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Good morning. Welcome to Grendene S.A.'s conference call to discuss annualized results of the first quarter 2019. We would like to inform you that this conference call will be held in Portuguese with simultaneous translation into English. [Operator Instructions] Let me remind you that this conference call is being recorded and will be available at http://ri.grendene.com.br.
The main officers of Grendene are here who will also be available to take any questions you might have: Rudimar Dall Onder, Chief Executive Officer; Gelson Luis Rostirolla, Executive Vice President; and Francisco Schmitt, Chief Financial Officer and IR; as well as the company's top management. We would like to inform you that the press release for the first quarter 2019 is available on the website http://ri.grendene.com.br in Portuguese and English.
Before proceeding there, I would like to clarify that any forward-looking statements made during this conference call about the company's business prospect and operating and financial estimates are a mere forecast based on the management expectation regarding the company's future. These expectations are highly dependent on market conditions, the country's overall economic performance, industry and international market.
I would now like to turn the conference over to Mr. Francisco Schmitt, CFO and Investor Relations Officer of the company. Mr. Francisco Schmitt, you may proceed.
[Interpreted] Good morning. Thank you all for attending another Grendene's conference call to discuss our results. As usual, we posted yesterday filings on all the charts regarding this presentation in this call, so that you can better follow up. In my comments, I'm going to be very brief, so as to allow some time for your questions.
Before discussing the company's performance, I would like to draw your attention to the distribution of dividend. According to our policy, we pay dividends on a quarterly basis. And regarding the first quarter of 2019, they are anticipated in the amount of BRL 36.8 million. According to the decision of the general meeting that approved the account for the financial year of 2018. And dividend is created of May 22nd 2019. Shareholders holding common shares enrolled in the company's record on May 9, 2018, the cutoff date, will be entitled to receive the amount.
Regarding the performance of the first quarter of 2019, with the drop of 29.5% in the volume of pairs, we had the very best part of the year. And the decrease occurred both in the domestic market, 26.6%; and in the foreign market, 37%. In our segment, these result is highly due only to a fall in consumption, so we must have lost market share, both domestically and externally.
The preliminary numbers that we have seen in the economic indicators and our perception of the market indicates that the leading conception generally declined sharply in this period. But in our estimation, hardly the same proportion in our figures have dropped. The drop in volumes are the main reason of the drop in results. We had a drop in our margins, and net income fell by 51% in relation to the same period of the previous year. It is true that in the first quarter of 2018, we had a good growth of pairs of 6.8% vis-Ă -vis the first quarter of 2019. So we've had a high base. But the figures of the first quarter are the lowest in first quarter since the company started its capital in 2004. The lowest number of pairs previously reached was of 31 million in the first quarter of 2005. And in this first quarter, we were close to 29 million pairs.
In our assessment, the main problem faced by the company in the first quarter was the lack of sales in virtually generalized way, among brands, models and geographies, which generally indicates a drop in demand. We did not suffer a cost impact other than the increasing idle. And they're normally carrying commercial expense due to the termination of contracts with some representatives in the amount of 9 -- BRL 14 million. In the previous year, there was BRL 1 million or BRL 2 million. There's always some representatives that lean for terminate. But this time, we had a larger number that impacted the [ sector ]. The efficiency was the best possible in the backdrop of drop in volume. We expected some causes that we are -- that we have been describing in our communication with the market. And we executed some action to handle what was expected. But unfortunately, they were not enough to reverse the scenario.
To improve the situation, we shift in December 2018 orders that would normally be delivered in January if the demand was better, both in foreign and domestic market. This anticipation in the case of exports distorts the comparison of the numbers recorded in Grendene in terms of export with the ones of Secex, and you can see there only the products that have crossed the border. Whereas in our sales, depending on the Incoterms of the sales operation, it includes the [ goods ] that are in the port. They are considered exported, so you cannot really compare the figures, especially if you consider from December to January. So having said that, we do not expect such a sharp drop in the domestic market. On the contrary, we were expecting a recovery start. The market expected the same.
And against this reality built in the first quarter, we can no longer talk about the recovery of footwear consumption in the Brazilian market for this year. So we can just offset the drop in the first quarter, but Grendene is then to likely to have a bigger number of sales than in the previous year. So the scenario in terms of consumption in Brazil is completely indefinite. We have seen the numbers in terms of unemployment rate and projection for the growth of the economy. The numbers are promising. Some optimists talk about 3%, and probably, it's going to be lower than that. So these figures reflect the consumption.
And exchange rate was positive, BRL 17 million. So otherwise, our results would be worse. And the results were in line with what happened in last quarter last year.
We've seen retraction of activities and the drop in sales. Cash generation was BRL 247.6 million in the first quarter, and we are proposing a payout of 49.3% of the results that were attained. With the following profits, the cash generation came mainly from the reduction of the investment in account receivable, and that fell alone accounted for BRL 242 million. On the other hand, it shows that they are sound assets, and this part of the working capital it becomes cash.
Another point important to mention is about the process that Grendene has against the government regarding excluding taxes, PIS and COFINS. On April 4, we published a relevant fact, and the decision was judged in Recife. The headquarters of the company is in Sobral. So the lawsuit was in Sobral. And Grendene still has to take some legal steps to be able to receive this credit.
Since these other legal steps are required and they include the qualification by the Federal Revenue Service of Brazil, Grendene has not recorded its gain in its financial statement yet and will only do so when we have a more accurate amount in terms of recovery and prospect of really recovering these values. Grendene still requires some documents that need to be provided in the next 30 days, which is a certificate of final and appealable decision to present it to the federal revenue and check if the authorities will agree with this amount, and then they move on to the compensation. It's prudent, according to Grendene, not to make any disclosure before we have a proper definition. Therefore, at this time, we are not going to mention any figures related to this gain until it is more materialized. And we're moving away from the realm of the expectations, considering all of them get quoted by the market.
Melissa stores grew. Melissa Clube is doing fine. From 263, we now have 315 franchise stores. And the other brands of Melissa, also recording a drop in volume, which was more concentrated in the market than in Melissa Clube. However, it was a very significant drop.
To conclude, I would like to say that, unfortunately, we cannot maintain our expectation as we used to, and we do expect to recover volumes this year. And according to our estimates, the results will be lower than last year. Our policy will continue on preserving the margins and whenever possible, to obtain absolute results. We are going to work on the profit progress. And considering the current scenario, the consumer will require adjustment, and we are going to make adjustments of our portfolio to those situations, so that we can make adjustment to this economic scenario and improve in order to obtain better results.
So these were the comments I would like to make. I would now turn the call over to you, so that you can ask your -- any questions that you might have.
[Operator Instructions] Our first question comes from Mr. [indiscernible] with [indiscernible]
[Interpreted] Mr. [indiscernible] from [indiscernible]. Mr. Schmitt, I have 2 questions. In the beginning of the conference call, you mentioned that there was a loss in market share by the company. I would like to understand that. In the commercial areas, there are diagnoses that would explain this drop in share and deduction of sales. I would like to know if you have new diagnosis explaining what occurred and if there's any relationship in the termination of the contracts of the representatives. Could this have been the cause that caused this loss or this drop in the market?
[Interpreted] Well, first of all, I would like to thank you for the question. We do not have a [ preferred ] diagnosis yet. We are here inferring the reasons why we lost market share because we see the drop recorded. If you could imagine that the consumption drop in footwear this quarter was 26% as we recorded as our drop. So of course, we lost market share.
[Interpreted] To whom did you lose your market share?
[Interpreted] I do not have the answer yet. What we have seen is that all companies are facing difficulties. Some of them are due to the working hours of their employees. And some days ago, we saw a report in Valor newspaper that there was a drop in the region of [indiscernible] in the shoe industry. And there were many explanations of why things are happening the way they are. The fact is that there is a significant drop, and we believe that our fall was higher than the other ones. The reason, we do not have the answer yet. When we analyzed the product segment, of course, we are going to see that there was a product [drop] was recorded at a -- in a more significant manner. So we can -- at the most, we're going to anticipate the launch of some products. But we do not have anything that could tell us that this problem will be concentrated on our certain area.
For example, in the areas where we have fewer representatives, it's there where we saw the largest drops? No it's not. So Grendene, the company of 50 years, obviously, it has representatives who retired. They move on, go to other operators. But there was no contentious termination with anyone. What happened is a regular exchange of the market. People grow old, and their companies are closed, the market changes. Things happen, so we cannot assign a reason to this. We do not have figures to explain that where we no longer have that number of representatives. We had the drop in the market. We cannot make this correlation. So we look at other points. So there is a difference in performance in the regions. Some of them had a 24% drop; others, 27%. But there is nothing that would let us know or would tell for sure what will be the reason in a more specific way. Can you repeat the second part of your question?
[Interpreted] I think you have already answered my second question. My question was if you had a diagnosis that would explain the fewer number of representatives.
[Interpreted] Yes. And in some -- there's not a specific reason or specific location where we see problems. If consumer does not have enough income, is not available to purchase, we observe that the consumer is not intimidated as they were some time ago. So there's room for consumption, but the consumer is much more cautious, and they are looking for cheaper product. If we could mention any trend, I would say that the trend was much more significant in the C class, and that's why the average income is higher because the most significant drop was related to more popular products, the C class. The other ones also had drop but less. So that would be the consumer that may not be able to spend as much as the offers we have. So we might have to offer products that would be purchased by that level of consumption.
In addition to that, I would like to say that the inventory levels have risen, and that means that this is not a problem that we have an immediate answer for. So if you end the quarter -- I mean, the retailer, if the retailer ends the quarter with the level of coverage which is higher than usual, and in some cases, much higher, so there's a lot will have to happen for a time, so that the inventory levels can go down, so that he can start purchasing again and activate the selling. So this is a situation that we have stated we are facing now.
Our next question comes from [ Roberto ] [indiscernible] Investment.
If you can a little bit -- expand a little bit on the issue of inventories. It's clearly that on the domestic market, there must have been some inventory building, and that also impacted the sales going forward. Can you give some more insight into your visibility of what is happening on the storefront and if this is really nationwide? Is this in certain brands? Is this just because of pricing? And what's the timing of visibility? How much time, and when did you start realizing that you're having some challenges in pushing the inventory? Or perhaps, where your customers too optimistic during the fourth quarter and ordered too much?
[Interpreted] Could you please repeat your question, sir?
Sure. I can. So my question is on inventories. And I really want to understand if to what extent there was -- too much was purchased by their clients during the fourth quarter and to what extent how high are the current levels of inventories at the point of sale at the customers, how much higher than normal. That's my first question.
[Interpreted] After our presidential election in October, there was some new formula, if you will, regarding the economy of Brazil and the stock market. And the market and the consumers were excited at the time. So there was a general conviction that this drop now with this new administration would expedite. And at the end of the year, in Christmas, it wasn't very good, but nothing is better what happened before. So that was the explanation that the government wanted to getting some adjustments. And a little later, there would be the recovery, but nothing happened when the results was closed in February. We mentioned that we were expecting an improvement or a recovery for those in the beginning of February, and nothing had happened really because January and February were slow months. And the explanation was that, oh, the president was still recovering from surgery. And now the figures of the Brazilian economy are still weak. So there are people even mentioning a drop, an expected drop in the GDP. So there was a reduction in the expectation. And how did that impact retail? So retail, we finished last year with a little bit more in terms of inventory. And the -- so the regular orders were placed. And in the first quarter, some adjustments had to be made. Now we are ending the quarter with the inventory much higher than usual.
Okay. Can you break...
[Interpreted] Sometimes easily fall high -- higher than usual. I'm talking about coverage, okay. Just to...
Right. Can you give an idea how much higher at all? [indiscernible] at the point of sale?
[Interpreted] [indiscernible] expectations. Yes. So 2 to 4x as high -- higher than usual.
Okay. Can -- how much promotion is happening at the moment to try to normalize the level of inventories at the point of sale?
[Interpreted] Well, I'm not going to disclose our strategy in terms of promotion there. But it is a tool that must be used, of course, but I'm afraid I cannot disclose details because it's about our strategy. But yes, we are analyzing what we can do in terms of price, products, promotions and the point of sale, everything, to encourage sales.
Right. And usually, how far in advance do you have visibility on the sales that should be coming through in the next quarter and so forth? Is that during the quarter? Or do you -- I mean, are orders placed with 1 month or 6 weeks or more in anticipation? How does it usually work?
[Interpreted] Well, we have an ideal that, yes, because Grendene only manufactures according to orders, so everything that is manufactured have a more difficult [ batch ]. But I cannot assure that there are no cancellations of orders or orders that are postponed. But we have a perception of the scenario considering the orders that we're getting. And if there are customers that are postponing orders, the number of orders that we are getting is low now. But with the -- for comparison with last year, last year, we had a low base because of the strike of truck drivers. But probably in the second quarter, we're not going to see drops in volumes that we gave in the first quarter, but we cannot expect a substantial recovery for the second quarter. Maximum we'd be able to maybe be a little bit better than last year. Just would like to draw your attention that last year, we had a major drop because of the strike that we had in May -- in late May or early June with the truck drivers' strike. Now we're considering a change in the season. Next quarter historically has better volume in our segment. But we are comparing the second quarters here, and of course, we have to disregard the seasonal aspects of this comparison. And in order to talk about a recovery -- more effective recovery and when considering promotions, we are considering that just for the second semester.
Okay. And lastly, could you give a little -- an overview about your export market? The volumes during the first quarter are quite similar in terms of size of generally what we see during the second quarters compared to 2018 and 2017. What are you hearing from your buyers in the vast number of markets that you export to?
[Interpreted] The export market remains a difficult one, and it's likely to get worse throughout the year, because the global economy is moving consumption in the main market, considering the gains, specifically, our most substantial drop is in South America. Now that the crisis of Argentina and Brazil, now the way it is, the whole of South America is depressed, if you will, in terms of consumption with figures much lower than those of previous years. And so Paraguay, Uruguay and Argentina, the consumption has dropped greatly in those countries. Well, in Venezuela, we have no sales to Venezuela. And Colombia may be the only Latin American country that we can say that it's performing better. In Central America also, there is a strong drop in consumption affected not only because of the poor performance of South America, but also the Americas as a whole slowed down. So we have a good interface with South America and North America, and of course, both are affected by the economy. Europe as well, there is a drop there. So maybe you can put it down to sort of the climate effect, summertime got there later or we had longer winter days in Europe. I don't know, but we have to consider all these factors. And indeed, yes, we have some concerning data about the German economy and nobody knows what's going to happen with Brexit and the unemployment rate in Europe. So all these factors are affecting consumption. And this morning, I read the news about a substantial drop in South Korea in the first quarter, the worst results in a decade. In China also, they were mentioning their economic slowdown. So we cannot expect a favorable scenario for this year. And again, we are considering the scenario for our launches and our marketing and promotion activity in order to capture the existing consumption. But we don't expect favorable times ahead.
Right. And how are inventory levels in the export markets at that point of sale? Obviously, I understand your production process, though.
[Interpreted] The international level, Grendene works through distributors. And their stock or inventory is not very concerning, because they have been cautioned in their approach. But in the point of sales, I wouldn't know about their inventory, no. I don't know if they're facing problems in terms of their inventory level in the point of sales abroad. Yes, I'm sorry, I wouldn't know the answer. But I know that yes, in South America, there are some customers, some clients in retail that are facing some issues, especially in Paraguay. Paraguay used to also serve the north of Argentina. So logistically, their area is closer to Paraguay than Buenos Aires, for instance. So Paraguay has nearly stopped selling to the north of Argentina. So yes, the distributors in Paraguay did face a stock or inventory issue.
Our next question comes from [indiscernible]
[Interpreted] So considering the unique results of this quarter and possibly of the year, don't you think that an option program of 2%, is not in line with the interests of the company with the shareholders? Then what is the target for this program of options? Is there a metric for you to be eligible to debt? Or can you tell me more about that?
[Interpreted] I don't understand what you mean by 2%. I'm sorry, could you repeat that, please?
[Interpreted] Because you mentioned there is a buyback program of up to 2% of stocks, right, just for the board, so are you going to buy back up to 2% of the shares?
[Interpreted] There was a misunderstanding here, because what I meant is that the company, every year, opens a buyback program. You can see some options there that were granted in the past. So these key executives have their option, the company has to have shares so -- to deliver. So we opened this buyback program, and there is always an excess in the number of shares, because this buyback program was authorized. Of course, I cannot have a board meeting for that immediately, but rather I must have the authorization for that beforehand. So if there is a need for that, I can buy shares. But I'm not saying that we're going to buy 2.2% of shares and deliver them in the option program. The program today has had 10 additions. And as people are eligible to the shares, the executives may exercise that or not. But from these results now, they will be reflected in 2 ways. If there is a drop in shares, fewer executives will find it interesting to exercise the options that have been party to that. And at the end of the year, when the board gets together to grant new options, if the result remains negative or bad, well maybe -- what I mean is the result will affect the Grendene program. Of course, you have to be eligible for that, and of course, the price has to be convenient. So 2% must not be linked to the current results. Okay. At this point, another question before we end.
[Interpreted] Okay. You said that you've had weak sales because of the economy as a whole. Is that what you believe, in Europe, in South America, in Brazil in the core business area of the company? Or what went wrong for some reason? Have you identified problems in the collections? Or is it more about the economy issues?
[Interpreted] Well, problems in the economy, yes, we have had. As I said earlier, consumption in Brazil dropped not only in terms of footwear, but consumption as a whole. I don't have the figures in terms of the drop in footwear, but all the figures that we have seen so far indicate a downward trend. But in terms of collections, there are 2 points. Firstly, it is really impossible for you to do wrong in our collection. We have over 15 brands. So it's very unlikely that in a given quarter, you'd do wrong in all collections simultaneously. I would be very surprised. Again, I know it may happen, but I would be really surprised if after all companies disclose their results, they show robust numbers in terms of growth in consumption. Of course, there are exceptions, but the truth is consumption is very low. And when you look at the collection, of course, we have 2 to maybe concede are lower sales, that if it were a better collection or better product, we would have had a different performance. And as we identified, some products were better accepted than others. We make the adjustments. And of course, in all collections, there are products that are a major success and others that don't do so well. But see, the reasons we cannot say, oh, our brand, a certain brand has had a fantastic growth, whereas another one had a substantial drop. So let's not talk about progress, because we have loss. But our drop that -- our brand that dropped, I believe, dropped 20%. So we cannot consider the issue with one specific segment and one specific product. But understand that we are still assessing and trying to diagnose what's really in the point of sales and we have just some competitors, the segments that we have to analyze each segment in light of the competitors. And we don't see, well, some competitors were more aggressive in terms of the promotions and price, maybe we could have been more aggressive as well. But it's hard to say if we had been more aggressive, we would have reversed this drop somehow or maybe mitigated it somehow or maybe with some promotions or in activities in the point of sales. We're still analyzing all that to see how we're going to deal with the situation.
[Operator Instructions] [Foreign Language]
[Interpreted] Considering the scenario that you are observing, what do you intend to do in the future?
[Interpreted] First, we have to do a deeper analysis on what happened. We are going to review the product portfolio and promotions. Of course, I cannot provide details about this plan because as you well understand, it is -- we have this all the time, we would not be able to disclose this. But we have always done along our history and we have faced different crisis on the way. We are going to look at the purchasing power of our consumer. And this is what we want to study, our product, which is the lowest classes, class B and C. So there's no way we can sell the volume of footwear and the volume that we have to those classes. So remember that causes decreasing the income of -- in this segment of fear of consumption, fear of losing their jobs, all those factors affect the consumption, and there is nothing we can do about them. What we can do is to develop products that can be competitive to that target consumer. And with this, we are competing for a higher share. I think that is becoming smaller. As I've been saying in the last 5 years, it's been 5 years since the footwear consumption has dropped. Never before have we seen such a continuous drop. And at a certain time this is going to reverse, and -- but so far, we haven't seen any effect, any material data that would sign to a recovery. So we are going to make it efficient. So the country, in general, has the consumption power, which is lower. So we are going to move ahead and compete in the market. Grendene is very competitive in the segment it operates. So we're going to draw our attention to this and participate strongly in this competition.
Next question [indiscernible]
[Interpreted] I would like to understand the cash position BRL 2.1 billion with a positive variation of 15% to -- is there an estimate or are you making investment of this cash?
[Interpreted] Oh, I did not hear the beginning of the question. Could you repeat, please?
[Interpreted] Yes, of course. In relation to the cash position, BRL 2.1 billion, I would like to know if you are continuing to really make investments?
[Interpreted] We think our cash position -- gross cash position is at BRL 2.2 billion and net cash is BRL 2.1 billion, as you mentioned. The difference in the level of investments is a temporary situation. Sometimes the stock market can hedge, but we do whatever is more convenient. As for cash position, we are always studying which investments to make, but we do not have anything concrete. In fact, I think it's hard. As to M&A, I do not see any possibilities of this happening. I do not see any relevant opportunities in the market that would bring about synergy that the company could add value. And as for the financial aspect, you can see that the interest rates are very low. Some time ago, there was an expectation that it's low, but now it's back to the interest rates drop. So we are studying on how to invest this cash if it's possible so that we can have some gain. Other than that, there is no news except for what you have seen so far.
Next question [indiscernible]
[Interpreted] My question is the following. This volume drop, did you identify any external competitor, China? Is there anything that would explain this drop in volume in this quarter?
[Interpreted] In the domestic market, we haven't identified anything. Imports haven't grown. We haven't seen any inflow of foreign products different from the normal business. It's more difficult to say anything in relation to the international market. But I do not believe that there is a trend or if there is anything specific here or there that would explain that. But I do not separate the explanation to the volume drop that we faced. Chinese products have been coming into Latin America for a long time via Paraguay, et cetera. But this is not something new. It's something that has been happening for a while. So I do not see that this would explain what happened, not at this time. There is a strong competition in the foreign market, Chinese products, especially in the lower segments. And we try to move away from this competition by means of not doing fashion, but being more basic and cheaper product. And we're trying to move away from this segment. But I do not believe that this would be a suitable explanation to what happened now.
[ Kyle Oliveira ] will ask the next question.
[Interpreted] I would like to ask if there is a specific strategy for the digital area. Is there any promotion, marketing policy, anything differentiated focused on the digital side or dimension?
[Interpreted] I need to add the -- to the previous question before I answer your question. Our Export Director is here with me, and he's saying that we face a lot of copy issues from abroad, probably made by the Chinese market. But this is something that happened more or less along the time. And then it goes to court to solve it, and this is a permanent war that we wage. Whenever you produce a successful product you have to handle the copies. And we prefer to be copied than to have a product which is not successful. We fight these issues, but I do not believe that in this quarter, in particular, there was a large growth of the copy that we saw in other quarters. As to the digital aspect, my answer is, yes, this is a topic that has been taking our time. We have been reflecting over this digital part. And Grendene has a large part of its marketing in digital means when we refer to promotions. Some brands have pages, which are very relevant, because they have their own traffic. It's a very interesting asset. And we have plans to go in this area. And again, we cannot provide details on what we're going to do, what we intend to do. But what we can say is that this is going to be a good evolution of our company. Since Grendene is a manufacturer, the digital aspect is affecting the distribution. In other words, where the retail market is, so the retailers have good strategies and they are doing well. They are making headway. They are making progress. But for us, this would be a link in the chain. There are clients, all the retailers that can do a good job in the digital area are becoming very successful. And in the industry, we can also see opportunities. And this time around, as we see it, it's not very significant, but as everything, we expect this movement to happen and affect this area as well.
[Operator Instructions] We will now close the question-and-answer session. I would like to give the floor to Mr. Francisco Schmitt for his final remarks.
[Interpreted] Well, thank you very much, once again, for joining us today. And we expect to have better results and give you better news the next time we get together. See you soon. Thank you.
Grendene's conference call is completed. Thank you for your participation. Have a good day, and thank you for using Chorus Call.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]