Grendene SA

BOVESPA:GRND3

Earnings Call Transcript 2020-Q3

[Operator]

Good morning and welcome to our audio conference Grendene S.A. to disclose and finalize results of third quarter 2020. We'd like to inform that this audio will be conducted in Portuguese with simultaneous translation into English. [Operator Instructions]

This session is being recorded, and it will be available at the website, r1.com.br (sic) [ ri.grendene.com.br ]. We have here today the main business executives from Grendene that will be available for your questions. Mr. Dall'Onder, Executive President; Mr. Luis Rostirolla, Vice President Director; and also Albuquerque, IR Director as well; as the main directors of the company.

The third quarter press release of 2020 is available at our website ri.grendene.com.br, both in Portuguese and English. Before we start, let me clarify that any sort of statement about perspectives and estimates about business of the company are just forecasts based on some perspectives about the future of the company. Those expectations, they extremely rely on the economic conditions of the market, about the country conditions and international economies.

Now I'd like to give the floor to Mr. Alceu Albuquerque, who is responsible for Investor Relations with the company. Now you have the floor, Mr. Alceu.

[Alceu de Albuquerque, executive]

Good morning, and thank you so much for being here today, participating at our third quarter earnings release of 2020. It's an honor to be here with all of you, once again, sharing our results. I hope you are all doing well and healthy. First of all, I'd like to let you know that yesterday, after the market has just closed, we had disclosed, at our website with Investor Relations, any information regarding our 2020 third quarter as well as an additional report about this audio conference to help you to follow this session.

As always, before we get into the third quarter performance, I'd like to highlight some dividend distribution. According to the right dividend distribution, we decided to disclose the 2020 third quarter as anticipated dividends of BRL 21.5 million at the referendum of the ordinary shareholders meeting about the exercise of 2020. Those dividends will be paid as of November 18, 2020, and that will be paid according to the dividend of the ordinary shareholders of Grendene, which are registered under the company's report according to November 5 at B3.

Now let's proceed to the third quarter performance of 2020. I recall that during the second quarter earnings release video conference -- audio conference, I should say, we were very optimistic about the business outlook for the second half. At that time, we were considering a gradual and continuous recovery. However, we see a general recovery and much faster than what we would expect, especially considering some lifting of social distancing. The main economic indicators disclosed lately, they had shown such a recovery, confidence by the consumers and the industry. And the retail market had shown us a strong recovery month after month. COVID research communicated by the Central Bank every single Monday shows us week after week and improvement in the GDP projection for 2020.

And under such a scenario of recovery, Grendene has gone through an inflection point in the second half. This is a reflect of strategy and quick strategies that we took in the upset of COVID-19. We are partners of our clients, and we had extended -- and we had put into installment payments, and we had paid salaries of our collaborators from the administrators to those that work in the shop floor to avoid any dismiss. We do believe that all those decisions had allowed us to strengthen all bases to a quick recovery to our operations. And that sets us into a strong position for a strong and rapid recovery.

We had the best third quarter in the whole history of Grendene in gross profit with a total of BRL 772 million, and the third better quarter in volume of shipped pairs with 53 million shipped pairs. Such a performance is a reflect of a turnover of economic activities, flexibilization of social distancing, which had allowed a reopening of our physical shops, a support of emergency salaries for those of less privileged strata. Also on an emergence and a recovery of our company, which in the third quarter, had to stop part of its production. And an excellent welcome by our collection is spring/summer by our dear customers. Such a growth was homogeneous between brands and channels, and domestic market was responsible for that, a growth of 12.4% in our gross sales and 20.4% in the volume of shipped pairs.

Our gross profit per pair of sold products in Brazil had a withdraw of 12.4%, similarly to last year, especially due to the concentration of sales in those indirect channels and self services, which had a representation above their participation in the volume of shipped pairs. But from August on and with a much greater intensity, as of September, retail channels and magazine, they went back to a great performance, thank to the reduction and the cooling down measures of social distancing.

With all of those measures, all channels managed to reach a much higher performance in relation to last year's third quarter's performance. Melissa's products also showed a good recovery, however, in the lower intensity, considering that the Melissa products in the greater majority are located at some shopping centers, where in those regions, those shops, they were closed for most of the semester. And even with some shopping centers reopening, we see a reduction in the flow of people, considering that shopping centers, they have reduced hours now. As some leisure products are still closed such as theaters and cinemas.

Volume of pairs had increased 18.8%, but gross profit had a withdraw in relation of the third quarter of 2019, considering 19.6% of gross profit per pair. The greatest concentration of shipping to Latin American countries, which consume basic products, and promotional campaigns carried out with some distributors in different regions of the world to accelerate the inventory turnover were the main reasons to guarantee that gross revenue per pair.

The net profit increase aligned to our gross profit or gross revenue, I should say. We guarantee that raw materials, they had faced some shortage. And that was responsible for some readjustment in the price of raw material, impacting our cost of goods sold. And consequently, our gross profit going to 44.7%. Even considering such an imbalanced scenario with demand, we do not see any risk of not be able to replenish our markets. We see that offer will go back to normal by as of December.

Operating expenditures, they represent an amount in relation to the last quarter of 2019, not considering the nonrecurring revenue of the inclusive process of ICMS of the calculation base of PIS and COFINS of BRL 47.8 million registered in the third quarter of 2019. Our recurrent EBIT has reached BRL 134 million with a margin of 21.2% and a growth of 20.3% in relation to the third quarter of 2019.

Financial result was BRL 19.5 million lower than last year's third quarter, especially due to the lower quarter of that period. With that, the recurrent net profit reached BRL 117 million with a drop of 8.2%. Once that is compared to the similar loss of last year, a product mix that is higher commercialized cost, pressure over raw material and a drop of financial results were the main reasons why we had such a decrease in our net profit.

But let's not forget that in the third quarter of last year, we acknowledged a nonrecurrent revenue, considering the inclusion of ICMS and the base of PIS and COFINS, where the liquid effect of the results was of BRL 38 million, and the EBIT of BRL 47.8 million.

We closed the quarter with a cash flow above BRL 2 million, reflecting the generation of BRL 329.5 million of operating cash flow in the first 9 months of this year.

Well, now I'd like to give some highlights about this quarter. Throughout the third quarter of 2020, we keep on producing and donating some protection items to help providers and to those work in safety. Since the very beginning of pandemic, we had donated over 2.6 million protection items, reinforcing our role as a citizenship company. In September -- last September, we announced to the market a licensing contract with Vulcabras to produce and commercialize with exclusivity the products of Azaleia brand in Brazil and in the world, except for Chile, Colombia and Peru. By including Azaleia in our branded portfolio, we'll be able to expand our relevance in the female segment, and to be able to consolidate even more our position as the main players in the footwear, not only in Brazil, but throughout the world.

Also, in the third quarter, we see the first deliveries of our innovation lab, Bergamotta Works, which aims to find new ways to reach our consumers and to bring together Grendene throughout our start-up systems. We had released last August 14, our Zaxy proprietary systems. And during September 15 and October 15, we respectively migrated USA Melissa and Ryder Brasil platform to our own platform, our proprietary platform. And our goal is to conclude all our external brands to our proprietary platforms by the end of the first quarter of 2021.

And we are already harvesting the fruits of that strategy since the release of this new platform. We see a growth above 500% on online sales of this brand in comparison to the same period of 2019. Another great delivery of the Bergamotta team, jointly with Melissa's team, was the release last September 15, of Hello Melissa, which is our subscription team, which will send monthly to the brand consumers, special kits with some kit gifts and exclusively products with the special products of the Melissa's DNA as to the exclusion action of the calculation base of PIS and COFINS. There is no evolution about that. There is no specific data for the STF trial. And with that, the administration is still monitoring and assessing, then it reflects as a consequence of a decision about the modulation by the STF trial.

And last but not less important, although those business outlooks, they seem to be very optimistic and in a much faster pace, the final impact of COVID-19 is still uncertain. On one hand, the increase of infection cases in European cases and in the U.S.A., after the lifting of social distancing, that has taken to new restriction measures. However, the reduction and the release of economical measures, which aim to reduce the shock impact over family's income, such as emergency support an MP 936. They increase some questions and concerns about unemployment increase and maintenance of economic recovery for the next months.

But even though -- and as I rolled out in our earnings releases, I would like to conclude this audio conference with 2 main messages. First, we show to be resilient over adversities, and we show that we are living this pandemic much stronger as a company. We are extremely proud about our collaborators and our recent executions. However, we are pretty aware about the number of uncertainties that we still see ahead.

And second, that our outlook for the third (sic) [ fourth ] quarter, they are very positive. Our daily production record and to contract over 1,000 temporary collaborators. And let me remind you that we have not sacked not even 1 employee during the panic, shows how optimistic we are sharing by the end of the third quarter, and we still keep that feeling of being optimistic.

Well, these are my comments that I had to do, and now we are going to open for your questions. Thank you so much for your time and attention.

[Operator]

[Operator Instructions] Our first question comes from [ Augusto Caramico] from [ Gadi Investment ].

[Unknown Analyst]

Congratulations on the results. And we keep track of the company. We like your case a lot. And we noticed that in this last quarter, the earnings coming from sales and exports was more focused on basic products with a lower added value. Do you believe this is a trend for this market situation? And I would also like to know about the market share in the market. I mean do you -- resuming that market share about smaller manufacturers and the gains of the company since the margins were reduced in this quarter.

[Alceu de Albuquerque, executive]

Thank you for the answer -- for the question. Regarding the first one, we see this as a specific situation. As I said in the audio, we ended up exporting more products to Latin America this quarter because it buys more basic products. And the markets that request products with a higher product mix -- higher price/mix, suffered more from the pandemic. But we believe this situation is not a trend.

As for your second question, we do not have concrete data about that right now, but our perception is that large companies had a gain in market share and are having that mainly due to the limitation of access to raw material that today is a difficulty not only for resin and PVC, but also other industries are having trouble buying raw material. So we have limited access to raw material. So we see a gain in market share of main players when compared to smaller ones.

[Operator]

[Operator Instructions] The next question comes from [ Victor Rodriguez ], investor.

[Unknown Attendee]

I would like to know if the conditional -- the commercial conditions mentioned in the press release will be implemented abroad or only in Brazil in the domestic market?

[Alceu de Albuquerque, executive]

Victor, could you repeat it? The connection was not so clear. Could you repeat your question, please?

[Unknown Analyst]

Of course. My question is, if the aggressiveness in terms of economic and sales policy that you intend to implement in the domestic market is also a strategy for the international market with other products, and not only the products that you used in this quarter.

[Alceu de Albuquerque, executive]

Well, our collection available in the domestic market, is also available in the international market. But we believe that in the conditions, the market conditions of the international market are more adverse in the sense that they're -- the economy in Brazil is -- has recovered better than in other markets. But all the products are available for our customers and distributors.

What we faced in the third quarter was a more adverse condition in the international market. But -- and also clients had higher inventories of products since the beginning of the pandemic. So we made a campaign with our distributors to help them reduce the inventory levels and then buy new products. But all the products are available to all distributors in the international market as well.

[Operator]

[Operator Instructions] This ends the Q&A session. I would like now to turn the floor over to Mr. Alceu for his final remarks.

[Alceu de Albuquerque, executive]

Well, once again, thank you all very much for attending the call, and have a good day.

[Operator]

The audio conference of Grendene has now ended. We thank you all for attending, and have a good day. Thank you for using Chorus Call.

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