

Then we saw a 10 bps dilution that helped mitigate those pressures due to lower variable compensation; and a 20 bps dilution from the 4-Bio mix effect. 4-Bio, as I mentioned, has lower margins, but also has lower expenses. So the growth helps on the expense side and harms also margin side.

On page 12, summing up, our EBITDA for the year totaled nearly BRL 1.2 billion. We are talking BRL 311 million in the fourth quarter, which is a 5.7% increase over previous year. So despite 50 bps margin pressure, we saw a nominal EBITDA growth in the year.

And when you look at the retail EBITDA, despite the pressures that we face, we're still talking about 8% retail EBITDA with 1/3 of the stores yet to mature. So I think it shows there were pressures of the business. And then 4-Bio has BRL 17 million of EBITDA -- had BRL 17 million EBITDA last year. It's a lower margin but the volumes are growing very fast. And the numbers we have for 4-Bio are better than any expectation we might have had when we bought the company.

On page 13, we talk about the net income. We did 500 -- nearly BRL 550 million in the year, and BRL 155 million in the fourth quarter, which is a 7% net income growth versus the 4Q '17. And then we had the 10 bps gain on the net margin in the quarter. We've booked this quarter a significant number of nonrecurring expenses. The bulk of this is related to increase in labor contingencies. This is comprised of labor claims filled in previous years. What happened is that with the labor we fought at the last new claims made against the company, the speed of the cost has increased, and this has made clear that our provision was insufficient. So we will revise the criteria, and we have, I think, now a much more conservative criteria. But then there is a [fraction] of BRL 47 million related to claims of previous years, but -- which were adjusted in the quarter. There is also a pressure in the quarter related to claims [above] the year, but this is (inaudible).

Page 14, we had a free cash flow consumption of BRL 140 million in the year and a total cash consumption of BRL 341 million, but we still maintain a very healthy, very low leverage of 0.6 net debt to EBITDA.

Then on page 15, obviously, our share price has fallen 36%. I think there was also a peak when we reached 90, but still in a tougher year, the share price followed. The way we look at this -- I mean, what concerns us is not the share price, what concerns us is the performance of the business. We try to do the best every day in terms of long-term value creation. And we believe that if we're right, the share price will show up and will show on the long-term. We are not managing -- or driven by short-term price pressures or even short-term price gained on the -- on our shares.

Okay, so this is where i have to -- I pass it to Marcílio to summarize the year and talk about the future. And I will be back to talk about the Onofre acquisition.

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Marcílio D'Amigo Pousada, Raia Drogasil S.A. - CEO & Member of Board Executive Director [4]

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Okay, thank you, Eugênio. Let's go to page 16, okay? We will talk about a little bit about 2018, okay? It was a challenging year for us but when we talk about this challenging year, we have to talk about the cycles. We always talk about these kind of cycles in our business. If you look into our history in the past, our (inaudible) have been settling down in this business, okay? I had a good number to show for [new stores] Abrafarma numbers that -- or that call for the -- opens for the competition. They open -- if you look in the last 12 months from January 2018, [546] stores. In January '19, they opened all 327 stores, which show for us this cycle happened in 2018. The market opened a lot of stores to compete against them and they suffered during the year.

(inaudible) tried to reduce the price in generics. We know how important generic market is for us when you do this all the year. Then we lose only [50%] in margin and the number one problem was expenses. This contributed group expenses when we grow the mature stores below the inflation.

But we did have very good several milestones -- good strategy milestones for us. We opened 240 stores. When we look at 2013 when we opened [130] stores, (inaudible) for us to open performance business. That 240 stores, we opened 20 stores (inaudible) good shape, good stores, nice quarters. It is there to open stores to serve the customers also.

We are in 22 different Brazil states. We are almost now delivering in Brazilian [pharmaceutical] market, but [what's better here]. 86% of our stores is located in a 1.5 kilometers to 8 customers then we not only needed in the good states in Brazil, but we are (inaudible) people.

We increased our share. We invest a lot in generic which is good for us. So that always in the past was not main strategy. We will start to do our main strategy right now. We learned a lot from the generic. We see -- we saw a lot of (inaudible) price also an increase, introduce a price in the number that always starts to grow. It's good for us in a sense about the future.

And we measure or dished out (inaudible). We closed there our new strategic plan and we start working in [December] 2018 and closed it also 2018. And this is the main driver for our (inaudible) customers centric strategy the digital (inaudible) optimal.

If we look at the market, we never see a large competition like this year, but you are much more stronger when compared with the competition this year than the past because we closed the year with 1,825 stores in 20 states, but you have 31 million active customers in our database. Put these together in the balance sheet which have numbers give for us a big difference between compare our numbers with the competition numbers. We are much more stronger right now than if you look for last year.

Let's go to page 17, talk about 2019. Our guidance for new stores will be the same. We are opening 240 stores. We had almost 170 contract signed for us this year, the same number we had last year, okay? We have enhanced the popular format. We know this is important for our future. This is important for keeping it growing, to keep the pace in 240 stores per year. We know that if we do that, which is higher in (inaudible) brand is large for us. We are changing the side stores and we do very well, we're hoping to open more stores in the popular format for the future also.

When we talk about the new strategic plan, we talk about the customer centric strategy, okay, but it's not only customer centric strategy, okay. We're looking for the digital strategy. We know the omnichannel customer buy more from us -- the omnichannel customer by more in frequency and buy more in the average (inaudible) also. Then we are planning to increase the numbers of digital customers for this year, our goal to reach 2 million omnichannel customers in the end of this year. We have right now 400,000. It should be a big challenge for the company. We are doing this right now. We start to work with the [SIO] teams. We have 3 SIO teams right now and we start working more in (inaudible).

We know that important for our results -- for our EBITDA margin to increase the numbers to grow the company in the mature stores. We believe in the end of this year, we start to grow again in mature stores above the inflation, a little bit below inflation. Why we do that? Because we -- I talked the cycles. The competition starts working last quarter and last year, and we think reached the averaged GDP. All the investments in generic we did in 2018, we don't have to do the same in 2019.

The other (inaudible) very, very strong in '18 is reduced expenses. So we know that it is a very good business in 2016, '17, and we need to do better right now, which is the (inaudible) expenses, to put all the partners together for prices (inaudible). And we know that if you [additionally] take decisions for the company, you can make it less expenses to (inaudible). We hired [an outsource] company to help us do that and you can see the results of the reduced expenses, not in this year but maybe [2020].

Right now, Eugênio will talk a little bit about -- on Onofre acquisition and I will be here for Q&A. Eugênio?

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Eugênio De Zagottis, Raia Drogasil S.A. - Corporate Planning & IR Officer and Member of Executive Board [5]

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Okay, so before talking about the rationale and the structure, I'd like to give an overview of Onofre. Onofre is a very traditional drugstore chain in Brazil which was acquired in 2013 by CVS. Last year, Onofre posted BRL 480 million in gross revenues, but it's important to mention here that the company has very negative EBITDA and net income. So we are taking about a turnaround here. Obviously, and also, there's no financial leverage involved here. The company had -- financially, Onofre is very, very healthy -- has a very healthy balance sheet, although there's a big challenge in terms of profitability, as I mentioned.

We're talking about a chain with 50 stores, 47 of which are in São Paulo, and e-commerce represents 45% of the revenue. So one of the main motivations of why we did the acquisition relates to accelerate our digital strategy, and I'll talk about that in a minute.

And the other expertise that, despite the relatively small size, because it's launched as -- Onofre is a fully formal company, very -- with very well structured back-office and very high compliance standards. It's very difficult for us to have an opportunity to do a small acquisition with this kind of characteristics. Generally, the smaller company, they are not audited. And what you find when you do a due diligence, they can be very scary. That's not the case here at all.

Then talking about the deal structure before I elaborate you more on the rationale. This is a transaction that is not involving disbursements by the company. So we are basically getting the company without any payment. The final numbers, obviously, will depend on working capital and other adjustments. So obviously, there's a target working capital. If the working capital is high then we have to pay back some. If thee working capital is lower than the target will have to pay more. But basically, the expectation is that we don't have to make any disbursement to get this company. So we are getting the company basically for free.

A company with no financial leverage, but the reason is obvious, the company was very negative EBITDA and we have to turn it around. Also infrastructure, we don't have to approve the General Assembly because we are talking -- it's below any threshold that would require us to do so.

But the closing will depend on CADE. This is a normal process. We believe this is a safe transaction but there again CADE is the order responsible for approving that. In our view, this deal should take 3 to 4 months to close depending on the time CADE will take to analyze it.

And finally, there's an existing arbitrage of CVS and Onofre against the previous owners, this arbitrage, will continue to be managed by CVS and we don't have any interference in the process. We don't have any downside and we don't have any upside from the arbitrage. Every gain or every loss will belong to CVS.

Then on the next page, we can talk more about the rationale. I think first and foremost, it's an opportunistic turnaround transaction. So again, it's a company losing money that we are gaining without paying any price, but we have to turn it around. We have to transform the negative EBITDA in positive EBITDA. And we believe we have the capacity to do so by -- simply by plugging Onofre into our structure of the operating supported by corporate structure, supported by our DC, our IT, our management. I think this is enough to create a relatively fast turnaround.

So again, the reason why we were able to get the company such a favorable transaction is that we are maybe the only company or one of the few companies who have the resources to do a quick turnaround here. But in addition to the opportunistic side, we believe this transaction accelerates our digital strategy, and I'll detail that in a minute.

In terms of the network, it's a small network but it's complementary to what we have. I don't think we -- I heard questions yesterday about cannibalization. And I don't think this is an issue here. Just like with Raia Drogasil, this wasn't an issue. Obviously, we would never open these 50 locations from the ground up in those neighborhoods where we have already a good market share. But these stores, they come already named with sales there, and we are talking about healthy levels of sales. So there's no problem if you have a store selling BRL 800,000 and there's a nearby Onofre store selling BRL 600,000. There's no cannibalization here. Obviously, if we grow the store from [BRL 500, BRL 600] or whatever it is, and let's say, we add BRL 100,000 more or BRL 200,000 more in new revenues by using our brands, by leverage or execution, or with the additional revenues there could be cannibalization. But still I don't know, half the revenues will be new revenues, half of the revenue growth will be in new revenues.

So this is a -- the stores -- the store's idea, it's a very similar logic to Raia Drogasil. No problem having 2 stores side-by-side with [to 350] stores side-by-side with each other as long as they are healthy stores and they are selling well.

And I think another aspect here has to do with the fact that by doing this transaction, by interacting with the company, by doing (inaudible), I mean, we learned that the company has a very good people. CVS was very successfully in building the team there. And we believe they have a lot of people there who can help us here. People who bring complementary skills. Because of our growth -- every year we are growing we are increasing our corporate structure, so we can get people from Onofre. So I think that the talent side is also a nice to have in this transaction.

Then when we about e-commerce, I -- this is one of the main most favorable aspects of the transaction. We're talking about the company that is one of the leaders in e-commerce in our sector. So these transaction more than doubles our digital revenues. Onofre have higher e-commerce revenues than we have. We're at least to maintain the Onofre brand in e-commerce. So this acquisition allow us to increase our fulfillment scale, which has an obvious impact in terms of delivery cost, and delivery density which has always an obvious effect in terms of reducing delivery costs. So this helps us a lot in going forward with additional strategy.

I think there's a big opportunity here because Onofre is focused in São Paulo, even though their website is national. They know -- they only have fulfillment in São Paulo and even (inaudible). So we will be able to take Onofre nationally by leveraging our distribution structure in all those markets where we operate. So there's an interesting upside gear to that.

And finally, Onofre's e-commerce is very complementary to what we do (inaudible) are focused on omnichannel. So we are talking about more and more customers doing Click & Collect, customers buying from stores to be delivered in 1 hour. So in the end, what this means is that progressively our e-commerce price for Raia Drogasil will be more and more similar to the store price. So this omnichannel offering that we have today is based on the convenience.

Onofre play is on the opposite side of the spectrum. Onofre is a pure-play Internet brand. Obviously, they have 50 stores but their capitalize was so low that omnichannel was never really a possibility there. But we can -- Onofre is the position as a pure-play e-commerce player, which is price driven. So cheaper price but less convenient. So you buy today, you probably pay less, but you only receive the product earliest tomorrow. As I mentioned, as we do more and more Click & Collect, more and more omnichannel and as our price will transition for Raia Drogasil to what the store price is, the pure-play price segment is a segment that we were recently behind, but Onofre allows us to figure that. So we maintain the Onofre brand positioning price, which is obviously a lower margin business, but we believe we can create value. We can generate positive profitability by doing that, while allowing Raia Drogasil to move faster for the omnichannel proposition, which as I mentioned, is a convenience-driven proposition. So it's a very complementary aspect in this acquisition here.

And finally, in terms of the stores, we're taking 50 more stores, they will allow us to gain some more scale and they allow us to gain capillarity. The quality of the portfolio is good. It's very complementary within São Paulo. And obviously, there are stores who lose money and we will have to close some of the stores.

We haven't decided yet on the branding strategy. Obviously, for the e-commerce, we maintain the Onofre brand. But for the store, we still have to decide on if we maintain or not the Onofre brand, how many stores we maintain, how many stores we close. So we are now -- as we're closer to that -- as we sign the transaction now, we are now moving towards developing detailed integration plans so that they won't have to closing. We can act fast and we can convert the negative EBITDA into positive EBITDA.

Finally, before Q&A, I would like to -- just to point on some highlights for IR. We will publish first quarter numbers on April 29; second half -- second quarter, August 6; third quarter, October 29. And we have 3 scheduled investor conferences, 2 in Brazil, BTG Pactual next week in São Paulo. On April 2 and 3, Bradesco conference in São Paulo. And finally, May 15 and 16, there is the LatAm CEO conference of Itaú, with Marcílio, myself, (inaudible).

So these were our prepared remarks and now we will go to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Mr. 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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I have a few. So the first one is related to the M&A strategy. So it seems that this deal was kind of another opportunistic one. So I'd like to understand like what's the mindset of the company towards further M&A in the future, so if you're actively looking for that? My second question goes into the e-commerce strategy. So you mentioned that even like being smaller, Onofre online operations are actually larger than RD's. So I'd like to understand like what they do different from you, particularly in terms of restricted products? And I would also -- it would be interesting to understand like if you have any target in terms of like online orders here for your e-commerce side? The third thing would be on the pricing platform, right? So we saw kind of flattish margin on the retail side, but we had some investments in certain categories. So I'd like to know how this pricing platform helped to cushion further margin pressure? And how we should be looking at it in the future? Lastly, concerning private label, right, so if we would think about like expanding to new categories further and how the penetration is evolving throughout this year as you focus on strengthening your competitive positioning?

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Eugênio De Zagottis, Raia Drogasil S.A. - Corporate Planning & IR Officer and Member of Executive Board [3]

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Okay, Joseph, thank you for the questions. I mean, the first thing is that until recently the whole focus was on organic expansion. We were [already] after 240 stores and obviously we had [new business time], not the energy to look into and think about M&A. We are now at a point in which we have stabilized 240 stores. That was the number from last year. That is the guidance for this year. So obviously, we're much more open and looking at M&A. We look at a lot of potential opportunities. You don't have the -- don't -- you have an idea of how many transactions come our way, but our market is very high here. So one of the aspects here in Onofre is that we're talking about the company that have extremely formal CVS level of compliance and so on. So it's very unusual to find a small, medium-sized asset with this kind of credibility in terms of their numbers, in terms [returns of their bases]. So what I'll tell you is, we're open to do selective M&A whenever we think it makes sense. I think another good aspect of this strategy is that there will be a big learning and I think, if this -- if Onofre, the integration is successful, as we believe it will be, I think this can be very encouraging. So for example, we have 50 stores in São Paulo. We will have the chance to -- we know how much they sell. We have the chance of understanding how much add -- how much value we can really add, so under our operation and maybe under our brand, if we learn that a store that sells 500 becomes 700, this can give us the encouragement to be more aggressive in M&A in the future. We will learn also how much -- we don't think it will be a huge distraction but we think there'll be some. But depending on how tough or how easy it is, we can also build more confidence for new deals in the future. So I think, it's a very good timing to try a small acquisition like this, that in addition to create value, in addition to deliver a positive acceleration of our strategy, will also allow us to learn and maybe to be more aggressive in the future. In terms of e-commerce, Onofre will -- 45% of what Onofre sells with e-commerce. So we're talking about something like, what, BRL 230 million, something like that, which is more than 2x what we do with (inaudible). But let's remember that (inaudible) is 2 brands: Raia and Drogasil. So brand-by-brand, Onofre sells 3xmore than even Raia or Drogasil. Obviously, it's a different strategy. Onofre won't be an omnichannel strategy, as I mentioned before. It will be a pure-play price-driven strategy but it adds up to efficient scale, it adds up to delivery density. We will be able to leverage our gross margin -- our buying terms for Onofre. We will be able to expand this delivery service nationally with another different kind of market (inaudible) in São Paulo, higher than it is (inaudible). So you can see the relevance of the business Onofre has built on e-commerce. So we believe we have a strong asset to carry forward with a lot of synergies to attract on the e-commerce side. Then your third question was on pricing. I think one of the elements helpful this year was by implementing new pricing strategy from the front store. So we -- this was very important for us. This year, we have another pricing initiative. We are conducting a pricing project (inaudible) for the Pharma side. So we're designing a much more structured, analytical and detailed proactive pricing strategy. And then we will use artificial intelligence to be able to react to pricing movements. It's easy to see that with 1,800 stores times 14,000 SKUs, it's impossible for the human eye to catch every movement. So with artificial intelligence, we can see a lot of movement in terms of operating pressure, in terms of molecules on gained or lost share very quick. So these are elements that we feel our pricing decisions and therefore to help either increase margins or accelerate growth. Either way, we increase the gross profit and that's what we want to do. And finally, private label is progressing very well. Private label is already more than 5% of front store-sales. We are -- we have new launches that will be very important in the coming months, like (inaudible) for example, it's a very high volume category. We have a lot of categories to complement. There's one brand which should be a new brand, [number 30]. So private labels is 5%. I'm sure it gets to 8%, 9%, 10% in a couple of years, relatively quick, below 3 years, something like that. And then we'll see what the future holds for us.

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Joseph Giordano, JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst [4]

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Just taking the opportunity here, I just wanted to explore a little bit the super apps and how does it play out within your digital strategy? I know you're part of (inaudible) but I wanted to understand, like how do you see that in the future? Probably this is like nonmaterial now, but how do you see this trend here?

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Eugênio De Zagottis, Raia Drogasil S.A. - Corporate Planning & IR Officer and Member of Executive Board [5]

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That's a good question. Right now, [half in material], it's very low volume. And in the end, I think, the value proposition for the consumer, where (inaudible) can help, is to have quick delivery of, let's say, your son has a sore throat, you need the medicine to -- in half an hour, and then half his day is affected for that. Our e-commerce strategy, especially for our key segments, which are chronic patients and mothers, is to go direct. So just one example, when we start looking at the pressure of P&L, we set up transaction of store P&L. The whole milestone of the company changes. Our idea is that if someone is a loyal, chronic patient with high standing, that customer should buy from us in 1 hour with 0 (inaudible). So if we're able to improve those end positions for the chronic patients and other core segments, I don't think the super apps can be more competitive than what we can do. We can do this for [future apps], we can apply any discount rule where they have, either loyalty card or PBM. So it's a much cheaper value proposition, the one that we can give to our core customers. But obviously, we can't offer free delivery for everybody. So there'll always be patients with -- always be customers for whom happy to be -- could have a better value proposition.

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Joseph Giordano, JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst [6]

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Okay, so I'll just try another one. So thinking on the restrictive products, right, so how far are we from potential mail order. So basically going back to that strategy of increasing the pocket share, we think are chronic patients. So they could just like send in the order automatically?

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Eugênio De Zagottis, Raia Drogasil S.A. - Corporate Planning & IR Officer and Member of Executive Board [7]

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Okay, well our agenda is really focusing on these chronic patients and other core segments like mothers, [buyers of high-end] of new products and so on. So the whole value proposition is towards them. The way we see it, for example, e-commerce to Onofre was something like 1% of total revenues. 1%, 2% or 5% of delivery of Click & Collect, certain (inaudible). But what moves the needle is that if this 1%, 2% or 5% means that this customer represents 5%, 10%, or 20% of my total revenue pool and if this customer is engaged through an app that allow us to offer a much better experience and collect much more loyalty and value, this can be transformational. So our view is, omnichannel. Omnichannel doesn't mean that the money will be made on Click & Collect or delivery. Although that could very well happen, but the goal is that over the whole lifetime of the customer, over the whole spectrum of channels with which the customer interacts, we believe that a connected customer will generate much more loyalty standing and better for us, and we'll generate much better experience and convenience for that customer. This is the view that we have. And 1% or 2% or 5% won't change the needle, but when you look overall what this customer buys, we can move the needle and this can be transformational. We have set a guidance -- not a guidance, a goal of increasing omnichannel customers from 0.5 million to 2 million by the end of next year. So we're thinking about exponential growth here and I think this is 1 year. Our mission is much bigger beyond 2019.

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Operator [8]

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(Operator Instructions) It appears to be no further questions. Now I'll turn the conference back to the company for their final remarks.

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Eugênio De Zagottis, Raia Drogasil S.A. - Corporate Planning & IR Officer and Member of Executive Board [9]

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Okay, first and foremost I would like to thank you all for following our call and for your support as shareholders. I'd like to summarize some of the points we made in this presentation. I mean, obviously, 2018 was a challenging year with increased competition, softer growth, which led to market pressures that we lost 30 bps margins, for retail, 50 bps if you put the 4-Bio mix effect together. But still we have a retail EBITDA of 8% with 1/3 of the stores still undergoing maturation. So I think we are in a very strong competitive positioning. When you look around us, what happens is that there was a lot of capital allocation in this market, a lot of companies will be in a lot of stores and this also has an effect on our softer growth. But the result is that this -- when the whole market invested so much capital, in a difficult environment, what we -- with margin pressures, what we see is huge leverage increases all around the industry, and this is translating through less openings and more closings over the last quarters. We have companies reducing the drivers, so we would -- this means that we need of a normalization. This also means that on a relative basis, with the kind of profitability, balance sheet and growth is to maintain, we have never been better positioned in our industry to keep moving the consolidation moving forward than we are today. So this is a key message that I'd like to be very clear. And in spite of the challenges of the year, we also had very significant achievements, like the record expansion of 240 stores a year. This is a number this market has never seen, and I don't know if any other retailers in this segment has ever opened so many stores in a year. We -- although we had challenges through the year, we ended the year at a very high note with stability in São Paulo, which is a real achievement given the competition increase we saw, and we gained in every other market. We entered -- and went a very bold price repositioning, which we did and still managed to maintain those margins and to move already 30 bps of retail margin, but this all completely changed our growth momentum. And I think we see the consequence through the year in terms of growth normalization and through next year, as I think we get back to normalize. And finally, I think we started a very ambitious digital transformation. I don't know any other retailer in Brazil who have Click & Collect in 1,800 stores, that can be fulfilled in 10 minutes, 15 minutes, half an hour. Every Click & Collection operation that we know of, is 2 days or more. In our case because the inventory is already in the store, you order now, in 10 minutes the product's probably ready for you to pick. We're now getting ready to announce Click & Collect for controlled medicines, which obviously will have an additional staff which they assign the prescription. But still for others, their challenge, it's difficult for the customer to find the whole inventory they need. People generally buy 3 units per product where a lot of products are low-developed products that are difficult to find. So for a customer who knows he can go in a store and do Click & Collect of a controlled medicine, and being fully aware that he's finding the product and this is a much expedited process, this is tremendous value creation. We also want to bring the digital solution inside the store. We are moving the pain points of the customer experience, improving the shop experience that we offer to the consumer. And again, (inaudible) we can connect. We can engage with a connect-to-consumer in a much deeper level than we can really for a normal consumer. So a consumer who downloaded the app, we will be able to (inaudible) to send reminders to take the pills in the morning and reminders to fulfill the prescription. We will be able to offer promotions and this will increase the share of wallet on these consumers. This will increase the value we provide them which will increase their spend with us. And the other aspect is that the assets that we have to support the digital transformation are absolutely unique. We have more than 1,800 stores that -- and a very staggering number with that. 86% of the Brazilian in consumers, we will see actually 1.5 month from our stores. So our stores, they're a customer-acquisition machine, CRM, omnichannel. It's a customer-retention machine. And then loyalty program, pricing, promotions, CRM and private label, these are value-creation machines for these consumers. So I think we have 30 million enterprise consumers. This is the biggest database in Brazil, combined with 86% of a-class people using within 1.5 kilometers range from our stores. These are unique assets that will allow us to transform our business to create a new growth engine through digital. So I'd like to thank everyone for attending the call, and we will be available for you in our road shows, conferences and even conference calls. Thank you very much.

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Operator [10]

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Closing and disconnecting.