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

Good morning, everyone, and thank you for waiting. Welcome to Alpargatas' Second Quarter 2026 Results Webcast. [Operator Instructions] Please be advised that this webcast is being recorded and will be made available on the company's IR website, ri.alpargatas.com.br, where the complete material from our earnings release is available. The presentation can also be downloaded via the chat icon, including in English. [Operator Instructions] We would like to point out that the information contained in this presentation and any statements that may be made during this webcast regarding Alpargatas' business outlook, projections and operating and financial targets constitute beliefs, assumptions and of the company's management as well as information currently available. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions as they relate to future events and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, market conditions and other operating factors may affect Alpargatas' future performance and lead to results that may differ materially from those expressed in such forward-looking statements. Joining us today are the company's executives, Mr. Liel Miranda, CEO; Mr. Andre Natal, CFO and Investor Relations Officer; and Mrs. Melina Rodrigues, Investor Relations Director. I'll now turn the floor over to Mr. Liel.

Good morning, everyone, and thank you for being here. I think we're going to start with a slide that all of you already know because we have been bringing this slide every single quarter where we show you our strategy and the results that confirm the success of the strategy we are pursuing. First of all, is the continuous growth in Brazil, where we still have a lot of opportunity to gain market share in all channels, in the specialized channel mainly, but also in the modern food channel, where we have been gaining good results and where we have been seeing good growth of our sell-out. The second largest pillar is this international growth movement, where we have 3 geographies, each one in a different development stage, but we are in all of them defining our business model and pursuing our growth. In Europe, we already have a more defined model, a better established brand, and we are accelerating growth. In the U.S., we have changed our business model, a partnership with Eastman, and this allows us -- has allowed us to access more retail doors, and this should bring an improvement to our market share associated with cost reduction. And in the distribution market, our focus continues to be in the main markets. And in those markets through our distributors, we have also been able to accelerate our growth in our priority markets. Marketing and portfolio, they are fundamental in our strategy. They are -- because a great pillar of this future and current growth is the relevance of our brand, which needs to continue to grow and be developed. And last, in our last quarter, the strategy combines those 3 pillars with a disciplined strategy, both in execution as well as financial as well as of costs and expenses. And there, we have been also through that, we have been demonstrating improvements in our return on capital and margins. So the combination of those 4 pillars have been our strategy. And it has been pursued for several quarters, and this was one more quarter where we have demonstrated, where we demonstrated our progress and that we are keeping steady paces towards all of those pillars. I'm going to hand the floor over now to Andre, who will give you details on our results.

Good morning. Elaborating a little bit on our volumes. Our global volumes saw an important growth over this last quarter of 9% globally. This performance is anchored a lot in Brazil's growth, which was also of 9%, considering, of course, the relevance of the region for our results. But we have also had -- saw a favorable combination of results in the international market, where we saw an important expansion, especially in Europe, where we had our peak season and where we saw, once again, a double-digit growth of 21%, which is considerable. Reminding you that in the first quarter, we had seen a growth of 18% in Europe. So we repeated once again, kind of a similar performance, consolidating a very strong performance for this first half of the year in Europe. And this is an important indicator given the importance of this region for our expansion plans and brand positioning in the world. The emerging markets, which encompasses Latin America, Middle East and Asia, the rest of the world is also a region where we saw again double-digit growth, even though part of this region has been naturally affected by the geopolitical issues that you all know of. But more than offsetting this movement, we saw a growth in Latin America and Asia that allowed us to reach this 12% growth. As for the U.S., even though we had a retraction of 30% in this specific quarter, this is not connected to the performance of the region. It's connected to the change in the business model that Liel mentioned and that we have been telling you about for a long time, which transferred our peak seasonal to the fourth quarter and to the first quarter rather than the second and the third considering our former business cycle. So in the annual comparison throughout 2026, we have a different basis for comparison, which gives this result of minus 30%. But on next slide, this one, we look at the first half of the year, which gives you a bigger, longer window and allows us to see better understanding without the contamination of the individual results for each one of the quarters. So in this case, we see that U.S.A. in the first half of the year grew 40% growth. It's worth mentioning that after so many years having been selling almost a steady volume, we already start to see a very relevant growth of 40% so far in the year. So in addition to entering new doors and participating in channels where we were before a little representative, now there is this symptom that can be discussed. And this is an indication of the execution we are managing to deliver in the U.S. In Europe, as I had said before, because of the combination with the first quarter of the year, there, we saw a certain stability in Brazil in an average growth of 8%. So still in the first half of the year, we grew 9%, which sounds to us as an interesting solid growth. And we can also talk about that, the effect that this is going to have in our margins and gain of scale. And this is very important for the moment we are going through right now. Moving on to the next slide. We have a positive cash flow generation. This cash flow generation is -- has been happening for many quarters already. There was just one quarter in which we failed, which was negative minus BRL 37 million, but we have been generating positive cash for a long time, which makes the company -- puts the company in this direction of deleveraging over time as the graph on the right side shows. It's important showing you that in this quarter, this number of 0.5 leverage is already free of the last deal we made with Ioasys that was made in 2021. So this has already been paid, and this is already discounted from this. Yet we still have this leveraging of 0.5%. So the leverage, by the way, is stable at a point where we -- which we consider very comfortable in terms of the capital structure and risk of 0.5%, but always with the trend that the company is going to be capable of generating cash and a business that over time will deleverage itself and which has been allowing us over time to also distribute money. We have also made own interest capital distribution, which also helps to hold the leveraging where it is because of the cash results it has yielded. Moving on to the working capital variation. We added one more information of the cash cycle, so we can have not only a financial tracking, but also of the working capital, the quality of the working capital. We see a stability. So we had exactly the same number in the first and second quarters with very small variation. There was a cash consumption. Seasonally, we had a large decrease -- increase/decrease in the receivables. This is the moment we had being paid for the sales made in previous. But now we have a very strong issuance of receivables in Europe, set off, which was -- it was made by the important growth in Europe and by the sales in Europe. So this demands some capital -- working capital in terms of receivables. When we look on the right-hand side, the CapEx is pretty much in line with what we had last year and as our budget approved in our last General Meeting. So we have been in this trajectory, which is very similar to the previous years. In the first half, we ramp up. And in the second half of the year, we expect to have marketing and CapEx expenses to be higher to reach the number that we have approved for the general meeting of the year, and we are going to respect and pursue that number. Moving on to the next slide, we start looking at Brazil's performance in detail. Brazil had a strong performance in volume. We saw a growth of 9% in the quarter, and this has been motivated by the sell-out expansion to 13% year-over-year, which is a considerable expansion. It's a double-digit expansion given the penetration of the category of this -- of our products in Brazil and the size and the relevance we have in Brazil. So naturally growing 13% is none of something to render as small. And this brings us in a volume very close to the levels we saw in the 2021 in the first quarter. We can see now on the right -- on the left side. There is still some scale. There is some still difference to be gaining in the scale effect. However, when we look at our net revenue per pair, it's in the little circles, we can see a very strong evolution of this net revenue per pair. From 2023 up to here, we have been very careful in any movement. We have been careful to -- before making movement. So this increase on the net revenue per pair year-over-year is not something just increasing prices. This is not the way we are working. Quite the opposite. This is the combination of the increase in prices, but also an important effect of the mix and our combination of the mix -- the product mix that we have been combining, so to make it more premium. So increasing the average ticket has helped us to have a better net revenue per pair, allowing us to gain more than the current inflation rate. On the right-hand side graph, it's important to see, and it's worth mentioning that we had an important gains in the food channel of BRL 2.4 million. When we look at the comparison between the sell-in and sell-out, there has been an increase of BRL 2.4 million. This is something we have been doing to ensure that there is alignment between those 2 metrics. We have no intention of selling inflated, so as to say, volumes of sell-out and that might generate an inventory problem of -- excessive inventory problem in the future. So over this quarter, we had a reduction in the inventory that we had stocked up in the first quarter, in our distribution chain, and now we very much reduced part of this volume. And when we look in the graph on the right-hand side, over the past 12 years, the sell-in and sell-out, we remind you that the sell-out is always estimated. We don't really have a global vision and precise accurate vision of the sell-out. So this comes from a combination of different sources that we have access to. So following this indicator that is the one we have been using, we have a stock up of 2.4 million pairs, which is also compatible with the fact that the market has been growing. So when we grow our sell-out 13%, this also demands a little bit more of stock levels in the chain itself. This is a slide that demonstrates an important commercial performance, both in the quality of our product mix as well as in the expansion of volume as well as in a disciplined vision of the inventory levels in our chain to ensure that it is healthy and correct considering the strategic moment we are in. Going through the gross margin in Brazil, this also saw a positive and important increase compared to the previous year. And it was actually quite positive compared to other years in the past as we can see in the historical series of the past years in the line. We are -- we have the second -- the best second quarter, even though we had a small compression of scale compared to 5 or 6 years ago. So this shows that over time, we have gained much more efficiency, and there are several elements behind that. There is the manufacturing efficiency, logistics efficiency as well as the administrative gains, which is not shown here. So our operations has become more efficient. So a combination of these several effects has resulted in a more efficient like 10 percentage points higher, which is very healthy considering the gross margin per pair, which is pretty much like you can see that in the circles, double, which what was 5 years ago. This is an important evolution, even despite of the scale effect that we are still missing a little bit compared to 5 years ago. Moving on to the expenses. We broke it down so you can see the variable, fixed and marketing expenses individually. Considering the variable expenses, we are pretty much flat with the previous years, but a little bit lower than we had in 2023. But eventually, marketing was higher in this quarter. So we don't manage the marketing expenses trying to fit this homogeneous equally in all the quarters. It's not the best practice. This is not what we do. We do it based on our global calendar on which the marketing investments are based on. So we respect the collabs, important activations we need to make around all the year. So because -- especially because of the World Cup and because of some collab we had in the year, these elevated our marketing to 10% of our revenue in that quarter. When we look over a longer period of time, in Brazil, we have been respecting 7% to 8% marketing investments related compared to the revenue, which means that we increased 2 points percentage compared to the previous quarter. The fixed expenses are slightly high in this quarter, a little bit of a high concentration connected to having a higher workforce. I think this is a permanent effort of the company, and we try to find ways to offset these effects that are always coming. You always have some offenders in terms of expenses and our payroll is part of that. So -- but we have been gaining more efficiency, and this is what you can see on the right-hand side, where you can see our EBITDA margin, which is increasingly slightly higher maybe for the second quarter is an all-time high in our historic series, but it's worth mentioning that we had a little bit more of a margin in our marketing expenses, considering the recurring marketing levels we have been investing in. So it was slightly better than a year ago and much, much, much better than some years ago. There is an evolution from 11 to 20 percentage points. It's extremely important to be noticed. We obviously are doing that in addition to the fact we are still missing on the scale effect that we still have not fully recovered compared to a few years ago. And again, we are comfortable with these levels, the levels we have reached, and we still want to keep working to improve the company, and we will do so. Moving on to the international operations. As I said, it also had an important performance in terms of volume, even though offsetting the seasonal results of the U.S. considering its new business model. So there, you can see a little bit better of volume scale, but it's important to see the graph on the left-hand side, showing that we sold 3.5 million pairs than we sold actually in 2021 in the second quarter. And this is an important scale compression. We're talking about 3.5 million pairs in a total of 7.7 million pairs sold, right? So it's actually quite relevant to scale difference. So despite this, we will see on the next slide that we have been able to compensate our margins and profitability on the next slide. So moving on to the next slide, you can see that the gross margin levels has recovered compared to that moment in 2021, where we had much more -- much higher sales volume. It's also a 3% increase year-over-year. We had those important moments in 2023, which all of you know about and have followed where we were pressured in our operations. And now we are back to a gross margin level, which is extremely important and in alignment, even though with our historical series, as you can see in the line of the graph, even though we are still missing on this 3.5 million pairs sold a few years ago, more than we have sold in this quarter. And this is something that we want to continue working on to gain this scale effect back. In the next slide, we go back to paying attention to the expenses. So the marketing expenses go back to a level of 14%, which we also understand to be totally healthy because there are several regions where we are building brand. In other regions, we are strengthening our brands. And in these regions, we believe we have a lot of potential for expansion. The variable expenses level is following. You can see this -- we reached here 15% of our revenue back to one of the best levels in our historic here is an all-time series, so especially the fixed expenses. And here, there is an especially important contribution from the American operation because this change in the business model makes us much lighter in terms of -- and more efficient in terms of expenses, and this helps us to bring the profitability levels back to another level, which can be seen on the right-hand side. The EBITDA margin brings us back very close to that levels we were in 2021 of 30%. We reached 29% right now. It's a great evolution. We actually reached minus 1% in our margin. So we can see in this trajectory that was steep and strong to go back to a very good level in terms of EBITDA margin. And even in margin per pair, we had a scale margin that was negative, but we had volume that was much more -- more than offset the effect, taking us to EBITDA per pair much better than we had in the previous years. We will keep working in the regions where we have a very good margin per pair. And if everything goes well there, we'll keep moving forward in those regions and increasing even more positively our margin. Moving on to Rothy's. Rothy's expanded its gross profit. Even though it's one-off, we had -- first, we had had a negative impact of the tariffs and now we had the refund of those tariffs, so concentrated in the second half. If it was not for this effect, we would be at 62%, which is consistent and aligned to the historic time and a little bit higher than we did in the same quarter last year. So in terms of gross profit, we are pretty good considering the EBITDA margin had saw a small compression when we look over the past 12 months. It's a little bit smaller year-over-year. And looking at the last 12 months, it's also slightly smaller than we have seen already. So there is a performance gap, especially in the online sales in which we have been working together with the management to understand, diagnose and understand the action plans we are going to reunite the online sales performance mainly. But overall, we don't see any kind of substantial change in the performance trajectory of the company. I think this was my last slide. And as usual, I'd like to thank you for your attention and time and open up for questions in case you have it.

[Operator Instructions] Let's move on to our first question. This is Danni from -- analyst with XP.

Congratulations for your positive results. I have 2 questions from my side. The first one is about the raw materials dynamics. This has been asked you before. And I think your shares reflected this worry about the volatility of the oil price. I think I asked you this about the last quarter, and you said there was certain purchase anticipation that had not been so much relevant, but it was done either way. So I wanted to understand how this contributed to the margin in this second quarter and how you're looking at the upcoming quarters and the management of the raw material. I also like to know how we can separate today that from the exchange rate fluctuation effect. A second question that is somehow connected to the first question, but a little bit broader is your pricing increase distribution. Natal, you said you have been very careful and a big part of the revenue per pair has coming from a better mix and not from the price increase, but I would like to understand how much you see a need or room for increasing prices considering the more challenging moments we are living, especially in the -- of the financial aspects in Brazil.

Thank you. Danni, I'm going to try to answer both questions. You ask it and more people ask it, in fact. And yes, we have been hearing this question a lot. We have been asked this a lot. And we have been trying to explain all the mitigation effects that exist in our numbers. Our sensation is that there is a little bit of an overreaction to the raw material prices. Of course, it is absolutely important because our raw material is only part of our cost, right? And inside all of the raw materials we have, the rubber is only one part of all the raw material universe that we use. And we also have a stock of this raw material. And I have already mentioned that we have a fixed relevant -- a relevant fixed part in the contracts we have, which also is mitigating to the price increases. And what you mentioned, the exchange rate fluctuation is another thing. Although the -- we have an increase in the raw material prices, we are seeing right now a decrease in the dollar price compared to the real. So this kind of offsets the results. You are right. I think the results that we expect right now is that shows the evidence of what we have been explaining over some time. We explained that in our last webcast and the numbers show in fact that this number is pretty mitigated, diluted in our results. Although despite all of those negative effects, we still saw very positive results, right? We also have our operational scale effects. We have been selling larger volumes. So this also helps us in the margin per pair, right? Speaking particularly on the stock levels, we have been benefiting over the past quarters of a price that had not yet been affected by war we anticipated. The first shipments we received with a higher prices contaminated by the geopolitical questions were in June. So we still have received very little effect. And again, when we saw the effect again, we also saw the geopolitical issues kind of accommodate and the oil levels go back -- oil price go back. I know it went up to close to $120, and now it went back to very -- much more normalized effect. So we don't have any opinion about the future prices. But what we saw is that this somehow offset. This was somehow mitigated. And when we see the price of the raw material arriving for us right now, they are pretty much aligned with the price we already have in our stock of raw materials. So we don't see a very strong negative effect for the upcoming months. There was a very short period when the prices were affected because we already had the stock because we already had benefited from a better pricing that we had negotiated. So again, although we navigate a little bit of this bad price period, there was a small uptick in prices, but this is already back to the average prices we have with our inventory already present in our stock. Punctually, like, it might happen, but in a longer period of times, we don't believe this is going to be -- we don't think that the prices will be much higher than what we have been receiving right now for our purchase. As for the price increase environment, we have been very careful, as I mentioned before. This 7.5% price in Brazil has about 2.5% of it, which comes from the mix, have no connection whatsoever with adjusting prices to consumers. And price adjustment to consumers is not an adjustment just because of inflation -- linear inflation adjustment to all products. We are doing this with data, like data-based, and always looking at opportunities that exist for a few or for some items and to all the corrections we need to make to each one of the items. But on the other hand, we don't see any kind of pressure on our -- on us to make like an adjustment of prices. The sell-out is showing that our 13% increase does not show us any pressure to make any kind of very steep adjustment. And we do not have any intention to make exaggerated price adjustments to consumer from now on. What we have been trying to do is always to have a channel and portfolio mix that makes us deserve to have this better average ticket price, not only just adjusting pricing for the sake of it to consumers. And this will continue to be our behavior and posture and the vision. We do believe that there is some flexibility. This thesis that we can adjust prices to consumer at any time that our margins are small is not true. It has already proven negative in the past, and we measure this elasticity, and we make our adjustment decisions based on the elasticity of our prices. This takes us to a position of being capable of having prices which are [ 0.7% ] higher than before, but with our sell-out growing 13%. This is part of the discipline that we want to continue to display in the future and that we expect it to continue to work in the future.

The next question is by Joao Soares, sell-side analyst with Citibank.

Amazing results once again. I have 2 questions from my side. I would like to understand the sell-out from Brazil caught our attention. We see the sell-out going at low single digits in some quarters, it was flat. And in this quarter, you delivered 13% in sell-outs increase. I'd like to understand how much of this is sustainable in the upcoming quarters? Given the investments that you have, the investments in marketing and investments in the brand image, and also understanding how much this represents in terms of market share, I think this is relevant and important to hear about that as well. Another question is that I was making some math here. And the last time you delivered this international margin was with much higher volume. You deliver a similar margin with 31% less volume sold, right? I'd like to hear -- I know you don't like to give this middle-term vision of the operation, but we are clearly working at another level right now. There is a lot of the commercial dynamics in the U.S. If you could talk to us a little bit about how we could imagine this potential, like, can this margin come to a level that we have in Brazil? Any kind of idea? This is extremely important, guys.

Thank you, Joao, for your question. Starting with the first question about sell-out in Brazil. Actually, we know that the sell-out in Brazil is variable, right? You remember that. Last year, we had some quarters where we grew high single-digit quarters, and we had quarters where the sell-out didn't grow. In the second half, we had the World Cup. So we had this growth in sell-out. Havaianas is connected a lot with this Brazilianness effect. Our on-time, in-full was above 80%. So we ensure that consumers found the products they wanted in the channels, they wanted at the right moment. And the third thing is that we improved our -- we have been improving our performance. This 13% sell-out is a consequence of us executing better in this specialized channel, executing better our operations in the modern grocery channel where we have more opportunities. So we have more opportunities to grow as well. And there is also a third variable, which is structure based. We had -- we have a very good market share in the distributors and wholesalers. And in this quarter, different from previous quarters, it did not lose importance in the market as a whole. So when you combine all of these variables, a onetime variable that was the World Cup that helps us to be present in the mind and in the heart of -- on the feet of all consumers. Our fundamental better execution variable, better displays, better visibility at the points of sale in the most important -- and being the most important points of sales. And this third variable when we have such an important channel having a good performance, this all added to this perfect great performance. And the sell-out is connected to the market share. In the specialized channel, we didn't have a market share measured, but in the grocery market share measured as by Nielsen, we gained almost 2 percentage points in market share because our sell-out is above the growth in the category, because of all of these variables that I mentioned. We don't give guidance. We don't try to predict the future. So we are working hard to have a very positive second half of the year, but we are not able to give you an idea of the sell-out levels we could expect for the second half of the year. I think this is the best answer you can have. The best indication you can use is the improvement of our execution at the point of sales via on-time, in-full numbers, communication display. So we didn't have a onetime of growth in the second quarter. It has been happening over the past quarters. This is about the sell-out of Brazil. As for the international margin, this is also not a onetime of growth. We have been working on that for several quarters. And in this quarter, in addition, all of this improvement in cost that we have been performing over the past 2 years in addition to the best execution to grow our volume that we also experienced, we -- the change in the volume in the U.S. had a significant contribution because we used to have costs associated with warehousing personnel that we have ceased having since the first quarter of the year in the U.S. So now, overall, we are operating through distributor with a much better margin in the U.S. So this is also not a one-off number. This is not a one-off phenomenon. This is the evolution of the work we have been carrying out over the past 2 years. When you look ahead, obviously, we don't give guidance and we don't try to predict the future. But as you said yourself, we now have a great opportunity of regaining the scale we once had in the past with a much better and much more efficient operation. So we believe that all the efforts we are performing right now would be able to allow us to recover this volume we managed to sell in the international operations in the past, which should contribute to a better profitability in the future. Would you like to add anything, Andre?

No, I think the only thing I would add in my analysis and in the opportunity in the international market about your last question is that it's very clear to us the size of the opportunity that's going to be over-indexed a higher growth with a high margin, higher price point because of the image positioning, especially in the American market and European market, we're going to have growth rates that are going to be higher than the global margin of the company. This should help us over time, not only decompress the international scale, but also increasing the margins, which are already better. We are not going to give you any guidance or projection. But again, this is where we believe that our opportunities for capitalizing are. We believe that there is where -- in these geographies is where we can gain the most in the future. And this is what is in our planning, in our scope for the future.