Grendene SA

BOVESPA:GRND3

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, everyone, and thank you for your patience. Welcome to the video conference of the release of the Second Quarter of 2023, the results of Grendene S.A. I want to remind those who require simultaneous translation that we offer this function on the platform. To access, simply click on the interpretation button through the globe icon at the bottom of the screen and choose the preferred language either Portuguese or English.

Anyone watching the video conference in English, you can mute your original audio in Portuguese by pressing the mute original audio button. This conference is being recorded, and it will be made available on the company's IR website, ri.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 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 S.A. 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 involve risks, uncertainties and assumptions because they refer to future events, and therefore, depend on circumstances that may or may not occur. Investors should be aware that the general economic conditions, market conditions and other operating factors may affect the future performance of Grendene S.A. and resulting 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 the company's key managers. I will now give the floor to Mr. Alceu de Albuquerque. Please, Mr. Alceu, you can go ahead.

[Alceu de Albuquerque, executive]

Good morning. Thank you, everyone, for your presence in our video conference for the financial results of the second quarter of 2023 and the first half of this year. The second quarter of 2023 was that very challenging quarter, very similar to what we have observed on the first quarter of the year. Inflation, even though we have observed resources, it still impacting the pockets of consumers and unemployment, even though the rates are going down, they are still high. Interest rates are still high, and we can still observe a high level of uncertainty from our clients. This is the scenario in Brazil.

In the world we could see a slowdown of the world economy regarding high inflation and high interest rates that end up impacting -- causing an impact in consumerism of the world population that is reducing the consumption of nonessential items and crisis in some countries in Latin America that concentrate 60% of our exports. So how was our second quarter? The volume decreased 15.4% compared to the second quarter of last year to 20.6 million shipped pairs. In the internal market, 4.7% decrease, 24 million for 22.3 million pairs. And then on the external market, we had a bigger return with 50.7% from 7.4 million -- for 3.6 million pairs of shoes.

If we look at the performance of exports, 3 countries, concentrate, 75% of the decrease. Argentina, Paraguay and Bolivia. In Argentina, the decrease is a reflection of the crisis they are going to for a while. So exports on the second quarter to Argentina, they decrease 60%. Paraguay and Bolivia, together, they have up to -- a decrease of 3 million pairs. This down -- this decrease is anticipated for -- anticipation of shipping on the first quarter. So this difference of anticipation kind of impacted the exports in the second quarter.

Besides that, besides anticipations, Bolivia has been going through challenges similar to the ones founding in Argentina. A difficulty to access exchange rate markets, to issue in part licenses and costs, to send resources overseas increased 4x. Other countries, we saw a reduction in exports was South Africa and Australia due to the deterioration of the economy. Just like some of the countries in Asia, we have observed various commercial barriers known tariff ones that end up making it hard to import -- to the exports to these countries, like India and Myanmar, where we can see difficulties of the importers, of obtaining imports licensing. And even though with this decrease of 50%, I'm going to talk about that later.

I'm going to talk about gross revenue, a decrease. And in the domestic market, it's stable, 0.1% growth. This growth was guaranteed by the Division 1 brands that showed growth in the gross revenue of the quarter. And in the foreign market, the decrease was 39.1%. When we compare 39.1% with 50 -- 39.1 % from the revenue, 50% of the volume of exports. So we can see that we had a growth in gross revenue per pair. It grew 23%. This is the result of the last representativeness of the exports of Ipanema, which has a smaller ticket and by the bigger representation of the female products and kids and inside the female lines, Zaxy and Azaleia.

They had a growth, which was very significant when compared to Grendha, for example, Zaxy and Azaleia, they have average tickets bigger than Grendha and that has helped the increase of revenue -- gross revenue in the foreign market. The gross profit increased 7.1%, BRL 185 million, it left from 34.2%, 40.9% is gain of 6.7 p.p.. We are going to observe later that all the components of the COGS, they showed improvements, but the raw materials was the one that contributed the most for this increase in gross margins.

The recurring EBIT will grow 38%. Recurring also, 160.2% reaching [indiscernible] the gross recurring profit 84%. The net revenue recurring increasing for 4 p.p., increasing in the detail of the domestic market, we separated the performance of the brands of Division 1 with Melissa. And then we can observe that the Division 1 brand, the sell-out growth increased on the second quarter, even though in a scenario of challenges, we grew in the final -- in the end because of our higher competitiveness regarding prices, quality and design.

We grew in a market that indicates that we are gaining market share. The selling, on the other hand, a decrease 4.5%. The selling market, we observed a very contained market with no further investments for distributors and retailers and there is a lot of impact from the retailers being for -- with high inventories, with other products that are non-Grendene products. And that can capture working capital and reduce the funds that companies have to buy other products. The big retail networks have high stocks of winter products that impacts working capital and that impacts the amount of money left to buy other products such as ours.

Selling goes down and sell-out increases. Retail is selling more our products than it's purchasing from us, which indicates a reduction of the level of their inventories. This reduction of the level of inventories in 45 days less than the average historical average. And the performance of the brands of Division 1, all the brands except Melissa, how did they perform? The gross revenue increased. The volume decreased 4.5% and gross revenue per pair increase 5.9%. Here, we have made huge efforts to make advances in the profit pool to try to capture more value, like selling the same volume of pairs.

During the second quarter, we noticed a growth that was very significant of the sandal archetype. It grew 87% -- 86.7% when compared to the second quarter of last year. The share in the sales of Division 1, one of this archetype left from 12% to 24%. So it's important to highlight that because this sandals in comparisons to the flip flops. Their prices are 50% higher than flip flops. This is why we are selling products that add more revenue to the company. The same thing is worth to the close archetypes. What are they actually? Boots, babouche, rain boots and flats, Ballerina pumps, the growth of these archetype along 17.1% with the closed archetype. So again, we are trying to make it available and to ship products with higher added value for our clients and that ends up impacting our gross revenue per pair.

The e-commerce of Division 1 also presents growth. It's a very important growth, 0.3 p.p. when compared to the online sales of Division 1 represent on the total of the sales of Division -- Internal Domestic Market division. On the food channel, which is a self-service, we grew 0.8 p.p., is the third quarter in a row that where we have been gaining share in this market. And then Ipanema and the female lines, they were the protagonist on the second quarter of '23. Ipanema grew revenue and volume. The female line grew revenue and volume remaining stable. And aside of female Zaxy, Azaleia have average tickets, they have a performance very positive when compared to Grendha.

For example, in Ipanema, within the mix of products of Ipanema, the sandal archetype, as I mentioned before, had a performance that was really positive. We grew also in volume. We opened new stores, we have more clients when compared to last year, especially in levels above the pre-pandemic situation. And as I mentioned before, our clients of retail and indirect channels, they are working with levels of inventory that are lower than when compared to the historical average. They have 45 days less of inventory.

Melissa had a behavior that was a little bit different than Division 1. The sellout and the selling, they kind of decrease. But just like individual one, sell-out had a performance that was above selling. In the case of Melissa, the sell-out decreased less than the selling, which again shows a reduction of the inventory levels of our franchises. The gross revenue of Melissa decreased 3.6% in the second quarter. Volume minus 9.5% compared to the second quarter and the gross revenue per pair grew 6.5%. This performance of Melissa is the result of the same reasons of those observed on the first quarter of this year. It's a reduction of the power of purchase of Class C, the ones that actually buy Melissa products, they are more aspirational products for those people and also readjustments throughout the pandemic to recompose a little bit of the margins that were lost. It ended up causing prices to increase and the lack of hit products.

As I mentioned before, on the first quarter. Two products were -- they have made 10% of the sales. They represented that. And to do the same thing this year, we need 6, 7, 8 different products. So the lack of hit products is one of the causes. Reduction of purchased power that impacted the sell-out. And with the decrease of sell-out, selling also decreased. The low sell-out is one of the reasons for the reduction of the selling and the franchises feeling insecure relating the recovery of the economy. Also reduce the selling volumes. They are working with lower levels of inventory and a very tight cash because of lower sales. This also ends up getting on the way of the selling volume.

The e-commerce of Melissa just like advances on the price point, they've got a margin -- gross margin, 50%, superior above the B2B when it's the industry direct selling to the retail stores. So we have been investing a lot to develop the e-commerce division -- either on Division 1 and Melissa, the gross revenue of Melissa on the e-commerce of the second quarter grew 28.6% and the share of Melissa sales on the e-commerce domestic -- in the domestic market was 12.8%. It's a 2.9 p.p. growth compared to last year, and we launched in the second quarter, The Melissa app. We are not investing in marketing to give flow to it because we are just collecting feedback from users that have already downloaded to implement improvements. When the app is mature, we are going to make more investments in media to bring because we've been noticing that all indicators and the p.p. are higher than the indicators of the regular online shops. The level of convergence is 4x higher in the app when compared on site. The volume of orders per pair is higher in the app rather than on the website on average ticket. You mean -- so all indicators are higher. So we are maturing our app so that we can invest more in media so that we can bring more flow.

So Melissa Clubs, as I mentioned before, franchisees are working very hard, but with levels that are lower than the average history levels. On this slide, we have the gross revenue, what has impacted our gross revenue in the second quarter. So volume was the highest negative impact on gross revenue in the second quarter, especially regarding export.

Prices and mix have added revenue especially price. and the price mix has helped a lot to keep more impact in price adjustments. Regarding CPV, we can see that there was an improvement on the second quarter, it's the third quarter in a row that we've been watching improvement on CPV levels. We've been mentioning that since last quarter in 2023 that we've been watching the withdrawal of the price of raw material, but we're still watching that happening right now. But we saw that there was a delay between the price of growth rather -- input material on raw material and it started to impact in the first quarter.

In the first quarter of this year, there was an impact that was a little bit stronger and it was more significant in the second quarter now. CPV has withdrawn 19.5% in the first quarter being the heaviest withdrawal in the raw material was 27.1%. Manpower fell 12.7% and other expenses, 11.5%. So we can see a total CPV from 19.5%, it falls more than the net revenue that fell 10%. If CPV falls more than the net revenue, we have margin. So we have 6.7 p.p. in gross revenue.

All components have shown withdraw regarding how much they consume from the liquid revenue but we have raw material that withdraw 5 percentage points when compared to net revenue. We have 0.5% and the other one is 0.3 p.p..

On this slide, we have the behavior of the main components of our CPV. So as you can see, since the beginning of 2022, we can see a withdrawal and we're still watching this withdrawal this year. And the only indicator that we've had so far that went forward, we can see manpower regarding the collective decisions regarding payroll. When we see the average role and we see the components regarding the PVC, we can see that is 4.1% above the average cost for replenishment. And what does it show? We have opportunities and we have for raw material. So we can have improvement in the raw material, so we can have less than the net revenue.

On this slide, we can -- we have here our jump regarding inventory. And we can see that in the second quarter, the volume is like close to BRL 440 million, and we had the second quarter with BRL 437 million. And that shows that we are -- with a very healthy level of inventory. We left an indication of 79 days for inventory to 65. That's great. And it's important to point out that we work with the fashion industry. An inventory of finished products and we deal with fashion, the longer it takes to be sold, this inventory will lose value. So when dealing with the production only, we produce only when we have the orders, we reduced this level of devaluation or depreciation of inventory because it takes too long to sell. So both inventory in the industry is healthy. And when we see the level of total inventory and finished pairs and components with footwear. So our level of inventory is healthy, just like the level of our clients. So both in the First Division and Melissa. So we are all working on levels that are lower, like around 30 or 45 days below historical levels.

Regarding our recurring operational expenses, we can see that they have recoiled as well. But because of that, and that they have the net revenue that recoiled 10.4%. So operational expenses, especially the recurring ones are representing 2.6 p.p. more than the net revenue, the less from 31.1% to 34.7%. You can see on the right, we can see on the opening of all these recurring selling expenses. We can see the commercial ones and the general ones and administrative. The variable ones are those that change according to the net revenue. So if net revenue drops, the variable expenses also dropped as well. And within that, we have commissions, freight, shipping and licensing. Marketing, which is investment in publicity and marketing. So we are regaining, and we are taking investment, again, we've invested BRL 16.3 million. The first quarter was BRL 21 million. So we can see it's a growth of 31%. And after that, we have the other operational expenses. And the main component that has been growing in the second quarter are the conventions, that they are growing around BRL 5.9 million more when compared to what we had invested in the second quarter last year. But this is because it was the first year after the pandemic that we've had the convention of the 3 markets. So we have the convention of Division 1 in Gramado. We had convention of -- Melissa's convention in Fortaleza in the Northeast and the global of the external market in Maceió in the state of Alagoas to all our distributors. So it's a very important moment that we presented the Spring/Summer '24 collection to our clients, both in Brazil and overseas in which we realized a great receptivity, I would say, when we presented. So they took it very positively.

Personnel expenses are growing, yes, but they are growing even below the historical levels. And in here, they are growing even when we consider the addition of all structure of Melissa's team in order to manage the franchise network. So even if we consider this improvement and this increase in the number of people and all collective payroll. We can see that we are growing 2.1% even below the levels of collective decisions. So when we look at admin expenses, we can see in taxes, that it changes BRL 1.7 million, but there is like a mismatch that we have the building taxes in Sobral that it was paid in the first quarter. But in this year, we paid in the second quarter. So from BRL 1.7 million, that is BRL 1 million that it is like Sobral's building tax.

Personnel expenses with admin grew like 5%, also below the levels of payment agreement that we had around that time. In the city of Farroupilha, the agreement was over 10%. Fortaleza was September last year, it was over 8%. And Sobral, we had this year that it was above 5%. So even if we have high agreements to payroll, we were able to keep the personnel expenses and that's because we adjusted the admin structure, both in the admin expenses and the commercial expenses. So we had an adjustment of around 15% of the headcount.

Moving now to the EBIT, recurring EBIT. It left BRL 11 million to BRL 18.7 billion, so it was around 160% and the main component that has contributed to this growth in the EBIT was the improvement in the COGs. We have around BRL 28.7 million that stands for nonrecurring items. And from this BRL 28.7 million, BRL 20 million respond to assets and we have a provision for credits and to retail in the first quarter, we had 3 large retail networks. But with one of them, we have to renegotiate. So we reversed that revision. And then we can see managing franchise, which is commission that we're still paying with a master franchisee due to the contract that envisions that we should be keeping paying the sell-in of Melissa Club, they haven't reached [indiscernible] months old of existence as from the termination of the contract.

So our net financial revenue, as you can see, reached BRL 72 million compared to BRL 67.6 million. So it's a 7% growth. Even if we consider an expressive cash expense due to paying extraordinary dividends of BRL 1.8 billion that we paid in May 17 this year and BRL 68 million that we had in June regarding the first quarter results. So the main components that have contributed was a lower recoil of the variable portfolio that we've had a variation of BRL 15 million. In our portfolio, we have -- the only position that we kept was one of variable revenue and we have a positive variation of BRL 14 million for the AVP, which is around removing that revenue from the gross and the net and applying financial results.

Our portfolio that we call the investment portfolio that we invest on alternative assets, traditional and bank investments, it closed the first quarter with a balance of around BRL 570 million. 84% of that portfolio -- of that wallet is allocated in projects for real estate development, 10% in variable revenue like [indiscernible] stocks and 6% in private cash. Just like last year, it tends to be like short and midterm. Just like we have the real estate investments, as they mature, we receive the main interest and dividend and we are not going to reallocate these products. We'll go to allocate in traditional assets, CDBs and public bonds.

Going now to e-commerce. E-commerce has been growing. It grew quarter-by-quarter. It's been growing a lot and that's we have like seasonal products. Our idea is to compare one quarter with the same quarter from the previous year. So GMV has reached BRL 17.9 million of this quarter. It's an important growth, 28% when compared to the second quarter last year. And with more than 50, I would say, it more than doubled when compared to the second quarter in 2021. The number of sold pairs grew almost 17%, so 16.9%, and it was around 175,000 pairs. The number of sessions grew from 13.3 million sessions, a growth of 14%.

General participation of e-commerce in total sale in the internal market grew from 2.8% to 3.6%. When we isolate that considering Melissa alone, we can see that regarding the general penetration in the market left from 9.9% to 12.8%. And just to get your attention to the app, as I mentioned, it was released in April this year. We are still in the process to mature the app but on the third month ever since the release, it showed 18.2% of online sales from Melissa. It doubled in size from May to June. So we can see great potential locked. And when I say locked, I mean that we are still -- we're not investing on media to bring more flow to the app.

Moving on now to Grendene Global Brands. We can lay in brick by brick so that when we look into the future, we can have like a solid, beautiful house and the representativity of -- in the external market which is a lot higher when we compare to the previous year. The moment that GGB is like, we're strengthening our brands and building distribution channels. So we've been investing in programs with digital influencers in the U.S. and multi investors different from what we've been doing in China.

We have influencers that are highly recognizable in the fashion community so that our brands can become better known and so that we can increase the brand awareness of our brands. We've had a coverage, an amazing coverage for Melissa's magazine in the U.S., it was amazing. We've invested on Ipanema's campaign endless summer road trips, which are those images that you can see at the bottom left that is a van -- a pink van and that it was driving around Florida, publicizing our brands. And in China, we've invested heavily to hire Rosy Zhao, who is a Chinese celebrity with more than around like 30 million followers in her account.

So focus now is to strengthen the brand to have initiatives so that we can publicize our brands and building distribution channels. And how can -- how is the performance in the first quarter? Total sell-out grew 168% when compared to the first semester last year. We led from $7.3 million to $19.6 million. We know it's a small base. But if we take brick-by-brick, quarter-by-quarter, we can see -- we've been watching the steady growth of our revenue in GGB.

Growth in the U.S. was up to 60% when compared to the first 6 months. Melissa's e-commerce is still growing in a very robust growth, it grew 4x, more than 4x when compared to the first quarter of 2022 from $1.3 million to $5.2 million. Ipanema has been growing steadily on Amazon. Sales are climbing month-by-month. And a point of attention in the U.S. is the wholesale and the physical stores. So how can we summarize GGB in the U.S.? Well, online is doing great. But on sale, in physical stores, we have, I'll say, a slower performance.

Wholesale is like retailers. American retailers, they are stocked up. They have lots of inventory. They're not that open to work with new brands, with new manufacturers. So the way we can commercialize our products at this moment, well, the front door is block shipping. How does that work? They release our products, they publicize our products in the online shops, but the inventory is with us. Every time there is a new sale, their system talks to us and we ship the product. And this is an entry because as retailers see that there is a nice demand of our products, only then will they be able to have a new order to replenish their inventory levels. And physical stores, a focus point is that we haven't found that exact moment that would be feasible for those shops. So we're trying to find the best formats, the best size in order to make physical stores feasible.

China is coming in a robust evolution stage ever since they stopped with zero policy. So sales grew 15% when compared to the first quarter, and they are growing steadily since we hired Rosy Zhao, that was in the first quarter of the first semester this year. That way you have an idea of the performance we have been having in China. They have a huge festival, they call this 618, represents a significant share of our online sales of the year in the segment. So last year, Melissa was -- it was qualified in the 350 and the biggest sellers of Tmall festival. But this year, we are in the 406 positions. So it's very robust growth from the -- that came from the initiatives of spreading out Melissa around China and hiring Rosy Zhao as the ambassador of the brand.

And here, my last slide of the results, I'm not going to talk about the half because we were talking about the first quarter 3 months ago, and I'm talking about the second quarter. So the volume on the first half of the year reduces 7.1% in the foreign market, 30.4% is a decrease. And in the internal market, we grew because of the -- our brands. The gross revenue is down 2.2%. In the foreign market, we have a decrease of 27.4% gross revenue, and we have a growth of 7.3% in the domestic market because of brands wise divisions.

The gross profit grows 5.4 p.p., the gross profit reaches BRL 407.7 million, which is a lot of growth compared to last year. The recurring EBIT grew 62.1% compared to -- goes to BRL 103 million and regain margins in 4.3 p.p.. The recurring net profit decreases, I mean, sorry, it increases 17.2% to BRL 240 million, and we have gains of 4.7 p.p. of recurring net profit.

Talking a little bit about the accumulated results of the dividends of the first half. The net profit was BRL 108.4 million (sic) [ BRL 180.4 million ] and we have BRL 95.1 million of incentives, tax incentive reserve. For legal reserve, we have BRL 85.2 million as we have reached the level of social capital. We don't need to constitute any legal reserves, additional ones. So the amount available to pay dividends is BRL 85.3 million and we have paid already BRL 68.1 million when we release the results of the first quarter. So we still have BRL 17 million to distribute. This BRL 17.1 million will be distributed as dividends. They will pay as of 6th of September for the shareholders that have Grendene shares from the 21st of August.

From the 22nd of August, the shares are x. The BRL 17.1 million represents BRL 0.02 per share. And here, we have a graph showing a volume of paid dividends since the opening of capital, the public listing. It was BRL 6 billion. If we update by the [ EPCA ] is BRL 2.8 billion. And when we update by the CDI, the accumulated value is BRL 10.3 billion.

What I had to say people for today, that was it. But before going to Q&A session, we have a great announcement. Yesterday, we closed a deal with Shakira, she's going to be our global ambassador of Ipanema for December '23-'24. So we're going to use Shakira for the domestic market and for the foreign market, GGB also, and we have great hopes on the results that Shakira can bring to us in the Melissa brand when we closed this deal. So that reinforces what I mentioned before when I was talking about the expense -- recurring operational expenses that we are resuming investments -- very significant investments actually in advertising to strengthen and build our brands.

So what I had to say for now that's it. So I will open it up for the Q&A session.

[Operator]

[Operator Instructions] Let's go to our first question, it's from [ Renan Santoro ] from Bradesco. [Operator Instructions]

There are any technical problems. Let's move to the next question. Next one is from [ Eduardo Marcelino ] investor as an individual.

[Unknown Attendee]

How concerned is Grendene about the sales of -- in Argentina with the current crisis? Markets -- though markets have barriers to buy the products. Doesn't mean anything about going to other markets, to migrate into other markets?

[Alceu de Albuquerque, executive]

Well, Eduardo, thank you for your question. I'm going to start by the end. We are always prospecting new markets. We -- our objective is to expand the sales of our products on the diverse continent and markets to try to reduce the concentration that we have in Latin America. Around 60% of our exports are for Latin America. So we have space to broaden our exports to other regions, especially United States and China, which are the countries that have the GGB focus.

Argentina has always been a great market. They have always purchased our products. But in the past years, they have been suffering because of their political and economic crisis. It's our -- of course, it concerns us because it was always a relevant market to us. And Grendene has its policy to export as it receives credit letters and nowadays, we are not being able to find banks in the market that issue credit cards to Argentinian exporters. This makes our exports process for the country more difficult. And related to barriers and difficulties to have the permits in Bolivia. For example, in Argentina, India and Myanmar are some of the countries where we have observed our importers are having difficulties, finding challenges to be able to obtain import licensing -- licenses.

[Operator]

We would like to continue with [ Renan ] from Bradesco.

[Unknown Analyst]

Can you hear me now?

[Alceu de Albuquerque, executive]

Yes.

[Unknown Analyst]

Two questions. In Division 1, with the inventory, with low levels. What are you going to do about the selling for the first quarter, especially that Alpargatas are going more aggressive, how can you see the evolution of the market share and talking about the volume of GGB products? Can you tell us a little bit more about the numbers of GGB? And how are they performing related to the initial targets to access the market?

[Alceu de Albuquerque, executive]

Related to Division 1, we can -- talking about market share, there is a channel where we can measure market share in a more effective way, the food channel, the self-service channel because there is tool called [ instant tech ] that measures the share in this channel. So if we consider the second quarter, we have increased our p.p. in the share of this channel because when we check the accumulated in the first half, this 0.8 p.p. goes up to 1.0 p.p.. So we have been increasing our share in this channel which is the channel where we can actually measure it. And this is less representative to Grendene. It's 10%, 12% of our sales in the domestic market of Division 1.

The more important markets are retail and the indirect channel, the distributors and retailers. In these channels, there is no tool where you can use to measure the sell-out. What they have is an internal tool that we have in partnership with [indiscernible] partnership with our channel. It gets like 70% of our clients for the indirect channels of the volume. So that will give a good dimension, a good idea because these clients are spread out throughout Brazil. So that -- it can be accurate the sell-out levels when we measure this way and our sell-out is growing in a market that's decreasing actually.

So that indicates in conversations we had with our clients, it indicates that our products are gaining market share, either through being more competitive price wise or when we compare our prices with the competitor ones, especially the Ipanema ones, we always had a gap of 10%, 15%. And nowadays, it's bigger. It's 10%, 15%, 20% because during the pandemic, we had a lower level of readjustments. So we didn't want to impact the volume of sales because volume is a huge driver of sales for Grendene. And secondly, because we understand that our product is flexible products. If you touch the price you touch the demand.

So as we have readjusted prices for inferior levels to our competitors, the gap between our competitors and us, it's bigger. So our product is more competitive related to prices, which is really positive in a scenario of compressing -- people having less purchase power. Clients, collection with hit products, it's what's helping us to sell our sell-out. Just for you to have an idea, Renan, we have launched in June in our convention, our Sempre Nova collection, our always new collection, which is our flagship product from Ipanema on our first month of our product, the clients of Sempre Nova in June, we had the best selling months of Sempre Nova. The best one in the past 6 years. So the products are highly competitive because of price and because of their design. Related to GGB for now, we are not opening numbers of volume. As the operation matures, we are going to own up these numbers. And related to expectations, it's inside our expectations. Online sales are performing above what we have expected. And the wholesale has been performing a little bit low, but not because of performance of our professionals, our GGB team, but because of our market conditions.

When we created the business case, especially for the wholesale, we didn't have this scenario of retail of a North American market with high inventory levels. We didn't have this COVID in China -- zero COVID in China. We didn't have retailers in North America wanting to reduce numbers of manufacturers and not wanting to have high inventories, wanting to repass all the risks to the manufacturers. So within the current scenario, I think GGB has been doing a very good job, much superior than what we have imagined if we didn't have this partnership.

[Operator]

[ Jones ] go ahead.

[Unknown Analyst]

Do you think you can tell us more about the operations in China? Are the products produced in Brazil then they are exported? Or do we produce them in China? It got me thinking because regarding production, China is way cheaper. So on that regards.

[Alceu de Albuquerque, executive]

Well, thank you, Jones, for your question. 100% of our production, both internal domestic and overseas is carried out in Brazil in the state of Ceará in the Northeast of Brazil. So we produce in Brazil and exports to the other geographies in the world. But China is very competitive. You're right. But Grendene, our main leverage is our capacity to produce and the textile. We have better quality and we are more competitive regarding the textile environment.

And before the pandemic, Grendene was selling shoes in the world, and we had the highest EBIT margin. And mostly speaking, that was a result of the textile resilience we have in Brazil. So 100% of our production is done in Brazil. And whatever we export and we sell in China is exported from Brazil.

[Operator]

Moving on to our next question. That's from [ William Holmes, ] individual investor. Moving on with your question. He asks, congratulations on your results. How long do you think you can reach the breakeven with GGB? How are sales behaving in Brazil, both in Brazil and abroad in the third quarter?

[Alceu de Albuquerque, executive]

Well, thank you for your question, William. We're updating everything at GGB regarding our business plan within -- I mean, for the next quarter. But our expectation is that by the end of 2024 and beginning of 2025 is when this operation will reach the breakeven point. Of course, that will depend especially on the performance. That's where the largest volume is.

We don't provide guidance regarding the future, even if we compare the first quarter. What we can actually say is that we've been watching at Melissa especially because we developed a hit selection, which is 6 products that have been developed especially to come to the stores and have good development and performance. Melissa has been performing higher in the sell-out rather than the sell-in. And we can see that in this division.

So as expectation for the second quarter, actually, the second semester that reduce 60% of our sales, we are expecting a positive semester even though we know that we're going to face a harder scenario. But we know that there are some triggers, inventory for our clients, being the market or Melissa's division on a lower level. Interest rates have begun to shrink. Inflation has been shrinking slowly, but surely, unemployment has been improving. So there are some short-term triggers that can help so that we can have a more positive second semester.

[Operator]

And now we are going to close our Q&A session. I would like to call now Mr. Alceu de Albuquerque for his final remarks.

[Alceu de Albuquerque, executive]

Well, thank you for being here with us in our call. Thank you for your questions. And our relations, our PR team is available to talk to you and have a great day. Again, thank you for coming.

[Operator]

Our video conference regarding the results of second quarter 2023 of Grendene is now closed. The PR relations with our investor is available to answer to any other questions that you might have. Thank you very much for the participants. Have a great day. Thank you.