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Edited Transcript of GRND3.SA earnings conference call or presentation 2-Aug-19 1:30pm GMT

Q2 2019 Grendene SA Earnings Call

Farroupilha Aug 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Grendene SA earnings conference call or presentation Friday, August 2, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Francisco Olinto Velo Schmitt

Grendene S.A. - CFO, Chief Officer - IR, Finance & Administration, IRO and Member of Executive Board

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Conference Call Participants

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* Alexandre Melo

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Presentation

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Operator [1]

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Good morning. Welcome to Grendene S.A.'s conference call to disclose and discuss the results of the second quarter 2019. We would like to inform you that this conference will be in Portuguese with simultaneous translation into English. (Operator Instructions) We'd like to remind you that this conference call is being recorded and will be available at http://ri.grendene.com.

Here with us are the main officers of Grendene, who will also be available to take your questions: Rudimar Dall Onder, CEO; Gelson Luis Rostirolla, VP; and Francisco Schmitt, Financial Director and IFO (sic) [IRO]; as well as the main officers of the company.

We'd like to inform that the press release of the second quarter 2019 is available at ri.grendene.com.br in the versions Portuguese and English.

Before proceeding, we would like to clarify that any forward-looking statements that may be made during this conference call about the perspectives and operating estimates and financial estimates of the business are estimates based on the company's management, based on the current expectations. They depend on market conditions, the general economic conditions of the country and international market.

I would now like to turn the call over to Mr. Francisco Schmitt, CFO and IRO. You may proceed, sir.

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Francisco Olinto Velo Schmitt, Grendene S.A. - CFO, Chief Officer - IR, Finance & Administration, IRO and Member of Executive Board [2]

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Good morning, everyone. Thank you for attending another conference call to discuss the results of Grendene, where we intend to discuss the numbers we disclosed yesterday and make some comments on how we see the results, the market this time around.

As usual, yesterday, we had an additional file posted that we call conference call presentation with the main numbers that will make it easier for you to understand the discussions. And in my comments, I'll be brief. I'm not going to repeat all the numbers that are in the press release, and I can answer some questions related to some of those figures.

Before moving on to the discussion, let's talk about the payout. Our dividend policy is that we'll distribute the results of the second quarter 2019 as dividends in the amount of BRL 15.4 million ad referendum the general meeting that approved the account of 2019 that will paid of the 21st of August 2019. Entitled to the dividend are the shareholders of the common shares GRND3 that enroll in the company by August 8, 2019, which is the cut-off date in B3.

So let's talk about the performance of the company. We are still facing a very negative market situation. Yes, nobody can ignore how the Brazilian economy stands, and this all affect us. And in the lines of the scenario, we are analyzing all the results. We managed to reduce the drop of the volumes of pairs in the second half of 2019 in comparison to the same period of last year to 20.1% and then the first half of the year -- last year was 29.9%. And the drop in the first quarter couldn't be taken as an indication of drop for the whole year at the same proportion.

In this quarter, the volume of pairs was stable. It had a increase of 0.1% in relation to the quarter of 2019 (sic) [2018], and exports were affected by the low consumption of South America and the Caribbean, with a drop in the volume of pairs in the second quarter 2019 of 24.6% (sic) [34.6%], practically the same proportion that we experienced in the first quarter 2019. And we cannot ignore the general economic situation of South America and Central America as well.

Last year, the GDP grew 0.5%. And this year, estimates say that the growth will be at the same level. Therefore, this affects the consumption in those countries and also our exports in those regions.

On the other hand, we continue trying to expand our presence in other markets, and Melissa reached the number of 136 exclusive shops abroad. And in the other segments, 555 stores also exclusive of our brands and the total amount of 40,000 sales points abroad. And I would like to draw your attention to the growth of the number of exclusive stores abroad, and this has been a trend.

Our strategy has made headways, improving the relationship with our trade to developing our brands and the communication with the market. We estimate that the inventories of the trade decreased this period or it was at least stable. And the sell-out in the second quarter was higher than the sell-in and contributing to this drop in inventory in stocks. And we provided support to the client so that they could do it. And reinforcing our relationship, our brand has been growing in terms of communication with the market. As an example, if I name a brand, we had a campaign with the pop star, pop singer Anitta, a campaign in Brazil and abroad that was launched simultaneously in different countries with concerts and performance of Anitta in South America, in Europe as well, and we promoted our brands in Brazil and abroad.

Our online sale in our own stores has been growing at robust rates of 2 digits, just like the digital sales with partners. And considering the growth trend, and its importance, we are creating a management area to focus on the opportunities that are coming up with the digital transformation. We do not ignore what's happening in the retail in Brazil and abroad. And we have been investing and focusing on how we are going to play out in this digital world.

Today, our communication with the market, our international brand and the communication of the customer is predominantly digital using social media and mobile channels. So the -- which is the favorite means of communication of the new generations. And the fan page in Facebook reached 6 million followers, and we have our own intense traffic, which is essential for any commercial activity in the network. And Instagram has 3.5 million followers.

The low volume and the low use of our installed capacity continues affecting negatively our margins. In addition, other factors that I mentioned contributed to the negative results last year. We had a provision of BRL 11.3 million, which is associated to the Judicial Recovery of the company. We were very conservative, and we had a provision of 100% of the receivables that we had, but we understand that there will always be a recovery of company of Provin. And in the first quarter, as we announced, we had BRL 14 million of terminations -- contract terminations with some distributors. And we made an great effort to make adjustments to our current cost structure, considering this new reality of idleness at the plant and in the market in general or the economy in general. There is a large level of idleness, and this affected the results of the quarter in the amount of BRL 8 million that were required to make adjustments to the structure to reorganize all the manufacturing processes with -- considering the lower demand that we are facing.

The Judicial Recovery has been filed by some clients, and some manufacturers are filing for bankruptcy. And this all illustrates the current situation of the market. And considering the scenario, we understand that we are doing well. And little by little, we are moving to the right track reaching our stable levels and maintaining our market share.

The consumption of shoe wear dropped in the first half, and we estimate that there will be a slight growth in this -- there would be a better situation, considering that we improved a little in the second quarter. And we expect that the second half of the year will be better. And this improvement will depend on the improvement in the economy, the reduction in the unemployment rate and other factors, which are related to the overall consumption.

Another point to observe in the result of the second quarter, as you can see in the file that we published as well as the presentation of the conference call, is the increase of the tax rate. So I refer to the Slide 16. And considering the negative results or the low results, we were not able to recover in terms of fiscal base. The benefit of the payment of interest on equity of the period, this is something temporary. This is going to be adjusted along the year. So this is not going to be a reason for us to be concerned. It's always important to observe that even though we haven't reached the expected results, considering all the difficulties that we have been facing posed by the market, the accrued income was BRL 118 million.

And after the first quarter, I saw some curious observations by some analysts saying that our results would have been much worse or more worse than the competition. Of course, they were talking about the numbers in terms of percentage, but they did not look at the income, the profit. And our profits were one of the best in the shoe wear segment, a big difference between the EBIT and the net income. And we believe that this is something that continues to happen.

Another positive point is the cash generation. We generate BRL 336 million for the period, showing that our operations are solid. And when there is a low level of activity, the capital will turn into cash, and the cash will increase. So we recognize that the results are worse than that -- those of last year, but they are still one of the best results of the sector. Some of them are still to be disclosed. And this is what I expect to happen.

The FX effect was positive in BRL 24 million. And the financial result was 42.3% higher than the same period of last year. And this financial result was driven by a higher level of cash. And cash supply in the percentage or rate levels are higher. And we have to consider that last year, we have, from March to June, a very large exchange rate variation due to [foreign] in that period that I mentioned of last year.

So in the second quarter, we had a negative result in the exchange rate variation, but this did not realize.

So the dividend yield is 1.4%. The drop in profit led to the cash generation, which was related to the receivables that dropped BRL 357 million.

When we disclosed the first quarter 2019 result, the company published a material fact informing that there was a decision, an appealable decision, of the action related to the exclusion of ICMS from the tax base. At that time, we did not have accurate numbers and the process or the lawsuit had just been decided upon, and our legal counselors advised us not to account for this amount because the accurate values were difficult to estimate and was still dependent on the approval of the tax authorities. So we filed for an application for the qualification of the credit, and the amount of this application, which is something that we have right, it amounts to BRL 482 million. And according to our calculations, this was being applied with the tax authorities. And this has not been resolved yet. We still haven't accounted for all this amount, and when the tax authorities decide upon it and when this amount is estimated and decided upon, we are going to recognize all this value.

And Brazil -- in Brazil, Melissa brand continues to grow in the second quarter. We had 316 franchise stores. We introduced mini-Clube in Melissa last year. When in the second half, we had 9, we doubled this number to 18 mini-Clube for Melissa.

Our policy continues to be to preserve the margins. And this cost adjustment that was made in the second quarter of the year is evidence of what I'm saying. And we are not only after larger margins, but in absolute results, which also would be higher. We are a company whose renewal of products is very intense, and we position ourselves in those crisis in -- by positioning the brand with collections and prices, and make adjustments to the current reality. Some people ask me if all those new products have already been launched in the market. The answer is no. Because, clearly, new products are reaching the market, and those new products have been created and developed considering the reality we've been facing. And we are always on the lookout to what the consumer is actually purchasing. So this information is important to our adaptation to the new scenario.

So these are the comments I have to make, and we are available to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question from Mr. [Santiago Santos], shareholder.

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Unidentified Shareholder, [2]

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The question we ask when we look at the statement, and it is quite repetitive, is there any alteration in in-house discussion about the use of financial investments that get to BRL 2 billion? Considerations on different destination for cash? Are we still investing in CDI? Or is there any intention or discussion about acquiring or distributing dividends, although we know that in order to distribute the dividends, we would have to pay the tax on this cash? This is my question.

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Unidentified Company Representative, [3]

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Thank you for your question. We -- in the last semester, Grendene has created a committee for investments. This is redundant. And this committee also changed its policy of financial investment allowing for a destination, not only in papers linked to CDI, but also in other products, debentures or certified receivables up to real estate investments. There is no change that we see yet, but the policy has been authorized to change so that the company can do those different investments in the pursuit of higher yields. To this moment, no operations were carried out. As for dividend, there is no intention of changing this policy. Year round, Grendene does not change this. Every year, in February, we sign a policy for the whole year, and we stick to it, unless something very big happens, a major impact, otherwise no. Besides Grendene has a history of maintaining what is decided in February as a distribution policy, and this has been ratified for quite a few years, redistributing as dividends only the part that does not originate in fiscal incentive, and therefore, is not taxable. We analyze whether it's better to distribute dividends or own equity, and we make the best option for the shareholders. This choice involves only tax aspects. And using the interest as an advantage for the company, if this happens, that's what we will decide.

Since we use the broadest possible ways of dividends on equity or applications or investments, we always choose, amongst the instruments of giving the shareholder the money back, which is the instrument that we consider best. And if it's dividend outside Brazil, it's better to distribute it than rebuy shares. There are limits of reflows and other operational issues. So we look for the best solution, and we distribute 100% of what's not subject to tax for the shareholders. We never refuse an investment or an opportunity just to maintain cash.

Of course, we are open, but the operation has to make sense and the company has to understand and look into adding value and not exchanging 6 for half a dozen. Any purchase operation, a premium will be paid on it, so the company has to create a value above this premium so that the return is awarding.

To invest more cash, we are looking into it, but there are no changes. We have papers that have a better remuneration. But on the other hand, the risk is higher. So this is all being evaluated and the company approves according to its bylaws and rules. Well, as for your question about cash, this is what I have to say.

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Operator [4]

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Our next question, Mr. Alexandre Melo from Valor Econômico Journal in São Paulo.

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Alexandre Melo, [5]

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My first question, could you elaborate on the gains of the brand in the franchise channel? Second question, in continuity to the previous one, considering the cash the company has, and you have areas in the market that are in Judicial Recovery, would you consider acquisitions of the assets or an asset of (inaudible)?

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Unidentified Company Representative, [6]

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The franchise channel is doing quite well. It was launched in 2012 for the Melissa brand, the only brand that has a franchise. The original number is 200 stores today. Today, we have over 316, much higher than the expectation, and it's doing beautifully. The credit goes to it for the growth of the Melissa brand in Brazil.

As for acquisitions, we cannot speak about specific cases here. But independently of the assets or the company, we analyze and if there is a possibility of adding value by doing it and create value for our shareholders, we have no restriction whatsoever of statement or balance to do it. We have totally free to decide what we cannot do and our Board would not allow for it is to make investments in value just for the sake of growth. It's always a permanent analysis process and so we come to a specific operation.

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Alexandre Melo, [7]

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Allow me another question. You mentioned the scenario, the second quarter. Could you please elaborate on how you see the perspectives of consumption in the second semester? You mentioned the month of July. If there was some warming up of the market, how does it look at present?

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Unidentified Company Representative, [8]

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According to our domestic expectation, depends on what will happen with the economy, but we -- it's very difficult to forecast. I speak about economy because consumption is 70% of the GDP. So if you're talking about consumption, you're speaking about GDP growth. And who can foresee the GDP growth for the second semester? There's not much we can forecast here. We will not mention the results we are already obtaining in the third quarter because it's July and August. We see contradictory news in the media a while ago. No, I'm not blaming the press for anything, please, but at a certain point, there are news that things are getting better. The next day, they're getting worse. So a few days ago, we saw the news that the sales in shopping malls are higher than since 2014, and we thought that in 45 days, the orders would flow in to our company. And now we just read that the industry -- the situation got worse. So there's a lot of uncertainty at present. We are at the end of the second Q, which is the lower period of activity for our kind of product, for our industry. This is historical, and it's a very small basis for us to establish references of what will happen in the nearest future. So we would leave it to each and every one of you to analyze. We look into situations and literature, what is expected till we see the GDP growth, and it all has effect on consumption.

Major consumption event of the second semester is Children's Week in October, Christmas is still far away. Do you speak of this? In July, we have school holidays, winter break here. So in August, people are coming back. It's quite undefined situation.

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Alexandre Melo, [9]

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I'm sorry, you mentioned the perspective of increase in the orders for the industry. And this is something that is going to be reflected upon in 45, 90 days for the improvement. Is that it?

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Unidentified Company Representative, [10]

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I'm sorry, could you repeat your question?

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Alexandre Melo, [11]

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Sure. You said that in relation to the sales heat-up in the shopping malls, this can be reflected in the orders to the industry some days after this period. Is that it? We have this time line, considering the perspectives for the second half of the year? Hello, Mr. Schmitt?

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Francisco Olinto Velo Schmitt, Grendene S.A. - CFO, Chief Officer - IR, Finance & Administration, IRO and Member of Executive Board [12]

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Yes. I mentioned in the -- in our report that was published by Valor Econômico Journal that when the retail market is more active, there is a certain delay and there is a reduction in inventories, and the inventories have to be replenished. And this delay takes about 30, 60, 70 days at the most depending on the inventory level that, that retailer would have, and then the order starts to be posted. If this continues the way we see it, so what I meant is that if there is an improvement in the retailer market and it's consistent, the industry will start receiving orders because the retail market will have need of replenish their inventories.

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Operator [13]

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Our next question comes from Mr. [Geraldo German], investor.

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Unidentified Participant, [14]

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Hello?

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Unidentified Company Representative, [15]

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Yes, I can hear you.

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Unidentified Participant, [16]

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I would like to know from the historical viewpoint, what's the performance expected with -- what is the performance of the previous years, the second half of the previous years?

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Unidentified Company Representative, [17]

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The second half of the year is always the best period of the year. This is the peak season in terms of activities. This is when the company has major events of consumption. And in addition, our collection of products sell more in summer. So this is a period where we deliver the products through the summer season, historically, the best season in terms of margin, volume and the use of our installed capacity. We have all the figures that have been published in the previous press releases. And in the annual report, we have information of the past 5 years. And these are figures that can be analyzed semester by semester, making all the comparisons. And you can understand what happened. I do not know if that's the question you asked.

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Unidentified Participant, [18]

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Exactly.

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Operator [19]

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Our next question comes from Mr. [Marcelo Vieira], investor.

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Unidentified Participant, [20]

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I would like to understand what the top level of the share owners (inaudible). So will there be any price adjustment so that sales can improve? And will margin be affected? And I would like to know what rate can we expect for the third quarter. I would like to understand the strategy for the second half of the year.

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Unidentified Company Representative, [21]

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Our perception is that the inventory levels of the retailers have decreased. So we have seen some adjustments in the period. It's hard to say if the adjustment was enough. That we can only imagine, since we do not have the market numbers available to us. So we imagine that the sell-out was greater than the sell-in. And that means that if the retailers sell more, the inventory levels will drop. So there has been a certain level of adjustments in those inventory levels.

In terms of price, we have to understand that Grendene does not affect or has any influence on the prices of the products that have already been launched. So when we launch the collection, the price will not be changed. The new product that will be launched will be developed and adjusted to have competitive prices, considering what the market is actually purchasing. So we may sacrifice some aspects so that the price can be more competitive. So this is something that is happening. So this is a continuous activity in the market that of making adjustment to the portfolio to what is happening to the market.

And when I say that we make adjustments to the portfolio, we mean considering the archetypes, the varieties of colors, collections, models, all the offer package, including communication offers. This is what I refer to when I say portfolio, and all this has to be adjusted so that this can encompass all that the buyer can pay for. So I can offer a very nice, very beautiful product, but if it reaches the stores and the consumer will not be able to pay, it will be useless. So we are going to continue making all those adjustment efforts, but the price that is observed at a later time when -- is related to the consumer response to that.

So if the consumer buy the product of low ticket, my income will be lower because I see that demand has moved to lower prices product. As to exports, the price in dollars in the second half rose 7%. People can ask: So your volumes dropped and the price increased? No, that's not it. South America, that purchase products which are cheaper, purchase fewer products. So the price observed in the rate is a higher-level price in the average ticket, and this is something that we are going to see in future.

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Operator [22]

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Our next question is with [Danielle Oliveri], investor.

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Unidentified Participant, [23]

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I would like to know about your strategies to resume growth in Brazil in the second half of the year. How are you operating with your brands? Not only Ipanema. How do you see Rider, Cartago and also children footwear?

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Unidentified Company Representative, [24]

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We are doing what I have just mentioned. We are making adjustments to the portfolio. We are also making adjustments to the typical consumer demand. And there is not a lot of new information in relation to this. The consumption in Brazil is lower than we had recorded in last year. And there's not much we can do about it. What we can do is to focus on the consumers that (inaudible).

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Operator [25]

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(Operator Instructions) We close the Q&A session. At this time, I'd like to turn the call over to Mr. Francisco Schmitt for his final remarks.

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Francisco Olinto Velo Schmitt, Grendene S.A. - CFO, Chief Officer - IR, Finance & Administration, IRO and Member of Executive Board [26]

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Once again, I would like to thank you all for attending this conference call, and we hope you will be here with us in the next conference call.

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Operator [27]

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Grendene's conference call has come to an end. We would like to thank you for your participation, and thank you very much for using Chorus Call.

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