Grendene SA

BOVESPA:GRND3

Earnings Call Transcript 2020-Q2

[Operator]

Good morning. Welcome to Grendene's audio conference to communicate and analyze the results of our second 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://ri.grendene.com.br. We have the presence of Grendene's main executives who will also be available to answer your questions. Rudimar Dall'Onder, CEO; Gelson Luis, Vice President; and Alceu Albuquerque, our IR Director; as well as the main managers of the company.

We'd like to inform you that the press release of the second quarter 2020 is available on our 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 business 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 of international markets. I would now like to give the floor to Mr. Alceu Albuquerque, Director of Investor Relations of the company. Please, Mr. Albuquerque, you may proceed.

[Alceu de Albuquerque, executive]

Good morning. Thank you all for attending our second quarter 2020 earnings conference call. It is a pleasure to be here with you today, sharing our results. I hope you are well and healthy. First of all, I would like to communicate that all the information regarding the second quarter 2020 were released yesterday after the market closed, on our Investor Relations website. We've also posted an additional file called Audio Conference Presentation to facilitate your follow up.

Regarding the performance of the second quarter and the reflect of the serious impacts of the coronavirus in the Brazilian economy in the footwear industry and, obviously, in our operations. The effects of COVID-19 began to be felt partially even in the first quarter when the first social-isolation measures started in the second half of March. But it was in the second quarter that the effects were more intense. April seems to have been the worst month of the crisis, as it was the time when we observed the highest rates of social isolation.

As of May, the first measures to relax restrictive measures began, which gradually gained strength and allowed for the partial resumption of activities and the reopening of trade. The footwear industry was one of the ones that suffered the most in the second quarter due to the closing of physical stores, given that more than 85% of the sector sales are made through physical commerce according to a survey of Abicalçados.

Grendene, as one of the main players in the sector, was also hit hard by the pandemic despite the numerous efforts to try to mitigate the impacts caused by social-isolation measures. We were particularly impacted by the successive decrease issued by the Government of Ceará that suspended non-essential activities in the State, preventing our production for great part of the quarter or the semester. When the collective holidays at the units in Ceará ended where we have 100% of our production, it was not possible to resume production due to the decrease I've mentioned earlier. To try to mitigate the impacts of the interruption of production, we've adopted in the Ceará units. The [indiscernible] wage reduction regime of 70% and the other 30% that should have been worked were not due to this decrease, and they were calculated as an Hour of Bank. We've only resumed -- managed to resume the activities and partially at the Crato and Fortaleza units as of June 1, and at the Sobral unit, which concentrates about 70% to 80% of our production on the 24th of June.

Even so, the resumption was and has been made gradually in accordance to the guidelines of the strategic resumption plan for the State of Ceará, which contemplates 5 different phrases for resuming of activities. At each phase, it is possible to add 20% of the total personnel capacity per [ shift. ]As I've mentioned previously, due to this decrease, we were practically unable to produce for the entire semester. Although we had orders on hand, we were unable to ship them due to the interruption in our production. During this period, when non-essential activities were suspended, we were able to supply some of our channels with the stock of finished product, and we were also able to produce boots. Because they were considered PPE products and therefore used by several industries of the economy among them, meat-packing plants, agribusiness, supermarkets, and public agents. Some of them considered essential activities. On the demand side, we were also impacted due to the closing of physical commerce. The drop in consumer income because of unemployment or because of reduction in wages and because consumers being more pragmatic and judicious and less confident in relation to the performance of the economy, as shown by the consumer confidence index, which fell in April to the lowest level since the beginning of the measurement of the index.

The consequence of the interruption in our production and the retraction in demand of our products was 85.6% drop in the volume of pair shipped compared to the second quarter 2019, totally 4.3 million pairs. In the first semester of 2020, the drop was 48.3% when compared to the same period last year. The decline was widespread among brands, models and geographies. Consequently, the other result indicators, revenue, EBIT and net income were also significantly impacted.

With the lowest volume of pairs, gross revenue fell 83.5% in the second quarter 2020, totally, BRL 82.1 million.

In the first semester, total gross revenue reached BRL 532.6 million, down 47.4% compared to the same period last year.

In the domestic market, we've observed the reduction of 86.3% in gross sales and 86.4% in the volume of pairs, reflecting the marginal increase of 0.7% in gross revenue per pair regarding second quarter 2019.

The retail channel, which is made up of retail chains, stores, specializing footwear and regional department stores, in which the presence of clothing and footwear is predominant. As well as department stores, the great department chains, anchors of shopping centers, department stores and magazines and door-to-door catalog sales companies had a hard time performing during the second quarter of 2020, also due to the closing or limitation of physical commerce and the impossibility of people to circulate.

As I've mentioned in the beginning of this audio, the resumption of activities started more firmly only in the second half of June. Thus, compromising the performance of these 2 channels, which had their participation in the volume of pairs in the domestic market, reduced by about from 30% historically to around 12% in the quarter.

On the other hand, the indirect channel made up by distributors and wholesalers who purchase our products to resale them in smaller supermarkets and neighborhood foot retailers and the self-service channel, which are the major national and international hypermarket chains and large retail chains of regional supermarkets, they've increased their participation from 48% to 88% due to the fact that they remained open throughout the period.

These 2 last channels, we've also observed an increase of average ticket due to the greater demand for products with higher added value, which were previously sold exclusively in the retail channel.

The Melissa products, unlike the other lines, are not found in the self-service channels that have remained open throughout the second quarter. Their sales are strongly dependent on the Melissa Clubs, which are mostly located in shopping centers. As the shopping centers were closed more for a good part of the quarter, Melissa's performance was strongly impacted in the second quarter. As for the foreign market, the drop in gross revenue and the volume of pairs was 72.2% and 82.1%, respectively, when compared to the second quarter 2019.

Gross revenue per pair grew 55.4% due to the devaluation of the real against the dollar.

The drop in the volume of pair shipped to the foreign market was, in our view, due to the interruption of reduction prevented the shipment of orders in the portfolio, due to the cancellation and postponement of orders, due to the temporary closure of trade in most markets, the high level of inventories and distributors and stores as well as consumers' fears of taking to the streets. Net revenue fell in line with gross revenue. Even with the drop in sales, the gross margin grew to 41.7%, that is, again, of 2.8% points when compared to the second quarter 2019.

This drop occurred because COGS presented a greater decline in net revenue due to the drop in labor costs. But here, we understand that the gross margin analysis is compromised in the second quarter due to the costs of idleness, which refer to the fixed cost of the manufacturing units that were inoperative due to the measures of social isolation.

In the second quarter, we stepped up efforts to adjust our cost and expense structure. Operating expenses decreased 25.1% in the period, totaling a nominal decrease of more than BRL 36 million.

In this quarter, we had BRL 48 million in nonrecurring expenses related to the impacts of COVID-19. Of these BRL 48 million, BRL 44.4 million are the cost of idleness, BRL 2.1 million are HR and hygiene costs, and BRL 1.5 million are donations of safety equipment to health and safety professionals.

We had also another nonrecurring expense, but not related to the coronavirus pandemic. This expense totaled BRL 8 million, and it refers to the bankruptcy proceedings of one of our customers.

In the second quarter, EBIT was negative by BRL 85.3 million. And in the first semester, EBIT was minus BRL 45.6 million. The financial result was BRL 6.5 million lower than second quarter 2019.

Financial investments were BRL 22.1 million lower due to the lower CDI. While the result from foreign exchange operations was BRL 9.2 million, in other words, BRL 13.6 million lower than the same period last year. Reminding you that the counterpart of expenses with foreign exchange operations will be in the revenue from the foreign market as we resume exports.

Yet the result of adjustments to present value-added to the result of investments in variable income was BRL 29.2 million higher than in the same period last year. The net result in the second quarter and the first semester was negative by BRL 44.4 million and BRL 14.6 million, respectively. In the second quarter, the company's operating cash flow of Grendene was BRL 204.6 million. And in the first semester, it was BRL 356.1 million. We ended the quarter with a comfortable cash level above BRL 2 billion. Well now, I would like to talk a bit about Grendene's Investment Committee that was created in May, last year, with the objective of evaluating investment alternatives not backed by financial institutions or in securities issued by the Federal Government. The committee is made up by 7 members, Alexandre Grendene, Pedro Grendene, André Bartelle, Rodrigo Arruy, Rudimar Dall'Onder, [ Carlos Augusto Leone Piani ] and myself. Initially, a limit of BRL 300 million was established to be allocated to other types of investments in financial instruments of private credit, including real estate financial swaps.

However, in April of this year, as disclosed in a statement to the market, the limit was increased to BRL 850 million. Allowing for the investment of the incremental value of BRL 550 million in shares that make up the B3 IBOVESPA index.

Until June 30, 2020, the funds allocated by the committee of investments were distributed as follows: financial investments, more traditional investments, 36.1%; equity interest via [ SEPs ] in real estate projects basically in projects, 14.6%; and variable income, 49.3%.

These 3 -- 43.3% were allocated to 7 different stocks in 6 different industries. They are banks, energy sector, real estate, logistics industry, steel and mining.

Regarding the action to exclude the ICMS from the PIS/COFINS calculation base, there was no evolution in the matter. That was an expectation that the Supreme Federal Court would clarify the question of points, including the request for modulation in the plenary session of 2020. But on 24th March, the process was again taken from the agenda due to the COVID-19 pandemic.

So for now, no date predicted for the SCF judgment. A highlight of this quarter was the publication of our first sustainability report, using the global reporting initiative methodology, in which we presented the results of a 10-year journey to improve our processes, reduce environmental impacts and reinforce our commitment with society. Throughout the second quarter, we continue to produce and donate protective items to health and safety professionals. Since the beginning, back in March, we donated more than 1.7 million protected items. And with that, we reinforced our role as a corporate citizen company.

Well now I would like to talk a little bit about our actions for the resumption of the market. We believe that those companies that are well positioned, whether in terms of products, in terms of commercial conditions or financial structure, will be able to capture a portion of the market share that should migrate from the smaller companies to large ones because of coronavirus impacts.

As the footwear sector is very fragmented, with a very large number of small and medium-sized companies, unfortunately, we believe that many of them will cease to exist because they do not have financial conditions to support 2 or 3 months without sales or with very low revenues. We do understand that we are well positioned to capture part of the share. We are fully obsessed with products as we understand that a company's differential lies in its products. And that will set us apart -- our products. In early July, we held our conventions that are traditionally done in physical way. But this year, we innovated and made them completely digital, both for the domestic and foreign markets, presenting the products that will be marked in the second half. The feedbacks we received from our distributors and customers were very positive. The volume of orders just confirms the feedbacks received. It looks like we are on the right track. We are also working closely with our customers to provide all the support needed to try to minimize the impacts of COVID-19 on their cash flow.

Due to our robust cash flow, we believe that we can differentiate ourselves from our competitors by providing more aggressive commercial conditions, which can be a greater differential at this moment of recovery, especially in the scenario, in which credit lines have disappeared.

Finally, I would like to talk about the digital transformation started last year. The digital transformation is based on the pillars of technology, culture and business and has the ambition to cover 5 years in 2. For this, the company recruited internal and market talent with the mission of promoting internal innovation. In the cultural pillar, the objective is to disseminate the digital culture of agility, experimentation and agile methodologies within the company.

Within the pillar of technology, our main focus is to internalize all the initiatives and the management of online trade of our brands in Brazil and abroad. Through the digital commerce, the vision is starting with Zaxy, which should become the key between today and tomorrow.

Thus, we intended to provide the customized experiences for the customers of each brands in addition to capturing operational efficiency gains. The third pillar is related to business and is represented by Bergamota Works, which is our innovation lab. It was created to look for new ways to access the consumer and to bring Grendene closer to the start-up ecosystem.

Finally, it is important to highlight the gradual improvement that we observed during the quarter and the semester in the dynamics of orders suggesting that the worst of this crisis may be behind us.

Although we are still experiencing a scenario of many uncertainties. Starting in May and becoming stronger in June and July, we noticed a significant recovery in the volume ordered for delivery in July and August, respectively, at levels similar to last year and with very positive margins.

But despite this improvement, we cannot assure you that the crisis has been overcome as there are countless uncertainties about the extent of the effect of COVID-19 on the economy as well as on a possible second wave of contagion. That said, we'd like to end by saying that we are very optimistic about the prospects for the second half of the year.

These were the comments I had to make, and now we open for questions. Thank you.

[Operator]

[Operator Instructions]

Our next question is from Mr. [ Rodrigues ], investor.

[Unknown Shareholder]

I'd like to know about the re-buy of shares by Grendene and dividends, worldwide speaking.

[Unknown Executive]

Thank you for your question. As to intermediate dividends. As the year to -- as the half-to-date results, that was negative. Unfortunately, we haven't got intermediate dividends results. As to rebuying shares as approved by our Board of Directors last April, we haven't acquired any specific shares to this program.

[Operator]

Our next question is from Mr. [ Santos ], investor.

[Unknown Shareholder]

On Page 3. It was told that July 30, Fortaleza would be operating under 100% of its capacity. And 40% of what was left of the -- your collaborators under their -- 1/3 of their shift. What do you see in terms of forecast by the State of Ceará to regain full operation by their, is tough in terms of work shift?

[Unknown Executive]

Well Fortaleza and Sobral plant, we are expecting to achieve 100% of the work shift, and we are working with 40% of our work shift so far. So we are mainly working around 80% of our capacity as we have a 40% work capacity per shift. So we might reach that very soon. So from July 30 to August 14, we see 40% -- we see an increase in Sobral from 40% to 100%.

[Operator]

Our next question now is from Mr. [ Steven ], investor.

[Unknown Shareholder]

I just would like to ask about market share gain. You mentioned that Grendene is really well positioned in terms of cash flow, considering the company's structure. Are you considering in the future? As you have a much better structure than the competition. Are you considering any acquisition? Are you working on an inorganic growth? I know that your cash flow counts on fiscal incentives, do you think that you would gain incentives by additional acquisition by acquiring those smaller companies?

[Unknown Executive]

Thank you very much for your question [ Daniel. ] We are always open to any market opportunity. However, we haven't got any forecast for additional acquisition. But yesterday, during our Board meeting, we stated that we are open for offers. However, we have to evaluate any new opportunities. We have to ensure if those opportunities will add value to Grendene. As the margins we see today, we find it very difficult to buy other companies from the market. So to be very objective, we do are open to new offers, sure, but we have to evaluate opportunities one by one.

[Unknown Shareholder]

Okay. I got you. And in addition to that, I also would like to understand the digital part of the business. Are you expecting to have a mobile app or maybe to establish a partnership with any technological player in the market? How about this digital development that would you -- are you considering to expand this franchise to a digital channel?

[Unknown Executive]

Well your question, unfortunately, is -- was not very clear because of the connection, but let's see what I can do. Well we started our digital transformation last year, and such a digital transformation is based over 3 pillars: culture, innovation, technology and business.

Culture, technology and business. The culture pillar aims to disseminate the cultural technology, I mean, to become the company more agile. The technology pillar conversely is after new ways to reach consumers. And by that, I meant digital channel. And there are different ways, different technologies and different resources to allocate technology. So technology is a very broad pillar. And not only we can get much closer to that ecosystem. And the business pillar is responsible to reformulate our e-commerce platform. Nowadays, our e-commerce platform is of a third-party partner, and we are optimizing all this platform, which is now our own platform, and we want to manage that platform. And now we have just kicked off the first one, which is [ Zaxy ]. And from the first half -- from the second half on, our goal is to become that more internal. We no longer want to work with third-party providers, but we wanted to make that internal. I hope I had answered your question. Thank you.

[Operator]

We now end the question-and-answer session. I would like to give the floor to Mr. Albuquerque for his final remarks.

[Alceu de Albuquerque, executive]

I'd like to thank you all very much for the attendance. Thank you very much, and I wish you all a good day.

[Operator]

Grendene's audio conference is closed. We thank everyone for your participation. Have a good day, and thank you for using Chorus Call.

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