Grendene SA

BOVESPA:GRND3

Earnings Call Transcript 2020-Q1

[Unknown Executive]

Good morning. Welcome to Grendene's audio conference to present and analyze the results of our first quarter 2020.

We'd like to inform you that this audio conference will be held in Portuguese with simultaneous interpreting into English. [Operator Instructions] We should remind you that this audio conference is being recorded, and it will be made available on our website, http://grendene.com.br.

We have the presence of the main executives of Grendene, who will also be available to answer your questions: Rudimar Dall'Onder, CEO; Gelson Luis Rostirolla, Deputy CEO; and Alceu Albuquerque, Investor Relations Officer; as well as the main managers of the company.

We would like to inform that the press release of this first quarter of 2020 is available on the website, ri.grendene.com.br, in the Portuguese and English versions.

Before we proceed, I would like to clarify that possible statements made during this teleconference on the outlook and operating and financial estimates of the company are mere forecasts based on the expectations of the management regarding the future of the company. These expectations are highly dependent on the market conditions on the general economic performance of the country, of the industry and international markets.

I would now like to give the floor to Mr. Alceu Albuquerque, Investor Relations Officer of the company. Please, Mr. Albuquerque, you may proceed.

[Alceu de Albuquerque, executive]

Good morning, everyone. Thank you for your presence in our audio conference of earnings result of the first quarter of 2020.

First of all, I'd like to say it is a pleasure to be here with you. This is my first conference call with Grendene, considering that I took over this post as officer of investor relations about 30 days ago. That's why possibly, some of the questions, I won't be able to answer, because I am still getting to know the company, but I'm here with my colleagues from the Board to support me if necessary.

I'd like to inform you that all the information regarding the first quarter of 2020 were disclosed yesterday, after closing of the market, on our website of Investor Relations. We also posted there an additional file called audio conference presentation to make the following of yours easier.

As it is usual, before we move into discussion of the performance, I'd like to draw your attention to the dividends. In this quarter, the management decided not to propose the payment of intermediary dividends because of the impact provoked by the coronavirus crisis to the economy and the Grendene's activities, but I'd like to highlight that this decision does not at all change the policy of dividends of the company; and what is expected, envisaged in Article 34 of the bylaws.

Talking about the performance of the first quarter.

The year started very hard for Grendene. January and February were very positive months both in terms of volume as well as margins, especially considering margins, but then March came, and with March, the first cases of coronavirus came up in Brazil. The states started adopting measures of social isolation to protect the population. Because of the quick dissemination of the disease and the social isolation measures, Grendene did not sell in the last days of March period, when we have the greatest part of our monthly invoicing. The result of this is a drop of the volume of pairs shipped in the first quarter of 2020 of 19% -- of 9% compared to the previous year. The drop was generalized in brands, models and geography. Consequently, the other result indicators revenue, EBIT and net earnings were also below planned. The effect of coronavirus were felt before the international market, and because of this, the drop in the volume of pairs in the external market was even more significant than internally, with the exception of Africa. All the regions where we have operations had a reduction.

With a lower volume of shipped pairs, the gross income dropped 12.6% in the period, totalizing BRL 450.5 million. In the internal market, the gross revenue dropped more than the volume of pairs, reflecting the gross revenue per pair. In the foreign market, the drop of gross revenue was below the volume of pairs, reflect of the increment of the gross income per pair because of the devaluation of the exchange. We had a drop also in the net earnings. Lower costs with labor made the CPV to drop more than the [ high growth ], improving from 40.7% to 41.2%. EBIT reached BRL 39.6 million in the period, which represents a margin of 10.7%.

The financial result was BRL 61.2 million below the first quarter 2019. Financial investments had a result of BRL 9.2 million below the first quarter because of the lower CDI, whilst the result of the foreign exchange operations dropped BRL 50 million. The negative result of the foreign exchange was atypical for Grendene and happened because of the significant devaluation of the Brazilian currency. The counterpart of the exchange -- foreign exchange will be in the revenue coming when we resume our exports.

Net earnings of first quarter were 61.1% below the first quarter of last year. Lower volumes of shipped pairs and the effect of exchange operations were the main reasons for the reduction of the net profit. The generation of cash of the first quarter was BRL 115.5 million. With this, we closed the quarter with a comfortable level of cash above BRL 2 billion.

The chain of franchise of Clube Melissa continued advancing and reaching 334 clubs in 31 March 2020. 13 -- 316 Clube Melissa and 18 mini clubs format adapted to meet the public of children. All the Melissa clubs are operating integrated in the omnichannel and purchase of physical and virtual shops. The synergy between online and off-line channels will allow the consumer to have more ways of buying their products without being tied to traditional formats of purchasing. Omnichannel of Melissa includes the infinite shelf, get it from the shop and express delivery.

Well, I'll talk a bit about the main measures adopted by Grendene to mitigate the impact of coronavirus. The first action was to create a strategic committee with the main executives of the company to follow the unfoldings of COVID-19. We managed to have blanket holidays to all our associates from the 23rd of March to ensure their health and integrity.

Today, the situation in each one of our units is the following. Here in Farroupilha, Rio Grande do Sul, associates have resumed activities on the 13th of April, with a reduction of work journey and salary of 50%. In the units of Crato and Sobral in the state of Ceará, holidays -- blanket holidays ended on the 26th of April. Associates returned from their holidays on the 27th with a reduction of their work journey and a salary of 70%. Since the state of Ceará is one of the epicenters of COVID-19, the governor issued a decree suspending activities that were not essential until the 5th of May. With this, our associates that should be working 30% of hours ended up staying at home, so those hours that were not worked are being calculated as a bank of hours. The expectation is to resume activities on the 6th of May. However, on the 5th of May, the governor of Ceará issued a new decree postponing until the 20th of May the suspension of nonessential activities. Because of this new decree, our teams from Sobral and Crato will continue in the regime of work journey reduction and salary of 70%, and the other 30% are being calculated as an hour bank. The forecast is that the activities may be resumed as of the 25th of May. In the unit of Fortaleza, also in Ceará state, the blanket holidays went until 12th of May. From the 13th of May, the associates have been working in the regime of reduction of work journey and salary of 70%. And they are calculating 30% as hour bank because of the last decree of the governor of the state that has postponed the suspension of the activities that are nonessential until the 20th of May. The expectation, as well as in the units of Crato and Sobral, that activities may be resumed from the 25th of May.

I think it is quite important to highlight that the reduction of salaries encompasses the Board of the Directors, the managers, directors and all the other associates of the company.

Another action that we have adopted here at Grendene was being very close to our clients to try to support them in everything that is within our reach. We have postponed for 30 days the receivables of the internal market with maturity between 23rd of March and 17th April 2020, with no charges. The other needs, including receivables of the foreign market, are being addressed and analyzed according to each client. We are also giving specialist attention to Melissa clubs because in their majority they are companies that are small that do not have financial reserves to support some months without any sales. We have also expanded our efforts to accelerate the deliveries of the project of digital transformation that has, as pillars, culture, technology and business.

Within this project, we have 3 processes that are taking place. One of them is related to the digital transformation in cultural terms that, along with the Grendene university, aims at disseminating culture within the company. The second is [ bergamot works ], which is our innovation lab. It was opened to seek new forms of accessing consumers and to have Grendene close to the startup ecosystems. The lab is in Porto Alegre. Today, we have 4 professionals who were recruited on the market to -- with vast experience. And the last process is the process of digital commerce, which is a reformulation of our e-commerce platform.

And lastly, we are analyzing line by line our costs and expenses so that we can find opportunities of gains of efficiency, seeking to adapt the structure of the company to this new scenario.

Well, to close, I'd like to say that at this time it is not possible to measure the magnitude of the impact of COVID-19 to the economy and to the future results of Grendene. The deterioration of the economy was very fast and intense, but the return to the new normality will undoubtedly be slower and more gradual.

Well, those were the comments I had to make for now. Thank you.

[Operator]

[Operator Instructions] Our first question is from [ Marco Motolini from MLN ].

Well, unfortunately, he has been disconnected. [Operator Instructions] Our next question, from [ Grendene, Mr. Santos ].

[Unknown Analyst]

This is [ Santiago Santos ] speaking. My question is the following. Going back to Page 4, where we have some notes, we see our cash where there is [ BRL 1,000,365,000 ] in circulation. And we have an addition [ BRL 17 million ] noncirculating, and then we have a total of [ BRL 36 million ] which is indexed as a percentage. So 2 billion of investments in financial applications according to the CDI percentage, which is 3% nowadays. This is a percentage which does not make much difference in the final result, yet we will have some investments going around 3% till the end of the year. So my question is, are you considering any sort of changes in this policy of applying the CDI percentage and maybe considering if there is any additional alternative once our cash is extremely important to consider those additional alternatives? Or maybe eventually a return to shareholders via dividends, which would allow, even if there was any sort of taxes to be paid, something that would allow an increase of our return on investments, ROI? Is there any idea about changing that policy to keep that cash applied over the CDI percentage which is not above 3% yearly?

[Unknown Executive]

[ Santiago ], thank you so much for your question. On March 25, we published in our website and we communicated to the home markets that our committee had expanded the investments limit, according to the investment committee which we created last year, to consider alternative investments. Initially, we comply with BRL 300 million, but last March 25, the Board of Directors and the committee went down to BRL 50 million. If you check the explanation BRL 23 million, we already communicate about some different investments differently from those conducted by the CDI and by the committee: BRL 26 million investments in [ equities ], BRL 3 million was acquired in debentures and almost BRL 65 million for shares which belong to the Bovespa. I'm sorry. Would you like to say anything?

[Unknown Analyst]

No, go ahead.

[Unknown Executive]

So in fact, we are considering different ways maybe to increase our cash revenue.

[Operator]

[Operator Instructions] Our next question is from [ Mr. Morera ].

[Unknown Analyst]

I have a question about finances, returns and results and about some variations in the currency exchange. Is there anything specific about it? Or it's just a matter of context?

[Unknown Executive]

Can you please repeat your question? Unfortunately, we could barely hear your question, so please repeat your question.

[Unknown Analyst]

Well, I'll try to speak louder. About our financial results according to the different currency exchange valuations, I would like to know if that can be beneficial or not to company. Or that is just a matter of accounting reasoning.

[Unknown Executive]

[ William ], that was done for accounting reasons.

[Operator]

Our next question is from [ Felipe Rais, Brasifi ].

[Unknown Analyst]

My question is related to sales. If you could elaborate a little bit more about sales during the second quarter considering that coronavirus has impacted significantly sales during the first quarter for 15 to 20 days. With a significant impact, the first quarter was a worse and negative quarter in terms of volume of sales and prices. And this quarter felt a very significant impact. I would like to hear what's your take on this quarter sales. What is going on right now?

[Unknown Executive]

[ Felipe ], I will ask Luis, who spoke before me, to help me to answer to your question.

[Gelson Rostirolla, executive]

[ Felipe ], we were careful enough according to our orders portfolio from March. We contacted our clients to see if they could get their orders with an additional time. With that, we tried to be very sensitive and we gave them some time extension. With that, they could have some more time for payments. We are concerned about their sellout. We'd like to support their sellouts so they can go back to the normal range as soon as possible. We had some obstacles at some important sites such as São Paulo and Rio de Janeiro, where the commerce is locked down and we cannot commercialize our products, but we believe that once our economy is open again, we will be able to sell normally. And we will be able to deliver what we have already being negotiated with our clients.

[Operator]

[Operator Instructions] We are closing the Q&A session right now. I would like now to hand over to Mr. Alceu for his final remarks.

[Alceu de Albuquerque, executive]

Once again, thank you very much for your participation, and I wish you all a very nice day.

[Operator]

Grendene's audio conference is concluded. We thank you all for your participation. Have a nice day, and thank you for using Chorus Call.

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