Arezzo Industria e Comercio SA

BOVESPA:ARZZ3

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen. Thank you for waiting. Welcome to our earnings call of the first quarter of 2019. [Operator Instructions]

We will have simultaneous interpretation into English, and questions can be asked by overseas participants. [Operator Instructions]

We would like to remind all journalists and others from the press that this conference call is exclusively for professionals from the financial markets and current and potential shareholders. Any questions must be submitted to Caroline Muzzi, our press relations person, whose contact information is available on the company website at www.arezzoco.com.br.

This conference call and these slides are being streamed on the web. It can also be seen on the company website. In case any of you do not have a copy of the Arezzo&Co press release published yesterday, Wednesday, February -- yesterday, May 8, you can get a copy from the company website.

This conference call is being recorded, and the recording is available on the website after the call is over.

Before we proceed, we'd like to clarify that any statements made during this call regarding the company's business prospects as well as projections, operational and financial goals concerning its potential for growth are forecasts based on the expectations of the management for the future of Arezzo&Co. These expectations are highly dependent on domestic market conditions, on the general economic performance of the country and international markets and are, therefore, subject to change.

Now I'll hand over to Alexandre Birman. Mr. Birman, please proceed.

[Alexandre Birman, executive]

Good morning, everyone. Thank you for participating in our conference call regarding the results of the first quarter of 2019. Rafael Sachete, our CFO; and Aline Penna, our Investor Relations Director.

In this quarter, we are celebrating our 8-year anniversary since we have opened our capital. I would like to highlight some of the good points we've had. We had a CAGR of [ 10.1% ] net income, and in this period, there has been a high cash generation, providing full payment of dividend, BRL 45 million since the IPO. We have opened 387 stores. In 31 quarters since this beginning, only 1 quarter did not present growth whilst [ 31 ] had, and 27 quarters with good result. In this scenario, we had a gain in market share of 30% since our IPO. So congratulations to our team. This shows that our business model is very successful.

Now talking about the scenario, it's important to analyze our results on a quarterly basis. In our business, the seasonal analysis is also important. We need to understand the Summer collection and the Winter collection analysis and also the height of Summer collection. Now we are transitioning from the Summer collection to the Winter collection, and there's also Carnival in the middle. We consider Winter after Carnival. The later Carnival is, the longer Summer collection is. These explain the results of the quarter -- in the fourth quarter. They need to be very strong so that we can improve our results and improve our sales for summer.

So we have a very healthy scenario in our network. A reflect of what we have in terms of the leftovers that we've had is also that our delinquency rate is low and we have a very good replacement of the Summer collection, very good sales. We have implemented also the Winter collection brilliantly in our business model, in the product creation, selling, production, distribution to all stores and also our communications process.

I would like to take this opportunity and to highlight what we've had in the 6 brands in this quarter. Talking about the Arezzo brand, we had a major change in the communication system, especially in the branding and institutional part of it. We realized that there has been a change in the behavior of consumers. They wanted to have a more inclusive communication, closer to their reality. That is something that is really appreciated by consumers. Gisele Bundchen was our leading lady for the -- our campaign. So we also had a strategy called Arezzo Together. We have invited 5 people, very different styles. This has been very positive. We have had a very good impact in social media for the Arezzo brand in Instagram. And in the upcoming days, we will have a total of 5 million hits. Taking this concept, since Gisele Bundchen is no longer our representative, we designed this to have a more direct communication.

In January, we have started a collection that focuses on younger consumer. Sasha Meneghel is the star of this campaign, and there are 5 celebrities that are also representing this brand.

In this period, we are launching our collection called Arezzo [ Soft ]. It will bring products focused on comfort. Also, there has been a very good growth in the Arezzo brand and a solid expansion of a new franchise model. There have been, too, progress in projects that have increased the engagement of the franchisees.

Talking about the Schutz brand, we have the appeal to be a super fashion brand. It is supported by the well-implemented campaign called Unlock Your City. And they took pictures using drones from different parts of the city of São Paulo. There has been launches made every 2 weeks and associated to different parts of the city of São Paulo. So this campaign had a very good repercussion. It has increased the perceived value of the brand, and it has leveraged the growth of the bags line. This communication strategy was very successful. Now we have scheduled the version 2 that is going to be done in Rio. We will have icons of the landscape of Rio, the urban and also the landmarks of Rio. It's a very solid strategy with good engagement. We had more than 4.4 million followers in Instagram. This shows a lot of improvement in brand engagement and brand awareness.

Anacapri is a very good business, very mature with a very robust growth of 20% compared to the first quarter of 2018. In average, we have 3 new franchises every month. In the pipeline, we also have a lot of requests for the following quarter to open new franchises. There has also been an increase in the bag categories, representing 8.4% of the mix.

[ Isabelle Verdi ] is an actress that is a very famous celebrity, and we are also in the communication trying to focus on women's self-esteem. There was a major event held last week with hundreds of women talking about self-esteem, and this is also a very good solution for an attractive positioning.

This is for -- we have had in Alexandre Birman brand a highlight for the growth in the domestic market, in the same-store sales and also in the foreign market. Here are some highlights in terms of presence in top international awards, and in the Golden Globes and the Oscar ceremony and Grammy ceremony, at the feet of those -- of celebrities. So this is like almost reverse marketing in Brazil. Another highlight is that the mix of the brand has been diversified. There is this connection between the sandals and the sneakers, as these sneakers has just been just launched as Clarita sneakers. It averaged prices high when compared to the same category.

Now briefly talking about the emerging brand that we call -- we have, Fiever, that is a casual sneakers brand, very strong in web commerce channel. In the quarter, we made a partnership, and we were part of the launch of the movie Dumbo in Brazilian cinemas. It talks about reverence, and it was very good for the teen audience. There has also been an interesting increase in the positioning of the brands, that is for both sexes. So it has been very good, especially to sales for men. OWME, we are still in our learning curve, making some adjustments in the price pyramid for the brand and also in its mix.

The results we have had from the stores are good, especially for the penetration we expect to have in the multibrand channel. We are making some adjustments, and we are working on some new products that we're going to launch next week.

Now I'm going to briefly talk about our strategy. In addition to the strong focus we have in our organic growth, we also have some strategic pillars we have focusing on in the past years, and of course, they will pave the way for our future growth. The acceleration of our learning curve has been very important, especially to our U.S. operation. We have had strong growth in the fourth quarter, over 75% increase.

So we have had a very -- we are changing our logistic partners, too. That will require investment, but with that, we will be able to grow this system of sales so that our products will be sold in the web commerce channel of other large stores.

We have opened a store in the first quarter and, that will serve as a pipeline for new stores to be opened in the second half of the year. The same-store sales selling results have been very good, and consequently, the results from the U.S. operation has improved in our net income.

Now talking about the second important pillar of our investments in our digital transformation. We had the inauguration of a new way of developing projects. I think you are familiar with that, the agile system. We have had very good results that are improving our improvements -- our efficiency.

Let me talk about BI information. We have also had a major rollout of our BI tool that is going to help us a lot. In this quarter, we had 23 workshops with commercial teams and over 70 initiatives that have been made based on data. I've mentioned the increase in the bag category of Anacapri. That was based on the benchmark for our best store, and we were able to take these successful stories from one -- from some stores to other stores, and that has impacted positively on the Anacapri brand. We have also implemented a pilot project related to the BI culture. In this period, there was an 8.7% improvement. That was based on relationship management based on data.

Another point I'd like to highlight that is also going to pave the way for future growth, not only for 2019, for next year, which is new channels. In April, we had additional BRL 3 million in sales. And we have 110 stores offering pickup store solutions, quick shipping in 10 stores. And these stores have an average of 5% of their sales using this solution. That's a very important tool. And we are now about to roll out this project to other stores.

We have 100 stores in which we have sales through web sales. With that, we can sell remotely. A customer can talk to a store person, but instead of going to the store, they can purchase online. The payment actually is done online. That is very good for credit purposes.

In terms of next steps in digital issues, in May 14, we'll have the first digital retail day involving all of our franchisees, over 500 people, in a partnership with JK Shopping Mall. We will host this event for 500 people. We'll have a talk show there. And as you all know, this talk show is going to be mediated by [ Geraldo Sabor ] and also with the new member of our Board of Directors, Luiza Trajano. That is going to be very good for this digital initiative. And we are also working with our sales teams because they are specializing in enchanting our customer.

We are also formatting our franchising network so that we can have a better integration of channels, especially when we talk about switches between stores. We have also started a pilot project to implement the [ FID ] for Schutz. And that's going to be implemented in the second half of the year. These were the highlights that I wanted to share with you.

And now I would like to hand over to our CFO.

[Rafael Sachete, executive]

Thank you, Alexandre. Good morning, everyone. Before we start the discussions of results, it's important to highlight that as of the first trimester (sic) [ first quarter ] this year, we've adopted the IFRS 16 norm, which brought about some changes in the way of accounting of fixed rentals qualified as leases. However, to ease -- for ease of comparison, all results presented here will be considered without the effect of the new norm.

The gross revenue of the company was BRL 463 million in the first trimester (sic) [ first quarter ] '19, with a growth of 8% in the domestic market and 81.2% in the international market, with highlights for the North American operations, which grew 105.6% in the trimester (sic) [ quarter ], representing 9.4% of the total revenue of the company.

On the following page, we see the gross revenue breakdown in domestic market, with a highlight for the Schutz brand registering BRL 112.3 million in revenue -- in gross revenue, with a growth of 8.8%, showing a recovery compared to the previous trimesters (sic) [ quarters ]. The other highlights for the Anacapri brand was 19.9% growth.

Good part of this performance is due to these new 34 stores that opened in the last 12 months in addition to the strong growth of same-store sales.

The Alexandre Birman and Fiever brands also presented great performance in the trimester -- in the quarter with a growth of 77% and 71%, respectively. Going on to Page 7 now, we see the gross revenue per sales channel. We highlight the web commerce channel, which grew 24.3% in the period, and the other brands grew 12.6% and 8.8%, respectively.

We should explain the drop in the channel of the owned stores due to losing 7 owned stores to franchisees. These were 5 Schutz stores and 2 Arezzo stores. We are not considering the transfers of stores for the channel, so the channel grew 11.3%. In terms of the sell-out, our network of the monobrand stores, which includes franchises, owned stores, web commerce, had 7.2% growth in sales due to the strong growth in the online channel and new net stores, 59 net stores that are monobrand in the last 12 months. It's worth highlighting also that the [ accrueds ] for the last 12 months for Arezzo&Co had a sell-in of 4% and same-store sales sell-out of 3.3% with a difference of 0.7 percentage points, which is a very healthy level for a franchise network. The multibrand channel, on the other hand, grew 12.6%, especially due to the new brands. And there is continuous work for greater cross-selling between the brands with this -- in the same sales point.

On Page 8, we see the number of owned brands and franchises and our area of sales. We closed the year -- the quarter, with 690 stores, being 677 in Brazil and 13 international. In the last 12 months, we had a 6.3% growth in sales with 65 new net stores.

On Page 9, we see on the left the gross profit for the quarter, reaching BRL 172.5 million, growing 17.7% and a gross margin of 45.7%. The expansion of 130 bps is better explained with the margin improvement due to the greater participation of the U.S. operation and the mix of the revenue. This is also due to the exclusion of the ICMS tax from the calculation basis, which impacted negatively the brands due to a lower representativity due to the conversions of some stores.

We -- in terms of the EBITDA performance, we had BRL 44.9 million in the quarter with a 10.1% growth and margin of 11.9% or 40% -- 40 bps, below the first quarter in '18. This is also due to our strategic planning which includes the expansion of the U.S. operation, which consumed 360 bps of margin in the quarter; and developing the newer brands of the group, OWME and Fiever; in addition to investment for digital transformation and other investments.

On Page 10, we can see that the net profit of the quarter is BRL 23.9 million, 11.9% lower than the first quarter '18. That was negatively impacted due to the following factors: a reduction in financial revenue resulting from a lower cash position in the period and due to the significant reduction in the Selic rate in the last 12 months; the exchange rate variation associated with the balance of the U.S. debt, mostly due to -- with a noncash effect; lower income tax rate in effect, resulting from the losses incurred in the U.S. operations in the quarter, which is nondeductible for income tax purposes in Brazil.

Now onto Page 11. We see the generation of operating cash flow, which in the quarter was 42.9% -- BRL 42.9 million, sorry, even with the payment of interest on equity related to the second half of 2018 on the 15th in the amount of BRL 20.8 million.

Onto -- on Page 12, on the left, we see that the CapEx for the quarter was BRL 8.6 million with a highlight for investments in the refurbishment of the brand and the new installations for Schutz and for the new factory for the Alexandre Birman brand, both in Campo Bom; and for digital transformation implementation of the flow counter -- flow meter for all the stores of the brands Arezzo, Schutz and Anacapri. In the North American market, we opened the Schutz -- a Schutz store in the Outlet Premium (sic) [ Premium Outlets ] in Las Vegas.

On the right side of the page, you see the indebtedness. We closed the quarter with net cash of BRL 125 million and a net cash-to-EBITDA ratio of 0.5x.

And lastly, on Page 13, the return on investment capital was 24 -- 29.4%, a little over -- a little under the first quarter '18. Although the NOPAT indicated grew 7.7%, it was impacted due to a greater operating capital. And this increment is due to the greater volume of inventory in the period, reflect of the growth of sales of the consolidated sales for the company in Brazil. And we are now looking for a greater agility and assertiveness at the end.

So these were the comments about the result for the first quarter. Now I would like to open up the Q&A session.

[Operator]

[Operator Instructions] Our first question is from Vinicius Figueiredo from Itaú.

[Vinicius Figueiredo, analyst]

There was an important growth in sales in the U.S. in this quarter and when we looked at this in local currency. So my first question is, in terms of profitability, what was the consequential evolution of the EBITDA in operation? How should we look at profitability in the semester in 2019 with the stronger level of sales? Second question, for the Schutz brand, could you please explain what provided this recovery of the brand? Is it higher traffic in stores? Or more conversion?

[Alexandre Birman, executive]

Thank you for your question. This is Alexandre. So starting with the first question in terms of the operation in the U.S. market. Absolutely, the growth was very strong, as we have seen. As we saw, it was around 100%. This is only representative of 9% of our revenue, so most of our business is still down here in Brazil, and we believe that this investment, in the long term, will provide greater growth. But we know that our capacity in Brazil is a very strong point for us with the digital transformation, new brands, new stores, the growth of the Anacapri brand, these are the highlights. So I would like to take this moment to make it clear that the U.S. operation is just one of our growth pillars. But our focus is the organic growth of the operations in Brazil, okay?

About the U.S. operation, its cause, let's say, of the growth was strong investment in its structures: people, system, inventory, opening of stores. So it's a process that we have been in the process of maturing in the investment and that we've had very positive results. I believe that this philosophy, we need to stop thinking about high gross profit. We work or operate with around 40% gross margin. We think it's the minimum for any business. That's why we can't go under that. We don't believe in lower margins much lower than that. In the U.S., the gross margin is very high in all channels, even the sell-in channel. But we are -- so Arezzo has an SG&A level to know where we are investing. And this is what it's been able to provide, these growth of profits. We believe that this is what provides the total growth of the company. Although relevant, it still allows us to grow bottom line very solidly and generate cash, which is what matters the most right now. In terms of the lower base point for our results, we believe that it's an interesting level due to the return that we've been able to provide for the operation.

Your second question, about the Schutz brand. We have no silver bullets for that question. It's a process. It's an organic process to improve the perception and attractiveness of the brand. Since this is a multichannel brand, the growth includes multi-brand growth, very strong growth in sales in stores. And in terms of the sales in stores, we are increasing our tickets. As I mentioned, these are more attractive brands so we are locating -- we have locations, very attractive locations in São Paulo and Rio de Janeiro with our flagship stores, which provided very good traffic and prove that the brand is growing with added value.

So I hope I've been able to answer your questions. If not, please ask again.

[Operator]

[Operator Instructions] If there are no further questions, I would like to turn it back to Mr. Alexandre for the last -- for the final comments.

[Alexandre Birman, executive]

I would like to thank you all for being here and our team to -- with a special mention to the passion and dedication from our team in our daily activities. This is a great company. Everybody who works here feels the same, and everybody wants to do the best every day. With this concept, we're also investing very much in our organizational culture with great highlights to our level of engagement, and we want increasingly to provide a company to train people to -- with great talent, to promote people from our internal pipeline and to provide great learning and great coexistence.

We are living in a very important moment of sell-out in the first semester. You all know that it's Mother's Day -- Mother's Day is coming. And the Saturday before that is the greatest sale day of the year. So everything has been very positive in that sense in this -- for this campaign. And so if you haven't bought a present for your mother, please do that. You can go online. We have express delivery in São Paulo. And I'm sure that all mothers will be extremely happy and feel recognized with a present from one of our brands.

Thank you all for participating. May we all have an excellent 2019. Thank you.

[Operator]

The Arezzo&Co teleconference is now closed. Thank you all for your participation. Have a great day.

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