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

Welcome, everyone, to the video conference to the results of the fourth quarter of '24 of Grendene S.A. [Operator Instructions] We inform that this video conference is being filmed and it will be made available on the company's IR website ri.grendene.com.br, where you can also find our press release for the fourth quarter '24. You can download the presentation from the chat icon, which will also be available in English. [Operator Instructions] We would like to emphasize that the information in this presentation, along with any statements made during the video conference regarding the business prospects, projections and operating and financial targets of Grendene are based on the beliefs and assumptions of the company's management as well as information currently available. Future considerations are not guarantees of performance. They involve risks, uncertainties and assumptions because they refer to future events, and therefore, 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 the company and result in substantially different outcomes from those 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 de, you can go ahead.

Good morning, everyone, and thanks for being here in our video conference to present the results of the first quarter of '24 and the year '24. To start our presentation, I'm going to start talking about the performance of the domestic market. As you know, we divide the domestic market between Division 1, which contains all the brands, except for Melissa. And then talking about Division 1 brands, and the performance facing this very challenging landscape, we have been facing throughout the fourth quarter of '24, but also throughout the whole year of 2024. So the performance of the brands of Division 1, they were really similar to the behavior on the third quarter. It was a landscape of persistent inflation, high interest rates, volatility in exchange rates, retraction in consumption and the [ fall ] in the stores that impacted the sellout of our brands in the quarter. So the sellout of our brands, they decreased 10.7% in the quarter. But with this retraction, still, we managed to present a growth of 1.2% in volume of selling of the brands of Division 1. So how was the result of Division 1 brands? We grew 6.4% in gross revenue; volume, we grew 1.2%; gross revenue per pair, 5.1% growth; and then our share in online sales in the Division 1 brands, they represent 1.8% compared to total sales of the domestic market of Division 1's brands. Who were the ones responsible for these brands? It was the male segment composed by Ryder, Cartago and Mormaii. And then the kid segment, the children one with our license for children and boots. The female collections from Grendha, Zaxy and Azaleia, they had a lower performance when compared to the fourth quarter last year, but very much centering Zaxy's line because Grendha had positive results. Ipanema also had a decreased performance in the fourth quarter of '23 and very much influenced by the collection, which didn't have the same acceptance of the one in the fourth quarter of '23 and also because competition in the market, especially related -- between products with 20 -- between BRL 20, BRL 29, competitors are striking hard. When we look related to channels and when we talk about big stores, magazines and our distributors that buy our products to sell them, the magazine -- indirect magazine presents as revenue and volume. Retail traditional stores presents growth in revenue, but a decrease in volume. And self-service channels, a little bit less relevant, represents about 10% of Division 1 sales. It decreases in revenue and volume. When we talk about Melissa's performance, Melissa is still having a positive behavior since the second quarter of 2022 -- second half of 2022, I'm sorry, we observe a growth in sell-out and sell-in. Sell-out grows 1.3%, sell-in grows 16.7% in revenue. Volume grew 3.4%, gross revenue per pair grows 11.6%, it grows more than volume. And also we have an impact related to price readjustments and sales of products mix with -- products with mix with added value. Melissa participation in the domestic market are 14.9% the share. This performance of sell-in and sell-out has been strengthened and boosted by the acceptance of this new collection in the stores and the efficient strategy of marketing that was executed by the brand and also by the increase of the sales price of commercialization of more -- with more added value. These excellent results and this acceptance helped the model of supply of our Melissa clubs were more derived by demand. It's more push than pull. We reached 422 stores in December 2024 when compared to 414 in December 2023. We have 8 stores, new stores opened in the end of the year. Looking at the external market, it also presented a challenging scenario with a lot of uncertainties generated by political crisis and economical crisis in traditional countries for Brazilian exports and Grendene exports also such as Bolivia, Argentina, exchange restrictions, persistent retraction in the United States. The Eurozone has a stagnant economy and low performance. We have observed an increase in protectionism with increased commercial barriers and tariff restrictions and intensification of exports from Asia that ends up increasing their share and logistics difficulties with delays in shippings. When we export to seasonal countries, when you delay the shipping because of logistic problems and you miss out the shipping of products, you will end up losing a month of sales, which will impact a reposition of products. So how was the performance of exports? We grew almost 32%. The revenue in real had a growth of 31.9%. Volume grew 12.8%. That represents a growth of gross revenue per pair of 16.9%. This growth in revenue and volume, they are very strong. But also, there is a very weak comparison basis between the fourth quarter of '23 and '24. In '23, we had a volume of products exported that were much lower than the average. When we compare our performance with the whole scenario of the footwear industry, we grew 11.8% industry when compared with decreasing exports of Brazilian footwear in general. We grew 12.8% and Brazilian exports decreased 6.9% because of this performance that were positive with our exports compared to the decrease of Brazilian exports. Grendene started to represent 1/3 of Brazilian exports on the fourth quarter of 2024. We had a growth of 5.7 percentage points. Facing this scenario, this domestic scenario and international one that's really challenging, we still can see -- we can still register a very robust result with a growth in all of our indicators. We can observe growth in volume, in revenue. We have growth in operating results and net results and all our margins. So the quarter -- results of the quarter, the volume grew 3.4%, reaching 44 million pairs. In the domestic market, we grew 1.4% and in external market, 12.8%. Gross revenue reached BRL 1.043 billion, a growth of 12% when compared to the fourth quarter of '23. And domestic market grew 8.9%, external market grew 31.9%. The gross profit grew 20.6%, reaching BRL 437.2 million, with a margin of -- a gross margin of 50.9%. It's a growth of 3.2 pp because of the growth of net revenue and decrease of production costs. Our recurring EBIT has a very robust growth, 38.8%, reaching BRL 217.6 million, a margin in EBIT -- recurring margin, 25.3%, a growth of 4.7 percentage points. Out of those, 3.2% comes from the gross margin and 1.7 pp are because of our continuous control and our strict control of our operating expenses. And finally, our net recurring result profit grew 35.5%, reaching BRL 347.6 million, an unbelievable margin of 40.4% margin is the outstanding, an increase of 6.7 pp. Out of those, 3.2 pp comes from the gross margin, 1.7 pp comes from the operating expenses and 2 percentage points from our financial results. Another curiosity since Grendene became a public held company in September and October of '24, we have had 81 quarters, and we registered profit or positive results in 80 out of these 81 quarters. The only quarter we had a negative result was the second quarter of 2020 when 100% of our operations in the Northeast of Brazil, they shut down the stock because of decrease of the state government of [ Serra. ] And even though we didn't fire any of our employees, our 18,000 employees. So this history of 80 quarters of profit, positive cash generation shows our capacity to adapt to the most diverse scenarios, landscape and to have a very, very positive and profitable operation. So in the next slide, I show the details of the results regarding the previous slide. But this is just to show the management adjustment we needed to perform in the accountability of our EBIT in terms of our real estate projects, and you can see that the accountability EBIT was over BRL 219 million. But when we apply such adjustment, we consider a recurring EBIT of BRL 270 million. There is a variation from the operational and the recurring one of around BRL 80 million, and such reduction is due to the result obtained with our real estate development projects. Today, we have about BRL 600 million in such projects. We invested in some of those through SSAPs. And then we have those net income. And we also invested in those through holdings. In those real estate projects, we invested through holdings. The results of such application come through equity and impacts our EBITDA. These results are by product of our cash flow investment, and we consider that as a result of our financial applications, and then we removed those BRL 98 million from the EBIT, and we moved them to the financial results. And then the recurring financial result of BRL 49 million with such a management adjustment, it's hard to represent almost BRL 150 million. So the management's recurring result is BRL 148 million. With this PowerPoint slide, we show you this declassification so that we cannot give you a false impression of the EBIT because this BRL 98 million represents our cash flow application, and it's not part of our operations. Here's another PowerPoint slide to compare orange and apples. We have an impact of a law that started to tax, our tax incentives from 2024. And our net revenue would have grown 13.8% if it hasn't been for the internal service tax through PIS and COFINS. And our COGS that increased 6%, it would have increased [ 7%] if it was not for the tax credit on incentives. So we had a tax incentive of BRL 6 million that reduces our COGS, the recurring EBIT that was around BRL [ 217,000. ] So we had an increase of 40.7% against the reported one, which was 38.8% because we have the impact of COFINS, internal revenue service, taxes and also depreciation taxes. And lastly, we have our net recurring result that was BRL [ 347,000, ] but it would have been BRL [ 358,000 ] if it wasn't for those PIS and COFINS taxes, if it wasn't for depreciation -- tax credits on depreciations and also income tax and social contribution on tax incentives. And here's a few variations of revenues in this fourth quarter as I said before, so you left with BRL 924.3 million to BRL 1.043 billion for PIS. So it represents a growth of 12.9%. So the volume in the domestic market increases by BRL 10.7 million in terms of price and mix variation. They add up BRL 56.7 million and international market adds BRL 20.8 million price variation and mix in the international market. They reduce revenue by BRL 1.6 million. And FX was around BRL 18 million in the fourth quarter regarding 2024 and it adds BRL 32.6 million in revenue. So here's our COGS. So our gross margin grows by 3.2%. It's a margin that represents 50.9% when compared to 47.7% of 2022 first semester. And when we open the COGS components, we see a reduction. And then the raw material leaves from 23% to 22%, a decrease of 1%. And then in terms of labor, it reduces from 18% to 19%, 1.1% reduction. And Other expenses reduced from 8.6% to 8.7%, which represents 1.1% reduction. When we look our COGS in terms of net income by pair, so our revenue grows by 9.2%, which is much superior to the COGS per pair, which increases by 2.6%. When we see the different components of the COGS per pair indicator, we see increase of those or one that is inferior to the standard. And when we look to our recurring operating expenses, we didn't control them very strictly because our expenses increased by around 6.7%, but it's still inferior to the growth of the income, which is around 13%. Recurring operating expenses represent 1.5% reduction of net income and then leave from 27.1% to 25.6%. And all the other components regarding the recurring operating expenses, they either decrease or increase less than the income. When we look at the recurring selling expenses, we see that our variable expenses increased around 20.9%, which is in line with this 13% of the net income increase. In terms of our investments in marketing, so it grows by 5.5%. And those are investments in order to reinforce our brands, both in the domestic and international market. There are other expenses, which decreased from BRL 52 million to BRL 48 million. And here, we have other expenses such as commercial teams, trips, participation in trade shows. And when we look at the commercial recurring expenses, they reduced by 5.5%. And when we look at our recurring G&A expenses, they grew by 7.5%, which is last and the net income growth, and it is impacted by 2 main factors, which are tax expenses related to the Ministry of Finance of the State of [ Serra ]. They have a new understanding regarding the ICMS taxes are not part of the default. That's why we had a growth in this kind of taxes. So this is very much in line with inflation. Here, we show the main variations of our EBIT. The accountable one leaves from for BRL 144.7 million to the BRL 298 million. And the recurring one from BRL 156 million to BRL 217 million. So we have a variation of net income and COGS, which grows by 29%. But in terms of percentage, as I have said before, this is a very inferior growth regarding the net income growth. So here's our net financial revenue regarding the fourth quarter. So we had a CDI, which was 1.1% and the average U.S. dollar was 18% stronger compared to real. And we have cash and equivalents, financial investments, which was 36% greater -- so we had a net accounting financial result which was 46% less than we expected, which was impacted by exchange rates. So here are the future sales that we promote in order to control this as we had volatility. So we treated at a certain level, but dollar currency went on rise. But everything is balanced out because when we zero our received goods in dollars, we reached good results. In terms of recurring net financial result, we reached over BRL 148 million. And the difference between the recurring and the accounting one is listed here. And here, we have the results of our investments of our real estate projects, the ones that we invested through holdings and how this comes into our equity and it impacts our EBIT. And then we went down to the recurring net results because it's application from our cash flow, and it's not part of our operation. So in December 31 last year, so we had BRL 578 million invested in those real estate projects. Here's a little bit about our e-commerce performance. Our e-commerce is on rise. In the fourth quarter of 2023, we had a growth of 25% of GMV. Our transactional volume -- GMV volume grows by 9%. So we have the growth of an average value because of added value projects and the discounts. And the number of sessions grows at 29% (sic) [ 24% ] and the gross margin grows at 2.8% (sic) [ 2.8 pp ], 71.6%, and the recurring EBIT reaches BRL 5 billion, which represents 3.5%. And our e-commerce was launched in 2021 during pandemic and this is our ninth quarter of positive EBITDA -- EBIT because when stores reached certain level of revenue, so we can make this channel really profitable. And as a whole, it represents 6.4% (sic) [ 5.4% ] in the domestic market of Grendene, which is -- which represents 4.7% in the fourth quarter of 2023. And when we look at Melissa more specifically, and this online China represents 15% of Melissa's penetration compared to 12.8% in the fourth quarter of 2023. We had a very positive result. The volume reaches BRL 139.4 million in the domestic market. We saw a growth of 1% and a decrease of 5%. The gross revenue reached BRL 3.2 billion, a growth of 5.7% (sic) 7.5%. In the domestic market, the growth of 8%; and in the external market, 4.8%. Gross revenue, 14.5% growth, reaching BRL 2 billion (sic) [ 1.2 billion ] and a gross margin of 47.2%, a pp of 2.7% related to the gross margin of 2023. There is a recurring EBIT, it has growth of 13.3% (sic) [ 33.3%], BRL 508 million with a margin of 19.3%. It's a gain of 3.6 pp. The recurring net result or the net profit recurring one is almost BRL 800 million, BRL 796.5 million, a growth of 20.5% and a gross margin -- net margin of 30.3% is a gain of 3.2 pp. This is the same chart I showed before, just to illustrate the change of management we did so we can have the right representation of our recurring EBIT and our financial results. So BRL 109 million from the subsidiaries, and we put it in the financial results. So the operating EBIT from BRL 557 million. When we had all the nonrecurring items, there are a total of BRL 49 million. And here, we have BRL 109 million of financial results with our real estate projects. And the recurring EBIT goes from BRL 557 million to BRL 508 million. Our net result, the accounting one was BRL 255 million, it [ parts ] to be BRL 365 million. Here, we can see the impact of the law, 14,789. The revenues that grew 8% should have grown 8.9% if it wasn't for the taxes by PIS and COFINS. CDB would have grown 3.9%, the COGS -- I mean, because of the depreciation that we suffered. The recurring EBIT, BRL 583 million would have been BRL 514 million, a growth of 34.9% and when compared to the 33.3% reported. And finally, our recurring net result from -- would have been BRL 829.4 million. It would be a growth of 25.4% when compared to the 20.5% reported if it wasn't the taxes of PIS and COFINS and depreciation, if it wasn't because of the taxes of our social contribution and state taxes. Our net results for the period is BRL 735 million. Out of this BRL 735.2 million, BRL 257.2 million come from fiscal incentives from ICMS or IRS. And it's for -- and it serves as a basis for legal -- for calculation. 5% is for the legal reserves of this BRL 454 million. And to distribute as dividends, we have BRL 454.1million. Out of this value, BRL 230.6 million were distributed in the first, second and third quarters. And then we have BRL 230 million to still distribute that will be distributed this way: BRL 120.6 million, it will be distributed as dividends, which is equivalent to BRL 0.13 and BRL 110 million gross discounting the taxes on the source, BRL 93.5 million, it's equivalent of BRL 0.103 per share. Shareholders with shares from the 23rd of April, they will start to be negotiated as ex dividends and the payment will be on the 7th of May of 2025. And just to wrap up, I'm going to show the year-to-date accumulated interest on equity corrected by the CDI. We have distributed more than BRL 13 billion of dividends since we became a public-held company. The IPCA is BRL 9.4 billion, and we have distributed BRL 6.3 billion also. This graph reinforces what I mentioned before in the beginning of the presentation. 80 quarters since we became a public health company in a sequence, only 1 quarter, we didn't generate positive results. All the others, we had positive results, showing our great capacity to transform to adapt to the most diverse political and economic landscape. Throughout these 20 years, we had -- we've been through many crisis and different landscapes, and Grendene always generated results with consistency and profitability. And that's it for all, and I am open for questions and now we are going to start the Q&A session.

[Operator Instructions] Let's go to our first question. The investor, William [ Holmes. ] He congratulates Grendene for the result and asks the question, what can we expect from COGS in 2025? And I would like you to talk a little bit about the GGB. What's gone wrong with the 3G? And what can we expect related to changes in GGB from now on?

Thank you, William, for your question. In a very objective way, the COGS of 2025 must continue aligned with what was observed in 2024. About GGB, I'm not going to say that something went wrong. We still believe our business model of GGB because we bought the whole of the shares. What happened is a different profile of investors. 3G Radar is an investment fund and their fund has a specific deadline to exist. Afterwards, they have to give the resources back to investors. And the sales of GGB, as I mentioned before, they were a little bit below what we had planned. And that's because of the economic landscape that the world has been going through. So the 3G Radar team did an evaluation. And in their point of view, they couldn't be able to deliver results and profitability estimated for their investors. So because of that, they decided to not continue in this partnership, but Grendene has a different profile. Grendene doesn't want results in a medium -- short and medium term. We do investments for long term. When we decided to go into this partnership, we knew that already. And I mentioned that before, we don't build brands, global brands from -- in 1 year. We don't build distribution channels, international ones in just 1 year. It's one brick on another brick. You just build this wall. And then if you look back, you can see that our major trajectory, if you look back. So it's the same business model. We focus more in Melissa because we understand it's the more mature brand in the international market. And we also understand that to build a brand in the foreign market, we must have our own operations because distributors, they don't have the financial capabilities or the interest to do investments, global investments to create global brands. We did adjustments in our -- in the GGB structure, in management, operations. We reduced expenses and what we are supposed to see now is a growth, but a growth more focused on profitability than -- it's a growth a little bit lower, but with more profitability.

We don't have any more questions. And the Q&A session is finished. I would like to give the floor to Mr. Alceu de Albuquerque to final consideration.

Once again, thank you, everybody, for your presence. If you have any other questions, our IR team, sorry, is always available to answer them. And I wish you a great day. Thank you.

The videoconference is now finished. The Investor Relations department is available to answer any other questions you may have. Thank you so much for your participation, and have a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]