Azzas 2154 S.A. (AZZA3) Earnings Call Transcript & Summary

Good afternoon to our investors and analysts that are listening to us here today. Thank you very much for your willingness and interest to participate and accepting our invitation so that we can be closer and in extremely transparent manner meet the founders of BAW and Rony -- you'll hear from Rony Meisler, and the expectations and the reasons behind this. I know it was the last minute invite, but that's what we had to do. We couldn't say that we were going to have a 1 p.m. conference call. On 11th of June, it advanced to announce an acquisition, right? I'm sorry for that. But I believe it was very interesting for you to be here with us and learn about this incredible story of these 2 brothers and then Celso joining and the future perspectives of BAW. So with slogan that will be presented here by Bruno Karra, who is the CEO; and Lucas Karra, who is the Creative Director says it all. It really represents the strength that BAW has. So before I hand over to you, Bruno, to talk about BAW, I already gave 2 interviews this morning. So BAW plays a very important strategic role in building the mosaic of Arezzo&Co, but it goes much beyond that. I said that if today, I had BRL 105 million to start a business, I would invest 100% of that in BAW because the brand has all the types of a future brand. It's 100% digital. It has a position that's very eclectic with consumers. And you were great in creating that name, right? We created Anacapri, Alme. So it's really hard to create a name that has to do with the brand, Black and White. That's what BAW stands for, BAW. So with that T-shirt, it gives us all of that, and it's for all social classes. It's affordable, and it's really cool. So it's cool to be used by a society that wants to wear exclusive products. It's an honor to have you guys here with us. It's that chemistry, right, since the beginning. And when we talk about successful brands, we want entrepreneurs that are passionate about what they do. In addition to the corporate taxpayer numbers, we want the individuals, and that's what you're giving us. So what does we make noise and not fashion. So well, I have goose bumps, Alexandre, from your words. Everything is new for us. So BAW was born with that jargon, and we make noise not fashion, right? So since the beginning, since the start, we wanted to bring in irreverent and [indiscernible] and bold vision. That was the pillar of the brand is being digital. That's what I want to touch on. So it's a common journey, right, buzzword. And some companies were -- sell 5 million a year, but don't do that, right? And you had that idea in 2014, right? So you were one of the first digital brands, right, in the market -- in the global market even? Yes. Back then, I think nobody talked about digital natives back then, right? And digital commerce was scarce. So the idea of Lucas, he was graduating as a designer. We thought of a brick-and-mortar store. So that's when we had the idea of saying, no, let's not do that. Let's go online. Instagram was just starting to get real big with influencers and bloggers. So since the beginning, we were really starting off with that type of promotion. So Lucas, designer; you, Bruno, are the CEO. Lucas is your younger brother. He's the big creative mind, right? Behind BAW.

Hi, I'm Lucas. I study graphic design. And since a kid, since I was very young, I always wanted to own my own brand.

You were born in apparel, right? Tell us about that.

We like to say that we were born wrapped in fabric. Yes, and I was born in a shoebox, right?

So how long has your dad have apparel plant?

Yes, over 40 years. I used to work as a designer at his plant, right, but I always wanted to have my own brand. And we used to go to the U.S. a lot, and we used to see a lot of things like Urban Outfitters for instance, and we're like, we don't have that in Brazil.

So to introduce you guys. And we received a question from an analyst this morning and the first interview, it was really sharp. So he asked, I wanted to understand how BAW can influence so much in digital, right? BRL 80 billion. Well, that's what's guaranteed so far. But It's going to be much more than that. How can you invest that much? And I explained Celso joining, who plays an essential role in the digital communication for BAW. Can you tell your story?

Of course. I joined in 2017. I was in advertising. I always worked in digital, and I always specialized in influencer marketing. So in 2017, when I joined the brand together with Bruno, we wanted to create a disruptive model that nobody has in the market. So it's not my merit. I'd say it's Bruno and the team's merit. So we created a performance model with influencers. It's completely disruptive. That's what we did.

Yes, incredible, incredible. Just for Rony, great. So you're behind that, right? And you connected them, you connected the digital influencers and related that to performance. That's why we can pay less, right?

Yes, in bringing the performance. Always working with both pillars. So they add on to each other.

So Bruno, can you explain about -- talk about Fernando. He's the CTO of the operations. So in addition to having all the aspects that I mentioned, the modern brand that is databased, and Celso just mentioned. Maurício Bastos, our Digital Executive Director is a fan. And Fernando worked in that in 2011 with the first Schutz site through the company that we hired back then. He was an employee of that company in 2011, right, as that company that created the Schutz website.

So Fernando joined the operation in 2016 as a programmer when we're going into the VTEX platform. And since the start, he was always brilliant. So in addition to working in programming, he was always focused on the business and he understood the BAW business model. So from the start, he challenged things and brought in innovations together with us and bringing in all the technology side. He's a business guy, right? He's technical, but he has a business mindset. And he has that developer mindset. So how to develop programming for success.

Perfect. Congratulations on building that. That's incredible. Arezzo&Co, Rony Meisler, who's going to give the positioning of BAW and how it fits into the Arezzo & Co. Up to you.

Good afternoon, Alexandre, all investors and my new dear partners, right? We're reciprocal fans, and we were following you guys, too. They sent me a T-shirt, way back when, right, that they created. I'd say it's synchronicity and that's what we like. So before we go and talk about the rationale and the business and the market, I'd like to add to Alexandre's words. And to set in stone that we're doing business with a fantastic brand that proved its business model, that grows exponentially and has a huge avenue for growth going forward. But especially, I have to say that we're doing business because of those 4 guys, those individuals, like Alexandre mentioned. When you talk about the background of textile. And it has -- their story comes from a family business with Lucas and Bruno and then Celso comes in because some people think it's just about hiring digital influencers. But no, you can't explain the methodology for 3 hours. It's like a framework that they created to work digital influence and solve the problem, which is the acquisition cost, right? And everybody that's listening knows that, creating a framework to solve that and scale up that brand at the speed that they are with financial profitability. So obviously, that framework can be scaled up, as Celso mentioned, for Reserva and Arezzo&Co and to the other brands of the group. And Fernando is the tech guy, right? He's the scientist behind that, right? And it's -- I'd like to say it's BAW land, right? Their office has an exciting culture. And I was talking about the business this morning. It's a love brand. It's BAW love here and BAW love there. But it comes from the inside because it's really exciting. So what Alexandre and I saw at BAW is not elementary. It's this, right? And myself and Alexandre and our business track record, we know that when that happens, it's kinetic energy. It's going to explode. So now going into the census of the business, talking about BAW. Obviously, they use a lot of data to identify trends. But you can see that they're -- they're worked on based on basic styles, so T-shirts, sweatshirts. And even though you have branding and style messaging, it doesn't have a specific season. It's the color, print, it's genderless, and that's great. I know everybody is going to see the website experience from now on. Everybody is going to go and check it out. So you can look at the product page, and you see the same product for men and women, and that, in addition to being a very diverse and inclusive business, it's something that based on the point of view of partners and creating efficiency in issues with sizes and so on, they pretty much launched together with other brands with Coca-Cola, SpongeBob, Bauducco or with -- every week or with digital influencers with the logic of scarcity, just few products. They run out fast. If you don't buy, you're going to miss out and that you have to buy fast. You have to wait until the next one. So the trends logic that I'm explaining is in the street where market, which is the big trend. So I can mention 3 big examples. Supreme recently sold for over $1 billion, Off-White and Kith. So streetwear consumers are very much influenced by music and digital influencers. They give huge relevance to social awareness in their consumption choices. And they always choose very comfortable, high-quality wear that at the same time generate exclusivity, value and perception of social status. It's iconographic fashion.

Rony, when you mentioned iconographic brand, one of the paradigms that BAW broke was the ability to rewrite that logo without losing its essence. So you're wearing BAW from a capsule edition, Lucas wearing something that's different. And this is the traditional one. So that's really cool. It's iconographic, and it's wearable, right?

We have a collection called LogoMania. Lucas, how many logos you launched at once, different BAW logos.

For its drop, at least 8, at least 8. So that closeness to the brands that people have, actually, it's better when you're not like that so attached to it and launching all these different things, right? So the addressable market of streetwear in the BAW world is $50 billion and has grown 2 digits per year in the past years. Next slide. So now specifically about BAW and not the market, 70% of our consumers are women although the product is genderless. So the other 50% buy pretty much the same product. It's music and lovers, they love art and culture. They have a green lifestyle. Consumption is mainly focused on the 18 to 24 age group up to a maximum of 34 years of age, a very young brand. And the main reason why people buy BAW is to dress like themselves. If you can see the pictures, it's just basic wear. So you can mix and match. It's very similar in that sense to Reserva. You can mix and match your personality so that same top could be worn by different women, different style women and they're dressing as themselves, not as the brand. Just to add, Rony, the data that you're mentioning, is just a small sample of a deep survey that we carried out with an agency called [indiscernible] that proved what our feeling was about BAW and awareness, which is the third in the rank of the street style brands and can only be comparable to large-scale brands internationally. Yes. For me, that was just the proof, right, for us. We read that. Well, this is more than proven than what we thought. So it has exponential acceleration from mid side going to large side, being third in streetwear consumers perception, that means that the power of communication is on to people and the brand knows better, more than anyone else how to use that tool. And in addition to quality products and personal identification, it's a fair price. We like to say that it's 3P, an incredible product, incredible experience because if you don't have an experience, you're not selling anything. The exponential purpose that really makes a difference in the world with the price that's lower than the expectation generated by the 3 other Ps. BAW fits perfectly into that 3P brand profile. Now to be more literal in the digital influencer strategy, over 700 influencers in Brazil and in the world that worked with the brands. They basically split the influencers into 2 groups. They're one-off brand ambassadors. They're always the same. And names like Whindersson Nunes, Gabi and Giovanna Ewbank, and there's just launched a video clip with all the clothes that he's wearing in the video is BAW. So it's really loved by youth. Congratulations on your work. Celso together with that Rony, you're going to bring that to all the Arezzo&Co brands. So this is a bit what we mentioned. So it's a tech company, customer-driven and e-commerce and the financial management, everything is done in-house. All the technology is in-house and data analysis is the raw material, the input to develop the collection, which makes a lot of sense in a new consumer journey -- consumption journey, which is not new. It was just expedited, but starts in word of mouth and social media and then goes into product development and then goes into sourcing, does make a lot of sense that a company has been doing that 100% according to their calling. And that not only in generating trends, but also in the track records, in consumer behavior and active conversation with their consumers are the foundation to develop products, right? So in picking new influencers and so on. So the consequence of all of that, we always like to show a number at the end because -- but the number is a consequence of a team, of a business model, of strategic mindset and that is the result. So we like to say in the digital area, exponential growth. The brand has been growing with a CAGR of 173% from 2017 to 2020. If you consider the last 3 years, going on average 70% a year and 2021 forecast what we can set in stone, but we believe that it's going to be much more than that given what's happening so far. So it is a result, and it is a consequence. Just to say that, that's sales and e-commerce alone. We're saying that we're going to get close to BRL 100 million. We didn't want to commit to that, but we believe that we're going to deliver BRL 100 million in e-commerce. And then when we channel -- scale up to multichannel, and I believe that this brand versus the value in total revenues of Arezzo&Co, it doesn't really seem like it makes a difference in the bottom -- to the bottom line. But in the midterm, some years from now, it's going to be greatly relevant because the brand's scalability when we go into other channels and other product categories, especially with what is already happening at Reserva and it's the assumption that we presented on October 23 in sneakers. We're going to be launching a full collection from BAW shoes in September. So we can scale up that number, huge opportunity to scale up. And Alexandre, I believe it's important to mention that our idea of consolidation has been strictly followed with a lot of resilience, a lot of responsibility in picking assets in a way that these assets come in with people, with the individuals, so we can build a company the size we imagine with great people. So we're buying the partnerships, not necessarily the assets or stores or brands. We've been following what is -- we believe the investments should be based on. And then these people without losing focus on their operations, they can always deliver value because they already have business models in their company for all the brands in the company, right? So as for these companies and these companies to our previous brands, right? So I believe that, that discipline in M&A is very well handled on a day-to-day basis and by the entire team. So it definitely makes us feel very comfortable in making that decision.

Yes. And within that universe to talk about that matter that's so important, we -- one of our assumptions is the book, The Founder's Mentality. So companies being insurgent with scale. So here, we have a company that's insurgent and that we will give them the scalability, fast scalability without losing their insurgence. So if we could link that, maintain the insurgence of these big founders who although they're not strictly executives, they are big leaders that really built what matters the most, which is brand value and bringing consumers in together with what's behind Arezzo&Co and even proven by reserve and the ability that Arezzo&Co has to provide all the support, to give them the scalability they need. That's what we expect the most. So guaranteeing them that growth and the autonomy with our platform so we can make them grow even more.

That said, I'd like to hand over to Aline, who's here with you, who's over there with you, right?

Yes, we have our M&A team here that was able to work autonomously without any financial advisers. These deal is fully built with all the diligence required. I'd like to thank [indiscernible] from our office and Deloitte, who supported us. But who actually conducted the process was Aline and her team, and it was brilliant.

Thank you.

Well, here, you've talked a lot about the rationale behind that, but it's also important to mention that at first in experimentation of the -- yes, with a lot of scarcity, there's the store on -- in the neighborhood of Brooklyn, not Fifth Avenue. We're going to open BAW stores in not very obvious places. I think it's important to mention. We have already have about 3 stores, right, this year?

And the idea is having these trial centers and all of the support areas from Arezzo&Co using the grounds in our tax incentives because BAW doesn't have any and we have incentives. So without a doubt, we'll have a profitability increment that will be very relevant. But it's already a brand that has a huge impact in digital media. We're going to use Reserva's knowledge for the products. So there's increment in gross margin. And in that, there's a relevant percentage of Reserva's e-commerce, 160,000, and BAW doesn't have that. So -- in print on demand. If we have that, we can have more versatility in our inventory, especially because it's mainly Black and White, right?

Yes. Perfect. So basic programs and in shoes as well, we still have few SKUs in that case. So there's a huge avenue for growth for BAW shoes as well, and that's something that's very relevant and that will be very relevant in their portfolio. And lastly, we'll talk about the main figures in the transaction. So we have the material fact that was published, apart in -- from cash flow to the BRL 5 million apart in shares. This is very similar to the Reserva transaction, so there's a part of shares that's very relevant to guarantee long term. There's a lockup for 4 years in the first anniversary of the transaction. It's 33% in the first year. And then, respectively, after each anniversary and BRL 20 million from cash as of 20 years. So BAW has a multiple in revenues from 1 to 1.3x sales because as Alexandre mentioned, BRL 80 million is the minimum that we see. We're very optimistic that, that figure could be even BRL 100 million. That's why there's the adjustment for the multiple. And to guarantee that trigger that extra we have in earn-out that would be paid 100% in cash, depending on the profit that's ascertained for BAW in 2021, which is an exceptional year for BAW history. The transaction has to go through the Brazilian antitrust agency, CADE, and we believe that it should be concluded in mid-August, so 60 days.

That was incredible. Celso, Lucas, Bruno. Fernando is not here. Welcome to Arezzo&Co. Welcome to AR&Co. And welcome, you're going to help us build our legacy and that woodpecker with a rocket on it, right?

Yes, it matches. Great, everyone. Thank you. Now we'd like to open for Q&A. Aline?

Well, the first question is what are the main aspects of the BAW and AR&Co. What can the BAW keeps to the group. I think we mentioned most. Now that you've bought a digital native brand, what are the characteristics that you would use to continue to add on to the ecosystem?

Well, first question was answered. And going on to the second, and then I'll hand over to you, Rony. Our objective is to achieve all consumer tribes with brands that have founders behind them, that add additional value. And that just the business model or the brand that was mentioned, that we would have the opportunity to use the Arezzo&Co platform that has shown to generate many results such as the Reserva example. We already almost closing the second quarter and the numbers are there to show that. So exponential growth of Reserva during the pandemic. So our objective is that we continue to build that mosaic with brands that are truly adored. Brand equity is essential. And -- so it's about having brands with loyalty and the opportunity for scalability and founders that are truly unique. And BAW is joining the whole of M&A at Arezzo&Co, which was done with a lot of diligence and success. And day 1 here, we're all together and ready to announce this transaction. I'd like to ask Rony to continue to -- and answer the question.

First of all, I'd like to address the logic. And first of all, it's about maximum respect to company culture. And we know that, that's part of the tripod, sales, communication and digital. You can't think of digital just as a product, right? It's like everything. It's a capsule. And if you don't think of everything together, you're thinking of it wrong. So absolute and full freedom in managing that by the managed -- or founding partners whose values and purposes became the company culture. So the place where we plan in generating efficiency as little as it could be, but it's always in growth. It's in back office, right, is in the support where we can give them financial, tax and all that type of assistance. And even maybe in a distribution center, we have one with advanced technology and proprietary technology, and we've talked about that in other calls. And without a doubt, we're going to be able to give a lot of efficiency gains as Alexandre mentioned. And we have the Print on Demand platform for textile printing. They're like printers, paper printers. But instead of that, in the tray, you're going to put in a T-shirt or pants or a hoodie and print that on demand. So you don't create product inventory, right? And that's not -- doesn't affect the planet, and we're going to plug BAW into that, into that framework. And with the add-on brands follow the logic that Alexandre mentioned, and I'd just like to mention again that these individuals are really relevant. We need very special people that are passionate about their business, that have a characteristic that generate high value for the brand, but also think of the brand in terms of scalability and growth.

Great. Any other questions?

We have some other questions that are very similar. One of them is how will you dose the monobrand and multibrand channels?

Okay. I'll start. And then Rony and Bruno can add to that. That's an exceptional question because we don't have the intention of having too many stores, right? It's about scarcity. We will not open a store on [indiscernible] It's going to be at Paulista Avenue. It's going to be downtown. It's going to be in [indiscernible] Bohemian neighborhood. So -- and then after a while, we might have some stores in the so-called maybe normal areas. Multi-brand, very selectively. That's our objective. Strong growth in digital mainly. Now the floor to you guys.

I have nothing to add in that sense. Perfect answer. That's exactly it. Huge investment in technology because it's -- the brand is highly scalable and digital. And in product lines like design sneakers for BAW would be fantastic. Today, we didn't talk about that, but I see it among the questions. BAW recently launched a co-lab with the C&A chain, which was fantastically successful. So that's a test you can say about how things could work. I think we have a good proof of concept, and the brand extension, in addition to shoewear and clothing, right?

Yes. It's a style brand. And Alexandre was perfect in -- as a temple brand, temple store that it has -- they have to be -- they have to convey the lifestyle of the brand, not opening a whole bunch of stores, just a few stores, but stores that really convey that lifestyle and the love brand, right? 2 weeks ago, I was down south, right? And there's a line in front of the store for people to go inside even during the pandemic. Yes, and focusing on my mini channels.

Anymore?

There's a question about how do we see the [indiscernible] brand and BAW interacting. Oh, sorry, VANS brand.

VANS is focused on skate wear, and BAW is much more streetwear. So VANS does have surf, BMX. So even though it's a lifestyle brand, VANS has this closer connection to sports and street sports like skateboarding. FIEVER has a lot of affinity with BAW. Before the transaction, we did a collab, but BAW has higher scale and awareness. So FIEVER will still be doing collabs with BAW and continuing in that sense with a lot of focus on sneakers. So they add on to each other.

Perfect. You said that well. I see VANS mainly in skateboarding and BAW lifestyle, pop brand. And with FIEVER, there are some synergies so we can consider new collabs, and that's something that we could discuss.

What about a collab with Reserva. Come on. Aline, anything else?

The last question, I think we summarized all the other ones here, is about the operation because we mentioned that although it still doesn't have tax incentives. We're not going to go into those details, but you can imagine that with the tax incentives, we can have margins closer to company margins, if not higher.

Yes, especially using all the infrastructure resources and even bigger scale in revenue growth. Those are the things that we expect. Moving -- no decrease in margin, the margin would grow. Okay. Great. It's great to have you with us here, Rony, Lucas, Bruno, Celso, Fernando. Welcome to Arezzo&Co, AR&Co. Thank you, everyone, for listening to us. You can be absolutely sure that BAW is here to fill in a huge space at Arezzo&Co with a very modern view of the world. We're very happy with that new avenue that's opening up through BAW.

Great. Thanks, everyone.

Welcome, everyone. Welcome.

Bye-bye. Thank you, everyone. [Statements in English on this transcript were spoken by an interpreter present on the live call.]