Pet Center Comercio e Participacoes SA

BOVESPA:PETZ3

Q3-2025 Earnings Call

[Operator]

[Interpreted] Good morning, everyone, and welcome to the Petz Group video conference call for the third quarter of 2025 results. This call is being recorded, and you can watch it in our company's Investor Relations website.

This presentation can also be downloaded. [Operator Instructions] This presentation will be presented in Portuguese, but the English version can be downloaded in the company's website.

Now I'll hand the floor to Ms. Aline Peli, CFO and Director of Investor Relations.

[Aline Ferreira Peli, executive]

[Interpreted] Good morning, everyone. I'll share some of our results and talk about our operational and financial performance. And after that, Sergio will bring an update on the Cobasi deal, updates on the CADE use and the Q&A session.

The main messages from this quarter include an expressive growth of our Private Labels, and I have a separate slide for each of them. Another focus is in cash generation. We had a very good cash generation for the period, not only total but also operational cash flow. Our omnichannel approach and its strategic pillar for the group and Clubz, which is our loyalty program that continues on a very important growth strategy for the company.

Now on Private Labels. We always mention how much we have advanced in that front. In this quarter, we were able to achieve 12.8% of our sales, which represents a 36% growth versus last year. And as I'm sure you are aware, since the beginning of the year, we also launched a product in the food category.

We have the selections brand that is performing quite well. So again, this is one element of our strategy to help differentiate our company, especially when it comes to marketplaces. These products can only be found at Petz, and we have been investing a lot in this strategy. These are high-quality products.

Usually, when we think about Private Labels, we think about perhaps products with not the same level of quality. This is not the case for us. They price mid or higher level. We have different price points. And at the same time, we also have brands that we acquired. So besides the brand we developed internally, we also have the brands we acquired, such as Zee Dog, Magix, and we are also developing new brands such as FüZ, which is a [Technical Difficulty] price brand that we developed focusing on cats to respond to the continuous growth of the cat category in our sales results.

This is a big highlight on the financial perspective, our net cash generation. Much of this comes from the operational efficiency that we have experienced, not just in terms of DRE. We have an expansion of about 30 basis points in our EBITDA margin, but also related to investments that we made this year. We reduced our CapEx this year. We continue to improve our working capital. We saw a significant improvement in suppliers this semester, and this is a little bit of that summary, BRL 140 million of total cash generation in this quarter alone.

This is Clubz. As I mentioned before, this is our benefit and loyalty club. We have different tiers available. So we have the bronze version, which is free for subscribers, but we also have silver gold and diamond categories. And focusing on the diamond category, which is obviously where we promote the most benefits. This is a BRL 24.90 subscription that you pay monthly. And very quickly, this is paid out when you consider everything you get all the benefits. You can access exclusive discounts on our Services. You also receive cash back we call it cash backs here that you can use for a future purchase.

So in the end, this is a share of wallet. Since I am paying from 6.90% to 24.9%, I tend to use the benefit more and more. So the idea is that these customers, they purchase more frequently with us and not as much as in other places such as small pet shops, marketplaces and supermarkets. And because of the cashback tools, they tend to come back more frequently to our Stores, which is something that for us was important to improve. So a little bit on Clubz.

We were able to double from one quarter to the other, we doubled the number of subscribers, which is a record performance that certainly made us very excited.

Now speaking on our Stores performance. Our Same Store Sales were 5.6% in this period. When we compare this to the same period from the previous year, we had [growth zero] in our LTM. So we continue on this recovery trend, still below what we would like to see. We would love to see a double digit here. And on the right-hand side, we see the different opening periods.

And perhaps jumping ahead a little bit, we usually say that the maturation of the Stores happened in 4 years. So as Stores mature, we tend to see margins that are higher. And just to explain why we have this 2023 Stores that, which is less mature with a better margin than in 2022.

This has to do with the regional mix of Stores. The year with the lowest margin is the year where we concentrated more Stores in the Northeast, where the digital share is greater. So when we look at Stores individually, the maturation curve is happening as expected and as we usually present to you.

Now on total revenue, our gross total revenue was BRL 1 billion for the group. We grew 6.9% when we look at B2C or sales that are performed through Petz Stores and channels that sell directly to end consumers, such as the Zee Dog website, we had a 7.3% growth. In terms of channel, our bricks-and-mortar Stores and digital channels, Stores grew 8.1% or more. And our digital channel grew 6.7%. And I'm going to give you more details later on, but this result leads a certain improvement in our gross margin.

So every time our Stores grow more than the digital channels, automatically, we have that carryover.

Another highlight here is for our Services. We grew 13.4% in the third quarter, something that we have been observing for a couple of quarters now. The revamping of this operation and the fact that it is once again growing, even growing at higher levels than our retail operation.

Looking at our gross margin now, I would say that we have 2 big elements here. Our private-label brands, which I mentioned on my first slide.

So every time we have a significant growth in Private Label, 30% in this year, we have this carryover, on average, I often say that we're talking about a greater range for Private Label that varies between 5 and 10 percentage points.

So the more we grow on Private Label, the more impact we see in the gross margin and also the fact that our Stores are growing at a higher pace.

But even with this fast growth in our Stores, when we look at the digital channel, we also see an improvement when compared to the previous year. But not necessarily, this is happening on the gross margin, but also because we are being very efficient in terms of expenses in our digital channel.

Because when we think about competitiveness in the digital, this continues to be a difficult channel. We had the presence of many players with a very immediate price comparison.

So our focus on improving digital is on expenses. So we're talking about performance marketing here. We are talking about logistics expenses and delivery to end consumers. Those are our areas of focus.

But of course, whatever we can do in terms of competitiveness is also being done. So we saw a growth of 70 basis points in our gross margin in the period.

Now talking about operational expenses. We consume a little bit of that gross margin I presented before.

We expanded our EBITDA margin in 40 bps in this period. 30 bps were consumed in our operational expenses, especially sales expenses, which was our biggest cause here. And here, we have to remember that we are opening fewer Stores, but nevertheless, still opening Stores.

We opened 9 Stores. We have 9 more Stores than the previous years. Of course, that has a consequence in rental and labor with a lower operational leverage because these Stores are not making their full potential because they're not mature. And that's why we see this pressure on the margin. We also invested a little bit more on online traffic.

But for this slide, I would like to highlight our G&A, which is under our control. Since the beginning of the year, I'm sure you know this, we have a number of action plans to control our expenses. So our G&A we grew less than the B2C revenue, the B2C revenue or B2B or the consolidated results were 6% or 7%. And in the G&A, we grew.

And preoperational expenses, of course, we reduced that because we are not opening as many Stores. So the fewer Stores are open, the lower my preoperational expenses. So that's also another gain that we saw.

And finally, our adjusted EBITDA as a consequence of everything I just presented, we were able to expand 40 basis points. Here in the chart, we see EBITDA divided by the net revenue and the gross revenue, different analysts prefer to see these results differently.

So when it comes to the gross revenue, we have 7.7% in the quarter, which is a very similar level that we saw in the second quarter. So we went from 7.8% in the second quarter to 7.7% in the third quarter and an important reversion when we consider what happened in the first quarter.

I'm sure you remember that we had problems in our DC and many other problems that happened as a consequence of the issues in the DC. So we went from 5.6%, resuming that high 7% level that we had. Net profit, no major highlights here. The size of the adjustment from the accounting profit for the adjusted one is not as high. And we have a lower rate this semester, which, of course, gave us a positive effect.

Since the first half of the year, we had a profit base that was quite low. We couldn't use the late domain. And now we have resumed a slightly higher profit base. We can get that benefit because we make a lot of technology investments.

And my final slide, just reinforcing our strong cash generation. Here, we're looking just at operational cash total was BRL 140 million, operational BRL 176 million. And this is a combination of a better EBITDA, but also lower CapEx and lower working capital.

When it comes to investments, we have reduced 10% this year, actually in this quarter when compared to the previous quarter. But if we look at the year-to-date of this year versus the year-to-date from last year, we dropped pretty much 20% in our CapEx level. So we're being very diligent in this environment of very high interest rates. And our idea, again, is to fund this growth and fund our operations with our own cash generation without raising any more debt in this scenario.

And one more comment we had a line of renovations that went up a little bit more than usual. This was a big renovation in a store that had an operational issue with the roofing that required a renovation. So it was pretty much the cost of a new store, but it's a store that's very important for us.

And also some initiatives that we did for energy, air conditioning and et cetera. And in order to reduce our OpEx, we did a slightly higher CapEx investment with a very fast payback. So we optimize our air conditioning infrastructure to optimize our energy costs.

And finally, on the right-hand side, we see our leverage. So after 3 quarters, and again, in the last quarter of last year, we paid dividends in this context of the merge already. And the following semesters we had a net debt position.

Now we resume our net cash position because we are generating a lot of cash because of the decisions of lowering our investments.

So that's it on my side.

Now I will hand the floor to Sergio, who will give us an update on the status of the deal with Cobasi and the discussions that are happening at the CADE. And after that, we'll start our Q&A.

[Sergio Zimerman, executive]

[Interpreted] Thank you, Aline, and good morning, everyone, who is with us for our results call.

Before talking about the CADE, I just want to reinforce one message to you all, which is exactly what Aline was mentioning about our focus on cash generation, something that we have been adopting as a company's policy since the beginning of 2023. And we believe we are extremely assertive in this policy for some reasons.

We have BRL 430 million in gross debt. We have a cash level that varies between BRL 450 million and BRL 500 million. So we are sitting on a lot of very high cash level, but with a huge amount of discipline of not spending this money and not focusing on expansion with this more expensive cash.

Of course, there is a reason that I'm sure you have been following. Yesterday, we saw the coupon decision to keep the Brazilian interest rate at 15%. We have the highest real interest rate in the world. For that reason, we refuse to make investments other than using our own resources in such a scenario.

Considering this reality, we understand that this is the best way for us to protect the investors' money. We have Stores that are very diversified, more than 260 Stores spread in 24 different states in the union. This is a policy that is here to stay while the interest rate is kept at those such high levels, which certainly punishes the retail segment.

Because we don't have a net debt scenario, quite the opposite, currently, we have a net cash situation, we are not so directly impacted by the high interest rates. But of course, as they impact the whole population of consumers, we are also indirectly affected by that.

After this quick message on the importance of our cash flow management, and again, Aline just mentioned, and I will repeat that because this is truly a big focus for us. In the end of last year, we distributed BRL 130 million in dividends because of the clause in the Cobasi deal. But at that time, we had a net debt because that was not a programmed event, but we focused on bringing that down to 0, and we are once again in a net cash scenario.

Having said that, let's talk about the deal and the merger. We are at the final steps of the process. My goal here, and please, that's why I ask Aline to do the presentation, so I could focus on the CADE presentation. Usually, I come and give you some updates in the beginning, but I decided to focus on this part because this is the last call before the final ruling from the CADE, and it's an opportunity for us to revisit the track record and the history that we had with the Administrative Council for Economic Defense because we have analysts and investors who are following this conversation.

We thought it would be appropriate to focus part of the call on the scenario of the deal and the approval. First, let's talk a little bit about the history of this process. It's important to remember that in April '24, we announced our MOU, our Memorandum of Understanding with this intent of merging with Cobasi. In August '24, and again, just a reminder, April 24, we are talking about now we are at the end of '25. More than 1.5 years since we announced our intentions to merge.

The signing happened in August '24. Now what happens? In the CADE, we registered the deal in September '24. That was quite fast, 1 month after the signing. What happened the moment we did that? Somehow, the market suffered with information. The CADE superintendents needed to do an analysis with a lack of external information from the market.

The CADE started, of course, requesting more information and rightfully so, so we could share with them different sources of information about the market because different from the food market or the pharmaceutical market, which is filled with external information, the reality is not the same for the Pet Segment.

Of course, this whole process only led the acceptance of our registration for the 320 days in February 2025. It took a long time before that process happened. There is a delay before the preregistration and the registration. But again, not because of lack of information being provided about the companies, but mostly about lack of information about the market. This is a highly fragmented market.

50% of this market is comprised by independent and small Mom-and-Pop Stores. Of course, this scenario led to a delay in the process of market analysis. We could get the registration of the deal, which took place in February '25. Once that was done in February 2025, the CADE, in a very diligent way, started doing their analysis. Then that third interest party appeared.

The third interest party started questioning the merger especially when talking about eventual jeopardize or losses for consumers. This is part of the game, it's normal for a third party to appear. They can raise questions certainly. The CADE directors welcome those considerations and started to take into account the issues that were raised at the time.

Of course, as a natural result, we needed to provide them with more elements and more information for those analyzing the case. Then in June 2025, so from February until June in 2025, the CADE intensified the analysis process with all the information we provide. Then in June '25, they published a decision.

Basically, they mentioned that despite the fact that in some markets, there will be a concentration, the high price competitiveness with marketplace and other pet shops and the arrival of new players in all markets mitigate any concerns that they might have when it comes to the mergers. Because of that, the ruling was that the merger was approved with no remedies required. Then, after this decision that we had a 15-day period for anyone to raise any issues. Then, Petlove, in the last minute filed claims against this ruling, which escalated the decision in the CADE. And what is the central thesis that Petlove has, so you're all aware. What is Petlove claiming as the third party? And what are the resources that they are presenting against the approval?

Petlove states that we are creating a duopoly in the market, meaning the only competitor that Petz has is Cobasi and vice versa. And for that reason, this duopoly once merged, will turn into a monopoly. That's the key thesis. And no one can compete against us. We can price products as we want because no one could compete against us. And in the studies that they mentioned that they conducted without knowing the source of that information, this monopoly would lead to a 5% price increase. 

And the results of this price increase would leave for Petz to be abandoned on the street at rates never seen before in Brazil, leading to a social tragedy in the pet segment because consumers would no longer be able to afford taking care of their Petz. This is the main thesis that Petlove presented against the merger. 

And then Petlove used a specific NGO and one of the more members of this NGO is Petlove employees. The NGO receives funding from Petlove, and they are the ones defending this hypothesis of a tragedy being caused by the merger. And we also saw some Congress people asking the CADE for a public hearing. 

And the rapporteur for the first time in the history of CADE granted this public hearing for the discussion of the case. We were quite surprised to hear that decision because that was the first time it happened in history. 

But at the same time, we welcomed this decision because the public hearing gave us the opportunity to listen to the different stakeholders involved in the merger, so we could become clear who is speaking against the merger and who is not opposing to it. And that was a very productive day, the day of the public consultation. 

When it comes to animal protection issues, we basically heard from 1 or perhaps 2 NGOs, but I remember only one, which is exactly the same NGO that is funded by Petlove, one of the Board members of the NGO is the Petlove founder, and they basically reinforced the thesis I've mentioned before. 

And on our side, we had more than 20 NGOs coming to this public consultation, whether to talk about the Cobasi programs or to talk about the Petz programs, saying that pretty much both companies have the biggest programs in animal protection and the donation programs that we do and something that takes place in most of our Stores, not to mention the financial support to the NGOs that are part of the programs. 

So, we were able to show that companies that are truly supporting the third sector in Brazil are basically Cobasi and Petz. And another important issue was that despite the efforts being made by the third party to bring suppliers for the public hearing, not a single supplier attended this event claiming any type of concern. 

And like I mentioned before, more than 90% of the suppliers who answered the CADE questionnaire did not raise any concerns about the deal, which is certainly important because if there is one stakeholder that could be worried about the merger, that stakeholder would be our suppliers, of course. 

And this was a very important moment for us to present studies that provokers conducted for us on consumer behavior even in the markets where we have a higher concentration of Petz and Cobasi Stores. And that gave us the opportunity to show how much these consumers fluctuate before digital and physical channels and between operations and also including marketplaces, local pet shops and supermarkets. 

So, it's a very fluid market when it comes to the consumers purchasing. And at the end of the public consultation, our assessment was that this was a very positive process. Once again, we praised CADE for this initiative because it gave us the opportunity to show that neither competitors, neither suppliers, neither consumer protection authorities were opposing the deal. 

The only opposition in a very focused way was coming from that third party, which by chance is a direct competitor for these companies. And now I have to tell you about the core thesis for the merger. And that's the increase of the competitive pressure in a very diversified market. Marketplaces promoted a digital inclusion for small retailers. 

Small retailers who were limited in the competition against us in the physical world are now our competitors in the digital world as well. Platforms such as Mercado Libre have more than 30,000 sellers who are pet shops. I don't know if it's 30 or 20, but it's certainly a very high number of sellers who are pet shops. Maybe 30,000 is the total number between all market platforms because I'm just getting this data from the top of my head. 

Nevertheless, we see a very significant number of small retailers now selling on these marketplaces. So, when we are talking about competing against marketplaces, we are talking about competing against small retailers that are now going digital using these platforms. Many times, these small retailers work pretty much at 0 margin on the digital channel with a focus on volume. 

And by doing that, they create a huge competitive pressure. in our own operations. And then there is this issue saying, oh, but it's weird. How can small retailers pressure the big ones. It's not very traditional or expected for this to happen. But all you have to do is go on your smartphone and search for whatever product you wish and see the reality of this information. 

Small retailers today, through the marketplace platforms, are having this tremendous competitive pressure against us.

And the other thing that we also verified is that because of that, our margins are being pressured, and because of that, our results are under pressure. And how can you become a better competitor by lowering the price. If you don't lower the price in order to compete, you are sort of eliminated from the game.

What happened in 2024? We had about 8% growth. And in this year, we are going to grow about 7%. But if you look at these growth rates, these growth rates are much below the market rates. So even though these are good numbers that we are presenting, even though we have focused on our cash flow, we are trying to do the best we can in the current scenario.

It's certain that we are concerned about this scenario. We have a history of 23 years. And for 22 years, we always grew at the same rate of the market or at a higher level. That's why we became leaders. But starting '24, we are growing below the market level. And perhaps in 2025, we're going to see the same results. And of course, that require us to adjust our route. 

Retailers work based on trend. We don't like this trend. And because of that, the merger makes the whole a lot of sense because it brings us a major opportunity to eliminate costs, variable costs, and fixed costs, but essentially costs that will give us the ability to better compete against the marketplace platforms. That's the key thesis. There is nothing more important than this in this deal. And we are absolutely certain because of all the synergies that we have with Cobasi that by doing the merger, we will have real cost cutting in order to improve our ability to compete. 

After having explained our core thesis, and again, what I am saying here is nothing new for market analysts. All we have to do is look at what the banks that cover this market have been saying about the increase in the competition. That in 2021, that achieved pretty much BRL 12 billion in market cap is being traded at about BRL 1.8 billion and with a much greater revenue that we had in 2021. But what happened? It's basically the perspectives that have changed, and they were not changed by accident. 

We really saw an increase in the competitive pressure. How some structured data about the market when it comes to the so-called duopoly or monopoly in the market. Let's say that both companies together, we have under 11% of market share, actually 10.2% of market share of the combined Petz and Cobasi share. If that's a monopoly, that would be the first monopoly in the world to only control 10% of the market. So it's truly scary when we see the 2 companies with 10% of market share being called a monopoly.

And still on the structural data analysis, I just wanted to reinforce that suppliers and competitors do not oppose the deal.

In reality, actually, we see some competitors opposing. But this is a very interesting moment in the public consultation. They opposed because they believe we will lower price. And that's a legitimate concern. Competitors, they need to be worried about the merger because we will lower our prices. This is natural. When it comes to the price issue that we are only competitors to each other. I just wanted to say one thing about that. We have Stores in about 140 markets in Brazil. 

And of course, I'm rounding up numbers here. But out of the 140, in 70 of these markets, we have both Petz and Cobasi Stores. And in the remaining 70 cities or markets, we either have only Petz Stores or Cobasi Stores. And here, we see an interesting piece of data that we gathered. The prices that Cobasi offers or the prices that Petz offers are exactly the same if the competition is present or not. 

So prices we have in a city without a Cobasi store are exactly the same as the prices we have in a city where a Cobasi store is present, and vice versa. So, if that thesis that we are only competing against each other, why would we have the same prices? Why wouldn't we use this as an opportunity to improve our margins? For one reason and one reason only, our true competitors, the true competitors for Petz and Cobasi are small retailers, whether through their Physical Stores, but especially about from their digital presence that happens again through the marketplaces. That's the real source of pressure that we have in the market. 

Another way to see this is saying that the first Cobasi supplier and the first Petz supplier represents about 20% of our numbers. And both of us together represent for this supplier between 20% and 25%, meaning, where do this power that we supposedly have come from? Because we're saying that 75% or 80% of sales from our main supplier for both companies is actually selling in other places. And this is a supplier that doesn't supply to supermarkets. So the remaining 75% are being sold at small pet shops in veterinarian clinics, which only reinforces this idea of how fluid and varied this market is.

And another aspect that I would like to highlight is the relationship that we have with the CADE. Just so you get that into the context when you hear the issues of the claims of the third party. There are 7 board members in that, so one is still to be appointed. So we're going to be judged by 6. And the current President has 2 votes currently because of this empty seat. And we were pleasantly surprised to see how each of these Board members presented legitimate concerns about the merger. 

In our opinion, this is a very interesting element to see how interested they truly are in protecting competition. They are really analyzing the claim that Petlove presenting that this merge will hinder consumers and lead to price increases. We had similar conversations with all the different Board members, and we were really welcomed by them.

But at the same time, they were very technical in their conversations with us. They said we are not convinced yet. We need more reports. We need more data. We need more arguments. We are very comfortable with this whole process because this is all we have. We have the data, the evidence, we have past data. and data that cannot escape logic.

On the other side, what we have is a story, a story that is not based on any real evidence, that is based in a fantasy created by an NGO that once again is funded by the company. One of the Board members of this NGO is the Petlove founder, and it's pretty much an empty argument, perhaps not completely empty. Because, of course, it's important to value the contributions from the third party because it leads the CADE staff to reflect and think the process through and do deeper analysis.

This is great because it gives us the ability to show the whole technical team and the different representatives what is really happening and what's really behind this deal. Of course, it is a lot of work. We get very anxious with the deadlines and the dates. But at the same time, we are very happy, very satisfied because we are being heard. This is all we need. We need to be heard. We need to be able to demonstrate the material that we have and the proof we have.

Regarding deadlines, so you are aware, the deadline is January 2, 2026. This is the theoretical date because they start their leave in December 20. There will be a final session in December 10. Sometimes there's an extra session on December 17. In practice, we're saying that by December 17, we will have the final ruling for this deal.

We can no longer ask for a postponement. If there's no ruling, the merger is approved and there's never happened in the history of CADE, and there's no reason it would happen right now. There will be a ruling by December 17. What is our expectation for the final ruling?

We are very positive about this ruling. We're very positive for a reason because we looked at the eye of every CADE Board member. We really addressed their legitimate concerns, and we are absolutely comfortable in knowing that every issue or concern that was raised by the CADE Board members or technical team were addressed by us with the data. Our best expectation today is that the final ruling will grant us full approval with no remedies by December 17.

Like I said in the beginning, this is the last results call that we will do without having that final rule. Before we go to Q&A, I have one final message. It's an invitation for everyone who is watching this results’ call to think this through with me. If you were one of our competitors and if you suspected that this deal is being done so we can increase our prices, would you be happy or sad with that?

If I were a competitor, I would be very happy because that would be a great opportunity for me as a competitor to gain more market share. A third party claiming with interest that have not been stated because, again, we cannot really imagine that their concern is about a price increase because they would benefit from that. In the end, what might concern them, which is a legitimate concern, they are concerned that the merger will represent an increase in our power to compete, that we will lower the prices and benefit consumers all over Brazil, raising the bar of the market. That is what is behind the claims presented by the third party.

Thank you very much for the opportunity of bringing you these updates. Now we are going to our Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Danni Eiger from XP.

[Danniela Eiger, analyst]

[Interpreted] Congratulations on the results. I have a couple of questions. The first one being perhaps Sergio already talked about what you can do in terms of the greater competition that you're being observing in marketplaces. But perhaps you could talk more about other initiatives that are already implemented that do not depend so much on the approval, perhaps negotiations with the industries. For example, we see in other segments that because prices are more aggressive or lower online, this is also driving them to change negotiations with the industry.

If you could give us some updates and information about initiatives that are being done besides the merger. The second question is about the Private Label potential. This is certainly a positive highlight for the quarter, but it still seems that you have a lot of room to grow. I just wanted to understand how you see this future. I think it was in the past results’ call, we asked about performance between categories, if perhaps one category is gaining more share or fulfilling more of the potential, maybe the dry pet food, if you could, we would like an update on that.

The third question about capital structure. There's a big discussion about anticipating dividends because of the possible tax. I don't know if you have that because of the deal, but I just wanted to understand if this is a strategy that you are considering.

[Sergio Zimerman, executive]

[Interpreted] Danni, thank you. Thank you for your questions. If I may, before I answer you, just one more piece of data that I would like to share with you. I forgot to mention that. I just wanted to remind you all that when the merge is confirmed, we are going to have 2, 3 weeks maximum to truly conclude the deal after the final ruling. And then every holder of 1 Petz share will receive a share from the new company, which will be traded at the same price from the last price, plus approximately BRL 0.70 for each share owned. 

For example, if you're paying today BRL 3.8 in 1 share, BRL 3.8 in January 1, which is when this change is supposed to happen, you will receive 1 share quoted at the same price, BRL 3.8, plus BRL 0.70 in cash because of the deal, okay? 

Now answering the 3 questions that you raised, Danni. First, on the competition. You talked about, you asked about other initiatives that are not deal-dependent. And in reality, this is what we have been doing all the time. I mean, actually, yesterday, I had a meeting with the suppliers, and we are constantly monitoring the market. Because when you talk about competitions for marketplace, there are different layers of this competition. We have the legal part of the competition, which is the illegal part, which is the competition against stake products, stolen products, products that are sold without an invoice. 

This is, of course, unfair competition. And this is one of our biggest focus because it's unimaginable that we are still living in this scenario and the marketplaces are not being penalized for selling these types of products. That's one part of the thing. And the other part is the competition that is playing by the rules. And of course, there's nothing legally wrong with that. And this competition that plays by the rules, that's when we need to cut costs, improve our efficiency and ask support from our suppliers. So they understand that when they launch a product, they won't be able to launch it in a digital platform because you need a human in the loop for that. 

So it's important to value the work of veterinarians, the work of the Stores, and the Stores employees to, because they help build brand. If you think about it, these platforms, they sell and compete very aggressively, but using what we built in terms of brand in the physical world. And if the brands simply go to the marketplaces without doing this branding process, whenever industries launch new products, they will face big challenges. So that's one of our main arguments that we use and one of our main initiatives to try to mitigate this increase in the competitiveness pressure that is not dependent on the deal. 

Now of course, the deal will lead to a more significant cost reduction, which will give us a lot of breadth to better compete against the platforms. Now on the question about Private Label, the results are great and pretty much in all categories that we sell. And speaking of the potential for Private Label products, Currently, we have about 12.5% or 13% of share. And our better estimates is that we can get to 20% of share of Private Labels. Of course, eventually, there will be a cap, especially because super premium dog foods, those products that are prescribed by veterinarians, they have a very high reputation in the market. 

And traditionally, consumers who buy these products are extremely loyal to the brands, and we totally understand that scenario. So hardly ever, we will be able to tackle that market more directly. And we will focus more on accessories and on hygiene and cleaning products, and on pet food products that are not so dependent on range. 

Now on your third question, which is about the dividends. You're absolutely right. We have been following especially with the approval in the Senate this week on the income tax project, but this is not really a relevant discussion for us right now because we still are awaiting on the final ruling from the CADE. And because the result will be announced still this year, we will have plenty of time to make the decision. And we don't know if the decision will be made only by ourselves or in combination with Cobasi, but of course, a decision will be made. And okay, regardless of the deal, the distribution of 25% of minimum dividends is guaranteed. 

[Operator]

[Interpreted] Next question is from Luca Biel from UBS.

[Lucca Biasi, analyst]

[Interpreted] I have 2 on my side. First, just a follow-up about the competition, but focusing on pharmacy. I think it will be great for you to comment when this competition or the stronger competition started in medication and the evolution of this process. So we understand if this could be an additional source of pressure on the fourth quarter. And still on the same category, how do you plan on facing this competition? Do you plan on lowering prices or any other strategy? 

And my second question is about the Petz inflation rate. If you could share with us the Petz inflation rate for the third quarter? And also, perhaps if you could comment on this trade-off of growing volume versus margin gains. 

[Sergio Zimerman, executive]

[Interpreted] Luca, thank you for all 3 questions. Regarding the competition on the medication category. You are absolutely right. This was the chosen focus by some of the platforms to enter the Petz market. And we know exactly the reason for that. These products have a high added value, and this is an opportunity for the platforms to become more competitive. So it is only natural for this movement to take place. 

As we started to notice that we were losing market, and one of the sources of this loss was actually on the medication that led to our reaction, of course. And one of the sources of this loss was actually on the medication that led to our reaction, of course. And this is what explains some changes in the margins that are expected in the fourth quarter.

And that's why I say that the results in the third quarter were appropriate in terms of margin, but we cannot imagine that there will be a margin gain, quite the opposite.

There will be a pressure on the margins in the fourth quarter. We still see this pressure happening because the competition only keeps on coming. And we need, of course, to react accordingly. Sometimes you need to react even before you can cut all costs possible for a very simple reason. You cannot be out of the growth game.

And that leads me to your third question, actually, which is about this trade-off between volume and margin. We cannot grow at any cost, meaning we cannot kill our margins. But on the other hand, we cannot keep margins at any cost, which would be losing our relevance in the market, which is what we saw in '24, '25.

And this would be a mistake because margins without sales comes from irrelevant retailers. A retailer with 260 Stores and not growing because every year, we have increase in rental costs, energy costs, wage costs. If we don't grow at a minimally acceptable level or at least above this inflation, we are put in a very difficult position. So this trade-off is more of a balance for us between the minimum growth that we need to achieve and this minimum growth is varying between a high single digit or low double digit. That's the minimum level of growth that we need to have.

From that point on, we can see how we can improve our profitability. So what determines this balance is the level of competition, which, like I've said before, has only increased in the past 2 years. We don't see any cooling down in the competition landscape in 2026.

Again, this competition is not coming from traditional retailers. It comes mostly from the growth in the digital platforms and marketplaces. And in any possible scenarios, these platforms will lose relevance in 2026, quite the opposite. So that's why we are extremely aware and focused on the deal and having that as soon as possible so we can start selling at better prices with the consumers without making our margins suffer because at net margins, they are already quite low.

I'll ask Aline to answer you on the Petz inflation rate because I don't have the updated information with you.

[Aline Ferreira Peli, executive]

[Interpreted] So when we always look at the LTM perspective. So it's around 4%, the Petz inflation this year, year-to-date. You remember that this last year, at the same time, we started to see some type of inflation. But right now, we are at 4%.

And just to add on Sergio's comment on margin, one important thing is to remember that we started this initiative of being more aggressive in the medication pricing about mid-August. So obviously, in the fourth quarter, if the conditions still apply, we are going to see a whole quarter of that versus the previous quarter with 1.5 months of this change, just to give you more context on that.

[Lucca Biasi, analyst]

[Interpreted] Super clear, Thank you, Thank you for your answer.

[Operator]

[Interpreted] Next question comes from Ruben Couto from Santander.

[Ruben Couto, analyst]

[Interpreted] Good morning Sergio, Good morning Aline. Thank you. I have 2 questions, very quick questions on my side. First, a quick question on the B2B Zee Dog channel. Internationally, it's still quite an impact.

Do you have any expectation of normalization in the short term? And does it make sense to continue with this international effort there are limited resources implemented because of distribution, but if you could give us more color on that.

And Sergio, considering everything that you said, and thank you for the very thorough explanation on the changes in the market with small retailers going to marketplace. But we also have the high interest rate, as you mentioned, and the fact that they are competing on price, but to ensure a digital presence. Are you noticing any type of weaknesses from smaller players because of that, maybe some closing or giving up on this strategy, perhaps a higher rate of closing because of this competition because for a company like you, this is hard. Imagine for smaller players.

Perhaps in the first year, this is something that is sustainable. But in the second and third year, the scenario changes. Am I mistaken in believing that? How do you see that in the future?

[Sergio Zimerman, executive]

[Interpreted] Thank you, Ruben. Thank you for the questions. All right. For your first question about the B2B in Zee Dog. We did a movement after acquiring Zee Dog, which, in our opinion, was quite assertive. We eliminated all the fixed costs so because of that, all the revenue is quite profitable.

So we cannot really mistake the fact that we might be selling less with that being something bad necessarily. And because we only have variable costs, regardless of the sales we have in global, it's okay. It still makes a lot of sense. And global, it's an important issue for creating brand awareness.

We did this launch in partnership with FARM recently and also in partnership with Reebok. And in the Reebok Stores, we had the, do products in the FARM Stores, now we are expected to see Zee Dog products in the Reebok Stores as well.

Even in Japan, the Japan Reebok ones, the Zee Dog products there. So it's a strategic approach as well, keeping that partnership with big global players, which is a branding -- brand awareness thing. This is a desired brand, not only in Brazil. This is also a desired brand in other international markets as well.

And obviously, that comes with challenges of operating in these other markets. But even without no marketing investments, no fixed cost structure, the brand keeps its power. So we're very comfortable with that first point regardless of the budget issue.

And talking about the competition question, I'm going to say 2 things. You are both right and wrong because the individual perception is probably correct. If you're going to compete without the right structure, just dropping the price without doing any type of calculation, all of a sudden, they will discover this is not sustainable, and they will leave the game because that will no longer make sense. 

So that perception is absolutely correct. But I would like to invite to think about this in a different way. In the big picture, you have many more people entering the market than leaving it. And that's why the pressure only increases because one person leaves another one comes. So, it's an exchange. It's a constant exchange and more people are joining in this market than leaving it. 

So, the competitive pressure in that sense is quite large. And part of this competition is unfair. It's important to highlight that, and we need to fight that with the support of the government and the legal system, not only for the pet segment for all different market segments that are suffering from that. And the legal part of this process, but again, the pressure will continue from those individuals who are competitive here because they use this as a strategy, for example, to create volume. 

So, they improve their cost in the physical world because they are selling volume without making a dime in the digital world. This is happening and will continue to happen. And in order to find that, we need to become more competitive. And the only way to be more competitive is by cutting costs. 

[Aline Ferreira Peli, executive]

[Interpreted] Sergio, if I may add on the B2B thing, we grew our international B2B for dog in 23%, way above the budget. So, we started the year with a more focused channel because it's a sell-in, sellout dynamics. They buy it, they form stock. And if it's the year is more difficult, the speed of sale is slowed down. 

But when we look at the percentage margin, what is left for us is a margin that is multiple times greater than the company's margin because we can position Zee Dog at a much greater gross margin. So, it is definitely worth that we have an excellent incremental EBITDA coming from our international operations. 

Of course, we're very aware of the market movements because despite everything that Sergio mentioned, the collabs and the partnerships, retail as a whole in the world is investing more on Private Labels. We are not the only ones doing that. 

We have our Private Labels that are quite strong here, and we observed that in some international partners as well. We used to be big clients and now are also trying to invest in their own Private Label. So, we are always monitoring that, but it remains quite a profitable channel for us still. 

[Operator]

[Interpreted] Next question comes from Gustavo Fratini from Bank of America. 

[Gustavo Fratini, analyst]

[Interpreted] Just a quick question. You mentioned that one of the big drivers for the expansion in gross margin was biggest share of Private Label products. Can we imagine that pretty much the whole expansion came from this growth of Private Label products? And what are the different categories performance? I just wanted to see how much this can contribute in the future.

[Aline Ferreira Peli, executive]

[Interpreted] Gustavo, what we can say, would you like to go, Sergio? 

[Sergio Zimerman, executive]

[Interpreted] No, please Aline.

[Aline Ferreira Peli, executive]

[Interpreted] That 70 bps, roughly speaking, we don't give you the details, but roughly speaking, we're talking about half. There's a physical and digital effect, like I mentioned before, the tax efficiencies and a number of other minor elements. But roughly speaking, we're talking about 30, 40 basis points from Private Label. 

And again, some categories that we received a lot of investment, for example, toys, 200 new SKUs were launched. The selections brand, pet foods, we brought that to Stores in the end of December last year. So, the categories that stood out the most were toys, the pet food. So, like I said, we are investing a lot on cat products. 

So, cat foods that Petlove so these are the big categories, but of course, without forgetting categories that have always been strong, like hygiene pads. We acquired Petix in 2021. And today, 90% of the whole hygiene pad products that we sell, including diapers and other disposables, but 90% of share comes from our Petix brands. 

So, we keep the consistency of the investments that we made in the past about 4 years ago, but we also have new categories joining this market with this margin expansion that I mentioned. 

[Operator]

[Interpreted] Next question comes from Irma Sgarz from Goldman Sachs Group. 

[Irma Sgarz, analyst]

[Interpreted] Most of my questions have already been answered, but I have 2 more here. I would like to understand how you see the macro demand moment, especially in the categories that are more sensitive to this issue and perhaps whatever you can share to differentiate the Stores positions. We have some Stores that are slightly more premium and some regions where perhaps this is more sensitive. 

And my second question is about perhaps just a follow-up on this balance between channels and the competition coming from marketplaces on digital. We don't have a lot of data on market share to follow. So, I'd like to hear your take and the researchers that you do. How was the pet market share development this year? 

[Sergio Zimerman, executive]

[Interpreted] Thank you, Irma, for your question. Okay. So first, your question about demand. I'm going to answer this in 2 ways. The first one is with a focus on the sector. We continue to see the growth in population. And information basically you shared about the advantages of feeding your pets with more quality products and applying anti-flea medication more often a year. 

This is a process that is ongoing, and this is certainly what drives the growth and the sustainable growth of this market, both in the past and in the future. So, in that sense, this is the sector's own growth dynamic. But I'll talk about the retail segment as a whole that benefits not only the pet segment, but all the different segments in retail, which is the approval that actually happened this week about the income tax bill. 

This money was removed little by little because governments did not correct the income tax rates, which certainly impacted purchasing power. And of course, not everything is being returned now, but at least part of what was removed is being returned. And it's going to start on January 1. 

Every formal employee who pays income tax will now have a different rate. And this mass of resources coming mostly from the middle class is most likely going to return to consumption. And now we're going to see a reversal of the process that happened in the past. So I see the year 2026 in a very positive way, when it comes to this increase in demand, especially because of the correction on the income tax rate. 

And again, the [Indiscernible] Congresswoman mentioned that the government has up to 1 year to correct this amount. And this is very important. It's very important for society to be aware of that because otherwise, in 5 years' time, we will be once again discussing the same issue. So it is needed for the tax exemptions or income tax exemptions to be corrected by inflation, since the revenue or the budget for the government is also automatically corrected by inflation. 

About your second question about the digital growth. And you're absolutely right. We don't have reliable data in the market about that. We find data just here and there. But what I could say to you is that in general, in the years of 2024 and also this year in '25, we lost share, especially in the digital channel. Our growth in digital certainly does not correspond to the digital growth that was observed for the whole pet segment. 

And again, for the second time in a row, we are presenting a better quality result. In the second and third quarters, we had better results, but we're still not happy with these results, far from that, far from happy because a retailer knows that changes in retail don't happen overnight, either for the good or for the bad. And if we are growing below the market rate, if we're growing below the online rate, the future is concerning. We cannot ignore that information. So what we are doing is exactly that. 

We are proposing this deal. We are waiting with a lot of patience for the whole process to go through. But at the same time, with a great deal of confidence that the answer will be full approval with no remedies because again, all the questions that you are asking are as analysts, only corroborating what we said in the public consultation process, and what the information that we share with the technical teams, and what we are constantly discussing. There is a big competitive pressure coming from marketplaces, which is the digitalization of small retailers, and we need to know how to address that because starting in 2026, we want to resume our growth, bringing it back to healthy levels. 

[Operator]

[Interpreted] The next question comes from Alexandre Namioka with Morgan Stanley.

[Alexandre Namioka, analyst]

[Interpreted] I just wanted to go back to the performance between categories. In your release, looking at the information on gross profit, you didn't mention the positive impact coming from accessories. And in the second quarter, you had mentioned this impact. I believe that since the second quarter of last year, you talked about a recovery of sales performance for this category. I would like to understand if you don't see this growth going back to normal levels. 

And the second question is, I just wanted to explore on the loyalty program. Aline mentioned that the number of subscribers doubled quarter versus quarter. Perhaps you could share with us some other metrics on the recurrent level that subscribers have and the average ticket. And maybe another interesting metric would be to understand the share that they have in your active users database. 

[Sergio Zimerman, executive]

[Interpreted] Thank you for the questions, Alexandre. You're right about accessories. At the moment, we mentioned that accessories were standing out in our growth. Currently, this category is presenting a growth that is in line with the company's average. Of course, variations here and there between types of products, but a more in line growth rate. So the increase in share or the recovery of share is more stabilized at this moment. And that's why we didn't highlight that piece of information. 

Now regarding the questions about the loyalty program, about share, average ticket, and recurrence. And I'm sorry, Alexandre, I have to apologize to you right now. But naturally, this cannot be disclosed. These are important differentiators for us. We know this is a very positive movement. But of course, this is a public call, and we have 60,000, 70,000 competitors watching us right now or at any other point in time, since this is a recorded meeting. 

So I apologize, but we cannot share any details on the different metrics for the loyalty club. 

[Alexandre Namioka, analyst]

[Interpreted] Okay. But at least you see a higher recurrence rate between subscribers and nonsubscribers, I imagine. 

[Sergio Zimerman, executive]

[Interpreted] Yes, naturally.  And even though this is going to sound obvious, if we didn't perceive this benefit, we either change it or delete it. No, we just don't want to share the secret behind that. That's all. 

[Operator]

[Interpreted] The next question comes from Nicolas Larrain from JPMorgan. 

[Nicolas Larrain, analyst]

[Interpreted] Most of them have been answered, but perhaps I just wanted to get some color on the Services and our focus for the fourth quarter. We saw a good recovery on the service segment. And I would like to understand what are you thinking about this recovery and the scenario for 2026? 

[Sergio Zimerman, executive]

[Interpreted] Nicolas, thank you for your question. Services, more than ever. We have always considered Services to be important. But more than ever, Services have become a strategic component for us, whether it's grooming Services or veterinarian Services. And it's essential for a reason. 

Again, everything we have mentioned about the competition against different players in the digital world. If we see the significant increase in competition in the digital world, one of our strategies to deal with that level of competition is having our service network service as a benchmark for veterinary Services in Brazil, and our grooming Services as the place for consumers to find a better cost-benefit ratio for taking care of their Petz. 

Now, what we try to do is identify the best ways to compete in this market, which is still quite informal. This is really well known. very common for these Services to be provided without invoices or tax receipts, something that is obviously not possible for a listed company. Of course, we collect all the taxes from our operations. So we are considering how, or analyzing how we can compete in this market. This is another competition challenge, but certainly a strategic one for us. 

So what I can say is that we see the Services sector as a very important one for our growth. So we need to grow Services more than we grow products. That's essential because in the past few years, we focused a lot on our growth in products and opening Stores. And now it's time to resume our growth or expressive growth in Services. 

[Aline Ferreira Peli, executive]

[Interpreted] And especially when you think of competitiveness and competing against this more informal market of the thousands of small pet shops in the market. One way to compete against that is our franchise project. We mentioned this in the release. This is an ongoing pilot project with a lot of opportunities to be rolled out next year because, in the end, the franchise structure with a different tax system makes it easier to improve the profitability of the segment. And just like we did for products, maybe become even more competitive in prices as well. So that's a little bit of the mindset. 

We have 2 big initiatives ongoing, whether it's the franchise model for grooming Services, or for our veterinarian health clinics. We are expecting to share more news about that next year. And also our health insurance program, which is still in the beginning. We haven't provided so many details in the presentation today, but the project is ongoing. Our health plan focused on prevention. And the beauty of our strategy is creating a link between both worlds through Clubz. So if you buy a health insurance plan bytes, you are already at the Diamond Pet Club. And if you are gold or silver, you have discounts. So we are focusing on the recurrence that we get from the Clubz, integrating this benefit for Services as well. 

[Operator]

[Interpreted] The Q&A session is now closed. Now we'll hand the floor to Mr. Sergio Zimmerman for his final remarks. 

[Sergio Zimerman, executive]

[Interpreted] Good afternoon, and thank you very much for following us this far. Like I said in the beginning, this is the last results call that we will have before the final ruling from the CADE. And I would like to use this opportunity to reinforce our confidence in the decision and the confidence that we have presented all the technical elements for a non-ready approval. 

I also wanted to reinforce that we are extremely pleased with the technical level of the discussions brought by the CADE. And this is truly done in order to protect Brazilian consumers and protect healthy competition. And I would like to close this call with a quote that was said during the public consultation hearing that can serve as food for thought for everyone. Because again, the more I've learned about the CADE, the clearer this became to me. 

The CADE is a regulatory authority that exists to protect competition and not competitors. So I think this is the key takeaway from this whole process for me. And because we are not going to meet again this year, I would like to wish you all happy holidays. And I hope 2026 is a year of a lot of health and prosperity, and see you next year. Aline? 

[Aline Ferreira Peli, executive]

[Interpreted] Good afternoon, everyone, and thank you for staying with us. 

[Operator]

[Interpreted] The Petz Group conference call is now closed. Our Investor Relations department is available to take any further questions. Thank you for coming, and have a great afternoon.

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