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

[Audio gap] A very important advancement in the sales of our online channels, both B2C and B2B, which started, which now represents 20% of the total revenue of the brand, 38% of the total revenue of the international markets. That's a very important market because this is 3x bigger than the moment before the pandemic in 2019 and 100% of our stores in Brazil, our own stores and in Europe are integrated through our omnichannel environment. As I said before, we have made a very important advancement, I'm going to talk a little bit more in detail about that with the integration of the Ioasys into our Alpa family. And we continue moving on, very well positioned, and we know that this performance will continue in the future, and we will continue delivering consistent results in the short and long term. Going a little bit into the numbers and indexes. Our performance in the second quarter 2021 was market by sustainability and consistency of results. Once again, it was boosted by the high growth of Havaianas, but also Osklen. Osklen grew substantially. We have already reached levels, rentability levels and profitability levels, which are superior to the pre-pandemic moment, growing 46% our net revenue versus second quarter 2019, and 73% increase of our recurring EBITDA versus second quarter 2019. We reached liquid revenue of BRL 1.3 billion, an increase of 68% versus the second quarter last year, and recurring EBITDA of BRL 197 million, which represents 163% increase, and recurring EBITDA margin of 18%, which is [ 6.3 ] percentage points higher than last year. Havaianas sell a volume of 58 million pairs, 58% increase versus second quarter 2020, reaching the record revenue of BRL 1.36 billion with a 20% EBITDA margin. This performance consolidates the brand at the top of the Brazilian market. Osklen has also reached a very significant results advancing in volume with 352,000 pieces sold, an increase of 189% compared to second quarter '20 and BRL 54 million net revenue and minus 11% recurring EBITDA margin. Let's go a little bit -- dig deeper into Havaianas growth. As I said, the net revenue was 2x higher than the average of the last 10 years with over BRL 1 billion -- BRL 1.036 billion, an increase of 68% compared to the second quarter. All business units have shown expressive growth, both Brazil as well as the Big Bets, Europe, U.S.A. and China and also the distributing markets showing strong recovery. The highlight for the quarter is for the Havaianas International, which has shown increase of 74% increase in volume, reaching 11 million pairs sold with a net revenue of BRL 516 million, which is an increase of 63% versus the second quarter 2020, 26% plus in constant currency in reais, representing half of the sales of the brand in the quarter. The EBITDA margin of the international market reached 30%. In Brazil, the highlight is the increase of 55% growth in volume, reaching 47 million pairs sold with a revenue of BRL 520 million, up 72% versus the second quarter 2020 and a recurring EBITDA of BRL 47 million, which is up 20% versus the same period last year. Our pillar channel -- our online sales, D2C and B2B, online, saw a BRL 220 million in sales in the second quarter, which is 3x superior to the second quarter of 2019. This -- our online sales already represents 20% of our total sales and 38% of our total sales of the international markets. In the second quarter of 2021, we have finished several advancements in the omnichannel channels. 100% of our stores are already activated in the omnichannel environment. In Osklen, we had the launch of the app, and we have total integration of the inventory to our DTC. A very important highlight is the advancement of the brand in the specialized channels, omnichannel, which are growing exponentially in their online platforms. The highlight here is the successful partnership with the brands, ZARA and Pull&Bear, expanding in over 300 physical stores. This is the business model that we have replicated both in the U.S. as well as in Brazil as well as in Asia with big partners of the lifestyle and... We are advancing very successfully and with a lot of optimism with Ioasys, it is a platform of user experience that leverage digital solutions. The large phases of integrating Ioasys is to potentialize our growth, our current and future Alpargatas growth and with Ioasys together with the Alpargatas family, we have 300 new employees, 149 developers, 45 designers, 30 specialists in project management and 10 specialists specialize in software architecture and a very strong team in training and development of people, of over 20 employees. We have already been through the onboarding. We have already mapped the key initiatives, and we are prioritizing the work fronts. And nowadays, we have over 50 teams being created in 5 large areas, which we have prioritized. Those fronts include, restructuring of the innovation lab, based on agile methodologies to give rise to the quick wins. We are going to be using a lot of this -- our data ecosystem and making our company increasingly more data-driven. The second large pillar is on top of [indiscernible], what we call HAVALOVERS, which is -- specific details with our audience in Brazil and in the international markets. With that, we intend to expand our portfolio innovation expansion and offer support to this expansion in this market, which is 3x bigger than the market we are in today, the beyond the core market. The third pillar is the entire map of the omni journey, bringing digital solutions to our initiatives in D2C and restructuring our e-commerce, so that we can keep advancing with unique experiences to our users. We also have a very strong support to our channel development. So our B2B and B2B2C will bring relationship plans, specialized channel with our partners and new channels that we will be opening in the near future. In addition to that, we are also bringing a new culture change, bringing agile culture, which is transversal to all of our business areas and units, we are bringing an innovation lab, as I have already mentioned before. And that's why we have brought Ioasys in house. And as our independent business model, it has acquired over 5 new clients in this period already being part of the Alpargatas family. So we are very excited with this business model that we brought in-house to our platform. The third pillar, which is the pillar of portfolio expansion through -- we are extremely strong with our [ flip flops ] core business through licensing, collabs, which are very successful, and I would like to highlight that once again, our Pride family was one of our highlights, counting on a global video clip, had a very high engagement in all of our social media channels and our Pride collection already occupies 1 of the 2 most important positions in the top 5. it has more than doubled the volume of the Pride collection compared to last year. Our innovation and collabs continue to advance, and I would like to call your attention for the Glitter family, which is expanding even faster in the international market, reaching volume records of sales. In the Glitter Family, we have over 9 models and over 24 colors. The Marvel line, the Marvel Classic is the fourth most sold model in the online channel. To give you an idea of the strength of this licensing, this license is 10% bigger than the Glitter family, and it's -- it already sells equivalent to 90% of all of our products of Disney. The partnership with collab is [indiscernible] has occupied the fourth in the first week of sales. There is a positive feeling of 98% for this product. And once again, it had a very high impact in the editorials in the... And in June, we started a warmup for the Olympics with our CRM and launching content related to the Olympics, and this makes us proud and brings recognition of Havaianas to the world. Nationally, we have a 199% higher engagement to the second place in the ranking and 96% of positive feeling. A large success of feeling engagement in the social media and sales. Beyond the core, we have doubled our volume compared to last year. More than that, we have increased 8x the models of the -- in slippers, having over 20 styles and 79 colors. So you know portfolio is very important to advance in the specialized channels beyond the core channels. In the beginning of June, we started our pilot store plus, Havaianas Plus in the Morumbi mall in Brazil so that the users can get to know the complete portfolio of the brand and this lifestyle proposal that we are bringing. We started and deployed launch from the TikTok, on the TikTok platform, and we surpassed all records that we had before, with over 2.7 billion visualizations on TikTok. And we also had the Juliette effect, the winner of Big Brother, Brazil. And only this announcement alone brought 45,000 new followers on Instagram, and 5,000 new followers on Twitter and a positive feeling of 94%. We are also announcing it's just behind me, the launch of our casual tennis shoes, which is going to be available to D2C sellout in August 2021. It's already in -- it will be in the international markets in the beginning of 2022. This is a very important strategic movement because it is of interest of all of our pillars. It is born with an innovative line, bringing ultra comfortable and very level of sustainability in all of its materials. This -- its strategic focus is to expand Havaianas Lifestyle with comfort and freedom. In channels where we made available the complete portfolio of products, and we are monitoring that. The products that go beyond the core already represent 20% of the total of our sales. So this is a huge strategic point for our brand, and this will increase the D2C and online sales in the opening of new channels that we can represent increasingly more the DNA of the lifestyle of Havaianas. In Osklen, we brought an unprecedent collection, the Gaia collection. It's an unforeseen collection. It's -- has had a very wide acceptance and very strong connection, being connected to the earth with sustainability. Osklen is a pioneer in Brazil and in the world. The Gaia collection is based on new actions that impact on our lives. It wants to bring the proposal of reflecting how our actions impact nature. It's the search for sustainable practice in favor of all forms of life on earth. Valuation and empowerment of community and knowledge generation of value for waste and redefinition of what is garbage. It brings together sustainable practices in favor of all forms of life on earth. Osklen as a pioneer in sustainable fashion, once again makes a movement with a new collection that leaves a legacy for future generations in the incredible history of this brand. In the sustainable pillar -- sustainability pillar, as I said, is a strategic channel, which addresses this exponential growth of the consumer of the -- conscious consumer, we have amplified our work and our logistics reverse program, both in Brazil and in Europe. We have launched the initiative -- We already have 8 points for recycling collection in Europe, in several countries. We have made a partnership in Brazil with a company, and we are connecting to aspirations of the society. And once again, we show the positive impact of this movement. Sustainable material in the store collection represents 62% of the composition using materials and fabric, which are recycled or are natural. The Alpargatas Institute continues to work hard against the impact caused by this sanitary and health crisis. We have donated over 30,000 pairs to vulnerable communities in Brazil, and we have supported the initiative, Brazil without hunger with the donation of BRL 5 million, equivalent to 5 million meals. And we have also supported qualification courses for over 200,000 students. So I would like to give the word now to Julian.

Thank you, Berto. Thank you, all of you. I'm going to go a little bit into the numbers right now, figures and talk about our P&L. Just a moment please. So the results of the second quarter, we can see as our pillars for our financial revenue and also gross EBITDA and net profit, we compare not only to 2020 which was expected, a growth, but also against 2019. As we said earlier, it's a move. It's a journey. [Technical Difficulty]

Guys, we had a technical problem with Julian's internet and he is going to reconnect, okay? We will be waiting for him to reconnect.

I'm sorry, I had a technical problem, but everything has been solved. Our revenue continues to grow, positive EBITDA margin as well. And obviously, the consequence of the result in the net profit. We're also going to see that to the difference concerning recurring and nonrecurring, it's minimal, as I had already said before. It was a transitory. So we had a very strong net profit. Here, we can see a little bit of this opening of the revenue, where on the left side, we can see an increase in volume of 40% -- 14% and the revenue increasing 46%. This is a positive result of the RGM, especially in Brazil and obviously an effect of the mix from the international markets. We grow significantly double digits against 2020, as I said before, but mainly against 2019. We had a growth -- a strong growth in Brazil, but also in this international businesses. In the international markets, the highlight is the EMEA for Europe, where we had a 38% growth. And even in constant currency, we had -- we grew -- here, we start to see RGM bearing fruit we started in Brazil, we're now expanding into EMEA and other countries. Well, the gross profit, we see a strong growth of 72%. It is explained by this increase in volume and also price and mix, as I said before, coming from International Havaianas, which can get a higher gross profit of 73%. And the gross margin per pair also increased in Brazil. It's still healthy. We chose also the reaction of the RGM pillar, mitigating part of these increases of raw material that we have seen and also the inventory turnover. We can look at this structurally. And the message is that we have the sustainable model of growth and margin expansion. It has been proving itself to be the right model. In 2021, we had an improvement in the international and this sustainable -- improvement is sustainable. Of course, there is seasonality, but we are talking about structural changes, for example, in the U.S. where we reviewed our go-to-market strategy. when we look at Brazil, we see that we -- the market still delivers, of course, in the second semester, where the seasonality was bigger. The RGM, which is the revenue growth management, it's not only the increase of price, we will continue to deliver working on a mix of products and channels and also price, but the growth of the revenue as well, protecting this ecosystem, but also analyzing sensibly. And it's natural in the short term, as this is a journey. It's natural to see some variation, whether it is in Brazil or whether it is in BMUs or lines of products. We don't undermine the future to have short-term margins, as I said before, and we have been strengthening our brand, gaining more users, buying other products in addition to the flip flops. So the final message in the gross profit is the RGM in Brazil has also been playing its role and margin per pair has been increasing as well. A little bit of this opening of the expenses, which I also would like to call investments. On the left side, we would like to see their average. We have excluded marketing here to have a look at the expenses and administrative expenses. So which went from 36% to 28%. So there is investments in user experience and IT structures. But it's a significant decrease from 36% to 28%. And you can see that we keep increasing, as I said, we -- as I said, we are not undermining the future and compromise in the future, so we still have double-digit expansion in the investment in market, and this is what we have been doing and going from 64 to 109. We have focus on margin, something structural, but also with a focus on investment in marketing, investment in teams, investment on branding to help us in flip flop sales, but also in the core business and beyond the core lines. The EBITDA. This is a chart, we are going to see increasingly that. You won't have -- we won't have a difference between the recurring and corporate EBITDA. If I get to the semester, you're going to see, we won't have it. We are using the IRFS 16 (sic) [ IFRS 16 ], the corporate EBITDA given increased more because there was some effect from a nonrecurring taxation part. It's a solid growth and the difference between those recurring and nonrecurring is smaller. In the next slide, we show the recurring net profit, a growth of 137%. The difference in recurring net profit is also pretty much 0. We have 2 positive messages. This growth comes from the operations. We see that the recurring items. As you can see, the nonrecurring items is minus BRL 42 million, so it has been decreasing. We don't have those nonrecurring items, and they have confirmed. As you can see, we knew that they wouldn't continue to happen. This foreign exchange in P&L, we have been managing this cash flow. We have a natural head sometimes in strong currency. We are -- out of Mizuno, we have a very positive trend. So our net profit, BRL 106 million. Next slide. Here, the return on capital employed continues to evolve. Here, we get the revenue. The net results direct from the P&L, and we make a rollout of 12 months. And the tendency that we see is that, that this return is increasing on the employed capital. We still have two strong factors. One is active of taxation, which we have been gaining in Brazil with PIS and COFINS and also the receivables for the sale of the sports which we should be paid off in over 2 years. So we see that in the return of the return on the capital employed. With all of that, it is important to be solid in our financial position, which continues to grow 176% plus, 38% more in the operational flow. We see in the EBITDA, CapEx level with investments higher than before, which puts us into our position of future returns even bigger. We see the acquisition of Ioasys, so it's left the -- our cash flow. We didn't have to go to the market after money for that acquisition. And the good news is that most of it is from what we received from the sales of Mizuno. So we didn't have to go after money in the market. We have protected our ecosystem, both from our suppliers and to our users, and we have been monitoring very closely all of that protecting and using this cash flow as much as we can to help us in our operational strategies, whether it's for protection, whether it's for inventory accumulation. So this position 636, and I have cash -- net financial position of around BRL 900 million. And that -- which is pretty healthy and also the debentures that we have. In the next slide, we have the big message. We have a leverage -- operational leverage based on that pillar that we have been always talking about, instead of bring the RGM once again, the VIP and the OBZ, which are behind that. We are already bringing you tangible numbers. So the RGM has been involved in Brazil. We have it in Brazil deployed for over 1.5 years, already in Europe and U.S.A. have been working now with the RGM. The restructuring of the U.S.A. in regard to its stores that we talked about, it has already being paid off. We see a turnaround in Brazil with positive results in the U.S., and all of that contributes to the volume and the RGM, so we see a growth as a company, but we also see happening in the Brazilian market and also in the international markets. And the expenses compared to the net revenue -- to the revenue has been decreasing. With this view of investing in UX and IT and the structure and also in marketing, obviously brings the growth of the EBITDA. I give the word back to Berto now.

So let's move on to the Q&A.

Our first question comes from Richard from Bradesco. Can you give some more details on the growth in Europe and the U.S. Did both delivered good growth. So I'd like to understand a little bit of the regions, channels and the campaigns that went down well and how is the perception of the brand in those markets. The second question, by Richard is [indiscernible] 300 stores of Zara. Is there still potential for a bigger rollout of stores. Can you talk a little bit about the partners -- partnerships with Amazon and Zalando? How are they performing right now?

Richard, hello. Let's go. Health -- brand health is still very strong in the Big Bets. We monitor this frequently, and we are growing both in terms of brand awareness and in terms of the main attributes, which means comfort, style, so this is a very important growth in those main countries in the U.S., countries in Europe, U.S. and China. The brand keeps evolving and growing in its indicators of brand health. In the U.S., we had an update of that at the end of the year. And at the end of the year, we will bring you more -- an update on that. So again, very positive brand health. Again, I want to remind you that we are user-driven. So we don't have an export model, right? So the brand health is a very important index for us. As for U.S.A. and Europe, the big driver and the strong driver is the opening. The lift of the restrictions in the commerce, which made us advance significantly in physical and omni-channels. I will talk a little bit about the partnership with one of our partners. So we performed very well in the sellout throughout summer, both in Europe and in the U.S., boosted and leveraged by the reopening of the physical commerce. In the online channels, we performed well, both in D2C and B2B. Obviously, last year, it was what sustained us last year. Therefore, the growth this year is small -- this growth is smaller. But in the B2B, we performed very well in the U.S., the highlight is in the B2B, especially using Amazon, we did very well. We are opening new B2B channels in the U.S. We are -- We have started with Target Plus and walmart.com. In Europe we advanced well with omnichannels -- omni customers, the trend is to specialize. So -- and the trend that all brands is to -- specialized channels is to go to omnichannel. In the platform, we are performing 2 times the performance of the platform. We have invested for that. You saw that in our market, we had investments. We had performance market investments, and this model has been working pretty well. We have the segmentation of products in those platforms in all of the channels. In Europe we already have the RGM deployed, which involves the segmentation. So this -- the RGM in Europe was another leverage with a growth of 4% in the countries -- in the price per pair in the countries in strong currency. The countries where we deployed the RGM, there was a growth of 4%. And we had products that we -- performed extremely well in all countries. The first one is the Pride line. The second one is the sliders, or women's sliders. And the third one is a Glitter line. It has been a very strong trampoline in the international market this year. So in the key countries, especially in Europe and the U.S., we see a strong movement of the brand and growth. And we also had a strong movement of recovery in the distribution markets and China continues to grow also strongly. So this is the overview of the international markets, centered on brand, centered on sell-outs, driven by the demand for the brand and focused on online sales. It was an increase of 38 -- it represents 38% of the total and also focused on increasing more in innovative products expanding our brand presence.

Our next question is by Olivia from JPMorgan. She wants to understand a little bit more the dynamics of the margin in Brazil. Although there was a relevant growth of volume and revenue. What are the main reasons for that? And how can we think about the leverage of the operational balance versus investments in Brazil in the next quarters?

Thank you for your question, Olivia. We have investments, I would like to remind you, we have a structure of investment centralized globally, and we have been making these investments when we compare with this evolution in Brazil, especially in the structure of UX and the IT structure, the diversification of those products, the beyond the core, et cetera. So we continue those investments. They are still happening. Of course, they will start to bring return a little bit more down the road, some movements in some quarters. There are some movements quarter-by-quarter, but we are looking -- we have a good expectation that they will be profitable in the future. From the Alpargatas structure, we have an FX, foreign exchange, which is natural. We have a compensation with international, and we have to import raw material. In Brazil, the constant currency is Brazilian reais. So I know there is -- a part of this variation is the foreign exchange. And the third one in this evolution of price and raw material, where we have been working, trying to mitigate it through the RGM. If we look at the price per pair, it has even been increasing. So you have a mixture of investments, increase of raw material that we saw in the market, increase of prices of the raw material and the RGM, as I said, in the next semester, in the next 6 months, we are going to have the RGM happening being more implemented in Brazil, which is going to bring those margins to better levels, but it's naturally increasing. So this is one point. And also calling your attention for the seasonality. When you get to the second quarter, you see that in Brazil, the growth in Brazil has happened. So this is not a surprise. This is part of this evolution of Alpargatas. So we're not surprised. But of course, we are down to work. We have investments in CapEx, and this is increasingly positioning us in a position to have those returns. We monitor sell-out. We have RGM to set the price. We have a movement in the -- also working the VIP. So we see a positive evolution with a few variations, temporary variations. But with nothing that can actually make us deviate from this positive evolution. If you also look at last year, we had the association with Mizuno. So we also -- we used to have a ratio, part of the volume of the Mizuno operations. So there are factors that we look at it, which are from the company perspective, but we have been working on RGM, we absolutely believe in the return of the RGM. So there are not many mysteries behind those evolution and returns.

Hello, Olivia. I would like to add just one point to what Julian has said to make it a little bit more clear, comparing the EBITDA margin in Brazil, I'm going to back step for a moment here for all of us to remember something. We have a model which is growth with margin expansion. This is what we delivered in the first quarter, in the second quarter and although -- so this growth should continue in the short, medium and long term. What is the structuring for this model? First of all, the first important point is that our RGM, revenue growth management. It's a structural model. What is important of the RGM is that it doesn't compromise volume. So it's the growth of margin per pair considering price, mix of channels, and mix of products. And you saw the initiatives we have deployed and it to generate volume growth together with growth of margin per pair using data analytics and all of the tools we have behind it. So this is very important. This is a structural and restructuring. And we are -- we shall see that continuing in the short, medium and long term. We are actually intensifying initiatives in the second quarter, including the 3 leverages. So prices, increasing the mix of products and in the mix of channels. That's very important and what -- and that makes us very optimistic in the investment for increasing the volume growth in Brazil. The second is structural point in the second quarter is the increase in the margin in the international market. In the first quarter, it was about 27% of the EBITDA, and that demonstrates all the work developed over the past 2 years in the international markets of restructuring, our focus on the important geography, geographical locations and also the restructuring in the U.S. The U.S. is back to the game, bringing profit for the first time. So once again, this improvement of margins in the international markets. We believe -- we credited this as being structural. What is not structural. In addition to the increase of raw material, increase of price that we saw in the manufacturing. We believe that we are going to see some variations. We believe that the second semester, we have -- is going to have a second dynamic -- different dynamics from the first semester, the first half. Because historically, in Brazil, we have better margins. We don't see why this trend is going to change. It shouldn't change, especially because we have a very strong operational leverage, which are bigger in the second semester due to the summer in Brazil, and the operational margins in the second international margins, which are usually negative, we don't see that happening this year because of the restructuring that we performed. So they could continue evolving the second semester in the international markets, although it should be a little bit smaller than the first half of the year, although it's still positive this year because of all the work we have done.