Springs Global Participacoes SA

BOVESPA:SGPS3

Earnings Call Transcript

[Operator]

[Interpreted] Ladies and gentlemen, thank you for waiting. Welcome to the Spring's Global Conference Call to discuss the Earnings Of the Second Quarter of 2020. [Operator Instructions]

To obtain a copy of the press release for the results, financial statements and presentations of the webcast, please go to the Spring's Global website at www.springs.com/ri.

Before proceeding, we would like to inform that forward-looking statements reflect the management's current perceptions and perspectives on the evolution of the business based on the evolution of the macroeconomic environment, industry conditions, the company's performance and financial results.

Any changes in such expectations and factors may imply in results that materially differ from the current expectations and include several risks and uncertainties.

Today with us is Mr. Josué Christiano da Silva, CEO of Springs Global, who will comment on the company's performance. Now I would like to give the floor to Mr. Josué .

[Josué Christiano da Silva, executive]

[Interpreted] Good morning. Thank you. I would like to thank all of you that are participating in this call. I know that this is a day with many announcements of earnings of many companies. And incidentally, most of them are presenting the results at the same time. So it's an honor having you here. Here, Pedro Garcia Neto, Alessandra Gadelha is here as well in different areas because of social distancing. And obviously, all of us will be at your disposal to answer any questions you may have regarding the quarter. I am going to make a brief introduction regarding the quarter. I believe that these are points that are important to highlight. And with no further ado, I will go to the Q&A session because then we will be able to clarify any of your questions.

As this quarter was extremely challenging, the results obviously, were way below what we expected. But because of the circumstances, of course, we have to congratulate the entire team that I have the pleasure to lead because of the results that they were able to deliver in a quarter where trade closed their stores. Most of our customers throughout the quarter had their stores closed, and there was a drop in sale of 19.5% drop. We believe that this is not something that -- well, we have to here recognize the effort of everyone in pursuing the objectives of the company.

Of course, this drop was higher in the Wholesale segment. Because all of our customers closed their doors throughout the quarter, and we mitigated a greater drop because there was a significant growth in our Direct Sales segment. And here, we had a 66% growth, thanks to the growth of our online sales that were 8.7x higher. I believe that this growth is an unprecedented growth in such a challenging quarter. This is a result of what we have been doing, especially in the investments in technology and in the strength of our brands and the competency of our team.

This is why we were able to register in a quarter like this, with these circumstances, a total growth of our sell-out of 22% approximately, and totaling our quarterly sell-out approximately BRL 155 million and there is a mix change between sell-in, sell-out because the trade has been closed. So our omnichannel couldn't be used in this period. And this mix change -- well, [ am ] registered a growth of 66%. So the retail side grew 66% because this is a combination of 22% sell-out that by itself is already significant. Thanks to the Internet that represents a growth of 8.7x. And this is combined with the greater sellout that was higher than what is normal.

Now obviously, this places an extreme challenge for us. I have spoken to my entire team, and I've said that now we have even greater challenges ahead of [ hour ]. We have raised the bar, and we have to find different pathways to grow again 8.7x. Well, it is very important to recognize that there has been a digitalization of the world throughout the pandemic and therefore, the foundation now is greater.

Yes, we have felt that as the stores reopened in July, although the total sales are growing, I'm talking about direct sale to the consumer, there has been a replacement by the sale in the Internet. And but the total sales continue growing. And the foundation of the Internet sale is very strong. We'll certainly we -- in the third quarter, we won't have a growth of 8.7x, but we will continue growing our Internet sales with one advantage with because the stores are going to open and continue selling in this channel because the physical stores provide a differentiated experience to our consumer.

So this significant performance of our direct sale to the consumer mitigated the drop in sales. In the wholesale market, that services our main customers that are retailer customers throughout Brazil. And unfortunately, weren't able to buy because they were closed. We had a slight contribution in this third quarter, and this contribution will be higher as of the third quarter. And I'm talking about the sales of our PPE line, especially for health care professionals, we observed in our call of the results of the first quarter. The authorities requested us to manufacture PPE because Brazil depended in foreign supply chains.

So we decided to invest temporarily because we knew that the fabric mask would be temporarily consumed, not permanent. So we adapted our sewing machines to manufacture fabric masks. And we also, yes, carried out a permanent investment with technology with a lot of productivity. And this is aligned for PPE, these protection masks. We're talking about Type-2 masks according to the American standards.

We're here, we're talking about gowns and other disposable items for the health care area. And this has opened a new opportunity for the company. And we even have the opportunity to export these products. The production is 800,000 units a day of these disposable items. The fabric mask, we no longer manufacture them because we knew that this was going to be something temporary. And the sale of the bed-bath, table topping products gained momentum in July and August. And this is why we had to anticipate the return of 2 production units that were on lay off to train our employees until the first half of the month of September, and we had to anticipate the return of these 2 units, Joao Pessoa in Macaíba in 1 month.

So as of the month of August, and as of today, our industrial units will operate full time. And therefore, we had no more space to produce with the sewing machines that sewed sheets and towels, we couldn't -- we had no more time to produce fabric tasks -- masks. But yes, we still continue manufacturing PPE health care health care products. It is important to highlight that there is a super demand or super supply because Brazil is open to import because of the pandemic and it forbids to export health care products. This is temporary because as soon as the government feels that the market is totally supplied, they will go back to the normal import practices, paying the taxes. And there will be freedom to export. And I believe that the prices will balance once again. Nonetheless, we have never practiced -- observed prices. Prices that meant 7, 8x the normal prices. We practiced higher prices because of the price of raw material increase. And when the prices rebalance themselves, we will go back to normal.

And there is a line that we're constantly investing, and this is a noble product because this services our health care workers, and these are people that we must value. We must applaud them. For the first highlight of the quarter was the performance of a retail market that continues with good performance, it is very difficult to the growth that was registered by the second quarter.

Now the second highlight was the introduction at the beginning, although very small of the lines of personal protection. This sale, I believe that the sale and during this quarter will reassure the return of the wholesale unit in abnormal levels. This is what we're seeing when we see the level of purchases, a bed-bath, table -- table topping and together with the individual protection programs will take us back to normal sales level and margins during the third quarter because over half of the quarter, 2 units were closed. Another thing that has concerned us is the absenteeism because of people that could not -- because people could not work. Since March 8, where we adopted social-distancing measures and all the protection and remote working, we on a daily basis, we have carried out the anamnesis of all of our employees something short with basic questions.

And in an automated ways, we have taken the temperature of our employees twice a day, decontamination procedures in the entry, and if any person presents a suspect, well, they go back home. As the pandemic reached the interior of the country, especially regions that hadn't been affected in the beginning. Of course, the rate of suspension continued. We believe that the curves of contamination of Brazil will progress, and I believe that we will see the peak during the month of August. And as they drop, I believe, that absenteeism will go back to normal and so will production. And this is something that we believe that will happen during the last quarter of this year. So we believe that the margins during the last quarter will go back to normal. Plants will be fully working during the last quarter. We believe in this today, plants back to normal with normal absenteeism. And this is our expectation right now.

Now the sales during the third quarter, well, probably what because of the PPEs will basically go back to normal, but with margins below what is normal because of -- because our 2 [ indoor ] industrial units had to stop.

So these are the main points and there is also a highlight regarding working capital and we -- our net debt dropped, of course, with the return of sales and industrial units, there is a trend for this working capital to increase again. We have had growth in sales in areas where the need of working capital is lower, like PPE, for example, here, we have less working capital need. I believe that there will be a growth of working capital as of this quarter, and the because of sales, but perhaps it will not be as intense as in the past because we are intensely working in order to maintain a lower working capital releasing resources and diminishing the cost of financing of the company's activities.

Well, the -- our financing activities are normal. We have received great support from all financial institutions. We have not faced any difficulties. Yes, we've had amortizations of shorter maturities and higher costs, but nothing that has meant any type of difficulty for the company's financing. These were the main highlights regarding the earnings results of the second quarter and prospects regarding the rest of the year.

As a target, we want to grow our sales in 2020. Compared to 2019, it won't be a significant growth, but we believe that this is feasible. The drop in sales, we believe can be reverted because of the growth in the retail market that will continue during the second semester and the introduction of the PPE line. That would be health care line. And with the resumption of sales in the wholesale market that appear to be strong and the Bed-bath Table Topping segment is not as impacted because people are spending and remaining more at home, they're socializing less. And therefore, household fabrics are important. I believe that the combination of these factors give us good expectation. And this is why we want to end the year with sales similar or slightly above the sales of last year.

Well, the margins aren't as good, but now we're going to manage our cash flow. And that we expect -- we expect that during the third quarter, with the reduction of absenteeism and the resumption of our business unit and probably -- and we hope that the pandemic curve is at a low. And we hope to go back to the margins of last year.

Well, the last highlight is exchange rate. Well, the exchange rate only increases the strength of our business model because this is a company of consumption products, and we work with strong brands and they are totally integrated.

Currently, our competitiveness, only increases. And of course, even the price of raw material, the margin also impacts us, the exchange rate variation. Although our exposure is not big but the benefit of the exchange rate is greater -- is better for our business model that that will sell directly to our final consumer.

And now we will go to our Q&A session.

[Operator]

[Operator Instructions]

[Josué Christiano da Silva, executive]

We received a question through the webcast regarding the sale of our furniture. It has a nice name, but the pandemic delayed the launching of this item. Yes, it delayed the introduction of Artex mattresses that are already being sold and they have been highly accepted by the customers that honored us with their purchase. This shows that the brand can extend its skills to other products. Household products actually. And we've received a number of compliments, like a consumer that said that the only problem with the mattress is that it's more difficult to get out of bed. It is so nice that you just feel like staying in bed. So this pleases us a lot.

Now the -- our furniture, well, we do not manufacture the furniture. And as our partners wanted to manufacture -- the ones that we're going to manufacture are also closed because of the pandemic. Therefore, we delayed the launching and the perspective is perhaps to launch it during the last quarter of this year. So I believe that we will not see anything this quarter. Perhaps we will see something during the next quarter. Well, unfortunately, this is a delay because of the pandemic.

We have a question regarding the growth of the SG&A and its percentage vis-à-vis the sales.

Well, of course, the sale in the retail market, it has a higher SG&A than the sale in the wholesale market. Wholesale sales have a lower gross margin and SG&A lower. The retail sale has a higher-margin and SG&A higher, especially the sale through the Internet, where you have 2 different costs that you had not only the cost of digital marketing that is properly controlled, and it drops as your customer base increases, but also the delivery costs, the freight, the logistics, that is slightly higher. Now the combination of this, so higher sales, higher direct sales to the consumer, higher sales through the Internet that already have a higher SG&A and a higher gross margin. And therefore, the figures are impacted, as we saw during the second quarter, gross margin increased, but the SG&A increased as well. So as you gain a bigger customer base, there are customers that if they have a good purchase experience, they become a permanent customers.

And the cost with digital -- with digital marketing costs drops. The logistics cost? Well, you can improve logistic, but in reality, the logistic cost is high in Brazil, and we believe that it will not drop. Now market digital cost drops because you have acquired the customer, you have cheaper instruments to reach the customer. And if the customer is satisfied, they become loyal and they go straight to your platforms automatically. So this is a trade-off. Actually, there is a growth through the sale to the customer. You increase your gross margin. Nonetheless, the operating margin here is even higher than the wholesale margin. So I really do not see this increase of the SG&A as a problem, actually, in addition to everything there is a legacy SG&A in the United States that is impacted by the exchange rate. And unfortunately, the exchange rate contributes in the company SG&A because we have a legacy cost in the United States. I hope I was able to clarify this question. Now regarding the technology platforms, there is a question about the evolution of these platforms.

I believe that a growth of 8.7x in sales during the second quarter. Well, this demonstrates how assertive we were in our investments in our platforms that are proprietary platforms, and we were only to achieve this growth into these platforms. These are a number of factors, brand team, but it is also due to the technology platforms that are robust, that are scalable. And therefore, we are highly satisfied with our investment. We are aware that that there are further developments that will help us in the future using the retail platform to broaden the reach of our sales in the wholesale market.

Therefore, we will be using PIX, it's a business-to-business version in order to sell and to broader sale to the wholesale, reaching establishments that can buy our products, and this will be cheaper through our technological platform. So we are reassured with our investment. It's not something that was done this quarter. This is an investment that comes from the past. Overall, we adopted everything in March. This is not something new, and we already had this in our platforms, and the results are here to prove that we were very assertive.

What I've read until the moment, I haven't seen and entered any company that had their sales growing 8.7x. And this is a result of a proper platform, and it's a proprietary platform.

Now regarding Internet sales, if during the second quarter, we sent products through the DEC in the stores. When the stores opened, we started sending through the stores. Before when the stores were closed, well, the lack of safety made us stop doing this. And we couldn't use our omni channel model.

What we did was to compensate our franchisees, giving them a percentage of the sale. We didn't have to do this, but we did it to support our franchisees. And in addition, in addition to using social selling, so their sales reps could sell-through WhatsApp and other tools, we also gave them the possibility to receive, although they weren't selling a percentage of the sale. A customer that had his tax ID connected to the store. We distributed millions of [ reals ] to our franchisees through this methodology that supported our franchisees. And so we gave them a part of the sale that was done through the e-commerce platform, and this was delivered directly from the distribution center.

And there was no participation of the franchisee through social selling. But if the customer purchased a product in a physical store, we identified the tax idea of the customer, and we gave a percentage to that store. So we supported our franchisees, not only postponing the payments of our accounts receivables, but we gave revenue opportunities to offset the fact that to service properly our customers to be able to have good performance, we had to disconnect the omnichannel. Now it's back to normal now. Now it is back to normal with the stores and the distribution centers.

Here, we have questions about a specific line. The pipeline is successful, it will probably remain. It will be broadened with more novelties. And I believe that we were assertive. We did have some questions, but this demonstrated that our brand can work with the pipeline and also the Artex mattresses and we will also have mattresses from other brands, and we will also have decoration lines and other products that represent a reasonable percentage of our platform sales.

So obviously, we are constantly developing products and we're innovating, and all of these products are part of these -- this line.

So today about what about the products that are not manufactured by the company that are like a marketplace in one of our brands.

They already represent sales above 15% of the brand. So this is why I believe that this has been a major success. And this demonstrates the strength of our brand that can be extended to other categories.

So yes, we will continue investing. We will broaden our categories that are connected to household. And this is for the consumers that trust our brand, and they know that they could receive good service or good post-sales service, guarantee of quality, guarantee of return and a good product at a fair price.

I have a question regarding covenants. Well, yes, we do have contracts with financial covenants. Not many. These are bilateral contracts. And one is with is capital markets. And well, strictly speaking, all of them is measured on a yearly basis, not on a quarterly basis.

And yes, we will have to discuss with these very few financial institutions about these covenants. Of course, it is very difficult to fulfill the financial covenants in the middle of 2020. But what we observed is that the financial institutions are totally open, and they understand the situation. We still haven't carried out any type of negotiation because we wanted to see the performance of the second quarter and a little bit of the third quarter to have a better idea of what we're going to negotiate, but we're talking about banks that are our partners.

We have no doubt that it will be possible to negotiate. We will have no problems. I believe that the financial institutions by and large, understand if it is a negotiations of working capital, it's more difficult because you have to call for a general meetings. So no, these are I see no problem because all of them postponed the maturity of this year for the future, and this shows that they're being our partners. So I see I'm very reassured regarding this point. And I believe that we will have a good negotiation at the right time. And today, obviously, we haven't -- so we haven't broken any covenant. And perhaps we won't even need to negotiate, but perhaps we will have good results, and there will be no need for a negotiating. Although the sales are going back to normal, the margins have been compromised. But we -- you never know what can happen. Brazil, is a very dynamic entry. And the corona voucher has injected funds in the economy.

So depending when and to what point it will be extended, maybe the results will surprise us positively.

We have a question about a possibility of launching apps.

Well, we have an app that was developed the purchase experience in the Apple is spectacular. And then we decided to remain within the responsive sites that are adapted to any type of browser for one reason, an app. So you need a development team for Android and one for iOS and a third team for the browsers. It's not that we don't know how to do this, but PIX, it's an app. It is our point of sales software that is and we are giving it special characteristics so that all our wholesale sale force can use it so that we can broaden the amount of customers. And this is an app, we chose Android technology because the equipment is more available, and it's cheaper.

So it's an app. So within our technology team, we have app developers that are highly competitive or competent. Now the consumer normally has a mobile phone that has a limit in terms of memory. Now the app occupies the memory of our consumer, the mobile phones with a lot of memory available are more expensive. And when there's a lack of memory, the customer sometimes starts deleting the different apps in their mobile phones. And these are the apps that they don't use as often.

Now one thing is an app of a retailer that offers a number of products in different categories. And then the customer like buys 12, 20x a year. So an app for food delivery, people eat 3x a day if they order food sometimes they have 5x a week so it is normal to use this app in a continuous fashion, and perhaps the app is on the first screen of the mobile phone. Now an app of bedding, tabletop and bath, where they buy 2x a year. Well, if this app consumes memory, they're going to delete it, it's not because of a lack of technology.

It's because of an economic decision. Let's say, there is not a great need for an app because the customers don't use it very oftenly. And yes, we do have an app, and we believe that this will be used. That will be personal technology, this helps people to sleep better. Oh, this is an IoT, totally developed by the company. I recommend a webcast that was made for the launching and to alert people about sleeping problems.

And I believe that is when -- this is one of the most important actions that you can adopt to improve your quality of life, your longevity. This is a good webcast, and this is the first step to -- there is an app developed. There is a graphic interface that is very cool, and it is trying to give information to people about their sleep quality. Because the IoT in our products doesn't only measure, it transmit. After they transmit this information to the mobile phone of the person after they wake up. And of course, these are algorithms that have been developed internally, and this gives us good suggestions to have a better sleep quality.

This is an app, of course, that will be used on a daily basis. And we do believe and we are developing this app, well, the other apps we decided to discontinue them because it costs to maintain the software updated in 3 platform. We launched new features in our software every 15 days. And as we had 3 different teams, this increase the cost, and it was unnecessary.

Well, as we introduce new categories, perhaps we will launch apps because we have the team to do it. As I said, PIX is an app, Persona is powered by Persona. So it's powered by Persona and Persona already has its app. It's app.

It's not here. They're talking about the drop in margins. There was a drop in margins during the first semester. It is not easy to recover what we've lost because plants were closed and stores were closed. The third quarter, although the sales are going back to normal levels. The plants are not fully operational. As you know, plants represent high fixed cost, you have lower absorption of fixed costs. And this -- so our margins will be impacted. I have no doubt that they will be better than the second quarter but still impacted.

Well, the fourth quarter, we believe that we will have normalized margins. And even with some growth, perhaps sufficient to revert the loss in margins. This is our perspective. Well, the exchange rate has increased cost of raw material. And of course, today is not the moment to transfer the increase of cost. We have to -- the exchange rate increased 35% vis-à-vis the beginning of the year, and we will end this way. But at a first moment, this compresses our margin but increases our competitiveness. I don't see this as something negative.

We have a new question about PPEs for health care professionals, basically 4 types of products here. Here, we have masks, surgical masks, respirators, gowns, hair and foot protectors, all disposable and also sheets, all are made in nonwoven fabric. These nonwoven fabrics are special, and they come from a major supplier that works with state-of-the-art technology, and we transform this raw material in these items. This is the new line of the company. We produce it, and we deliver around 800,000 units a day. So the market is showing signals of supply. There is a decree in Brazil that forbids us to export any type of health care product, and we can import without taxes, but I believe that the government will be sensitive as the pandemic curves drops.

And if the government feels safe that the health care area in Brazil is properly supplied. I think things will go back to normal. These are very important. These are very noble products for our noble health care workers. And we will -- this line will become a permanent line.

But all of them are manufactured in our industrial line in Blumenau. We chose this industrial line and we invested in this line to produce these type of products.

[Unknown Executive]

[Interpreted] We have a question about the future growth. Will it be organic? Or will -- do we expect potential acquisitions?

[Josué Christiano da Silva, executive]

[Interpreted] I believe that currently, we have the opportunity of organic growth, which is substantial. And this quarter showed it. You know the strategy has been clearly outlined. And we were implementing everything. And this quarter, we have been able to see how assertive we were in this implementation of the capacity that we have to continue implementing.

Well, today, we have nothing in sight. We will continue investing strongly in the development of technology, in information, in order to guarantee our customers, that our brands will be an authority for in the Household segment. And I believe that our customers see this. And of course, they know that they can improve their quality of life, provided they have wellbeing at their places, and they have good quality sleep as well.

I see no further questions. But I would just like to highlight that I am at your disposal. Alessandra is also at your disposal to answer questions that weren't answered here. Sometimes, as the -- you have questions in different areas, you end up missing a few.

Well, once again, I would like to thank all of you that participated in this earnings conference call. I would like to say that this was a challenging quarter, but important things happened as well. When we see retail sellers with a 50%, 60%, 70% drop, and we saw our retail growing 22%, our figure is 66% in the balance, but 22%, well, we can see -- we can realize that something was done not only during this quarter.

This is a accrual effect of investments and efforts that led to this result, and it is the management and the strategy of this company. So thank you very much for participating here. I hope that during the third quarter, we're able to show you better results. I strongly believe in sales because we are following up orders. We believe that the wholesale sales will be stronger practically back to normal, especially when we add the PPE line, I don't think that the margins will go back to normal because half of the quarter, we had 2 plants that were closed. They're resuming their activities now. And we still have had high absenteeism in -- we also reduced the number of worked hours. And but now this will go back to normal.

So we, for some cases, we adopted 936 Act, and there has been an increase in cost, but we believe that the margins will improved vis-à-vis the second quarter. Sales in the wholesale market will improve significantly vis-à-vis the second quarter and things will go back to normal and maybe above normal levels as of the last quarter, this is our expectation.

Our expectation is to sell this year, the same as last year or perhaps slightly above and try to recover the loss margin during the third quarter. Although, we do have a number of points that we must take into account. Thank you once again. I hope to see -- I hope to have you with us during the third quarter, and we are at your disposal to answer any additional questions.

You can contact me. You can contact Alessandra or Roberto.

Thank you, very much, and have a very good day.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]