Grendene S.A. (GRND3) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for your patience. Welcome to the video conference for the release of the fourth quarter '23 and 2023 results of Grendene S.A. [Operator Instructions] The video concurrence is being filmed and will be made available on the company's RI website, ri.grendene.com.br, where you can also find our press release for the fourth quarter of 2023. You can download the presentation from the chat icon, which is also available in English. [Operator Instructions] We emphasize that the information in this presentation as well as any statements made during the video conference concerning the business prospects, projections and operating and financial targets of Grendene S.A. are based on the company's management's beliefs and assumptions as well as information currently available. Future considerations are not guarantees of performance. They involve risks, uncertainties, assumptions and because they refer to the future events, and therefore, they depend on circumstances that may or may not occur. Investors should be aware that general economic conditions, market conditions and other operating factors may affect the future performance of Grendene S.A. and may result in substantially different results than that stated in such forward-looking statements. Today, we have the following company executives with us. Rudimar Dall'Onder, Chief Executive Officer; Gelson Luis Rostirolla, Chief Operating Officer; and Alceu de Albuquerque, CFO and Investor Relations Officer, as well as all the company's key managers. I will now give the floor to Mr. Alceu de Albuquerque. Please, Mr. Alceu, you can go ahead.

Good morning. Thank you, everyone, for your presence in our video conference to spread the results of the fourth quarter of 2023 and the year 2023. We start talking about how was our quarter. The fourth quarter was a quarter -- a challenging one, just like the previous quarters, conditions, macroeconomic ones with the interest -- high interest rates and high debt, restrictive conditions of credit, they continuing -- causing an impact negatively in the consortium of the families. But even though we have this very challenging scenario, we have registered a very positive quarter, a quarter where our net revenue was stable, the volume presented a slight fall. But on the other hand, we presented a strong growth of our recurring EBIT and recurring net profit and a strong recovery of our margins. This performance -- this positive performance was guided by the internal market that grew in the quarter. I'm going to talk about it later. It grew both in revenue and volume. But within the internal market, domestic market, talking about the Division 1 brands that all the brands except Melissa, they present a 6.2% growth in gross revenue, 2.1% in volume while the gross revenue per pair grew 4.3% related to an increasing revenue bigger than in volume. The revenue coming from online sales from the brands of Division 1, they grew 42%, while the participation of the online shares on total sales of Division 1 in Brazil, they grew 0.6 pp in the quarter. And how was the performance of Division 1? The brands, the segments that have determined this growth was the Female one, the Male one and Kids segments. Within the Female lines, we observed an expansion of the 3 brands. Grendha, Zaxy and Azaleia. And it's a growth that -- where we have observed since the beginning of the year in the lines of -- in the Female lines. When we look at the Male segment, we observed a growth in the 3 brands also, Rider, Cartago and Mormaii. This growth is a result of an equation of our product portfolio for more accessible products. We also observed a growth in the Kids line that started to have like good sales and repositioned volume after the Children's Day. Ipanema, on the other hand, presented an inferior results to the fourth quarter of 2022, caused by the comparison basis with the -- when Ipanema had a strong performance in quarter 2022, and it was a little bit inferior than in the quarter of 2022 because it was concentrated in the same [indiscernible] collection because it had a important highlight in the fourth quarter of 2022. And this performance that was a little bit inferior of Melissa was influenced by the movement of liquidity of inventory. We have observed that from our competitors within the channels we presented growth, the self-service channel and the magazine channels were the most important ones. And the retail channels and indirect channels are the channels that demand products with more added value, and they presented a slightly negative performance. On the graph on the left-hand side, we continue with a positive sellout of the brands of Division 1 that we observed in the previous quarters. It remained in this fourth quarter, and we also noticed the dynamic between selling and sellout becoming normal within the Division 1 brands. In a similar movement, we observed the same at Melissa. Melissa started the year with a slower performance. It had a weak first quarter, but from the third quarter onwards, we noticed a recovery movement from the performance of Melissa, both selling and sellout. And this movement was confirmed in the fourth quarter. This movement of recovery that started on the third quarter, it was influenced by the Spring/Summer Collection 2024 that has started to arrive in stores and had an excellent review by the consumer -- the end consumers. So the accumulated sellout of the Melissa Clubs on the fourth quarter grew 12.9% while -- when compared to the fourth quarter of 2022, and the selling started to present a growth differently than what we observed in the first quarter. The selling grew 5.4% and then the gross revenue of Melissa in the fourth quarter grew 9.8%. Volume grew 5.4% and the gross revenue per pair 4.2%. The sales of Melissa in the online channel grew 27% on the fourth quarter, and they started to represent 2.6 pp extra related to the total sales of the market coming from 9.6% to 12.2% this quarter. During a very complicated period for the franchise sector, we opened many new stores totaling in December of 2022, 414 stores, 414 Melissa Clubs. Melissa, as I mentioned before, the clients accepted really well this new Spring/Summer Collection that is already in the domestic market stores. It's not in the foreign market yet. It will be available in the next summer, the '24 summer. And we reached more than 200 active users on the Melissa app. It was launched on April 2023, and it has been growing quarter after quarter. The sales via app -- Melissa app, they represent over 33% of the total online sales of Melissa and the importance of this channel and the sales in the app is that it's one of the most positive indicators when it's compared to the website, conversion rates, average ticket. So it's a channel that comes with a lot of quality and profitability and has been growing quarter after quarter. The exports, the external market had a little bit of a slowdown, a negative performance, just like the Brazilian footwear sector in general, and this negative performance is a reflection of the slowdown of the global economy. It was because of high inflation and high interest rates that ends impacting on consumer habits of the population, especially in the countries of the northern hemisphere where the developed countries population are not used to live with high inflation. So this has caused an impact in their consumer habits in these countries. We also have an impact -- Latin America has a very relevant impact. 50%, 60% of our exports, they have -- they sell to Latin America countries. And in Latin America, we have many countries leaving political and economic crisis and the recovery of this crisis has been really slow. What has caused an impact in the purchase power of all the consumers? Climate impacts such as the El Niño also caused the impact on the sales in the fourth quarter because of the rainfall season, which is -- and competitors from the Chinese market because after the pandemic like with the reduction of freight costs, the Chinese products are here -- are coming here in a very competitive way in these countries, I mean. United States, we still can see a very complicated scenario, a challenging one. The retail sector has been suffering where retailers continue with a high inventory levels. Consumers are searching for products of less value of minor prices, retailers presenting restrictions to work with new brands and new suppliers. So when we can enter these new markets, new brands, with the modality drop shipping, once the product starts performing well, they open the doors of a few stores to display your products presentially. Selling in Europe was not so good because of the weak sellout in 2023, which will cause an impact. Rainfall season above average also caused an impact in the sellout in Europe. And in Africa, we have seen political tensions and energy power problems, the devaluation of the Angolan currency. And also in the North of Africa, we have seen a few difficulties to send dollars. And also, the Middle East between Israel and Hamas has caused an impact also as a whole in the region. Having said that, our result of the quarter as a whole, the volume reached 42.5 million pairs. It's a decrease of 2.4% when compared to the fourth quarter of 2022. And this decrease is concentrated, as I mentioned before, in the external market that decreased 19.7% and in domestic market grew 12.2%. Gross revenue, BRL 924 million, a decrease of -- in the external market is 28% decrease. And while in the domestic market, we see a growth of 7.3%. Gross profit growth 3.6%, reaching BRL 362.6 million and gross margin growth 1.8 pp coming from 45.9% to 47%. And this growth of margins is concentrated in the raw material factor, a reflex of reduction movement of reduction prices in the main raw materials observed in 2022, and they have -- they cause a little delay in our COGS. The recurring EBITDA grew 19.2%, reaching BRL 157.5 million. And we also have a growth in the recurring net profit of 3.4 pp, and this margin goes to 20.7% -- 22.7% and recurring net profit grows 22.7%, reaching BRL 256.5 million, while the margin grows 33.7%. Revenue composition of our gross revenue, as I mentioned before, it drops 1.5% in the last quarter being that internal market is adding gross revenue in this quarter, whereas the external market removes the gross revenue. The volume has brought BRL 16.5 million price and mix, and we can see here that we are more concentrated on the price effect. We have a growth in revenue of BRL 35.5 million, the volume for the external market removes almost [indiscernible] million in revenue and price will remove around BRL 11 million in revenue. Exchange that we have, it was 55.1% that our [indiscernible] valuation, it removes almost, I would say, BRL 10 million in the revenue in the quarter. If we open the call numbers, we see that our gross margin grows 1.8 pp in the quarter, as I mentioned before. And this growth of this gross margin is concentrated on the raw material component, that it's going to consume less than the net revenue when compared to the same period in 2022. The last quarter, the raw material would represent 27%. And now in the fourth semester, we have 23%. In the components that we have 1.5 -- 1.1 pp that it's higher than the net revenue, starting from 18.4% to 19.5%, and that is due to the collective bargaining that we've had in 2024. And this is due to a lower volume of pairs that have been shipped because we ended up diluting having like a short -- a smaller space to have in the cost and also due to more complexity in our products. And when we talk about complexity, we're talking about minute per pair. So the per minute grew like 12% when compared to 2022. We have a small growth in other costs, so we have 1.2 pps. When we move to the right and we are talking about net sales and COGS per pair, it grows 2.1% reaching BRL 17.89 per pair whereas the pair cost will have 1.4 less. And this growth of COG per pair, it's concentrated on the raw material indicator. The other components that we call labor and [indiscernible], they grew due to the reasons that I mentioned previously. You can see in the slide, the recurring operational expenses. The first one that they have grown 1% in the quarter. They started from BRL 200 million to BRL 205 million from BRL 203 million to BRL 205 million. Commercial expenses grew like 3.1% in the quarter. But I would like to call your attention here that you can see on the net sales, better say, expenses with personnel, but it's impacting this growth within the [indiscernible] of commercial expenses. We can see the impact of structure and managing franchise that we've had now since last year. And we did that in order to replace the franchise mass when we did not renew the contract. So within this line of expenses with personnel, in commercial, we have the cost of a structure, I would say, 100 people to do this managing of all the franchisees that used to be done by the master franchisee. If we consider how much we are saving for not paying that and comparing with what we are investing today in this structure to manage our franchise, we have a positive result of around BRL 2 million in the quarter. Admin expenses have been kept stable in BRL 7.2 million. We have a small growth in personnel development if we talk about the admin of 2.7%, but this is a lower growth if we compare to the inflation in the same period. You can see in this slide, the impact and the variations in the recurring EBIT that started from BRL 132 million to BRL 157.5 million in the quarter -- fourth quarter, a growth of 19.2%. And the components that added to this recurring EBIT in Q4 were basically variation of net revenue, variation of COG and also commissions. We have BRL 12.8 million of nonrecurring items. Within this BRL 12.8 million, we have asset equivalents of around BRL 13.9 million. We've had some reversals in the PDD that we have in our recurrent expenses and some process credits. Speaking of the financial results now, net financial revenue, we've had BRL 35 million higher when compared to Q4 in 2022. Even if we had an average balance that has been invested at BRL M million lower. And this BRL 35 million growth is concentrated on a loaded line of other financial assets like SPs. And basically, here, it was a debenture -- participated debenture in the Vale do Rio dos Sinos that brought to negative results in Q4 in 2022, but throughout this period, in which we brought these operations, we had a very positive result. On the right, you can see the portfolio allocation that we call a portfolio for [ ET ] that we have alternative assets when compared to the traditional investments. So we have federal public bonds or bank bonds. And when we closed the year, we had 485.5 million that have been invested on that portfolio being that 94% of this was allocated in real estate development and around 6% in [indiscernible]. Okay. What's the profitability and the rentability that we started in 2019? The portfolio as a whole had 100% of profit that is about 165% in CDI. For real estate, we had 65.2% equivalent to 165.6 in CDI. Private credit grew almost 83%, which is equivalent to 205.5% in CDI. And variable income has had 194.3%. That is equivalent to 582.8% in CDI. As I mentioned before, we don't have like other positions of variable profit. And the only position that we kept last year was Vale do Rio dos Sinos in which we closed the operations. It was around the end of the year when this action, the stock in Vale do Rio dos Sinos was in ex dividends. The next slide, we have our e-commerce. E-commerce has been growing quarter after quarter. This is the fifth quarter in a row that our e-commerce has brought a very positive EBITDA. We reached a given scale in which we can, I would say, dilute our costs and make these operations profitable. GMV has grown 42.1% if you compare to the Q4 last year, whereas in the whole year, we saw a growth in GMV of 38.2%. Gross margin has grown 6.5 pp in the fourth quarter, whereas in the year, we had [13.4] pp. And we've been observing a steady growth in the margin throughout the year because as from April and May, we started doing this great job of like revising commercial policies, revising discount policies and policies regarding like selling products in the full price or with discount. We started revisiting and rediscussing our expenses, both operation and commercial. We've had many adjustments that ended up reflecting on the commercial bridge with a better gross margin. And then we had infrastructure that reflected a recurring EBITDA that grew 788% if we compare Q4 in 2022. The recurring EBIT has grown more than 600%. General penetration of e-commerce in the total sales in the internal market reached 4.5% if we compare to 3.4% in Q4 2022. But when we see this indicator throughout the year, penetration of e-commerce has already represented 3.9% of our revenue in internal market, whereas in 2022, that percentage was only 2.9%. If we look at Melissa, specifically, online sales have been represented 12.2% of Melissa alone in the internal market. And that was in the Q4 2022 that represented 9.6%. In the whole year, online sales in Melissa represents 12.8% in internal markets if we compare to 9.2% in 2022. Moving now to Grendene Global Brands. In the end of 2023, we reached 2 years of operations. And what did we do in these 2 years? We focused on people and brand. We have a team of over 50 professionals that know about the culture with a very low turnover. We've invested more than $20 million in marketing, and we increased the relevance of our brands on local consumers. We've observed a growth of online sales in more than 9x with higher influential figures and digital influences in the local cultures. Well, we can see Rosy Zhao in China and Shakira as a global Ipanema representative that makes our brand known. We reintroduced Ipanema and Cartago in the U.S. And even with this initial hurdles like having new clients and especially B2B in the U.S., we enhanced in 70% of the number of active clients in the U.S. We are back with our brands on Amazon, which is our second largest client in the U.S. We've opened 17 new exclusive Melissa stores in China, and we've completed distribution center in China with 100% of local team. We have offices in Miami, in China and in Brazil. And what were the results? Net sales revenue went from 31.4%, it's almost 60% in volume. Online sales in the U.S. and in China, I'm talking about consolidated China and U.S. in all channels, okay? Tmall, Melissa, Amazon, we grew 237% alone. Melissa alone grew more 2.4 and the wholesale U.S. and brick-and-mortar stores are suffering because they are 6% below and 13% above in retail. This is the channel that pays the bills, and we can -- we are facing some difficulties in order to grow along the channel due to the macroeconomical situation that I mentioned before. So retail with inventory and retailers, they don't want to have new brands to have relationships. But still, we've done a great job. We've done a job that is superior to what we expected if we were on our own. And in the physical stores, Melissa physical stores, we haven't found the perfect ideal model to have profit with some stores. We closed one in Los Angeles, we closed Melissa Gallery. And with those structures and resources, we are going to relocate to other initiatives regarding the brand. Now the year-on-year in a nutshell. So volume, we had 5.8% withdrawn. We reached almost 150 million pairs. Internal market, the withdrawal was 6.1% or 5.8%, and we have -- net revenue has withdrawn 5.2%. We reached BRL 3 billion. Withdraw of 25% in external market and a growth of 3.2% internal -- external markets, better say. Gross profit, even though the revenue and the volume is lower, we grew 7.5% to almost BRL 1.1 million. Gross margin grew 4.4 pp. We reached 44.5%. Recurring EBIT grew 34.5% in the year reached BRL 383 million. And recurring EBIT grew 4.4 pp reaching 15.7%. Our recurring net profit reached BRL 661 million. It was a 7.8% growth compared to 2022. And our net reached 27.2%, a growth of 2.8 pp. So you can see that it was a stable year regarding revenue and volume and the strong growth in results with these margins. So just to highlight that the margins, if they grow, even with the lower volume that we all know that volume is a great driver for margin at Grendene, and even having this recoil of exports, if we can say that we have higher margins. Coming back now regarding results in the year, BRL 557 million, we're going to have -- this is because of the fiscal incentives and to have the legal basis for calculation, we have BRL 282.9 million. As we reached 20% of social capital, we don't need to put more resources to legal reserves. So we have BRL 282.9 million to invest. In the year, we have distributed BRL 137 million. So we still have to balance BRL 145.8 million that are going to be distributed to the stockholders that have stocks of Grendene of May 2 in 2024. So this action is ex dividend on May 3. Payment will take place on May 15, and this is how we are going to pay. BRL 50.8 million as dividends and BRL 95 million gross to [ACP], that net with the 15% of income tax would be BRL 80.7 million. And that sums up 15% by net that's going to be paid on May 15. And to finish, we can see the accumulated dividends and interest on equity. We paid BRL 5.8 [million] since we opened capital. And if we correct this value according to the IPCA, this will be BRL 8.5 million and corrected by the CDI, it's BRL 11.2 million. This is what I had to say for now. So now I open for Q&A.

[Operator Instructions] Our first question is from [indiscernible], Bradesco BBI, analyst.

I would like to ask about Melissa. Melissa has been consolidating its recovery with the strong sell-out in the quarter. Can you exploit a little bit more. Can you talk more about the factors for this recovery? Is the summer collection, but that -- maybe there is also a macro factor? And how is the performance in this quarter in the beginning of the year? And related to expansion, should we expect these current levels to continue? Or do you think other factors will contribute to the expansion in 2024?

Thank you for the question. I'm going to start with the second one. We must see a growth in margins in 2024, but not a very significant growth as it was in 2023. Because I would say that the biggest part of capturing the benefit is coming from raw materials, we have used that. So raw materials decreased prices in 2022. And that will take 2, 3 quarters to reach our COGS. So if we observe the behavior of the raw material throughout 2023, it remains stable with few variations down and up. And in a short and long and average term, we are not foreseeing oscillations in raw materials. It will -- we think it will be going to vary slightly throughout the year. So the PVC compound also are still 3% above the average cost of replacement of the input. So probably, there is a marginal gain here added for the raw material component, but we expect a stability from here on -- from now onwards. And related to the other component, as we foresee higher volumes to 2024, it's always a driver of margin volume. And also -- and therefore, there is opportunity for capturing more margins. We expect the growth of margins in 2024, but not with the same intensity, with the same volume of 2023. And related to Melissa, there are many factors that added. They end up bringing a positive result, the one we saw in the fourth quarter, and we continue seeing the same on the third quarter of 2024, the first quarter in selling and sell out. And the first one was the excellent arrival of the Summer Collection, everybody liked it. As soon as it arrived in the stores, it started selling really well, and that generates a cycle that new products arrive from new collection, new collections tend to sell full price and have more interest rates that will generate more profit and increase the working capital of the franchise. So they will be able to place more order in this cycle, it will go on and on increasing our profit, our margin. And also internalizing the franchise management is something that we did to come closer to the franchisees. And even though we cannot measure that, it has been causing a positive impact given the feedback we have received and conditions, macro conditions that seem to be -- we have signals that they are improving in interest rates reduction and levels of -- reduction in levels of debt and credit conditions improving are signs that they can put consume up, and part of this consumer can be directly to our products. They will increase consume levels, these drivers. And we expect we have seen a positive performance in this fourth quarter in the domestic market, and we are expecting a positive performance in the foreign market of Melissa because of this new collection, because this new collection is arriving in the foreign market for summer 2024, and we expect positive results because of that.

Let's go to our next question. It's from [ Evan Kaiser ], an Investor. He asks, "I would like to understand, how is the partnership plan of 3G Radar to exploit the foreign market?"

Evan, thanks for your question. The partnership has been very positive. Just a little background. We started the operation in 2022 and 2023. Now it's -- we completed 2 years of this partnership, and we have been focusing a lot in the strengthening of our brands in the U.S. and Canada markets, China and Hong Kong, and we have a very close relationship with the GGB team. So weekly, not only myself but also the sales teams of GGB and Grendene, they talk to each other to adequate portfolio and to capture trends. It's been a partnership that's really positive. And we have major expectations as we used to have when we closed the partnership. When we started the partnership, expectations -- huge expectations for GGB.

I saw a question in the chat. We expect the breakeven of the operation for 2026.

Just answering the question, it's written in the chat.

Our next question is from [Edward Marcelino], an Investor. Does the company study possibilities of coming out of some markets that are presenting low levels of sales just for operational costs?

Thank you for your question, Edward. No. We haven't evaluated that yet because all our product lines, they add results to Grendene. We don't have any lines that are slowing down.

Next question, [ Emilio Fernandes ]. Congratulates you for the presentation and great results and asks the following. About the Law 14,000 taxes of COFINS and CSLL about the investments for the next year for 2024. What will be the procedures of Grendene for that -- for this loss and regulations?

Thank you, Emilio. The Law 14,789 published in the end -- on the 29th of December starts to get taxes from PIS, COFINS and inland revenue and the counterpart of this new taxes, it will give you credit of 27% on depreciation and amortization you have in the stores that receive this benefit. So what is Grendene doing about it since January? We have been collecting taxes. And we are going to start with a legal action to question the validity of this law, given that many lawyers that we spoke to, they defend the fact that this law violates the federal pact, the concept that the federal entity is removing from the taxpayers benefits that were given by the state. So we are collecting these taxes. We have been doing that since January, and we are going to file a lawsuit and the 27% on credit over depreciation of the operation in [indiscernible], we have done that since January to give -- to benefit us within this provision of the law.

And now it's the end of the Q&A session. I would like to give the floor to Mr. Alceu Albuquerque to the final conclusions.

I would like to thank all of you again for your presence in our video conference and our IR team is available to clear any questions. Thank you, and have a great day.

The video conference related to the fourth quarter of 2023 and 2023 of Grendene S.A. is now closed. The Investor Relations department is available to answer any questions you may have. Thank you to all participants, and have a nice day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]