Netshoes (Cayman) Restricted (NETS) CEO Marcio Kumruian on This autumn 2018 Outcomes – Earnings Name Transcript

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Netshoes (Cayman) Restricted (NYSE:NETS) This autumn 2018 Earnings Convention Name Might 1, 2019 8:30 AM ET

Firm Members

Otavio Lyra – Director of Enterprise Growth & IR

Marcio Kumruian – Chairman & CEO

Alexandre Olivieri – CFO

Convention Name Members

Operator

Good morning and welcome to the Netshoes Fourth Quarter and Full 12 months 2018 Earnings Name. A slide presentation is accompanying immediately’s webcast, which is accessible within the Buyers part of the corporate’s web site, www.investor.netshoes.com. There will likely be a chance so that you can ask query on the finish of immediately’s presentation. At present’s convention name is being recorded. [Operator Instructions]

Now I wish to flip the decision over to Otavio Lyra, Treasury and IR Director, please go forward.

Otavio Lyra

Thanks. Good morning, everybody, and thanks for becoming a member of us immediately. A replica of our earnings launch could be discovered on our company web site within the Investor Relations part together with the presentation for immediately’s name.

With me on immediately’s name are Marcio Kumruian, our Founder and CEO; and our CFO, Alexandre Olivieri. This convention name consists of forward-looking statements or statements about occasions or circumstances which haven’t occurred. Netshoes has primarily based these forward-looking statements largely on its present expectations and projections about future occasions and monetary developments affecting the enterprise and its future monetary efficiency.

These forward-looking statements are topic to dangers, uncertainties and assumptions, together with amongst different issues, basic financial, political and enterprise situations in Brazil and in different markets the place the corporate is current. The phrases imagine, could, will, estimates, continues, anticipates, intends, expects, and related phrases are supposed to determine forward-looking statements.

Netshoes undertakes no obligation to replace publicly or revise any forward-looking statements due to new info, future occasions or different elements. In gentle of those dangers and uncertainties, the forward-looking occasions or circumstances mentioned on this convention name may not happen. The corporate’s precise outcomes may differ considerably from these anticipated within the forward-looking statements.

Our earnings launch was distributed on April 29. The doc is accessible from the quarterly disclosures and supplemental SEC info hyperlink from the Investor Relations web page of our web site.

As you might remember, on April 29, 2019, we introduced the execution of a merger settlement between Netshoes and Journal Luiza S.A. A separate press launch was issued concerning the proposed transaction and posted to our web site. In reference to the proposed merger, we are going to file with the SEC an info assertion of Netshoes. The data assertion will likely be delivered to Netshoes shareholders. Netshoes urges traders and shareholders to learn the data assertion with regard to the proposed merger when it turns into obtainable, in addition to different paperwork filed with the SEC as a result of they may comprise sure vital info.

You might acquire copies of all paperwork filed with the SEC concerning the transaction freed from cost on the SEC’s web site, www.sec.gov. You might also acquire these paperwork freed from cost from Netshoes’ web site. This name will give attention to our fourth quarter and full 12 months outcomes, and we request that you simply confine your questions and feedback to those outcomes and never the introduced merger.

I’d now like to show the decision over to our CEO, Marcio Kumruian.

Marcio Kumruian

Thanks, Otavio. And good morning, everybody. Thanks for becoming a member of us immediately on this name to current our fourth quarter and full 12 months 2018 outcomes. I’ll begin the presentation speaking briefly concerning the transaction introduced on Monday. Netshoes entered in a merger settlement with Journal Luiza and are you – change into upon its completion, an entirely owned subsidiary of Journal Luiza. Topic to the phrases and situations of the merger settlement, Netshoes shareholders will obtain $2 per share in money for every frequent share.

The merger is topic to the satisfaction of sure situations precedent, together with amongst others the approval by two thirds of the votes solid by the shareholders on the Netshoes Common Assembly and the approval by CADE, the Brazilian antitrust agent.

We’re pleasured with this end result, because the structural adjustments and enchancment packages performed over the previous 12 months aiming and preserving worth for our shareholders enabled this transaction.

The transaction is a recognition by Journal Luiza of Netshoes’ main place within the Brazilian e-commerce setting and its strong development potential in implementing Journal Luiza’s strategic targets. Netshoes’ main place in vogue and sporting items is complementary to Journal Luiza’s current supply and with the intention to obtain way forward for each corporations, made that an ideal match.

Slide 4. We have now reached this end result after a really difficult 12 months for Netshoes in 2018. Over the course of the 12 months, we took decisive and mandatory actions to streamline our operations and give attention to our core B2C enterprise and on Brazil, higher place us to safe medium time period worthwhile development. This strategic, we expect, consisted in 5 key strikes.

First, we corrected what, with the advantage of hindsight, was a enterprise determination that diverted assets, vitality and administration time, our diversification into the sale of diet dietary supplements by way of the B2B channel. As you recognize, in Q3, we introduced this, however mandatory, determination to discontinue our B2B operation devoted gross sales of diet dietary supplements and nutritional vitamins, recognizing that this diversification generated inadequate outcomes.

To make certain, the discontinuation of our B2B operations had a brief time period value. It resulted in a write-off of current diet dietary supplements stock in addition to a provision for uncertain accounts receivables. But it surely removes the drain on our accounts and leaves us totally centered on our core B2C enterprise.

Secondly, in Q3, we concluded the sale of our operations in Mexico. Whereas we’ve pulled out of serious Latin American market, we led to money drain of one other R$15 million damaging EBITDA in 2017, because the Mexican operation was in an early-stage operation and the ramp up would have required appreciable further funding.

Thirdly, we’ve taken the choice to additionally pull out of Argentina, leading to its not too long ago introduced sale to a gaggle led by BT8 S.A. This was a troublesome determination as properly, however the logic right here is identical as Mexico, keep away from the distraction of administration time attributable to nation’s advanced financial scenario and be totally centered on Brazil.

Fourth and fifth, we finalized the implementation of two vital operational enchancment packages. The industrial enchancment program, which recognized vital alternatives to enhance revenue margins and the zero-based price range, which recognized greater than R$25 million in potential value saving measures initiatives for 2019.

Final however not least, we accomplished the renegotiation with banks of our working capital and debenture credit score line, increasing our debt maturities as you may be additional detailed by Otavio in a while. Following these strikes, Netshoes immediately is a extra centered firm, customer-driven, Brazilian B2C sport and life-style platform.

Slide 5. All these adjustments, after all, have a brief time period influence on our 2018 reported outcomes as you see on Slide 5, however ideally an enchancment in underlying efficiency. The whole one-off value in 2018 of the choices we took is R$178 million. This consists of the R$73 million write-off to terminate our B2B operations devoted to gross sales of diet dietary supplements and nutritional vitamins in addition to R$35 million damaging EBITDA from these actions.

It additionally features a R$13 million value for hyperinflation in Argentina and the R$21 million value associated to our personal discontinued operations in Argentina. The remaining consists of R$15 million in consulting and authorized prices, notably working for Bain & Co. to enhance our operations and a R$21 million cost to wash up our stock.

These one-off prices had been excessive, however they’re additionally an funding in our turnaround to make Netshoes a stronger firm, one that’s extra centered, extra versatile and extra disciplined.

Slide 6. And at last on Slide 6, you see that even we work on key strategic strikes, our fundamentals stay strong, as evidenced by the figures of indicators. Over the previous 12 months, our variety of registered members rose 16% to just about 25 million.

Lively clients are up 4% to six.Eight million. Invoiced orders rose 5% to 12.6 million, and orders positioned by cell units are up by 13 share factors to 59% of complete orders.

Our market GMV grew by 67% in 2018 to achieve R$333 million. And the common basket reached R$204, up 4% year-over-year on a ForEx-neutral foundation.

Over the 12 months, our market GMV participation has grown practically 5 share factors to 12.8% of complete GMV. And the participation of vogue and sweetness has grown practically Three share factors to 17.1% of complete GMV. Our actions all through the previous months reaffirm our dedication to our renewed technique.

Let me now hand over to Olivieri to current our financials in larger element.

Alexandre Olivieri

Thanks, Marcio. I’ll start on Slide Eight with the expansion of our GMV. As you see on the slide, GMV grew by 4.7% within the quarter and three.1% in full 12 months. This development comes regardless of unfavorable impact from our B2B enterprise, which was discontinued in Q3 and foreign money results. GMV in Brazil grew by 6.6% within the quarter and 6.9% within the full 12 months regardless of continued strain from product markdown to enhance stock high quality and by the persevering with transition from 1P to 3P.

On Slide 9, we give attention to internet gross sales. Consolidated internet gross sales had been R$566 million in This autumn, down 1% on a reported foundation, however up by 3.8% on a ForEx-neutral foundation. Within the full 12 months, internet gross sales had been down by 1.5% on a reported foundation and up by 1.9% on a ForEx-neutral foundation. The web gross sales evolution is in line with the technique of reinforcing the participation of market as a share of our complete GMV.

Let’s flip to gross margin on Slide 10. As proven on the graph on the left aspect, gross margin was closely impacted by the actions we undertook to streamline our enterprise and stimulate short-term money technology, dropping to 23.5% in This autumn and to 23.1% within the full 12 months.

Administration’s short-term actions aimed toward turning round operations and different non-operating influence negatively affected gross margin throughout the 12 months by 6.1 share factors when evaluating full 12 months ’18 to full 12 months ’17.

As proven on the graph, on the right-side hand of the web page, the important thing reality within the 12 months consists of 2.6 share factors attributable to decrease tax advantages on account of 2016 tax change and to the shift of Zattini’s operation to Barueri distribution middle.

This leads to greater tax cost to the P&L however permits to make use of collected tax credit score over the subsequent 12 months; 0.9 share factors associated to greater internet transport prices and different value of gross sales primarily affected by the acceleration of complement gross sales by way of the corporate B2C channel; 4.1 share factors because of the discontinuation of the B2B enterprise and 1.Four share factors influence from adjustment to current worth and hyperinflation accounting adjustment in Argentina.

On Slide 11, we present that we proceed to make effectivity good points in our promoting and advertising bills. As a share of internet gross sales, promoting and advertising bills improved 50 foundation factors year-over-year to 26.2 share in full 12 months ’18.

Advertising expense declined 40 foundation factors year-over-year to eight share of complete GMV in full 12 months ’18. Nevertheless, as a share of internet gross sales, advertising expense elevated 30 foundation factors throughout the identical interval because it displays of the quicker development of our market operations.

On Web page 12, you see that G&A and different bills as share of internet gross sales had been Three share factors greater within the quarter and 1.Eight share factors greater within the full 12 months. The rise within the quarter is especially associated to optimistic impact of share plan and layoff bills reversal in This autumn ’17, greater consulting bills and different working bills associated to the enterprise turnround.

Excluding the optimistic impact of the primary quarter of 2017 on the re-dimensioning of the shares plan, our G&An increase within the full 12 months was contained to 1.1 share factors. We proceed to be centered on lowering mounted bills apart of the zero-based budgeting program.

On the next slide, we transfer to adjusted EBITDA. Consolidated adjusted EBITDA within the quarter was damaging R$63.Three million. Within the 12 months, adjusted EBITDA was damaging R$205 million, strongly impacted by all of the strategic adjustments performed by the corporate in 2018 as presently detailed by Marcio.

Turning to Slide 14. The consequences simply talked about led Netshoes to a put up internet loss from persevering with operations of R$90 million in This autumn and R$322 million within the full 12 months as proven on Slide 15. Let me now hand over to Otavio to touch upon our stability sheet.

Otavio Lyra

Thanks, Olivieri. As proven on Slide 15, Netshoes improved its complete debt profile in This autumn. Complete debt was diminished from R$286 million in This autumn ’17 to R$228.9 million in This autumn ’18.

As talked about by Marcio in his introduction, we benefited from our debt renegotiation with banks which will increase maturity by one 12 months to 2021 and establishes a 12 month grace interval on principal amortization. We, thus, eradicated nearly R$108 million in debt amortization by way of the primary half of 2019, with no cost to the common value of debt and introduced quick time period debt right down to 17% of complete debt on the finish of This autumn ’18 in comparison with 46% on the finish of Q2 ’18 earlier than the renegotiation.

On Slide 16, we give attention to the development in working capital. Due to the stock write-off associated to the discontinuation of the B2B enterprise and improved stock administration in B2C, each Netshoes and Zattini, we’ve diminished our internet working capital cycle to damaging six days from optimistic 13 days within the earlier quarter.

In comparison with the fourth quarter of 2017, our receivable cycle has elevated by eight days because of the decrease quantity of factoring of bank card receivables, and we’ve diminished our stock cycle by 64 days, 17 days from the discontinuation of the B2B enterprise and 47 days from more practical stock administration. Remaining B2B stock represents 9 stock days on the finish of This autumn ’18.

I will end on Slide 17 with our working money stream. We recorded a 3rd consecutive quarter of working money technology as our money cycle continues to enhance. Working money technology was R$58.1 million within the quarter.

Excluding factoring preparations, working money stream improved R$59.6 million and R$161.6 million year-on-year respectively in This autumn ’18 and 2018 full 12 months.

Let me now hand over to Marcio for his concluding remarks.

Marcio Kumruian

Thanks, Otavio. 2018 was a troublesome 12 months, and our outcomes had been marked by some choices that at a time after they had been taken provided long-term development potential, however that ended up taking over an excessive amount of of administration time and represented a drain of our funds.

Netshoes immediately presents a unique enterprise profile. It’s a firm totally centered on B2C in Brazil solely, the place we’ve a robust aggressive place and strong model. Our stock ranges are actually more healthy and higher managed, with new and higher-rotation merchandise.

Netshoes has optimized its working capital and days of stock are at traditionally decrease degree. That is a part of the way forward for monetary self-discipline that we’ve put in place all through the group.

The acceleration of {the marketplace} is a crucial lever in direction of higher stability between development and margin, leveraging our robust model and market presence. Final Monday was a vital day for me and the corporate. Whereas Netshoes believes in its potential and engaging market alternative, our monetary outcomes and rising strain on our working capital place has led us to reevaluate Netshoes’ means to proceed as an unbiased firm.

I’m really honored for what the Netshoes crew has constructed and achieved over time and I am assured Netshoes future will likely be brighter with Journal Luiza. Thanks very a lot to your consideration. And we are actually completely satisfied to take your questions.

Query-and-Reply Session

Operator

[Operator Instructions] This concludes our question-and-answer session. I’d now like to show the convention again over to Marcio for any closing remarks.

Marcio Kumruian

Thanks, everyone. Have a pleasant day.

Operator

The convention has now concluded. Thanks for attending immediately’s presentation. You might now disconnect your strains. Have an amazing day.



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