Vulcabras S A : 4Q23 Transcript

Video Conference (English Transcription)

Earnings Release 4Q23

Vulcabras (VULC3) March 07th, 2024

Operator: Good morning ladies and gentlemen. Welcome to the Vulcabras Video Conference to discuss the results for 4Q23.

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 websitewww.vulcabrasri.comand 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. Pedro Bartelle CEO and 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 here select Videoconferência

Mr. Pedro Bartelle

With the combination of strong brands, a vertical business model 100% focused on sports and efficiency gains in operations, Vulcabras (VULC3) records in 2023 the best year in its history.

Gross revenue was R$ 3.2 billion, a new record, with growth of 11.5% compared to 2022. The gross margin reached its highest historical level, reaching 41.7% in the year, an increase of 4.7 p.p. versus the consolidated figure for 2022. Recurring EBITDA increased by 31.5% against the result presented in 2022, reaching R$ 640.5 million in 2023. The recurring EBITDA margin was 22.7%, 3.5 p.p. higher than in 2022. Recurring net profit was R$ 489.7 million, an increase of 32.0% compared to the result in 2022.

The Company's own e-commerce channel continued to grow rapidly. Compared to 2022, it recorded a growth of 104.4%, with an increase from R$ 136.9 million in 2022 to R$ 279.8 million in net revenue in 2023. In the year, it reached a 9.9% share of total revenue.

The revenue of the Athletic footwear division grew by 13.1% in turnover, a result of the complementarity of the brand and channel mix, operation in new product categories, andportfolios aligned with the profile of each consumer, expanding the performance and revenue of the brands.

4th quarter of 2023

With revenue of R$ 919.1 million, growth of 7.1% compared to 4Q22, Vulcabras also records the best quarter in its history, the 14th consecutive period of growth.

The gross margin, like revenue, also grew, reaching 42.7%, an increase of 4.4 p.p. against the same period of 2022. Recurring EBITDA was R$ 177.7 million in 4Q23, growth of 22.8% compared to 4Q22, with a 22.5% recurring EBITDA margin (2.9 p.p. higher than in 4Q22). Recurring net profit reached R$ 144.7 million in 4Q23, an increase of 18.5% compared to 4Q22, with a recurring Net Margin of 18.3%, 1.8 p.p. higher than in 4Q22.

The e-commerce channel recorded net revenue of R$ 94.9 million in the quarter, growth of 101.1% compared to R$ 47.2 million recorded in 4Q22. In the period, the share of the Company's total revenue was 12.0%. With a strategy focused on positioning and consumer experience, the channel evolves exponentially in both revenue and profitability, capturing relevant synergies and economies of scale and strengthening Vulcabras' performance.

The record performance in 2023 and 4Q23 consolidates the best year in Vulcabras' history, marked by the strong growth of our brands. The historical performance reflects a mix of complementary brands, knowledge of more than seven decades in building brands in the national market and a vertical business model, from development to production, which offers the Company's brands agility and an exclusive assortment to explore their respective avenues of growth.

At Olympikus, the expansion of revenue with the "Família do Corre", focused on sports performance, increased its presence in the running market and elevated the brand's perceived value. Today the category already represents more than 15% of the brand's revenue and the Corre 3, one of the models in the performance line, was the most used sneaker by Brazilians in runs recoded on the Strava app in Brazil in 2023.

Mizuno accelerated expansion in high-performance running with the development of national collections of performance Athletic footwear to complement the portfolio offered, and expansion of the assortment with the start of local manufacturing of the Morelia football boot line.

Under Armour maintained its growth focused on training and basketball categories, conquering Brazilian gyms and courts and becoming the leading brand in training footwear sales, with a focus on gyms, in the main clients of the Brazilian multi-brand retail.

Vulcabras, which throughout 2023 made dividend payments consistently, totaling R$ 208.4 million and which recently announced an extraordinary payment of approximately R$ 367.7 million, today announces another dividend payment in the approximate amount of R$ 204.2 million (R$ 0.75 per share). This recurrence and constancy reinforces the Company's ability to generate cash and constantly search for the best capital allocation, thus delivering to its investors one of the best Returns on Invested Capital on the market.

We closed 2023 in our best shape, maintaining the consistency of the evolution of the Company's results. For 2024, we will continue executing the strategy with a focus on sports, 2

seeking to expand our operations based on the strengths of the business, investing in our brands and paying attention to new avenues of growth and synergies, aiming to maintain the consistent and sustainable growth cycle of our business.

We now turn the floor over to Mr. Wagner Dantas CFO and Investor Relations Officer.

Mr. Wagner Dantas:

Good Morning.

Let's start the presentation of the 4Q23 results talking about the Gross Volume, where the information can be seen on slide 5 of the presentation.

In 4Q23, gross volume reached the mark of 8.7 million pairs/pieces, an increase of 0.5% compared to 4Q22.

Breaking down by categories, Athletic Footwear showed growth of 1.2%. This growth is due to the increase in sales in the domestic market, but this was overshadowed by the reduction recorded in sales in the foreign market, especially to the Argentine market.

Other Footwear and Others there was a reduction of 18.1% mainly due to the decrease in the volume sold of flip-flops and boots for professional use.

Apparel & Accessories recorded growth of 12.6% in 4Q23 when compared to the volume recorded in 4Q22. This growth is due to the increase in sales in the domestic market, mainly direct to Consumer.

In the year to date 2023, the gross volume invoiced reached 31.4 million pairs/pieces, showing a decrease of 0.9% compared to the volume recorded in 2022. The dynamics throughout 2023 was one of volume growth in the domestic market, which was overshadowed by the retraction in sales in the foreign market and at the branch in Peru, especially for the Argentine market.

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

Even in the face of the continued challenging scenario in the sports retail segment, the Company's net revenue reached the mark of R$ 791.3 million, an increase of 7.1% compared to the same period of the previous year. This result highlights Vulcabras' resilience in facing market adversities, consolidating its leading position in the sector.

This was the 14th quarter with consecutive growth, reinforcing the solid pace of sales expansion and achieving positive performance across all of its sports brands.

The Athletic Footwear category recorded an increase of 7.8% in 4Q23 compared to the same period of the previous year. This growth in revenue is due to the increase in sales in the domestic market, which was overshadowed by the reduction in sales in the foreign market.

The Other Footwear and Others category decreased by 8.5% over 4Q22. The reduction in revenue in this category was caused by the decline in the performance of flip-flops sold in both the domestic and foreign markets.

The Apparel and Accessories category increased by 15.5% over 4Q22. Despite the challenging retail scenario, especially in the specialized distribution of apparel and accessories, revenues of this category presented an increase in sales in the domestic market, both in the wholesale sales channel and mainly in the DTC (Direct to Consumer) channel.

In 2023, net revenue reached the mark of R$ 2,817.7 million, reflecting a growth of 11.1% compared to the same period of the previous year.

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

In the domestic market, net revenue reached the mark of R$ 768.0 million in 4Q23, an increase of 11.4% compared to the same period of 2022. This positive performance confirms the Company's constant growth rate in the domestic market.

The Company's three brands presented growth in the domestic market compared to 4Q22. The highlight of the quarter was the growth of Athletic footwear and the resumption of growth in the apparel and accessories category.

In the foreign market, net revenue for 4Q23 reached R$ 23.3 million, a strong decrease of 52.7% compared to 4Q22.

All categories had their revenues strongly impacted by the stagnation of sales to Argentina (the main destination for our exports) due to the unpredictability of the measures implemented by the new government and which led to the interruption of shipments pending greater clarity regarding the country's future behavior.

At the Peru branch, in 4Q23 there was a reduction in revenue compared to the same period of the previous year, reflecting the continuity of macroeconomic difficulties that impact the economic activity and consequently the consumption.

In 2023, net revenue in the domestic market totaled R$ 2,651.3 million, a significant increase of 14.8% compared to the same period of 2022. This growth evidences our robust performance in the domestic market, highlighting the commitment and effectiveness in meeting the demands and expectations of the national scenario.

On the other hand, in the foreign market, net revenue in 2023 totaled R$ 166.4 million, a reduction of 27.0% compared to the same period of the previous year.

This variation highlights the specific challenges faced in Latin America, mainly in Argentina, which has repeatedly faced problems related to economic and exchange rate instability.

It is worth noting that in the comparison of the accumulated for the year, the accumulated value of 2022 was increased by the exports of flip-flops made with the Under Armour brand to the North American market, supporting our partner that was facing, at the time, complications in global supply of these models and increased the comparison base by 418 thousand pairs of flip-flops in the Other footwear and Others category.

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

Highlight in 4Q23, the Company's E-commerce recorded a significant growth of 101.1% in relation to the same period of the previous year, reaching the significant mark of R$ 94.9 million in net revenue.

With a strategy focused on positioning and consumer experience, the channel continues to evolve rapidly. The share of digital sales in 4Q23 reached 12.0% of consolidated net operating revenue, an increase of 5.6 p.p. compared to 6.4% recorded in the same period of the previous year. In 2023, the share of digital sales reached 9.9% of consolidated net operating revenue, an increase of 4.5 p.p. compared to 5.4% in 2022.

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

Gross profit in 4Q23 reached the mark of R$ 337.5 million, a significant increase of 19.3% compared to R the same period of 2022. Gross margin reached 42.7% in 4Q23, reflecting a significant expansion of 4.4 percentage points compared to the 4Q22.

The positive impact brought to costs due to the large volume produced in 4Q23 provided gains in production efficiency and the capture of operational synergies that resulted in the improvement of the gross margin.

For the twelfth consecutive quarter, the Company reports growth in its gross margin. The 4.4 p.p. gain achieved in 4Q23 compared to the margin obtained in 4Q22 demonstrates the consistency and robustness of the Company's business model.

In 2023, gross profit was R$ 1,176.0 million, an increase of 25.5% compared to 2022. Margin in 2023 reached 41.7%, 4.7 p.p. higher than 2022.

The main factors that contributed to this gross margin gain in 2023 were:

• i) Capturing synergies and economies of scale resulting from production growth;

• ii) Expansion of the product portfolio across all brands, exploring new categories and expanding the offer;

iii) Growth in the share of DTC (Direct to Consumer) sales, where gross margins are higher than the Company's general average due to the characteristics of this channel;

iv) Stabilization of prices of main raw materials.

Moving on to Slide 10.

Selling, advertising and allowance for doubtful accounts expenses in 4Q23 totaled R$ 140.7 million, an increase of 22.6% compared to the same period of 2022.

Direct expenses linked to sales and allowance for doubtful accounts, excluding those related to advertising, reached the mark of R$ 97.9 million, growing 16.8% when compared to the same period of the previous year. In terms of revenue share, selling expenses, excluding advertising, in 4Q23 represented 12.4% and in 4Q22 the share was 11.3%.

During 4Q23, some variable selling expenses showed an increase in their representation relative to revenue, mainly due to changes in shares between channels. The increase in the share of sales made through E-commerce, with a considerable part of these sales made through marketplaces, led to an increase in expenses with commissions and shipping.

In 2023, sales expenses, excluding advertising, totaled R$349.0 million, representing an increase of 17.9% compared to 2022. The relative share of these expenses in relation to net revenue increased by 0 .7 percentage points compared to 2022, totaling 12.4% in 2023.

We can move on to slide 11.

General and administrative expenses totaled R$ 44.3 million in 4Q23, a decrease of 24.9% compared to 4Q22. As a percentage of net revenue, there was a reduction of 2.4 p.p., from 8.0% in 4Q22 to 5.6% in 4Q23.

The reduction in the comparison between the quarters of 2022 and 2023 is due to the recognition in 4Q22 of "non-recurring" expenses for R$ 18.0 million in legal fees related to the gain in a Pis/Cofins lawsuit over ICMS in the subsidiary of Ceará. Excluding the effect of this expense, the variation would be an 8% growth, most of which is linked to the increase in spending on Technology due to the growth in sales through ecommerce.

In 2023, there was an increase of 3.3% in general and administrative expenses compared to 2022, from R$ 150.2 million to R$ 155.2 million in 2023. When comparing the percentage of net revenue, there is an increase of 0.4 p.p. in 2023 compared to 2022.

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

In 4Q23, the Company reported a net financial expense of R$ 2.9 million, a deterioration compared to the same period of 2022 when it reported a net financial income of R$ 65.8 million.

It should be noted that in 4Q22 there was the recognition of "non-recurring" net financial income of R$ 72.4 million that impacted the result. Comparing 4Q23 with 4Q22 excluding the effect of non-recurring income, the main variation was observed in the increase in financial income. This is due to the increase in cash and also the correction of Pis/Cofins credits to be recovered that were recognized during 2022.

In the year, financial income (expenses) presented a financial expense of R$ 4.8 million in 2023, in contrast to a financial income of R$ 41.3 million in 2022.

On slide 13 we have net income and adjusted ROIC.

Net income in 4Q23 reached the mark of R$ 144.7 million, a decrease of 32.5% over the income in 4Q22. Net margin reached 18.3% in 4Q23, a decrease of 10.7 p.p. compared to 29.0% in 4Q22.

It is important to highlight that in 4Q22 there were "non-recurring" events that affected the

Company's net income. Considering Recurring Net Income, the income in 4Q23 was R$ 144.7 million, an increase of 18.5% compared to R$ 122.1 million in 4Q22.

The recurring net margin also increased by 1.8 p.p., from 16.5% in 4Q22 to 18.3% in 4Q23. The improvement in net margin in 4Q23 is mainly due to the improvement in operational performance, which resulted in increase in gross margin.

Net income in 2023 reached R$ 494.9 million, an increase of 5.3% compared to 2022. The net margin decreased by 0.9 percentage points in the comparison between the years, reaching

17.6% in 2023.

In the comparison of recurring net income, the growth in 2023 was 32.0% and reached R$ 489.7

million, compared to the adjusted income in 2022.

Annualized adjusted return on invested capital (Adjusted ROIC3) reached 28.4% in 4Q23-LTM (last twelve months ended 12/31/2023), an increase of 0.3 p.p. over the 28.1% obtained at

12/31/2022.

We now move on to slide 14.

In 4Q23, EBITDA reached the mark of R$ 177.7 million, a growth of 0.6% compared to 4Q22. The EBITDA margin decreased by 1.4 p.p., reaching 22.5% in 4Q23 compared to the 4Q22.

It is important to highlight that in 4Q22 there were "non-recurring" events that affected the Company's EBITDA. When considering the Recurring EBITDA, the result obtained in 4Q23 was R$ 177.7 million, a growth of 22.8% compared to R$ 144.7 million in 4Q22. The recurring EBITDA Margin also showed a considerable increase of 2.9 percentage points, reaching 22.5% in 4Q23.

The 2.9 p.p. gain in EBITDA Margin in 4Q23 against the same period of the previous year is mainly due to the excellent operational performance, which resulted in an increase of 4.4 p.p. in gross margin.

In 2023, EBITDA reached R$ 641.3 million, an increase of 22.0% compared to 2022. The EBITDA Margin when comparing 2023 to 2022 increased by 2.1 p.p., from 20.7% to 22.8%.

In the comparison of Recurring EBITDA, the growth in 2023 was 31.5% when compared to the recurring EBITDA obtained in 2022. The recurring EBITDA Margin in the year-to-year comparison increased by 3.5 percentage points, reaching 22.7% in 2023.

Moving on to slide 15 of the presentation.

In 4Q23, R$ 39.6 million were invested in property, plant and equipment and intangible assets, a decrease of 9.6% compared to the amount invested in the same period of 2022.

In 4Q23, the highlight of investments in capex was the 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 the year with R$374.5 million in cash and a net debt of R$63.3 million. Our final financial leverage position is comfortable and represents 0.1 times Ebitda. This condition allows us to take advantage of growth and investment opportunities responsibly, preserving our debt repayment capacity 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.

The variation in cash in 2023 was R$ 168.4 million, essentially due to the following events

• I. EBITDA of R$ 641.3 million;

• II. Variation between Long-Term Assets/Liabilities of R$ 117.6 million, 7

• III. Increase in bank liabilities by R$ 20.7 million;

• IV. Increase in the need for working capital of R$ 192.3 million;

• V. Investments in property, plant and equipment and intangible assets of R$ 138.8 million;

• VI. Dividends paid of R$ 229.1 million.

These events combined resulted in a positive cash variation of R$ 168.4 million over 2023, demonstrating the Company's financial health and cash generation capacity.

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,

Eric Huang, Santander:

Good morning, Thank you for taking our question. To begin with, there was an article yesterday in Brazil Journal in which Pedro comments a little about the beginning of the year. I just wanted to understand a little better, how are you seeing the performance for each of the brands, is there anything different among them? And also, if you are seeing any differences among customers; slightly larger, smaller customers, perhaps where performance may be a little more difficult, or, on the other hand, also coming at a slightly better level.

And a second question, also looking at this matter, is regarding store design. To understand a little of what we can expect in terms of CAPEX. Should this bring any increase in expenses that could have an impact in some way? To understand a little more about how you are thinking here. I think everything will be well planned, but to think about possible impacts that we can see at this point. Thanks.

Pedro Bartelle:

Thanks, Eric, for the question. Good morning, again, everyone. I'll start at the beginning of the year. The beginning of the year, from what we have seen in trade, is very similar to the end of last year, still not as strong. We believe that from now on, post-Christmas, the market will start to improve a little.

Vulcabras remains outside the curve. You see the 4Q, the 14th consecutive period of growth. We have our goals for 1Q24, and we are reaching our goals, even in a market that is still difficult.

Many brands are present, well established in Brazil, and as you know a lot about the sector, there are still many sales going on. The trend is for them to decrease, but, for now, we still see a beginning of the year with a lot of sales, a lot of import errors, from importers, bringing too many products and ending up promoting a lot of sales, especially on websites and e-commerce.

Our three brands, we've had Mizuno in-house for three years now; Mizuno, which, when we acquired it, had revenues of R$ 440 million, has now exceeded R$ 1 billion in revenues. We managed to reach, with the three brands, a relevant position in the market, but they all have organic growth agendas, including Olympikus itself.

At Olympikus, we have an important expansion in the high performance line, in this democratization of high performance. We recently launched the most expensive footwear that Olympikus has ever launched, the most technological, the Supra, with a carbon-based propulsion plate covered in graphene, a Michelin sole, a cushioning midsole made of a very noble raw material, which is Pebax expanded in nitrogen, all the most advanced high performance features we managed to bring to this Olympikus product.

So, Olympikus reaches R$ 1,200 to compete with the super shoes, and this will help us further expand this high-performance category at Olympikus.

Mizuno itself comes with news. We started producing football boots last year. Mizuno is very traditional, very strong in football boots, with the traditional Morelia boot. We are producing this boot here in Brazil, and we are planning to expand the collection for this year. In addition to the Morelia, other football boots are entering the football boot market.

Under Armour is a bit initial, but we are bringing, and already producing in Brazil too, the military-inspired line, which is Hunting and Fishing, which are the products more for climbing mountains, the most robust products. By the way, they are those colors, sand, camouflaged, etc. Our mapping shows that there is a very relevant audience that likes these products and wants them. So, we are producing in Brazil.

So, the three brands have important organic growth agendas. And, in addition, I have already said it last time, but it is very important, this is something that we see that has a huge potential for growth, we are very strong in sport. Even though our products are also used in everyday life, whether they are used in fashion, we do not develop products specifically for fashion.

What is this 'fashion'? The sports lifestyle, athleisure. So, we created a separate product development area, with marketing people, with dedicated commercial people, and we are starting to bring the athleisure collections, the fashion collections from these international brands, and also creating a collection of products in Brazil, which will start with a product, a work very similar to what we did with the Corre line at Olympikus, which today is already reaching a 20% share in sales, and we are also doing it within the fashion line. So, greatly expanding the three brands with this.

As far as customers are concerned, I don't see any big changes. We see that, last year, some customers had a little difficulty, especially the large ones had a little difficulty. We have seen some order cancellations. This is not good. Then we have to resell this, and these programs that these large customers make, normally, when they discontinue or cancel something, it takes a lot of work to put it back on the market.

This year, we started a year very similar to last year. Well, but, I would say, a slightly more difficult year, including the beginning of the year.

Does this mean we are selling less or will we sell less? No. We have a growth agenda, an agenda mainly to maintain results. Our EBITDA results, profits and margins have reached a point that we consider very good. We will grow depending on the market, depending on the environment, but we consider our results to be quite good, but in a market that is still a little difficult.

I'm a bit of an optimist, personally. I think that now, from now on, from March onwards, sales will start to pick up a little more and trade will improve.

I think we missed talking about stores and CAPEX. Wagner, if you want, please complement me, but we are very dedicated here to the growth of this retail arm within the Company. It is something that is a priority within the Company.

In fact, we already have nine stores. In fact, in December we opened our fourth Under Armor outlet store in Brazil, at Shopping Guarulhos. It is working very well; in fact, it has surprised us in terms of sales. And our decision here is to bring Under Armor mono-brand concept stores to Brazil.

We are now developing our business plan, we are setting up a team, we are studying the market, how we are going to bring this arm into the Company. I want to make it very clear, Vulcabrás is a vertical brand management, an industry with a great competitive advantage that works very well. I'm not going to take this structure to start looking after retail.

We were not experts in e-commerce, but we created a dedicated e-commerce area within the Company, we hired, people have their autonomy, and today we even consider ourselves a great e-commerce specialist, because it has worked very well . It's already rising from 10%, it's going to 12% of our revenue.

So, we want to create this retail arm because there is a huge lack of channels to sell clothes, and 80% of Under Armour's sales worldwide are clothes and accessories.

So, we see that most sporting goods are sold in shoe stores, which do not sell clothes, or specialized stores, and many of them only sell sneakers. So, there is a huge growth opportunity for Under Armour, but it will depend on the channel.

That's why we want to open the stores. We are going to open a few stores at the beginning to smooth out the operation, and we believe in franchising, then franchise them and create a chain of stores. So, CAPEX will not be relevant because of this.

Wagner, please complement me.

Wagner Dantas:

If I can complement Pedro's answer, what we have built in terms of evolution of our results in recent years comes largely through complementarity and capturing synergies. So, it's also a little bit about how we see this possibility of opening this physical retail arm, monobrand Under Armour stores, stores that will boost the sale of a category in which we currently have difficulty through current distribution, the characteristics of Brazilian sports retail.

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