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Edited Transcript of ARZZ3.SA earnings conference call or presentation 14-Aug-20 4:00pm GMT

Q2 2020 Arezzo Industria e Comercio SA Earnings Call

Belo Horizonte, Mg Aug 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Arezzo Industria e Comercio SA earnings conference call or presentation Friday, August 14, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexandre Cafe Birman

Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers

* Aline Ferreira Penna

Arezzo Indústria e Comércio S.A. - IR Director

* Rafael Sachete da Silva

Arezzo Indústria e Comércio S.A. - CFO & Corporate VP

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Presentation

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Operator [1]

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Good afternoon, everyone. Thank you for waiting. Welcome to the Earnings Call of 2Q '20 for Arezzo&Co. (Operator Instructions) This is also being transmitted in English, and this conference is only for financial market analysts and shareholders. Any other questions should be sent to our press relations company available on the website. This conference call and the slides is being simultaneously streamed on the web and in English. Lastly, I'd like to hand over to Mr. Alexandre Birman.

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [2]

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Good afternoon, everyone, and welcome to our conference call for the results of the 2Q '20. I'd like to thank you for your attention, participation and how close all of you are with our company and giving us this external view that always helps us a lot. We have with us our CFO, Rafael Sachete; and our IR, M&A and Strategy Director, Aline Penna.

This is our agenda for today's call. After opening remarks, I'll give you some context on the retail market. We'll go into the pillars of action of Arezzo&Co, given this new situation that we are all experiencing. Right after that, I'll hand over to Rafael Sachete to give us some more in-depth information of the financial results and mainly -- and then the highlights for the month of July. After that, we will open for Q&A as we deem it's the most important part of this event.

Imagine how today has been very hectic for everyone. Many companies giving their earnings calls, the references are changing, the bases are changing, so each company has a different way of interpreting the impacts to their business. In a nutshell, I believe it's very important for us to talk about our vision of the future. I'd like to say that we're very happy, if I can say that, with the actions that we have taken. Even though they were harsh and difficult, they enabled our company to quickly resume our revenue levels and improving our profitability.

We are very confident about this year, and I can also strongly state even in a bold manner that the impact of this crisis at Arezzo&Co is in the V format. In August, we will achieve 87%. I'll give you more flavor on that later on further into the presentation, in sell-out, in the direct-to-customer channels in -- compared to 2019. And we are bringing in the sell-in for the U.S. operations together and we expect a growth for August.

Now about a more high-level scenario, I'll give you some context of how consumers' habits have changed. And I may be a bit repetitive because I know that many of you are already in tune with all these changes. But I'd like to share with you the main 5 pillars. So consumption is becoming more and more conscious and that challenges the role of fast fashion. We understand that awakening continuous desire is our mission, and that (inaudible) in showing a brand purpose, showing that we are concerned with the environment, social matters and showing that we are concerned with the circular economy. That will be positive for our business.

More time at home and that's very obvious. Right now, that is a lot. But as it goes back -- things come back to normal, that will remain. The casualization of fashion is very relevant. And we'll show you how we adapted our collections to more time at home. The digital explosion is something incredible. When you have children at home, you can see that cellphones is a part of their body. Everybody lives through screens and that will change the consumption information habits.

Then the expedited demand for convenience, everything here and now, so being fast to service our consumers is becoming increasingly more important. And as of Monday, we will deliver our e-commerce in the city of Paulo, which accounts for 20% of our sales with guaranteed delivery until the next day if you order before noon. So that type of convenience is becoming increasingly important.

And brick-and-mortar, that's also still very important. That's the contact point, the touch point that we have. It's human relations and you have consumers. But that will change. It is changing, where we should have, first of all, safety for our consumers and stores as well as the convenience, agility and the experience in store.

Now I'm going to talk about market data. Power industry doesn't have coverage from Nielsen, for instance, so we have market intelligence, where we bring together a mix of many information, even monitor. There's a lot of information there. So here, we have data from 2 different sources. First, Cielo, looking at a high-level view of retail and also the Brazilian Association of (inaudible) ABLAC.

So here, you can clearly see the resilience that Arezzo&Co has and consequently, expressive market share gains. That makes us feel comfortable in the path that we're taking and the relentless pursuit of -- or to obtain absolute leadership and in the learnings, the main areas for us to explore other categories such as the VANS brand, with whose revenue is 20% already coming from apparel. And we're very confident about this path that we're taking.

Let's talk about our strategic map. It's worth mentioning that all the content that we are showing here was shown to you in December at our day. 2019 was marked by a deep dive into our new project, a 6-month project, very well spearheaded by our strategic department, with the help from a consulting firm that's been with us for more than 10 years, which is [Bay Company]. They have an American which wrote a book, which is the mantra of our company because we want to be a company with scale with an insurgent spirit. This is our as-is, our organic growth. It's still a very important leverage for our business. And we put our brands here to understand the profile of our consumers and also analyze what are the main spaces to add new brands. So this is how we group them.

In democratic and casual, Arezzo and Fiever. Our luxury pillar -- I'm sorry, it's wrong here, it's Arezzo and Anacapri. Schutz and Alexandre Birman in luxury. Comfort and flats, Alme and Fiever. And looking at action sports, which is lifestyle, and it's very important for our company, VANS. So here, we have the change in our business model and our omni experience, which was before just a promise is now a reality. And I think you've heard this for many companies of doing X years and X months. Here at Arezzo&Co, it's a fact, several initiatives that were for 2021, 2022 were already implemented in the second quarter, the main one being, and we're going to talk more about it, is launching our marketplace, which has its official launching date today, August 14.

So several initiatives will evolve. This is just the beginning. But for September, we're churning at the real marketplace with the 3P brand. And this is how we have peer-to-peer sales circular economy, which would be very appealing. You will be able to use your credit times 2 to buy a new product, starting with the Arezzo brand and also speeding up our e-commerce.

So about consolidation, we're deeply focused on the fashion market in Brazil. It's a very broad universe and looking at insurgent brands. The pillars that support our operations, people and culture. And I said in our call for the first quarter that the main thing we needed to go through this crisis, which is true, is our culture, with people that are -- love what they do. They're very resilient and don't measure efforts to deliver their results. Obviously, we all know that data is the new oil. So here, we have a very strong IT and we want to grow in the international market.

So here are the pillars, and looking at the 5 months of Arezzo&Co's operations during this pandemic. The first month from March 9 to April 14 was a time for awareness and quickly organized the company in a different manner, creating the Crisis Management Committee, implementing all the home office actions. And on April 15, we had the opening of our production center in Rio do Sul, which is very important for this speed. We didn't cross our arms. We really did go forward and attack the problem.

In May, we're going to see the charts with the sales in March was very -- May was very important for our results because of the energy that we placed on it on Mother's Day and after Mother's Day. Now going into the new normal, and from -- in June, we implemented all the operations that I showed in our strategic planning. And from July 1 on, we had our New Year's Eve party on July 1, really starting the year on this milestone of doing 6 months -- next 6 months, we couldn't do in the first 6 months.

Now going into very important operational pillars that I would like to share with you, which were implemented during this time that I mentioned, becoming the new normal for our company. Great focus on our Rio Grande do Sul departments, not just for the main purpose of our company, which is to develop products but also to become a digital hub. I'm going to show you the opening of the new department that opened last week. Restructuring our position and organization chart, which is important to creating layers to be more agile.

Also speeding up our collection, you're going to understand what it is. New level of online sales that are extremely relevant, especially in our market. New role of the franchisees becoming digital sales. Speeding up the platform, which we will also provide more information for a new positioning of the pricing of Schutz in the U.S. now going into much more competitive and broader market with a much greater potential to grow, focus on new businesses within the fashion universe in the AB segment, expanding also handbags and footwear, implementing a B2B strategy for sales with 100% virtual showrooms, which not only have what we had before, but also very strong video content that engages consumers. We had very important tests for our company, which was the increase of multi-brand customers to our virtual sales, and now it became the new normal. Also, we implemented a concept to increase the assortment of stores using marketing, but not increasing the inventory of the stores, so you will have variants of color of the model through activating samples, which make them wish to buy it, and the sales is made through the e-commerce channel. Focus on the core company actions and also resuming investment in Alme and Fiever so that they can grow as well. Obviously, great focus in our distribution center.

Now I'm going to show what actually changed in the new company's mindset, even closer to creating a product and from the conception until delivering into the consumer, focus on the sell-in, sell-out calendar to a very dynamic global calendar, focusing on e-commerce, large marketing campaigns to activate every 2 weeks, new products, so -- and also half-year actions for branding. So we will have close to 20 collections per year, also inventory to deliver to the stores. The part of the sales is generated at the store will be sent to e-commerce, also having face-to-face salespeople on the floor to have relationship with the customers, both online and at the store. Online is important for our sales. On the B2B side, through trade shows and virtual showrooms on 100% virtual sales and also launching collections to meet our customers, which took 2 week -- 2 to 3 weeks, now it takes 3 days so we can meet more than 1,500 customers. So these are great changes in our digital means, and that came to stay here at Arezzo&Co.

This slide is very important. I would like to point out one of the assumptions that we have right now, which is to getting closer to our franchisees and understanding their side, which was highly impacted and -- impacted our results, but we want to maintain that chain to be sure that our investments and our actions are on the right track and always improving. At the beginning of July, we did a survey with our entire franchise chain with 75% of adherence. And here we can highlight some very interesting points. Actually, it's 75%. So strengths. That's a characteristic of Arezzo&Co. The fast response, proximity, transparency, training. So you can see the level of the trainings that we had and close work with leadership. So that's one of our assumptions that worked. Here are some of the works. We're in the middle, we have digital partnership, agility, communication, proximity. As a final result, we have an engagement level of 4.2 on a scale of 0 to 5, so we're very confident in the adherence from our franchisees and the measures that we took were very important in that in the second quarter.

So now let's talk about innovation. That's one of our assumptions since the beginning, since the foundation of the company, we've been marked by many eras of innovation. And now I'm going to highlight some of the pillars at the moment we're going through right now. So to give you some more flavor, the timing of collections every 15 days. Here, May and June, we have the dates for all the launches, so we have from launch -- L1 is launch 1 up to 11. You have the date when it will be launched and when it will be activated in this store. So very short cycles, enabling us to adjust our product mix according to customer adherence and also adjust our volumes according to the new sell-out levels.

So on this slide, I'd like to ask you for some patience. I'm going to talk about this data, and you can use the QR codes that can take you straight to brand Instagram. And that shows our ability of having, for the past 45 days doing so many activations, so what our consumers see, our product launches during the pandemic that already had major bestsellers. So you can start off with Arezzo and then Schutz and Anacapri, splitting up the space with Alme and Fiever. On the bottom, Alexandre Birman and VANS. VANS, we don't manage the sell-in calendar, but we are gearing 100% to their global directions. And here, you can see that in the collab, the Simpsons cartoon that was a huge success. So 11 collections, up to the time being, we had 6. We developed 1,096 (sic) [1,196] new styles. We've already sold 2.5 million pairs and 350,000 bags. Where we have BRL 24 million (sic) [BRL 224 million] in financial volume, so 1 million pairs and 120,000 bags already delivered. So imagine that these products were created and produced and activated during the pandemic. So when I'm saying that we're in the new normal, that July was a new beginning, the data is here to prove that. The number of replenishments that were already made, that's the main indicator, 20 that generated 130,000 pairs. So home was a success, ZZ PLAY, the Arezzo marks or loafers. So this shows us that how we -- much confidence we're placing in our future.

On this slide, we have more information about the launches that were very coordinated. So you create a product and think of the best way to communicate that, activate it in social media and quickly get to sales. So we used entry price points for the 3 main brands. As you can see here, the home line that generated sales of 50% in the month. Other ways to activate our sell-in, as I mentioned, not just the electronic showroom that has been around for years, but also video activation on YouTube. You can see that we have summer -- Arezzo Summer 2021, that was a studio that was acquired by our company, and that gives life. It gives strong images that's streamed on YouTube. And on the right, you can see the same activation profile and the investment in that studio to activate sell-out through what we call live shopping that has been done for Schutz. And as from the first urban activation on 19th of July, BRL 1 million sold in just a few hours. So as I mentioned, the main factors which the franchisees adhere to the survey and closing -- placing their trust in Arezzo&Co is proximity and training. Here, we have some examples of that of everything that was done. So live sales convention, 100% online for over 5,000 people connected. The launch of a virtual character, the personification that we're calling the new salesperson role with a digital consultant called Izza. A number of lives and interactions with franchisees in the morning show in July, when we created our new -- when we started our new year, where we had that in the 6:26 in the morning, where we had our consultants and advisers, for instance, Luiza Helena, which adds a lot of value for our franchisees.

During the pandemic, we considered a new format of retail. We believe this is very important because we know the essential role that brick-and-mortar stores play. So inaugurated the concept of digital store at Arezzo in the Morumbi Shopping Mall. So we have a hub where salespeople can work with equipments and seats. So they're ready for sales that are virtual, and that's most of the sales that we have today. We have more distance between the chairs, more customized and a bigger store. We also have a QR code for each store so you can buy on through WhatsApp. You don't even have to go into the store. This store has achieved the same levels of revenues as last year at the Morumbi Shopping Mall.

Last week, as I mentioned, we inaugurated our new digital hub in the state of Rio Grande do Sul, it's called ZZ Digital. So it's an investment in studios, where we're going to have more quality in our images. And another important detail is that all our new products will be introduced in e-commerce with models wearing them and in moving today, it's static. But -- and that will change the quality and how our customers see the products. All those investments are made so we can maintain the very high levels of sales that we have in e-commerce. In addition to that, centralizing the brands with logistics and merchandising, being centralized so that we have an efficient launch every 15 days. So it's a change in investments that are going to bring in the results.

Now some more flavor about the results. So here we go, a highlight to the average growth greater than 200%. So I learned with my father that percentages could be misleading. So if you have a large percentage of a small base, doesn't give you the final value that's actually relevant, in our case, in addition to being expressive growth percentages. Here, you can see that the revenues of our e-commerce: in April, BRL 45 million; plus BRL 49 million in May; BRL 60 million in June; July, BRL 59 million. August is getting close to those figures. So we do have a new normal. Even though many stores have already reopened, as you can see on the right of the page, so 88% of the stores are already open. The new normal, approximately BRL 55 million a month. And if you consider that for the next 12 months, we're talking about BRL 660 million a year. So it is very strong growth, and I'm absolutely sure that with the number of investments, we could keep that level up. About our brick-and-mortar stores, it's very important to point out our -- the capacity of our chain. And I really would like to thank our franchisees for their efforts. So as soon as the malls reopened, Arezzo, Anacapri and Schutz stores where were the first to open. Some reclosed and then reopened, and we were very close to that everyday operations, not leaving 1 store closed if the mall was open. So it was very impressive with the number of stores we have.

About omni, very important data. We started this journey in February 2018, so we're now mature to use the digital channels. 100% of the stores are enabled, 99% for sales link. The linked -- sales link is -- they closed the sales through a link on WhatsApp, 20% of the revenues. So the data is very relevant and shows that this is a reality at Arezzo&Co. I would like to point out information that is very important to everyone. Our performance in the sell-out, considering on the left side what is direct to customers, so online in brick-and-mortar stores. When we started in May, we had a good May for Schutz, 67% of the results of 2019 and reaching in August, 98% of the sales compared to last year. Anacapri, a jump of 79% in August; and for Arezzo, 40% to 76%. Consolidated for Arezzo&Co, we -- in July -- remember, this includes online and brick-and-mortar store sales. Of July, 76% to the 3 first days of August already with 87%. On the other side of the slide, we've been very transparent to show the results of just the brick-and-mortar stores, knowing that the result of a brand today cannot be measured just by the brick-and-mortar stores because the multichannel is a reality. So what matters is the growth with consumers, including both the brick-and-mortar stores and online sales.

Now just speaking of the brick-and-mortar stores, I'm going to go straight to the month of July and August. So Schutz, 54% to almost 80%; Anacapri, 51% to 62%; and Arezzo jumped from 45% to 58%. When you look at the consolidated of Arezzo&Co for July, and as we've shown yesterday in our earnings release, on the brick-and-mortar stores, we reached 50%. And we're sure that we're on the right -- in the right direction. In the first 3 days of August, we already have 63% on the brick-and-mortar stores for 2019. So remember that adding the online sales, we have 87%, so it really is a very good level.

Just to close this chapter, consolidating the months of the pandemic, Arezzo&Co sold BRL 215 million on online sales, just the same amount that was throughout the entire year of 2019, with that new level of BRL 55 million per month, and that's our target. Now talking about very important operation, and we still highlight and put our efforts in our operations in the U.S. It was a very important moment that we had to make very difficult decisions. And this is when we have to make these difficult decisions, and they were the right ones for many reasons that I'm going to share. We revisited our growth strategy, which had a target of opening brick-and-mortar stores. And now today, we're going to focus 100% of our growth on the online side. We see this chart that shows the results in the second quarter. We already have 77% of our online sales, and were great sales at several stores and department stores that have good online operations.

New positioning of Schutz going into the contemporary segment. Products that are right below $100, which we had 3 launchings for the sell-in of virtual with very good acceptance by our partners, especially at Nordstrom, we tripled our sales. So you're going to see the results that we will have in the next month, especially in October when they will be delivered. So we are very confident in our strategy. We do see in our overhead costs, not just by the decision, which was hard to close a few stores, but also reducing our overhead, of reducing our showroom so that we reduce the fixed cost to a new level. And in August, we will already have positive results because of that. This chart shows, in a nutshell, the size of the market on each price range and where Schutz will position itself, so around $100, which has a very good addressable market, and Steve Madden is the key brand with a revenue of $1.5 billion. So we're sure that we're growing well, and we have the possibility of increasing Schutz. Alexandre Birman will continue at the luxury level and focus on e-commerce and maintaining their flagships at Madison and the Bal Harbuor Mall.

Now my last pillar, then I'm going to pass the floor to Sachete. I would like to -- on this 14th of August, we're advancing in a very important direction, which is to launch our platform. We have here a very important asset for any platform: data; register; customers; more interesting, 10 million registered consumers, and that's very important data. 3 million customers in the past 12 months. The number itself is already very high, but imagine that we're talking about basically women from the AB social class in Brazil. So we have to -- almost 100% of data from the AB class women in Brazil. This gives us the capacity to operate, as I will show you, together with the shopping experience of our 7 brands. And in 30 days, we will open our marketplace with additional brands, the mother categories, not just apparel, but also accessories. This will be the first step. Continue going on in the time direction, we will have other attributes. Our platform is a living beam. We have a launching today. This is the official launching. So we have 1P in September. We already confirmed that we will be an actual marketplace. And from then on, new features will be launched clockwise, as you can see here, a platform of content and social connectivity in which we will invest in editorials that will bring relevant information to maintain our customers engaged. We will also launch our super app this year that will offer circular economy, new ways to pay, especially considering welting, and we will use data to customize even more our relationship with our consumers.

The next slide I will show you more data about the ZZ Mall. I would like to invite all of you to access it. On the next slide, we will have an official invite. It's already streaming in air. We are doing some tests with people who are trying it. We will launch 3P with about 10 brands being our partners at the beginning and also being able to activate these brands with our database of 10 million customers. And in September, we will launch a pilot of resale of the Arezzo brand. So I'm absolutely sure that we will revolutionize the fashion market for classes A and B, with curatorship that was never seen before in the supply of our products. So here, a presentation of ZZ Mall, the best brands in just 1 place. So here, you can see a video with navigation. You can buy Arezzo, you add it to the cart, and then you can go into Schutz, you can buy a bag and you can buy something from Arezzo. Then you can go to VANS, and maybe you want to buy something for your husband or your boyfriend, some sneakers. This is one of their classic styles. So you have a slip-on from Arezzo, a bag from Schutz and a sneakers from VANS, and then you can pay, and you will receive at home Arezzo, Schutz and VANS. One-stop shop, very convenient for our consumers.

So this is what it looks like. Here, we have the laptop browser version as well as a mobile version. So if you're interested, you can use the QR code and you'll be sent straight to the ZZ Mall that is being officially launched today as a soft opening on August 14.

Thank you, everyone. Now I'll hand over to my partner at this time, a person that was paramount for us to get this far with such strong results, Rafael Sachete.

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Rafael Sachete da Silva, Arezzo Indústria e Comércio S.A. - CFO & Corporate VP [3]

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Thank you, Alexandre. Thank you, everyone. Thank you for taking part in our earnings call.

Now we're going to talk about our revenues. Our gross revenues for the quarter, a change to -- achieved BRL 228.8 million, a drop of 56.2% (sic) [53.2%] year-over-year. Here, we have to mention the expressive growth of e-commerce, 3x higher than last year, close to 200% in the quarter. It was already performing well in the first quarter. But in the second quarter, we really transformed the e-commerce. Another important point to highlight, on the negative side, but on the other hand, a structured negative aspect that was conceived that way. So this sell-in about our franchisees and multibrands. So the company was considering that when the stores were closing and that closure could be longer than expected, so given that scenario, we decided to not send the products. Even though orders were in-house, the decision was to keep these products here and sell these items online so that we didn't overburden our partners and their cash flow. They're very important to our history, and they will remain important when our business resumes.

Here, we have some information in relation to the moment experienced in the stores. We currently have 88% of the chain open, 643 stores in total. And in July, the stores that were open performed 50% of the sales of the previous year. As Alexandre mentioned, in August, year-to-date, we're around 62%, 63% of the revenues of 2019 in the brick-and-mortar stores, so it's a growing -- we're growing -- increasingly getting back to normal.

Moving on to the next chart. On Slide 39, our gross revenues are 51.9%, BRL 91 million, an increase of 5.1 percentage points. Here, it's worth noting the mix in the channels. So web commerce is where we have a higher performance in gross margin, and therefore, that channel mix supported us to achieve a growth in percentage points at this time. On the other hand, the drop in sell-in, the 85.4% of the sell-in in multibrands and franchisees supports the growth of gross margin as they have a lower gross margin than the direct-to-consumer channels. On the right, we can see the EBITDA for the quarter, and the adjusted EBITDA is BRL 5.6 million, a drop of a 12.4 percentage points, mainly impacted by the revenues, but also a lot of merit and efforts on the company side to look at its cost in a structured manner, expenses in a structured manner and have a complete review of the framework and cost, contracts and expenses. During the pandemic, and not just for this moment, we will have a new base of recurring expenses as a result of the restructuring, not only in Brazil, but also in the U.S.

Now on the next slide, we can see the income statement with the financial indicators. A lot of what we've already mentioned, gross profit and EBITDA. So here on the right, we can see how the expenses were structured for the quarter. Sales expenses, logistics and supply reduction of 66.3% of the cost in the U.S. operation, and most of that will see a recurring effect moving forward as a result of the restructuring. As in Brazil, 47.4% of cost reduction, excluding VANS, that's not part of the base of comparison, is also result of the restructuring and reorganization work in expenses. In admin expenses, we have a drop of 34.5% in the period -- in the quarter.

Now some more visibility. We've created this report -- management report, which is also available in the earnings release. And here, we have the details of the one-off effects that are part of the results for 2020. To be very thorough, it shows us BRL 77.7 million negative. Here, we separated the Brazilian -- from the North American operations. So on the left, the North American operation, where the two first items are related to write-offs relating to the stores and the office, the 4 stores that we closed as we believed in their potential and revenues. But at this time, they weren't generating results. Quite on the contrary, the results were negative. And based on our understanding, at this time, it would take longer for them to recover, and these losses would be for a longer period of time, so we decided to close those operations as they weren't generating cash. So Item 1 is the write-offs, and the second one are contract terminations in the U.S. The contracts are a bit longer, so we had to pay some penalties, and that has an effect on cash. We also had termination -- employee terminations and bad debt and margin provisions that were entered in this quarter totaling BRL 42.1 million.

On the right side, Item 1, we have the fund that supports our franchisees at this time during very difficult times in revenues or stores closed, so supporting margins. So connected to meritocracy for the ones that were able to execute their sell-out and bring in financial support so we could cover part of their margins during that period. As I mentioned before, there was a lot of concern on the company side in relation to sustainability of our chain, not only our manufacturers, but also our franchisees and commercial partners. The second line, we have termination costs in Brazil, it's a bit higher. That's a result of restructuring that's a bit higher as well. On the bottom, we have returns of products that were in transit. In March, we brought that back into inventory. So bad debt. We're also increasing the allowances where we believe that they could be realized during this moment in retail, and some stores are having issues in payment and lower amounts and discounts and as well as we have extemporaneous credits of the PIS and COFINS taxes that were credited now in the -- in 2Q '20.

And then in our focus in preserving cash, that was a big mantra we started off in March -- on March 20. We were very careful with cash. We had to be very careful with cash operations, looking at our partners, but also looking at our business. We started the pandemic on March 20 with about BRL 30 million of positive net cash. We knew we had challenging times in front of us, and we captured debt at a very appealing condition at the time. Those debts that are in our balance sheet and our intention from the beginning was not to use that debt, but we could need it, and we did need it between March and April. We had to access part of those resources. We reached a negative net cash of BRL 75 million. And from the mid-May, this has been generating positive cash flow for our company. We closed the quarter with BRL 35 million of negative cash flow, but now in July and August, we already have BRL 12 million in positive cash flow. So cash generation is doing very well in the company and now it's consistent, so we didn't need to use the debt again for our business.

So that's a very important message from our franchisee and multibrand chain. From the very beginning, Arezzo&Co has been their partner, and we have been aiding them. And now we're really being able to have that reflex of that in people paying their debt. So all the payments are being paid in due time, that means that we're in the right direction.

Now the highlights for July. We're very, very happy with these figures. We achieved BRL 172 million in revenue. Considering what we had in VANS, BRL 35 million of cash generation. And today, we have BRL 244 million to be received in the next 60, 70 days, which really makes us confident that the revenues will happen. The EBITDA in July was very positive, with the much better controlled expenses. And in July, we continue to have growth on the web commerce, and we were able to maintain almost 200% growth, so 3x higher. So we're very confident that this is a new normal, and the revenue and sell-in is already going very well.

Thank you very much. And now I would like to open for our Q&A. Please feel free to send your questions that will be through Zoom and Aline will read them to us.

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Questions and Answers

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Aline Ferreira Penna, Arezzo Indústria e Comércio S.A. - IR Director [1]

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Okay. So the first question -- I'm going to put together some of the questions from the analysts. It's for the -- about the platform. So Luiz Guanais mentioned the potential of ZZ Mall and the resale of used items. And joining that with Santander's question, what is the expectation of onboarding of third-party brands in the marketplace? And if we're going to approach brands that complete -- complement our assortment.

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [2]

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Good afternoon. It's Alexandre. Thank you for your questions. I'm sure that with the most important initiatives from our company, starting with the onboarding, we will open 3P with at least 10 brands. We already have 20 in a very advanced stage of negotiations. These brands will complement our assortment, especially focusing on apparel, but also brands that bring experience, which the creatorship of ZZ Mall expects with accessories, homeware, so it will be a very interesting mix. The potential that we see for circular economy, important data that I have to share with you, is that Arezzo and Schutz are one of the top 5 brands that most generate revenue and an important player of this segment. And we're really been highlighted by this pandemic. Arezzo and Schutz are one of the main brands. Our goal, obviously, is to centralize offering the advantage for consumers to sell their products, their secondhand products at our own websites through ZZ Mall. They will have a rebate of 100% of the amount for -- to be used in a new product, so that will be very important as well. And we're developing retention of these customers in the ZZ Mall environment.

So it's something that we think is very important and something we just started. We've been discussing circular economy for some time. We had the initiative of almost launching our own website at the beginning of the year, but now we decided to go to ZZ Mall with a partnership with a player that is not the largest in the segment, but that is doing great technological work in the e-commerce segment because the segment, the most important issue is to please your customers, is providing a good experience, not just buying the product that is different from what they see in the picture. So it's something that we really believe, and obviously, it's another -- it's a complementary -- an offer that complements and not our core operation. We will have a greater shift for fashion. It will be the place to go for Brazilian fashion.

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Aline Ferreira Penna, Arezzo Indústria e Comércio S.A. - IR Director [3]

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Alexandre, we also have a question about how the connection with the 10 million customers that we already have registered in our platform, how would that work?

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [4]

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Through our CRM. Well, little by little, we will start a process of making these customers loyal, putting them on the time line. We have a soft opening today without any investments in marketing, 100% organic. And as I said, on Wednesday, we invited some friends to try, and we already had interesting numbers, 10,000, 1 day; 12,000, the other. But it already shows that there is appeal. Today, we have our soft opening that will last for the next 30 days. And I'm not going to give you the exact date, but around September 15, we will have a big bank, and we will have a great event. It will be the first day that we're going to actually put money in this opening. Rafael already mentioned some of this. We will have a great digital event. We have a communication company that is very modern that's partnering with us, so we will add value to our current partners. And from now -- and from there on, we will activate our database, starting with the active customers that are around 3 million, and then we will actually grab -- little by little increase this growth.

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Aline Ferreira Penna, Arezzo Indústria e Comércio S.A. - IR Director [5]

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Perfect. Our next question is from Helena Villares. She has 3 questions. The first is about the operations in the U.S. It still shows top line performance even with the cost cut. In July and August, what is the strategy? What type of customer? Is it a new customer or it is the same that already bought the brand? This new price positioning of Schutz changes your mind about multichannel?

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [6]

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Perfect. Thank you for your question, [Helena]. The consumer still didn't see this brand repositioning of Schutz. It will take place in September. We're doing a super activation, very strong work that will be done with communication. So as I said, we had 3 launchings for sell-in, in which the purchases from our partners will be in the online stores. It's called Revolve Operation. It's -- Schutz is the #1 shoe brand, and you will see the size of the assortment they have. So it's online, but we're talking about Nordstrom, Bloomingdale's, department stores that are still standing, and we think they will continue to stand because they're solid brands. So that already happened. This revenue will start in September, and the first order wave will stop by September.

So about growth, it's highly increased by the online, which has an average amount higher than sell-in, and maintaining sales called dropship, in which the product is offered at the department store websites, but the fulfillment is through our own platform. It's interesting to say that 30 days in the second quarter, our distribution, which is in New Jersey, was closed. So the options in our American operations are very strong, and that's why we maintain our store in Beverly Hills, which has very strong distribution. This store sells 1,000 pairs per month. And now looking at the West -- East Coast, we had 2 operations: in Miami; and in the north part of the East Coast, New York, we have 2 stores at Madison. So we're going to keep those 2 stores to maintain our branding and also we will express deliver to our customers, and the growth will take place through multichannel but highly focused on digital sales, either our own or third party. In August, we will have growth similar to July, around 40%.

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Aline Ferreira Penna, Arezzo Indústria e Comércio S.A. - IR Director [7]

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The next question is from the integration of omnichannel with the franchisee because it's gained momentum with the pandemic and how structural will that be when things come back to normal? And how much is that strong integration that we have -- you have with franchisees change in relation to multibrands?

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [8]

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Well, okay, 2 very separate relationships. So the multibrand channel, which is the second part of your question, to be very honest, I believe it will be hard to operate in terms of store shipping or store pickup or activation based on -- off the shelf. I think it's more of a commercial relationship but are increasingly higher share of wallet. This is idea. There's idea, project testing and then rollout. But in idea, right out, Aline, that we've been working on for a while, is creating -- well, it's a bit complicated. I'm going to try to simplify this. So it's multibrand but works under 1 of our brands. So 80% of the assortment would be from our 7 brands. And based on that, you have -- be able to manage that closely, be it bad debt or training. And based on that, you'd be able to roll out the options as well as that type of store profile. That's still an idea. Okay, just to clarify that, it's not even a project, but we believe that, that could be a next step.

Going back to the relationship with franchisees, without a doubt, it's a change that didn't start in March, April 2020. We've been working on this since February 2018. And a bit of a year before we had the -- in May, we had the first digital retail day with our franchisees. Even with the presence of Luiza Helena, it was at the JK Shopping Mall. I really miss those big events and all the people. And that was very important. That was the official kickoff of implementing the Arezzo&Co calendar. And today, to continue a weekly cycle where we invite people and speakers to support us, today, we'll have the CEO from the Imaginarium store that's been an interesting case in our vision in omnichannel operations. Showing the best practices to our franchisees, we launched Izza, who is our virtual salesperson as well as Arezzo University that has a very constant process in training. So it's not that it's just a spark, it's actually a transformation in retail with continuous process in training, and investment will take us where we want to be with the relevant percentage of sales will be -- be it store pickup or mainly sales through links.

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Aline Ferreira Penna, Arezzo Indústria e Comércio S.A. - IR Director [9]

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Great. The next question is from Tobias. He's saying congratulations on your 2020 new year. So in that plan of becoming a house of brands, it seems like you're doing very well. When do you believe you'll ready to include foreign brands? I'm going to add to that one, another question. You've been very vocal about the M&A strategy. Could you give us some flavor about who your targets are and who you would not (inaudible)?

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [10]

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Hi, Tobias. Thank you for your question. Yes, I think we need to toast on that, that was our objective. So start off new life on July 1. So we've seen revenues in July, (inaudible), we've been working strongly on that growth of these 2 quarters. So that makes us very happy. And I wanted to say that our main objective is our team engagement, and we have that very enrooted at Arezzo&Co. And about that other question about our M&A activities, events seems like a big case, and our ability to identify a brand that would add value to our business in terms of revenues, new consumers and because VANS has a lot to add, and we're going to grow a lot in children's shoewear in Brazil with VANS. So the integration has showed how much we are ready, be it in people. Today, leadership -- VANS leadership is a person that was trained in a Arezzo&Co. Her name is [Maria Asesa]. She started off with -- is a controller -- controlling management. She was trained in merchandising in Italy. She worked in merchandising, in Schutz and Anacapri, so she learned all of that. And now she's the VANS Director, maintaining the VANS culture in Brazil. With people, where you take -- it's important to bring in that management culture, but keep the people culture. And then the more harder matters, systems, logistics, check less than 90 days, SAP was integrated and in ERP in the year and as well as the omniplatform called [Hydrus].

So VANS growth, even with pandemic, has been very strong. In the second half this year, it will continue. So to answer your question, yes, we are well prepared. We have good matters being addressed that are ongoing, and we do not want to enter C and D class. That is not a class that we are looking at because we do believe that we know how to operate best in A, B, in terms of branding and creating value. So that's the only remark that I have. And fashion, that's our core business.

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Aline Ferreira Penna, Arezzo Indústria e Comércio S.A. - IR Director [11]

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You mentioned VANS, and we have a question from Olivia Petronilho from JPMorgan. She says that the transition for production was already very relevant in the first half. You increased the local production. Can you give us some more flavor about your next steps with VANS? What changes in streamlining could we expect in operations in the next 6 to 12 months?

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [12]

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Yes, Olivia. That was very important. In the second half, our sourcing area with -- where one of our core is agility to change many products that have been sold in sell-in in the first half and would be produced abroad and imported, we switched that to local production, and we believe that 70% of production will already be local in the second half. That's our objective for the next 2 years and have more flexibility and control of production in addition to improving our gross margins and not being exposed to the FX effect. In addition to that, integrating the stores, so VANS only had 2 stores, brick-and-mortars and 2 outlet stores. And during the pandemic, we've inaugurated 3 stores, 2 in the city of Belo Horizonte in the shopping mall and 1 in the Barra Shopping in Rio. We have 3 stores that we've already signed. So we can expect speeding up the brick-and-mortar stores of VANS. They are a big hit. We're talking about great sales levels in the stores that were already inaugurated. We'll continue to grow e-commerce. So the VANS leader that we maintained from VF that was operated in São Paulo was already reallocated. So I'd like to thank Luiz and all the other people that moved to Campo Bom, who strengthened the digital side, and so that's very strong in VANS again to guarantee its continuous growth. Those are the main differentials that we could add with VANS in terms of brand and product, VF global does exceptional work.

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Aline Ferreira Penna, Arezzo Indústria e Comércio S.A. - IR Director [13]

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Our next question are repeated questions. One from Olivia and 1 from Irma Sgarz from Goldman Sachs. They ask, since the accelerated curve to go migrating to online, what do you think about expansion plans or potential opportunity to revisit the number of brick-and-mortar stores?

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [14]

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Well, we understand that our audience right now, customer level is at a very good level. So the operations of VANS, as I mentioned, we have a few to see -- look at Anacapri, which were in the plan and maybe converting a multibrand into Arezzo Light. About Schutz, it's at a level that we think is ideal. We don't intend to expand too much, but we do understand that right now, we will have good opportunities to negotiate real estate, which might lead us to expand in areas in terms of area at malls that we already have stores to provide a better experience and also have more room for inventory and opening Anacapri and Arezzo Light, which were already forecasted. For 2020, this plan changes, we already have Arezzo and VANS consolidated. But if we do have some opportunities to open after 2021 and through M&A process, there are brands that have low footprint in our capillarity and knowledge of hundreds of sales point in Brazil. Allied to the vacancy that is already showing will be important for Arezzo to open new stores and (inaudible) brands.

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Aline Ferreira Penna, Arezzo Indústria e Comércio S.A. - IR Director [15]

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The next question is from Richard from Bradesco, he says that, could you talk more about the role of the stores? You mentioned that the stores will have a greater interaction role with consumers with the brand. Is it possible with the current format of the stores? Do you need larger stores, fewer stores? And the [economics] of the stores will continue to work for the franchisees if they're selling more e-commerce products?

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [16]

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Richard, thank you for your question. First of all, it's worth saying that we believe in the importance of brick-and-mortar stores, so we will continue to invest, making our business model [suitable] to continue and to the expansion with brick-and-mortar stores. About the sales floor area, we understand that some places in Brazil might need larger areas. As I said, because of the vacancy, we can negotiate good conditions. And some other places, we have larger stores, so we have the opportunity of having an experience inside the store. If you're in São Paulo, if you go to the mall, I invite you to go see the Arezzo store at Morumbi Shopping. It was already a large store, but the places are inviting for a digital experience, we will -- we have a project to retrofit several Arezzo stores that exist to go into that new format with low investments.

About the economics for the franchisee, today, the percentages that they receive from selling in the infinite shelf are the highest in the market. So they do want to sell by e-commerce, especially if they want to lower inventory, which is what we're doing now, more frequent collections and replenishing faster. So they have a reduced inventory on the other side. What we receive in terms of commissions with their sales and we reduced recently that commission. And the franchisees that are doing well -- with store pickup are doing well. They're very happy with the [important] percentage of implementing their revenues.

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Aline Ferreira Penna, Arezzo Indústria e Comércio S.A. - IR Director [17]

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Our next question is from [Daniela Cower from Eleven]. About the performance in the stores in the malls that they're performing lower than last year, is that because of the economy right now or because of the restrictions of the mall opening hours?

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [18]

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Thank you for your question, Daniela. First of all, I would like to highlight the ramp-up process. If you look at the results in June, July and August, which we already have 63% of the revenue already accomplished, so we have -- if we have a progression curve for September and October, we intend to very soon reach the same levels as last year. And we hear a lot in the market of the increase of productivity of the stores, which is the sales and the number of hours the store is open, it did increase a lot. But I don't think that is a figure that we have to focus on. So your question, yes, definitely, the restrictions in opening hours, especially here in São Paulo. In Rio, they open almost the full hours, so maybe that's the new normal for the malls. From 10 to noon was not good time to open, you had fewer people there. So I think that the malls should open a little bit later, except for those who have gyms inside. So those -- our restrictions really do have a great impact. And also, we have several stores -- although we have opened 88%, we still have a few that are still closed. And this just does impact our results even though it's a low number.

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Aline Ferreira Penna, Arezzo Indústria e Comércio S.A. - IR Director [19]

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The next question from Daniela and also others are about the mix of sales in the third quarter. It will be similar to the second quarter, higher sell-out percentage compared to sell-in or if we will have some kind of expense dilution and mix more towards sell-in?

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [20]

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Well, definitely, the percentage of sell-out and e-commerce accomplished in the second quarter is what we presented. We didn't have any sell-in, only a few spot ones. So in absolute numbers, the -- for sell-out, it will be similar to the second quarter, BRL 65 million per month, but the total of the company would be much higher. So we will have a growth in the sell-in. But it's worth mentioning that the e-commerce sales, since August 1, are for new collections. As you've seen, more than 1 million pairs of new models -- and I would invite you to access the Instagram of the brands. And this increases the gross margin of e-commerce, which even with the reduction of the weight average, (inaudible) that tends to be higher than the gross margins in the (inaudible) half, but the growth of the sell-in will be higher with a lower gross margin.

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Aline Ferreira Penna, Arezzo Indústria e Comércio S.A. - IR Director [21]

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If you already have some kind of [operation] leverage for these lower expenses in the third quarter. And [Cassimiro] from HSBC mentioned about the online channel.

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [22]

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(foreign language) greatly the profitability of Arezzo&Co. And in this third quarter, we'll operate in the blue, which will help the consolidated numbers of our company.

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Aline Ferreira Penna, Arezzo Indústria e Comércio S.A. - IR Director [23]

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Another question from Felipe Cassimiro from HSBC. What is the financial health of the franchisee and multibrand channels at this time?

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [24]

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Well, starting off with multibrand, that's the channel where we've had expressive growth in sell-in, and that is a result of our gain. It's not the market share. It's what we call the share of wallet, so it's growing within those 4 walls of multibrand because our brands with the launches every 15 days, that's very frequent. If you'd like to see our sell-in for the collection, it will be on this -- between 7 -- Tuesday and Wednesday next week, so you can see that frequency in launching the right products has been growing. So about the financial -- and it's the same for the franchisee. And about financial help, you can see that through bad debt. So in June, we had a 100% of the receivables and even some past due from the previous month. And in August so far, everybody is paying on time, it's very positive, even more than we expected, and that's the trend. It's a trend of continuity of franchisees paying on time, unless we have a new catastrophe, but the trend -- we're trending towards financial health similar to previous levels in franchisees.

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Aline Ferreira Penna, Arezzo Indústria e Comércio S.A. - IR Director [25]

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And last question from Olivia Petronilho from JPMorgan. [Olivia's] asking for some more details in inventory composition, we mentioned in the release that part of it should be -- remain until the next year. She would like to see volume of our fashion content that might require (inaudible) in the third quarter.

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [26]

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Well, Olivia, thank you for your question. Most of the inventory was already sold in the second quarter. It's something that we act strongly on, so the percentage of inventory to be marked down in the upcoming months is much lower than it was in the second quarter, so we were able to work on that. If you consider BRL 150 million in e-commerce in the second quarter at an average price of BRL 200, that's 150,000 pairs. So that's a huge volume that was already sold. We don't have high levels of inventory from past collections and our weighted gross margin, given the growth of e-commerce, was very strong in the second quarter. So the highest revenue moving forward, it will come from new collections.

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Aline Ferreira Penna, Arezzo Indústria e Comércio S.A. - IR Director [27]

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We have another question here from Bob Ford. He's asking, Alex, could you talk more about how you're considering licensing new brands in Brazil or the possibility of licensing Schutz or Arezzo internationally? And there's another question here, if we're looking at Europe or Asia.

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [28]

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Thank you, Bob, for your questions. Results are very positive. And there's the group -- the VF group has other brands. Were their contracts are ending with other players here in Brazil, yes, and we are talking to them. In terms of licensing other brands, that's one of our assumptions of growth. About licensing Arezzo and Schutz brands in the U.S., we believe that our own operations have reached an interesting level of revenue and profitability, so it's still not the case. The Arezzo brand that is still virgin, I'd say, in the U.S. market could be a possibility because the ability to create products, and Arezzo is incredible, and there are no players similar to that in the U.S. And regarding Europe and Asia, the answer is no. We really focus our international growth on the U.S. We know that there -- it's a better comeback in Europe and Asia, but we need to focus. We already have a very extensive universe to grow, but we're not looking at Europe or Asia. Rafael, would you like to mention anything?

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Rafael Sachete da Silva, Arezzo Indústria e Comércio S.A. - CFO & Corporate VP [29]

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Olivia, just about Olivia's question. Thank you for your questions. You have to consider that the higher inventory, BRL 107 million year-over-year is BRL 45 million of inventory of the VANS -- because of VANS, so the -- it's growing from the others. And VANS has 60% on their core business, the old school, the era, the slip-on, so those products weren't delivered for wholesale from multibrand, and they're not marked down, and it will be delivered as from now.

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Aline Ferreira Penna, Arezzo Indústria e Comércio S.A. - IR Director [30]

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We have no further questions.

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [31]

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Thank you, everyone, for participating in this video conference. It was much more than just the results of the second quarter. Thank you, everyone. And my final message is that, in our opinion, the biggest achievement in this pandemic. I hope that everybody is still listening, what I want to share is something very important to us. I'd like to say that pressure creates union. It shows that a company that is a high performer and has a high-performing environment, you can attract and engage people even in a scenario that's highly challenging. And here at Arezzo&Co, that is a reality. Based on this survey in July, Arezzo&Co was chosen as one of the Great Place to Work companies with high-growth in the engagement levels compared to last year, even in the pandemic scenario, so that shows all the passion, dedication and commitment that we have, and that's what drives people to wake up even earlier every day and fight this battle every single day.

I'd like to congratulate my team and leadership for having conveyed this message about how proud we are to be a part of Arezzo&Co and take that strength and energy to add a lot of value to our society, in our social side, environmental side is very important and high-level governance. So on the way to 2154. Thank you very much.

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Aline Ferreira Penna, Arezzo Indústria e Comércio S.A. - IR Director [32]

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Good afternoon. The Arezzo&Co conference call is now over.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]