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Edited Transcript of ARZZ3.SA earnings conference call or presentation 7-Aug-19 2:00pm GMT

Q2 2019 Arezzo Industria e Comercio SA Earnings Call

Belo Horizonte, Mg Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Arezzo Industria e Comercio SA earnings conference call or presentation Wednesday, August 7, 2019 at 2:00:00pm 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

* Rafael Sachete

Arezzo Indústria e Comércio S.A. - CFO

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Conference Call Participants

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* Helena Villares

Banco Bradesco BBI S.A., Research Division - Research Analyst

* Irma Sgarz

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Luiz Felipe Poli Guanais

Banco BTG Pactual S.A., Research Division - Research Analyst

* Marco Calvi

Itaú Corretora de Valores S.A., Research Division - Research Analyst

* Robert Erick Ford Aguilar

BofA Merrill Lynch, Research Division - MD in Equity Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for waiting, and welcome to the Arezzo&Co conference call where the results for 2Q '19 will be presented. (Operator Instructions) This call will be translated into English, and participants overseas will be able to ask questions. (Operator Instructions) We would like to remind all journalists and others from the press that this conference call is exclusively for professionals from the financial market and current and potential shareholders. Any questions must be submitted to our press relations, Caroline Muzzi, whose contact information is available on the company website at www.arezzoco.com.br.

This conference call and the slides are being streamed on the web and can also be seen on the company website. In case any of you do not have a copy of the Arezzo&Co press release published yesterday, Tuesday, August 6, you can get a copy from the company website. This conference call is being recorded and the recording will be available on the website after the call is over.

Before we proceed, we would like to clarify that any statements made during this call regarding the company's business prospects as well as projections, operational and financial goals concerning its potential for growth are forecasts based on the expectations of the management for the future of Arezzo&Co. These expectations are highly dependent on domestic market conditions and the general economic performance of Brazil and international markets and are therefore subject to change.

Now I will hand over to Mr. Alexandre Birman. Mr. Birman, please proceed.

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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 morning, everyone. Thank you for taking part in our conference call relating to the results of 2Q '19. I have with me our CFO, Rafael Sachete; and our Director of Investor Relations, Aline Penna, and the analysts that quickly wrote their reports contributing to a critical external view of our results.

Now speaking about our results, we believe are satisfactory. Without a doubt, we expected more expressive growth. However, I'd like to highlight that since our IPO, we grew our revenues in all second quarters at 12.3% CAGR in addition to CAGR of 9.6% of [dividend]. It's interesting to observe that in these 7 years, in all of them, we have positive same-store sales in the second quarters.

Speaking about the scenario. The second quarter is mainly highlighted by the winter collection with the highlight to the Mother's Day collection. And in the Saturday before Mother's Day holiday, we had record sales with same-store sales greater than 6% on that day with a total of almost BRL 25 million in sales in 1 single day.

I'd also like to highlight in this quarter the continuous growth of the handbag category share, which shows there's an opportunity to invest in other product categories. Handbags already account for 25% of our revenues or our share in that quarter.

We had growth in all brands in all channels except for Owned Stores where the transfer to franchisees is part of a strategy, a deliberate strategy, on our side so we can have a higher return on invested capital as well as a higher focus in franchise management. We believe that this movement is very important and it shows the interest of many entrepreneurs to become franchisees. So we will continue this process throughout the other quarters of 2019. We also forecasted good advances in our Digital Store strategy, and I'll give you further data after the opening remarks where we had high adherence from our franchisees.

In addition, to give even more traction to our projects and expedite these projects, we had new hires in technology and e-commerce. They report to our Executive Director of Digital Transformation, Maurício Bastos. And also to strengthen our knowledge in that journey, we hired Silvio Meira to our Strategic Committee for Brands and Innovation. He's a member of the Board of Directors of renowned companies that have been becoming highlights because of digital transformation. So in that period, [we] had an opportunity to learn even more with the U.S. market, [presenting] high growth of revenues.

Now briefly about our brands and the main pillars in our company. The Arezzo brand has increased its actions in the marketing. We received the Top of Mind award for the third consecutive time from Exame magazine. And in addition to the institutional campaign of the winter collection and other branding strategies, this time we created a campaign that was focused on Mother's Day, presenting diversity and considering the purpose of sorority in the Arezzo brand where we had stars playing this role that -- very famous mothers and daughters in the country. And to continue our 360-degree strategy in product and marketing, as we started in April in 2018 with a case of a scarpin called Nina, this year we launched ZZFUN sneakers, which is a huge success and running out in just a couple of weeks with strong replenishment of over 20,000 pairs of the same model. In 2012, we had sneakers that also accounted for significant results and we believe that this category is gaining more and more relevance, already accounting for 20% of Arezzo brand sales.

In relation to Schutz, it's maintaining its path of resuming growth, presenting a 9% global growth and 2.5% in Brazil with the major highlight to the brand's e-commerce that has percentage of almost 15% where we implemented a test of the direct consumers to e-commerce and production, which we call speed factory meaning it's produced on demand in less than 2 weeks for the products that are being purchased on e-commerce. So a lot adherence from consumers. For Anacapri, it's presenting continuous and expedited expansion, growing 18% in the quarter, even having 62% in 2Q '18. A number of franchises opened in these months and we should end with 200 stores.

Now to Alexandre Birman brands. For every quarter, we will open the level of disclosures and strategy about the brand as even though it accounts for 5.3% of our consolidated revenues, which is not that high, in global terms it has a lot of growth where over 6% of the sales come from outside the company, however, it presents a strong growth of 58% same-store sales with a highlight to the new flagship store being opened in Iguatemi Mall, which sold over BRL 1 million in the month of inauguration and now we will open 2 more flagship stores in Brazil in the second half of the year with also major highlight to the growth of the e-commerce for the brand. In the U.S. market, the main market for the brand, we inaugurated a new showroom with the purpose of providing an even stronger brand experience for -- in major department stores and we will inaugurate the third store in Dallas, Texas.

About Fiever. We are very confident about the increase of share of wallet in -- for sneakers and women share of wallet. And even for men, we already have 12% of its sales for men -- in men's sales. So trying to define the best option to roll out the monobrand Fiever stores and now the multi-brand store owners are going to specific sneaker stores. That's a monobrand profile that we don't have with our current brands. But we believe that, that is very important niche to grow at Arezzo&Co, and the brand's e-commerce that in this quarter had almost 50% growth.

And last but not least, I'd like to highlight our most recent brand, our baby that just turned 1 year old, which is OWME. So I have to say that the name will change. We've been analyzing that and some consumers are having trouble in pronouncing the name. Therefore, we did some work to rename them and we considered our very important brands, Arezzo and Anacapri. So back in '72, there is a map of Italy and we found this city called Alme. And it's much easier to pronounce with a nice sound, but it still has part of the original name. So it will be rebaptized in August to Alme. And therefore, we'll continue to invest in those brands, opening a flagship store in the Iguatemi shopping mall close to the PÃO DE AÇÚCAR supermarket on the ground floor. And then we have a pilot project for Alme in the Morumbi Shopping mall.

To end my opening remarks and hand over to Rafael Sachete, I'd like to say a few words about our evolution in our strategy focusing on digital transformation. So in relation to channels, we had a lot of progress having 294 stores qualified for click and collect; 40 for store shipping. And almost half of this network in 200 where we have remote sales by the sales people with a tool, a WhatsApp tool through a partnership with Cielo.

We also have strong investments in logistics, and in this past year, we're going to kick off and have an initial test for 18 stores that will run or that we'll operate through RFID, so we're investing in equipment in our stores. So the project's already been -- is ongoing for 6 months now, and we know how important that is for us to read our inventory quickly. Therefore, the RFID project should be completed by the end of next year. So in August we are inaugurating a new DC for our e-commerce. There's a [mezzanine], it's 10,000 square meters in total area, able to store over 350,000 shoes and also considering our long-term growth would be to expand our brands in the U.S. market.

So we have a new organizational structure that is more in line with what we have in Brazil, that is very successful. So we have a director responsible for each brand and a financial and operational professional supporting the brands. The brands report to me and operating management reports to the Executive Director here in Brazil. Results are still strong, as you've seen. We have the visibility and believe that this will continue throughout the next quarters in 2019. We will inaugurate a new Alexandre Birman store in Dallas, and we're opening up more points in department stores, with a highlight to Nordstrom.

So that's part of our strategy and then we'll be giving a more deep -- or in-depth view about how we can make our brands even more sustainable and create business that will have the -- with the basis of sustainability and strengthening our organizational culture. So to conclude, we'll begin the new strategic branding cycles in September, having a consulting firm that's been our partner for many years supporting us in this project as well.

I'd like to hand over to our CFO, Rafael Sachete. And right after that, we will be open for more clarification and talk about our results. Thank you very much.

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Rafael Sachete, Arezzo Indústria e Comércio S.A. - CFO [3]

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Thank you, Alexandre. Good morning, everyone. And before starting and discussing the results, it's important to emphasize that in Q1 this year, we adopted IFRS 16 standard. However, to make comparison more -- to make it easier, all results here presented are not considering the effects of the new standard.

Now starting on Page 5, the gross revenue of the company was BRL 489.5 million in Q2 '19. It's 4.6% growth in the domestic market and 32.6% growth in the foreign market with [emphasis] for the U.S. market that grew 70% in Q1 and already accounts for 10% of the total revenues of the company.

On the next page, you can see the breakdown of the gross revenue in domestic markets where the highlight is the brand Anacapri reporting BRL 56.8 million, a growth of 17.6% and the still positive performance of Schutz as presented in the previous quarter and that continued this quarter, too.

Now on Page 7, you can see the gross revenue per sales channel. The highlight is the performance of Web Commerce, which grew 21.5% in this year as well as the franchise, which grew 6.3%. We should explain the drop in our Owned Stores sales with the transfer in 2018 of 7 stores going to franchisees, 5 of them were Schutz and 2 Arezzo. If we just consider these transfers, that growth channel would have grown 8.2%.

In terms of sell-out, our monobrand chain of stores including franchise, our Owned Stores and Web Commerce presented a growth of [8%] in sales, due especially to the strong growth of the online channel and the net opening of 54 stores, monobrand stores, in the last 12 months in addition to same-store sales, which grew 4.1% in the second quarter of 2019.

We should also highlight that in the last 12 months, Arezzo has presented a sell-in same-store sales of 2.7% and a sell-out same-store sales of 3.3%, which is a difference of 0.6 percentage point, a healthy level for the channel.

The multi-brands channel in turn grew 3.1% over a basis of 18.9%. The performance is the consequence of winning new customers, especially for our newer brands and demonstrating a cross-selling between the brands in the same points of sale.

On Page 8, you can see the evolution in the number of stores and our sales footage. We closed the quarter with 696 stores, 681 in Brazil and 15 overseas, an increase of 5.4% with 60 openings in the last 12 months and 6 this quarter.

On Page 9, we can see on the left the gross profit of the quarter, which reached BRL 184.3 million, a growth of 3.1% and a gross margin of 46.8%. Among the factors explaining the gross margin, the positive highlight is the greater participation of our operations in the U.S., the Web Commerce channel. And on the negative side, the worsening export margin, lower participation of our Owned Stores in the mix and some indemnities, labor indemnities, that we have to pay in our Owned Stores with an impact of BRL 4 million.

Still on this page, on the right-hand side, you can see our EBITDA, which reached BRL 58.8 million in the quarter, 4% growth and 14.9% margin, that is 20 basis points below Q2 '18. The pressure on margin comes from the decisions in our strategic branding, which includes the expansion in our operations in United States of America. We should mention our extemporaneous credits coming from the collection of income tax, which led to a net effect of BRL 8.4 million in EBITDA.

On Page 10, you can see the net income of the quarter reached BRL 42.4 million, 27.9% over Q2 '18 with a positive impact of the improvement in the financial results because of lower FX variation and also due to the positive effect in income tax rate and suffered a negative impact of our financial results that went down.

On Page 11, you can see the generation of operational cash in the company, which was BRL 41.2 million in the quarter, 56% greater than Q2 '18.

On Page 12, on the left, you can see the CapEx in the first (sic) [second] quarter of BRL 17.5 million with the highlight for the investments on digital transformation, expansion of our distribution center for Web Commerce and investment in our new factory, Alexandre Birman. In the U.S. market, we have a new headquarters in New York with a dedicated showroom for the brand Schutz and Alexandre Birman and also the new Schutz brand in the country. On the right, we have our debt. We closed the quarter with a net cash of BRL 81 million and net cash/EBITDA ratio of 3x -- 0.3x, sorry.

Lastly, on Page 13, ROIC reached the level of 27.7% as compared to 31.2% in Q2 '18. Although NOPAT is in line with the previous year, ROIC was impacted by increase in working capital because of higher inventories as a consequence of the growth in the company's sales, especially in the U.S. markets and also it was impacted by a credit of the income tax that took place in end of 2017, which leads to a different comparison basis.

Those were my comments. I thank you all very much for your participation. And now we are open for questions and answers. We are available to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Marco Calvi from Itau BBA.

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Marco Calvi, Itaú Corretora de Valores S.A., Research Division - Research Analyst [2]

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I have 3 questions on our side. So first of all, can you talk about what happened in the quarter in relation to exports? So there was a drop in the industry overall in terms of exports. So could you give us your opinion on that and what we should expect for that for the rest of the year?

Second, I would like to understand, in terms of gross margin, other factors that you explore in relation to the positive and negative effects to the gross margin. What are the effects and maybe if you can quantify the effects? So which ones do you believe are nonrecurrent and wouldn't happen in the upcoming quarters?

And third, can we talk about multi-brands? So there was growth already based on a very strong basis, and at the same time, there were some market dynamics going on, especially for you, so e-commerce is gaining more room and this format such as the light Arezzo store. So in a scenario of a recovering economy this year, should we expect a recovery following the same path in multi-brand channel? Those are my 3 questions.

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [3]

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Marco, thank you for your questions. This is Alexandre speaking. So I'd like to start off talking about exports. When we talk about the foreign market, we should split that up into 2 pillars. So the first one is our main focus of operating in the foreign market, which is our own operation in the U.S. market. The second one are the multi-brand store owners. So it's work that we've started about 20 years ago. We have very important partners in many different countries in the world with a highlight to the Middle East and South America.

So there are some ups and downs during the quarter, it's worth highlighting that. In the consolidated figures, the channel does not present growth. However, it's a much smaller job than what we saw in the second quarter. So we had growth in the first quarter and then the drop in the second quarter. This channel is not a priority. So we have other channels, franchises, Owned Stores, multi-brands and the operations in the U.S. So I'd like to say that out of the channels that we operate in, the one that we dedicate ourselves less to because of the time required is exporting to other countries.

And in the second quarter, we had some other issues, some 60% -- sorry, almost 10% of that amount relating to sales is specifically related to one customer in Argentina, a long-term partner. And I did visit them in August last year to begin a process to negotiate franchises -- to open Arezzo in Argentina, which was well -- we were all advanced in that conversation. However, everybody knows what's been going on in Argentina in the past 12 months, and with that, there was a fallback on that.

And the other 40%, and related to 2 other customers. One was a China customer, which is not a priority. They bought a lot last year to test it out. The result wasn't what they expected, so they decreased their purchases, but they still have of a partnership with us. The other one was a customer in Chile, which was a strategic partnership. It's a renowned department store and now it's the biggest competitor and -- especially in a market with important players. And in that transition, we had a drop of 8%. So for the second half, we don't believe that this channel will grow much. It should be -- growth should be flat. It's not our priority.

So -- and now I'm going to talk about multi-brand with what -- I focus on strategy. And to talk about your -- to answer your third question, Sachete is going to talk about gross margin.

So the multi-brand channel, it's very important for the [capillarity] distributing [our] brands. It's worth noting that all brands, starting with Arezzo, 47 years ago, and more recently, OWME, with the higher growth in multi-brand. But as brands become more mature, we move them to the franchise channels. So as we mentioned, the Arezzo light project with over 40 stores that were opened, we should achieve 100 stores by the end of [last] year. So we've been -- where we have consolidated market share in cities, we switched from multi-brands to light franchises, so that's a growth of -- expected growth of 25%. But obviously, that decreases the sales of multi-brand. So as we said, there's more exposure of the smaller store owners to macroeconomic conditions. Therefore, we have been strongly working with them.

Our trade show calendar for the industry changed a lot, the FRANCAL, which is always in July changed to June, so we had to switch our launch -- change our launches and coordinate the launches from franchise and multi-brand. It's always a challenge. So now for the third quarter, we expect positive results of high single, low double digits in growth for that channel. So it's a channel that we have a very seasoned team, very dedicated team. So percentage of our revenue that we believe it should remain around that, but our main growth is in franchises and Web Commerce. I'd like to hand over to Sachete if you have any doubts about [what I] can answer.

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Rafael Sachete, Arezzo Indústria e Comércio S.A. - CFO [4]

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Marco, so complementing your question about gross margin, we closed the quarter with a pressure of 10 basis points on the margin. And you asked whether that's recurrent or not. We have mentioned 4 reasons, 4 explanations for this variation in our number. The main reason was related to the payment of labor indemnities in our factories, and this accounted for 40% to 50% of the impact. So I believe this is not a recurrent factor.

And the other 3 factors, I mentioned exports. So sale of our owned stores, the transfer of our owned stores, and so for exports, this was negative. And we think this is not recurrent either. So it had an impact of 30 basis points. The transfer of our owned stores, which is recurrent because we are transferring back after 12 months. And this is going to be dynamic, but impact is not so great. And our U.S. operations, we are very optimistic. We think this is going to deliver a very good growth, and this will cause an impact, but will be positive over the next few months. Have I answered your question? If you still have any other questions, we are here to answer.

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Operator [5]

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Our next question comes from Luiz Felipe Guanais from BTG Pactual.

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Luiz Felipe Poli Guanais, Banco BTG Pactual S.A., Research Division - Research Analyst [6]

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My question is about the digital initiatives. I would like to understand the level of compliance of franchisees with the initiatives that you are implementing. Just so that we -- a bit more color how this will evolve over the future quarters.

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [7]

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Luiz, thank you for your question. This is Alexandre. As we said, we are continuously investing in the digital initiatives. It started in 2018 with the first digital day we had with our Board members, and now also with our leaders. And from then on, there was a process of getting to know, having many consulting services going deeper into that, international travel for immersion in other countries.

And then in 2019, we started by opening or -- with the new system to create solutions with the squads. There were 5 important squads in the company who are formed. There are many other people directly involved in that today, addressing those pillars, and then I'm going to explain to you in a nutshell. Number one is channel integration. I'm going to give you some more data, a few more numbers of what we've done over the months. And the other one is a new display for the information for the numbers of our collections in terms of merchandising. So data analytics in terms of information, our turnover of projects also improving our [selling] process, in which, today, has 80% of the sales, that's something that we'd call electronic. And implementing many analyses so that franchisees can see better what they are buying.

And there's also BI we implemented late last year, a tool called Tableau that has been recently bought by Salesforce in the U.S., it's a French tool. And the rollout has been interesting in the network. But we're not yet at the front end with franchisees, but this will be taking place shortly still this year. And in terms of data management, this is going to be very relevant for decision making. And also we're improving our lead times with our partners and suppliers of our stores. We have been working very intently on the utilization of lead times, and we think this is key in our business. We're working on such fashion, and 20% of our businesses is done in open platform. And we want to connect the distribution centers to the factory and to the stores. We call it fast tracking.

And so additionally, we have been investing a lot on e-commerce. To reinforce the team, we hired 2 new executives, Rodrigo Ribeiro, with wide experience in retail and in banking and in fintech. And so we really believe that this is going to help us in payment of our franchisees, once [we involve that.] The other one is Pedro, with wide experience of more than 10 years in a renowned chain of home -- household appliances in Brazil. And recently, he was with another fashion retailer, and now he is leading our e-commerce initiatives. And with these new hires, we also have Silvio Meira to reinforce our team to be part of our committee of strategic branding information -- and innovation.

And so we have 110 stores that were operating in the Q1, now we have 304. So this demonstrates great compliance by our franchisees. We had a convention on May 14 with our Board member Luiza Helena. And she spoke to them with a talk, and she was explaining how important it is to integrate channels. And the good thing is to see how franchisees are willing to be involved in a multi-channel strategy, and our franchisees are seeing that this is the way for them to increase their margins. And also we had been investing more and more in stores and in partnerships with local operators of logistics so that we have very good experiences with regards to speed of delivery by our store. Because when a customer buys something through the e-commerce instead of going to the brick-and-mortar store, they want to have a fast delivery and have a low freight costs and want to get the product as fast as they can at home. And now the e-commerce inventory and the brick-and-mortar stores, so we are integrating the stores. We have 200 pairs of inventories for e-commerce and 150,000 for the brick-and-mortar. So we're investing very much on our strategies, accounts for more than 6% of our sales.

Lastly, our lean sales. And we are training our salespersons to become a remote sales consultant so that they can go to the stores and then they can convert. So improving communication systems throughout WhatsApp business with the final consultant offering our product catalog and offering sales with full security with the [link's] system, which is a venture between Arezzo and Cielo. And this is a huge priority of our business and we're investing a lot, both in -- it's very important to myself and to our Board members, too.

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Operator [8]

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Our next question is from [Gabriel Diceli] from Santander.

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Unidentified Analyst, [9]

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Congratulations on your results. I just have 1 question. So with the positive growth in the U.S. operation, can you give us an update on when you expect breakeven in the operation, which quarter?

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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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Thank you for your question, [Gabriel]. This is Alexandre speaking. This is the fourth quarter of strong growth, greater than 50% in the U.S. operations. The good news is that we believe that the growth that we've seen in the second quarter will also be the same in the third quarter. So the main sales, be it to partners -- department stores and even online partners. And even one just had an IPO, it's not very well known in Brazil, but there's a high share in the U.S. market. It's called Evolve (sic) [REVOLVE] especially for young consumers, and Schutz is the #1 selling brand on Evolve. I saw they just purchased 1,400 pairs to replenish the same style.

And 2 weeks ago, I was in the U.S., and there is the dropship program, we have a new 3PL partner that's doing a lot of work with us in logistics. So we're very confident of the capacity to execute the dropship system. In addition, there's a strong growth of our e-commerce and opening stores in the important locations in the U.S. market. So all of this is coming from -- through a lot of dedication and, obviously, investment.

Our main focus is to grow revenue. We've had some important adjustments that had nonrecurring effects in the quarter. But we still have some adjustments to make in the second half of the year. We don't disclose any adjusted results. But internally, for management purposes, it's important to understand that if gross profit minus expenses, is that recurring, and what's the bottom line is for that [math.] What we expect for the second half is flat and some effects of the restructuring that will be recurring for 2020. So as for next year, we believe that we will have breakeven. We'll breakeven, going to positive. But it's worth noting that our focus is to invest, to grow revenues. If you have any questions, just let me know.

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Operator [11]

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Our next question is from Helena Villares from Bradesco.

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Helena Villares, Banco Bradesco BBI S.A., Research Division - Research Analyst [12]

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Actually, I saw that the EBITDA margin in Brazil increased this quarter. But if we take away the positive ICMS effect, there's a contraction of 90 bps. So I'd like to understand the main factors of that pressure that's coming from the gross margin or investments in technology or on the digital side. If you can quantify that, that would be great. I'd also like to know how you see that for the second half of the year.

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Rafael Sachete, Arezzo Indústria e Comércio S.A. - CFO [13]

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Thank you, Helena. This is Rafael speaking. Thank you for your question. Yes, we did have some pressure on the margins, but to go into details in that figure, if we exclude the tax credit -- because it's the operation. If you look back, we could have been recognized within that period but we only recognized that when we won the legal lawsuit. So minus 230 bps of the drop in margins. But we don't go into the detail for every quarter in that. In 2018, in the second quarter, I had some credit as well that [was in COGS], and so it [wasn't that] clear of about BRL 23 million. But when I look at that effect and [then the recurring] that we detailed here about BRL 5 million in the quarter. And for the plant, the labor claims, then the margin would be flat.

So it's an -- as a company, obviously, you in the market will look at the final figure. But just to explain what happened, and when I reached pretty much flat margin and in the math that you did yourself, we had a lot of investments in digital transformation, the teams creating the framework and logistics as well where we're investing a lot, we believe that the figure is suitable for the quarter. And looking forward, we believe that the second half will have a margin close to flat or even with some improvements, always considering that we could have some U.S. effects. And based on the continuous investments that we will continue to have in digital transformation, RFID and logistics and improving our operations.

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Operator [14]

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Our next question is from Irma Sgarz from Goldman Sachs.

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Irma Sgarz, Goldman Sachs Group Inc., Research Division - Equity Analyst [15]

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I have a quick question about the RFID projects. Could you talk about the road map for that implementation and the benefits that you will reap from that? Maybe some more macro data, high-level data, but also an option of working with the micro data and RFID so you can have a more in-depth analysis of the product in the store, like [a heat map]. So it could be on a long journey. So I'd like to understand what you think about that RFID project journey.

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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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Irma, thank you for your question. This is Alexandre speaking. Well, in fact, I have to say that I'm an enthusiast about RFID. So we already had a pilot project in 2015 for the Alexandre Birman project -- brand, sorry. It only has 4 stores, but it already operates in inventory management with RFID for 3, almost 4 years. So I've been really pushing everyone because it is paramount for our business model to use RFID technology.

I'm going to talk about something very specific that really helps us out a lot. 90% of our sourcing is in the region of Vale do Sinos so putting a label on is very simple. So it's still in building -- when you're -- so it's something that [you should not] after the shoe is ready, and that label is in the production chain, the shoe production chain. So you put the insole in and then you already put the label on the shoe with RFID, and that makes it easier for the sequence. You don't have to label again, and that's the challenge for other retailers. So we have to kick off and after the rollout, what we expect we're going to start off with 15 owned stores in the second half of the year. The process this is well advanced. We have a squad dedicated to RFID with 6 people exclusively dedicated to that topic. We should take that to another 100 stores in 1Q '20, and end [last] year with 100% of operation running on RFID. So 18 months from the beginning to end.

Our main objective is inventory accuracy. So we want to start with basics, so that's what we want. We want precision of turnover and inventory, so we know or we can supply, replenish our stores and that works with that. That's very important to improve the accuracy of products, especially when you talk about the product grids. We considerably increased the supply for our franchisees of open grid. Today, it only gives us the continuables. And as for next year, all replenishments in all seasons will be done through an open grid.

So the sky's the limit of the benefits that we'll reap from RFID. So starting off with heat mapping and understand the areas in the store that work best. And based on that, you can practically control the shelf life of that product. But initially, it's about open grid replenishment and inventory accuracy. That's the idea.

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Operator [17]

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The next question comes from Robert Ford from the Bank of America Merrill Lynch.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division - MD in Equity Research [18]

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I would like to ask about same-store sales in U.S. and department stores and what do you offer in e-commerce.

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [19]

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Just to make it clear, you were asking about same-store sales in the department stores, but I couldn't get your second question, I'm sorry.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division - MD in Equity Research [20]

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Could you tell us, on your brand in U.S. and the sales, or rather Internet sales, e-commerce sales in the U.S. How this is going? The website?

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [21]

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So .com sales in Schutz website and e-commerce in the department store, is that what you were asking?

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division - MD in Equity Research [22]

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Yes, please.

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [23]

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So starting with the same-store sales in the department store, our main focus today is to increase the number of stores. So the main focus -- and we're also launching collection this week. It's important week for the U.S. market. And we and many other retailers this week, we are opening the new showroom for our Schutz brand, and we have a penetration of 78 stores overall. And we have a significant actions with Bloomingdale's. So the main turnover of our products have been at Bloomingdale's, especially with regards to .com. So the growth and the percentages here are greater than 400% growth. It's the largest offer of dropship -- is with Nordstrom and there are hundreds of SKUs that we offer, and it is related to our inventory. In terms of logistics, we have just made significant investments in changing of our new partners. And as I mentioned that was 2 weeks ago, and they're very efficient with wide experience in the shoe industry. And so dropship is going to increase a lot.

In terms of same-store sales, so we have -- we are seeing an opportunity to grow, especially by increasing the number of SKUs that are available for the most relevant brand. And so we have a deal with Nordstrom for 10 stores, and we are going to have many point-of-sale engagement actions. Also there's an opportunity to hiring a salesperson for whom you pay a monthly fee, and she sort of looks over your brands, she will oversee -- she's the special person for your brand in the department store. Now talking about .com, definitely, this is where we are growing the most the Schutz brand. And its proprietary website has been growing by about 60%. And we still have a lot to grow. I'm very confident.

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Robert Erick Ford Aguilar, BofA Merrill Lynch, Research Division - MD in Equity Research [24]

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Sorry, I'm still here. I know that's your experience. But could you also say something of Schutz stores in Short Hills, in San Francisco and Miami, please?

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [25]

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Okay. So talking about Aventura store that has caused a positive surprise to us every week. Although now the store is not yet known, not too many tourists go there, it's still hard with the hurricane, but we have had a positive surprise. It's performing well above from our initial expectations, about $230,000 per month, which is way beyond its breakeven.

So the profile with -- in the Aventura Mall, we had very good performance. Now in New York -- New Jersey, [it has] positive performance. We know that the mall there will get better and better. And when it gets colder in New York, everyone starts going to the mall. I was 2 weeks ago there, very well -- good location for the store, and I'm very happy with the team, merchandising. So it's really meeting our expectations. San Francisco, I have to tell you that the beginning was not as we expected. Of the 3 stores that we opened, San Francisco is the only store that's performing below our expectations. We had a problem with turnover at the beginning. We had a contract that -- we were not successful in hiring the store manager. But we really believe on the city, the [profile] of consumers, and we will try to learn to make it successful, too. But the other 2 ones are doing very, very well, and we believe everything will be well from now on.

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Operator [26]

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If there are no further questions, I would like to turn the conference back to Mr. Birman for his closing remarks.

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Alexandre Cafe Birman, Arezzo Indústria e Comércio S.A. - CEO & Member of Board of Executive Officers [27]

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I thank you all for your participation. The questions are always most welcome, and they help us to analyze our business. I would also like to take the chance to thank our Board of Directors for the strategic support in our decisions. And I would also like to highlight the important -- how important this week has been in our [sellout] calendar with the official launch of our winter collection. Yesterday, we had a major event in our Schutz store, at Oscar Freire store in São Paulo. Then we are going to have Arezzo and then Anacapri. And Fiever also this week. Arezzo brand has a very nice event in the park in São Paulo on Saturday. We're focusing on sorority with many lectures, many talks, many [yoga] and a talk on healthy eating. So Arezzo really investing a lot.

And then next week, we have a new show. And I will be together with the team on the roadshow, visiting many stores in all [capitals] throughout Brazil in many launch events. So really happy with our summer collection. And I'm sure the second half of this year will be even more positive. I thank you all. I thank our team for excellent sales, and let's go on. Thank you very much.

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Operator [28]

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The conference call of Arezzo&Co has now ended. We thank you all for your participation, and we wish you a good day. Thank you.

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