CONFERENCE CALL. (only in Portuguese) Date: November 14 th, at 5 pm BRT/ 2 pm US ET/ 7 pm London. Phone: Dial-in Brazil:

Transcription

1 CONFERENCE CALL (only in Portuguese) Date: November 14 th, 2017 at 5 pm BRT/ 2 pm US ET/ 7 pm London Phone: Dial-in Brazil: Code: Alpargatas Presentation: Speakers: Márcio Utsch CEO Fabio Leite CFO fabiols@alpargatas.com.br jsalvio@alpargatas.com.br mweger@alpargatas.com.br pbueno@alpargatas.com.br 1

2 1. PERFORMANCE SUMMARY FOR THE THIRD QUARTER OF 2017 R$ million 3Q17 3Q16 Var. 3Q 9M17 9M16 Var. 9M NET REVENUE % 2, , % BRAZIL % 1, , % SANDALS INTERNATIONAL % % ARGENTINA % % GROSS PROFIT % 1, , % Gross margin 43.5% 42.6% 0.9 pp 44.1% 45.0% -0.9 pp BRAZIL % % Margin 46.0% 43.8% 2.2 pp 43.5% 42.9% 0.6 pp SANDALS INTERNATIONAL % % Margin 67.2% 66.6% 0.6 pp 66.6% 69.8% -3.2 pp ARGENTINA % % Margin 19.0% 24.7% -5.7 pp 22.3% 28.2% -5.9 pp EBITDA % % EBITDA margin 11.5% 13.0% -1.5 pp 16.4% 14.4% 2.0 pp BRAZIL % % Margin 14.7% 15.2% -0.5 pp 20.0% 12.2% 7.8 pp SANDALS INTERNATIONAL n.a % Margin -0.7% 4.5% -5.2 pp 18.3% 23.5% -5.2 pp ARGENTINA % % Margin 6.4% 10.4% -4.0 pp 3.2% 12.4% -9.2 pp CONSOLIDATED NET INCOME (FROM CONTINUING OPERATIONS) % % Net margin 7.5% 8.5% -1.0 pp 11.7% 8.7% 3.0 pp In the third quarter of 2017, Alpargatas initiated the recovery of its results, with some indicators outperforming those of the first quarters of the year. From July to September 2017, company performance was better in Brazil than in the international operations. In the domestic market, net revenue was slightly lower than in 3Q16 (-1.1%), in spite of revenue growth for Mizuno and Osklen. The reason was the drop in Sandals business revenue, where the increase in average price did not offset the lower volume. On the other hand, gross margin in Brazil increased by 2.2 percentage points, with higher profitability for Havaianas and Mizuno. The cost reduction and expenditure contention programs continued to generate positive results. The gain in gross margin and greater productivity in operating expenses benefited EBITDA margin in the domestic market. However, it did not exceed 3Q16, due to an increase in other non recurrent expenses, principally the provision for expenditures related to the exchange in controlling stockholders. In Sandals International, the higher average price of exported products offset the lower volume and Export revenue in dollars grew in comparison with 3Q16. In contrast, revenues in dollars and euros decreased in the United States and the EMEA region. The evolution in Export profitability drove growth in gross margin in Sandals International. This gain did not offset the lower SG&A productivity, reducing EBITDA margin in this business in 3Q17. In Argentina, Topper footwear continued to face competition from imported products, compromising sales volume. 2

3 The increase in average prices was enough to increase revenue in pesos, but at a lower percentage than annual inflation. Gross margin diminished as a result of increased production costs, as did EBITDA margin. The variations in the main consolidated indicators in comparison with 3Q16 were: Net revenue: R$ million, a 3.2% drop. Gross profit: R$ million, a decrease of 1.1%. At 43.5%, gross margin grew 0.9 p.p. EBITDA: R$ million, 14.9% lower, with an 11.5% margin. Net income: R$ 71.3 million, 15.6% lower, with a margin of 7.5%. Operating cash generation: R$ million in the 12 months ending on September 30, Appreciation of preferred shares from January to September: 60.0%. Shareholder compensation in the year: R$ million. Since 2Q17, Alpargatas has disclosed its results indicators excluding the sales cut-off effect (goods invoiced but not yet delivered) so that the capital market may track performance without this effect. It should be noted that with this criterion, the main result indicators advanced in the quarter. Pro forma (without sales cut off) R$ million 3Q17 3Q16 Var. 3Q Net Revenue 1, , % Gross Profit % Gross Margin 44.6% 42.5% 2.1 pp EBITDA % EBITDA Margin 14.3% 13.3% 1.0 pp Consolidated Net Income % Net Margin 10.6% 9.0% 1.6 pp On September 20, the sale of a controlling stake to Itaúsa Investimentos Itaú S.A., Cambuhy I Fundo de Investimento em Participações Multiestratégia and Cambuhy Alpa Holding S.A was concluded. On the same date, the Board Members who will represent the new controlling shareholders were elected in an extraordinary general shareholders meeting. An Alpargatas S.A. shareholder agreement was also signed. In a meeting of the Board of Directors on October 6, Mr. Pedro Moreira Salles was elected Chairman of the Board of Directors and the Finance, People and Strategy Committees were established. In an another extraordinary general shareholders meeting held on November 1 the creation of a permanent statutory Audit Committee and the reformulation of the company s bylaws were approved. 3

4 2. RESULT OF OPERATIONS 2.1. SALES VOLUME Sandals and Havaianas Extension Products As commented in the second quarter report, with the successful launch of the 2017/18 sandals collection, favorable seasonal factors, low stock levels at major clients and the implementation of marketing measures, the company was expecting the resumption of Havaianas and Dupé sell-in growth from the second quarter. The 5.7% decrease in the volume sold in the domestic market (-2.0% without the cut-off effect) countered this expectation due to the delay in the expected recovery. In July, volume was still lower compared with the same month in 2016; however, volume growth accumulated in August and September was already 3.9% higher. In the overseas market, the lower sandals volume is explained by: United States: planned reduction in volume sold to the off-price channel and a significant drop in volume in the Havaianas stores and the independent retail trade due to hurricane Irma. The Havaianas stores in Thousand pairs/pieces 3Q17 3Q16 Var. 3Q 9M17 9M16 r. Var. 9M Miami, Disneyworld and Key West remained closed for a number of days. EMEA: the third quarter accounts for 12% of the region s annual sales volume being a period of lower volume most of it commercialized via Havaianas stores. Some countries, especially England, France and Germany had adverse weather conditions during the quarter compromising the performance of sandals retailing. Exports: suspension of exports to Colombia, due to the transition to a new operating model which is being implemented in the country. Sporting Goods and Textiles SANDALS 58,347 62, % 145, , % DOMESTIC MARKET 53,782 57, % 122, , % INTERNATIONAL MARKETS 4,565 5, % 23,174 22, % NON-SANDALS PRODUCTS % 1,443 1, % DOMESTIC MARKET % 864 1, % INTERNATIONAL MARKETS % % TOTAL 58,840 62, % 146, , % DOMESTIC MARKET 54,143 57, % 123, , % INTERNATIONAL MARKETS 4,697 5, % 23,753 22, % Thousand pairs/pieces 3Q17 3Q16 Var. 3Q 9M17 9M16 Var. 9M FOOTWEAR 2,582 2, % 6,859 6, % BRAZIL 1, % 3,060 2, % ARGENTINA 1,369 1, % 3,799 4, % APPAREL % 2,123 2, % BRAZIL % 891 1, % ARGENTINA % 1,232 1, % TOTAL 3,317 3, % 8,982 9, % BRAZIL 1,516 1, % 3,951 4, % ARGENTINA 1,801 1, % 5,031 5, % TEXTILE (km) 3Q17 3Q16 Var. 3Q 9M17 9M16 Var. 9M ARGENTINA 4,045 4, % 10,544 13, % 4

5 Mizuno increased its footwear sales because of the higher offer of basic and intermediate line products which are being manufactured/assembled in Brazil. Sales of the performance and infinity lines also grew. There was a drop in sports apparel volume as a result of the strategy of increasing the presence of higher added value articles in the portfolio, while reducing the number of products on offer. In Argentina, sports footwear sales were lower because imports has enabled the commercialization of imported products at lower prices than those manufactured locally. The decrease in volume was compounded by the growth in the number of points of sale for competing brands of Topper, which have boosted their presence in small footwear chains in the country. In Textiles, volume was lower due to higher stock levels at distributors and to decreased purchases by apparel manufacturers, as a result of higher import volumes. Osklen Thousand pairs/pieces 3Q17 3Q16 Var. 3Q 9M17 9M16 Var. 9M (footwear, apparel and accessories) % 1,074 1, % Osklen volume was higher, driven by 50.0% growth in sales to the multibrand channel and a 25.5% increase in e-commerce. Anticipating the summer collection launch calendar helped drive the strong performance in the retail channel NET REVENUE R$ million 3Q17 3Q16 Var. 3Q 9M17 9M16 Var. 9M NET REVENUE % 2, , % BRAZIL % 1, , % SANDALS INTERNATIONAL % % ARGENTINA % % In spite of the increase in Mizuno and Osklen revenues driven by higher volumes, net revenue in Brazil was slightly lower than in 3Q16, due to the decrease in Sandals business revenue, where the 3.2% higher average price (sandals + Havaianas brand extension products) did not offset the lower volume. In Sandals International, higher average prices in the United States (17.0%) and in the EMEA region (2.0%) were not enough to offset the decrease in volumes, resulting in a decrease in revenue in local currencies. In Exports, even with the lower volume, revenue in dollars grew due to a country mix with a higher average price and price increases in diverse markets. The 2.6% appreciation of the real against the dollar (compared with 3Q16) contributed to the reduction of International Sandals revenue in reais. 5

6 CHANGE IN NET REVENUE 3Q17 x 3Q16 9M17 x 9M16 EMEA - euro -3.2% 7.2% USA - dollar -5.1% -0.9% Exports - dollar 1.8% 14.4% In Argentina, the increases in the average prices of footwear and textiles offset the decreases in volumes, driving a 5.2% increase in revenue in pesos, worthy of note being the strong performance in retail, with a 27.0% revenue increase. In reais, revenue was lower because of the 15.7% appreciation of the real against the peso (compared with 3Q16). The Footwear business accounted for 67.0% of revenue in 3Q17 (66.0% in 3Q16), with Textiles corresponding to 33.0% (34.0% in 3Q16). STORES 09/30/17 09/30/16 FRANCHISES OWN TOTAL FRANCHISES OWN TOTAL During the quarter, the variations in Alpargatas retail revenues on a same store basis were: Havaianas (franchises in Brazil): -4.0%, driven mainly by weaker sales in Rio de Janeiro, where there is a large concentration of stores and where the market has suffered from a decrease in income and a reduction in the flow of tourists. Osklen: 2.0%, due to the anticipation of the launch of the summer collection in the stores and improved consumption in some markets, such as São Paulo GROSS PROFIT HAVAIANAS Brazil Overseas OSKLEN Brazil Overseas TOPPER ARGENTINA OUTLETS Brazil Overseas TOTAL R$ million 3Q17 3Q16 Var. 3Q 9M17 9M16 Var. 9M GROSS PROFIT % 1, , % Gross margin 43.5% 42.6% 0.9 pp 44.1% 45.0% -0.9 pp BRAZIL % % Margin 46.0% 43.8% 2.2 pp 43.5% 42.9% 0.6 pp SANDALS INTERNATIONAL % % Margin 67.2% 66.6% 0.6 pp 66.6% 69.8% -3.2 pp ARGENTINA % % Margin 19.0% 24.7% -5.7 pp 22.3% 28.2% -5.9 pp In Brazil, gross margin was higher, driven by: Increase in Havaianas gross profitability, due to: (i) the positive impact on costs of the industrial changes, such as the internalization of the rubber injection process; and (ii) the increase in average prices. Growth in Mizuno gross margin, due to the exchange rate (impact on imported products) and switching production to Brazil. Osklen s increased share in revenues the business has a high gross margin. 6

7 In Sandals International, gross margin was slightly higher due to the increase in Export margin. In Argentina, the lower dilution of fixed costs, driven by lower production and higher raw material prices, in particular cotton (50.0%) increased footwear and textile production costs at a higher rate than the increase in the respective average prices in pesos, resulting in a loss in gross margin EBITDA R$ million 3Q17 3Q16 Var. 3Q 9M17 9M16 Var. 9M EBITDA % % EBITDA margin 11.5% 13.0% -1.5 pp 16.4% 14.4% 2.0 pp BRAZIL % % Margin 14.7% 15.2% -0.5 pp 20.0% 12.2% 7.8 pp SANDALS INTERNATIONAL n.a % Margin -0.7% 4.5% -5.2 pp 18.3% 23.5% -5.2 pp ARGENTINA % % Margin 6.4% 10.4% -4.0 pp 3.2% 12.4% -9.2 pp In Brazil, growth in gross margin and higher productivity in commercial, general and administrative expenses the expenditure contention plan drove a 5.0% reduction in this group of expenses in the quarter benefited EBITDA margin. However, the increase in other operating expenses, such as for example the provision for non recurrent expenses with the change in stock ownership, impacted EBITDA and reduced margin. In Sandals International, the gain in gross margin did not offset the lower SG&A productivity, which was higher in the United States, due to marketing investment, and in Europe, because of the increase in the number of own stores. In Argentina, higher operating expense productivity helped attenuate the loss in EBITDA margin, which was lower than gross margin. From this year, Alpargatas has started reporting consolidated EBITDA as shown in the following table, no longer adjusting it for other extraordinary revenue (expenses). The amounts for 2016 follow the same criterion. R$ million 3Q17 3Q16 9M17 9M16 (=) Consolidated Net Income Payment of taxes Financial Result Depreciation and Amortization Result from Discontinued Operations (=) EBITDA The table below demonstrates the balance of other extraordinary revenues (expenses) with adjustments to the classifications in the 1Q17 and 2Q17 reports. In 3Q17, as mentioned previously, the main extraordinary expense in Brazil was the provision made for the change in stock ownership. In Argentina, the main extraordinary expense was labor indemnities resulting from the restructuring. R$ million 1Q17 2Q17 3Q17 9M17 1Q16 2Q16 3Q16 9M16 Other non recurring revenues (expenses) Brazil Argentina

8 2.5. NET INCOME R$ million 3Q17 3Q16 Var. 3Q 9M17 9M16 Var. 9M CONSOLIDATED NET INCOME % % Net margin 7.5% 8.6% -1.1 pp 11.7% 8.6% 3.1 pp Consolidated net income in the quarter totaled R$ 71.3 million, with a margin of 7.5%. The earnings per share in the nine month period ending on September 30, 2017 was R$ 0.68, compared with R$ 0.56 for the same period of the previous year. The most significant variations in net income were: - R$ 19.1 million in EBITDA, impacted by the variation of R$ 20.9 million in the provision for expenses with the change in ownership (R$ 17.0 million in 3Q17 and reversal of R$ 3.9 million in 3Q16). + R$ 14,0 million in income tax. The tax loss in the quarter generated an income tax credit, compared with a debit in 3Q16. - R$ 2.1 million in the financial result. The gain from the decrease in interest on loans was less than the loss from financial investments (lower interest rates as well as average cash volume invested). - R$ 6.5 million increase in expenses from the exchange variation related to financial assets and liabilities. CONSOLIDATED NET INCOME (CONTINUING OPERATIONS) Quarterly variation (R$ million) (19.1) (2.1) (6.5) Net income 3Q16 EBITDA Income taxes Financial result Exchange rate Other Net income 3Q17 8.6% Margins (%\ of net revenue) 7.5% 2.6. NET FINANCIAL POSITION On June 30, 2017, Alpargatas had a negative net financial position of R$ million, resulting from a cash balance of R$ million (operating generation totaled R$ million in the year) and indebtedness of R$ million due in the short-term, R$ million of which in Brazilian currency. In this quarter, total longterm debt was temporarily reclassified as short-term while the company awaits approval of the change in stock ownership from the BNDES and BNB Banco do Nordeste do Brasil. 8

9 Net financial position 09/30/2016 EBITDA Items with no impact on cash Working capital CAPEX Financial Result Payment of taxes Exchange rate NFP before payment to shareholders Payment to shareholders Net financial position 09/30/2017 Operating cash generation of R$ million Net Financial Position POSIÇÃO(R$ FINANCEIRA million) LÍQUIDA (R$ milhões) (193.8) (50.2) (128.8) (38.6) (43.4) (121.8) (200.2) (192.2) 3. CAPITAL MARKET AND SHAREHOLDER COMPENSATION On September 30, 2017, Alpargatas preferred shares (ALPA4) were quoted at R$ and its common shares (ALPA3) at R$ 14.15, respectively 60.0% and 62.4% higher than on December 31, From January to September, Ibovespa appreciated by 23.4%. At the end of the third quarter, Alpargatas s market cap on the B3 index was R$ 7.01 billion, 59.1% higher than at the end of The average daily trading volume for ALPA4 in the quarter was R$ 9.5 million, 63.8% higher than the average volume traded in 3Q16. In a meeting held on November 13, 2017, the Board of Directors decided to antecipate a R$ 38.2 million payment of interest on own equity, to be paid out on December 13, Added to the R$ million already paid in the year, Alpargatas shareholder compensation now totals R$ million in ***************************** 9

10 BALANCE SHEET (in thousand reais) ASSETS 09/30/ /30/2016 LIABILITIES 09/30/ /30/2016 Current assets 2,095,033 2,179,017 Current liabilities 1,079, ,342 Cash and banks 142, ,577 Suppliers 344, ,325 Tempory cash investment 228, ,220 Loans and financing 399, ,734 Trade accounts receivable (net of provisions) 792, ,209 Debt reestructuring agreements 4,371 6,559 Inventories 776, ,994 Payroll and related charges 156, ,868 Other receivables 42,527 50,593 Reserve for contingencies 16,623 13,637 Prepaid expenses 26,052 21,017 Provision for income and social contribuition taxes 21,414 39,791 Assets held for sale - - Taxes payable 21,312 31,377 Other assets - - Interest on capital and dividends payable 4,784 31,731 Recoverable taxes 87,493 96,843 Other payable liabilities 110,578 95,418 Assets from discontinued operations - 65,564 Liabilities on assets from discontinued operations - 7,902 Long-term assets 191, ,717 Long-term liabilities 303, ,823 Recoverable taxes 50,054 15,532 Loans and financing 163, ,858 Deferred income and social contribuition taxes 68,576 76,179 Debt reestructuring agreements 19,959 25,200 Escrow deposits 22,594 22,286 Provision for taxes - 193,051 Other receivables 50,224 32,720 Taxes Installments - - Provision for income and social contribuition taxes 56,331 66,705 Reserve for contingencies 38,363 25,462 Other payable 26,133 11,547 Permanent Assets 1,353,981 1,364,486 Shareholders' equity 2,256,780 2,041,055 Investments 1,658 2,634 Capital 648, ,497 Property, plant and equipment 721, ,000 Capital reserves 172, ,542 Intangible 630, ,852 Treasury shares (64,248) (64,248) Profit reserves 1,569,188 1,315,725 Equity assessment (149,529) (128,440) Hedge operation - - Additional dividend - - Minority interest 80,073 85,979 TOTAL ASSETS 3,640,462 3,690,220 TOTAL LIABILITIES 3,640,462 3,690,220 Book value per share (R$)

11 INCOME STATEMENT (in thousands of Brazilian reais) 3Q17 3Q16 9M17 9M16 Net Sales 951, ,832 2,618,213 2,988,493 Cost of sales (537,023) (564,244) (1,462,476) (1,643,322) Gross Profit 414, ,588 1,155,737 1,345,171 gross margin 43.5% 42.6% 44.1% 45.0% Operating Income (Expenses) (329,017) (315,538) (798,190) (993,426) Selling (256,347) (234,117) (754,162) (732,963) General and administrative (41,573) (66,346) (146,369) (195,192) Management fees (3,976) (3,768) (10,699) (12,928) Amortization of intangible charges (6,272) (8,195) (20,230) (25,483) Other operating Income (expenses), net (20,849) (3,112) 133,270 (26,860) EBIT - Operating Results 85, , , ,745 operating margin 8.9% 10.5% 13.7% 11.8% Financial Result (16,192) (14,052) (41,097) (49,471) Exchange variation (9,126) (2,612) (14,989) (19,831) Operating Income 59,811 86, , ,443 Income and social contribution taxes 11,496 (2,501) 5,702 (23,455) Net Income from continuing operations 71,307 83, , ,988 Net result from discontinued operations (1,674) (3,138) Consolidated net income 71,307 84, , ,850 Net Income from controlling shareholder 73,318 85, , ,349 Minority Interest (2,011) (791) (9,652) (5,499) EBITDA - R$ million EBITDA margin 11.5% 13.0% 16.4% 14.4% 11

12 CASH FLOW (in thousand reais) CASH FLOW FROM OPERATING ACTIVITIES 09/30/ /30/2016 Cash from operating activities 291, ,025 Net income for the period 307, ,988 Depreciation and amortization 71,985 78,352 Income (loss) from disposal/derecognition of property, plant and equips. 11,766 2,161 Equity pickup 0 0 Interest and Monetary and foreign exchange variation 34,743 53,804 Provisions for tax, civil contingencies and labor claims 15,173 14,681 Deferred income and social contribuition taxes -2,104-24,651 Suspended taxes payments -198,624 0 Allowance (reversal of) for doubtful accounts 17,756 6,687 Provision for (reversal of) inventory losses 9,042 8,333 Amortization of charges on loans and financing -37,742-32,513 Unrealized gains/losses on derivative transactions ,291 Gain/loss in operation with derivatives 0 0 Stock option plan granted 0 0 Remeasurement adjustment - 1st acquisition Osklen 146-2,052 From sale of Real property 0 0 Provision for Impairment of property, plant and equipment/intangible assets 11,425 0 Remeasurement od asset for sale 0 0 Net cash spent in discontinued operations 51,251-18,056 Changes in assets and liabilities -211, ,312 Trade accounts receivable 78,153-7,690 Inventories -181, ,614 Prepaid expenses -14,666-8,049 Taxes recoverable -59,479-3,054 Trade accounts payable -61,919-10,638 Taxes payable ,929 Payroll and social charges -1,180 31,761 Payment of income and social contribuition taxes -28,346-22,123 Other 57,349-39,834 NET CASH - OPERATING ACTIVITIES 80, ,713 12

13 CASH FLOW FROM INVESTING ACTIVITIES 09/30/ /30/2016 Acquisition of property, plant and equipment and intangible assets -80,223-60,555 Short-term investments -32,520 22,680 Redemption of Financial Investments 115,343 0 Receivable from sale of permanent assets 0 3,786 Acquisition of Investments 0 0 Initial Cash Balance of controlled company 0 0 NET CASH - INVESTING ACTIVITIES 2,600-34,089 CASH FLOW FROM FINANCING ACTIVITIES Loans and financing raised 174, ,555 Amortization loans and financing - Principal -195, ,341 Payment of dividends and interest on equity -111,547-43,150 Amortization through debt restructuring of subsidiary -4,946-8,585 Acquisition shares to be held in treasury, net 0 23,890 NET CASH - FINANCING ACTIVITIES -137, ,631 Exchange gains (losses) on cash and cash equivalents 1,427-38,124 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -52,836-75,131 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 391, ,926 CASH AND CASH EQUIVALENTS AT END OF PERIOD 338, ,795 13