Grendene SA

BOVESPA:GRND3

Earnings Call Transcript 2019-Q3

[Operator]

Good morning. Welcome to Grendene S.A. conference call to disclose and analyze the results of the third quarter of 2019. We'd like to inform you that this call will be held in Portuguese with simultaneous translation to English. [Operator Instructions] We'd like also to remind you that this call is being recorded, and it will be available at our website, http://ri.grendene.com.br.

The main officers of Grendene are here, who will also be available to take your questions: Rudimar Dall Onder, Chief Executive Officer; Gelson Luis Rostirolla, Executive Vice President; and Francisco Schmitt, CFO and IRO; as well as the company's top management.

We'd like to inform that the press release regarding the third quarter of 2019 is available at the website http://ri.grendene.com.br in Portuguese and in English.

Before moving forward, we'd like to clarify that any forward-looking statements made during this conference call about the company's business prospects and operating financial estimates are mere forecast based on the management's expectations regarding the company's future. These expectations are highly dependent on market conditions, the country's overall economic performance as well as of the industry and international market.

Now I'd like to turn it over to Mr. Francisco Schmitt, CFO and Company Investor Relations Officer. Please proceed.

[Francisco Schmitt, executive]

Good morning, everyone. Thank you once again for joining us in this call, in this earning release call regarding the third quarter. Well, as usual, we have already posted a file on the Internet with the major numbers in order to support you so that you can follow us -- the discussion. So I'm going to be very brief on my comments, and I'd like just to highlight the most relevant factors and then we will open for Q&A.

So as usual, we start by talking about the distribution payout. And according to our current dividend payout policy, dividends regarding the third quarter of 2019 will be anticipated in the amount of BRL 93.8 million ad referendum the General Shareholder's Meeting that approved the accounts for the financial year 2019. They will be paid starting November 19, 2019. Shareholders holding common shares end of Q3 enrolled in the company's book by November 4, 2019, and that is the cutoff date, these are eligible to receive this amount.

With regards to our performance on the third quarter, we'd like to highlight the fact that although the market is still demonstrating some really, really low recovery times or very weak recovery times, we have achieved the best result in 2019, not only with regard to absolute numbers but also when compared to the same period in 2018. The drop in our gross revenue has been decreasing over this year. So in the first quarter of 2019, that number was down 22.4%. In the first semester, that was 16.2%. And now in the 9 months, this number went down to 11.5%, confirming what we had mentioned that the first semester result was an outlier and actually did not represent this year's results.

So we are closing the 9 months with a net profit of BRL 285 million, and the distribution of dividends increased in the amount I mentioned earlier of BRL 146 million. This proposed dividend corresponds to a payout of 52.7% and dividend yield of 2.7%. Although we have not recovered volume to the level we had last year, which would lead to a lower dilution of fixed cost, the adjustments made in our cost structure in the first semester allowed us to achieve a gross margin of 47.9% in this third quarter, which is above the same period last year by 1.9%. In this period, EBIT grew 65% and net profit, 48%. This is for the third quarter.

Besides that, in the third quarter of 2019, we saw a growth, I'd call it a recovery, of 66.6% (sic) 6.6% in the volume of pairs exported. So a good recovery in Latin America that presented a really low demand in the first semester of 2019.

The impact of FX in the 9 months was positive by BRL 25 million. In the first semester, it was almost manageable. And before taxes, we had over 32% above the same period of last year. So this year, BRL 133 million and last year BRL 101 million for the 9 months.

And for these 9 months, we also have a nonrecurring revenue in this third quarter of BRL 38 million that's coming from the lawsuit carried out by the company regarding ICMS, PIS and COFINS and BRL 25 million nonrecurring expenses for the first semester. And they were already presented in the period earlier. I'm not going to go in-depth about the lawsuit, but it's already explained in the explanation note 12 that you see above our financial statement. So over there, you're going to find the history of the entire process, our expectations and where this stands in the Brazilian judiciary system.

With regards to executing our strategy, we have been strengthening our relationship with our client following on execution. And in general stocks in retail have been adjusted. The sellout was above sell-in in most of the first semester, and that allowed retailers to adjust their inventory. And also we see recovery in consumption and an outlook -- and positive outlook. It seems now that the inventories are now better adjusted.

And also in continuing with what we have previously shared in establishing the new digital business, we have now appointed an executive that has been a long time at Grendene, Mr. Paulo Antônio Pedó Filho. Amongst some of his achievements, he successfully led the restructuring of Melissa at the beginning of the year 2000, turning Melissa into this iconic brand both for the Melissa, Clube Melissa. Today we have 328 stores, so 37 stores more than compared to September of 2018 and 12 more than what we had when we closed the first semester.

Another point I'd like to highlight is the action we carried out on October 15 regarding sustainability. As many of you know, October 15 is the Conscious Consumption day in Brazil, and that was established by the Ministry of Environment in order to raise the awareness of consumers about the destination of waste and the entire cycle or life cycle of a product so that it's sustainable.

And strengthening all of the actions that we have already carried out, we have also launched the Vegan seal, so ensuring that we do not use any animal input besides other initiatives. And on October 15, in a very bold action, Melissa suspended sales in all Melissa gallerias in Brazil and abroad and at every single Melissa store raising the awareness of consumers so that consumers could reflect on sustainable consumption. And all Clube Melissa stores are now -- places -- a permanent point of collection so that if consumers, for one reason or another, want to just to discard their Melissa, they can go to 1 of the 328 Clube Melissa store, and we will then send the products for recycling. So we are very, very happy with the result of this action. And we believe that it's also a fact that we should highlight in this third quarter call.

So these are the comments I'd like to share with you. And now we can move to the Q&A session. So thank you very much.

[Operator]

[Operator Instructions] Our next question comes from [ an international adviser ].

[Unknown Attendee]

A great quarter, Francisco and the team. Just wanted to follow up on 2 things. One if you can talk about the profitability and the recovery in 2019, where do you expect exit margins to be as we've seen this tremendous progress in this quarter?

And the second question is about the order momentum for the collections in early 2020. And how do you see the recovery in consumption grow from your clients but also on the broader basis as we go into the first half of 2020?

[Francisco Schmitt, executive]

Well, with regard to recovering our profitability, it came mainly from our internal actions and adjustment of our cost structure, and these have already been disclosed in the first semester. We understand that we started the year expecting that the economy would be more dynamic that we would see a recovery compared to previous years. But that did not happen in the first semester.

And what we've learned is that our cost structure was actually above what would be more recommended to the level of demand that we have. And that's why in the second quarter and some also in the third quarter, we made adjustments in the cost structure by reducing the headcount and many other costs. So we went over our cost structure in-depth in order to adjust it according to the expected demand. This adjustment proved to be effective, and that's why we see a growth in our margins and results. Although, we do not present a robust recovery in volume that would certainly help us to leverage these margins. So for these 9 months, we have historically low volumes. We could certainly discuss the different reasons that led to this scenario, but we can mention high unemployment rate in Brazil, also issues in Latin America, international market also facing many challenges. So we did see this lower volume after many years. We believe that now our cost structure fits the demand, and we expect to see better margins in the future. This is our current expectation, unless something else happens.

We have also seen this increase in the dynamics of the economy increase the number of orders since September, and this is still going on. And according to recent unemployment rate in Brazil also proved that we are now experiencing going through the bad moment. And our expectations for the first semester of 2020 is that the trend we see in the Brazilian economy keeps up. So we expect that we have a better economic scenario for 2020, but it's really hard to discuss what's going to happen in Latin America. If the economy improves, we're going to see increased demand for Latin America, and as for the other countries, we will keep working. We are going to look for growth in other markets. So the impact we have had in profits, so cost adjustment does not depend on what's going to happen in the market unless we see really a relevant drop off. But otherwise, we will expect to benefit and to see improved margins. So this is how we see the scenario today.

As for FX, it has not been a hurdle. The exchange rate variation is within a reasonable range, so we may see some small variation upwards or downwards, but it's really not our major concern. And as for raw material and input, the Brazilian inflation rate is very low, and the raw material is actually less expensive than last year. The major variable is demand, and we're going to work in order to improve on that. And we hope that Brazil's consumption increases, and that would allow us to also grow. I do not know whether I've answered your question.

[Unknown Attendee]

No. That's fine. That's really great. And the bottom line is that you're seeing increased orders and momentum, but at a decent level, nothing that's alarming necessarily. It's more of a normalized order from your clients with the reassessed level of inventories where they are. That's all, into 2020, if you can confirm that.

[Operator]

[Operator Instructions] With that, we close our Q&A session. I would like now to hand it over to Francisco Schmitt for his closing remarks.

[Francisco Schmitt, executive]

Well, once again, thank you all very much for joining us this morning. Should you have any questions, please feel free to contact us at any time. Our IR area is always at your availability. Thank you.

[Operator]

The conference call of Grendene is closed now. Thank you very much for joining us this morning, and have a nice day. Thank you for using Chorus Call.

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