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

Good morning, everyone. Welcome to Alpargatas third quarter results slide. I'm [indiscernible] Investor Relations Specialist. Today with us Beto Funari, our CEO; Julian Del Neto, our CFO; and Investor Relations team. Carlos Biehl, IR manager, and [indiscernible]. The Q&A session will be done by [indiscernible]. We will now open the microphone for questions. Please write your questions during the presentation. At the end, we will read it and answer the questions. Now I would like to turn the floor back to our CEO. Please, Beto, go ahead.

Thank you, [ Salyn ]. Hello, everybody. Welcome to our earnings call. I hope all well with you. Our third quarter results is marked by accelerated growth. Our net revenue grew 18%, our EBITDA 20%. So high growth and margin expansion. Alpargatas delivered BRL 944 million in net revenue. Our operating gross margin expanded by 70 basis points and we achieved 17% EBITDA margin. Important to highlight, our net financial position has doubled compared to the closing of the second quarter '20 with BRL 380 million in cash -- or BRL 318 million in cash -- sorry, BRL 318 million in net financial position and our cash position, BRL 2 billion. Julian will give you more detail on that. The highlight of this accelerated growth in the third quarter is Havaianas. Havaianas grew revenue by 24%, leveraged by volume growth of 11%, and the EBITDA in Havaianas has grown -- grew 30%. Havaianas Brazil and International showed accelerated growth. We have the best ever third quarter in Brazil with 21% revenue growth and our International business grew 34%. Our global online sales continued to outperform. We grew 168% on online sales, which combines our havaianas.com and our sales through marketplaces and B2B. Next slide. Now I'll comment on our 4 strategic pillars. Havaianas strategic pillars, International and Brazil. International was 34% of our revenues in third quarter. The revenue grew 34%. The key highlights are our 3 priority markets, our 3 priority big brands; EMEA, North America and Caribbean, and China, with a volume increase in these markets of 36%, and our online sales has more than doubled with a growth of 143%. Online sales in our international markets are around 60% to 66% of our total sales. Havaianas Brazil. Again, the best ever third quarter with a revenue growth of 21%, supported by a volume growth of 13% and a net price positive impact of 7%, [indiscernible] 7% to 8%. Our market share remains robust. This is in grocery, convenient stores, who have an increase of 400 basis points year-to-date, and partner also shows positive trends. Our second strategic pillar is digital expansion. Havaianas, as I mentioned, grew 168% globally; 280% to havaianas.com, our e-commerce, it's almost 4x; and our B2B, almost more than 2x with a growth of 117%. Osklen has also shown very positive growth, 190% online sales; 226% in osklen.com, so more than triple; and in B2B, 151%. So digital in Osklen was more than 50% of the business in the third quarter. An important highlight in terms of portfolio was the sale -- the deal with Vulcabras for the transfer of the contract of Mizuno Brazil. A deal that's a value of approximately BRL 200 million. And this deal has 3 important benefits for Alpargatas. The first is the release of working capital and reduction of our FX exposure. The second and very strategic is this gives us an opportunity to release resources, investments to expand, accelerate the global expansion and digital expansion in the innovation portfolio, the Havaianas and Osklen brands. Also, with the deal with Mizuno with -- our manufacturing site was not part of the deal, and we're going to have the opportunity to use these sites and the network around that to expand capacity, invest in new technologies for Havaianas growth. Next, we have a new structure in our international regions. We are creating an international brand market units, business units, led by Fréd Lévy. So Fréd will be responsible for Asia Pacific, Europe, Middle East, India and Africa, North America and Caribbean, and Latin America. Fréd has track records -- phenomenal track record with Nespresso, where he has been 19 years. Also responsible for developing Nespresso in North America with turnaround there. In the last 5 years, Fréd was the CEO of a startup called Coravin also, where he showed fast global acceleration. Fabio remains in our second business unit. So in Havaianas, we're going to have 2 business units, international and Brazil. Brazil led by Fabio. And with the sale of Mizuno, we also -- Leandro, who was the Head of Osklen Mizuno, he'll continue to be the Head of Osklen, but also take additional responsibilities for our global digital channels and rollouts of our omnichannel strategy starting in Brazil, but also the expansion in global digital channels. The other areas, functions remains as it is. Our third strategic pillar is innovation in our core business. We have 3 major pillars: the innovation and portfolio expansion. The first is our core business. Our core business remains very fresh and very vibrant. We are building our leadership in flip flops, both in Brazil but also globally. Working very close with [indiscernible] makers, with licenses like Naruto, Minecraft, new shapes and formats like Tradi Zori and enter in street wear. We have our second drop with Yves Saint Laurent with a sustainable flip flop, also a huge success in our Sparco family, the Glitter family, which we launched last year, which did well globally this year, also to continue to show a very strong incrementality to the core business. The second pillar is beyond flip flops and especially the advancing flat open shoes with the Saint Tropez range, new offers, new technologies, new materials. We're expanding the range, and we have seen very positive results. In the month of September, for instance, we see a global growth of 170% in this range of beyond flip flops, and in Brazil specifically made almost, since beginning of the year, 8-fold increase, 700%. Next slide. And the third pillar is lifestyle. We are touching, we are feeling the water, how we expand in lifestyle, combining a total look. And we have, with this, a co-line with New Era, a global leader with caps, where we have the flip flop and the caps co-lined with Eastpak backpacks in Europe, also very successful, and the launch of socks, which combined with the flip flops has been the leading brand as a market leader in the stay at home during this pandemic. We are also launching the "for more colorful days" campaign in Brazil and globally, focusing on total look using colors as a filter. In doing that, we launched our global digital flagship in Brazil. We have planned rollouts to 38 -- to more than 30 countries around the world. It shows more than a digital flagship store. This will also help us [indiscernible] present our products with a deal that is beyond just a simple show of our flip flops. Next slide. We can do cross-selling. We do filtering by color, by styles and with that we are starting to see also strong signals that we can grow the brand and the cross-sellings and the average ticket in our e-commerce. Next slide. All of this has been achieved. All this accelerated growth, supported by a very resilient ecosystem, a demand-oriented supply chain. We have been the insourcing of our e-commerce in Brazil in the third quarter. We have been working with the high level of efficiencies in logistics, and we have a better quality inventory through high-turnover high-margin stocks. Our industrial operations are undisrupted, very solid and robust. We continued to invest in health and safety practices. We have -- also during the third quarter, we invested and expanded our production capacity, hired new people, created new shifts and invested in CapEx. And we have also concentrated optimizing our CapEx in order -- Julian is going to talk more about this when you see our operational cash flow. The brand has also evolved and accelerated in high-growth sales channels. Since May, in Brazil, we have gained more than 40,000 new points of sales in grocery, food, convenience and drug stores. We have stepped up our investment in performance marketing and in brand building, especially directed to digital sales or online sales. And this has shown very high levels of returns and also growing the -- strengthening the health of our brands. And also, we started pilot tests with omnichannel in Brazil, in Europe and the United States. Next slide. Another important landmark for this quarter is our focus on sustainability, our fourth pillar. There are 2 important announcements that we did during this quarter. First is strengthening our focus on innovation, new materials, new products, but also in brand communication. The second key pillar is corporate governance. We created a sustainability commission, reporting to myself, and direct line with the strategic committee of our Non-executive Board. Announced the creation of [indiscernible]. So we appointed a Head of Sustainability. This is part of our people organization with direct line to myself, following the practices of -- the best practice of the company's own sustainability. Next slide. Now I hand over to Julian.

Thanks, Beto. Good morning, afternoon, evening, wherever you are. Let's deep dive on the results, and I'll go through some explanations. I think in a nutshell, before we deep dive into them is to say that those results are consequences of our strategies, absolutely in line with our expectations, slightly better, mainly in Brazil, EMEA and in United States. So our pillars, our global, digital, innovated and sustainable strategy, together with revenue growth management, VIP and zero-based budget are delivering what we are expecting. Of course, we are still living in a COVID world, mainly in the APAC region, but I'll get there in a second. So in a nutshell, this is absolutely in line with our strategy, and we feel good about it. Again, foot on the ground, there is lot of challenges still ahead, but -- so the BRL 944 million, again, it's related to continued operations. So Mizuno and [Indiscernible] in the beginning of the year is not the year. So we're only talking about continued operations. BRL 944 million, it is an increase of 18% versus last year. And when we take a look at it, the recurring EBITDA, and I want to emphasize that this EBITDA contains investments. So the mindset and, again, the strategy that we have been making, we continue to make investments. We increased investments in marketing, mainly trade marketing as mentioned before. We continue investing on big brands. China did not exist for us last year. And so we continue on the branding. We are in the initial phase there with good results on the volume, as mentioned, Beto mentioned before. So this recurring EBITDA represents 20%. So we had the leverage, despite of all the investments there, and this improved the total margin of the -- of the company on a recurrent basis of 40 basis points, of which Havaianas per se is 70 basis points. So that, of course, drove the recurring net income, BRL 166 million (sic) [ BRL 116 million ], which is a double-digit growth versus 19%, 13%. And the net financial position, as Beto mentioned, we doubled versus prior quarter. We are better than we started the year despite of the crisis this year, and again, this just shows that the strategy of the ecosystems is also working and the P&L does talk to the cash position. Would you please go to the next slide, where we talk a little bit about the strategy on liquidity. Again, we started out with the strategy of building up a position. We have been generating cash since Q4 last year, and we ended up with more cash than we went to the market. But the net financial position taking out this funding that we got is positive. As I mentioned, within a year time frame, we increased BRL 194 million. So it's this BRL 123 million against this BRL 318 million, of which 400 -- roughly BRL 400 million comes from operational cash flow. And I'll show you in the bridge in a second. Of course, excluding the discontinued operations. So we continue doing the stress test, but of course, the COVID is not gone, but it's not on the work base that we had before. So we still have a pretty solid cash position. I have been repaying the insurance that we got in the beginning of the crisis, with a mindset of trying to pay this all by end of this year, again, depending on the results. But this is just to show that this was truly insurance, that we didn't use the insurance, but it was very good to have that insurance there. But again, this insurance is covering 29 months of crisis like we had before, and that's not the case. And therefore, we should be decreasing. If you see the funding of BRL 1.7 billion there on the right -- top right side there, we used to have BRL 2.5 billion in the last quarter, so we decreased the BRL 800 million there. In what's left, BRL 1.3 billion is basically related to this insurance, of which we have already -- gave back part of it, and we should be giving this back until the end of next year. Next chart, please. So we have been managing cash. But again, this is cash for growth. This is the guess and those dollars -- the investments for us to grow on the big brands there. And we split this again in 3 buckets here. The working capital first. Always focus on the ecosystem and this paid off -- has been paying off. Not only the suppliers but also customers. We took a look at the whole chain. This was the time to show partnership, and that's what we did. And the good thing, that's why we comment here on the right side, the full risk is mitigated. It's because all the negotiations that we have done with the customers, they have been honoring them. So this worked it out and also with our suppliers. Of course, as the system goes and the inventory turns, they are making money, we are making money. So we're pretty happy with this, always protecting the future. So we keep, of course, working on extending payment terms. If you see in the market, I think we are one of the best in our market to have days of payments versus days of receiving. And Mizuno was, as Beto mentioned, was a pressure to us because the terms of payments with the market is longer. And with this negotiation, we're improving our working capital as well. On the cash management related to projects, not only OpEx, we are managing marketing on a -- performance marketing on a centralized based on business case and return on investment, but also CapEx. We have a pretty good process. We are, of course, diverting. I mentioned to the market, we will be spending more CapEx this year. Of course, we revisit part of that. And we are focusing this to give us a capacity, focus on the user experience, the digital side and the IT and logistics. The flow of S&OP for us is crucial as we have mentioned before. So I don't have short-term maturities going on. We have credit limits on the market [indiscernible] where the market were when we was started -- when we started out the crisis. So we feel pretty good about it. Next slide, please. The discipline is all about discipline here. It is beating the drums on a weekly basis, on a daily basis in some cases here. And as we mentioned before, those are our 3 pillars. They're not projects. They're not here to go and stay in -- start and go or -- this is something that we -- of course, we have different stages here. And I would say RGM is in early stages here. We started in Brazil, there's a lot of opportunity there. We haven't rolled -- we have started, but we haven't seen yet this rollout globally, and we will do that. So there is benefit. We don't give guidance. But of course, this is proven in Brazil to give results. In Brazil, we expect even more, but -- and again, it's not only price. It's focusing on the products, what we offer as products, of course, pricing there, focusing on the products there give us the turns and the good margin over there, smart channel portfolio mix and how we play with that. The VIP is the project -- 100% is a project that we focus on supply chain and the industrial side. Again, focusing on risk mitigation on multisources. And again, the rubber paid it off. We see improvements. We see better prices in rubber if we compare to last year related to that, plus we are not appended on global sourcing or local stores or any type of sourcing. So we manage this to have the multisourcings to be in a good position there. And the zero-based budget, again, second year that we are going through that, a lot of thinking, this thinking also is guiding our budget for next year. And the highlight here is on the distribution cost efficiency, focusing a lot on the freight per pair. And mainly now that we're moving out to digital as well, this is a crucial exercise, and we are even better than we're expecting in this package. We have 3 -- sorry, 11 major packages here, and this is just one of them. The other one relates to core G&A. As Beto showed it of their restructuring, but thinking about what do we need vis-à-vis this new reality COVID, as mentioned, Beto before. Also the lifestyle, the digital, what are the resources that we're better allocating? So we are doing a good job there, too. Next slide, please. Okay. Let's start slicing this P&L so you guys get a flavor of our results and what is behind this? I want to make sure that you guys get because we feel pretty good about it. The gross margin growth of 20%, high double-digit year. Brazil is the big highlight. Again, RGM playing a big role in Brazil there. So the driver there of this margin, 48.4%, mainly coming from Havaianas and coming from RGM. The international part is still pretty high, 65.6%, but you say, well, but Julian, there is a drop there, if I compare to last year, but this is not apples to apples. I kept it there because those are the numbers that we've seen in the statutory play. Again, I mentioned this in Q1, Q2, Q3; I'll mention that in Q4, again. Next year, I promise not to mention that because what we did this year for the EMEA business, we reclassified expenses, that was the only region that was putting that as the SG&A, the warehousing. So we allocated this now in gross margin. Just by doing that, the margin is comparable, flat, 65.6% as comparable margin here. And again, we also had events, and then we sliced the international part there, going a little bit before -- sorry, different to this. We see EMEA, and we see also the North America and Caribbean improving margins, not only gross margin but also EBITDA. Whereas we could have been better, but the pressure, and you see this in the next slide, too, but -- is the distribution market of APAC because of COVID. Remember, it's one of the key markets for tourists as well. So we have this temporary effect higher in the countries there. They're 8 months in lockdown. So we had pressure there and the temporary pressure on the import license for all distributor in Argentina, too. And as I said, a lot of investments there that we have been doing. But even with all that and comparing apples-to-apples, we still maintained international very high. And again, we have even starting the RGM, as I mentioned. Next slide, please. On the recurring EBITDA, the following slide will be between recurrent EBITDA and statutory, but this is why we focus on because this is going forward. Brazil 30 basis points, again, mainly driven by, as I mentioned before, the RGM which is not only price, it's how we execute a lot of work in the SG&A maximization. Remember, when I compare to next year -- last year, we invested in [ UX ], and we are very comfortable with investment on [ UX ], digital, IT, marketing. We increased marketing. If you compare to the market competitors, you see some of them decreasing. We're increasing the marketing. But branding, again, we do investments in China. As I mentioned before, EMEA and NAC, they're building up, they are growing. You see they are negative because of the investments, because of the temporary effect of COVID, but it's because mainly Argentina and the distributors of APAC because EMEA and NAC actually are growing, growing and also growing in their local currency. So the investments is what we are focusing here. And again, this is something that we expected. It's absolutely in line with what we're doing and a lot of positive trends going on. Next slide, please. What I did different here to help you guys out. Again, this is the chart I always show to you guys. What is the criteria that we use. So there, you can also do your modeling, your calculation. I just put number here to make it clear. So I go from -- let's focus on the first column here, the blue column here. I go from BRL 158 million to BRL 141 million. So there is a BRL 17 million hit here of nonrecurrent items. I have a good guide, which is the IFRS because on a statutory basis, this is now below EBITDA. So for us, managing is like before. So I manage the stores above. And you also have the impact of COVID up to the level of EBITDA and restructuring costs, as Beto mentioned, we started already not only on organization, but we start also to take a look at some stores, what it makes sense. We have that in mind already even before COVID because we are going to D2C. The stores have a role of helping us out with the D2C, but they have a purpose. And we believe on the purposes, which is the experience of the customer. So we are revisiting some of that, and we'll continue to do that until the end of the year. We have done that in the past already. And we have done this in Europe. We have done this in India. We're doing a little bit across the globe as well. So this is an ongoing exercise. And next slide, please. This is where I like to put upfront here and to show if you go my press release is also there. I start with this net recurring, BRL 116 million, as I mentioned. This is on reals. I, again, take out the 40% related to Osklen since they had -- we had a negative result. So it's a good guide here in green. So I go to BRL 122 million, which is what I call recurrent profit associated with the partners of the controlled company. And then how do I go from this BRL 122 million to this statutory BRL 5.4 million Julian? Mainly 3 buckets, we have been very clear. First one is the Mizuno. So we announced, again, this is still subject to the -- our regulators approval here, the CADE or [ Conselho Administrativo de Defesa Econômica ] in Brazil and then -- but already classify this as operations -- or discontinued operation below the line of current here. So the BRL 60.2 million is a combination of what I had to write it off in the balance sheet, as mentioned -- Beto mentioned, they are some assets that I'm not going to take. Vulcabras is not taking our industrial site -- the industrial part of it. So I had to do some provisions and some impairments there and also the negative results that we have from Mizuno because of the COVID exercise. So that totals roughly around BRL 60 million. And then we had the COVID per se, as I mentioned before, BRL 30 million above. And the rest is, as I mentioned also before, I am prepaying this insurance COVID loan that I get and by prepaying, I have, of course, some costs related to that. So that totals something that you see over there. Last but not least is the restructuring that I mentioned before [indiscernible] in some of the stores. So those are for us more recurring items and absolutely under control from our perspective. Last but not least, I mentioned about the net financial position. So we are in good place -- good position, good place. We generated in this 12 months BRL 194 million, and as I mentioned, on the bucket here on the left side, BRL 400 million coming from operation and continue to invest. If you see the investment on CapEx related to the Digital, [indiscernible], IT, as I mentioned before, in this 12 months, we continued investing there. And last but not least, the last bar there, you see BRL 96.6 million, is the increase, and this is related to Mizuno, the discontinued operation, a little bit of Argentina there, but this is -- they were -- they consumed more cash within this 12 months. And as Beto says, once we get out of this business, we're going to have a positive impact on our working capital. And that's what I had to say. I'll hand it over to Beto again.

Thank you, Julian. Thank you very much. So as you have seen, our brands remain very strong, especially Havaianas and our executional focus, quality of our execution is driving our performance and showing acceleration in growth. I want to emphasize 3 main points. First is a very strong combination of profit generation combining with investments. So we keep investing in our strategy and the long-term growth potential of the company. We keep expanding margins and will have a phenomenal result at operational cash flow. At the same time, we have -- we are showing that we continue to build strength in our high-growth channels. The portfolio expansion is showing positive signals that the brand can go beyond flip flops -- that flip flops remains very vibrant and healthy. Hence our global expansion is showing very strong signs with the volume increase in North America, Europe and China in the third quarter, on top of the growth we had in the second quarter. And to support all of these, an uninterrupted, very resilient, demand-oriented supply chain. This is our value creation model. I want to refresh our minds, our memories. Four growth pillars, global expansion, digital acceleration, portfolio expansion for innovation and sustainability. And our 3 pillars for margin expansion, supported by a very strong, highly engaged organization that's also purpose oriented and showing the commitment for the long-term success of the company and our impact on society. Then, before I open for questions and answers, this is our infographic, will remain on the stream with the highlights and all we have done to support society during this pandemic situation and the efforts we have done in the communities where we operate. So with that, I would like to open for questions and answers.

Thank you, Beto. We have a question from [ Isabella Lamas ]. My question is regarding the supply chain. Have you been noticing any disruption related to materials/suppliers? Any risk this could impact your capacity to meet demand?

Thanks, Isabella. We have built strategic inventory levels to cope with the surge in demand. So we feel very safe from that perspective. We are very well prepared for the surge of demand. We also -- in the key materials that have shown some stress globally, we have a very strong relationship with the suppliers and we have not seen any interruption. So in terms of disruption related to material suppliers, at this moment, we don't see a risk.