Grendene S.A. (GRND3) Earnings Call Transcript

Good morning, everyone, and thank you for your patience. Welcome to the video conference for the release of the second quarter of 2026 of Grendene S.A. [Operator Instructions] Please note that this video conference is being recorded and will be made available on the company's Investor Relations website, ri.grendene.com.br, where the full earnings release material can be accessed. The presentation is also available for download via the chat icon including in English. [Operator Instructions] We 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 is 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 results and 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 as well as the company's key managers. I will now give the floor to Mr. Alceu de Albuquerque. Please, Mr. Alceu, you can go ahead.

Good morning. Thank you, everybody, for your presence. In our video conference to disseminate the results of the second quarter of '26 and the first half of the year. The quarter was marked by an environment of a challenge in consumer. In this environment, we try to preserve the profitability -- operating profitability of the business and cash generation. We have observed signs of recovery, a gradual recovery of our lines in the domestic market, it remained with a very selective consumption because of this very challenging environment because of the high indebtedness levels of the population and the high inflation rates influencing low-income people. Added to that, population, especially the low-income population, they have less money on their pockets for consume and especially to buy nonessential items such as footwear. This environment created a more selective consumer trying to make purchases in the more accessible categories. In the international market, we continue growing in volume, focused a lot more in Latin America that supported the shipping for international markets. We try to preserve our profitability. Gross margins are stable, positively impacted by raw materials that have compensated the pressure of labor and a mix of commercial products that are more accessible. Also, we continued very rigorous with our operating expenses in this control. Our net income had a drop, especially pressured by lower financial results because of the extraordinary distribution of dividends that happened in the last year -- in the end of last year that our net cash flow had a significant reduction. Still, we kept a very robust cash position with BRL 1.5 billion in net cash. Having said that, in the second quarter, the volume was up 26.8%, a decrease of 0.9%. This decrease is concentrated in the domestic market, where we noticed the volume decrease, 1.9%, while in the international market, we observed a growth of 4.8%, focused highly on the region of Latin America and concentrating almost all of our shipments. The gross revenue decreases 3.2%, reaching BRL 731.8 million. Net income has a smaller decrease of 0.4%. The markets have behaved, the domestic and the international one, there was a retraction of 5%, while in the international market, we observed a growth of 2.3%. The gross profit grew 0.6%, and it was supported by the good behavior of raw material, good performance that have compensated the labor in COGS, as I'm going to mention in a while. Gross margin reached 48.2% and 4 pp. Adjusted EBIT decreased 48.6%, BRL 95.3 million with a margin of 3.3%, a decrease of 2.2 pp. It was adjusted by the GGB numbers. Excluding GGB numbers, we have this decrease of 2.8 pp in our gross margin and the adjusted net income decreases 48.6% for BRL 95.3 million impacted by the financial results, especially because of the high distribution of dividends on the quarter. The net margin recurring one is a retraction of 17.5 pp. Now going into the detail of every single market. If we observe the domestic market, Division 1, all the brands, except for Melissa are in the Division 1. In the domestic market, we observe a consumer that's more selective, concentrating a demand in more accessible categories and channels that circulate more money like self-service, direct and indirect channels. They are our distributors and wholesalers that buy our products to sell to smaller markets in neighborhoods. So the gross revenue of the brands decreased 7.5%, especially impacted by the revenue per pair because of the commercialization of demand of product with lower prices. The volume have decreased retraction, minus 1.8% revenue per pair minus 5.8%. The highlight is the growth of 15.7% in the e-commerce of -- with the online -- Division 1 online brands. When we see the dynamics of selling and sell-out, we observe a scenario that is more important than the -- higher than the sell-in, indicating more cautious in the reposition of inventories, recomposing inventories for the future. As I mentioned before, the more accessible categories and the channels with more circulation, they have better performance inside the brands of Division 1 in Ipanema with the men's segment with Rider, Cartago and the boot segments. They are the ones that led the growth. We had -- they led the growth in the second quarter with products with more value added. These products have a more challenging scenario. I'm talking about Melissa. Melissa grew in revenue 2.6%. Volume decreased 3.2%. We observed that as revenue grows, volume decreases, we have a revenue per pair of 6.0% growth. We could keep our premium positioning and our capability of selling products with more added value even in this challenging environment. Online Melissa sales GMV that take into consideration sales done by Grendene and by our franchises using our online platform, they grew 6.9%. Then observing this dynamic of the sell-in and sell-out of Melissa, we can notice that the sell-in and sell-out have similar behaviors, indicating a balance between high-end consumer and the repositioning in the retailers. In the second quarter, we had the World Cup where we could observe a significant reduction in the flow in the Melissa Clubs, the stores during the World Cup. As I mentioned before, e-commerce had a very positive performance, compensating for the less flow in the physical, the brick-and-mortar stores. While the sell-in just accompany the increase of the sell-out. We started the second quarter with 438 franchises when compared to 419 in 2025. In the international market, Latin America just supported the shipping growth. We have positive KPIs of gross revenue in dollars and reais. So gross revenue increased 2.3%. When we look in dollars, it was 14.8% and the volume grew 4.8%. It was supported by the shipping to Latin America and what we could observe in the international market, an environment, a challenging one, marked by regional conflicts, exchange rates and our international distributors also were very careful with their inventories. The growth is concentrated in Latin America because of the conflict -- regional conflicts, we can see a lot of the logistics disruption. And the improvement -- the growth in international freight costs and then started with the online sales, the digital channel combined growth with higher profitability and share gains in the domestic sales, GMV grew 12.1%. Volume per pair growth 4.1%, even with a decrease of 14% in volume of sessions gross margin grew 2.2 pp, reaching 71.3%, while recurring EBIT in the online channel grew 10.8%, going up to BRL 1.4 million. The general shares of our online sales in the domestic market on total sales, 6.3% when compared to 5.3% in the second quarter of 2025. When we isolate Melissa, the online sales represents 18.2% of everything we sell in the domestic market. Here, we are showing what impacted the gross revenue from BRL 756.2 million to BRL 731.8 million is a decrease of 23%. The volume reduced our internal revenue and impacted negatively our gross revenue in BRL 17.5 million. Volume, price and mix. Volume adds BRL 8.7 million, while price and mix, they added BRL 18.4 million. The exchange rate, the average was BRL 5.4 compared to BRL 5.65 last year in the second quarter. It reduced -- decreased our gross revenue in BRL 23 million. Now starting with our COGS. The reduction of our -- the costs in our raw materials was the main reason for our growth in gross margin, which went -- we had an increasing 0.4 pp. When we observe the factors that compose our COGS, as I mentioned before, raw materials that went up from 23%, and it's representing now 22.3%. It's a gain of 1 percentage point, while labor is -- the share was 0.2 pp and this increase in labor reflects basically the payroll. Since last year, we have been observing the payroll costs. With the commercialization of products that are more accessible, we have a dilution of our fixed costs. Also, we have an increased complexity of products sold. Even though they are more accessible, we observed a more complexity in the production of models. Looking to our operational expenses, total ones, I include the [ GGD ] and I include the results as well. When we invest through a bonus and then you have other costs. When I consider the total expenses, 9.7% and when we do the adjustment recurrent, the operational recurring remained practically stable with a growth of 1.5%, which is below the inflation. Now total commercial is 2.4%. When I consider the expenses, recurring expenses of GGB, I have a growth of 1.8%. Now the administrative and general expenses total once they dropped 14.1%. When I exclude GGB data, I have 1.2% of growth. When we look to the commercial -- total commercial expenses and the total administrative expenses, we have retractions of the expense. When I exclude the GGB, we have a growth because this shows the work that was -- restructuring that we did in the structure of [ GGD, ] where we had significant reduction of the operational structure of the company. Here, we can see a graph that shows the impact of our EBIT. Here in the left part, we have the EBIT in the second quarter 2025. It was BRL 42.5 million. For the second quarter, it went for BRL 9.7 million. Here, we see that the net income brought a negative inflow of BRL 2.4 million and the negative impact of BRL 58 million. As I mentioned, we have in real estate investment around BRL 1 billion. Basically, the instrument that we use are either these COGS or holdings. When the investments are done in holdings, the return impacts. So in the second quarter, we had several projects launching and how does the accounting part -- the booking part work through holdings. When we do the investment until a project is launched, we then carry this investment for the value of the main value. When the project is launched, all the profitability is seen during the launching. Last year, we had several projects launching that had the -- they had retained profitability that was seen in the second quarter. This year, we did not have the launching. So we have a profitability, a retained profitability to be recognized because there was no launchings of the referred project. All the other items, variation of IOE -- sorry, COGS, they helped us to have a positive EBIT. When I do the reconciliation of accounting EBIT with BRL 9.7 million for the adjusted EBIT, we have BRL 6 million of recurring expenses in the second quarter of 2026, basically regarding to the GGB, basically referring to operational GGB plus BRL 2 million, which is the inventory for GGB. Here, you see the financial results. As I mentioned, we had a reduction of the result of 34%. This reduction is explained because of the low balance invested, 47% that was invested. We had BRL 9 billion invested. In the second quarter, we had around BRL 6 billion. This was because of the payment of dividends throughout this first quarter. Then we do the adjustments, the real estate project that we launched in the past, I then bring BRL 50 million inside our financial results. This result is part of the remuneration of the cash flow and not of the operation. When I do this adjustment, our adjusted financial results has a reduction of almost 61%. We have around BRL 1 billion invested in our real estate investment projects. Since its launch, it has retained profitability of 27% of the CDI. We go more objectively in the first quarter results that are very similar to what we observed in terms of the behavior of the second quarter. The volume grew 0.3%, reaching [ 52.5% ] in pairs, the international market had a retraction and the domestic market growth in 3%. Gross revenue drops then and the retraction we see both in the international market and in the domestic market that reduced 3%. The gross profit reduced 6.5%, reaching almost BRL 465 million with a gross margin with a retraction of 1.7%. Adjusted EBIT reached BRL 74.8 million with a retraction of 41% with a recurring EBIT margin of 7.6%, a retraction of 4.7%. Our adjusted net profit reached BRL 217.4 million, very much impacted by the reduction of the average balance with a retraction of 2.3%. Here, the items that impacted our revenue the internal market and the gross revenue, the mix, which is more accessible, it reduces our gross income. Also we see the -- while the mix price added BRL 65 million in gross revenue. There was a reduction of gross revenue in BRL 42 million because of the 10.5% of the value. Our COGS, we had 1.7%. Raw material is helping the gross margin with a lower intensity as we observed in the second quarter. Representativeness of raw material on the net income went 22%. Labor in the first quarter as observed in the second quarter, it represents 1.6% above the net income when compared to the second quarter. The impact of labor and also the remuneration of the payroll and a better dilution of costs because of the commercialization of the portfolio of items that are more feasible. So we have a lower dilution of the cost of labor. Our total operational expenses grew 2.4%, being that commercial expenses 5.4% and also general and administrative expenses reduced 6%. When we exclude the GGD, the total expenses, they grew 0.3% under the inflation of that period. Administrative and general expenses then reduced 6%. When we consider total expense grew 1.9% when we exclude GGB data. Once again, the same comment about the second quarter, this reduction. When we look to the total with a slight increase under the inflation when we see extra expense of GGB shows the strong work that we do to reduce the operational structure of GGB in the past. Here, once again, the graph shows that what impacted our EBIT in the first quarter. Here in the first quarter, the explanation regarding the equity for real estate investment is the same for the period of the first quarter. As we saw in this second quarter, like the first quarter, for example, COGS, commercial and administrative expenses and others, they have added EBIT to Grendene. When we consider the accounting adjusted EBIT, we had BRL 3.5 million of nonrecurrent expenses. The main components here are seen over foreign income that was an agreement that we did with the IRS because of the new understanding of the incidence of CIDE over the payment of the license abroad, and we had the results of the GGB in this first quarter. The financial result very similar to the first semester, similar to the second with the average balance, which is 32.5% under. In the second quarter, it was BRL 58 million. Now the adjusted is BRL 56 million of financial result that impact our EBIT. We do then an adjustment for the financial results because this reflects the remuneration of our cash flow and is not part of the operation. Lastly, the result, the retained result of the semester was BRL 191 million. When we take away the reserves, we have BRL 3 million for the calculation of legal reserves. Now we have to distribute BRL 114.3 million. As we have distributed BRL 55.7 million in the first quarter, now in the second quarter we still have to distribute BRL 58.6 million. How will they be distributed? Well, BRL 28.6 million will be distributed because of dividends and almost BRL 30 million gross or BRL 24.7 million net through the IOE, which considers the 17.5% of the net value. This will be paid for the shareholders that have shares on the 23rd of August. So this share ex dividend on the 24th of the 8th. This is what I had to present regarding the figures of the second and first semester of the year.

[Operator Instructions] Let's go to our first question, is from Julius Caesar. First, the EBIT margin adjusted 3% on the second quarter of '26. What do you consider a connection with mix, discounts and fixed prices? The second question on the quarter, they were generating BRL 333 million in operating cash and accounts receivable, what would be the cash generation and working capital today? Sorry, it was just too fast.

Thank you for your question, Julio. The first question in relation to the EBIT margin, it was basically impacted by the commercialization of more accessible mix of products. In this scenario, in this environment, the macroeconomic environment that's highly challenged, we observed a demand for more accessible products or goods and that impacted the EBIT margins with less dilution. Then remember, reminding that the second quarter is always our quarter with less value because of the seasonality is the quarter with less value where we have less dilution of our costs. Then for the second half, third and fourth quarters, we will have a recovery of margins, and we will commercialize items with more added value. In relation to the cash generation, as I mentioned before, our business is highly seasonal. On the second quarter, we have -- it represents 60%, 70% of our sales. We always have to compare the cash generation of the quarter with the same quarter of the previous year. So we don't have an alteration, a change in the composition of our working capital components, accounts payable or accounts receivable. I don't see a different dynamic than the previous years.

Our next question is from Bruno Loureiro. Grendene has a solid history of cash generation, but we noticed that the dependence of the domestic market is exposing the revenue to macroeconomic local consequences we operate. What's the strategic barrier so we don't use the idle capacity and for a more robust international capacity? Secondly, in relation to the line of products, the portfolio is focused always on the same categories. Is there a study to diversify for new segments and materials to avoid market share stagnation and to attract new consumers. Lastly, observing the capital structure and productive capacity of Grendene, I would like to see -- to know the vision of the directors of the executive officers of the future expansion for new markets internationally as a way to reduce dependence on domestic market. Besides that, what stops Grendene from expanding and diversifying its portfolio, trying to find new sources of revenue and value added just like Vulcabras and Alpargatas are doing?