Grendene SA

BOVESPA:GRND3

Earnings Call Analysis

Strong Q3 results despite market challenges; robust revenue and profit growth.

In a challenging third quarter, Grendene reported a revenue increase of 10%, totaling BRL 749.5 million, aided by a strong domestic market performance, particularly from the Melissa brand, which saw a 53.3% rise in net revenue. The gross margin improved to 47.9%, reflecting better cost management and a higher revenue per pair. Recurring net profit surged by 45.9% to nearly BRL 240 million, showcasing effective operational execution. Guidance indicates continued focus on product quality amidst foreign market pressures, with a projected increase in operational efficiencies.

Strong Financials Despite Market Challenges

In the third quarter of 2024, Grendene S.A. reported robust financial results, highlighting a notable growth trend in revenue and margins. The company achieved a net revenue of BRL 749.5 million, reflecting an 8.8% increase year-over-year, primarily driven by increased gross revenue per pair sold. Despite a slight decline in volume shipped (down 1.5% to 40.5 million pairs), gross revenue saw a significant boost of 10%, reaching BRL 358 million in the domestic market. The strong performance was chiefly attributed to the brand Melissa, which saw a remarkable 53.3% increase in net revenue due to effective pricing strategies and improved product offerings.

Effective Cost Management and Margin Expansion

In terms of profitability, Grendene's gross profit increased by BRL 358.7 million, resulting in a gross margin of 47.9%, an increase of 2.4 percentage points. The company managed to keep its cost of goods sold (COGS) growth to just 4%, indicating effective cost control amid rising raw material prices. This careful management has contributed to a recurring EBIT growth of 31.6%, totaling BRL 161.2 million, which highlights an EBIT margin improvement of 3.7 basis points. Additionally, net profit rose significantly by 45.9% to BRL 239.4 million, with net margins increasing to 31.9%, reflecting strong operational efficiency.

Market Segmentation Insights

The performance of Grendene's brands varies significantly across segments. The male-focused brands, including Rider, Cartago, and Mormaii, demonstrated resilience with a 12% increase in average revenue per pair sold. In contrast, the female segment showed mixed results, with brands like Grendha and Azaleia performing well, while Zaxy struggled. Competition impacted the Ipanema brand negatively, as aggressive promotional strategies from rivals made it challenging to maintain its market position. The company anticipates focusing on enhancing the female line's appeal moving forward.

Challenges in International Markets

Grendene also highlighted challenges in international markets, notably a 13.5% decrease in volume exported and a 5.4% decline in foreign sales. This downturn relates to economic pressures in key markets like Argentina and Bolivia, where dollar scarcity limits purchasing power. Additionally, geopolitical tensions and supply chain issues have impeded the ability to maximize export opportunities. Despite these challenges, management remains optimistic about future recovery and is navigating these challenges by adjusting strategies for key markets such as the U.S. and China.

Guidance and Future Outlook

Looking ahead, Grendene expects to increase growth from its current performance trajectory. The company provided a cautious yet optimistic guidance for the next quarter, projecting continued revenue growth and improvements in operating margins. The management anticipates further gains in the domestic market and is focused on reinforcing the brand's competitive positioning. The effect of tax legislation and fiscal incentive changes is also being monitored closely, as these factors may impact future financial results.

Shareholder Returns and Dividend Policy

Grendene continues to prioritize shareholder returns, maintaining a historically high dividend payout. For the current quarter, the company plans to distribute dividends amounting to BRL 80 million, translating to approximately BRL 0.08 per share. This commitment to returning capital reflects confidence in its ongoing operational success and robust cash flow generation. Overall, Grendene's strategy remains focused on balancing profitable growth while rewarding its investors.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning everyone. Thank you for your patience. Welcome to the video conference for the release of the Grendene's 3 Quarter '24 and 9 months '24 Results of Grendene S.A. [Operator Instructions] Please note that this video 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 this 3 quarter '24 results. The presentation is available for download in Portuguese and English via the chat icon. [Operator Instructions]

Please note that the information in this presentation as well as any statements made during the video conference regarding Grendene S.A.'s business prospects, projections, operating and financial targets are based on the company's management's beliefs and assumptions as well as information currently available. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions related to future events, which may or may not occur.

So investors should be aware that general economic conditions, market conditions and other operational factors may affect Grendene S.A.'s future performance, resulting in outcomes that differ substantially from those projected in these statements.

Today, we are joined by the following company executives: Rudimar Dall'Onder, Chief Executive Officer; Gelson Luis Rostirolla, Chief Operating Officer; Alceu de Albuquerque, Chief Financial Officer and Investor Relations Officer. We are also accompanied by all the company's key managers. I will now turn the floor to Mr. Alceu de Albuquerque. Please, you can go on.

[Alceu de Albuquerque, executive]

Good morning, everybody, and thank you for your presence in our video conference for the results of the third quarter of 2024 and the numbers accumulated in the 9 months of the year -- the first 9 months. This third quarter was a third quarter where we registered results -- very robust results, a growth in revenue, a growth in all of our margins and growth in operating results, recurring ones and also net recurring results.

Even though these results are solid and very robust, that doesn't reflect the dynamics of the quarter. It was a quarter just like the previous 2 ones, a very challenging one. And these results were conquered day after day. We fought for that. And this result is basically pushing -- it's the result of the performance of the domestic market and how the numbers were.

The volume was stable with a -- it just went down a little bit, minus 1.5%, in 40.5 million shipped pairs. In the domestic market, we also presented a growth of 1.1%, while in the foreign market, there was a decrease of 13.5%. The gross revenue increased 10%, reaching BRL 358 million and in the domestic market was 13.2%. And in the foreign market, it decreased 5.4%. The results of the domestic market, they are because of Melissa. The brand of Melissa had a very robust performance. I will talk about it later.

And the male segment of Division 1 with the brands Rider, Cartago, Mormaii and Grendene Kids. We can see that the gross revenue had an increase -- it increased faster than the decrease in volume, and that reflects a growth in revenue -- gross revenue per pair in about 12%. It reflects of a price readjustment in the beginning of the year, but also because of a mix of more added value products.

The gross profit increased BRL 358.7 million, reflecting an increase of gross margins of 2.4 pp, 47.9%. This growth reflects the growth in net revenue. The smallest production costs were impacted by raw material prices as we observed in the last quarters. The recurring EBIT also grew in a very intense way, 31.6% in BRL 161.2 million, representing a growth of EBIT recurring margins of 3.7 bp in 31.6%. This growth in margins reflects the growth in net revenue, less production costs, and it reflects our management in our operating expenses that are growing in a difference than the net revenue.

And our recurring net profit almost reached BRL 240 million, a 45.9% growth with net margins -- recurring net margins of 31.9% is a growth of 8.1 percentage points related to the recurring net margin of the third quarter of 2023. And this growth of 40% of our recurring net profit reflects the financial -- the robust financial results we had in the third quarter.

As we know, in January this year, we had the Law 14789, started taxing our incentives -- our fiscal incentives and social contributions also. But apart from that, the government guaranteed an increment of 25% in the depreciation of investments for our state incentives. This slide is to show you we can compare oranges with oranges. The net revenue of the third quarter was BRL 749.5 million. It would have been BRL 755.6 million if it wasn't by the tax incentives applied. The growth would have been 9.7%, but now it's the 8.8% we are reporting.

COGS grew 4%, totaling BRL 390 million. It would have grown 5%. It would have been BRL 394.4 million. Our recurring EBIT also suffered an impact because of the PIS and COFINS taxes and also credit on depreciation. So our recurring EBIT totaled BRL 161.2 million, a growth of 31.6% and it would have been BRL 163.7 million, a growth of 33.7%. And our net recurring result with PIS and COFINS without fiscal incentives, it has been impacted by social contribution taxes. Our net profit was BRL 239.4 million, a growth of 45.9%. It would have been 52.7%, a total of BRL 250.5 million.

Talking a little bit about the performance of our domestic market and the foreign market. The brands of Division 1, they grew in net revenue and 4.9% in selling, and they had a decrease of 0.8% in volume, which represents a growth of net revenue per pair of 7.5%. This growth of the revenue is fostered by the male segment: Rider, Cartago and Mormaii and also the kids segment. These 2 segments were the ones that increased the performance of the brand.

The female line, Zaxy, Grendha, Azaleia and Ipanema, they had a poorer performance when compared to last year in the third quarter. In the female segment, Grendha and Azaleia, they presented a positive performance, but Zaxy, it was responsible for decreasing the performance of the female segment based on a comparison basis -- when compared to the third quarter. Ipanema, we can see the decrease because of increased competition. Competitors making sales promotions and discounts in the end for the end consumer. That has hindering a little bit the performance of Ipanema in our third quarter.

And also, we had a smaller performance, a poorer performance with the collections when you compare last year and this year's collections. We also impacted -- there was a [indiscernible'] of orders from the third quarter to the -- in 1 million, 1.5 million pairs. And in brands of Division 1, there is a very fluctuating sell-out. There are moments, it's a positive scenario with growing sales, but sometimes we have moments more negative ones. The sales in the end are fluctuating.

When we check the performance of Melissa, Melissa had a very strong performance. The selling increased 53.3% in net revenue, 30.8% in volume, which represents a growth of net revenue per pair of 11.1%. That reflects especially a less -- a smaller participation in Melissa sales. We are selling more full-priced products.

This excellent performance of Melissa selling is a reflection of the products being well accepted. The new collection products that are arriving in the stores and also spring/summer collection of last year also. But the new products have a very good acceptance in our stores. We had an implement of 9 stores compared to the third quarter of last year in September 2023. And then we closed the quarter with 413 stores. That's the number we've got now, 413 stores.

The foreign market, we noticed a scenario that's very challenging one in general. In all the regions of the world, especially in Latin America, which represents 60% of our exports. We can see in some countries like Argentina and Bolivia, they have problems with dollars being scarce. In Argentina, we can see signals of improvement, a robust improvement in the third quarter, but still the volumes are below historical levels.

We also noticed challenges for GGB with the reduction of sell-in for GGB and reduction of sell-out of GGB for its respective clients. China, as we have seen, has been presenting -- the economy has decreasing a little bit. It's unwinding too. We need to -- they need to improve the economy. It's been receding the economy in China. And United States also migrated from premium stores for off-price stores in big retail chains where we sell our products.

We have been reporting difficult challenging scenarios. We can see growth in sales in the United States in stores where we call discount stores. T.J.Maxx, Marshalls, this type of stores, they are reporting great results. But it's not where we sell our products. We sell our products sometimes when it's just leftovers of old collections. We sell our products in big department stores and the sales behavior is quite challenging. It's still complicated.

The other factor hindering exports is lack of regularity. We have schedules for shipping of footwear. And then the ship, it simply doesn't stop in the port. That causes delays in our deliveries and our shipment and it hinders the sales of the quarter. We can see how Asian shoes are increasing their sales around the world, and that has been compromising our sales also. Conflicts, war -- the Middle East has been impacting that also.

In summary, the net revenue decreased 5.4% in BRL, in dollars, 16.7%. Volume decrease is 13.5%. And then the gross revenue per pair increases 9.3% in BRL. This decrease in revenue and volume is not something common for Grendene. The footwear sector in general has been suffering. In this third quarter, the revenue of exports of Brazilian footwear decreased 9.8% and volume presented a decrease of 10.4%. It's a scenario that has been affecting the whole footwear segment as a whole.

What are the factors that contributed to our gross revenue coming from BRL 842.3 million to BRL 926.4 million. The volume in the internal market increased 7.4%. Price and mix added BRL 84.6 million in revenue. In the foreign market, volume decreased our gross revenue in BRL 19.4 million. Price and mix decreased BRL 4.7 million in our gross revenue. The exchange rate, it was 3.4% stronger than in the third quarter last year. It adds BRL 16.3 million of revenue to the company.

Looking at our COGS, our gross margin presented a growth of 47.9%. It's 2.4 pp because of the decrease of our COGS. And within the COGS, we can see an improvement in all our components related to the third quarter of '23. And then when compared to the historical levels of the third quarter in 2021, we see an improvement in all the components, except from labor because of problems we had with -- and then also the commercialization and sales of the shipment of products with increased added value and then because of smaller volumes where we can actually dilute costs with labor.

When we look at our indicators of net revenue per pair, we can see that the net revenue per pair increases 10.4% when compared to the third quarter of last year, while the COGS per pair increased 5.7%. We increased our revenue per pair in intensity when compared to the COGS per pair. This behavior, you can see -- if you compare the annual average growth since 2021, we present an average annual growth revenue per pair of 6%, while the growth average of the COGS is 4.2%, indicating again our capacity to elevate our net revenue per pair. At the same time, control our production costs that present.

It grows in a superior intensity on pair. It grows some 3.5% in comparison to 8. 8% of the recurring net profit. And with this, our recurring operational expenses represent some 26.4% in comparison to 27.7% of Q3 previous year. So it represents 1.3 percentage points less. And our recurring sale expenses, selling expenses grew by 6.2% and recurring -- variable recurring expenses grew by 9.8%.

And here, we have freight and others and licensing. Publicity grows 12%, a higher step against net profit, but this is due to more investment in marketing to reinforce our brands and investments in publicity, advertisement represent 4.9% of net sales. And other expenses are less 12.9%. Here on top, we have staff expenses, travels and others.

Recurring commercial expenses represented 24% of net sales, and now they represent 22.9%. So when we go to general -- recurring G&A expenses, they grew, but in a reduced intensity than revenue. And because of this, they represent now 3.7% in comparison to 4% in Q3 last year.

Now graphically, we show what impacted our EBITDA. So accountant EBITDA moves from BRL 96 million to BRL 145 million. And when we not consider recurring items, the growth at [indiscernible] and recurring EBIT goes to BRL 161 million. So this leads to a recurring EBIT that is the net revenue. And we have all the other components, COGS growing in an intensity less than the revenue increase.

And within nonrecurring items, the main one is real estate equivalents of GGB equity earnings that did not meet breakeven. The financial revenue, we peaked at 115.2% above previous year, even though with an average basic interest of 2.9% inferior. This given an average cash and equivalents of 45% -- a little more than 45%. Besides, our development projects also had a performance that was very positive and contributed to this result of BRL 108 million.

Now our portfolio, that is the investment committee portfolio, we have an approval to invest up to BRL 157 million. It is composed 100% in real estate projects, and they totaled BRL 530 million. Now our e-commerce still grows. The GMV grew some -- and the volume is reduced almost 20%, and this is given to the less product volume participating in this e-commerce. So we're selling more products on full price. This improves the average ticket.

Now, we peaked 15 million unique users accessing our platforms and the gross margin grows by some 70% and our recurring EBIT was reduced to 9.8% in comparison to Q3 last year. And this is given a higher market share of omnichannel. So sales are done through our sites, but the product leaves our sales partner inventory. So they pay a commission to Grendene. Now online channel penetration grew some 2.8% and Melissa penetration, it is reduced from 10% to 8.5%, given the less participation like EMC. So the volume is reduced, but GMV grows.

Now talking about the accumulated result. It is very similar to what we presented we showed in Q3. So we have gross revenue margins and operational result. So our volume reached 95 million pairs, a reduction of 1.7% and internal market have some small growth of 0.8%, while the export market is reduced some 12%. Gross revenue grows by 5.1%, some more than BRL 2 million and internal market, it grew by 7.8%, while export -- external market, a reduction of 6.4%.

Gross profit grows by 11.5%, reaching more than BRL 800 million and gross margin grows from 43% to more than 45% and a growth of 2.3 percentage points. And again, given a net revenue and reduction of CPV and being that the component with the highest impact. Recurring EBIT grows almost 34%, reaching more than BRL 3 million and our margin grows some 3.6 percentage points, peaking 17%, the same behavior as the second term -- the behavior of the term, and our recurring net profit grows less than net profit.

And finally, our recurring net profit of almost BRL 450 million and a growth of almost 11%. And recurring net profit grew by 1.2 percentage points, peaking 25%. Here, the same spreadsheet considering the impact of Law 14789, it grew 6.6% to almost BRL 2 million. If it wasn't by PIS and COFINS taxes -- if it wasn't for this, it would grow by more than 2.5%. Recurring EBIT peaked at BRL 305 million instead of almost BRL 302 million, so a 35% growth. And our recurring profit would have grown more than 16%, peaking BRL 471 million instead of the almost 11%.

Here, given the result of the BRL 404 million accumulated, we have BRL 169 million coming from tax incentives. So we have a basis of legal reserve of some BRL 222 million to distribute dividends. Because we already shared some BRL 89 million in the first and second quarters, we still have a remaining of almost BRL 135 million. And how would this be distributed?

So in terms of dividends, almost BRL 80 million. So this would be some BRL 0.08 per share. And JCP, it is equivalent to BRL 0.05 per share. So this would be given on December 5. So from December, they become ex dividend. So this is an updated graph how we distributed dividends since going to the market opening and it amounts of BRL 12 billion. And if you take an updated by IPCA, it's some BRL 9 billion and the accumulated with no correction, it's BRL 6 billion. We have a payout of 54%. This represents a dividend yield of 5.1%.

And what I had to talk about Q3 and accumulated this year, this is it. Now I'm open to questions.

[Operator]

[Operator Instructions]

First question, [ Lucas Xavier ] investor.

[Unknown Attendee]

Is there an action plan to the possible import rate increase in U.S. from new government?

[Alceu de Albuquerque, executive]

Well, we don't have any plan so far because historically, in moments of increase of import taxes and Trump government has spoken explicitly on import taxes on Asian countries, and we see it more as an opportunity than a threat on this import tax increase because North American industry -- well, U.S., they don't have a footwear industry, which produces our type of product. So we see it more as an opportunity being Grendene an option to Asian countries more than a threat.

[Operator]

Now the following question from [indiscernible], a sell-side analyst.

[Unknown Attendee]

I would like to understand the impact of Alpargatas share in Grendene market. Without a doubt, we have competitive prices. But how do you see ticket ALPA4?

[Alceu de Albuquerque, executive]

Sorry. Can you repeat the question, please?

[Operator]

ALPA4.

[Alceu de Albuquerque, executive]

ALPA4. Well, yes, Alpargatas is a renowned company with a strong brand historically. Because we have a stronger brand in products that are similar, we have a pricing that is a little bit more competitive. But what we're seeing is a movement that is strong in liquidity at the end point, not specifically Alpargatas, but other competitors. And what we see is to position -- to be positioned and work to have competitive prices in terms of design, quality and pricing.

[Operator]

Next question from Alexandre Melo.

[Alexandre Melo]

I would like to know what is your expectations on dollar variation? Is there an impact on revenue given that 17% of volume is export? And if there is an impact on the cost of raw material?

[Alceu de Albuquerque, executive]

Thank you very much for your question. Now the strengthening increase of dollar price, it is more positive to Grendene because we have more revenue in dollars than costs. So the strength of this exchange rate is favorable to Grendene. So as per cost, our raw material costs are updated on a monthly basis. And yes, they are influenced by dollar, but our Q3 results already reflect this increase.

[Operator]

Now, we finish the Q&A session. We would like to pass the mic to Mr. Alceu Albuquerque for his final words.

[Alceu de Albuquerque, executive]

Good morning to all. Thank you very much again for your presence. And our Investor Relations team is available if you have other questions. Thank you very much, and good morning to all.

[Operator]

Now this result presentation is finished. Our Investor Relations department is available to answer all other questions that might arise.

Thank you very much to all participants, and have a good day.