Alpargatas SA

BOVESPA:ALPA4

Earnings Call Transcript

[Mari Espirito Santo, executive]

Good morning, all. Welcome to our video conference to communicate Alpargatas' 2022 first quarter's results. Today, we have with us Beto Funari, our CEO; and Julian Garrido, our CFO. This video conference is being recorded and simultaneously translated into English. Questions should be sent by using the webcast in chat. Please write your questions throughout the presentation, and we are going to read and answer them at the end during the Q&A session. Before proceeding, I would like to clarify that forward-looking statements that may be made during this video conference relating to Alpargatas business prospects, projections and operational and financial targets are beliefs and of the company's Board be made with base on information that's currently available. Now I turn you back to our CEO.

[Roberto Funari, executive]

Good morning, everyone. I hope everyone is well. We are going to start talking about our results. And later on, I'm going to go deeper into a few points. Alpargatas results in the first quarter 2022 had its highlight. First of all, they stabilized the course of cost of raw material when compared to the fourth quarter 2021, acceleration in the increase year-over-year. In other words, the rate was growing 47% of the inflation of raw material costs, and it's decelerated to 41%. Our production costs, not our COGS. Its acceleration rate decreased from 38% in the fourth quarter to 29% in the first quarter of 2022. This is the result of the actions we described to you that we would be implementing. So the good news is that we implemented such actions. And those of mitigation are creating this impact, which is extremely important for our short-term model for protection of our EBITDA.

During the presentation, Julian will get deeper into those fronts to show you how this plan has been working. The second point of highlight in the results of the first quarter is the growth of 11% in constant currency. It was about 90 --8% in the consolidated because we had this important exchange rate variation. Our international operations grew 17% in the constant currency.

This growth has made us reach a level of revenue, which is the highest in the history of Havaianas for a quarter. In Brazil, we had a mix, starting to get better. We had a sellout, positive. However, a selling that has shown a decrease. This difference was a reduction of inventory inside the quarter from the beginning to the end of the quarter, therefore, a healthy reduction. And as such, we move it on with a positive sellout. We also had 1 important point throughout the quarter since we know we are passing on the price and that makes this model that we are implementing showing these positive results as expected. The international expansion came with increased volume and revenue, as I said -- as I mentioned earlier, of 17% in constant currency as well as in the prices of the mix of products.

So the RGM, we are still at the beginning of the implementation of RGM, but we can already see the results. Therefore, our focus on EBITDA margin protection was reached, and the 2 biggest points that helped in this protection was the stabilization of costs and acceleration of the prices. Therefore, the EBITDA remained in 19%.

As for Rothy's, we are reporting for the first time on Rothy's. This is the beginning as we had promised, we are already defining operational and finance metrics. We started with Rothy's officially after March with the first Board meeting. We had instructions and decisions for the budget in March, and the beginning of this new cycle path of Rothy's started. So I'm going to detail that. It was a very encouraging beginning with a very important cycle of investments. And once again, all the actions being developed showed to us that we have not only a great brand, but also a very strong organization at Rothy's. Having said that, I'm going to go through the numbers. To remind you, once again, they are all in the release that was published. We had a growth of net revenue of 9% versus the first quarter of '21. This made our revenue in the quarter reached BRL 927 million, which is the first -- it's a record revenue in a quarter in our history.

Our recurring EBITDA margin reached 19% and our net income from continued operations was of BRL 112 million, and our recurring net income was of BRL 139 million. As for the net income from continuing operation, Julian will give you more information on that. Back to the numbers concerning the performance of Havaianas and its financial indicators. We had net revenue growth in Brazil of 8%, and volume in Brazil decreased. There was a variation of minus 4%, which is due to -- sellout was positive. We saw a growth in the international net revenue of 8% in constant currency in the Brazilian reals and 11% growth in the international volume. The gross margin was of 47%. There is an impact of negative gross margin compared to the last quarter of minus 5 percentage points. However, compared to the fourth quarter, there was an increase of 4 percentage points. Our gross margin per care is stabilized compared to the first quarter 2021 at BRL 7.7 million per pair. And it showed an important growth of 30-odd percent per pair compared to the fourth quarter 2021.

As for the operating expenses, we will continue our strong control and effective control. So they represented 33% of our net revenue, 2 percentage points more than it was last year. Still, we increased our investments in marketing in 12%. Again, that makes us to continue our cycle of growth to see the acceleration that is going to come at a certain moment. The EBITDA margin reached was of 18%. It is -- has a 3 percentage point decrease compared to the first quarter last year. However, 1 percentage points higher than compared to the fourth quarter of 2021.

Now I turn to Julian Garrido, who is going to explain the rationale and some lines of the balance sheet and the overall results. So I'll be back after Julian.

[Julian Garrido Del Neto, executive]

Thank you, Beto. Good morning, everyone. It's always a pleasure to talk about Alpargatas and our results with you. I would like to remind you that our history is a movie, not a picture. Today, I will start discussing this evolution in our gross profits. I am looking here at the upper left side corner, we finished the first quarter at BRL 441 million, which is aligned with the BRL 442 million of the first quarter of 2021, which is interesting to see is the contribution of the regions we can see, the international, which is the lighter orange going from BRL 217 million to BRL 225 million, or 4% up. And in Brazil, we had a percentage decrease of 4% because of the price compared to the price of last year. And we are going to be talking a little bit more on that a little further down today. When I look at the left bottom of the slide, as Beto mentioned, we see that Havaianas within the total, we see that our consolidated of 47.6%, it is a decrease. And although the money is stable, we saw consolidation of the revenue. But once again, we are talking about a movie. If we look -- compare it to the fourth quarter of 2021 which was 42.9%, we went to 47.6%. So therefore, an increase of 4.7 percentage point increase. Definitely having the international business of Havaianas contributing to that.

On the right upper side, we are going to go into the main reasons for the pressure of price, which is the rubber cost. The first 2 blocks once again on the upper right-hand side in commodities and financial exchange. In this proportion of 50-50, they make up the price of our rubbers, the rubbers used in our processes. Speaking of the commodity a bit. The composition of our rubber. Our rubber, as you know, has the butadiene and the insole. The butadiene has a useful life of about 30 days as a raw material. Of course, after the process, after it's being processed, we don't see this limitation. As we only have a useful life of 30 days, we cannot stock it large amounts of butadiene. And there is not a hedge market for butadiene because the shelf life is too short. The on the other hand, doesn't have a short shelf life. However, we still don't have a hedge market. So what do we do in terms of that? The inventory cover. We used this working capital to create this inventory formation of stock, increasing this coverage and giving us stability in terms of order.

So how does that happen in our accounts and our results? Well, there is a timing for that. As a raw material, the price is fixed at the distributor. When it arrives to us as raw material, it goes into the production cost as it becomes a finished product and then it goes into the COGS. So it takes like 3, 4, 5 months to happen. So that's why we cannot tell you accurately when this is going to happen. You can already see an improvement in the market. And this stability, as Beto said, is starting to be seen, and we are being able to control this a little bit more. Of course, the exchange rate variation is something that we have been using. We have strategies and policies for -- we have a natural hedge for the protection of our numbers, not only for the effects of treasury, but also for the transactional risks. So with the composition of those 2 blocks, FX and commodities and its gives us this changing structure. This is a structural change. You can look in our balance sheet. And this is what reflects in this beginning of the stability.

We cannot state anything. However, we have this protection in our balance sheet. Is this all? Of course, not. We also have the operational efficiency of Alpargatas. You are already tired of listening to us talking about our VIP pillar. And we also have a very similar verticalization, similar to Rothy's, where there is a foreign such as Coca-Cola, where we have optimization of rubbers, new formulas of rubbers, using old rubber, and this is all part of that. And also, our CapEx has been helping us in the -- in our efficiency and decreasing all this complexity, decreasing our scrap and improving our process as a whole for all of our resources. So this is the -- this inventory strategy that makes us stronger.

Next slide, please. Well, as it has been said before, we don't work only internally. We also work the revenue growth management. This is a pillar. This is not a project. Once again, it has its phases and times. So it is in a process which is a long-term project, which not only accounts for the passing on of prices, but also of revenue. There is the availability, profit. So what we saw on the top is Brazil. And underneath is international. In Brazil, the RGM is of BRL 61 million, helping us to mitigate this COGS pressure. As for the international, the RGM is already seen at BRL 27 million. This is very strong. We are expanding that right now. And you can already see this contribution of the RGM side, this spectrum of RGM. In the next chart, we also talk about other costs, costs which are more controlled by us. And we have always managed that at a return -- looking at return. I excluded margin here on the right-hand side. So the set that we have is to manage this expenses without compromising the future.

We are investing. We can see that it goes from 222, 232. So investments in CapEx and capabilities, what we call, analytics in data and especially in digital technology and sustainability. Even though it went from 2020 to 2032, you see that the percentage over the net revenue decreased from 28% to 26%, that's what we call leverage, and that's what we are always looking forward to reach. So in other words, we will continue to grow our investments without diminishing or undermining our leveraging. On the right side, we have investments in marketing, which are fundamental for the company, both in marketing. So we continue increasing it from 56% to 62%, 12% up. Reminding you that as for the international, we invest more, but we don't sacrifice that. So keeping the investments, keeping and protecting our EBITDA. This is our message here on this slide.

Next slide, please. When we look at this net income, it's extremely important as we break this story into 3 parts. These are 3 important things. 2 are noncomparable and 1 is comparable. The first 1 comparable is Havaianas history, the non-comparable is Rothy's history. Why it's not comparable? Well, because I didn't have Rothy's last year. So the first bar you see of 126 brings us to the net income that we see right now. So there is Rothy's and 1 part of Osklen. And I'm going to go through them one by one in detail. So we start at 126, we recomposed these discontinued operations of 22, and we reached 148. From the BRL 148 million, We see a reduction to BRL 139 million, which are the 2% points I mentioned before. So BRL 8 million is depreciation. We spent BRL 330 million CapEx last year, much more than we invested in 2020, and it went down in 2021. Again, long-term investments in capacity of production. Yes, we had recurring EBITDA when compared to 2021. But I want to be repetitive and talk about that again.

So overall, this history of Havaianas, a decrease of 2% points and investment in depreciation. This is the comparable. The part that cannot be compared. We have discussed results of the Rothy's minus 2020. This is a picture of investment, over $14 million in this first quarter. Beto will talk to you a little bit more about that. When you look at the first bars of equity, while equity is still not consolidated. Remember, we have 49.9%. And the equity is composed of 2 parts. The amortization. So in the overall, this is inventory. So we should have similar results in the second quarter, just for 5 months and after that, it's going to a much lower number. And remember that there is over $14 million in this result as investment and as it should be guys. Considering Osklen parts, there are BRL 30 million, which were Osklen's negative results in this -- the beginning of this year. And the 60, as we announced in April, we ended our operations. So part of that had been made in December, and now this is the second half of it. This is our composition. The message to be sent here is there are 3 factors. One is comparable for Havaianas connected to investments and Rothy's and Osklen.

The net financial position, of course, it also has an influence on those 3 factors, Havaianas, Rothy's and Osklen. And I have separated for you what is operation and what is non-operational. We started at BRL 698 million. This was our net financial position, which I had as in cash plus what I have as debt with banks. So this is the BRL 698 million. We removed the Osklen debt, where we sold Osklen. We have operational flow of 12 months. We have 715 of continued operations inside. The working capital, the biggest part of BRL 481 million comes from the inventory. It's connected to what I mentioned to you about the raw material strategy over the commodities. And there is also a 150 connected to derivatives. In the operational, it's much connected to Rothy's, what we have already paid for the first installment and the rest is still there in our cash and the CapEx investments that we made over the past 12 months. As I mentioned before, we spent BRL 481 million extra to what expense in this period of the previous 12 months when we compare to March 2020.

And lastly, there is a little bit of and Osklen over these past 12 months. Therefore, a growth of BRL 927 million, solid cash, net financial position. This is everything I had to tell you today.

Now I'm going to turn it back to Beto. Thank you for your attention.

[Roberto Funari, executive]

Thank you, Julian. So this was a deep dive we had in our main highlights in our finance, especially in the front of mitigation concerning inflation of our costs. And now I'm going to go to another part of the quarter, which is what we are building, how we are building Rothy's and Alpargatas for even brighter future. I'm going to start with Havaianas International. The actions we have been performing. It is extremely important to highlight before I start the updates of each one of our businesses -- international businesses that we look at the international operations in a different way that we look at Brazil. In the international operations, Havaianas is advanced as a fashion brand. It's a lifestyle brand. So therefore, we can apply this strategy of making it a premium brand, which by the way, it's a requirement from all of our customers, B2B and our end users in those geographies. So therefore, we have a model which is focused at this stage of the brand as a fashion brand in the international operations. And you are going to see how we are preparing the company and creating the years we needed to boost this growth.

Once again, progress is extremely important because in order to accelerate, you cannot only have sales objectives. You have all the company to leverage and activate this mechanism of selling. So since we streamline those gears and those levers, this machine is going to run increasingly more as a Formula 1 race. In Europe, we advanced a lot, there are many key things happening in our portfolio beyond the quarter with a focus on Sandals & Accessories advanced a lot. A month ago, I made a long visit through several different countries in Europe. And what's caught my attention a lot was how we expanded our presence in terms of sandals and the receptivity of -- to our accessories in the market, where our customers increasingly see the lifestyle aspect of the brand. Secondly, in Europe, we are 1 step behind Brazil, however, 1 step ahead of the other international brands, considering the RGM. We have an internal structure, and we are implementing what we call RGM 2.0 using data analytics and tools, and we can already see those very important effects.

And here, I'm not only talking about the inflation, I'm talking about the whole intelligence behind the pricing so we can grow price and volume which is working well as we see this working well, too, in Brazil. We are starting a new age for those of you who are in Europe and U.S.A. right? Because there is a whole generation in those markets doesn't know what inflation is. I'm very happy to say that we have -- we deployed this RGM project last year, and we are happy to have deployed it. Our third point is the digital ecosystem. In Europe, we are very advanced. We are already operating in a very similar way the way we operate what I saw in Rothy's. Not only that, in Europe, we have a first premium work, what we call Pan-European customers, those who go to several countries, crossing borders and using omnichannel as a purchase channel. We have made an -- we made an exceptional work, and we have seen this as a great vector for growth.

In addition to that, we have been reinforcing these -- our talent. In supply and technology, we made important investments. Not only that, we have a new CFO in Europe since the last day of last year, who came from Nike. We have a new Chief Marketing Officer, the Chief Marketing Officer, was promoted to lead on the global -- on the core. So already with this focus of a fashion brand and her experience in fashion, we also brought incredible talent to support her and our operations in Europe. In addition to that, we made an important change in Europe. Due to the COVID, we were forced to change our business model and focus increasingly what we call the domestic market, not only depending on the touristic markets. So this has been extremely successful and reinforces the strategy of the brand in Europe and this focus in the domestic market has been a great success as tourism catches up after the social restrictions are lifted.

Soon, we are going to make our ERP upgrade to be aligned with our digital transformation in the front line, and have -- and this more complex structure of the company. In Europe -- there is something missing on this slide, but I want to reinforce that we are also starting in the second half of the year, a new logistics operation, which will bring our service levels up, making it better with more capacity for replenishment, more data, more analytics and also offering support to this diversity of channels we have. So great investments in Europe. Once again, we are removing the bottlenecks and creating a potential for a higher acceleration of growth. So I'm extremely satisfied with our progress in Europe.

In the U.S.A., U.S.A. is still one of our goals, and we will be creating business in Europe that's going to be as large as it is in Europe and Brazil. We have now a model that is more aligned with this fashion, vision of the brand, with the idea of working on removing the bottlenecks. We have a new president for our business in USA. I'm going to have the pleasure to introduce her soon. She starts next year. She joins our company next year. We have also a CFO from Brazil going to the U.S., our new CFO, specifically to control how this operation -- logistics operation between Brazil and U.S.A. works. And we are also having all the RGM being implemented there. Frederic has already performed important changes to our strategy -- commerce and RGM strategies and making a very important adjustments in levels, discounts, et cetera, this kind of -- this is one of the issues we have in the U.S.A. and we have in the U.S.A. and more than that, redirecting our channels to the premium fashion and therefore, we can reach and meet all the demand we have, making our brand more premium because we do have the space. We have the room for that, for the brand. We are working on several fronts, which are about to happen. We are going to have a new 3PL. We made an important benchmarking because Rothy's is extremely strong in that point, and we are bringing strong insights to help us.

And we're also restructuring Amazon business. We are changing from the 1P to 3P model to a full commerce company called Pattern. This only -- not only gives us financial benefits in the P&L, but also this company, Pattern, works with several brands. It's a multi-brand which has a very -- 4.5% logistics level rating at Amazon. So it puts us 1 step ahead in terms of algorithms. So in the first quarter, we had some -- we had -- we suffered in terms of volume because we stopped selling through Amazon, and we are back through Pattern. So we are extremely happy with this new movement, and this is going to help us to clean our platform of third parties, which are not authorized to sell Havaianas. The go to market or GTM, we started this project right now in the first quarter, so we can gain better prices and bringing the brand to the level we want and reducing exposure to off-price channel and raising our price levels by reducing discount. It's a change that has never been tried before, and I'm extremely satisfied that you'll -- tell you about this. It's going to create some turmoil in terms of volume in the short term, but this is how we actually what we have to do to create a premium brand position in the American marketing. In addition to that, we have the -- the new ERP that will support the branch to work better.

In China, I have great news for China and one not so good news. The good news is that we have the full trading partner upgrade, the BQ, we had a strong work with them, reformulating this new level of volume. And in addition to that, we expanded our team. We are much aligned to the way, for example, Rothy's work. So we are discussing now in China. We have a portfolio plan for creating a more premium and portfolio extension of categories. Slides are extremely important in China. And we are opening up this point of only being a domestic market and focusing on tourism. Because this has grown -- this grew a lot because of the COVID and we have the evolution of the offline with a few wholesalers trying to have a more robust model. However, the COVID attacked us in terms of consumption, not in terms of supply. So this is a year of transition in China, where we see a high -- I predict a high growth for China. And we -- what we see is not a way that we can operate in China right now. In fact, there are some locks in China for deliveries of no essential products that will affect our delivery. So our decision is to continue investing in brand building responsibly throughout this year, structure our team, streamline our operations and use -- take this opportunity when we are -- we can be back after the pandemic.

In the distributor market, they also had a very important development by saying that this is due to the elimination of the bottlenecks, implementing best practices, and with that, we are having the launch of the global flagship. We had extremely positive results in Asia. In 14 countries. We are bringing this new initiative to new countries. We also made this important movement, a focus on domestic markets and looking at tourism as an incremental in sales. We had an acceleration of sell-out in Asia of close to 20% in Latin America and close to a little bit above 10%. So the distributor partner upgrades are bringing this acceleration of sell-out and sell-through. And we are still upgrading our distributor partners. I told you in the past about this. So we are having more of this focus as a fashion brand with this capacity of handling the domestic market and this digital approach in Indonesia, Argentina and Mexico.

We are working on it, and we are creating this grounds for what we call the future big banks. I have a dream of not only having 6 big in our international operations, but actually expand that into 10 or more as we evolve in our models. So these -- all of these work is under the water line. But this is fundamental to eliminate the bottlenecks and to streamline these gears and these levers for growth. The second area I would like to emphasize is the digital transformation evolution. Coincidentally, we are celebrating today 1 year of the acquisition of Ioasys, where we had an integration extremely successful and made extremely with our here. And Ioasys brings to us mainly talent and people, 550 employees are part of what we are -- what we call the [ Alphatek ] combination between Ioasys and Alpargatas. This was a big jump in our digital transformation capacity, but we are aware that we need to open up new fronts and also control the pace that we have this transformation.

The first pillar, which is not on this slide, is the transformation of our mindset, transforming the mindset of the executives, training, the leadership, offering training on different leadership training on agile methodologies and working in squads. This has been transforming our mindset by working with Ioasys supporting us to work in this agile way, not all areas in the company just to make it clear, it doesn't have to work in this agile way. However, there are 2 fronts, the B2B and D2C ecosystem, D2C with the focus with experience of the users. In the B2B, you have small gears. And these are improvements that we are making -- continuous improvements we are making and which connected to our current technology infrastructure, which can already be 100% cloud-based.

And these are the large deliveries that we have for -- we are making right now. And this year, we are celebrating the very important deliveries. In the B2B in Brazil, we are launching a new sales portal. This is going to make our relationship easier with our customers. The customers will go through our indirect channels. It's a platform that's 50% faster than our current process, and it's 100% cloud-based. It can be escalated. So it brings the feature of escalation, and also other features which will result in a transformation for our indirect channels. Our partners are extremely excited about all of that. And this supports all the movements we are making in the go-to-market for the indirect channels in Brazil.

The second delivery is the Click 2.0. The Click 2.0 is a recommendation for purchases of portfolio using algorithms that boost our capacity to generate orders, which is in agreement with our manufacturing and logistics capabilities, reducing our lead time, increasing our service levels. And in addition to that, we have the potential of sellout for our franchisees. So that's an important delivery, which is going to have the biggest impact in our business in Brazil.

In the D2C, these deliveries are in Brazil and international operations, which has a larger penetration rate. In Brazil, we are launching our e-commerce flagship 2.0 in Brazil. So we launched in Brazil. The first, they have been showing great experiences and great metrics -- performance metrics on the website and on mobile because there is a lot of -- more of engagement in this mobile. And I invite you all, we are going to send you a video, so you can get to know this platform, and I invite you to go there and have your purchase experience using this website. It's a huge transformation from what we used to have.

So I think now we have reached the right point where we have a low complexity plus brand experience. So we are going to have faster checkout, intuitive search for products, and we are going to continue with branding and content what we already had. In addition to that, the mobile platform flagship, which follows the same line, it's not different from what we are looking at in terms of experience in Brazil. It's already 1 month ahead of Brazil, is already showing an NPS of 93, which is extremely high for the U.S.A. market. And we are also delivering -- improving the delivery processing 38%. All of that already shows these capabilities -- new capabilities of deliveries that we now have. In addition to that, we have the alignment of all of these experiences and solutions that we are rolling out to all global flagships we have nowadays. In addition to that, we have an infinite shelf in payment integration initiatives, which is going to be rolled out gradually.

We have a bot and offer our checkout. So we are including several fronts of the omnichannel, both in Brazil and internationally. This is an extremely important slide that shows evolution and progress in our portfolio.

Here is a follow-up of what Maffei showed to you on the Investor Day. This is the new collection that is being released right now. It is a collection that expands, bringing new families and new models, especially in the category of slides and sandals. In addition to that, we are diversifying our line of accessories. As I said, it's a huge opportunity, a huge market, where we have opportunities. And one important innovation. You remember when the slide was launched, now we have the Square family of product, we really bet on it, which is a new shape for flip-flops. We have the slides. The highlights for the slides are is this Ready, is the yellow one here on the upper left side with a completely renewed line for our traditional Slides. And as for the Square family in Brazil, we also have this launch in Brazil. And in the Beyond Core, we have disclosed like Street Shanghai and Street Tokyo models, already on this streetwear fashion. And we also have the You Milan. So this and also the improvement for the accessory lines that we have in line with this session approach that we -- I have told you about.

And I'm going to tell you a little bit about Rothy's. We are still at the very beginning, and I want to get back because I promised you a few operational and financial metrics. We already have them. We could ask you for a little bit more of a patience for 1 more quarter, but we haven't done that. We actually already brought them to you. The reason, not our, Rothy's reason to choose Alpargatas as a strategic investor and look at the future together is to allow us to create a unique integration in the industry. This vision confirms every time we have an interaction, we are already working together in several fronts, and that makes us feel very positive about this partnership, which is just starting. When Alpargatas stepped in, the goal of Rothy's founders is that we open up a new cycle for growth of Rothy's. Remember that Rothy's used to grow 50% historically. However, during the COVID, they went into a cash protection mode. The idea is that we can resume this cycle of growth. Why is that important? Because Rothy's has 2 characteristics that hold our retention.

The first one -- the ROI for investments of performance and marketing is superior to any other brands that we saw in the industry -- in the benchmarks that we had for the industry. For that purpose, the price point is also higher. So this is a performance that brings quick return. Secondly, the most important metric, the lifetime value of consumers considering the CAC, they have a lifetime value, which is higher of 12 months, what we like to measure. It's above, too, so -- which is very important for this model. So one of the large focus is starting already inside the Board of Rothy's is to start the expansion. The most important number on this slide, you are going to be looking at is the investments of $14 million that was in March. Where is it going to? To performance marketing, I will get back to that. In brand building, what we promised about boosting the awareness of the brand and in the expansion of our retail, our monobrand stores. So.

I wouldn't associate this result of $32 million and 20% to the $14 million. Why? I'm going to explain. Before I want to talk about the $32 million. Historically, the first order of Rothy's is a order that represents about 15% of the entire year. So it's a year for preparation for the arrival of the collection. It's very similar to what we do with Havaianas in Brazil. It's the introduction of the collection and everything that comes in the second and third quarter with acceleration of the fourth quarter because of the calendar of the retail in the U.S. So the first quarter, not having -- not been all that strong, already shows growth. We reached BRL 32 million. It is already a good recovery since December last year and the investments of BRL 14 million. The performance marketing, which started in March has a lag of up to 5 weeks to show us the results. And here, we use data analytics. Digital native company works with the data. They don't work with the guesses or the studies that indicated the result. We have a lag of up to -- a delay of up to 6 weeks to see. So this cycle of higher investment is bringing this acceleration.

And what we see in April and May is already an acceleration aligned to this model that we are looking at. So that's why we feel comfortable showing you this investment of $14 million. In addition to that, we are investing in the brand building and in the retail expansion. We opened up new additional stores. Now we have 13 stores. We have a 78% increase in SSS. And in the second half of the year, we're going to bring 3 new changes, new optimized websites. They have an incredible website. They're one of their great strengths, they were -- they managed to make one even better version of the website that is going to be delivered as we speak. There is a new collection. And third, there is a brand campaign to be released. This is going to be released throughout the second quarter to raise this awareness and work on brand building as we had told you. So part of the investment was in the end of the March and now in the second quarter.

So Rothy's is an important part of the history. The EBITDA was negative in BRL 9 million, which is a reflects of this investment of $14 million. And it's very important to show and to tell that we are in the moment of investment. So moments of investment, partners of investment, moments of investments will bring sometimes negative EBITDA results. However, the return will come, but this is going to demand from us to boost this business once again. So this was this idea to show you this meaningful primary results in the first quarter. So our goal is to go back to growing in the D2C or in the digital, and use this primary expansion of B2B and acceleration of opening of the stores to have this capacity of investments for our international expansion, which -- international expansion of Alpargatas, which we are in the beginning of the studies right now. So I think this is the delivery of the promise we made of bringing you more details about Rothy's and allowing you to know better Rothy's business that is making us more excited by the day.

Very well, I'd like to reinforce now this point. Okay. We have great brands, high potential, but this only happens if we bring the talent that can deliver what we want. I have received a separate question about the people and talent areas of Alpargatas. I want to highlight 2 points. First of all, this entire mindset transformation that we are going through right now. But more important than that, very few companies need this leap in terms of talent with critical for the future as we did nowadays at, the Alphatek, the combination -- the combined operations of Alpargatas and Ioasys. We have 150 employees. Just Ioasys has over 300 employees. So therefore, we bring critical skills and technology design skills, which are amazing for a company. We are investing ahead of our potential for growth. And Rothy's also adds to us with 190 employees in the U.S.A. and 1,000 employees in China, employees with high level of skills. Very key skills in design, new development of products and in R&D.

We have 92 employees in China, which are working together with the 32 designers in San Francisco, making this translation of design and execution, we have an advanced organizational structure with the skills and talent profile in line, which is the growth potential of Rothy's. So we are going to have the sharing of the best practices. I have already mentioned the 3PL, right at the beginning of the 3PL in the U.S. So nowadays, we have a talent pipeline and talent capacity that makes me very excited. Because we have those people, those talents with critical skills for the future, looking at the future. So this is what we have to do to create a global powerhouse of desired and hyperconnected brands. So this is the vision of the progress in the most fundamental pillars. There are other pillars I can introduce to you such as sustainability, which is critical. But I think that in this quarter, what was important is to talk about these short-term issues that we are all focused on.

So we have a plan that is showing the first signals to be working. And here is cost management. So this is the animal we needed to tame right now. So what we said during the results of the fourth quarter. We said that our model is a order to protect image in a scenario of inflation of costs. What does that mean? We need to change the game to pass the adjustment in prices ahead of the inflation of costs. And I showed you that's behind. As we start to stabilize the cost, then we started to pass on to adjust the prices not only to mitigate that, but also go back to our expansion of an acceleration of margins in the future. Where are we at today in the beginning of May? The variation -- the raw material cost variation is slowing down. There is more stability compared to the previous quarter. The raw material has stabilized, the absolute costs. The growth rate from quarter-to-quarter was from 47% to 41%, so which decreased to 6%. This cannot yet be seen in the COGS. The production went from acceleration of 38% to 29%. So we also decreased the 9 points. At the same time, our adjustment of prices accelerated.

The RGM had a fundamental role, was of 10% in January. We started to flow -- it started to flow in the P&L in March. And this new collection which is being released officially next week, but it started to be released in March. It starts to be seen in the P&L in June. Therefore, we can implement this model and to create this lever, which will create an impact of protection. And in the long term, we can expand the margins with growth. But we are also ahead of a scenario where there is a risk as well. A macro risk, right? So we cannot be blinded to the risks existing in Brazil in this environment of inflation, which will pressure the revenue of people and will result in people having to make choices of consumption.

Nowadays, with the stronger brand we have, what we see in the market is that there is an exchange of channels. People were in consuming, they choose channels to make their money more effective because they are losing power of acquisition or power of consumption. Instead of going to stores, they think of their sale mission, they change their channels. Since the brand has 300,000 points of sales, and we have this all of the channels and large portfolio of prices, we see this variation, which is positive. The sell-out grew again and the price grew, as I mentioned, and we see our mix protected with this trend of becoming even more positive. But we are at the beginning of this process. As I said, we will keep looking after the results and look at indicators and control to make sure that this model works.

Since the new collection is released in June, in the P&L, we are going to be monitoring. And international also brings risks to us and challenges. What are they? It's the first time in 40 years in Europe that people are experiencing inflation as we see in Brazil. U.S.A. is also the first time in many, many decades. So this is very new for everyone. So we need to have this vision, understanding that there is this volatility in the market and understand how this is going to impact the season that is starting right now in U.S., in the whole Northern Hemisphere and what is going to happen in the market inside this scenario of the inflation that we see. The second point is the increase of the basic interest rate in Brazil.

We are very aware of that and working close with the point of sales to make sure that the inventory are healthy. Because if the inventory levels are not healthy, we cannot release the new collection.

So our idea was to be able to implement this model and to be able to deploy this new collection now. And in this second quarter, we are going to have -- to be seeing these variations considering the healthy inventories and also the new collections. The third point is what Julian has already explained to you about the volatility of the rubber prices, where we have some limitations to create more inventory if we have the opportunity. But as we consider the final product in rubber, we are trying to expand the coverage of rubber, and we are evolving on that. As for the second quarter, we see this acceleration of price pass-through or the adjustment of prices should the product sold. With a richer mix, this helps in our inventory health levels. We have a stabilization of the basis. This is going to also be affected by other variables, but we have a quarterly consecutive comparison. So we have a stabilization of the basis. It's important to highlight that.

And we also started to look forward. So what is the second quarter going to be -- going to look like? I don't really know. We are increasing our inventory, but we don't see any kind of barriers to that, but there is also a volatility of finance exchange or exchange rates in Brazil. So we are all cautious about how we are going to be operating in the second quarter. However, the policies, the front, the work continue the same. We will replicate them, we will copy them, and we will reinforce them, which have shown us positive results of stabilization of costs. And this is our focus this year to protect our EBITDA margin. We are going to see to be watching -- observing this selling variation numbers, especially in Brazil and continue the operations expansion in Brazil.

[Mari Espirito Santo, executive]

Having said that, I open up for questions and answers in Brazil. I'm going to ask you the first question, I'm going to be quick. Both Daniela and Richard from Bradesco asked a question about the dynamics of volume. What can we expect for the second quarter given that's the inventory of the -- in the retail are lower and if they create a recovery for the sell-in for Havaianas in the second quarter.

[Roberto Funari, executive]

The evolution of sell-in and sellout is positive. That's what we see. And I think that to the second quarter, are going to have adjustments to inventory. Some inventory is going to be seen better service levels. So I don't really see this very favorable inventory levels. In Brazil, the working capital of our customers is adjusted to the inflation that we see in Brazil. So I am betting -- as we advance throughout the year, looking at the sellout and sell-through to be reflected in the selling.

[Mari Espirito Santo, executive]

And Joseph, I'm going to send your last question. Joseph is asking us about our manufacturing structure, what we see about the evolution of the on-timing tool.

[Roberto Funari, executive]

We had a great leap in the on-timing tool, OTIF, both for Brazil and for the international operations. In Brazil, we are a little bit under 80%. Internationally, we are already above 70%. And but -- sorry, 30% in the international markets. And this isn't good, right? Our expectations internationally are even higher, right? So we need to go further and in Brazil as well. So evolution is positive. We have the operations area both for manufacturing and supply chain, which is constantly improving its service levels. But we still have a long road ahead of us to bring more benefits to us. As the investments in the ILEP, right? Remember, it's going to be a bigger capacity for reacting faster. It's going to be the mix in center that's going to give us this capacity. And yes, it's going to have a very good positive results.

[Mari Espirito Santo, executive]

There is 1 last question that's arrived Beto that I think it's worth mentioning. It's a great question. We mentioned about the new management in the U.S.A., which is more aligned. Could we talk about the focus and our goals for the U.S. focus and goals?

[Roberto Funari, executive]

Well, the goal -- the long-term goal is to grow our share to reach double digit in the flip-flop industry market. And nowadays, we also have as a goal, to have this transformation into a premium brand. These are the most strategic goals for the U.S.A. market. How are you going to reach that? We are going to especially increasing our D2C, especially the e-commerce, we are improving and implementing in the U.S.A., the best practices for Pop Up which we have from Europe, we are bringing to the U.S., and we are advancing as well in our logistics. The U.S.A. is accelerating -- is going to accelerate as soon as we adjust our logistics. But in the U.S., you cannot take a large lead if you're not ready in terms of logistics. So we're trying to balance both aspects to be able to pull it off. The brand has a great potential in the U.S. This comes from customer surveys as well as from constant feedback, our commercial partner feedback that we received from customers. And we are, of course, going to learn from the best practices [ Rothy's ] is sharing with us.

[Mari Espirito Santo, executive]

Thank you very much. I'm going to move on now to your final message.

[Roberto Funari, executive]

Well, as you know, guys, the 1 great success in our first quarter was the cooperation with Gerando Falcões, which is NGO in Brazil, where we brought artists from Favela, from slums in Brazil. And this has been -- this is the best seller already and has a greater demand. We saw to bring this to Europe as well. So I'd like to highlight one of the artists who brought this one of my favorites. I have here with me -- this is Luis World, he brought this image, which is a child flying and a heart, which is a symbol of hope and strength. That's all dwellers in Brazil can have a better life than what they have right now and they can go anywhere and reach any heights. And this is very inspiring for me at Alpargatas, especially in this moment, we are living where we can have hope strength and being the owners of our destiny. This is what can make us make our business a better business.

I leave you with a great -- wishing a great week.