Vulcabras S A : 1Q24 Transcript

Video Conference (English Transcription)

Earnings Release 1Q24

Vulcabras (VULC3)

May 08th, 2024

Operator: Good morning ladies and gentlemen. Welcome to the Vulcabras Video Conference to discuss the results for 1Q24.

I would like to go through some instructions before starting.

This Video Conference will be held exclusively in Portuguese. The transcript of the event in English will later be made available on the Company's IR website. The video and presentation of this Video Conference will be published on the Company's website www.vulcabrasri.com and on the CVM after the market closes.

Please be advised that all participants will only be listening to the Video Conference during the presentation and then We will start the Q&A session when further instructions will be provided.

Please be advised that forecasts about future events are subject to risks and uncertainties that could cause such expectations not to materialize or to differ from expectations. These forecasts express an opinion only on the date they are made and the Company does not undertake to update them.

Present with us today are Mr. Wagner Dantas, CFO and Investor Relations Officer.

Now we are going to watch an institutional video and in the sequence we return with Mr. Wagner

Click hereand select 1T24 Videoconferência

Mr. Wagner Dantas

After a historic 2023, Vulcabras continues to consolidate the success of its strategy of focusing on sports and reports in this 1Q24, another quarter of record results. This is the 15th consecutive quarter of growth (quarter versus quarter of the previous year), which reinforces the consistency and resilience of the business, even in the face of a market full of challenges.

Net Operating Revenue (NOR) in 1Q24 reached R$ 597.3 million, an increase of 4.6% compared to 1Q23, and the Gross Margin recorded in the quarter was 40.2% (an increase of 0.7 p.p. versus 1Q23). EBITDA was R$ 122.4 million, growth of 4.7% compared to results in 1Q23, with an EBITDA Margin of 20.5%. Net Profit reached R$ 88.8 million, an increase of 6.2% compared to 1Q23, with a Recurring Net Margin of 14.9% in 1Q24 (increase of 0.3 p.p. versus 1Q23).

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In addition to the results above, Vulcabras also announces the payment of interim dividends for R$ 0.15 per share, approximately R$ 41.1 million, maintaining the quarterly payment as previously disclosed by the company.

Footwear division grows across all brands

Net revenue from the sports footwear division (which corresponds to 82.9% of total revenue) was R$ 495.4 million, growth of 7.4% in 1Q24 versus 1Q23. The gross volume invoiced in the category reached 4.2 million pairs, an increase of 4.7% compared to 1Q23. This positive performance in the face of a domestic market facing challenges in consumption and aggressive competition in sales, combined with the situation in Argentina that kept the volume of exports far from a regular level, confirms the strength of the brands and the resilience of the Company's business model.

Olympikus continues to drive Vulcabras' growth with the Corre Family, which accounts for 15% of the brand's revenue, democratizing access to high-performance technology. In this sense, it took a new technological leap with the Olympikus Corre Supra, the first Super Shoes developed and produced in Brazil, which features an unprecedented Carbon

• Graphene propulsion plate, registering sold out sales in its launch week, which reinforces the success and the search for the brand's products by high-performance consumers.

Mizuno continued to expand its authority and leading role in the high performance- running category with the launch of two Super Shoes, the Wave Rebellion Pro 2 and Wave Rebellion Flash 2. In basketball and training, Under Armour continues to invest and consolidate its leading role with the launch of national products, designed for the Brazilian consumer, and global products, such as the Curry 11 in basketball and Project Rock 6, in training.

E-commerce maintains accelerated evolution above retail

The expansion of e-commerce was another highlight in 1Q24, recording growth of 51.9%, jumping from R$ 50.7 million in 1Q23 to R$ 77.0 million in 1Q24. The channel's results are anchored in the brands' product positioning and segmentation strategy, far exceeding the pace of retail growth. As a percentage of revenue, the channel represented 12.9% of the Company's total net revenue, growing 4.0 p.p. compared to 1Q23.

In February 2024, Vulcabras concluded the operation to issue new shares (Follow-on), raising a total of R$ 501 million for its cash. The main objective of the funding was, in addition to the entry of new investors into its shareholder base, to promote greater liquidity and a consequent increase in the volume of operations with its shares.

In 1Q24, even in a scenario full of challenges and macroeconomic instability, we maintained the consistent evolution of our results. The result of a resilient, agile business model capable of meeting what the Brazilian consumer is looking for. Over the next few months, we will continue investing in our brands, through technology and innovation,

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and paying attention to new avenues of growth, aiming to maintain consistent and sustainable growth in our business.

We will begin the discussion of the results by commenting on the GROSS VOLUME, information about which is available on slide 5 of the presentation.

In 1Q24 gross volume reached the mark of 6.7 million pairs/pieces, an increase of 0.8% compared to 1Q23.

Breaking down by categories, AtheticFootwear showed growth of 4.7%, driven by the increase in sales in the domestic market, with all brands showing a positive performance, which was mitigated by the reduction in volumes sold in the foreign market.

Other Footwear and Others showed a reduction of 14.4% compared to 1Q23, with growth in the slippers category, however, overshadowed by the drop in the professional boots category due to the weak demand observed at the beginning of the year.

Apparel and Accessories recorded growth of 1.1% in 1Q24 when compared to the volume recorded in 1Q23.

Moving on to slide 6, I will comment on Net Revenue by product category.

In an economic scenario of reduced consumption and penalized with the implementation of new measures related to the taxation of investment subsidies through Law 14,789/23 (Provisional Measure 1185), 1Q24 proved to be a very challenging quarter. Even in the face of difficulties, the revenue Company´s reached the mark of R$ 597.3 million, presenting a growth of 4.6% compared to the same period in the previous one.

The Company's net revenue was negatively impacted by R$ 7.2 million, (1% of ROB) due to the Pis/Cofins taxation on the ICMS subsidy recognized for the period.

This was the 15th quarter with consecutive revenue growth, achieving positive performance across all its sports brands, thus reinforcing the solid pace of sales expansion and highlighting Vulcabras' resilience in facing market adversities.

For comparison purposes, if the effect of Pis/Cofins taxation on the ICMS subsidy in 1Q24 was excluded, the net revenue obtained would be R$ 604.5 million, a growth of 5.8% over 1Q23 revenue.

The Athletic Footwear category recorded an increase of 7.4% ,this growth in revenue is due to the increase in sales of the three brands, driven by growth in the domestic market and partially overshadowed by the reduction in sales in the foreign market.

The Other Footwear and Others category decreased by 7.0% over 1Q23. The decline in revenue in this category was caused by the drop in the professional boots category due to the weak demand observed at the beginning of the year. However, this drop was mitigated by the growth in the flip-flops category.

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The Appael and Accessories category continues to face a challenging retail scenario, especially in specialized distribution and presented a reduction of 7.4%, the highlight was the sports socks subcategory, which presented a positive performance in revenue.

Moving on to slide 7, we have the breakdown of net revenue by market.

In 1Q24, in the domestic market, net revenue of R$ 562.9 million was recorded, representing an increase of 7.2% compared to the same period of the previous year. This positive result confirms the Company's consistency in its continuous growth in the domestic market.

The Company's three brands recorded growth in the domestic market compared to the same period of 2023. During this quarter, athletic footwear was the positive highlight, presenting growth in both volume and revenue, which was partially reduced by the drop in revenue from Apparel, accessories and professional boots.

In the foreign market, net revenue for 1Q24 reached R$ 34.4 million, a significant drop of 25.5% compared to 1Q23.

All categories suffered a strong impact on their revenues due to the decline in sales to Argentina, which is the Company's main export destination. Even with the resumption of exports to the country, difficulties in domestic consumption and restrictions on remitting dollars abroad mean that the volume of business with Argentina remains far from its full potential.

At the subsidiary in Peru, during 1Q24, a reduction in revenue was also observed compared to the same period of the previous year. This reflects the persistence of macroeconomic difficulties that impact economic activity and, consequently, consumption.

On Slide 8 we have information related to the digital channel.

Driven by a consumer-centric strategy and with the purpose of promoting an exclusive experience for the Company's three brands, the digital channel continues its trajectory of accelerated evolution.

E-commerce continues to grow significantly, far exceeding the growth rate of retail as a whole. One of the Company's main avenues, the channel recorded R$ 77.0 million in net revenue in 1Q24, an increase of 51.9% compared to 1Q23.

As a percentage of revenue, the channel represented 12.9% of the Company's total net revenue, growing 4.0 p.p. compared to the revenue share in 1Q23.

Moving on to slide 9 to talk about Gross Profit and Gross Margin.

Gross profit in 1Q24 reached the mark of R$ 239.9 million, an increase of 6.5% compared to the same period of 2023. Despite the impacts of the effects of Law No. 14,789/23 (Provisional Measure 1185), which, among other measures, provides for Pis/Cofins

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taxation on ICMS subsidies, the Company's gross margin reached 40.2% in 1Q24, reflecting an expansion of 0.7 percentage points compared to 1Q23.

For the thirteenth consecutive quarter, the Company recorded an expansion in its gross margin. The 0.7 p.p. gain achieved in 1Q24 demonstrates the stability and resilience of the Company's business model.

For comparison purposes, if the effect of Pis/Cofins taxation on the ICMS subsidy in 1Q24 was excluded, the gross profit obtained would be R$ 247.1 million, with a gross margin of 40.9%.

The main factors that contributed to this gross margin gain in 1Q24 were:

1. Improved production efficiency, with the capture of synergies and economies of scale resulting from production growth;
2. Expansion of the product portfolio across all brands, exploring new categories and expanding the offer;

Moving on to Slide 10.

Selling, advertising and allowance for doubtful accounts expenses in 1Q24 totaled R$ 110.7 million, an increase of 7.4% compared to the same period of 2023.

Direct expenses linked to sales and allowance for doubtful accounts, excluding those related to advertising, totaled R$ 83.2 million, recording an increase of 4.8% when compared to R$ 79.4 million reached in the same period of the previous year. In terms of revenue share, selling expenses, excluding advertising, in 1Q24 represented 13.9%.

During 1Q24, we noticed the continuation of the same trend identified in previous quarters, where certain variable sales expenses increased their proportion in relation to revenue, mainly due to changes in shares between channels.

The increase in the proportion of sales made through e-commerce, with a significant portion of these sales occurring through marketplaces, resulted in an increase in commission and shipping expenses.

In 1Q24, advertising and marketing expenses totaled R$ 27.5 million, an increase of 16.0% compared to 1Q23.

In relation to net revenue, advertising and marketing expenses represented 4.6% in 1Q24, an increase of 0.5 p.p. Compared to the share observed in 1Q23.

In 1Q24, Olympikus continued to strengthen itself in the running scene with the Corre Family, a category that represents 15% of the brand's revenue, activating the running community with sponsorship of events, competitions and athletes, and revolutionizing the market, this time with the launch of the Olympikus Corre Supra, the 1st Super Shoes made in Brazil that positions the brand among the running elite.

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At Mizuno, we launched the Wave Rebellion Pro 2 and Wave Rebellion Flash 2, biomechanics and technology in favor of stepping that brought even more innovation to its high-performance Smooth Speed Assist (SSA) technology, offering the most innovative and technological features for those who seek excellence in running. To further advance in the performance-racing segment, it signed a partnership with MPR, one of the largest sports consultancies in the country.

Under Armour activated the basketball and training categories by launching innovative products, hosting events and creating collaborative content that reinforced its commitment to these communities. As a result, the launches combined with communication strategies boosted sales in both categories, consolidating Under Armour as a reference on the courts and a leader in training.

We can move on to slide 11.

In 1Q24, general and administrative expenses totaled R$ 37.5 million, representing a percentage of net revenue of 6.3%, an increase of 0.6 percentage points over the 1Q23.

The main increase occurred in the expansion and maintenance of the E-commerce platform, essential to support the expansion of the channel.

We now move on to slide 12 to talk about the Financial Result and Net Debt.

In 1Q24, the Company reported a net financial income of R$ 0.8 million, an increase compared to the same period of 2023 when it reported a net financial expense of R$ 2.1 million.

The main variation is the increase in financial income. This is due to the growth in cash available, driven by robust cash generation and the resources incorporated with the capital increase captured in the public offering carried out in February.

The Company has a solid financial situation and on 03/31/2024 achieved a net cash position, which means that its available assets, cash equivalents and short- and long- term financial investments exceeded its liabilities represented by short- and long-term loans and financing. The net cash balance position as of that date was 160.2 million, indicating a positive and healthy financial position.

The reduction in net debt was mainly due to the excellent operational cash generation, driven by the resources captured in the public offering carried out in February, despite the capex acquisitions and dividend payments throughout this quarter.

On slide 13 we have net income and adjusted ROIC.

Net income in 1Q24 reached the mark of R$ 88.8 million, an increase of 6.2% over the income in 1Q23.

Net margin reached 14.9% in 1Q24, an increase of 0.3 p.p. compared to 1Q23.

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It is important to highlight that Net Profit was negatively impacted by R$ 9.6 million and the net margin by 1.4 percentage points due to the implementation of the measures imposed by Law No. 14,789/23 (Provisional Measure 1185). Disregarding the effects of such measures, net profit would be R$ 98.4 million and net margin would be 16.3%.

Even in the face of extremely challenging retail and adopting all the determinations imposed by Law 14,789/23, the Company demonstrated resilience in its results and showed growth in both its net profit and its net margin.

Annualized adjusted return on invested capital (Adjusted ROIC) reached 29.3% in 1Q24- LTM (last twelve months ended 03/31/2024), an increase of 0.9 p.p. over the 28.4% obtained at 12/31/2023.

We now move on to slide 14.

In 1Q24, EBITDA reached the mark of R$ 122.4 million, a growth of 4.7% compared to 1Q23. The EBITDA Margin reached 20.5% in 1Q24, the same achieved in 1Q23.

It is important to highlight that EBITDA was negatively impacted by R$ 2.6 million and the EBITDA margin by 0.2 percentage points due to the implementation of the measures imposed by Law 14,789/23 (Provisional Measure 1185). Disregarding the effects of such measures, EBITDA would be R$ 125.0 million and EBITDA margin would be 20.7%.

Moving on to slide 15 of the presentation.

In 1Q24, R$ 29.7 million were invested in property, plant and equipment and intangible assets, a decrease of 11.1% compared to the amount invested in the same period of 2023.

The highlight of investments in capex was the continued expansion of the industrial pavilion of the rectilinear machinery park at the Ceará plant, intended for the production of Knit uppers.

We can now move on to slide 16

We ended 1Q24 with R$ 575.8 million in cash. The net cash position balance on that date was R$ 160.2 million, indicating a positive and healthy financial position Our final financial leverage position is comfortable and allows us to take advantage of growth and investment opportunities responsibly, preserving our payment capacity of debt and facing market challenges with confidence. We are committed to maintaining this solid financial position to support our sustainable growth and ensure value for our shareholders

These events combined resulted in a positive cash variation of R$ 201.3 million, essentially consisting of:

1. EBITDA of R$ 122.4 million;
2. Increase of R$ 495.6 million in Other Revenues mainly due to Follow-on;
3. Variation between Long-Term Assets/Liabilities of R$ 19.5 million;

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1. Decrease in bank liabilities by R$ 22.2 million;
2. Decrease in the need for working capital of R$ 75.9 million;
3. Investments in property, plant and equipment and intangible assets of R$ 29.7 million;
4. Dividends paid of R$ 449.3 million.

We conclude our presentation and open the door for questions.

Question and Answear

Operator:

We will now start the question and answer session for investors and analysts. Participants can submit questions in writing using the Q&A tool at the bottom of the screen.

To ask questions by audio, simply click on the "Raise your hand" button. When your name is called,

Victor Rogatis, Itaú BBA

Good morning, everyone. Thanks for taking my questions. I have three. The first is, when we analyze the average ticket for sports footwear, there was an increase of 3% year-over- year. I would like to understand what exactly explains this factor. Was it necessarily a price increase? Was it a higher penetration of high-performance products? In addition, do you intend to raise prices in the coming quarters? That is the first question.

The second question is analogous, but focusing on apparel and accessories, which saw a year-over-year decline. I would also like to understand what caused this drop. Was it the average ticket, or was it a need to be promotional, possibly due to the competitive Brazilian market?

And the last question is about advertising in marketing, as a percentage of net revenue. There was a significant year-over-year increase. I would like to understand how we can think about the evolution of this line going forward. Thank you, everyone.

Wagner Dantas:

Rogatis, thanks for the questions. Average ticket for footwear: I think the main influence here comes from a mix effect. It's not a collection where we applied price increases on the same products, but it's a 1Q where we saw significant growth in the e-commerce channel, which brings with it direct sales to the end consumer.

So, it's a sale with a much higher average ticket than the traditional wholesale sales. Additionally, there is the portfolio itself, the product mix within the brands that has been improving quarter by quarter.

At Olympikus, we have growth in the high-performance category, which naturally has higher average tickets. Mizuno is regaining its prominence in the high-performance

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scenario as well, selling footwear with higher average tickets, and Under Armour is a leader in the basketball and performance training segments.

So, positively, it's these two impacts. E-commerce growth. This brings a higher average ticket for the category. Qualified portfolio. A more technical and high-performance mix. I think the deflator for these two positives is the foreign market itself, which showed a decline and ends up pulling the average ticket for the footwear category down.

The second question was about the average ticket, the average price of apparel and accessories. As we tried to make it clear in the release, apparel and accessories as a whole show a decline. This was offset by the evolution and increase in sales of socks, which have a lower average ticket than traditionally sold items like t-shirts and backpacks. So, the negative impact on the average price of apparel and accessories also comes from the mix.

The third question is about marketing. I think marketing, like other variable expenses, such as commissions and freight, will show a change in the Company's consolidated number, as a percentage of revenue, leading to a structural change throughout 2024.

As e-commerce grows, these items should represent a higher percentage of revenue. The reason is that when you sell directly to the consumer, the freight ends up being higher than delivering a full truckload to a retailer's distribution center.

Commissions: in e-commerce, you have the feed and marketplace, with the take rate of these marketplace partners being higher than the commissions we pay to representatives for wholesale sales and distribution. In the marketing section, we have performance marketing in the e-commerce component, through the e-commerce channel.

So, we buy traffic on Google, activate social media, in terms of revenue percentage, this investment ends up being greater than the traditional investment we make through wholesale, opening store fronts and developing campaigns.

So, the percentage of the value invested in revenue, as it is a developing channel, we ended up having this over-investment. Throughout 2024, this is a trend you can expect, with variable expenses undergoing a transformation. Compared to our historical performance, we see an evolution, a slightly higher percentage.

The main point here is the EBITDA margin. Despite the growth of a channel with a higher gross margin and higher variable expenses, we have managed to mitigate this, absorbing it with synergies and scale gains, in fixed and operational expenses.

Therefore, the company's EBITDA has been preserved. Despite our growth in a profitable channel that should or would be a deflator for the company in terms of margin, we managed to offset this within back-office synergies and have been maintaining the company's EBITDA in a constant evolution in terms of margin.

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I covered all your points. If you have any further comments, feel free to ask.

Laryssa Summer, XP:

Okay, Wagner thanks for answering our questions. I have two here from our side. The first is about DTC; you mentioned in the release that it's a focus and have been commenting on it for some time. We would like to understand if the current sales level and the higher gross margin of the channel already offset the slightly heavier structure in expenses.

The second question is about inventory; we saw a smaller investment in inventory this quarter compared to the same period last year. We would like to understand if this has to do with an expectation of still pressured demand in the short term.

Wagner Dantas:

Thank you, Laryssa, for the questions. As for the profitability of the e-commerce channel, when you sell directly to the end consumer, you have a higher average ticket; you end up absorbing a markup, the full chain margin, selling directly to the consumer. So, the gross margin is indeed higher compared to the gross margin we capture in wholesale sales.

But it also needs to finance an SG&A structure, with higher selling expenses, as I explained in the previous question to Rogatis. The fact is that e-commerce today is profitable every month; it has been this way throughout 2022 and 2023.

In 2023, it already showed an evolution, robustness, scale gain, and synergy capture, where this gross margin already surpassed a stronger SG&A structure, the fixed expenses the channel has to perform to operate.

And just like in 2H, throughout 2024, we already have an EBITDA margin. We do not disclose the EBITDA margin of the channel, but what I can tell you is that in absolute profit terms, it is already equivalent or superior to the same product sold through wholesale.

So, even though, in percentage terms, it has an EBITDA margin lower than the company's consolidated margin because it is divided by revenue that, due to the markup, is double the ticket, in absolute values, the profit per pair in e-commerce is already equal or superior to the profit per pair captured in traditional wholesale sales.

We view this very positively because, in addition to being accredited for the business as a whole, it's a trend. A channel continues to grow disproportionately. This quarter it grew 52%, and it is a channel that prioritizes positioning, experience, and a segmented product offering. The best the brands have to offer, which we may not always have the multi- brand retail distribution doors to execute, to offer this product directly to the consumer.

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