Q2'24 Results
Renato Franklin - CEO
Intro
Hello! Welcome to the Grupo Casas Bahia's Q2'24 results presentation. This video is released together with the earnings material for disclosure. Tomorrow we shall hold our live video conference, for the Q&A session.
Q2'24 Highlights
In Q2'24, we continued the gradual improvement we have been reporting since the adjustments implemented in the Transformation Plan, which had a greater impact on the results of the second half of 2023.
Our priority is to have a more robust free cash flow and, due to the evolution of the Plan's initiatives, we had a positive generation of R$ 92 million in the quarter. Contributing to this generation, I would highlight the strong discipline in working capital, maintaining an optimized inventory level, R$ 1.4 billion lower than the previous year, and reducing the inventory period from 97 to 82 days.
This is the third consecutive quarter of improvement in gross margin and EBITDA since the Q3'23, more impacted by the Plan's adjustments. Elcio will detail the result a little more, but I would like to point out that, in addition to this quarterly improvement, we had a year-on-year increase in gross margin, with a rise of 1.5 p.p. to 30.7%, reflecting a more profitable mix, the quality of inventory and greater penetration of services.
We maintain strict cost control and focus on core activities, which contribute positively to our profitability. An example of this is the growth in contribution margin, both in the B&M store and in 1P online, while the businesses that complement our ecosystem have also shown gains in profitability, such as 3P, profit in Bartira, and improvement in banQi. These advances enabled the EBITDA margin to increase by 0.7 p.p. year-on-year to 7.0%, as well as a sequential gain of 0.9 p.p. over the previous quarter. I would also like to point out that we have concluded the debt re-profiling of R$ 4.1 billion, with the support of all the creditors. This is a great vote of confidence that we have received for the progress of the Transformation Plan initiatives, which make it possible to increase the average term from 22 to 72 months and reduce the average cost by 1.5 p.p., strengthening our balance sheet and cash flow.
Specialist Omnichannel Positioning
Here I reinforce our strategic positioning as a specialist omnichannel player with a focus on profitability. As a result, our GMV and revenue fell due to the operational decisions associated with the Transformation Plan, which are expected to reduce revenue initially but prioritize the profitability and sustainability of the operation in the medium and long term.
Thus, this variation mainly reflects the adjustment in the store chain, with the closure since 2023 of 60 units that were margin detractors; the resizing
of the online operation, with a reduction in incentives in the B2B channel, which previously accounted for 35% of 1P online GMV and now accounts for 24%, but with better margins; in addition, the discontinuation of 23 categories in the 1P operation, which we continue to sell through 3P, monetizing through commission rates.
As a result of these adjustments, 3P recorded an increase in revenue, while 1P online and in-store recorded a year-on-year improvement in contribution margin of 0.8 p.p. and 0.3 p.p. respectively. In other words, we increased the profitability of the channels even with the reduction in the top line, in a sustainable way and with the potential for operating leverage in the coming quarters. With these new efficiency bases, we will generate value with the gradual resumption of growth cycles.
Installment Plan
Now I would like to talk about our installment plan, which is a major lever of sales and profitability for the Company. We are the leading provider of installment plans in Brazil and, in this quarter, we increased our portfolio to R$ 5.5 billion. Delinquency indicators remain healthy, with over 90 and ADA (Allowance for Doubtful Accounts) on portfolio improving annually and quarterly. A highlight was the digital installment plan, which set a record for online sales of 1P, with a 7.9% share. We have an installment plan with a long and consistent track record of profitability, a strong brand, and an addressable market of 91% of Brazilian municipalities, in other words, a lot of growth potential, with strong long-term value generation.
Logistics
We strive for maximum efficiency in our logistics infrastructure by automating processes, increasing productivity through omnichannel; and profitability by reducing costs and expanding services for sellers and non- sellers. This approach drove a 19% increase in multi-marketplace fulfillment in the number of customers and 30% in revenue, while third-party logistics also grew, 19% in the number of customers and 13% in orders.
Even with the closure of 4 DCs to adapt our operation to a specialist approach, with a lean and profitable structure, we had significant improvements in delivery times in all modalities, with a highlight for marketplace deliveries, which are not managed by the Company, which reduced the deadline by 43%, due to the change in 3P strategy with a mix more focused on core items and the development of the sellers' sales levers.
Transformation Plan
In this Q2, our Transformation Plan, which aims to generate a more robust free cash flow and higher return on capital, completed one year since its launch. I would like to take this opportunity to present an overview of the main levers implemented in this first phase of the Plan, which focused
mainly on the Company's strategic re-planning and adjustments with immediate effects.
I will start with the initiatives that impact the top line, highlighting the record 7.9% share of digital installment plans in 1P online, contributing to the 3 p.p. increase to 16% in the penetration of CDC and other services. The 3P operation recorded revenue growth by 8% in the first half, as a result of the review of marketplace operations and other services, with an increase in the take rate of 0.2 p.p. to 12.6% in Q2'24. We had the migration of 23 categories with negative margins from 1P to 3P, which contributed to an improvement in the quality of inventory and a lower need for promotions.
On the cost front, there was an 8.5% reduction in third-party service expenses over the six months, due to the establishment of a permanent control tower to renegotiate and review the Company's contracts.
I would also like to highlight the structural adjustments that we have made and that we continue to benefit from, such as the reduction of 10 k positions, which represent more than 20% of the staff and more than 40% of leadership positions; the reorganization of 9 DCs, including the closure of 4 of them and the closure of 60 loss-making stores since the beginning of 2023. Still, regarding stores, we established a Recovery Plan, which enabled 54% of our stores to improve their margins, 12% of them by more than 5 p.p., while the others remained stable.
From a cash flow perspective, I would once again like to highlight the generation of R$ 92 million in Q2, which helped us to have the best first half of free cash flow in the last 5 years. We released R$ 1.4 billion in inventories, improving quality, with 92% of inventory within 90 days. With regard to the cost of capital, I would highlight the improvement in the average cost from CDI+2.6% to CDI+2.0% and the increase in the average debt term, from 30 to 72 months.
We carried out several initiatives to improve our capital structure, such as raising R$ 623 million through a follow-on; the R$ 4.1 billion debt re-profiling, which was concluded with the adhesion of all creditors; as well as progress in the monetization of assets, including the monetization of R$ 1.7 billion in tax assets.
Lastly, I would like to talk about the change in the installment plan financing model, an initiative that is less advanced than the others mentioned, since it has not been taken up yet. But even so, we have made important progress in the systemic segregation of FIDC and Company's resources, the implementation of biometrics to reduce fraud, the CCB contract and the implementation of systems control. These initiatives, as well as improving the conditions for borrowing, allow us to increase the penetration of digital installment plans.
However, it is important to highlight that we have only completed the first phase of the Plan. We continue with our transformation office with our own team and the support of BCG, which guarantees the support of a world- class strategic consultancy from the start of the Plan. We are focused on executing and identifying new opportunities. Based on the mapping of
these initiatives, we have increased our short-term EBT improvement estimate by R$ 200 million, setting a new target in the range of R$ 1.6 to R$
1.8 billion improvement. Remember that this increase only considers initiatives that are already structured and partially implemented, and we will continue to look for new opportunities.
I now give the floor to Elcio for the financial highlights.
Elcio Ito - CFO
Q2'24 results
Thanks Renato and hello everyone!
In this presentation, I will cover the financial topics in 3 blocks, as I have done in recent quarters.
First, we will discuss the Q2 results and the effects and benefits that can already be seen after the first year of the Transformation Plan, where the focus has been on profitability and cash flow.
Renato has already commented on the deliveries and we have executed the Plan with great discipline and consistency. When we focused on profitability, we made a lot of adjustments in terms of allocating capital between businesses, focusing on core categories, realigning sales channels, reviewing commissions and freight, among other things.
As expected, this set of measures has led to a decrease in revenue and, as a result, a reduction in costs and expenses of equal or greater intensity. Renato has already commented on the various cost and expense initiatives implemented during the second half of 2023, which had their non-recurring impacts on the result.
Well, we started the first quarter of the year more cleanly, with the gross margin, for example, already at a historic level, and we always indicated that it would be a gradual and sequential process. We are now presenting the Q2 with better results year on year, and also compared to the first quarter. The Plan's initiatives will continue to make progress over the coming periods and will structurally improve the Company's results.
As we carry out the transformation, we have a very clear priority of generating free cash flow and maintaining liquidity to manage the operation. This quarter we closed with a positive free cash flow of R$ 92, the best first-half cash flow in the last 5 years. We closed with liquidity of R$ 2.9 billion, stable compared to the first quarter.
We have implemented debt re-profiling, and it is certainly a fundamental milestone in this trajectory.
Income Statement
I will start with the Income Statement, which again showed a sequential improvement in the year-on-year and quarter-on-quarter comparisons. As in the previous quarter, net revenue decreased by 14% due to the operational decisions implemented, in line with our positioning as a profitable omnichannel specialist, as we have already mentioned.
Gross profit totaled R$ 2 billion, with a gross margin of 30.7%, an annual improvement of 1.5 p.p., and a quarterly improvement of 0.7 p.p.,
reflecting a more profitable mix, the quality of inventory, and greater penetration of services. I would like to point out that this is the third consecutive quarter of sequential margin improvement since the third quarter of last year when we were impacted by the sales carried out to release old and lower-turnover inventories.
Expenses fell by 9.1% year on year, as a result of budget adjustments and austerity. Clearly, given the market and the Company's scenario, we are reinforcing a culture of very strict expense management.
We achieved an EBITDA margin of 7.0%, an annual increase of 0.7 p.p., and a quarterly increase of 0.9 p.p., marking the third consecutive quarter of improvement.
Net financial expense reflects the net positive effect of R$ 637 million. Within the accounting standards, we have CPC 48, where we assess whether this debt re-profiling falls within a term we call "substantial change". After analysis, we concluded that there was a substantial change, and therefore we did not recognize the previous debt and recognized a new debt. The difference between the original obligations and the new obligations generated this temporary accounting gain. There is no cash gain and this accounting gain will be reversed over the term of the new debenture, in the absence of any other future changes. Therefore, it is a non-recurring item and that is why we are managerially including a line indicating the net loss if we did not have this impact from the ER.
Thus, the net profit for the Q2 was a positive R$ 37 million and excluding the effect of the ER we would have had a net loss of R$ 384 million.
The increase in margins, even in a scenario of reduced revenue, demonstrates the potential for operating leverage that we can capture in the coming quarters, given that we have already structurally reduced the level of expenses.
We are enthusiastic about the progress of the Transformation Plan and its benefits, which are now being captured more clearly in the results, but we are aware that it is a long journey and that there is much more ahead of us if we are to reach the Company's potential.
Inventory
With regard to inventories, we have maintained a level of R$ 4.4 billion since the Q4'23. Year over year, we have an annual reduction of R$ 1.4 billion, due to the reduction in older, lower-turnover inventory, as we mentioned in previous quarters. In terms of average inventory time, we went from 97 to 82 days, an improvement of 15 days year over year.
I would like to emphasize the quality of this inventory, that 92% of the inventory has a term of less than 90 days, and that we continue to encourage greater efficiency in the commercial and logistics team to maintain or even make further progress.
Although we are always looking at cash flow, our goal is to grow sales while maintaining an optimized inventory level, with commercial
intelligence and logistical systems and processes that allow for an efficient allocation of assortment by region.
Cash Flow
In terms of cash flow, I would like to point out that we had a positive free cash flow of R$ 92 million, even though revenue was R$ 1 billion lower than in the same period last year. This is the result of the discipline of the capital applied to all fronts. In addition, we have maintained the positive impact of tax monetization and labor costs within expectations.
I would stress that cash flow is a priority for the Company and we have made important progress in recent months. An example of this is that in the half-year view, we have a clear trend of improvement in free cash flow, which has allowed us to achieve the best result for a first half in the last five years.
I also highlight the lowest variation in the liquidity balance in Q2 in the last 4 years, which allowed us to end the quarter with a position of R$ 2.9 billion, essentially stable in relation to the previous quarter.
Debt Re-profiling
I would like to emphasize that, as published to the market, we have almost completed the re-profiling of the unsecured financial debts of R$ 4.1 billion, which includes lengthening the amortization schedule, including a grace period of 24 months for interest payments and 30 months for principal payments.
The amortization period goes from 22 months to 72 months, and we have a reduction in the average cost of 1.5 p.p. As a result, the Company will save R$ 4.3 billion over the next 4 years, of which R$ 1.5 billion in 2024.
This is a fundamental milestone in the Transformation Plan and we will continue to make progress in improving the Company's capital and debt structure.
Thank you all very much. I will give the floor back to Renato.
Renato Franklin - CEO
Key Messages
I would like to stress that we have diversified our sources of revenue by monetizing logistics services, retail media, installment plans and increasing the penetration of services, which in addition to contributing to the margin, extract all the competitive advantage that omnichannel gives us. We position ourselves as an omnichannel specialist, prioritizing profitability throughout our ecosystem, in all our business units. As a result of this strategy, by allocating resources to what we do well, our core, we have increased profitability in all channels.
Strict cost discipline, coupled with greater capture of the Transformation Plan initiatives, resulted in the third consecutive quarter of improved gross margin and EBITDA, including a year-on-year increase. This operational improvement was essential for us to generate a free cash flow of R$ 92
million in the quarter and the lowest variation in cash balances in Q2 in the last 4 years.
We concluded the re-profiling of R$ 4.1 billion of bank debt, with the support from all the creditors, representing a vote of confidence in the evolution of the Transformation Plan and addressing part of the improvement in the capital structure for the period.
We are in the second phase of the Plan, now with selective investments, which should strengthen the core and generate an increase in revenue. All this so that, from 2025 onwards, we will have a new moment in the Company, one of greater acceleration, with a focus on expansion, improving the channels, and continuing to improve our margins even further.
I would like to take this opportunity to thank all our customers, our employees, suppliers, financial institutions, and other stakeholders. We are confident that we are on the right track to take the Company to the next level and enter a new cycle of growth from 2025 onwards!
We will continue to be Totally Dedicated to You! Thank you all very much and see you tomorrow at our videoconference.