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

Good morning, ladies and gentlemen, and welcome to the audio conference call that will review Alpargatas Fourth Quarter and 2019 Results. [Operator Instructions] As a reminder, this conference is being recorded and webcasted at ri.alpargatas.com.br. This conference call includes forward-looking statements or statements about events or circumstances, which have not occurred. Alpargatas has based these forward-looking statements largely on its current expectations and projections about future events and financial trends affecting the business and its future financial performance. These forward-looking statements are subject to risks, uncertainties and assumptions, including, among other things, general economic, political and business conditions in Brazil and in other markets where the company is present. The words believes, may, will, estimates, continues, anticipates, intends, expects and similar words are intended to identify forward-looking statements. Alpargatas undertakes no obligations to update publicly or revise any forward-looking statements because of new information, future events or other factors. In light of these risks and uncertainties, the forward-looking events and circumstances discussed on this conference call might not occur. The company's actual results could differ substantially from those anticipated in the forward-looking statements. Participants on today's conference call are Mr. Berto Funari, CEO; and Mr. Julian Garrido, CFO and IRO. I would like now to turn the conference over to Berto Funari. Please go ahead, sir.

Hello, everybody. Good morning. It's a pleasure to have you here for our quarter -- fourth quarter and full year results. I would like to start by reinforcing our vision and our strategy. Our vision is to create a global powerhouse of iconic brands, iconic brands that are -- that play in attractive markets and also iconic brands that are bigger than the P&L that generates. Our belief, our conviction is that iconic brands can continue to grow and expand with bigger, addressable markets. Addressable markets that are driven by new segments -- new geographical segments, new consumer segments and also new usage occasions. The other important element of the iconic brands, we are looking at to build, is the engagement of the users of these brands. These brands, iconic brands, they usually have a high potential for further strengthening the engagement through innovations and new user experiences. Our strategy, how we want to create value is based on 2 simple metrics: sustainable growth and margin expansion. Sustainable growth that is driven by 4 pillars: the globalization of our brands, especially Havaianas; the high growth in online channels; the innovation in our portfolio; the experiences we offer to our users; and sustainability. We want also to consistently expand margins with 3 major initiatives: the revenue growth management that looks at how do we drive revenue growth ahead of our volumes, the cost of goods efficiencies drives that we have and the SG&A optimization for zero-based budget approach. I want also to reinforce that these 3 margin expansion programs. They are not projects, they are structures of lean organization, and they are here to continue to deliver year-on-year. All of this embedded in our culture of -- that is inspired by people that emphasizes the owner's hearts and also the way we work together to face the impossible, make things happen and grow together. We also very much focus on taking actions today that can bring future benefits for both society and for all the acquisitions that we operate. The highlights of our business results for the fourth quarter is the growth across all of our iconic brands. So Havaianas reached BRL 884 million, a growth of 6%; Osklen grew 5% to BRL 97 million in the quarter; and Mizuno grew by 8% to BRL 145 million in the quarter. Our main geography, Brazil, grew 7% on top of a high comparable basis of quarter 4 2018. And this is clear when you look our direct-to-consumer performance metric. Direct-to-consumer is our -- is comprised of our same-store sales and e-commerce sales. In Havaianas, we grew 18% in direct-to-consumer in Brazil, and Osklen, we grew 8%. So a very solid results across our portfolio, our main geography, which is Brazil and supported by strong direct-to-consumer sales. The highlights -- the financials highlights for the quarter: Our net revenue increased to BRL 1.1 billion, growing by 6%. Our gross profit expanded by 4.5 percentage points, growing 16% to BRL 579 million. Our recurring EBITDA grew by 17% to BRL 249 million with our EBITDA margin expansion of 2.1 percentage points. Our recurring net income grew by 24% to BRL 197 million. The full year results, they demonstrate the focus of our strategy. We increased our revenues to BRL 3.7 billion, a growth of 10% on total global revenues and a growth of 10% on the revenues in Brazil, where we have all of our 3 brands playing. The growth is around double digits across our iconic brands. Havaianas grew globally 10%; Osklen, 16%; and Mizuno, 10%. Our Havaianas international business grew in reais, 12%; and in constant FX in dollar, euro, 80%. This shows that the split by brands and business units. Havaianas Brazil, which is our main business, is 59% of our business; Havaianas international is 21%. So Havaianas as a total brand is 80% of our business, Osklen is 8% and Mizuno is 12% of our business. Havaianas grew very healthy on the volume price mix. Volume growth in Havaianas globally grew 3%, 2% in Brazil and 9% in international business. And our EBITDA has showing -- our recurring EBITDA margin has expanded by 1.2 percentage points and grew ahead of top line growth by 18%. The highlights by segments. Havaianas Brazil has shown a very positive performance in sell out across both our indirect channel and our direct channel during the year, showing that our focus of sell out is healthy, the overall sales, the quality of our delivery. We have also shown during the year, expect change in our service levels. We have also had a better channel and product portfolio mix, and also have been able to implement price increases that has driven our revenue growth ahead of our volume growth. In Havaianas international, we grew in the year, 9% in volume; 12% in net revenue in reais; and 8% in FX constant. The highlights in EMEA is Europe, Middle East, India and Africa. The performance, both growth in volume and in revenue, came from growth in the online channels that we focus during 2019 and the restructuring of our physical retail footprint where we eliminated low productivity, low return stores. We also relaunched at the same tower, our e-commerce platform and that help us to drive growth, both in volume and revenues in EMEA. In Latin America, we grew both in volume and net revenue, driven by the continuous growth of our direct operations in Colombia, where we tripled the number of distribution points, especially multibrands, key account stores. And also the turnaround in Argentina, where we have a new distributor, and we reset our distribution strategy to focus on key accounts and high-engagement customers. In APAC, we have completed our restructuring of our distributor base, where we changed 50% of our distributors during the course of the last 18 months. And we also have started our direct operations in Czech, second half, where we have our old stores in the digital online platforms, namely Tmall and also JD. And we also exploring WeChat as a sale and engagement platform. APAC, as mentioned in the fourth quarter, impacted the results in international because of the ramp-up of the new distributors. If you take the second half APAC results, we have shown a 13% increase in volume and a 24% in net revenues. Mizuno, we grew 10% double-digit and -- in volume and 16% in net revenue through the development of portfolio through different price points, but also innovations that we focus, especially in the premium segments of the market. Osklen, we continue to focus and grow shoes. Shoes is our key strategic category in Osklen. We had an improvement of the portfolio mix in shoes, also growing in new online platforms. We have also implemented in our stores, new way of engaging consumers through capsules and also drops. Namely, we have 3 major capsules that we have run during the course of the year. And also, we have implemented a successful strategy for November, December around the main retail rebates, Black Friday and Christmas. Our EBITDA, as mentioned before, is driven by the 3 initiatives we have in driving margin expansion: revenue growth management, the VIP 100% program that will focus on cost of goods and efficiencies and the zero-based budget that focus on SG&A. So with that, I would like to hand over to Julian, who will report on the financial results.

Thanks, Berto. Good morning, good afternoon, wherever you are. We're on Page 9. So this first page talks about the fourth quarter results. Again, the footnote there, the discontinued operations of Argentina include Topper and Textile, they are not included. So we grew top line at 6%, EBITDA at 17%. Therefore, we got leverage here and gained basis points in our margin and the same thing happened in the current net profit there. If you turn to Page 10, then the message here is on the full year. 10%, so double digit, this will be across the board with the leverage that I commented also in the fourth quarter. So 10% on the top line, EBITDA gaining 120 basis points there, and net profit as well up. We did generate cash, BRL 371 million. I have a page that details about it. Of course, most of that comes from the operational results. If you turn to next page, Page 11, I started slicing a little bit the EBITDA. And again, we talk about the recurring EBITDA. We have been going through a transition with the new Alpa. So we have some nonrecurring items as we have mentioned before. So this one is to give a clear picture of the core evolution of our results. On the left side there, we have the quarter 4. We see the Brazil region growing from BRL 202 million to BRL 253-ish million, around 25%. And as Berto mentioned, the international part basically comes from this rent part from the new distributor in APAC. So something that we manage, something within our expectations as well. When you see on the right side here, the total year, you see growth coming from both sides, on the international side and the Brazil side, driving this 18% higher than the top line, therefore, bringing our productivity and gains of basis points. If you would now go to the EBITDA -- the recurring EBITDA page. As I mentioned, we are going through a lot of ups and downs. We don't expect this to be all the time. But again, for compare basis, we have to do that. So the left side there, if I take a look what the main drivers are of this fourth quarter is the IFRS because we didn't have that last year. The long-term incentive, this one is a specific for the 15 and 16, the new ones are totally different. So this is a big spike because of the prices related to our restructuring of the market in the fourth quarter and some of the new Alpa restructuring, as we mentioned, mainly in Europe. If I go to the right side, if I take a look at the fourth quarter and I do the same exercise, we talked to you guys about this last year. So with that, the sales of ASAIC, the initial percentage per share and then the provision that we did for the civil dispute in the U.S. and some adjustments on our policy of the inventory there. So now if you move to next page, basically is the same thing. The only thing I will highlight on the left side there is the deferred tax asset of Osklen reversal that made the change. So if you would move finally to Page 14, where we have the cash, the financial position. So what I have in cash minus what I have in debt. We were negative at BRL 72 million back in December, we landed at BRL 299 million in December this year. So a generation of BRL 371 million, as I mentioned, most of that coming from operational cash, of course, all driven by EBITDA. If you see the bars, the IFRS is because on the statutory side. Since it's now amortization of those rents, it got separated, but we manage them together. And the CapEx, the investment and [indiscernible] as well to improve the margins and productivity. That's all I had. So I'll hand it back to Berto for the final message.

Hi, everybody. I would like to cover some key highlights of our pillars, global digital innovation and sustainability and how we progressed during the year. Let me start with the global expansion pillar. In Europe, Middle East, India and Africa, we have developed the important strategic partnerships with key strategic retailers, both targeting younger target -- consumer segments, but also more fashion-oriented consumers. We have also, at the same time, amplified and improved our presence in the online channels in marketplaces and market -- and fresher marketplaces and also strengthened our position in Amazon. In Europe, where we operate directly in 16 countries, we have, in 2019, opened the 16th country, which was Greece, also with strong EMEA results. At the same time, we -- in the fourth quarter, we transferred the responsibility over India operations to the regional EMEA team. The team that has already a successful track record in developing and opening new markets, especially where fashion credentials are extremely important. We also implemented in Europe a restructuring of our physical retail stores, reducing the number of stores, focused on the reduction on the low productivity, low return stores. In APAC, we have, as I mentioned it already, the restructuring of distributors, but also very importantly, we have opened our direct operations in China in the second half and started investing with the focus on the e-commerce platforms with our own stores in Tmall, JD and WeChat. United States, we have restructured the team -- the leadership team. And during the year, we have strengthened our focus on digital channels and key accounts -- fashion key accounts, which is in line with our core image of the Havaianas brands. In Latin America, we have continued to develop the business, the direct operations in Colombia. We tripled the point -- the number of distribution points, especially on key accounts. And in Argentina, we have reset our distribution strategy, and we have a new distributor on board. Last but not least, in our strategy to focus on iconic brands, we have also sold our share wholly in the Alpargatas SAIC, our Topper and sports goods business in Argentina. So in digital, we have invested the new competencies in the business. We have a global user experience team, who is driving the marketing ROI, performance media, user experience across online and offline touchpoints and also translating consumer insights into portfolio risk stratification. We have also scaled up the -- we have in Brazil already, our commercial business intelligence area. And we are now creating a global business intelligence area who will focus to roll out our revenue growth management program, but also the use of data analytics to drive our portfolio and our user experience across our global markets. We have as well invested more -- we have invested more on our retail base, not just researching the stores, but also creating our store labs with technology in parallel that help us to improve services, user experience and also creating a powerful feedback loop that help also scale up insights in our all distribution part of sales, but also in our portfolio. In Havaianas, we are refocusing our media investments into an integrated digital-rated media strategy. We also stepped up our sponsorship of global platforms like the World Surf League. And I would like also to mention, a very successful partnership with Comic Con in Brazil, which is the largest Comic Con in the world, where we had a tremendous presence with exclusive portfolio, but also driving user experience in the younger target group. In Osklen, we have tested different omnichannel services, and rates scaling up and strengthening our capabilities in that area. We also -- on top of the omnichannel focus, we also introduced exclusive drops, capsules in our e-commerce, which was the zodiac in Valentine's Day that help us to drive our e-commerce business. In Mizuno, the digital highlight was the launch this year of our e-commerce platform and the refocus of our investment in acquiring online users to our e-commerce platform. Innovation. In innovation, we launched our important purpose-centric brands movements called Havaianas Friendly, looking at normalizing the use of open footwear and expanding the brands to more occasions. Also in terms of product innovation, we have successfully launched the Sparco range, which became our best -- our global best seller. We have more than 5 families or styles using our data technology. We have also a very successful launch of scaling up of our center-pay line, which help us to drive the brands in more usage occasions. On our strategic focus on the male segment, we have successfully launched 2 products, the Urban Family and [indiscernible] and that has also helped us to gain market share in the male segment. In terms of innovations in Osklen, we launched successfully a hybrid shoe line, combining innovative design and also integrated social media campaign that went viral. We also launched new drops, exclusive collections for a period of time -- on a limited period of time, Havaianas zodiac and the rock'n'roll capsules. In Mizuno, we expanded the launches, the innovations in different price points. And we also introduced new technologies and designs. The highlights was [indiscernible] launch during Christmas periods. And during the year, the Creation 20 and the [indiscernible] 2, that's also proven to be best sellers in the premium category. The store labs, I mentioned already. The store labs are helping us to innovate how we drive new user experiences. And we are able, in an agile way, to capture that insights and also translate into better in-store executions across all our channels, not only our direct channels. And in sustainability, we -- both brands, Havaianas and Osklen has shown a tremendous improvement. According to the Fashion Revolution index, both brands are in the top 5, and Havaianas has been and has shown our highest improvement index. And then we also became a signatory of the United Nations Sustainable Development Goals through our Alpargatas institutes. Last and absolutely fundamental for the performance of the company, we have introduced a new management system, created by goals and by a structured way to manage performance across the business and a new culture. A new culture that is inspired by people that focus on making it happen and facing the impossible. So it's action-oriented and also has the ownership, the owners heart at its core. It's also a culture designed for making teams more effective, more agile and learning fast together, as they're growing together. And also, we as a company are giving more focus on taking actions now, taking care of the future. So finalizing our results shows that our focus on our strategy on creating a powerhouse of ICONIC brands is driving the results, a new culture and a new management system that can help us to do it sustainably and also to have a consistent -- consistency in expanding our margins. With that, I thank you for your attention, and I'll open for questions and answers.

[Operator Instructions] Our first question comes from Olivia Petronilho, Banco JPMorgan.