PETZ
1Q23 REVENUES OUTCOMES VIDECONFERENCE EDITED
RECORDS
MAY 5th, 2023
Sergio Zimerman (CEO):
Good early morning, everybody. It’s an enjoyment to show you our discussion of the First Quarter of 2023. Before we in fact start the discussion, I simply wished to state a couple of words about our understanding of the macro situation. On the need side, we see a stabilization of the motion that we had actually seen in 2022. So need is supporting with clear signals of healing occurring in some classifications of discretionary items.
As you will see in the future, among the highlights of this healing motion is occurring in dog collars, where we have a considerable share of our personal label. The outcomes of the very first quarter demonstrate how effective the execution of what we revealed in the last call has actually been, which was a look for a balance in success, development and development.
I’m going to attempt to explain this through a metaphor. Let’s picture we are on a ship and conditions in the sea are rather unfavorable. It’s drizzling, the sea is with a chaos and when we speak about balance, comprehend this idea of velocity or deceleration as a relative idea that considers the velocity of market share gain or the decline in the speed in which we get market share. But at no point we think about not getting market share. It’s crucial to clarify that since of some discussions we have actually been having, this is what balance implies to us.
For 21 years or more than 80 quarters in a row, we have actually been getting market share and we do not wish to disrupt this series anytime quickly. So for us, getting market share is necessary. However, getting market share can be getting a bit of market share or more market share which’s when the external situation can be found in. And in our understanding, our company believe that the velocity in the gain of market share must not be so extreme, so we can concentrate on our success.
But we are constantly going to work for this balance. A gain in success is likewise conditioned to increasing our market share. And this is the essential message for us when we consider the future and when we consider the speed of growth for this business.
Another crucial thing that I wish to show all of you today is some huge subjects that are impacting the economy as a whole. And maybe we must information how these huge subjects effect Petz particularly, so this tax conversation on tax advantages, et cetera, et cetera. What is the effect that has on Petz?
Zero, basically no effect, just since of the reality that we do not receive any tax advantage that is of substantial significance. So this tax advantage conversation is not associated to our business. It’s something that we have actually already talked about in the past, the conversation with withdrawal threat (“risco sacado”). We do not deal with that. Another conversation that is rather strong is the conversation on rates of interest. That is rather high and here we have a a lot more indirect involvement and why do I state that?
Well, the circumstance today is no net financial obligation, a bit above, a bit listed below, however it’s almost like we have no net financial obligation. So this situation of high rates of interest today has a really minimal effect in our financial obligation situation. We do not offer in credit, so this rates of interest situation does not always
effect our sales. Of course, high rates of interest have an effect in the economy as an entire and in the acquiring power of customers as a whole. So — and for indirect factors, it impacts not just Petz, however the sector as a whole.
Another uniqueness that is necessary to point out, so we can contextualize is something that I have actually been stating because the minute of the IPO. It involves how resistant the family pet sector is. And resistant does not indicate resistance, however it implies that we are a market that is a bit more safeguarded from this unfavorable situation. So the market has still a healthy development projection for this year for the market as a whole. And Petz, by this market, is going to continue to get market share, like I said in the start. So the mix of these 2 aspects is what I called a double strength element that Petz has.
And still discussing the macro situation, we have the DIFAL (default?) component, which basically didn’t impact us. So, when we are speaking about outcomes and I ask forgiveness since I’m deviating the discussion, however it is essential to cover these huge subjects associated both to the outcomes and to the economy. So it’s clear for all financiers to comprehend what are the aspects that have an impact on us and what are the huge aspects that do not impact us.
And a few of these have basically no influence on our business. I likewise require to point out one crucial aspect of the deceleration of the inflation rate. In the previous months, we have actually seen the most affordable level of internal collected inflation. So we are talking particularly about the family pet inflation. So we see a deceleration in the inflation rate in a constant space, and naturally, this is what is going to help us recuperate the discretionary classifications of items.
Just to provide you more context on the history of the business, Petz is turning 21 years this year, so we have actually divided this history into 3 primary minutes. The initially one, in August in 2002, when the business was established, the business had all the qualities of a business that is going back to square one, opening its very first store which had all the natural qualities of a business that is simply beginning. The interaction was a lot more casual, procedures didn’t have a great deal of structure, a lot more sensation than science, a lot more basic abilities than professional abilities, and we continued like that till 2013, so we have 27 shops, BRL200 million in earnings and receive financial investments from the Warburg Pincus Fund, which led us to the 2nd part of our story that went from 2014 to 2022, which is the minute when we ended up being more expert as a business. We brought rather extreme levels of governance to get ready for our IPO.
We think, we did an IPO in a really fully grown level when it pertains to professionalism and governance levels in the business. And in this more fully grown phase, we likewise did our M&As. And we think about that this 2nd cycle ended in 2022.
In 2023, we are beginning a 3rd cycle, which is now comprehending that our business today is no longer that business from 2013 when we received our very first mutual fund, that’s when we had our very first network, our very first chain of traditionals shops. Today we have a big share of digital sales, business that were obtained and are being incorporated and with this viewpoint of developing a community that is going to make good sense for customers, and with this view, that development comes together, hand in hand with balance. So now we have this clear concentrate on success and money generation at the very same time, and this is the 3rd cycle that we are beginning in 2023.
Here we might state that regardless of the reality that we see often combined signals, we are really positive about 2023 because, like I simply said, we see some indicator of modifications. And most likely, this is going to be a lot more obvious in the 2nd half of the year when these signals are going
to be extreme. But simply the reality that we are already understanding signals that precede a more powerful healing, that’s already a respectable factor to be positive.
We began to discover these signals in the end of the 4th quarter. They are being verified now in the very first quarter, and we wish to see this trajectory continuing. Like all of you understand, retail does not proceed huge leaps, there is no button that you can press and what was bad turns good and what was good turns bad. Retail works based upon patterns, so we are quite taking note of all these patterns and we attempt to work ahead, so we can fix the patterns when they are stagnating in the instructions that we desire them to, and at the very same time, so we can discover with a fortunate quantity of expected time, the positive patterns on the business. And here, I can state that we are discovering signals that are not so representative in regards to figures, however that most likely by remaining in the very same trajectory will bring a year of 2023 and 2024 for substantial healing.
It’s crucial to bear in mind that 2020-2021 were years that were quite preferred by the pandemic. 2022, which was the year of the storm, and now 2023, we start to see the signals that now we have a balance, it’s not that unusual level of need that we had that we had throughout the pandemic, however it’s not the very same conditions we had in 2022. It’s a a lot more well balanced business situation that we see in 2023.
Like I said in the start, this level of discipline appears in our outcomes. We’ve handled development and development in order to protect our success with a small gain there. And it’s likewise crucial to point out that in order to reach all those objectives, we are investing greatly in having a cohesive management. Many subjects belong to various departments and locations. So now in 2023, our focus is to have various departments concentrating on the very same thing with comparable business efforts so our actions are more efficient. And this is where information science has actually been teaming up tremendously
So, we are bringing various abilities, various locations together with the assistance of information science. And I can state that despite the fact that we spend a lot with innovation, we are simply beginning to gain the outcomes of those financial investments. So, we have actually invested a lot in preparing ourselves for this minute, so we would have the possibility to track customer habits and comprehend how they act and how they pick. And now we start to see the advantages of having the ability to have that exposure.
Now, concentrating on today’s conference, we are going to cover these 3 subjects, the level of success for Petz standalone, recording synergies in the procedure of combination of the obtained business, and the generation of money and more efficient capital structure.
So, when we speak about raising the levels of success for Petz standalone, a couple of minutes earlier, I discussed this mix of various locations and departments that we work highly together, so we can make really exact modifications on what requires to be altered. So we test, we determine, we do control groups, we understand precisely what we are going to lose in regards to sales when we use a specific modification. We have the ability to track this loss of sales, for instance, when we alter something on the pickup from store, when we get rid of the discount rate from the pickup from store, if you take a look at the separated piece of information from that, you see, pickup from store is decreasing. It’s natural, if you get rid of the discount rate, it’s going to decrease.
But the information science that I discussed previously is so crucial since it permits us to track where these clients went to. So part of those clients move to the ship from store technique, other part of those clients, they go shopping in our traditionals shops. So they simply go to the store and purchase their items there, and part of these clients we lose. And that’s when
we utilize all our science behind the contribution margin. We utilize science to comprehend the extra expenses that we would have from these modifications. And what are the benefits for eliminating that discount rate in the very first location? And just how much contribution margin you have actually lost from the clients that disappeared and just how much the clients that in fact go to the shops will create in regards to margins.
So we take a look at them, go deep into the information and we can plainly comprehend if worth is being produced or not and we are producing worth. But science does not stop there since you can have that exposure based upon the typical or the mean information. But that’s inadequate. We take a look at the average however we take a look at the dispersion that we see.
So we see this level of dispersion per city, per state which’s when we do the 2nd motion. So this tracking is so exact that it sufficed for us to comprehend that, for instance, in the city of Sao Paulo, we must get rid of the service charge from the pickup from store just in the city of Sao Paulo. This is how deep we enter into the understanding of information. We saw that in the city of Sao Paulo’s worth was not being included, however it was something particular for this technique in this area.
So we’re speaking about the velocity of recording the synergies. We have Zee.Now with a really innovative minute. Inside the 2nd quarter, we are going to conclude 100% of Zee.Now being inside the Petz environment. So Zee.Now will end up being a brand name for B2C sales, however totally being run inside the Petz environment, likewise from the financial viewpoint inside the Petz environment with all the gains in synergy that that is going to create.
So, we are quite advanced, and once again, we anticipate to see the conclusion of this procedure in the 2nd quarter. And this is particularly crucial when we bear in mind that the Zee.Now success now will end up being — or it reveals a good pattern to have precisely the very same margin we have for the family pet digital business. When we consider items, we released the Slim Line, which is that Chinese tool that we gave Brazil which began operation in the mid of the very first quarter. It is already producing the Zee.Dog Pad, so we no longer import them from China. This is a reality that began in the end of the very first quarter, in the start of the 2nd quarter.
And absolutely that is going to create synergies, particularly in the 2nd quarter, I indicate more intensively in the 2nd half of the year. It’s going to be a really crucial gain for us. Zee.Dog Kitchen continues to be examined, however we still see a boost in sales, which is necessary for us, however particularly the level of fulfillment that clients are showing. Because for us, this is the most crucial thing for us, happy clients with Zee.Dog Kitchen and boost in sales.
Of course, whatever is still being evaluated internally. We’re still evaluating how successful this business is as a whole. We understand how to do the mathematics, and we will figure out how possible this business will remain in regards to scale and the kind of item, and this is why business is still being examined.
An crucial projection for the slim pad in the United States, bearing in mind that in the U.S. market 5% of the sales of pads are from the routine pads which was provided in Brazil and Slim representing 95% of the American market. And now we have actually released the Slim brand name for the U.S. market. We are still on the early actions, however we are extremely expecting the arise from the 2nd quarter to see if we can in fact permeate this item classification inside the U.S. market.
Talking about items still, with collars, we have Zee.Dog placed as the very best brand name. We have actually released a much better classification with the Petz brand name, and now we have the Spike brand name in the good level. So we have 3 pricing structures. Better is the 100 recommendation, and the very best is 60% above the much better recommendation and Spike is 40% listed below. And this is so substantial therefore crucial that this classification, which is, collars is among the discretionary classifications that already revealed clear indications of healing. It’s already growing in-line with the total development of the business, which is exceptional news since for a couple of quarters, we had not seen development or development levels that we’re way listed below the typical development.
And this is a classification that is entirely ruled by our own brand names. We have 67% of share of our personal labels when it pertains to dog collars in basic, that makes this classification really successful. There are some other products to be talked about here, particularly the Zee.Dog franchise design. We are still evaluating the system. Again, we are really careful. We do not like to come up with a power indicate offer something, if we still require to evaluate development possibilities, however we have 8 franchisees already. We are evaluating their efficiency.
We are renovating the mathematics with all of them. And if whatever is confirmed in the end, we will accelerate this franchise job.
And this is an optionality that had not been mapped at first, however that will end up being rather fascinating as an extra opportunity for growth. This evaluation is going to occur in the 2nd quarter, so more than likely in the 3rd quarter, we will have a concept already if we can accelerate this franchisee job for Zee.Dog or not.
Now, on the 3rd huge block of subjects we’re going to go over today, it is essential to bear in mind the distinction that exists when it pertains to money generation today. Aline, will provide you more information on this, however we move from a negative money generation of minus BRL60 million from the very first quarter of 2022 to BRL30 countless positive money generation in the very first quarter. Talking about functional, so what occurs? Much more discipline in imports, a lot more discipline in the generation of stock and in the replenishment of shops and the complete cycle.
So, we are going to continue in this look for much better effectiveness in logistics as a whole. It’s likewise crucial to highlight that we raised BRL200 million. We still have a really comfy money circumstance. We are somewhat money positive – net money positive. And the most crucial thing, thankfully the reality that we do not have no kind of rush to raise these funds permitted us to raise funds at lower rates than at the time of the Americana’s case. So definitely, this is among those unusual cases in which the reality that we were not in a state of seriousness for discovering these resources, even with the scenarios not being so favorable in the market, we had the ability to enable at lower rates that we had actually revealed previously.
Working capital sensible, it is essential to discuss our enhancement in the stock levels and likewise our tax effectiveness with the brand-new DC in Hidrolandia-GO assisting us recuperate the tax credits we had in Sao Paulo. Now, I wish to hand the flooring to Aline Penna and I will return to the Q&A session. Thank you quite.
Aline Penna (CFO):
Good early morning, everybody. I’ll speak about the monetary highlights for the Petz Group in the very first quarter of 2023. Just one remark. We are going to talk more about the Petz Group, why is that. Well, because our combination is rather advanced now, it’s going to end up being harder to separate the EBITDA efficiency of the obtained business and those numbers for Petz.
