Vulcabras Azaleia S A : CALL TRANSCRIPTION-3Q20

Conference Call (English Transcription)

Vulcabras Azaleia

Earnings Release 3Q20

November 10th, 2020

Operator: Good morning and thank you for waiting. Welcome to the Vulcabras Azaleia conference call to discuss results for 3Q20. Present today with us are Pedro Bartelle, CEO of the company, Mr. Wagner Dantas, CFO and Investor Relations Officer and our Investor Relations team, Mr. Valdinei Tortorelli, Ms. and Ms. Luciana Serrano

We inform you that this event is being recorded and that all the participants will be only listening to the conference call during the presentation of Vulcabras Azaleia. Then we will start the Q&A session, when further instructions will be provided. If you need any assistance during the conference call, please request the assistance of an operator by entering * zero.

This event is also being transmitted simultaneously through the internet, via webcast, and can be accessed at www.vulcabrasazaleiari.com.br, where the respective presentation is available. The selection of the slides will be controlled by you. The replay of this event will be available soon after its closure. Please note that webcast participants will be able to register, via website, questions for Vulcabras Azaleia, which will be answered after the end of the conference, by the IR area.

Before proceeding, we would like to clarify that any statements that may be made during this conference call regarding Vulcabras Azaleia's business prospects, projections, operating and financial goals, constitute beliefs and assumptions of the Company's Management, as well as information currently available for Vulcabras Azaleia. Future considerations are not performance guarantees, involve risks, uncertainties and assumptions as they relate to future events, and therefore depend on circumstances that may or may not occur.

Investors and analysts should understand that general conditions, industry conditions and other operating factors may affect the future results of Vulcabras Azaleia and may lead to results that differ materially from those expressed in such future conditions.

I would now like to give the floor to Mr. Pedro Bartelle, CEO of the company, who will begin the presentation. Please, Mr. Pedro Bartelle, you may proceed.

Mr. Pedro Bartelle: Welcome to the Vulcabras Azaleia results conference call. Vulcabras Azaleia discloses hereby its financial results for the third quarter of 2020 amid an economic recovery, after the most arduous period of the pandemic, and reports with optimism the recovery of its results

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Faced with a scenario of macroeconomic recovery that is still slow, but gradual, data from the Brazilian Institute of Geography and Statistics (IBGE), in September, state that retail registered an increase of 5.2% in July, in comparison with June of this year.

Directly linked to this scenario is the footwear sector, segment that was positively impacted with the resumption of activities of physical commerce in large centers which, according to data from the Brazilian Footwear Industries Association (ABICALÇADOS), accounts for more than 40% of the total of shoes sold in Brazil. Also, according to the Brazilian Association of Handicraft and Footwear Retailers (ABLAC), the Retail Performance Index (IPV), in September, and in the footwear sector as a whole, recorded a positive visitor flow of 12.4%, compared to the same month of the prior year.

In this quarter, we reported healthy sales growth, with the rebuilding of our gross margin and better balance of expenses within this scenario. The pace of sales and production in this third quarter was equal to that of pre-pandemic periods, which evidences the effectiveness of the measures adopted thus demonstrating a growth trend for the second half, as a whole.

In 3Q20, the Company posted net revenue of R$ 382.9 million, an increase of 6.5% compared to 3Q19. Gross Margin was 34.2% in 3Q20, down 0.5% when compared to 3Q19. EBITDA registered R$ 66.3 million, an increase of 2.6% compared to R$ 64.6 million in 3Q19.

The maintenance of the portfolios of the first half of the year, combined with the good performance in receiving orders for the new collections of the second half of the year (Olympikus and Under Armour), launched in July, were fundamental for the full recovery of our manufacturing operations. In July, we had already discontinued the adoption of Provisional Executive Order (MP) 936, which allowed us to operate with reduced working hours.

The use of this Provisional Executive Order, during the critical period of social distancing, enabled the Company to strategically preserve its productive and distribution capacity, thus allowing both a rapid and sharp recovery of results.

We still live with the pandemic and continue to care for the people and communities in which we operate. The security protocol adopted remains very strict in the manufacturing plants, where we protected around 300 people identified as belonging to risk groups. Most of the activities in the commercial, administrative and financial areas continued to be carried out under the home office regime.

In July, we launched the collections of the second half of the year (Olympikus and Under Armour) in an innovative, dynamic and 100% digital format. The success of these collections, seen in the volume of orders made, is due to the relentless pursuit of innovation. New technologies introduced in the plants allowed the construction of increasingly lighter and more efficient models. This has enabled us to build and offer our consumers the widest portfolio of products based on the best cost-benefit ratio in the market.

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The performance of our brands' online stores maintained the same trend of expansion recorded over the prior quarters, thus registering a growth of 234.7% over the same period in 2019 and 32.3% over the prior quarter.

In September 2020, the Company announced two strategic changes that endorse its decision to focus its efforts on the sports footwear category, a key segment where the Company has its greatest strengths. In September, the Company announced the purchase of the Mizuno (a leading brand in the running shoe category) operation in Brazil, previously operated by Alpargatas S.A., which, after the fulfillment of the precedent conditions, including CADE's approval, it joined the Olympikus and Under Armour brands becoming part of our sports brand portfolio, where each brand has a different purpose and "target consumer".

The announcement on the acquisition of the Mizuno operation in Brazil was followed by an announcement regarding licensing of the Azaleia brand to Grendene, which is recognized as a successful manager of women's footwear brands and which has all capability to continue building value in the Azaleia brand, which remains a significant asset for the Company. With this, the Company will start to produce sports shoes exclusively in its factories, generating more scale and synergy.

Where, despite the uncertainties in this atypical year of 2020, Vulcabras Azaleia remained focused on the search to expand its business and capture strategic opportunities. It continues to add value to its brands, develop products and technologies that bring the best value proposition as perceived by the consumer and in the improvement and adding value to its employees.

It is through these ideals and with an optimistic vision of the future that Vulcabras Azaleia believes in its growth and in a prognosis of increasingly better results

Now the presentation of our performance in the quarter. I would now like to give the floor to Mr. Wagner Dantas, our CFO and Investor Relation Officer,

Mr. Wagner Dantas: Good morning everyone. We started the presentation with slide 5, gross volume of pairs and pieces.

In 3Q20, gross volume billed totaled 7.9 million pairs/pieces, with growth of 8.6% compared to 3Q19 7.3 million pairs/pieces.

After going through the entire 2Q20 with operations interrupted or operating partially, the Company entered the month of July with the factories operating in the fullness of the available capacity and continued to do so during all subsequent months of the quarter.

The resumption of sales occurred with the products from collection for the first half of the year that were included in the pre-pandemic orders and which were maintained by customers. At the end of July, the new Olympikus, Under Armour and Azaleia shoes collections for the second half of the year were presented. Following launch of the new collections, the growth in the volume of orders occurred very quickly and made it possible to fill the production capacity for the entire second half of 2020.

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In view of this positive response from the market, the Company quickly resumed its pace of revenue and, consequently, its revenue growth.

The volume sold grew in almost all categories in 3Q20, with the only exception being the category of women's footwear, which presented a retraction mainly due to the drop in sales of branches abroad, which still face restrictive difficulties due to the adoption of social distancing measures.

In the first nine months of 2020, the gross volume billed amounted to 15.4 million pairs/pieces, a reduction of 22.2% as opposed to the volume in the first nine months of 2019, of 19.8 million pairs/pieces.

On page 06, we present the net revenue per product category.

In 3Q20, net revenue was R$ 382.9 million, a 6.5% increase over R$ 359.4 million in 3Q19.

The 3rd quarter of 2020 began with the easing of social distancing measures in all Brazilian states and with the reopening, even if only partially, of most physical retail. As of July, still taking advantage of the pre-pandemic order book, the Company resumed operation of the factories in the fullness of available capacity, thus continuing throughout the subsequent months of the quarter.

Athletic Footwear revenue increased by 4.0%, with a positive performance both in the domestic and foreign markets. Both revenue from Olympikus footwear and Under Armour footwear increased compared to the same quarter of the prior year.

The Women Footwear category recorded a decrease of 12.8% when compared to the same period of 2019. During the period, there was a decrease in revenue from sales to the domestic and foreign markets, due to the drop in sales volume.

The Apparel and Accessories category recorded an increase of 32.2% compared to 3Q19. Both Under Armour and Olympikus revenues increased. The category of other footwear and other increased by 84.0%, mainly driven by the growth in sales in the boot category.

In the first nine months of 2020, net revenue was R$ 720.2 million, 27.0% lower than in the first nine months of 2019, when it was R$ 986.1 million.

On page 07, we present the opening of net revenue per market.

Net revenue in 3Q20, in the domestic market, totaled R$ 357.8 million, an increase of 7.3% compared to 3Q19, when it was R$ 333.5 million.

In the domestic market: the increase is due to the increase in almost all categories, with women footwear being the only exception. With the reopening of physical stores, even with restrictions on access and opening hours, retail sales once again took center stage in our revenues. The e-commerce with the Company's brands maintained the trend of expansion and robust growth.

In the foreign market, net revenue in 3Q20 was R$ 25.1 million, a decrease of 3.1% over the R$ 25.9 million posted in 3Q19.

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