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2Q18 PRESS RELEASE
1
CONFERENCE CALL
(only in Portuguese)
Date: August 13th, 2018
at 9 am BRT/ 8 am US ET/
1 pm London
Phone:
Dial-in Brazil: +55 11 3193-1001
Code: Alpargatas
Presentation:
http://ri.alpargatas.com.br
Speakers:
Márcio Utsch
CEO
Fabio Leite
CFO
http://ri.alpargatas.com.br
2Q18 PRESS RELEASE
2
1. QUARTER HIGHLIGHTS
Organizational Structure
From 2018, the company has had the full structure needed to fulfill its ambition of growing the Havaianas
brand even further in Brazil and in the international market. The Havaianas structure is divided into five
markets: Brazil, EMEA, North America, APAC (Asia & Pacific), LATAM & Africa. These markets are
supported by the global Marketing and Havaianas Products, Design and Innovation and Planning and
Business Analysis areas, responsible for developing content, guidelines and sharing best practices for the
Havaianas and Dupé brands in these regions.
Digital Director
Also new is the creation of the Digital Executive Director position over the coming months, which will have
the challenge of driving modernization and promoting the digital transformation which will support the
growth of the company and its brands, integrating cultures and accelerating business expansion.
Strategic Consulting
Review of the Havaianas Strategic Plan
With support from a renowned international consultancy, we are reviewing the Havaianas strategic plan
which encompasses accelerating internationalization and capturing levers for growth in Brazil.
Go-to-Market
In the course of the quarter, a specialized consultancy worked together with the Havaianas team analyzing
the go-to-market model for Brazil. This work resulted in recommendations for optimizing channel strategy.
2Q18 PRESS RELEASE
3
Human Resources
New Trainee Program
On August 6, the new Alpargatas Trainee Program was launched. The 15-month program will begin in
January 2019. In the course of the program, the trainees will participate in a series of activities aimed at
developing their technical, business and interpersonal skills, enabling them to assume the position of senior
analyst upon completion of the program. The objective of the Alpargatas trainee program is to develop
talent and prepare individuals to be future leaders.
CAPEX
Consolidated investments in expanding the business and maintaining operations (capex) totaled R$ 21,3
million in second quarter of 2018, of which R$ 11.7 million was dedicated to expanding retail operations in
Brazil and overseas, and R$ 9.6 million went towards the modernization of machinery and equipment and
technological updating.
Transportation Strike
The transportation strike in Brazil at the end of May affected raw material supplies to the factories. The
company rapidly decided to suspend production and give collective holidays of between 7 and 10 days,
depending on the unit, to minimize the effects of the strike. Equipment maintenance was also brought
forward to this period.
In Brazil, the billing of about 4 million pairs of sandals was deferred in June, together with 60,000 pairs of
Mizuno footwear. However, in spite of this adverse conjuncture, 2Q18 saw double digit growth in sandals
volume in Brazil.
In the overseas market the impact was proportionally more significant, with a volume of 1 million pairs of
sandals pending shipping at the end of the quarter. It should be noted that there were no cancellations of
customer orders.
According to internal estimates, the negative effect in sell-out occurred during the course of the strike and
shortly afterwards, until supply was normalized.
2Q18 PRESS RELEASE
5
2. SALES VOLUME
Havaianas Sandals and Brand Extension Products
Even though part of the billing volume was deferred due to the transportation strike (around 4 million pairs),
Havaianas and Dupé volume grew 21.5% in the domestic market during the quarter, the result of better
product turnover at customers and the launch of the new Havaianas collection, which performed well.
The overseas market was also affected negatively by the transportation strike in Brazil, which jeopardized
shipments, particularly to Latin America and Asia & Pacific (1 million pairs).
Sporting Goods and Textiles
2Q18 PRESS RELEASE
6
Mizuno presented a drop in sales volume due to the shipments not undertaken during the strike (60
thousand pairs) and to the non-confirmation of orders as a result of this event.
In Argentina, sports footwear sales volume continued to climb with Topper imports, which, as has been
commented in other reports, has enabled the effective fulfillment of demand for higher added value
products.
Osklen
Sales volume in the direct consumer channels grew during 1H18; however, in the indirect channels
(franchises and multibrand) there was a reduction due to the transportation strike and isolated cases of
franchisee default. Year to date, volume dropped 3% compared with the same period of 2017.
3. NET REVENUE
In Brazil, the increase in Havaianas revenues offset the drop in the other businesses during the second
quarter.
Osklen net revenue was slightly lower than the same period of last year. The growth in revenue in all the
direct channels (retail, outlet and e-commerce) was responsible for the higher average price during the
quarter. Worthy of note was the growth of 5.1% in same stores sales (SSS) and 47% in e-commerce.
2Q18 PRESS RELEASE
7
In Sandals International, net revenue in reais, which benefited
from the appreciation of the dollar and the euro, was 4.6%
higher than in 2Q17, even with the drop in revenue in local
currency in three of the four regions. 3
In Argentina, revenue in pesos grew by 17.8%, mainly due to the performance of the footwear business. In
reais, revenue was lower as a result of the 24.2% appreciation of the real against the peso (compared with
2Q17).
During the quarter, growth in Alpargatas retail revenues on a same store basis was:
Havaianas (franchises and company-owned stores in Brazil): 4.6%.
Osklen: 5.1%.
4. GROSS PROFIT
In spite of the impact of the transportation strike on production, consolidated gross profit in 2Q18 grew 6.8%
with a 1.4 p.p. gain in gross margin. The main driver was the higher share of the Sandals business in the
company total, with an increase from 62% to 66% in the quarter.
2Q18 PRESS RELEASE
8
In Brazil, Havaianas saw a gain in gross margin with an increase in share from 65% to 70% of revenue,
offsetting the decrease in margin in the other businesses in 2Q18.
There was an increase in gross margin in Sandals International due to the exchange rate effect.
5. RECURRING EBITDA
In 2Q18, consolidated recurring EBITDA grew 12.4% and margin increased by 0.8 p.p. compared with the
same period in 2017. The main extraordinary items in the second quarter were: labor severance payments
in Argentina due to restructuring to adapt to the macroeconomic situation in the country, provisions for
success fees related to contingencies and consulting expenses.
Sales Expenses
Sales expenses, which include freight, advertising, marketing, commissions, royalties and licenses totaled
R$ 282.9 million in 2Q18. This represented 31.8% of net revenue, 0.5 p.p. below 2Q17. Freight expenses
corresponded to 3.5% of net revenue, remaining practically stable compared with the second quarter of
2017. Some international structures were still under implementation in 2Q18 and have not yet incremented
net revenue for the company: establishment of the Latam structure, repositioning of the US office, new
overseas stores, the opening of offices in Colombia and Hong Kong.
2Q18 PRESS RELEASE
9
General and Administrative Expenses
General and administrative expenses totaled R$ 55.3 million in the second quarter. This corresponded to
6.2% of net revenue, 0.2 p.p. lower than the year ago period. This reduction reinforces the company’s
constant commitment to boosting efficiency and profitability.
6. NET INCOME
Consolidated net income in the quarter totaled R$ 18.3 million, with a margin of 2.1%. The most significant
variations in the consolidated net income in 2Q18 were:
R$ 8.5 million less in EBITDA, the variation in which is explained in chapter 5;
R$ 12.9 million less in income tax, due to the credit in Argentina in 2Q17 stemming from the reduction in
the 2016 calculation base as a result of the recognition of the inflation in the net monetary assets of
liabilities;
R$ 12.9 million less in financial result/exchange rate variation, comprising:
o R$ 12.8 million increase in the financial result;
o Negative exchange variation of R$ 25.7 million, primarily in Argentina.
2Q18 PRESS RELEASE
10
7. NET FINANCIAL POSITION
On June 30, 2018, Alpargatas had a net financial position of R$ 39.9 million, the result of a cash balance of
R$ 657.4 million (operating generation totaled R$ 563.3 million in the 12 months ending in June 2018) and
indebtedness of R$ 617.4 million, with the following profile:
R$ 282.5 million (46% of the total) due in the short term, of which R$ 76.7 million in Brazilian currency.
Short-term debt in foreign currency totaled R$ 205.8 million, with swaps for reais for R$ 34.7 million of
this amount, which was used mainly to finance working capital for the overseas subsidiaries. It should
be noted that R$ 124.2 million of the company’s cash balance is in foreign currency.
R$ 334.9 million (54%) due in the long term, all of which in Brazilian currency.
2Q18 PRESS RELEASE
11
MARKET / BUSINESS UNIT HIGHLIGHTS
8. SANDALS
BRAZIL
Traditionally, the months of April and May are characterized by low stocks in the sales chain while it
awaits the launch of the new collection in June. The launch of the collection was a success, with an
improvement in customer sell-out and a consequent double-digit increase in sandals volume (sell-in).
The indirect channels had a larger share in total revenues during the quarter, which reduced the average
price in Brazil. This was in addition to the reinforcement of the entry level product portfolio at the end of
2017.
NORTH AMERICA
As part of the restructuring of the North American operation, there was a reduction in sales in the less
profitable channels in the United States (wholesale and off price), in events, as well as in e-commerce in
Canada, where freight costs were making this channel unfeasible.
EMEA (Europe and Middle East)
In 2Q18, net revenue in local currency in EMEA was slightly higher than last year, improving +1.5%, the
result of improved performance in France and Germany.
LATAM (Latin America) & AFRICA
The operation in Latin America was impacted by the transportation strike in Brazil at the end of May,
which impeded the shipment of around 200,000 pairs to the region.
APAC (Asia and Pacific)
Asia and Pacific was the region worst hit by the strike, with the non-shipment of around 800,000 pairs
during the quarter.
9. SPORTING GOODS
In Sporting Goods, orders for 60,000 pairs of footwear were deferred as a result of the transportation
strike.
There were promotions in sporting goods in Brazil throughout the second quarter because the categories
not associated with soccer were penalized during this period.
2Q18 PRESS RELEASE
12
10. OSKLEN
During the quarter, operating cash generation for Osklen improved compared with last year, as a result of
better working capital management, with a reduction in default and improved stock management.
Highlights:
acceleration in the digital channel and integration with the physical stores, with double-digit growth
over last year, reaching 43.7% in 1H18;
growth for the 4th consecutive quarter on a same store sales basis. Growth of 5.1% compared with
2Q17
11. ARGENTINA
The situation in Argentina remains unsettled. At the beginning of the quarter, sporting goods sales were
strong. In April the peso suffered heavy devaluation, which led to a drop in sell-in, while sell-out was
maintained. However, at the end of the quarter the exchange rate impacted prices, leading to a fall in sell-
in and sell-out.
In view of this adverse conjuncture, with help from a specialized consultancy Alpargatas has adopted a
series of measures to minimize the macroeconomic impact on the footwear business: control over working
capital, re-assessment of the manufacturing operation and the importation of finished goods.
Textiles: volume continues to decrease due mainly to the competition from imported products.
12. CAPITAL MARKET AND SHAREHOLDER COMPENSATION
On June 30, 2018, the company’s preferred shares (ALPA4) were quoted at R$ 12.10, and the ordinary
shares (ALPA3) at R$ 11.49, respectively 29.6% and 31.6% lower than on March 31, 2018. From March
to June, Ibovespa depreciated by 14.8%. At the close of 2Q18, Alpargatas was valued at R$ 5.5 billion on
the B3 exchange, 16.6% down on the year ago period. The average daily volume of ALPA4 shares traded
in the second quarter was R$ 9.0 million, 11.5% lower than the daily average for the year ago period.
In a meeting held on August 10, 2018, the Board of Directors decided on an advance of interest on own
capital amounting to R$ 37.6 million, to be paid on September 18, 2018. Alpargatas’ shareholder
compensation has totaled R$ 110.6 million to date in 2018.
2Q18 PRESS RELEASE
13
13. INDEPENDENT AUDITORS
In the period from April to June 2018, no services other than those related to external audit were
contracted from KPMG.
14. DECLARATION FROM THE BOARD
In accordance with article 25, paragraph 1, item 5 of CVM ruling nº 480/09, the Board hereby declares that
it has reviewed, discussed and agreed with Alpargatas S.A.'s accounting information for the second
quarter of 2018 and with the review report from the independent auditors.
São Paulo, August 10, 2018
Board of Directors
2Q18 PRESS RELEASE
14
BALANCE SHEET
(in thousand reais)
ASSETS 06/30/2018 06/30/2017
Current assets 2,275,490 2,152,961
Cash and banks 133,344 110,222
Tempory cash investment 524,030 289,108
Trade accounts receivable (net of provisions) 733,204 776,785
Inventories 753,747 794,898
Other receivables 27,153 47,180
Prepaid expenses 33,027 35,119
Assets held for sale - -
Other assets - -
Recoverable taxes 70,985 99,649
Assets from discontinued operations - -
Long-term assets 215,181 189,037
Recoverable taxes 26,264 54,257
Deferred income and social contribuition taxes 135,778 61,727
Escrow deposits 38,967 22,641
Other receivables 14,172 50,412
Permanent Assets 1,188,161 1,366,694
Investments 2,316 1,142
Property, plant and equipment 702,129 736,222
Intangible 483,716 629,330
TOTAL ASSETS 3,678,832 3,708,692
LIABILITIES 06/30/2018 06/30/2017
Current liabilities 1,023,122 1,132,862
Suppliers 351,218 364,178
Loans and financing 282,506 384,293
Debt reestructuring agreements 2,354 5,315
Payroll and related charges 128,104 152,247
Reserve for contingencies 15,733 16,486
Provision for income and social contribuition taxes 26,563 23,956
Taxes payable 18,567 19,441
Interest on capital and dividends payable 36,832 36,094
Other payable liabilities 161,245 130,852
Liabilities on assets from discontinued operations - -
Long-term liabilities 453,989 335,317
Loans and financing 334,920 187,542
Debt reestructuring agreements 10,703 23,962
Provision for taxes - -
Taxes Installments - -
Provision for income and social contribuition taxes 50,356 59,445
Reserve for contingencies 21,406 36,727
Other payable 36,604 27,641
Shareholders' equity 2,201,721 2,240,513
Capital 648,497 648,497
Capital reserves 172,799 172,799
Treasury shares (64,248) (64,248)
Profit reserves 1,540,406 1,533,098
Equity assessment (166,964) (131,717)
Hedge operation - -
Additional dividend - -
Minority interest 71,231 82,084
TOTAL LIABILITIES 3,678,832 3,708,692
Book value per share (R$) 4.60 4.66
2Q18 PRESS RELEASE
15
INCOME STATEMENT
(in thousands of Brazilian reais)
2Q18 2Q17 1H18 1H17****
Net Sales 890,583 859,584 1,792,667 1,667,044
Cost of sales (472,719) (468,219) (965,969) (925,453)
Gross Profit 417,863 391,365 826,698 741,591
gross margin 46.9% 45.5% 46.1% 44.5%
Operating Income (Expenses) (379,618) (342,821) (644,447) (469,173)
Selling (282,893) (277,570) (527,290) (497,815)
General and administrative (52,671) (52,733) (102,560) (104,796)
Management fees (2,607) (2,106) (7,535) (6,724)
Amortization of intangible charges (8,835) (6,564) (16,846) (13,958)
Other operating Income (expenses), net (32,611) (3,848) 9,785 154,120
EBIT - Operating Results 38,245 48,544 182,251 272,418
operating margin 4.3% 5.6% 10.2% 16.3%
Financial Result (3,390) (15,377) (12,090) (24,906)
Exchange variation (27,906) (2,971) (33,355) (5,862)
Operating Income 6,949 30,196 136,806 241,650
Income and social contribution taxes 11,324 24,222 (5,653) (5,794)
Net Income from continuing operations 18,273 54,418 131,154 235,856
Net result from discontinued operations - - - (1,674)
Consolidated net income 18,273 54,418 131,154 234,182
Net Income from controlling shareholder 22,533 55,977 136,605 241,824
Minority Interest (4,260) (1,559) (5,452) (7,642)
EBITDA - R$ million 64.1 72.6 233.2 320.5
EBITDA margin 7.2% 8.4% 13.0% 19.2%
2Q18 PRESS RELEASE
16
CASH FLOW
(in thousand reais)
CASH FLOW FROM OPERATING ACTIVITIES 06/30/2018 06/30/2017***
Cash from operating activities 235,518 249,465
Net income for the period 131,156 235,856
Depreciation and amortization 50,574 48,120
Income (loss) from disposal/derecognition of property, plant and equips. 4,702 8,728
Equity pickup 0 0
Interest and Monetary and foreign exchange variation 21,551 24,432
Provisions for tax, civil contingencies and labor claims 8,661 8,098
Provisions for income tax and social contribution 25,233 29,985
Deferred income and social contribuition taxes -18,654 8,170
Suspended taxes payments 0 -198,624
Allowance (reversal of) for doubtful accounts 8,515 10,678
Provision for (reversal of) inventory losses 7,112 8,140
Amortization of charges on loans and financing - -
Unrealized gains/losses on derivative transactions - -
Gain/loss in operation with derivatives 0 0
Stock option plan granted 0 0
Remeasurement adjustment - 1st acquisition Osklen 0 294
From sale of Real property 0 0
Provision for Impairment of property, plant and equipment/Intangible assets 0 14,337
Remeasurement od asset for sale 0 0
Osklen Impairment Adjustment 0 0
Net cash spent in discontinued operations 0 51,251
Correction of legal deposits -10,501 0
Provision for success fees 7,169 0
Changes in assets and liabilities -5,189 -229,023
Trade accounts receivable 137,122 153,050
Inventories -102,643 -152,883
Prepaid expenses -21,474 -23,160
Taxes recoverable -4,293 -70,215
IPI tax credit receipt 37,031 0
Trade accounts payable -7,647 -60,967
Taxes payable -10,501 -30,183
Payroll and social charges 3,870 -9,820
Payment of income and social contribuition taxes -16,315 -27,415
Operations with derivatives -587 -641
Amortization of loans and financing -36,467 -25,396
Contingencies -26,308 -6,297
Other 43,023 24,904
NET CASH - OPERATING ACTIVITIES 230,329 20,442
2Q18 PRESS RELEASE
17
CASH FLOW FROM INVESTING ACTIVITIES 06/30/2018 06/30/2017
Acquisition of property, plant and equipment and intangible assets -30,616 -63,348
Short-term investments -110,801 -59,010
Redemption of Financial Investments 113,988 144,443
Receivable from sale of permanent assets 0 0
Acquisition of Investments 0 0
Initial Cash Balance of controlled company 0 0
NET CASH - INVESTING ACTIVITIES -27,429 22,085
CASH FLOW FROM FINANCING ACTIVITIES
Loans and financing raised 203,983 101,937
Amortization loans and financing - Principal -319,547 -121,695
Payment of dividends and interest on equity -138,563 -42,883
Amortization through debt restructuring of subsidiary -4,913 -3,035
Acquisition shares to be held in treasury, net 0 0
NET CASH - FINANCING ACTIVITIES -259,040 -65,676
Exchange gains (losses) on cash and cash equivalents 6,283 1,965
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -49,857 -21,184
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 629,238 391,347
CASH AND CASH EQUIVALENTS AT END OF PERIOD 579,381 370,163