Grendene SA
BOVESPA:GRND3

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Grendene SA
BOVESPA:GRND3
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Price: 5.01 BRL -0.79% Market Closed
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Earnings Call Transcript

Earnings Call Transcript
2022-Q1

from 0
Operator

Good morning, everyone. Thanks for waiting. Welcome for being here for the results for the first quarter of '22. Rudimar Dall'Onder and Alceu de Albuquerque will be the hosts. You'll found the press release of the first quarter of 2022 at grendene.com.br. We'll have a version of English and Portuguese. There will be simultaneous translation into English. [Operator Instructions] We would like to say that all the declarations made here during the presentation. indicate operations and financial -- they are just projections according to expectations in relation to -- highly depending on the functions of the performance of the country and financial results of international markets.

Let's give the floor to Alceu de Albuquerque.

A
Alceu de Albuquerque
executive

The first quarter, I hope you are all fine and very healthy. So to get started today, I would like to give you an overview of our first quarter, firstly on the internal market and afterwards on the external market.

On the internal market, what we have seen is an environment -- I'm sorry. I was disturbing, sorry.

So once again, on the domestic market, what we can see is an environment on the beginning of the year, an inflation scenario with high interest. The unemployment rates were very high, which had an impact on the lower classes and their incomes as well. The classes A and B, we still can see the same behavior observed on the fourth semester with a higher interest to consume. But along the quarter, what we can see is a recovery on the consumption, which has improved throughout, which can be seen with the behavior of consumption at the retail.

We can see on the graph on the right, the sell-out -- the accumulated sell-out, as you can see on the right of our products, in a part of our clients on retail. And that, we believe, reflects on the market as a whole. So if we take

[Audio Gap]

and we can see a similar behavior at Melissa, which has been 30% over -- a number around 19%. And as we take the quarter, we have been 42% over. And that behavior both on the brands of Division 1 as in Melissa Clubs, what do they show us? They show us the worst has gone. So the dynamics of this first quarter was inverted comparing to the last year. We started the first quarter last year very strong, then we had the Delta variation of COVID. And in the second quarter, we entered with a more negative expectation for the second quarter, which is a contrary view of what we are perceiving now.

Now we are observing a more challenging scenario. In February, we improved our scenario. We have a better significant improvement, showing us that the second quarter should be strong, and we have great expectations for the rest of the year. That has been the scenario in the domestic market. But in the international market, it was the opposite. We saw a favorable environment for expectation, not just for Grendene, but as shoes in general.

But we saw a reduction, of course, on the COVID cases, which ended up stimulating tourism, and that reflects the diversification strategy of bigger clients trying to have a wider range of suppliers. So they are not exposed to one country only avoiding supplying problems.

Another factor that contributed for our expectation is the elevation of the international freight costs which makes Asian products less competitive. So based on that, we can see a recovery, a general recovery of all of our markets, especially in North America due to this diversification of customers.

What is the reflex of that in our numbers? So in the first quarter of 2022, we had 22.6% volume, inferior to the same period last year. And that drop has been pulled out by the domestic market, which dropped 35.4% in that period. What are the factors? And why can we perceive this drop in the internal market? Well, first of all, because of the scenario that is not favorable to consumption, as I mentioned before, the inflation is high, which compromises the consumption, especially the low-income consumer, where a number of our products, they serve this population. Hello Melissa are more for classes A and B. But the rest of our products, they are for low income. So we had a high unemployment rate. We had high inflation, so that reduces the consumption capacity of this population -- lower population.

Another factor is the sales at the Christmas of 2021, we had an impact, which ended up impacting stocking and opening for new launches. We also had the anticipation of orders coming from our clients, our dealers. So we would avoid purchasing in January because of new adjustments. We had announced a 2-digit adjustment from January on. So a part of our dealers, they opted for that to be done in December, so it wouldn't impact our business in January.

And our basis of comparison against the first semester of 2021 is that in that moment, around 5 million pairs that should be shipped in December 2020, their shipment has been delayed to 2021 because of our capacity being taken over. That reflects our production in the second quarter, the whole second quarter of 2021. So we received the orders in that quarter, but we couldn't produce because of interruption. So the normalization of the delivery on that process and the high demand, the strong demand of the second part of 2020 overtook our capacity, and the normalization of orders would happen only in 2021. So that has been a scenario in the internal market.

In the external market, international market, what we could see was a high demand exactly because of the diversification, much because of the high cost of freight coming from Asia, which makes the Chinese product less competitive. With that, we managed to enlarge our products, increase the number of shipping pairs around 18.9%. And when we look at our revenue, it's quite stable, dropping around BRL 630.8 million. And looking at the domestic market, we saw the number of 9% related to the first quarter of last year, meaning that the volume dropped in 30%, but the revenue dropped a little less because of a bigger gross revenue, which grew 31% due to price readjustments during that period and a better mix of added value also because Melissa had a good performance in the last 3 quarters and because of the recovery of retail and the magazine channels, with historically demand a higher added value.

In the international market, our -- we had a 16.4% growth in our gross revenue. Our external foreign market, the gross revenue per pair grew in dollars, 2.1% and then -- sorry, in a drop of 2.1% in BRL because of the exchange valuing, we had 4.62 the dollar in reais this year here in Brazil.

Looking at EBIT, we had -- the EBIT had a drop of 57% and was influenced by the continuation on the costs of raw material. When we compare the first trimester of the one year with the other, we have all -- the carrying all the increase of the raw materials in 2021.

Just for you to have an idea, in 2021, one of our main -- PVC, one of our main raw materials represent 20%, 25% of our whole. It had an increase of over 60%, so the comparison gets all that.

And besides the pressure of costs coming from raw material, we also suffered a higher pressure because of labor, and one of them is a higher volume of orders to serve the companies, to serve the shop floors. We stopped being so productive as we have a higher volume. The volume is one of the biggest drivers for margin at Grendene. As the volume dropped 19%, we had a smaller productivity in labor. Even though we still have a management involved in the production, this productivity of labor has a factor that has contributed to intensify this loss of productivity, which is the new variant, the Omicron that ended up bringing a -- Sorry, I just forgot the -- we used to have more employees, more collaborators having to stay at home. It was a labor absence, work leave, and that ends up affecting productivity of our labor.

Apart from that, we had an inflation in the period, and all the union raises kind of impacted the workforce. So the high absent of work leave, high union workers having the taxes of the salaries and also the inflation kind of impacted in the raw materials in this quarter when compared to the end of the year, we observed an instability of the raw materials, stability in prices. And this stability is still not affecting our average inventory price. And this going drawback of these prices that we started observing last year, and it was stable this year. It will start impacting the third quarter of 2022.

Another factor that contributes for this downfall of our EBIT, it was operational expenses that have increased, influenced especially by the commercial expenses. And when we talk about it, we are talking about advertising and publicity. We are talking about people, employees, people related to our e-commerce team. In our first quarter of 2021, there were still -- we were still putting together the team. Now on our first quarter of 2022, we have this team very well structured, and probably we won't have any new increases that are relevant in our team. And the increase of national freight, the shipping because of the high prices in fuel also have an impact.

With all of that, all our EBIT margins increased from 24% to 9%. And when we talk about recurring net profit, it became relatively stable, reaching BRL 5.3 million, and our net margin was also stable going 1 percentage point down. The difference between EBIT margins that were 9% and 24.2% is a result of the excellent performance of our cash flow that increased and got BRL 88 million as a result in the first quarter. It was BRL 42 million above more than when comparing to the first quarter last year. Particularly, they were influenced by 2 accounts. It was our variable income portfolio that had a result like BRL 252 million. BRL 40 million above what was -- what our result in the same quarter last year and BRL 42 million in this quarter, BRL 20.6 million above last year.

Even if the volume applied is better, the cycle of high increase of tax rates, we had a 10.3% increase in our first quarter when compared to last year, it was just 2%, which is kind of helping a lot with the financial results.

This slide is just detailing about the numbers I showed in the previous slide, I talked about it, and I'm going to talk a little bit about our portfolio. We call it the investment committee portfolio, BRL 688.2 million when we had tax rate very reduced when we were looking for investments that were a little bit more profitable. BRL 850 million, we used to have in March 31. They were allocated in the market. We had BRL 688 million allocated in the margin, and the shares were divided like 50% was about real estate, projects of development, retail state projects with INCC plus 9 and EMCC plus 12. These are profits that are projected, and it will confirm themselves alongside when the projects will develop.

We also have a variable income, representing 42%. And we also have private credit presenting 80% of this share value. When we look at this variable portfolio, 20.1% are allocated for mining especially Vale do Rio Doce. We have 34% in the financial institutions like such as Banco do Brasil, 36% in energy, such as Eletrobras.

Based on these numbers, I have presented, the company is proposing a distribution of BRL 83.7 million for dividends in JCPs. This is a gross revenue when we discount the 15% of gross value -- when we discount taxes, they will become BRL 31.450 million net. The dividend shares to be distributed are BRL 67.5 million and a net value to the shareholders of BRL 71 million, like BRL 81.6 million by share. These dividends will be paid to the shareholders that have Grendene's shares on the 9th May 2022. So the shares will become -- they will be negotiated in ex dividends, and we will start paying this dividend -- JCP dividends from the 25th of May onwards.

As I showed before, in other situations, I have an evolution here of our dividends and JCPs that will pay out in 2004. And we paid about BRL 4.3 billion. In this quarter, as I mentioned before, we are -- we have been distributing BRL 83.7 million. These are the numbers of the quarter, and I would like to get into more detail as regarding our e-commerce. Then I will call about GMV, which is a very good product that we have now.

Our e-commerce is still growing. It has -- it kind of grew robustly in this quarter when compared to the first quarter of 2021. We increased 300% in GMV. Our e-commerce nowadays represents 3.7% of the sales in Brazil in the internal market, domestic market. Regards -- related to the profile of our customers that purchase products with less value-added, we reached a plateau of 25% like other competitors have reached, but we believe that 12% is a little bit healthier for this plateau than that. And Melissa represents a lot of this result and Rider as well. Other lines with cheaper products where the freight can compromise also. Maybe we'll have smaller penetration with them. 10% to 12% would be the penetration -- the healthy penetration of our products in the internal market.

We also had an evolution in the first quarter when compared for the fourth quarter of last year. It's a quarter that has a lot of flow of people in the website because of Black Friday and Christmas. So we had an increase of -- we had 16 million online sessions in our first quarter. It's an increase of 240% compared to the first quarter of '21. From the 16 million online sessions, more than 5 million were done by clients -- different clients. We are bringing new people to our websites.

More than 170,000 pairs sold in the period. We kind of increased the cities that we are receiving our products. It's an increase of 31%. We implemented in Sao Paulo the same-day delivery of Melissa and we managed to deliver on a ratio of more than 10 kilometers products on the same day. We did the integration with Mercado Livre. We started the development of Melissa ABB, that's going to happen. It will be ready until the end of the year. And we are also going to integrate new marketplaces throughout the second half of the year.

On the third quarter, we are going to integrate with Renner [indiscernible] and on the fourth quarter, [indiscernible] . So we have a lot of initiatives going on in our e-commerce. We have been learning a lot with the GGB people, we have been sharing a lot of information and experiences.

Talking about of GGB, when I mentioned the results on the fourth quarter, it started the operations on the 1st of January, and it continues focused in the growth and the building up of the infrastructure to support a long -- medium and long-term growth of the company. Or what do I mean about infrastructure? It's about people, systems and processes. So regarding people, Gustavo and André have hired a team of highly capacitated people with a lot of experience in the sector. So the targets of medium and long term can be achieved -- in terms of systems, they have been building information systems, IT systems, where decisions can be based in information, turning systems into a more robust system.

For example, the online operation that they assumed from the second quarter of January, we replaced our platform for the Shopify platform. And the flow of clients with this logic we had days of peak where the flow was so high that this website ended up being slow or going down. So they are investing a lot of money to make to turn these systems into more robust systems.

And when we talk about process, GGB started with global brands, very strong brands, but the company didn't exist. So they are building the processes in deciding who does what. They have been hiring suppliers, third-party suppliers, payrolls, logistics operators and all the processes that a company needs. All the processes, the companies already have -- we didn't have before because we -- and now we are focusing in building up these processes and fine-tuning all the markets we are going to act and the brands we are going to use and increasing local presence, the index of products for the mix for United States is a specific mix, for China is another mix. The commercial calendar for United States is one calendar and for China is another one, for Hong Kong, for Canada.

So they have been creating these programs to share those with these mixes of products that are specific for every single market. This is why we have to review the first result. We are going to view this first result in only 2023. Because as I mentioned before, the calendar of the North Hemisphere, it's a calendar that's a little bit different than us. In May of a certain year, for example, the buyers of our clients, they receive the budget to allocate in a specific brand or product. From that onwards, this purchases, they get together with manufacturers, they get to know collections and place the orders that are going to be delivered from January to May of the following year. So now in May 2022, the commercial -- the sales team of GGB are going to get together with clients. And in June and July, they are going to present the summer -- spring/summer collection of 2023. They are going to know our collection, and they are going to place orders that will be delivered from January onwards -- January 2023.

So commercial actions that are going to start from May and June, they are going to reflect on the shippings that are going to happen from January to June next year. This is where we are going to see the results. The results of our new management -- our management. The e-commerce of GGB, we assume the -- assumes the GGP management of the e-commerce from the second quarter of January onwards. And after that, we could note an increase of 100% with Melissa. It's the only brand we have selling online in the United States and increased a lot when comparing to the last quarter of last year. And this growth is a result of many different alterations and changes. For example, when we used to manage, we couldn't acquire a product without having an account at the Melissa website. Now you can do that, you can do a purchase on the website without having an account. We used to have to tell the gender to make a purchase. Now, we don't have that anymore.

There is a very strong culture in the American market of evolving of sending back products, returning products and it's a more amicable or more friendly experience now because the variety of products kind of reducing 30%, which ends up reducing the negative feeling of our consumers when they see a product, and this product is not available in stock. With a smaller mix, they can have a better inventory management. And also, they can have a more adequate inventory for the local consumer. And small actions like that, they made the e-commerce in the United States to grow -- they helped grow 100% when compared to the first quarter last year. When we talk about China, for example, the lockdown in China kind of hindered the advances of GGB in China. We had an evolution. We managed to acquire the TMALL store, our farmer distribution and TMALL is 1 of the main channels -- sales channels, online sales channels in China. So we acquired this store from our distributor. And with that, we acquired the entire database of clients of them.

So the lockdown is something that we must pay attention to kind of made us postpone the entering of GGB in China, but we have been working hard to advance in that market. And on the 18th July 2022, there is a day that will represent all the online sales of the year in China, and we are going to assume that in TMALL and we have high expectations for the results obtained from there.

And I would like to -- in the end, I would like to share, we did a collab with world manual -- Manual do Mundo. And it's the first low-impact collection that we are producing soles with recycled -- 30% recycled content made of rice hull and coconut fiber. And it's really, really cool and interesting because these people from Manual do Mundo many of the world -- they made a video, the link is above the picture of the product. It's a 19 minutes video with more than 50,000 visualizations that show in a very fun way and very light way, all our manufacturing process. So I invite you that are watching us to access this link and watch this video, which is really interesting.

This product we launched with a menu of the world. It reflects our effort to bring our products to use bio products with renewable sources, replacing fossil materials. And this collection joins all the collections that we had before, for example, Rider R4 that uses bio-based EVA, Melissa Free that uses sugarcane materials. And this is just to demonstrate a little bit of our efforts to bring renewable sources materials to our products and always remembering that the PVC used in our products is recyclable, 100% recyclable.

We use up to 30% pre-consumption recycled material in our products also. If we have a waste generated inside the factory, this waste is going to go back to production, b, go through a process and it will end up being vegan materials, new materials.

Our products are vegan. They are registered by the Vegan Society in the U.K. Our PVC can be reused many, many times. And we have more than 400 points of collection since 2019 to incentivate initiative the circular economy, what I had to say that was it.

I would like to end saying that even though our economic scenario is still a little bit challenging. Is it near where we have a lot of uncertainties, it's an electoral year. We are going through a very light political crisis going through a war between Ukraine and Russia. Many, many elements of uncertainties are part of our scenario. But we are very optimistic. It's a positive scenario coming -- arising, especially for the second quarter of this year. We have indications that we will have a very strong resumption given to the volume of sales of our products.

So I would like to end with this message, and I'm hoping for question and answers now.

Operator

[Operator Instructions]

Our first question comes from Vinicius Picinini from Quantus.

U
Unknown Analyst

Alceu, congratulations for the disclosure. It helped a lot the results of the first quarter. And my first question is if you can pass an idea of the volume of the highest in December -- and also the Omicron volume that happened in the second semester, if you can pass along some numbers on that, that would be helpful.

A
Alceu de Albuquerque
executive

Thank you for the question. Just to understand what I'm not -- I didn't understand. How many of the 2020 migrated to 2022? How many pairs -- how many pairs should be sold in December that were sold in January? And the second question, how many pairs were supposed to be done in the first quarter and because of Omicron, you have to move to the second quarter.

This is hard to answer -- regarding the anticipation of orders, I would say, around 10%, 15% of orders that were supposed to be shipped in January. They were anticipated to December and speaking of reallocation for the other semester. What I have is the orders we received in March to deliver in April. Remember Grendene only produces -- we produce just in time. So what we have is a relocation is an improvement of sellout at the edge, and we have a certain delay from 1 to 2 months until we have the selling because the retailer, the dealer, they see an improvement at the end. And they place the order in March, and we deliver in April.

Here, we don't give any guidance. We don't go give any previous results, but what we can see is the volume of orders in March to deliver in April was a very strong volume, confirming that feeling we had of a recovery on the level of consumption at the end, which is already reflecting our scenario.

U
Unknown Analyst

If I can ask another question. Looking at the e-commerce on the internal market, can we expect that in the next 12 months, you will increase the integration with the digital, physical Melissa and what are the next steps?

A
Alceu de Albuquerque
executive

Today, our Melissa Clubs, they are already integrated on platform of omni channel. So when I show the performance of e-commerce. I don't talk about billing over. I talk about GGB because there is a difference between GMV and the turnover, the BLA because one is done only by Grendene, that leaves the stock software. And GMV considers not only the turnover done by Grendene where the product leaves the delivery center of Grendene but also considers the sales that are done at Melissa site. But who makes the sales per se is Melissa Club because the product leads the club. And in that case, Grendene receives a commission per sale, but the sale itself is done by Melissa Club.

And a part -- I don't have the exact numbers now. The number of clubs, which are already connected to this platform, I would say they are almost 100%, and we have the pickup in store mode, we also have delivery at the house of the client mode and all these forms, they are available at this platform.

Operator

Our next question comes from Renan Satori from Bradesco Bank.

U
Unknown Analyst

I would like to ask about the raise in prices. What was the level of acceptance? And if you think there was any negative impact -- and my second question was the perspective of opening stores of Melissa from now on.

A
Alceu de Albuquerque
executive

Regarding the readjustment of prices, we announced it in the end of last year. And as I mentioned in that time, it was a readjustment that wasn't very questioned by our clients because the market as a whole felt the need of readjustment and the readjustments we did around 2 digits was as little as possible, so we could avoid at the maximum the demand of the impact.

Let's say the readjustment was around 10%. If we take a product in Ipanema, which is sold from BRL 20, 30 putting 10%, it's BRL 2, BRL 3 at the final price of this product. We believe that with the readjustment we did was necessary to see the -- to organize the margins, again, it doesn't have a very elevated impact on the product demand. It doesn't affect the product demand. The smallest number of pairs shipped in the first semester was a more structural issue, a more economic -- high inflation in that inflation for the low customer -- low-income customer can be really bad because it's more related to food and power that they can't run away off. So they have less money for consumption.

I don't have the feeling that readjustment we did was what impacted the demand. What impacted demand was as a structural thing as the order -- the orders to avoid this adjustment, the dealer, the retailer, they wanted to have a better profit margin, obviously, but without the readjustment and a strong basis for comparison with the first quarter of 2021.

And another point here is in a high-inflation scenario of a little money in the pocket, historically tends to be beneficial for us. And that is because if you take our product and you take our competitors' product, both they offer very similar features, but ours has a lower pricing. So in a scenario that population doesn't have much money to consume, and they have to consume a pair of flip flops, historically, we have perceived that they prefer our product because we have very similar features, but with a lower cost.

I don't know if this was your first question, but could you please repeat the second question?

U
Unknown Analyst

The opening of Melissa stores, the perspective.

A
Alceu de Albuquerque
executive

So we ended the quarter with 388 stores. We closed 3 stores in last quarter, but we should finish -- we should end the year. We expect to end with 415, 416 stores. And historically, the shops, they aren't opening the first quarter. They start their opening after that. So we had openings in the first quarter. We had 3 stores, but we had 6 stores closing. -- we expect that until the end of the year, we have, yes, 415, 416 stores.

Operator

Our next question via text comes from Mr. Marcelo Garcia from the Company [indiscernible].

U
Unknown Analyst

How Grendene perceive the local market in the international market, the growing expectation in sales?

A
Alceu de Albuquerque
executive

Thank you for the question, Marcelo. Yes, we have growth expectations, both in volume as in income revenue in both markets. In the domestic market, we have a higher representativity, a higher share. We should grow but it's some more slight growth when compared to long-term midterm perspectives. We have an international market that in 2016 were higher than $300 million. And with this partnership we had with 3G, with GGB, we have very high expectations on the international market, on the foreign market for growing. The biggest Grendene growing driver on medium and long term is the international market.

Operator

We finish in this moment, the question-and-answer section. I would like to give the final word for Alceu for final consideration.

A
Alceu de Albuquerque
executive

So one more time, thank you all for being here in our web conference, and I'd like to reinforce, we have a very positive view for the year. We had a revenue growth, volume growth, margin recovery, especially in the last line. And even though we are aware of the challenging environment we are going through. In election years, historically, the government injects a lot of resources in economy, which ends up as an incentive for consumption. We have a number of benefits being reviewed in terms of Brazilian rights. And all those are resources coming into the economy and to make that incentivate consumption, and we believe that must contribute for retail sales, including Grendene.

As I said, in moments of high inflation and unemployment, the products, mainly the low-income products, they tend to perform well because we are very competitive. We have excellent products with design -- outstanding design and very accessible products. And that's what we do. We provide fashion in accessible ways to our consumers. So with this injection of resources and competitive products, Melissa has the high-income consumer with appetite for consumption facing these factors, these issues. We have a positive view on that until the end of the year. Thank you all, and I wish you all a good day.

Operator

The webinar of Grendene S.A. is closed. We would like to thank your participation, and we wish you all a good day.

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