Learning Center
Plans & pricing Sign in
Sign Out

Conference Call Transcript 2Q11 Results Grupo Technos (TECN3


									                                                           Conference Call Transcript
                                                                       2Q11 Results
                                                          Grupo Technos (TECN3-BZ)
                                                                   August 11th, 2011


Good morning, and welcome to Grupo Technos’ 2Q11 earnings conference call.
Today with us we have Mr. Joaquim Ribeiro, CEO of Grupo Technos; Mr. Thiago
Picolo, CFO and IRO; and Fabio Bueno, IR Manager.

Today’s live webcast and presentation may be accessed through Grupo Technos
website at: We would like to inform you that this event is
recorded and all participants will be in a listen-only mode during the Company’s
presentation. After Grupo Technos remarks, there will be a question and answer
session. At that time further instructions will be given. Should any participant need
assistance during this call, please press *0 to reach the operator.

Before proceeding, let me mention that forward-looking statements are based on the
beliefs and assumptions of Grupo Technos management and on information currently
available to the Company. They involve risks and uncertainties because they relate to
future events and therefore depend on circumstances that may or may not occur.

Investors should understand that conditions related to the macroeconomic scenario,
industry and other factors could also cause results to differ materially from those
expressed in such forward looking statements.

Now, I will turn the conference over to Mr. Ribeiro, who will begin the presentation. Mr.
Ribeiro, you may begin your conference.

Joaquim Ribeiro:

Hi, everyone. First, I would like to welcome everyone to the first quarterly earnings
conference call of Grupo Technos. This conference call marks the beginning of an
important phase for our Company’s' life, considering our IPO in July, and it will be the
first of many to come in the future.

Before discussing our performance in the latest quarter, I would like to reaffirm some of
the main points of our investment case. We believe that Grupo Technos has three
characteristics that make it a truly differentiated Company in the Brazilian consumer

The Company is the leader in this segment in terms of revenues, not recently but for
more than a decade. The company has the resumed growth profile that positions it
uniquely to grow in favorable as well as in unfavorable cycles. The Company has
profitability and return levels comparable not only to the best companies in the
consumer sector in Brazil, but comparable to the best international benchmarks.

Again, in this semester we proved that leadership growth, profitability and return are
characteristics inherent to our business. Also before entering into discussion of our
quarterly results, we understand that our mission is not only to grow the Company in
the short term, but to prepare it to grow in the long term in a sustainable manner.

In that sense, we have directed great efforts towards strengthening and structuring our
team, strengthening our processes and increasing our leadership in brands and
distribution through higher and more effective marketing investments.

                                                             Conference Call Transcript
                                                                         2Q11 Results
                                                            Grupo Technos (TECN3-BZ)
                                                                     August 11th, 2011

We believe that the efforts have a long-term focus and will guarantee us a continuous
and ever-graded leadership in our segment. GrupoTechnos has an important long-term
agenda to lead growth and the development of the watch and accessory segment in
Brazil, which for many years was undersized compared to the watch sectors in other

We believe that we have the chance to lead secular growth in this sector, through
brand development, marketing investments, channel development and through the
licensing developing or acquisitions of new brands and products.

We believe that is a great path for secular growth in our industry, independent of
cyclical economic factors in Brazil or globally. Our results in the latest quarter show that
we are on the right path.

I now pass the word to our CFO, Thiago Picolo, so that he can go over our results in
more detail.

Thiago Picolo:

Good morning, everyone, and thank you for your participation. Starting our
presentation on slide two, we have the main highlights of the quarter, and after that we
go into a more detailed discussion on the main variables.

In the 2Q11 we grew our net revenues by 35.6%, reaching R$72.3 million. Our gross
profit grew 37%, our adjusted EBITDA grew 31.1% and our adjusted net income grew
32.7%. At the end of the 2Q we priced our initial public offering, we started trading on
July 1st in the Novo Mercado of BM&FBOVESPA under the ticker TECN3. As
mentioned before by Joaquim, this offering represented an important step in the history
of the Company, and one more milestone in our history of growth and leadership.

On slide three, we see the evolution of gross and net revenues in the quarter and in the
semester. In the quarter, our gross revenues grew 37.3%, reaching R$88 million. In the
semester, our gross revenues grew 42%, reaching R$145.4 million. Net revenues grew
35.6% in the quarter and 41.5% in the semester, reaching R$72.3 million and R$119.2
million, respectively.

On slide four, we see the breakdown of the growth between volumes and average
prices, showing that our sales growth came almost entirely through volume growth. In
the quarter, our volume grew 34.6%, reaching 647,000 watches, our average prices
rose 2.2%, reaching R$129. In the semester our volume grew 46.9%, reaching
1,117.000 watches, while our average in the price fell 1.9%, to R$123.

It is important to notice that in 2011 we see a significant growth in the share of the
fashion category within our portfolio, with products that generally have lower average
prices than the rest of the portfolio. This mix factor contributed to the reduction on our
average price on the semester basis, but it was out waved in the quarter by the
success of high value-added collections launched for Valentine’s Day within the classic

Moving on to slide five, we have the breakdown of our watch revenues by segment and
by distribution channel. Looking at the segment breakdown first, in the 2Q11 the classic
segment grew 28.1%, and represented 70.4% of our sales. The sport segment grew
23.3%, and represented 18.8% of our sales, while the fashion segment grew 380%,

                                                           Conference Call Transcript
                                                                       2Q11 Results
                                                          Grupo Technos (TECN3-BZ)
                                                                   August 11th, 2011

and represented 10.7% of our sales. As mentioned previously, we saw that despite
very healthy growth rates in each individual segment, we have a significant increase in
the share of fashion watches within our portfolio, given that the numbers for the 1H10
were still somewhat irrelevant.

Looking at the distribution channel breakdown, in the 2Q11 specialized stores grew
37.5%, and represented 71.1% of our sales, while department stores grew 39.1%, and
represented 28.9% of our sales. We see in this case a very even growth between
distribution channels, with stable relative shares among the two.

On slide six, we see the evolution of the gross profit of the Company. In the quarter,
our gross profit grew 37%, reaching R$47 million, and representing a gross margin of
65%. In the semester, we recorded a growth of 42.3%, reaching R$75.4 million and
representing a gross margin of 63.3%.

We see, therefore, a growth in gross profits substantially in line with the growth in
revenues, with a small expansion seen in the quarter being attributed to the success of
high value-added collections launched for Valentine’s Day, which also contributed to
the growth in average prices, as mentioned before.

Moving on to slide seven, we have the evolution of our adjusted EBITDA. In the
quarter, our adjusted EBITDA grew 31.1%, reaching R$22.9 million, and representing a
margin of 31.7%. In the semester, our adjusted EBITDA reached R$36 million, a
growth of 44.8% with a margin of 30.2%. The EBITDA margin in the quarter showed
decrease versus the previous year, but the numbers for this semester still shows a
small margin expansion.

The margin decrease in the 2Q can be justified by the growth in selling expenses, both
by the increase in expenses such as advertising, sales commissions and prizes,
shipping and consulting fees, as well as the timing of such expenses. As mentioned in
the beginning of the call, we are seeking to structure and strengthen our Company, our
brands and our team to generate and support a high and sustained growth rates.

On slide eight, we have the evolution of the adjusted net income, in the quarter we
grew 32.7%, reaching R$17.1 million, and in the semester we grew 32.1%, reaching
R$26.1 million. It is important to note that this net income, as well as the EBITDA
presented in the previous slide, is adjusted to exclude the positive impact generated by
the sale of our headquarters. This real estate sale generated a capital gain of around
R$8.8 million and a bottom line impact of R$5.2 million net effect.

On slide nine, we see our working capital situation, comparing numbers at the end of
June 2011 with the same period in the previous year. We prefer to show this variation
year over year, to better capture seasonality effects. We can see that in the aggregate
we had a growth in our working capital above the growth in our net revenues in the last
12 months. At the end of June, 2011, our working capital totaled R$182.9 million
versus R$129.1 million at the end of June, 2010. As a proportion of net sales in the last
12 months, working capital rose to 72.2% at the end of June, 2011, versus 67.3% at
the end of June, 2010.

Analyzing the individual accounts, we have an increase of 1.3 p.p. in accounts
receivable, and an increase of 4.3 p.p. in inventory, due to the establishment of proper
inventory coverage for the recently launched branch within the fashion segment, as
well as to the increase in the inventory coverage for our best-selling models to avoid

                                                            Conference Call Transcript
                                                                        2Q11 Results
                                                           Grupo Technos (TECN3-BZ)
                                                                    August 11th, 2011

stock outs and loss of sale. Our accounts payable demonstrated a small positive
variation of 0.6 p.p.

Finally, on slide 10, we summarize some of the figures from our Initial Public Offering
and show our debt position.Our Initial Public Offering totaled 28 million shares,
generating R$173 million in proceeds for the Company net of commission. We
currently have 58.4% of our shares with the controlling group, 37.1% market flow and
4.5% with a group of officers, managers and coordinators at our Company.

One of the many uses of the proceeds raised in our IPO was the repayment of debt.
Immediately following the financial settlement of our offering, we repaid all outstanding
financial debts. Post-IPO, we have a net cash position of approximately R$62 million,
which gives us plenty of strategic flexibility to accelerate the growth of the Company.

With that, we conclude our presentation and open the floor for questions.

Matt McClintock, Barclays Capital:

Hi, good morning, and congratulations on your 1Q as a public company. I have a
couple of questions, the first one is: I understand from your earlier call that you called
out approximately a 5% inflation in your COGS from China, your costs in China. I was
wondering if you could break that out among the components, are you seeing more
inflation in movements or are you seeing more inflation in other pieces that you source
from China? That is my first question.

My second question is: how does inflationary pressure in your sourcing costs from
China flow into your cost of goods sold and in your gross margin? I understand that you
have a pretty sizable working capital at your assembling plant in Manaus, and I was
wondering if we started seeing inflationary pressures this quarter, would that not be
reflected for a couple of quarters, given that sizable raw material position that you hold.

Joaquim Ribeiro:

Hi, Matt, thanks for the question. Let us go through this COGS question, just taking a
step back for a second. About 2/3 of our COGS is USD denominated, and about 1/3 is
Real denominated that comes from the assembling costs that we have up on our plant
in Manaus. The directional commentary that we gave on the previous call, in terms of
cost pressure coming from China was the following: we have not seen as much
pressure as we have seen coming from the call that we heard from [unintelligible].
Obviously, we are seeing some inflationary pressure in terms of COGS, but they are in
single digits, as opposed to double digits that we saw on the other company’s
conference call.

Just breaking that out a little bit further so you understand, the 5% number that we
gave was more directed to the movement side of things, so we have seen a little bit
more of an inflation on the component side of things coming from China than we have
seen on the movement side of things coming from Japan.

That adds up to a little bit lower than a 10% inflation that we see. And how this flows
into our COGS, obviously that impacts that 2/3 of the COGS that are USD
denominated. Obviously that 2/3 of the COGS also has everything to do with the
exchange rate that we have, so when you have exchange rate fluctuations that impact
the 2/3 of the cost as well.

                                                            Conference Call Transcript
                                                                        2Q11 Results
                                                           Grupo Technos (TECN3-BZ)
                                                                    August 11th, 2011

For the 1/3 of the COGS that you asked for, that is our Manaus based cost, we have
been doing a lot of work over the past two years, just trying to make our plant as
efficient and as productive as possible. And obviously we are seeing some benefits
from lower costs per unit over the past two years and certainly over the past two
quarters in COGS costs.

So, what we said previously and what we reaffirm today is we should not have big
surprises in terms of the COGS side of things in coming quarters and obviously we had
pretty positive news on the gross margin side of things for this past quarter.

Thiago Picolo:

Matt, let me address what you asked about the timing. You are right in that higher
component cost, for example, would translate in the first moment to a higher inventory
level, and they will only start showing in our results when the products are effectively
sold. So, in the sense of the products remain in inventory for a while you will not see all
of the impact of that right away.

Just as a general guideline, I guess, is when we bring the products over we look to
launch them quite soon after receiving them, and then once you launch a product it is
common to see a large part of the sales from that product coming within the first one or
two months, and then you have a sort of step down in the level of sales coming from
the product where the product remains on sale for several months until the inventory
eventually runs out.

So, it varies a lot, depending on how successful the product launches are or not, but
you should see an impact coming sort of immediately, and then part of the impact
coming gradually over the following months counting from the launch of any specific

Matt McClintock, Barclays Capital:

OK. Thank you. That is very helpful, and if I may ask another question, you are close to
cycling the launch of your kiosks, which I believe you did initially back in September of
last year. Maybe could you provide some color on what you have seen with the kiosks
over the past year, some lessons learned, and maybe if you could provide color as to
the performance of the kiosks relative to your initial expectation? Thank you.

Thiago Picolo:

I guess on a very general level I would say we are very much on track and very much
within our expectations in terms of the kiosk project, both in terms of the roll out of
these kiosks, and in terms of the performance of the kiosk itself. What we have found
as we imagined is a tremendous space for us to offer such a format to our retailers,
both from a client side, and I am talking about end consumers here, which I think are
very much in need of a better, more efficient, more visually pleasant shopping
experience, and also coming from our clients, the retailers, that seek to have a way to
expand their business without significant capital outflow and with the support of one of
their leading partners in Grupo Technos.

So, I would say it is still kind of early, we are up to nine kiosks at the date of the
release, we still have quite a few launches to go this year, and we are targeting for 50

                                                           Conference Call Transcript
                                                                       2Q11 Results
                                                          Grupo Technos (TECN3-BZ)
                                                                   August 11th, 2011

by 2013, I would say we are very much on track and we are very pleased with the
impact that it has had in the market, in our retailers and in our Company.

Matt McClintock:

Thank you very much. Actually another question came to mind, so I hope you do not
mind. I know it is small, but can you perhaps provide some more color to the growth of
the fashion category during the quarter, I assume the bulk of that was through Mariner,
but could you just maybe talk about what you saw within the quarter? Thank you.

Thiago Picolo:

Yes, I mean, we actually do give a good break up for the fashion category as a whole,
and then I can give you a little bit more color within the fashion category. So, the
fashion category in this quarter grew 380%. Of course, as you mentioned, it grew from
a very small base, about R$2 million last year, so the percentages are relatively
meaningless in that sense.

Within that category we have Euro on one hand, a very feminine, fashion-focused
brand, and we have Mariner on the other hand, which is more of a young, hippie sort of
brand, that has a very strong interchangeable band component to it.

I would say both categories have been going very well, and particularly I think what is
been interesting for us is to see the growth in the interchangeable band product. This is
a product that has been quite a fad in Brazil for the last year, so growth has been
tremendous, but it is also a product in which we see a tremendous volatility and a
relatively short fashion cycle here, it goes up very quickly and it comes down very

So, I would say that in general we are very pleased with the growth of the fashion
category, we see in Euro a more sustainable growth for the long term, and in Mariner
we see a very interesting growth when you look at the last semester, but also to say
that we are very concerned and very vigilant in terms of monitoring the cycle of this
product, given that it is a much more volatile product.

Joaquim Ribeiro:

Matt, let me just complement what Thiago said. I think the beauty of Technos is
obviously the balance of products that we can have to our growth. If you look at our
results, obviously the fashion segment grew 380%, like Thiago said, that was the
category that was basically not explored by the Company last year.

So, it is a recent add to our portfolio, and obviously we are excited about the growth
that we have coming from this segment, but when you look at the Company overall, the
fashion side of things only accounts for something approximate to 10% of our sales,
10% to 15% of our sales.

What is interesting here is obviously the balance approach that we have for growth,
when you look at our classic segment, that grew 28% in the quarter, and when you look
at our sports segment, that grew 23% this past quarter, so it is a very balanced growth.
Obviously, as we enter the fashion world, as we enter the fashion category, obviously
we are exploring products which have a very different profile from the profiles that we
see in the classic segment and the sports segment.

                                                              Conference Call Transcript
                                                                          2Q11 Results
                                                             Grupo Technos (TECN3-BZ)
                                                                      August 11th, 2011

Obviously those are products that have a shorter life cycle in nature, obviously they are
home to big bets that we can obviously have very high returns when we get those big
bets right, but obviously there are some risks associated with the inventory coming
from fashion driven segments.

So, I think the fact that we have a very balanced Company, with very balanced
category growth, it speaks well for the strength of the Company we have, and Thiago
talked a little bit about the interchangeable model, obviously that is a part of our growth,
that is a small part of our business, but when you are looking at growth obviously it is
an important ingredient to our growth. And like he said, obviously it is a product with a
life cycle that is shorter than the life cycles that we see for the other companies and we
are monitoring that quite carefully.

Matt McClintock:

Thank you for the color.

Irma Sgarz, Goldman Sachs:

Hi, good afternoon. Just a quick follow-up actually on the participation of the fashion
category, you had about 10.7% of sales coming from the fashion category. I was
wondering if you could break out whether in percentage terms or in absolute figures
how much is actually from the Euro brand and how much is from the Mariner so that we
have one idea of the impact this could have as Mariner kind of goes to the end of its
cycle. And from what I understand, in the 2Q10 you did not have any contribution from
Mariner yet, if I am correct here. Thanks.

Joaquim Ribeiro:

That is right. Irma, let me give you some color on that. Basically as we look at the
fashion category, we usually do not break out specific totals for each brand, but you
could, I think, safely assume that we are talking about the revenue base for Mariner
and Euro that is about half and half right now.

Obviously, those are very different brands, with very different stories, as Thiago said,
Euro is a recent addition to our portfolio, about two years ago we licensed a company
with an option to buy, very feminine in its profile, very much driven by cutting-edge
fashion forward styling, and what is interesting about Euro is not only the fact that it is a
fashion brand, but it is a women’s brand, which is something that we did not have in the
Company specifically before. And I think that what is important about Euro as well is
the fact that it has given us an entry point into the retail franchise business that Matt
mentioned, and obviously having that entry point not as a multi-brand franchise, but a
mono-brand franchise, it is very important strategically for our endeavor moving

Talking about Mariner from the other side, as Thiago said it is a younger, hipper brand
that we have, right now very focused on the interchangeable segment of the market.
Eventually, our goal obviously is to include a single band collection here, but it is
certainly a point, as you mentioned, that the interchangeable world, the
interchangeable collection has a shorter product life cycle than we see for other
categories, and obviously we believe that it is important for us to keep that in mind

                                                                                  Conference Call Transcript
                                                                                              2Q11 Results
                                                                                 Grupo Technos (TECN3-BZ)
                                                                                          August 11th, 2011

The share of value for the Company is small, obviously we are talking about a segment
that does not total to a giant participation of our Company's revenues, but in terms of
growth it is important, and we are obviously very carefully monitoring sales of
interchangeable models going forward.

Irma Sgarz:

Thank you.


I am showing no further questions, I will turn over to the Company for final

Joaquim Ribeiro:

Thank you very much. Irma, let me go back to your question just once more, because I
think there was a part of your question that I did not answer, talking about the first two
quarters of last year versus the last two quarters of last year. Obviously in the first two
quarters of last year we did not have any meaningful sales coming from the fashion
segment, the only side of revenue base we had in the first two quarters of last year was
sales from the Euro Brand that we have, because we did not launch Mariner up until
the third quarter of last year.

This is actually very important obviously, because as you are going to see coming up in
the next two quarters, on the 3Q and on the 4Q of 2011 we are going to be dealing with
comps that are a little bit higher than the comps we had for the first two quarters of this
year. Obviously with the interchangeable band segment in the fashion category having
more meaningful sales in 2010 in the last two quarters than the first two quarters, so
that is important, and thank you for the observation.

I just wanted to thank everybody for the participation on this first Grupo Technos’
earnings call, this is the first of many iterations that we are going to have in the future,
and we thank you for your participation and support. Thank very much everybody.


This concludes today’s Grupo Technos’ earnings conference call. Year may disconnect
your lines at this time.

“This document is a transcript produced by MZ. MZ uses its best efforts to guarantee the quality (current, accurate and
complete) of the transcript. However, it is not responsible for possible flaws, as outputs depend on the quality of the
audio and on the clarity of speech of participants. Therefore, MZ is not responsible or liable, contingent or otherwise, for
any injury or damages, arising in connection with the use, access, security, maintenance, distribution or transmission of
this transcript. This document is a simple transcript and does not reflect any investment opinion of MZ. The entire
content of this document is sole and total responsibility of the company hosting this event, which was transcribed by MZ.
Please, refer to the company’s investor relations (and/or institutional) website for further specific and important terms
and conditions related to the usage of this transcript.”


To top