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Edited Transcript of ALPA4.SA earnings conference call or presentation 5-Aug-20 1:30pm GMT

Q2 2020 Alpargatas SA Earnings Call

Sao Paulo, SP Sep 15, 2020 (Thomson StreetEvents) -- Edited Transcript of Alpargatas SA earnings conference call or presentation Wednesday, August 5, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Julian Garrido Del Val Neto

Alpargatas S.A. - Chief Financial & IR Officer and Member of Management Board

* Roberto Funari

Alpargatas S.A. - CEO & Member of Executive Board

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Presentation

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Operator [1]

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(technical difficulty)

today, and we have a great presentation to show you. Please, Berto, go ahead.

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Roberto Funari, Alpargatas S.A. - CEO & Member of Executive Board [2]

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Welcome, everybody. Hope you are well and healthy. Today, we see how Alpargatas has faced an unprecedented challenging market scenario with the pandemic. Our second quarter is a strong sign of our resilience. The way we reached our results and also showing -- demonstrating how we are showing recovery in this very challenging environment.

Next slide. In the second quarter, we achieved a net profit of BRL 45 million. That shows our resilience with margin expansion. Our margin expanded by 210 basis points. Our recurrent margin has expanded 400 basis points as a total company, 300 basis points in Havaianas. Our EBITDA margin achieved 19%. We had a positive net financial position of BRL 153 million and a cash position of BRL 2.6 billion, showing that the company has protected the cash and navigated the second quarter with a positive cash environment.

Also, the second key highlights of our second quarter is the strong recovery that we have seen, especially in June, but not only started in May with Havaianas, but in June, the total company achieved net revenue growth of 11% and an EBITDA margin of 18%. The main drivers of these results is Havaianas, our global leading brands has achieved growth in May and also in June, 5% in May and in June, accelerated to 25% driven by our Havaianas International division performance, which grew in the quarter, total quarter by 12% and achieved 46% of total Alpargatas versus 33% last year.

Another key driver of our recovery is the performance of our global online sales, which almost tripled in the quarter and achieved 25% of our total sales.

Next. Now we cover the key strategic pillars of our strategy. Just to -- as a reminder, our growth strategy is focused on 4 pillars: global expansion, Havaianas, digital expansion, innovation and sustainability. So I will cover these 4 drivers, these 4 growth strategic drivers.

Havaianas has delivered an industry-leading performance in the footwear industry. If you see -- if you take into consideration the recent release of results of global brands in the sector, Havaianas is a top performer driven by our International division, Havaianas International that in the quarter reached 51% of the total Havaianas business. Havaianas International grew in revenues 12%, grew in May 61%, and in June, 57%. This is in reals, this growth. We should take this growth into a constant currency. The growth in May was around 15% and in June, another 15% around. So strong performance, strong recovery of our international business.

Havaianas Brazil, who reached 49% of the total revenue of the brands, has also shown positive growth in June, grew 8% in revenues but also in volume as well. So 5% in volumes, showing positive price/mix relation and high quality, healthy growth in June. And also in the first half of the year, we continued to gain market share with strong performance in the grocery channel, pharmacy and convenience stores.

Next. The next key pillar of our growth strategy is the growth acceleration in digital. And here, our 3 brands have shown tremendous performance. We had grew Havaianas 3x in online sales. Online sales, the definition we have is the combination of our havaianas.com with the B2B marketplaces and verticals. So the combination makes our online sales, and then we break down these 2 segments, havaianas.com, we call e-commerce, and B2B are the marketplaces and platforms. So Havaianas grew 3x during this quarter, around 7x on the havaianas.com and doubled the business in the B2B platforms. Osklen doubled the business, doubled the growth versus same period last year. Total online sales 2.5x in osklen.com and 57% in the marketplace is in the B2B.

And Mizuno also almost doubled the business of total online sales. The highlight was the performance of the B2B, where we grew 89%.

And this is clearly driven by focus on performance marketing and investment in digital. In the second quarter, we expanded our digital markets, content creation. We have gained continuity of our EmpathyDrivesEmpathy campaign that we initiated in the first quarter. We put performance marketing investment focused on creating this response on sales, both in our media -- digital media platform, but also in the marketplace platforms across all key markets that in turn generated high traffic and high conversion rates. That's what we are seeing.

Havaianas Brazil has concentrated the efforts on interactive campaigns with influencers, pioneering the sponsorship of lives with strong local celebrities, stars, singers. And also we have done strong performance with Osklen. We also in Osklen expanded all the tool box of omnichannel and digital sales tools. We have implemented digital salesforce. We have implemented WhatsApp chats.

We have boosted our CRM programs. And for instance, on Valentine's Day, which happens in Brazil in June, was -- is the second best Brazilian event for the brands in the year, and we have achieved an e-commerce growth of 400% compared to last year.

Mizuno online growth again 80%, especially in B2B. We are consolidating ourselves as the second largest brand in Netshoes site. We also launched all the digital salesforce tools to support our growth in the stores and also having been very active in digital marketing, sponsoring lives with professionals, personal trainers, nutritionists and sports psychologists.

Next slide. The third pillar of our strategy is innovation. We launched in the second quarter, a new collection, we call 2021 Collection, which we start shipping already. And this collection is very specific, because it's highly focused on high margin, high sales, high turnover velocity products. This was extremely well received by our trade partners. And on top of that, this new collection includes innovations in flip-flops, new shapes, new technologies, but also the expansion in sandals, accessories and apparel.

The St. Tropez, which is our leading product, our products in sandals has also performed well in the first half with a growth of 336%. So more than quadruple the sales of this range in the strategic segment for expansion of the brand.

We also enhanced our digital strategy scoping. We have done all of this launch of this new collection with virtual sales conventions all over the world, and we achieved very strong level of engagement. And as I mentioned, very strong positive feedback. Not only that, we have also launched ourselves into the streetwear universe with our high-growth segment of the market with the launch of Mastermind Japan -- the collab of Mastermind Japan. This collab included top products, but also a new shape called Tradi Zori, and that refers back to the origins of our brands and the inspiration, the Japanese traditional Zori sandal. And not only that, post this collab, we rolled out our streetwear Tradi Zori range in this specific channel and also online.

We also launched during the month of June, our Pride collection. This has 3 innovative things: one is innovations in flip-flop in terms of printing technologies and stripes technology. But not only that, we launched apparel and accessories. This is a permanent range, and it achieved the highest net promoter score and positive sentiment in social media, boosting the brands and engagement of the brand during the quarter.

We also innovated. We are leading the occasion of staying at home. As you guys know, with the pandemic, the stay at home is the biggest disruption for consumer goods brands. We are leading the way in the sector, turning Havaianas into perfect brand for staying at home and the launch of the Havaianas socks consolidates, creates, stimulates, inspire consumers to adopt the brands in the stay-at-home opportunity, which also reflects in the high-growth rates we experienced in the brand.

Mizuno also launched a special limited line called Enerzy, the new technology and doing extremely well. It's amazing new technology, and we are making this available in the online platform of Netshoes and Centauro.

Next slide. This growth in global, digital and innovation is only possible because we have a very strong business ecosystem. And this business ecosystem has 3 major pillars: first, the transformation of our supply chain to be demand driven. As we have been presenting to you, we are showing strong investments and improvements in our logistics, efficiency, with a strong focus on service and lead time levels. This has also helped us to leverage these results. We have worked extremely smart in allocating our working capital to support our ecosystem and the strong recovery. And then we also have worked on inventories to make sure that we have (inaudible) 1345 and respond quick to the service levels required by our customers, our users, especially for to support this growth online, but not only the strong growth that we are seeing, especially in Brazil in the grocery channel.

Our industrial operations has demonstrated an enormous capacity to adopt, strong continuity. We have not interrupted 1 minute. We have implemented all the health and safety standards. We have redesigned our production lines, and we have done CapEx optimization during this period to also support the recovery. And our strong presence in high-growth channels, especially grocery, pharmacies, convenience stores and online has been very important during this pandemic.

As you guys know, in April, we had around 40% of our channels closed. We operated 60%, and this situation has improved, and in June, we got around 70% to 75%. And our strength on these high-growth channels where the traffic of people is, both online and off-line, has demonstrated a strong ecosystem for our business and supporting performance.

Next slide. We also -- the fourth pillar of our strategy is sustainability. We also have focus on our people's health. We adapted our factories in record time. Between 22nd of March to 13th of April, we remodeled all our factories in order to maintain strict safety standards and social distancing. We have also adapted our administrative offices. We have been working on a home office basis since the beginning of the pandemic. No issues at all. The company was already in the cloud, G Suite as a standard platform for all of us, all the tools people are familiar with. So we have been switching the key and working very quick on this home office base. But also, we are preparing our offices for future opening in a gradual way. We also adapted our stores. We also established all the norms of protocols. We also supported our community with vaccines, mental health support line. We have invested a lot in communication and engagement with our community and our employees. And we also have engaged with our strategic external partners, customers, franchisees, suppliers in order to make sure that the whole ecosystem is healthy.

Next slide. On top of that, we also supported the society and played a strong role in supporting society, what we call our solidarity network. First, we took what we do best, which is shoes. We have donated in excess of 400,000 pairs of shoes, Havaianas, and also protection shoes. We have adapted some lines to provide health care professional shoes. We also supported the communities where we have our factories and the health system of these communities and with our important partner here in Brazil, Maurício de Sousa is a cartoon (sic) [cartoonist] in Brazil, very popular with kids. We have donated 150,000 masks. On the health side, we have engaged with important programs in Brazil, the United Nations Global Compact. We have donated 1 million masks and also the largest private initiative supporting our health system in Brazil. We have engaged with the Todos pela Saúde donating BRL 5 million and also 1 million masks. Our Alpargatas Institute has also donated more than 500,000 basic foods, cleaning, hygiene items for vulnerable communities across the country.

So with that, I'll hand over to Julian to talk about our financial performance.

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Julian Garrido Del Val Neto, Alpargatas S.A. - Chief Financial & IR Officer and Member of Management Board [3]

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Thanks, Berto. Good morning, good afternoon, good evening. This is international call. Thanks for joining. Before I start, questions, please send them through the chat. We'll be getting a Q&A in the end of the call, and we'd be pleased to address them, okay? So you have enough time to write until I finish. I promise to go slow, so you can write it down.

All right. So as Berto said, our top line is BRL 681 million. Let's put this into a context. As we have seen in some moments, we only had 60% of our stores opened. So 40% were basically stores, meaning channels were closed. So the revenue you see there dropping 20%, it's within this context. Just as Berto said, what helped us out was the digital, was the mix of the country as well, mainly coming from EMEIA there. And out of that drop of 20%, the highlight in the quarter, Havaianas only dropped 8%.

Again, it is the COVID reality, but we had less than double-digit drop in Havaianas. Now if you take a look at the month of June per se, you see the total company already catching up. We saw that in May as well. So June is 11% double-digit and Havaianas 25%.

If I go now to the EBITDA, the statutory EBITDA BRL 132 million positive. We were pretty happy with that, again, not to be too optimistic, we were on a neutral basis, with all the headwinds that we had. We had this 19% EBITDA driven by the operational results, as Berto mentioned, and some tax gains that we had, thanks to the legal department that we also had in this quarter.

On the net profit, positive BRL 45 million, and attributed to the partners of the parent company, BRL 54 million, which is a growth of 63% when I compare it to prior year. And net financial position, we ended up being positive. To be honest, when we started, we thought that this will be negative. And that was the reason why we went after, what I call the insurance. We borrowed money, roughly BRL 2.1 million additional. While we had BRL 0.8 million this quarter, BRL 1.3 million the prior quarter. And the good story is that we didn't have to use that insurance. So we are still able to manage throughout this crisis with the money that we built not only in Q4, but with the operations within this quarter. It is a drop from Q1 of BRL 150 million, mainly because of COVID and because we also paid a short-term incentive related to prior year. And we also paid the dividends that I'll show you in a second.

So next page, please. So liquidity and cash, of course, drove the quarter here. We started out with that exercise. So -- and here, you see on the left is the evolution vis-à-vis the 12 months, meaning last year, we had also BRL 177 million on the positive side. So it's a BRL 24 million delta there, of which BRL 30 million we paid dividends. And of course, we went through the COVID, and I will talk in a second.

We used this cash to help the ecosystem as well. The cash per se at BRL 2.6 billion, what we do and we have been doing, and we will be doing is stress test because we still are with this COVID scenario. We don't know what's going to happen. So we tested ourselves, and when we did the initial test, again, it's a stress test, not an estimate, we saw that we needed a certain amount of money. To be honest, we went to the market, and we grabbed every single penny that we could to leave it over there to -- not only to support Brazil but globally as well. And we ended up with a cash of BRL 2.6 billion, and this is stress test vis-à-vis the progression that, of course, in the beginning it was not 36 months, but now it is. We -- with the cash that we have, we are able to survive the new stress test for more than 36 months. This basically shows that we have enough for what we need and even for the hypothetical stress test. The funding, BRL 2.5 billion, BRL 0.4 billion and the BRL 2.1 billion is what I mentioned that we took, of which BRL 0.8 billion was very, very in the first week of April.

Okay, next page, please. So what we did and how we managed that? Focusing 3 big pillars here: the working capital with the ecosystem mindset, the managing the basics of the cash and making sure that we were in a pretty good balance sheet and position with bad debt as well.

So if you go to the left side. So what we did is we segmented this, again, the customer side and the supplier into clusters. We want to make sure that we understood the ones that were suffering more, the ones that were, I would say, average and the ones that were suffering less. Everybody suffered. So -- and we treat them differently. So the strategy and the tools that we used were differently. And one example of the weakest part of this, the most part that suffered most was our franchises here in Brazil. And even within that, we subdivided that in groups to see how we would be able to help, not only with the working capital but the commercial team and again, across the board here, helped it out to understand where the needs are, what the cash flow was. So we could understand in helping some of the costs like rents and everything else. So we negotiated and rebalanced the stocks and deadlines.

On the cash management, we took a look on the zero-based budget mindset, what is critical now? And what can be postponed or just eliminated vis-à-vis the new reality? And the cash CapEx, not only CapEx but also the expenses. Let's focus into the platforms, the digital, the user experience, what can we do towards that? And the IT, again, with the new directors and the team there helping out a lot. And focus what was needed. So it was a chain combination there. And we are very happy also to see that the whole chain, including the commercial to the end, we are focusing on selling the inventory.

Again, we -- of course, we're adapting our factory. So -- and a good thing is the -- our products are good. And then -- but we focused a lot on selling this inventory, and we postponed some collections, and new collections, and launches and everything. So leaving this phase of transition here.

And since the beginning, as I mentioned before, we were not only managing how we would go through the crisis, which is still not over as we know, but how we would get out of it and prepare ourselves to get out of it. Because we knew that this would bring a lot of returns. And that's what happened, to be honest, in May and June. So of course, April was tough. And we want to make sure that our credit lines were there, even though, as I mentioned, we had enough insurance there and managing the provision for bad debt. And again, what we did, we have policies, and we also follow technically the IFRS 9, and we are absolutely compliant with that. And we felt in good shape. And this is not a finance exercise. This is a commercial exercise together. So we had -- we do have weekly calls, actually 3 times per week, and we have committees that we decide not only, okay, let's negotiate this customer, but how do we help him get out of this, what makes sense. So we don't give him -- we give enough oxygen, but not too much, so that he can die with that. So this is a combined effort here with the whole directors.

Next, please. Dealers. As we mentioned before, we create values for the customers and growing the company and managing the expenses and allocation of cash that gives return. So those are not projects. Those are pillars. And again, we're not reinventing the wheel here. This is exactly what we have showed to you guys last year. The RGM, revenue growth management, the expansion of the gross profit, focusing on the VIP 100%, which is focused on the supply chain, on the industry and also the products to make sure that we have the best of it. And the SG&A, the zero-based budget mindset. But again, we have that all over the place. On the RGM on the left side here, focus on the products that will give more margin, and we can replenish them, and we can help this whole chain make it happen. So that was the focus? Portfolio. What makes sense now? Where it makes sense? In what region it makes sense? So when we saw that Europe was really booming up, we put the focuses there. And there was products availability, there was marketing. And there was the focus. So we put -- and so it's -- of course, the FX also helped us out, but it was just not the FX, it's a wave that we cashed, and we were very fast into this. So when I take a look at the CapEx, as I mentioned before, in the multisources, we have started this project last year, taking a look, not only is a risk strategy, but also helping us save. And we have a more competitive supply chain there. And on the right side is zero base, is the controller. It's beating the drum every day, looking on the needle right now before asking how do I make it that cheap; why do I spend it? And on the SG&A, controlling the wastage that we have and the rent relief as well.

Next page, please. So on the EBITDA. Here, the message is we grew EBITDA to from BRL 103 million to BRL 132 million, but mainly the international contribution. Because this comes along every time that we grow the international part, we saw Berto mentioned there, now 51% representing the total sales, it brings higher margins. And with the high dollars as well, it's a double dip on the positive side there. And Brazil, again, here is Havaianas, Osklen, Mizuno, also bringing positive. And again, of course, the effect of the PIS/COFINS brought by the legal department.

Next page, please. I will show to you guys, how do I go from this BRL 132 million to the BRL 64.7 million what I call the recurring EBITDA, still positive. Still double digit, 10% of the EBITDA on the total sale. And what worked was the positive gained from the legal department, the PIS/COFINS -- exclusion of ICMS from PIS/COFINS calculation. And of course, the investments that we have to do and the expenses on the COVID that Berto mentioned. So it was not only adapting our factories to the reality, adapting our headquarters too, but also the donations that we had over the year. And this impacted the EBITDA. IFRS, as you guys know, we have this now because of the statutory. It's not included above, and we include that now.

So next page, please. When we see the evolution of the net financial position. As I mentioned before, we went from BRL 177 million back in June '19 to BRL 153 million negative BRL 24 million, of which BRL 30 million, if you see on the right side there on the dividend. So if you see the free cash flow operation, it was BRL 5 million driven by EBITDA and the investment, I want to highlight investment. We keep investing in the CapEx. But as I mentioned, IT, as I mentioned, digital platforms, that is already paying off. You saw the growth that Berto mentioned before. And that's what I had.

Next page, I'll hand it over to Berto.

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Roberto Funari, Alpargatas S.A. - CEO & Member of Executive Board [4]

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Thank you, Julian. To finalize what we are seeing, our resilience based on the strong fundamentals we have, generating profits, expanding margins and cash protection and positive cash. We're also very well prepared to face these challenging times. That is coming as of. It's not the end of it, it is the start of it. We are performing -- outperforming in the high-growth channels, and we are also outperforming Havaianas, driven by international expansion, digital and innovation. We're also very well supported and structured with a demand-driven supply chain ecosystem that we have and that differentiates us.

So next slide. So we have demonstrated -- here's a summary, and I'll be leaving the screen for the questions and answers.

And we demonstrated during this very challenging quarter, unprecedented times, a strong resilience, an enormous capacity to adapt, adjust. Our brands showed the strength and the quality. And with that, we have been able to start to show recovery. And we look forward to continue to build a company for the future with a long-term view. Thank you very much, and I'll want to open for questions and answers.

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Questions and Answers

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Unidentified Company Representative, [1]

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Thank you, Berto. We have a question from Olivia from JPMorgan. Olivia wrote that you mentioned significant market share gains in the quarter. Can you talk a little bit about what you are seeing in terms of competitive landscape amid the crisis in Brazil and abroad, both in terms of price point as well as relationship support to clients. And there is another question that I can leave it for later.

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Roberto Funari, Alpargatas S.A. - CEO & Member of Executive Board [2]

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Olivia, thanks for the questions. I think your question is related, how is the marketing environment in the competitive landscape. What we have seen is twofold. The first side is from the users side, where people are with strong stay-at-home behavior, combined with this high adoption of buying online plus when they go outside for buying, they go with a shopper journey using a technical terminology that is planned. It's not anymore by impulse. And having analyzed that of environment, we have adapted our strategies to be the first to respond to these consumer preferences and expectations. We facilitate all the shopper journey.

Secondly, we have strengthened our position in the channels where people go for these planned shopper journeys, especially grocery, pharmacies and convenience stores. And in doing that, we also work with our trade partners to help them with spending their basket value and their margins as well. So it's a win-win combination here.

In terms of trade dynamics, we are capturing very fast the growth in the online area, online sales, both in terms of our direct-to-consumer, our havaianas.com, where we invested, we are creating consumer experiences, we have a strong calendar, we're bringing new deals. And that, in my view, has a competitive edge globally, not just in Brazil.

And secondly, we have built on already solid -- strong position we have been building over the last 12 months in Amazon, Zalando, like -- type of marketplaces, where combined with a very strong replenishment program with them, where we have been able to fast respond for the replenishment, which is very important for the algorithms, we have been also creating a competitive edge there.

And last, the fact that we positioned the brand to be the leading brand in the stay-at-home movement, has also contributed so that our digital performance market investment has also taken a leading position there. These are the key drivers behind this gain, both in market share, but also the outperformance in online sales.

Then there's a second part of the question. I think Julian can talk a little bit about this. Can you ask the question? Yes, I'm sorry, I think you didn't ask.

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Unidentified Company Representative, [3]

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Yes, no problem. Olivia asks on the SG&A savings. Looking at the key adjustments made this quarter, marketing, operating, structure, et cetera, how much of it should we expect to be structural versus temporary adjustments to the current environment?

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Julian Garrido Del Val Neto, Alpargatas S.A. - Chief Financial & IR Officer and Member of Management Board [4]

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Thanks, Olivia. I was muted. Thanks Olivia for the question. It's always tough to separate temporary and what is structural. Before, I think #1 is the bad debt. As we have seen, we created BRL 40 million this year. And just in the quarter, BRL 29 million, which is BRL 23 million higher than last year. So calling this temporary or not, I'll put that aside.

So we have to separate this bad debt from the SG&A. For the rest, I think I can split this in three. And 1/3 of it is absolutely structural. The other 2, 1/3 is one-timer, but that doesn't mean I'm not going to have one-timers again. And the last part is we have suspended some of the investments that we had. And can I call them also structural? Yes, because it will be my call, it will be our call. Daniel from the HR is all over this together with the team from the zero-based budget. We drive it, it's contingency management. So what is, I would say, structural is the pillar of the zero-based budget to keep the SG&A as low as possible and on a percentage of sale, keep getting positivity. And I'll separate the bad debt, which we have a policy, and we follow the IFRS 9. But again, the another packages do drive after the structural with change of policies and always managing the need first. And then what is the cheapest and the timing for that. We have that under control. Of course, there's always a challenge. There is always things on the distribution, which is one of the package. We are also doing very good structural changes there all over the places, changing the policy of the T&O when it comes back. So a lot of it's structural, absolutely. And the other ones, always managing to make sure that we have the best investments on our SG&A.

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Roberto Funari, Alpargatas S.A. - CEO & Member of Executive Board [5]

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I can complement Julian in 2 parts. I think on the other side, we also have cost pressures there. We're going to need to operate at higher standards of health and safety. This means the costs we're going to have in our stores, in our factories, to adapt to this. But also on the structural side. I think one of the biggest movements in our SG&A on the structural side is as we advanced on digital, performance marketing, digital driven, gave us the ability to start to drive investment of marketing on a performance basis and in a dynamic way, which helped us as well to optimize the SG&A going forward. So I think the question here is more related that we will take the opportunity of this fast adaptation regarding COVID to make sure that our -- our zero-based budget approach is firing, so we can continue to drive efficiencies to implement a structural data-driven performance marketing. And at the same time, we're going to see the need to invest, to keep the company momentum and also adapt to the health and safety standards.

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Unidentified Company Representative, [6]

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We haven't got any additional questions. So Berto, please go ahead for your final thoughts.

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Roberto Funari, Alpargatas S.A. - CEO & Member of Executive Board [7]

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Thank you. So thanks for your participation. We covered the 2 questions by Olivia. Our team continues to be available for you guys. I want to finish saying that we see our strong fundamentals, our commitment for our long-term drivers paying out during this very challenging second quarter.

Our brands remain strong and vibrant. Our dealers to expand margins, to create growth, to remain solid, and we are seeing improvements and getting better and better in our operational discipline. And we continue to drive the 3 main priorities: our people's health, the health of our business and our ecosystem, and supporting society. It is a challenging environment, a very dynamic environment out there, and we will continue to give you updates with this.

Based on this, I would like to thank you, and have a great day. Thank you. Bye-bye.

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Julian Garrido Del Val Neto, Alpargatas S.A. - Chief Financial & IR Officer and Member of Management Board [8]

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Thanks. Take care.