Grendene SA

BOVESPA:GRND3

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, everyone. Thanks for waiting, and welcome for the video conference for the press release of the First Quarter '24 of Grendene S.A. [Operator Instructions]

This video conference is being filmed and it will be made available on the company's IR website. ir.grendene.com.br where you can also find our press release for the second quarter of 2023. You can download the presentation from the chat icon, which is also available in English. [Operator Instructions]

We would like to emphasize that the information in this presentation as well as any statements made during the video conference concerning the business prospects, projections and operating and financial targets of Grendene are based on the company's management's beliefs and assumptions as well as information currently available.

Future considerations are not guarantees of performance. They depend on circumstances that may or may not occur because they are about future events. They depend on circumstances that may not happen. Investors should be aware that general economic conditions, market conditions and other operating factors may affect the future performance of Grendene .S.A., and it might result in substantially different results than those stated in such forward-looking statements.

Today, we have the following company executives with us. Rudimar Dall'Onder, Chief Executive Officer; Gelson Luis Rostirolla, Chief Operating Officer; and Alceu de Albuquerque, CFO and Investor Relations Officer, as well as all the other key managers of the company.

I will now give the floor to Mr. Alceu de Albuquerque. You can go ahead, Mr. Alceu.

[Alceu de Albuquerque, executive]

Good morning, everyone, and thank you for your presence in our video conference to spread the first quarter '24 results. This is a very sad moment for us that live here in Rio Grande do Sul. So I would like to take this opportunity to manifest on behalf of all Grendene, our solidarity to all the Gaucho people. This is the worst climate tragedy, and it's one of the worst moments and said this moment of our history.

I would like to take this opportunity to thank all the efforts and the education made of all the thousands of volunteers, Gauchos, and from all the other states in Brazil, not only here in Rio Grande do Sul that have been working relentlessly to help all the victims of the flooding. Grendene hasn't been impacted by the floods. Our operations are still operating 100%. But we are giving support to all the victims of the flood in a very structured way, very close of all the responsible entities, in a way to optimize the impact of our donations.

At this time, we are supporting with donations of 50,000 liters of water. We are also giving out footwear and thousands of clothing, towels, socks, children's socks, thousands of toys for people in the shelters that are living in the shelters.

All of our units in Rio Grande do Sul and in [ Serra ] are they have points where you can collect donations, and we are doing the logistics of these donations from [ Serra ] until the places that were damaged by the flooding from [indiscernible] to Porto Alegre and other regions also. So once again, it's a very, very sad moment. And together, certainly, we are stronger.

So starting with the results of first quarter of '24. The first quarter was a very positive quarter for Grendene. It's where we had a growth in revenue. We also had a growth in operational results, growth in net results and margins. On this first quarter of 2024, our volume reached 28.3 million pairs, 3.2% less when compared to the first quarter of '23.

In the domestic market, we grew 4.6%, reaching 22 million pairs and the external market volume was 6.3%, a decrease of 23.2%. The gross revenue grew 0.7%, reaching BRL 662 million. In the domestic market, we had grow of 6.7%, BRL 528.3 million. And the external, we have a decrease of 17.5%, a total of BRL 162.5 million.

On the first quarter, the highlight was the domestic market that increased the results of the company. And within the external domestic market, I'm sorry, the highlights were Melissa that presented another quarter that's very positive. And this positive performance, we have been observing since June last year when we had the Summer/Spring Collection, which has been very well accepted by our consumer within the brands of Division one. The male segment and the female segments were segments that presented very positive results. On the other hand, Ipanema presented a decrease in revenue and volumes.

Talking about the international market. As I mentioned before, our volume decreased 23.2%, but that's not something that only happened to Grendene. It's something that's been happening because of the -- in the export of footwear in Brazil, they have decreased as a whole. The Brazilian exports of Brazil, they decreased 28% in Brazil.

So Grendene has a 23% decrease, but in general, Brazilian exports, 28.2%. What means that we gain market share on the above Brazilian exports in general. So now we have this share of 22.8%, 1.4 pp. And our gross profit grew 10.2%. The revenue -- gross revenue is stable, but we grew 10% because of the increase in the net revenue, which is bigger than the gross revenue because of less returns, and less discounts and less production costs, especially related to raw materials.

Our gross margin grew 2.7 pp for 44.6%. Our recurring EBIT, it's up 32% for BRL 38.4 million and EBIT, recurring EBIT is 3.4 pp for 18.4% and the growth of margin EBIT is above the gross margin because besides, we have a decreasing gross margin and we reduced production costs.

We were more efficient in our operational expenses. Our recurring net profit went down 5.3%, reaching BRL 147.7 million, and this decrease is related to the last financial results. Grendene, differently than the majority of the Brazilian companies has a net flow of over [ BRL 5.3 million ]. So if the decree of the [ selling ] decreased [ 2.6 pp ]. And we had a cash flow decrease less than BRL 530 million because of the distribution of dividends of [ BRL 1 billion ] that we had in May last year.

These 2 factors, less volume applied and the decreased selling rate was 5.3% smaller than last year. I have a table that compares -- it demonstrates the impact of the Law 14,789 that was approved in the end of 2023 and we started taxing ICMS from January onwards. So our net revenue reported in the first quarter was BRL 539.4 million, a grew of 3.7% when compared to the first quarter of 2023.

But within this revenue of BRL 539 million, we suffer taxing of PIS and COFINS because this law establishes that the state fiscals will start being taxed by COFINS and IRS and social contribution. If we didn't have the impact of this law, our revenue would be BRL 543 million and a growth of 4.5% compared to the first quarter of last year.

And when compared to BRL 539.4 million, our COGS suffered an impact also, but it's a positive one because this Law 14,789, establishes that besides the taxing by the PIS, COFINS and social contributions, the counterpart of this taxes is a fiscal credit of 25% on the depreciation of the endeavors that receive fiscal benefits. So in this case, we have a reduction of COGS of BRL 3.5 million. Our CPV, our COGS are BRL 298 million.

It should be BRL 302 million, in case we didn't have this law in operation. The impacted EBIT, also BRL 500,000, approximately [ 9.8.4%. ] If we didn't have this law, it should have been BRL 98.9 million, a growth of 32.6% instead of 32%.

As I mentioned, the law establishes that the fiscal benefits of ICMS and PIS, and COFINS and IRS and social contributions. So besides the impacts I mentioned, I also had an impact of BRL 5.4 million related to revenues and social contributions on benefits. So our recurring net profit reported, it was BRL 147 million should have been BRL 153.7 million, in case we didn't have this law operating. We had a decrease of 1.4% instead of 5.3%.

Here talking a little bit about the dynamics of the domestic market and talking about the Division 1 brands. They are all the brands except from Melissa, they had advances in 7.2% in the quarter. Volume grew 2.2% and it grew [indiscernible]. And at this moment, at this first quarter, online sales have shown 1.8% of the total amount of the internal market. This great performance of that division is due to strong turnover and replacement that broke the eyes of our products at the end of the year.

As I mentioned, the great performance in the male category with higher [indiscernible] and the female that were like 6 or 7 quarters that had a very nice performance compared to 1Q. Female is by Zaxy, Grendha and Azaleia. On the other hand, Ipanema has shown a weaker performance when compared to first Q '23. But we are still having this moment of getting rid of inventory that has an impact on the bulk, but most especially on price of the products. When we look at the dynamic like sell-in/sell out dynamic, our products started to -- well, we had the very beginning of the year, in January, we had a positive sellout.

But in -- along the quarter, that sell out migrated to negative band, and we closed the first quarter with the sell out of negative accumulated of 6%. On the other hand, sell-in due to the replacements and due to those replacement of our clients, if we consider that last year, sell out was higher than selling in all quarters. So we observed a very positive volume for replacement, and that had a positive impact on our sell-in.

Regarding Melissa. We had a very positive result. Almost 35% on the volume of 35% and liquid revenue per pair around 6.7%. We had a very strong growth in our e-commerce that sold 25% and penetration in e-commerce on total sales in the internal market represents 13.5%. This great performance not only in sell-in that grew 26.5% in bulk, but also in the sell out that was 21%.

This explained due to an excellent acceptance of the Spring Summer Collection '23-'24, that reached the stores in July last year. This positive result of sell out ended up like bringing results regarding sell-in increased; bringing a positive performance in the sell out. Our franchisees place new orders. So they have new products. New products attract more sales, and they tend to be sold in the full price. And when we have the full price, we have a better profitability from the franchisee and they trust the brand and they place more orders. So you see, this is a virtuous circle that we have in sales.

We observed a very consistent volume in sell out in all regions in the country because all regions showed a positive sell out. We closed the first quarter with 409 clubs, so 7 more than '23. And sell-in was very positive, not only in the club and franchise clubs but in all other channels, being the franchise and also in the multi brands online and in the brick-and-mortar stores.

Moving on to the international market, the export market. We can see that Brazilian export has suffered as a whole. Grendene has recoiled a little bit. And because of that, we had 1.5% share in the total exports reaching 22.8 per pair.

And why is the export market complicated? Because -- well, Latin America, most of exports from Brazilian pairs and also Grendene have been suffering with political and economical crisis. Just like we see in Argentina and also in Peru and other countries. So that has impacted export in Brazil.

High interest, high inflation rates in the northern hemisphere for the developed countries have impacted the consumption habits of consumers who are not used to working with high inflations. So they are migrating in order to consumption and to have that idea of cost benefit. In the large retail like Macy's, Nordstrom, Bloomingdale's, they're large stores but they are empty. And when we look at the smaller stores that we call off-price like Marshalls, TJ Maxx and Ross, they are booming with people. But that's not the channel that we sell our products. We usually go to the premium stores.

In Europe, we have a weak sell out in the summer, so that impacted our sell-in. So we had a performance that it's below expected. Wars in the Middle East have been impacted exports to that region and more competition with Chinese products that are gaining momentum.

In this slide, we have a little bit of the gross revenue that we started from BRL 657.6 million to BRL 662.4 million. So there is a certain stability. We have a steady growth of 0.7%. Internal market, we record BRL 23 million price and aggregated mix like BRL 10.2 million per pair. External market volume, we had lower like 37.8% in revenue, and price and mix per pair contributed bringing BRL 15.4 million -- better saying [ BRL 15.9 million ]. Exchange, we had 4.7% stronger than the first quarter last year. So Brazilian real has grown 4.7% and we drew BRL 6.5 million in revenue.

Thinking about our cost of goods. We withdrawn 2.7 pps from 51.8% to 55%. And the component of the CPP is raw material that started in 25% as a whole to 22.3%. So it's a gain of 3.5%. And with that, our net revenue -- better say our gross revenues from 6.4% to 44.6%. And it's important to point out this growth of 2.7% was reached even with a lower volume of exported pairs and the volume is the greatest driver for margin at Grendene. And that result has been reached without the [ recur ] on the export because Grendene has higher margins in the exports. So as exports recover as volume grows, again, we have plenty of room to recover and to maneuver to have an additional recovery. When we think about net sales and COGS per pair, our net sale has grown 7.1%, whereas our COG per pair is 2.2%. So COGS per pair has a lower intensity when we compare to the net revenue per pair.

Thinking about our operational -- recurrent operational expenses, they recur 3.1%. And when compared to the growth of liquid revenue, net revenue of 3.47%. On the right, there is a comparison of the recurring and the administrative expenses. Within these expenses, I still have an additional breakdown for variable expenses. These variables, so we talk about commissions, freight and licensing.

So these expenses, as the name says, are variable and they go along to the net revenue. So we see a growth of 3.1% of variable expenses, which is lower than the net growth that was 3.7%. Publicity grew 24%. We are intensifying investment on that. Other expenses, other commercial expenses they go back to 9.7%. So we were more efficient in managing other commercial expenses.

When we look at the general administrative expenses, we grew 5.6%, BRL 1.5 million. But that growth, 80% of that growth is focused on the tax expenses. This BRL 1.2 million that we see on tax expenses, they are about anticipation of paying the building tax in this first quarter. Payment was done in the first quarter. And last year, the first quarter payment of this building tax took place in the second semester.

If we exclude this effect of the building tax in the city of Sobral, Ceará, we can see that it's lower than the inflation. In this slide, we can see the impact of each component in our recurring EBIT. So it was BRL 74.5 million in the first quarter last year. We reached BRL 98.7 million this year. And the main component that contributed to that growth was the positive variation of net revenue and the negative variation of the COG.

We sit on nonrecurring items. That's BRL 6.69 million for our EBIT. And within the nonrecurring items, the variations, we are talking about estimated provision, doubtful debtors. And as I mentioned, we are going through a moment of -- that we are maturing. So revenue growth, but our investment in marketing and to strengthen our brands also grow in intensity because these are investments that are being done in order to bring future revenue. We have BRL 7.7 million of reversion for provision, and this is related to pending, if we compare to [indiscernible] and the description here is quite clear.

This is our financial results. As I mentioned, net financial revenue. We had BRL 530 million less in this first quarter when we compare to the first quarter last year, due to the extraordinary distribution of BRL 1 billion that we did in May last year. So we have a lower balance that has been applied. In other [indiscernible] that is like 2.2, and we compare to the first quarter last year, that generated a result of 36% lower than last year.

We have this wallet for investment, this portfolio, that bring bank investments in the first quarter with allocated balance of BRL 34 million. This is dividing 93% that goes to project for development and 7% in private credit. This portfolio started in 2019. You may remember, has accumulated profitability of 230% of CDI. Being that the real estate and private credit is almost 60% of the CDI, the private credit and portfolio have 205.5% and variable income is almost 582% of the CDI. Just a reminder, we don't have like novel for variable.

Our GMV of the e-commerce grew 20.9% the gross margin, 6.4%. We have been doing strong works to reduce the discounts, and we also had a bigger market share of products. With that, our recurring bit grew almost 79% and our share in our line sales has been growing quarter by quarter, reaching 5.3% on this first quarter when compared to 4.7% on the first quarter of last year. And Melissa sales reduced 14% of share, online share, for the [ 13.5%]. This point percent decrease, it's related to the excellent performance of the off-line channels.

Talking about GGB. The gross revenue grew 6%. The gross margin grew 4.8 pp our gross margin has a very positive growth because of the healthier sales. What I mean by that is like full price sales. We have been observing a strong growth in China. In United States. Also in United States, it decreased a little bit because of the movement that the North American retail has been going through. They don't want to work with new brands and retailers. They don't want to take -- have inventory take risks. And so the drop shipping mobility is where the products are exposing the online channel of the retailers, the sales happen. And when they happen, who does the logistics? It's GGB.

As these products, they have -- they sell well in the online channel. We open new doors for brick-and-mortar stores. So as I said, it grew 6.6%. It's a quality growth. Gross margin is observed. The growth and the gross profit also almost 50% increase, even though the final result, the net result is stable. So the question is if the gross margin grew almost 50%, why the last line is stable? It's because we are investing in marketing initiatives. We have been investing. We are investing in our brands with higher intensity than the growth of our sales and the gross profit. This is a work for medium and long term.

The investment of these brands, strengthening our brands and marketing, to strengthen the brand awareness of our brands. In China, we had a very positive performance with our brands, especially Melissa. We also saw a very robust growth in Rider, Ipanema and Zaxy and other brands. And rise[indiscernible] grew also in China and the United States. So GGB has been doing what we expected growing continuously quarter after quarter because we are doing a very strong movement to strengthen our brands.

The results, it's a little bit below what we planned. But it's not because of the performance of GGB. It's because of macroeconomic conditions. GGB has been doing an excellent work. Much superior than what we would be doing if we were on our own. So here, the result, the net result is BRL 139 million; incentive reserves, BRL 64 million; and legal reserves, BRL 75.8 million.

As we have reached 20% of also show capital, the resources for legal reserves, we have available to distribute dividends, BRL 75.8 million. This BRL 75.8 million represent 0.08 per share. They will be paid on the sixth of June for those shareholders that have Grendene shares and on the 21st of May 2024, that will be paid. It will be ex-dividends after the 22nd of May. This graph with our distribution of dividends, on interest on equity accumulated, since the our company went public. We have distributed BRL 5.9 billion of dividends. And if we update this value because of the IPCA, it's a total of BRL 8.7 billion. And if we update by the CDI, it's BRL 11.6 billion.

So people want I had to tell you about the numbers of the first quarter, that's it. So now I would like to open for the Q&A session.

[Operator]

We close now the Q&A session. I would like to give the floor to Mr. Alceu de Albuquerque for the final considerations.

[Alceu de Albuquerque, executive]

Well, once again, thank you so much, everybody, for your presence. And I would like to ask you, your contribution from all of you at this time, at this moment, we have been going through. So if you can please help us the best way you can with donations and the way you find possible. Our state is in great need.

Thank you so much, and have a nice day.

[Operator]

The video conference of results related to the first quarter of 2024 of Grendene S.A. is now closed. The international relations department is available to answer all your questions. Thank you, and have a great day.

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