Vulcabras S A : 2Q23 Transcript

Video Conference (English Transcription)

Earnings Release 2Q23

Vulcabras (VULC3)

August 02nd, 2023

Operator: Good morning ladies and gentlemen. Welcome to the Vulcabras Video Conference to discuss the results for 2Q23.

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 hereselect Videoconferência

Mr. Wagner Dantas:

At a new level of revenue and profitability, Vulcabras, a 100% Brazilian Global Sportech, reports another historic quarter in this 2Q23. With a gross revenue growth of 10.6%, gross margin of 41.4%, 5.4 p.p. higher than the same period of the previous year, the Company records its highest recurring net income in a quarter, R$ 133.8 million, an increase of 40.8% over 2Q22.

Even with the continuation of an unstable macroeconomic scenario and a challenging retail environment, for the 12th consecutive quarter the Company continues with a growth above double digits, posting a gross operating revenue of R$ 840.3 million in this quarter, R$ 3.1 billion in the last 12 months.

Revenue in the footwear division grew by 14.2%. Olympikus continues to innovate and grow with its purpose of being a democratic brand also in high performance, and, this quarter, it launched Grafeno 2, the evolution of the first footwear with a graphene-based propulsion plate in the world. Maintaining its strategy of focusing on the training and basketball categories, Under Armour brought Curry Season to the country, the biggest and most complete season of Curry, a line developed in partnership with the American basketball star Stephen Curry. In training, Tribase Reps was a sales success and leader in the training category. Mizuno, a leading

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brand in the premium performance running scenario, launched this quarter the Wave Rebellion Series, with three iconic models, including the Wave Rebellion Pro, the brand's "super shoe", the Wave Rebellion Flash and the Wave Rebellion Sonic.

The e-commerce channel, for another quarter, more than doubled its sales, posting a growth of 104.7% compared to 2Q22. The channel's Net Operating Revenue jumped from R$ 27.9 million last year to R$ 57.1 million in 2Q23, thus corresponding to 7.9% of the Company's total revenue. With a strategy focused on positioning and experience, the channel continues to grow at great pace, capturing synergies and with profitability also growing at an accelerated pace.

The gross margin recorded in the quarter was 41.4%, an increase of 5.4 p.p. compared to 2Q22. In the half-year period, the gross margin is 40.5%. This sharp evolution is the result of the Company's strategy to focus on the sports segment, which allows the capture of synergies in the production process and complementarity between the portfolio of brands and products. The exponential growth in direct sales to the consumer also plays a relevant role in this evolution.

Recurring EBITDA margin of 23.3% and recurring net margin of 18.5%, with growth of 4.3 p.p. and 4.0 p.p., respectively, compared to 2Q22, reinforce the Company's strategy and ability to capture synergies also in its commercial and BackOffice structure. In the half-year period, the growth was 3.8 p.p. in the recurring Ebitda margin and 3.7 p.p. in the recurring net margin, demonstrating that this new level of profitability is not something one-off in the quarter, but structural and solid, the result of the strategy of focusing on sports and the company's excellence in capturing synergies and complementarity between brands, product categories and channels.

Continuing the video conference, we will present the Company's performance in 2Q23

Let's start the presentation of the 2Q23 results talking about the Gross Volume, where the information can be seen on slide 5 of the presentation.

In 2Q23 gross volume billed totaled 8.3 million pairs/pieces, down 1.1% compared to 2Q22.

Talking a little about performance by category, in Athletic Footwear the growth was 8.0%. The highlight in this quarter was the significant growth recorded in the domestic market by manufactured footwear, even in the face of a more challenging retail environment. In imported Footwear, despite volumes remaining stable compared to 2Q22, sales performance should be considered very positive. The fact is that the comparison with 2Q22 was impaired, since 2Q22 ended up concentrating the volume of arrivals of imported footwear from Vietnam and Indonesia planned for the entire 1st half of 2022. During the 2nd half of 2021, Vietnam and Indonesia suffered the imposition of protective measures due to the Covid-19 outbreak, including the effective lockdown. These measures had a direct impact on production and on the delay in arrivals of the imported footwear, forecast for 1Q22, thus accumulating arrivals in 2Q22 and, consequently, sales of these products. In Other Footwear and Others, there was a decrease of 1.1%, mainly due to the decline in the volume of flip-flops sold in the foreign market. In Apparel and Accessories the registered decrease was 23.9% faced with a more challenging retail scenario, especially in the specialized distribution of clothing and accessories, in addition to a milder winter (compared to the previous year), the volumes of the three brands suffered a reduction.

In 6M23, gross volume totaled 14.9 million pairs/pieces, an increase of 1.0% compared to 6M22.

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

In 2Q23, Vulcabras showed relevant growth in its revenue, even in the face of a more challenging scenario than that observed in previous quarters. The Company reached the mark of R$ 723.9 million in net revenue, an increase of 10.2%, compared to 2Q22.

In yet another quarter of revenue growth above the average retail performance, when compared to market indicators, the Company maintained its strong pace of sales expansion, posting a positive performance in its brands.

In Athletic footwear, we grew 14.2%, in Other footwear and others the reduction was 0.9%, and in Apparel and accessories the reduction was 11.7% compared to 2Q22.

The increase in revenue in 2Q23 compared to 2Q22 is due to the robust growth observed in manufactured footwear. In imported footwear, revenue remained stable mainly due to the strong revenue recorded in 2Q22, when there was a concentration of deliveries and, consequently, the revenue for the 1st half, due to the delays recorded in the arrival of imported footwear from Vietnam and Indonesia due to the lockdown imposed in those countries by the Covid-19 outbreak.

In 6M23, net revenue amounted to R$ 1, 295.0 million, 14.1% higher than in 6M22.

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

Net revenue in 2Q23 in the domestic market totaled R$ 666.2 million, an increase of 13.7% compared to 2Q22. The highlight of the quarter was the expressive growth of athletic footwear, which was overshadowed by the reduction recorded in the apparel and accessories category.

In the foreign market, net revenue in 2Q23 totaled R$ 57.7 million, a decrease of 18.5% compared to 2Q22, due to macroeconomic factors and the difficulties faced by local distributors in obtaining import licenses.

In 6M23, net revenue in the domestic market totaled R$ 1, 191.1 million, an increase of 19.4% compared to 6M22.

In the foreign market, net revenue in 6M23 was R$ 103.9 million, a decrease of 24.0% compared to 6M22.

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

Highlight among the sales levers of the quarter, the Company's e-commerce channel maintained the strong pace of growth seen in recent quarters, and in 2Q23 it posted net revenue of R$ 57.1 million, a relevant increase of 104.7% compared to the same period of the previous year.

The online channel continues to implement its growth strategies and the share of digital sales reached 7.9% of consolidated net operating revenue in 2Q23, an increase of 3.7 p.p. compared to 4.2% in 2Q22.

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In 6M23, the share of digital sales reached 8.3% of consolidated net operating revenue, an increase of 3.8 p.p. compared to 6M22.

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

Gross Profit in 2Q23 reached R$ 299.6 million, an increase of 26.8% compared to 2Q22. Gross margin reached 41.4% with 5.4 p.p. higher than that verified in 2Q22.

For the tenth consecutive quarter, the Company reports growth in its gross margin. The 5.4 p.p gain achieved in 2Q23 compared to the margin obtained in 2Q22, demonstrates the consistency and robustness of the Company's business model.

The main factors leading to this gross margin gain were:

1. Expansion of the product portfolio in all brands, reaching new categories;

1. Growth in DTC sales share (direct to consumer) where, due to the characteristics of the channel, gross margins are higher than the Company's general average;

1. Capturing synergies and economies of scale as a result of increased production;

IV.	Reduction in international logistics costs and also in the prices of some raw materials.

In 6M23, gross profit was R$ 525.0 million, an increase of 29.9% over to 6M22. Margin in 6M23 was 40.5%, 4.9 p.p. higher than that obtained in 6M22.

Moving on to Slide 10.

Selling expenses and Provision for doubtful debts (ex-advertising) in 2Q23 totaled R$ 83.8 million, registering an increase of 20.6%, compared to 2Q22.

As a share of revenue, selling expenses (ex-advertising) represented 11.6% in 2Q23, up 1.0 p.p. about 2Q22.

Some variable sales expenses increased in terms of revenue, mainly due to changes in the participation of brands and channels. The increase in the share of sales made through Ecommerce, with a considerable part of these sales being made through marketplaces, led to an increase in expenses with commissions and freight. The exception was the line item "Allowance for doubtful accounts", which presented a reversal of allowance in the amount of R$ 4.8 million due to changes in expected losses in the receivables portfolio of some customers.

In 6M23, selling expenses (excluding advertising expenses) totaled R$ 163.1 million, an increase of 25.5% to 6M22.

The share of selling expenses over net revenue increased by 1.1 p.p. in the comparison with 6M22, reaching 12.6% in 6M23.

Advertising and marketing expenses totaled R$ 35.1 million, an increase of 16.2% over to 2Q22.

As a share of net revenue, advertising and marketing expenses accounted for 4.8%. In 2Q23 it represented 4.8% in 2Q23, an increase of 0.2 p.p., when compared to 2Q22.

In order to support the accelerated pace of revenue growth and ensure a prominent presence in the main retail windows, investments in marketing and trade were increased through presence in major sporting events and in new point of sale materials aligned with ongoing campaigns.

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We can move on to slide 11.

General and administrative expenses totaled R$ 38.9 million in 2Q23, an increase of 21.2% compared to 2Q22. As a percentage of net revenue, there was an increase of 0.5 p.p., reached 5.4% in 2Q23.

In 2Q23, the increase in administrative expenses is mainly due to the following factors: (i) to the transfer of increases negotiated in collective agreements to administrative salaries and also to the increase in personnel expenses due to one-off reinforcements in the teams and, (ii) in third- party services, the Increase is due to the expansion of services related to the DTC (Direct to Consumer) BackOffice.

In 6M23, totaled R$ 71.3 million, an increase of 21.5% compared to 6M22

When comparing the percentage of net revenue, there is an increase of 0.3 p.p. in 6M23 in relation to the equivalent period of 2022.

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

The net financial Income in 2Q23 recorded revenue of R$ 3.1 million.

When comparing with 2Q22, the main variations were observed in the increase in financial income and in the reduction of interest paid due to the increase in cash, the correction of PIS/Cofins credits to be recovered during 2022 and, also, by the "non-recurring" financial income related to the correction of recognized credit arising from a favorable decision in the Judicial Process related to Eletrobrás' compulsory deposits in the amount of R$ 4.4 million.

Comparing the periods, the financial income (expenses) was a financial expense equivalent to R$ 17.9 million in 6M22, to an income of R$ 1.0 million in 6M23.

As at 6/30/2023, the Company had a net debt of R$ 89.1 million, 57.8% lower than that observed at the end of 12/31/2022, being practically the same amount presented at the end of the previous quarter.

On slide 13 we have net income and adjusted ROIC.

In this quarter, we presented a net income of R$ 139.0 million, registering a growth of 33.9% over the result presented in 2Q22.

The net margin reached 19.2% in 2Q23, an increase of 3.4 p.p., compared to 2Q22.

It should be noted here that some "non-recurring" events impacted the Company's net income. Comparing Recurring Net Income, the result in 2Q23 was R$ 133.8 million, an increase of 40.8% compared to 2Q22. The Recurring Net Margin reached 18.5% in 2Q23, with an increase of 4.0 p.p., compared to the Net Margin reached in 2Q22.

Net income in 6M23 was R$ 222.6 million, up 41.2% over the income in the same period of the previous year. The net margin when comparing 6M23 to 6M22 increased by 3.3 p.p reaching 17.2% in 6M23.

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