Springs Global Participações S A : 3Q22 Result

3Q22 Results

December 16, 2022

Springs Global: Free cash flow of R$ 25 million in 3Q22

São Paulo, December 16th, 2022 - Springs Global Participações S.A. (Springs Global), a company in the Home & Decoration segment, leader in bedding, tabletop and bath products, had a free cash flow(a) of R$ 25.3 million in the third quarter of 2022 (3Q22), enabled mainly due to the decrease of R$ 104.8 million in working capital. There was a reduction in the manufacturing operations in this quarter, with scheduled stoppages at the manufacturing units, resulting in idle cost of R$ 44.4 million. Net revenue totaled R$ 296.6 million in 3Q22.

Operational restructuring

The Company has decided to restructure its industrial operation, in order to improve its profitability, with the simplification of its product lines, reducing from approximately 7,000 to approximately 1,500 SKUs manufactured concurrently. Wholesale sales will be concentrated on products under the Santista brand, with its own production, while the Artex, MMartan and Casa Moysés brands will be exclusive to AMMO Varejo sales. This optimization of production makes it possible to reduce industrial complexity, with productivity gains, in terms of unit cost and reduction of percentage of second quality, due to the increase of the production batches, resulting in the reduction of working capital, and therefore, contributing to better profitability for our shareholders.

Debt management

In 3Q22, the business combination of New Keeco Holdings, LLC, Springs Global's indirect subsidiary that was available for sale, was completed with Hollander Parent Corporation, forming a new combined company called Keeco, Inc., which will operate in the same market segment as both companies, with consolidated revenues equivalent to US$1.3 billion. With this transaction, Springs Global has an expectation that is stake in Keeco will have an important valorization in the coming years, through business growth and obtaining operational and administrative synergies. On the other hand, with the postponement of the sales of its share in Keeco, the Company began to look for other sources of liquidity to reduce its financial leverage. The Company renewed part of its debt agreements, equivalent to R$ 254 million, and obtained a waiver of compliance with financial ratios for June 30 and December 31, 2022 for a significant portion of its contracts.

Allocation of non-operating properties for sale

In the fourth quarter of 2022 (4Q22), the Company decided to allocate non-operating properties in São Gonçalo do Amarante-RN for sale, whose balance sheet values as of September 30, 2022 totaled R$ 373.8 million, and started negotiations with some interested parties, which are in progress.

Reduction of loans receivable from companies in the Coteminas group

The balance in receivable from related parties, mainly with Companhia Tecidos Norte de Minas (CTNM) will be reduced as the group companies receive payments for the sale of properties and businesses, which are in progress, and amortize their respective loans with Springs Global. The resources received by Springs Global will be used to pay debts with third parties, and, therefore, contributing to the reduction of its indebtedness and cost of debt.

Among the non-operating assets being sold, we highlight the contract for the sale of a farm for R$ 230 million, of which 61%, will be used to reduce the debt. The conclusion of the sale, and, therefore, the beginning of payment, depends on certain precedent conditions.

Consolidated Performance

Revenue

The consolidated net revenue reached R$ 296.6 million in 3Q22, 34.6% and 22.0% lower than 3Q21 and 3Q19 revenues, respectively. In 2020 and 2021, families invested in their well-being, due to the longer stay in their homes, favoring the home & wellness sector, and in 2022, with the resumption of their routines, they directed their spending to other items such as apparel and services. Additionally, inflation has been a significant factor in the loss of purchasing power of families and in the increase in the costs of the products offered, harming, mainly, brands whose target audience is the lower-income population.

The Bedding, Tabletop and Bath(b) line was responsible for 57% of 3Q22 revenue, and intermediate products(c) for 14%. The Retail revenue contributed 29% of total revenue in 3Q22.

Revenues from the Bedding, Tabletop and Bath line amounted to R$ 169.8 million in 3Q22, 42.3% lower than the value recorded in 3Q21, with a reduction of 52.2% in sales volume.

Revenues from intermediate products were R$ 40.3 million, 11.0% higher yoy, and with a decrease of 39.7% compared to 3Q19.

Retail net revenue totaled R$ 86.6 million, 29.7% lower yoy, negatively impacted by lower sales from e-commerce.

Retail sell-out (GMV)(d) revenue reached R$ 162.9 million in 3Q22, 21.6% lower yoy and 9.8% higher compared to 3Q19.

	439.8	453.6
380.4
			296.6
3Q19	3Q20	3Q21	3Q22
	Chart 1 - Net Revenue, in R$ million

19%	27%
28%	29%
18%	8%
17%	14%

64%	65%	57%
55%

3Q19	3Q20		3Q21		3Q22
		Bedding, tabletop and bath		Intermediate products		Retail

Chart 2 - Revenue per product line

Costs and Expenses

Cost of goods sold (COGS) was R$ 232.9 million in 3Q22, with a yoy decrease of 19.8%, mainly due to lower sales volume and classification of part of the conversion cost as idle cost, representing 78.5% of net revenue, versus 64.0% in 3Q21 and 66.8% in 3Q19.

The main raw materials are cotton and polyester that, together with chemicals, packaging and trims, are included in materials costs, which amounted to R$ 169.1 million in 3Q22, 9.0% higher yoy, with the increase in the costs of raw materials and inputs being partially offset by lower sales volume. The average price of cotton, our main raw material, increased yoy by 19% in Brazilian Reais in 3Q22, however with a 18% quarter-over-quarter (qoq) reduction.

Cotton price - CEPEA / ESALQ

in Brazilian Reais cents per pound

900

800

700

600

500

400

300

200

28/06/2022

15/07/2022

03/08/2022

01/07/2021

20/07/2021

06/08/2021

25/08/2021

14/09/2021

01/10/2021

21/10/2021

10/11/2021

30/11/2021

17/12/2021

07/01/2022

26/01/2022

14/02/2022

07/03/2022

24/03/2022

12/04/2022

03/05/2022

20/05/2022

08/06/2022

22/08/2022

09/09/2022

28/09/2022

Chart 3 - Cotton price, source CEPEA

The conversion of raw materials into finished goods requires, mainly, labor, electricity and other utilities, designated as conversion costs and others, which reached R$ 47.7 million in 3Q22, with a 60.1% decrease yoy, since part of the conversion cost was classified as idle cost, due to the scheduled stoppages in some manufacturing units in 3Q22. Idle costs, when they occur, are recognized directly in income statement for the period and are not