Alpargatas S.A. (ALPA4.SA) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for waiting. Welcome to the video conference to present Alpargatas' Third Quarter 2025 Results. [Operator Instructions] Please note that this video conference is being recorded, and it will be made available on the company's Investor Relations website, ri.alpargatas.com.br, where the full earnings release materials can also be found. The presentation can be downloaded and is available in the chat icon, including an English version. During the company's presentation, all participants will have their microphones disabled. After the presentation, we will be begin the Q&A session. [Operator Instructions] We emphasize that information contained in this presentation as well as any statements that may be made during the video conference regarding business outlook, projections, and operational and financial goals of Alpargatas are based on the beliefs and assumptions of the company's management as well as on currently available information. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions as they refer to future events and therefore depend on circumstances that may or may not occur. Investors should be aware that general economic conditions, market conditions, and other operational factors may affect Alpargatas' future performance and lead to results that differ materially from those expressed in such forward-looking statements. Today, we are joined by the company's executives, Mr. Liel Miranda, our CEO; Mr. Andre Natal, CFO and Investor Relations Officer; and Ms. Melina Rodrigues, Investor Relations Director. I now hand the floor over to Mr. Liel.

Good morning. Thank you all for being here with us today. As usual, we are going to start by giving an overview of Alpargatas' businesses in the third quarter. And I think it's important to start by talking about the growth of Brazil and international. In the international market, we saw a third quarter where all -- in all of our geographies, we reached growth in sell-out, which means the results of all efforts, communication, marketing, and distribution that have been deployed over the past years. Europe grew 2%, U.S.A. grew above 30% in sell-out. And in the IDM, in these international distribution markets, which suffered in the first half of the year due to variables in markets where we have specific problems to handle, reached in the third quarter 5.3% of growth. Reverting the trend, we saw the negative trend in the first half of the year. In Brazil, we saw the growth trend that we already saw in the first half of the year, both in sell-out in the -- which means the final sale to end consumers as well as market share gains, especially in the modern channel, where we measure using Nielsen. And finally, in the specialized channel, which is a big opportunity for Alpargatas to grow, in all recent quarters, we have been growing there. And this quarter was not different. We grew 3.5% in the specialized channel. As for marketing, we had a summer in the international market where we deployed a lot of efforts, and these efforts have resulted in good achievements, both for the brand recognition and also operational results. We have just been recognized as the most desired fashion brand in a very well-respected Lyst and Havaianas was crowned as the most desired fashion item in the world. In Brazil, we start summer, as we know, with a communication campaign. And this year, this communication campaign is being reinforced. In the past years, we used it to have a more restricted geography for this communication. And this year, we are having better efficiency and are widening these marketing investments in Brazil. It's going to be a national campaign to be deployed in all media outlets, which has actually debuted a few weeks ago. And last, we also know the large opportunity Alpargatas has in the portfolios of Kids and Men's products in which our market share is a little bit smaller than our market share for the Women's products. So they are all growing and more accelerated than the overall growth of the company. In this case, this segment grew 13% in the third quarter. So as for the growth, we see good results across all geographies, all segments, and this is the result of a lot of hard work in all the previous quarters. When we -- it comes to simplification of our operations, we continue with our agenda, policies, and strategy of our efficiency, and we keep reducing our fixed expenses. When we compare to the basis of 2022, we are still growing. We confirm a total reduction of 17% of fixed expenses reduction compared to 2022, impacting all of our margins. And the last movement we made as part of this agenda was the migration of the shared services center, which used to be outsourced. And this was brought in-house, allowing us to keep moving in this journey of simplification and efficiency improvement because other areas in the company will be able to be simplified, automatized, generating cost reduction and synergies. As for the enablers that we need for our future growth, one variable that we spoke a lot about in the previous quarters was the service levels to our clients, and we see the on-time in full service levels, which is the capacity to deliver on the date promised and in the amount promised. And the fill rate, which is the total amount of deliveries also is still growing. So our capacity to resolve a historical problem of logistics and distribution to our clients is being addressed at the moment. As for the inventory management, which was also a problem we saw in the past, we have been having the discipline of working, always focusing on sell-out. All the distribution we make and deliveries to our internal clients and distributors is based on the reading of what they are selling to end users or to resellers. Therefore, we avoid an accumulation of inventory in the chain. This is being carried out with discipline in all geographies, and we see that in this quarter. And last, as for capital allocation, we have a proposal for reducing our capital structure, which was announced last quarter and which should be implemented by the end of the fourth quarter of this year. And as for the investments, they are still being allocated with efficiency and our ROIC increased 7 percentile points year-over-year. These are all signs of this management and discipline. And last, as you saw the announcement we made yesterday, Alpargatas' Board made the call of not exercising the purchase of Rothy's, which means we are still significant investors of Rothy's. So we'll keep working with the other shareholders and the management team in the U.S. as we have done in the past, seeking more growth and more development for this company, but maintaining our current capital participation at Rothy's stake. Now I give the floor to Andre, who will take you through the numbers of all of those results.

Good morning, everyone. It's a pleasure to be here with you to share a little bit of the numbers, specifically for the third quarter. I think this is a quarter which is important because it consolidates a series of advancements we were seeing in several fronts along the journey and which we deemed as priority. So the results we are reaching right now are a first evidence that some of the pathways we have chosen are actually yielding the good results for the company. When we look at the global map of growth, we had important growth volume in all regions, across all regions in the world. As we always said, the third wave of adjustments that we prioritized was about the international markets. And this is an important quarter from this perspective because it shows significant volume growth in all international volumes, 15% in U.S., 8% in Europe, considering that they are already at the end of the peak season and 5% in the international distribution markets, which encompass Latin America, Africa, and Asia. So it's a meaningful result, followed by a meaningful growth in revenue. In Brazil, we had a small retraction in volume compared to 1 year ago, but this is expected. We were already warning in the first and second quarters of the year that we had carried out a strategy of anticipation of sell-out to our distribution. So there was certain expectation that we are going to retract a little bit our sell-out. As Liel said, we respect a fine management based on sell-out. So this retraction, decrease in volume is in place for accommodating sell-in and sell-out, which is not -- never the same, but we're always going to be trying to balance them out. So this adjustment is much more a symptom of this choice of being disciplined between sell-in and sell-out and having our sell-ins always focusing on this final sale to consumers, the sell-out. Now moving on to the cash generation. We generated BRL 205 million. This is an important mark because we have reached 10 consecutive quarters of generating positive cash. Over this period, we accumulated over BRL 1.3 billion, which is an important milestone and made this graph on the right-hand side possible, this leverage of the company. We reached this very high ground of 2.7x leverage and this prioritization of what is really important and this discipline was what actually allowed us to reverse this trend and bring our leverage into negative levels, as you can see right now. So in other words, right now, we have more cash than we have debt in the company. And this is what resulted in us proposing to the shareholders to reduce our capital structure, which has already approved in an Assembly of BRL 850 million. Moving on, we can see the working capital variation. It's pretty much neutral. We have some important effect of inventory reduction on the one hand. And on the other hand, we have a reduction in raw material prices and commodities that we needed to purchase. And as a result, we have a certain reduction in the -- so the working capital follows be normal. When we look at the CapEx, we -- our investment was pretty much the same as our previous quarter, in the second quarter. And this is within our annual plan, which was approved by our General Assembly at the beginning of the year. Again, the yearly prediction of investment is BRL 220 million, and we follow the implementation of the major marketing campaigns to be within this budget provision. Now moving on to Brazil's results. Brazil saw a sell-out increase of 1%. When we look at the last month's consolidated number, we -- this is closer to -- this is the metrics that we should pursue in the long-term. And this is what we use as a basis for our discussions month after month and decide on the pathways from now on of how we manage our inventory levels, so we can make the movements which are coherent with our sales position without generating a surplus of inventory in the market. In this moment right now, there is an accumulation of inventory of 3.5 million pairs, and this is normal because in Brazil, in the third quarter is when the retail is stocking up for the summer sales in the fourth quarter and the first quarter 2026. So this is absolutely normal to have this some accumulation in inventory. And we have reached this 3.5 million accumulation, even though we had this retraction of 3% in the sell-out, again, to accumulate parts of the sales we had already anticipated in the first quarter, as you must remember. Moving on to our gross profit and gross margin, we have had a strong recovery compared to 1 and 2 years ago. And even when compared to the periods when we had even higher volumes such as in 2021 and 2022. This obviously is generated by several things. But continuously, we have been demonstrating efforts in our manufacturing activities in addition to a management of the products, which is very careful and gradually making our mix of products more premium than before, which led us to generating an expansion in margins. If you compare to the previous quarter, we saw a higher gross profit per pair because of this scale, higher scale. Moving on now to the SG&A expenses. This is a permanent agenda for the company. And of course, this is one of the first items we addressed in our turnaround, but this will not stop. We keep looking for efficiencies and opportunities to be more efficient. So when we look at this bar graph on the left, we can see an important route of reducing in the expenses connected to an increased margin, which leads us to the EBITDA graph on the right side, which led us to having a 30% EBITDA margin in the third quarter, which is an all-time record. So that's an important milestone. And this is the result of several things I mentioned, the price discipline, management based on sell-out, efficiency management and so on. And all of that connected to the manufacturing efficiency led us to this meaningful result. And this is the work of a large and dedicated team that made us reach those numbers. Moving on to the international operations. We mentioned several times that this was something that depends on regaining scale and recovering the scale. If we did that, we would be able to reach desirable returns. So when we look at that, we saw that we had important growth in all regions. Europe closed the peak season with a volume expansion and that was an important symptom that we wanted to see in this operation. And Europe did not only that, but did that with a very good healthy numbers, considering the channels and prices that we have in operation right now in Europe. So this growth that happened in Europe, we understand to be solid and a good foundation for a positive future. In the U.S., while we are still working in the business model transition that is going to kick off next year, at the same time, we are making sure we manage our operations well. So in this quarter, we see an important growth in the volumes sold, also a growth in the revenue, in terms of -- an important numbers of growth in terms of channel and profitability. And for the international distribution markets, we also see a growth in volumes sold after having a first half of the year of reduction in sales. We believe this is also important to consolidate our scale to reduce expenses and have increasing margins in this region. As such, we reached a gross margin of 63%, which is 3 percentage points higher than last year and which is already above the levels we were at in 2022 when we had a bigger sales scale. So these results are based on the recovery of sales, but also in the -- all the efficiency that we have gained over time. As for the expenses for the international markets, we also see a reduction, important reduction in fixed expenses. We went from 89 to 68 on the left-hand side graph. And there is also a smaller reduction in the marketing expenses, but this is absolutely like related to a few reasons. First of all, is the seasonality. We had a second quarter, which was stronger. Here we're only showing you the third quarter. So we cannot see that here on the graph. But basically, our second quarter was stronger. We concentrated our marketing expenses there than we used to. And we removed a little bit of this investment in the third quarter. Another reason is that last year, we had the Olympics, which justified the increase in market expenses we had in Europe. And now we are returning to the normalized levels of investment. These are basically the 2 results when you look at this larger 9-month time series. And there is also a decrease of marketing expenses in the U.S., but it goes back to the historical levels of marketing expenses because in 2024, we had increased that. So we are back to what we understand being a normalized historical level of marketing expenses in the U.S. even though there is apparent retraction, when you look at a longer time span, marketing remain -- marketing expenses remain untouched. So we are not looking for efficiencies by cutting off investments in marketing, just to make sure everyone is on the same page here about that. And last, I would emphasize the EBITDA margin that we -- in the last -- past 2 years, in the third quarter, we had margins which were below 21%, like difficult moments in the operational internationals. And now we are back to minus 3%, in line with our seasonal expectation and in line with what we had in 2021, 2022, which is -- was yielded by this better gross margin, but also by a better disciplined expenses or expenditure management. Last, I'd like to emphasize that Rothy's has reached its 12th consecutive quarter of expansion in its EBITDA. So we have expanded in all of those 12 quarters, some expansion in EBITDA even including this problem with the tariff in the United States. We found other means of reaching efficiency, resulting in important operations. Over the last few quarters, we have been compensating the tariff effects and moving on this trajectory of growing margin and strengthening our EBITDA. This is what we had for you in terms of figures. And now we are going on to the Q&A. Satisfied with the results that consolidated the advancements we saw, but at the same time, with an outlook of doing much more in the future.

[Operator Instructions] Let's start with our first question. It's from Danni, sell-side analyst with XP.

Congratulations for your results, especially for these long-term results. I have 2 questions from my side. The first one is to Liel and Natal. I think we were with you during the Investors Day, and you showed several opportunities that you see for the future in the outlook of the company. You even mentioned, right, in your results, this metaphor of climbing higher mountains. Maybe you could give us an idea for the next month. What do you see? What are the main leverages for generating value for the business in 2026? Obviously, the international operations are the focus. But like if you could give us like 3 main leverages or levers that you can use in the short-term to generate value. There are several that we -- I believe there are several in the midterm, but I would like to understand a little bit what is the most important thing so we can monitor for value generation for 2026. And as for the gross margin, there is a -- it was a very strong gross margin. So I'd like to understand how we can see this as being sustainable from now on because whether or not you like the channel that you have been struggling the most, which is the grocery channel in Brazil, and which has probably the worst return on the mix of products because you have the most basic products being sold there, not the premium one. So maybe if you could make us understand what you see for the future or what was actually part of the -- this strong gross margin that you have had -- you had in this quarter -- past quarter.

Thank you, Danni, for your question. I will answer first and then Andre can complement about the margin. What we believe in terms of opportunities for generation of value is what we presented to you during the Alpa Day. A reminder that we don't give any kind of guidance and expectation or any kind of forward-looking statements. The desires we have, which are not new, but are materializing right now are, first of all, the specialized channels in Brazil. This represents about half of the market, and we have a significantly small market share there compared to the grocery channel. We grew in this quarter 3.5% in the specialized channels, which is accelerated compared to the overall growth we had. And this is because of the focus we are having on growing in this channel. We have been trying to improve our On-Time In-Full, right? We are reaching 80%, way, way better than it used to be in the past. We have launched the lines of Men's products and Kids products, which is much more directed to this specialized channel, which has been helping the growth and also the commercial focus of working with them and developing our operations there. So in Brazil, our specialized channel represents this mountain to be climbed here in Brazil in the next years and quarters. And speaking of the second opportunity starting next year is the business model change in the U.S. As we mentioned before, we didn't have a distribution scale since we had a small operation there. And because of that, we couldn't grow. And all of that combined with the strong own operation costs that we had in there because we had since the management of storage of the products as well as all the way through the sales to the end user. Next year, we are going to change this business model. As you know, we are going to -- we have made a partnership with a distributor that has decades of experience in the U.S., Eastman Group, and we believe our capacity for distribution is going to be way, way bigger than we have ever had there. And this should boost our market share and returns. On the other side, since we are going to have a distributor participation, we are going to be focusing on what's the most important part, which is developing products and marketing in campaigns and all of the operational costs are going to be borne by our commercial partners. I would say that the U.S.A. is the second largest opportunity for value creation for the business. And the third, which applies to all geographies, and it's a journey we are already in. We are much more disciplined in our pricing management in terms of generating value through sales. So our choice of channels, our policy of -- for discounts and our strategy -- portfolio strategy has been generating more value with the same number of pairs sold. With the same number, we have been reaching higher margins, and this should continue to be an important lever to generate value because since we eliminated the previous issue we had of excess of inventory, we can -- we don't have to yield so many discounts in our sale. As we improve our commercial execution, sales execution, we are less dependent on channels where we have a smaller margin. And as our portfolio evolves, we can sell products which are perceived by consumers as having bigger value. So this improves the mixing -- the mix of products results. So Brazil, specialized channel, U.S.A. change in operations model and better management of pricing are the 3 avenues for growth.

Thank you, Danni, Andre here. About the margin, I think it's an important point, and I'm going to use this to talk a little bit connected to what Liel mentioned of price management. We have had a very disciplined pricing management. But if you look at compared to what we had a year ago, we had an average price in Brazil, which is about 10% higher than the third quarter in 2024. And this is not an effect of price increase, in fact. This was a problem we had in the problem of excessive price increase, and we don't have this problem anymore. Instead, we have a better mixing of products, which leads to better results and higher margin rate. So when you look at this evolution of the gross margin, if you compare the figures of the third quarter compared to a few years ago, we see that the top line per pair has expanded, but with basically flat COGS expenditure. And if you look at the cost of goods sold, the COGS, and you analyze that throughout all the variables that we face, there is the raw material, which has been flat with the exchange rate pretty much flat and with a smaller volume. And our COGS moved actually sideways, like the variation of our cost of goods sold was of sense. And there is something interesting to look at in there. At the same time, we have a better mix of more premium products that yielded us to get better results. The gains in efficiency we had in our manufacturing system were enough to offset these better products -- mix of products. So you have this virtual cycle of the mix in the revenue that doesn't result in increased prices in manufacturing because at the same time, we gained a lot of efficiency in our operations. So you don't provide guidance. So I don't know how much this is going to be sustainable or if you were going to keep this gross margin. But either way, what I can tell you is that these efficiency gains that we have mentioned, and which are the foundation for these numbers, these are things that are here to stay. None of that are random for this quarter that would show these results and justify those results. On the other hand, you need to remember always that we are always buying commodities that are exposed to the exchange rate variation. So I cannot know how this is going to be in the future, what price levels will be in the future. But yes, if we think from the perspective of what we have done, we have made an important movement in the company. And from this perspective, I can say this is here to stay, but the margin levels from now on will be based on all the other effects, as I mentioned before, commodities prices variation and all the variation in the exchange rate.

The next question is by Vinicius Strano, sell-side analyst with UBS.

First of all, I'd like to explain a little bit to the gross margin in Brazil. It was a very strong evolution. I would like to explore a little bit the operational leverage because we still have volumes which are much below the peaks we saw in the past, and yet you have a very expressive margin. So maybe you can talk a little bit how about your gains in operational levels can huge -- can help you in the margins in the future? And as for the U.S., I'd like to hear from you how you see the level of -- the negative contribution of the American market right now and how you're working this hands over to the Eastman Group partnership? And what is the minimum scale you imagine for the U.S. in order to make it profitable next year? And yet about the United States operation, I'd like to see how you see the brand image and the perception you have about your competition or the competitive landscape in the U.S.? So I would like to understand, in summary, a little bit the potential you see for the U.S. market.

Thank you, Vinicius, for your question. I will start with your second question, speaking about the American market. Obviously, you remember, we always disclaim here that we don't give guidance. So I can tell you where we are and what the strategy is. But the situation in the -- for the U.S. market is 2025 is a clean or clear year. It's a year where Alpargatas is operating in the U.S. as it used to operate previously. All the positive results which are coming right now are already the fruit of our efforts to improve our sales and commercial execution in the very format we are operating right now, and this has yielded positive results. The volume, the 30% volume increase shows that. Secondly, it's a market where people are -- the promotions are -- the special prices are very important. And we have focused on the channels which are -- offer more profitability rather than in discount channels. This is a policy we have for all the geographies. We want to rely more on full price channels than discount price channels. The combination of all of that with the operational efficiency that we have been pursuing in all of our functions, in all our roles, in all our areas of efficiently managing our costs has resulted in a very strong losses we used to have in the American operation. The results actually impacted the results for all the international operations. The last third quarters in the previous years were very negative. This year was still negative, but was already much normalized compared to the 2021-2022 operational year. So we actually have resolved the big loss we had in the U.S., bringing this to historic normalized levels. So this is what we managed to achieve in 2025. The hands-over is completely planned and is being executed. We already have a sales and commercial and distribution contract with our Eastman -- with our partner, Eastman Group, it will be kicked off in January. And from January on, we expect that our distributor, Eastman Group will take the Havaianas brand to more doors. So we, as a result, are going to have expansion in volume. I cannot tell you exactly what it is, but we expect that after so many years selling flat sales in the U.S., we believe that we have potential. I think it's kind of obvious, right, the potential of the American market is much bigger for Havaianas. So we expect to increase this substantially. As we said before, the U.S. is a very fragmented and competitive market. Even though we have a very low volume, we are the second top-of-mind brand in the U.S. by consumers. So this demonstrates the potential we have. We are a well-known brand with a positive image with consumers, which relies on many years of building -- brand building in the U.S. However, limited by our lack of capacity, so as you say, to distribute well, which we expect to fix now with this new partnership. So I cannot give you any numbers for 2026 or any kind of a guidance of expectation. But what I can tell is that the results for 2025 are normalized back to years such as '21, and '22, where we saw a growth in volume, and we expect that in 2026, we are going to accelerate in that direction. Natal, can you complement with anything I have said?

Hello, Vinicius, thanks for your question. This operational leveraging, it's important. And there is an analysis I'd like to mention that we presented during our Investors Day. We have already tried to analyze our gross margin, looking at all the scale loss we had, considering the peak of volume in 2022 and all the way up to now. You certainly have seen this analysis, but you can go and look again. With that number of volume that we had back then, we were already reaching record margins, if adjusted -- if the scale was adjusted to our current scale. Considering that if the scale could go back to that levels, again, these are not building blocks that we can put on top of each other, right? Things change, commodities change. There is -- as I answered in Danni's question previously, but there are many things that could change. There are many variables. But if all of that remains constant, we still have scale gains in manufacturing if we manage to go back to manufacture the same volume we were manufacturing in 2021. But we have to mention something important that in addition to the operational leverage, there is also an important EBITDA impact there because of our efficiency gains. When we look at our EBITDA margin per pair that we had in Brazil in 2021, in the third quarter, 4 years ago, it was at BRL 2.95 about that. And now our margin is BRL 5. It's almost 73% growth in this EBITDA margin, very minimal, very relevant. So when we look at this margin EBITDA per pair, when we break it down, over 100% of this is because of efficiency gains in our operations. So in fact, we have a negative effect of this scale loss, which is extremely relevant too, which could add another BRL 1.80 on top of that. So we increased our efficiency strongly enough to offset this loss of scale and yet to increase our margins. But as we go back to our manufacturing levels, we should be able to add more to these gains. Again, I cannot give you a number where we can get to because of all the variables that impact. But just to give you an idea of how much this scale loss in the last 4 years have impacted operations and how much we can regain that in the future? How much of this is possible?

Now the next question is from Joao Soares, Sell-side Analyst of Citibank.

I'm sorry. I was having a technical problem here. First of all, I would like to congratulate you. I think you got -- made one of fastest and most efficient turnarounds I have ever seen in the market. So congratulations to all management. In Brazil, our operations, you have resolved. You have concluded the turnaround in Brazil. I think it's important what Vinicius brought up about the operational leveraging and about the margins in the international operations. But I think one important point is to understand Europe's moment. There was a good volume sold this quarter. And I think based on that, you can already have an idea of the preordering levels for 2026. I'd like to understand a little bit what do you see for the European market? And I would like to understand what kind of scale would make our operations a little bit more comparable to our Brazilian margins? I want to understand how much of this operational scale can contribute to your margin abroad? And the marketing expenses, how do you understand the phaseout of the marketing expenses? This quarter was a positive surprise. I would like to understand how much of this is sustainable and how much you are looking at this marketing expenses if you are going to hold this -- if this is a sustainable level of marketing investments considering every quarter?