Alpargatas SA

BOVESPA:ALPA4

Earnings Call Transcript

[Operator]

[interpreted] This video conference is being recorded and translated simultaneously into English. The Q&A session will be conducted.

[Operator Instructions]

Before continuing, I'd like to clarify that any forward-looking statements that may be made during this video conference regarding the company's business prospects, projections and operational and financial goals constitute the management's beliefs and assumptions based on information that's currently available. Now I give the floor to Luiz, our CEO, who will start the video conference. Luiz, you can go on, please.

[Luiz Fernando de Saint Edmond, executive]

[interpreted] Good morning, everyone, and thank you for being here for our earnings release. We'll start with a short summary of what we have been experiencing throughout the year, and Andre after me will go deeper into the details about the results of the quarter.

As you all know, we took on the company in the Second Quarter of 2023, and we are going through a delicate moment. We have had several consecutive months of bad results and the consumption of our cash. This scenario demands actions which were immediate, some of them quite hard but able to avoid and prevent a deterioration -- a continued deterioration of the company's nature.

The first focus was to preserve cash, so we decided to reduce inventory compatibilize the production and demand at the moment and reduction -- significant reduction of purchase of raw material also needed to strongly reduce investments levels, eliminating all initiatives that were not essential.

Another priority was to have the kickoff in the reeducation of the structure of the company and the level of expenses of the company. with some simplification measures to ensure as much as possible the preservation of the company's bottom line, especially in the moment when the top line numbers especially having the adequation of the numbers in the inventory. Is this the from what we would like to be?

In this Third Quarter, we have seen some indications that the resumption of sales volume is normalizing. Sell-out continue to evolve sequentially. Going back to the same level as the last year in the same period. Additionally. we started to see some positive trends in our expenses, as reflect of part of the actions which were taken in the Second Quarter.

We are also seeing better sequences of cost of production sold cost of goods sold with a higher simplification of the portfolio and better productivity levels in our factories. Overall, we saw a significant improvement in our manufacturing management, whether considering the quality of our products, the losses in production processes and operational levels, which we believe is going to continue.

We know that in spite of some operational improvements, we still have many challenges to be taken and faced in [ on ]. We are away from what we aim. Our service level still does not reflect what we can really deliver in our international operations, mainly in Europe. They were severely impacted by a series of problems that are still being resolved and will take some time to be.

Thus to ensure that we're going to have the tools and the capabilities needed to reach the results we aim the creation of a road map for the future is necessary. After an important initial diagnosis, we are right now working on a strategic review involving a good part of the company's leadership and which should direct and guide our future growth -- sustainable growth and with an improvement to profitability.

We have, in our favor, the brand Havaianas, which remains extremely strong, even facing all the adversities and challenges we have been facing over the past quarters. We have launched a new campaign that breaks a cycle of 3 years that we hadn't been exploring the seasonality in Brazil in this time of the year and takes us back to TV after 1 year focusing mainly on digital marketing.

Additionally, we represented Brazil once again as the official shows for the Brazilian Pan-American Olympic team. These actions and others have been generating great engagement, but in part of our consumers showing that our attributes and brands are recognized and desired.

In summary, even if our results are far from what we already delivered in the past, we see an evolution in all the fronts that we started working on. There is a lot of work ahead of us. We keep finding out about new problems and new opportunities to be tapped. But we also have the conviction to be going towards the right direction.

I take the opportunity to show my total confidence in Alpargata's team motivated by the passion and dedication to our brands. Our team understands and has been working to deliver the short-term results and simultaneously build on our future. I will now give the floor to Andre, who is going to explain the dynamics behind our movement so far. Thank you all very much.

[Andre Natal, executive]

[interpreted] Well, good morning, everyone. It's a pleasure to be here with you, sharing part of our results. One thing that we consider very important should be done right now is not only to discuss the picture of the Third Quarter, but also try to insert to the Third Quarter within a movie that is more comprehensive and where we can understand the movements. That's extremely important to understand the path towards the recovery that Luiz mentioned. And as he mentioned, it is long, and there is a lot of work ahead of us. But on the other hand, we can, if we insert the Third Quarter in this movie, we can also see a good part of the evolutions that have been made so far, which are actually several and which go in the direction which we would like to, even though the company is still not delivering the results, we would like it, and we understand it should deliver considered its potential.

Having said that, on this first slide, I would like to recover with you. Some of the topics that we have spoken about and discussed in the earnings release for the Second Quarter when we had a very strong compression -- scale compression where we had almost 0 EBITDA results, especially because of the level of inefficiency because of the expenses of the company, but mainly because of the top line that generated all of the dynamic of losing scale in our operations. In that moment, we shared with you what we believe it to be from that moment on.

Part of the dynamics of reducing our inventory in the chain and how that would reflect in terms of reducing our own internal inventories and resumption of the scale and so on. So in this little -- on this slide, we can see a little bit of that sequence that was the narrative we brought to you in the Second Quarter of the year, and I would like to recover it a little bit by reminding you that at that moment, we talked about the need and intention of going back to have a recovery in our sellout, so it was the beginning of a sellout recovery up to that point.

We had a compressor sellout of about 3%, but we believe and everything indicated that we had a gradual improvement of this allowed situation, that this recovery would be 1 of the drivers to reduce the inventory levels in the chain which was already decreasing at that time, but it was still in the middle of this adjustment cycle and had not yet been completely concluded. And as this normalization happened, this would resume the closeness between a match between our selling and sellout.

So this would allow us to during our internal finished inventory of products, and this happened -- started to happen in the Third Quarter. These checks you see in these boxes indicated that we went towards the direction. When you look at the inventory of raw materials, at that time, we had already been able to reduce significantly the inventory levels of raw materials. But now we see that this decrease continued to happen along the Third Quarter, and this happens as to free up working capital in the company.

In parallel to all of that, there were measures that we shared with you at the time that would be -- we would be going to be implemented. That was more visible and more immediate to be able to capture a little bit of the compression of expenses that we understand that is necessary and possible and yet implement all the measures for cash burning that was happening, and I will make more comments later on.

On this slide, we showed it to you in the last quarter. And some investors and analysts has required us to remain to keep this slide in a way to keep track of this evolution over time. So this slide summarizes a little bit our business cycle from the purchase of raw material into the sale of our products. And we can see this evolution year-to-date.

Today, up to September, we see the sellout going down 2% which means that since we had minus 3 up to June, the sellout over the Third Quarter was flat actually compared to the Third Quarter of last year, which is an important information because we go from a level of minus 3 to a flat level of sellout. And obviously, inside this quarter, this trend was also upwards in showing an improvement movement.

This allowed us to, in the green graph below, you see positive inventory. You see that the cycle that was midway. Now we could say that overall, it has ended. So this is a number, it's approximation. We don't have a complete visibility of the inventory of all of our clients in the supply chain in the entire -- in all retail. But overall, we can have reasonable forecast and reduction and it seems to have ended.

When you look at the sell-in, in potential terms, it gives an idea that there is a mismatch considering the minus representing the sellout. What you're going to see in another graph that the right comparison is -- should be in the number of pairs because in the Third Quarter of last year was when the entire sell-in was in excess to the sellout and the biggest part of the sellout was created.

So what we said in last quarter that the sell-in and sellout should be in a match -- [ in ] when we see the growth of our sale, which was led by the growth of sales to the -- to the final consumers.

Our inventory of finished products, which had been balanced up to June over the Third Quarter started to decrease, which we understand should be important for the release of our working capital. and to resume some leverages inside our management, and inside our inventory inside our commercial policies. The production cycle are still below last year's. And this is just because we wanted to keep control of our inventory levels.

The cycle of reduction in raw material has been happening already, and we were -- we managed to accelerate that. As we saw an increased acceleration in the raw material purchase, which you can see on the left here in minus 52%. So we purchased much less, so we could effectively drain this inventory that was in excess last year was it too much excesses year due to all the volatility of the commodity.

So this is a summary of all the dynamics of the volumes and release of inventory and this dynamic was very important. It is behind maybe underlying the numbers. But here, we try to make it very clear to understand what evolution the company is having in this sense. This graph shows and reflects what I have just said about the this compass between sell-in and sellout. Just to remind you that the sell-out last year, the yellow bar was much bigger than the blue bar.

In other words, we sold much more to clients, and it was sold to consumers. So it accumulates an inventory in the retails and the clients that was too large, this inventory throughout the First and Second Quarter was trained, and this is shown you can see numbers of payers on this slide.

There is a mismatch between the First Quarter and Second Quarter between the yellow and blue bars. They are quite apart from each other. And this was what generated the pressure -- the scale pressure in our operations. But it was important to try to adjust the business cycle along our chain production chain and sales chain. As you can see in the Third Quarter, it's very easy to say visually that the yellow bar is very close now to the blue bar, which means that at this moment we seem to have ended the adjustment cycle. There were still some adjustments in the first months of the Third Quarter, but we leave the Third Quarter with inventory level much more like leveled up with what is expected for this moment.

On this slide now, we also show you on another front, the measures we have taken and we have been implementing considering efficiency gain and simplification of processes inside the company. We had told you that we were starting at the time, a process, a structured process to detail the understanding of our opportunities for cutting costs and expenses, and this is still ongoing. It's not yet over. We are still ongoing with this project. which will go into the end of the year. But at that moment, we also said that we wouldn't wait for the end of this process to start to implement part of the actions that we understood it to be possible to be implemented at the moment.

So we have started them. And this is a breakdown. We are talking about all of the [ facts ] of our [ 0 OBZ ] packages. So for example, here, you don't have the write-offs or severance, but you have -- we have the real expenses so we can have a real tracking of what -- you have a reasonable metrics of the efficiency of the company.

So when we look at that is anchored on the First Quarter to have effect of comparison. We can see clearly the First and Second Quarter in a level, but already a considerable decrease effect in the Third Quarter, especially because of the small time that there was between the quarters, we see an important compression of expenses that is being and will be very important as a way to attend [indiscernible] the effect of the top line in our results, which should help us over time to resume the profitability of the company.

On this next slide, I'd like to show you in a more visual way what I mentioned before. The company had been up to April this year in route of burning cash. So with cash burn cash in the cash burning added up to 1.2 billion, in these 13 consecutive months without exception. And of course, this generated a pressure in the leverage of the company up to that point. But luckily and happily due to all the measures to hold the investments, CapEx and working capital, we have been able to reverse this trend. So we are going to the sixth consecutive month of net positive cash generation.

We understood that was a priority before anything else to preserve liquidity and to preserve the financial structure of the company. So here, we have concrete evidence that this is happening right now. I'm going to give the floor now to Rafael Estides, who is going to give you some details about each 1 in the breakdowns of the business areas and the financials for this period.

[Rafael Estides, executive]

[interpreted] Thank you very much, Andre. I'm going to talk a little bit about the results concerning the results of the quarter, starting with Havaianas Brazil BMU. We saw a decrease of 20% in the volume year-over-year and 15% decrease of net revenue, still affected by the increase of volumes that happened last year.

As Andre mentioned before, the sellout was flat in the Third Quarter. Therefore, there is an important sequential evolution month-over-month in the quarter. And even with this decrease in volume of 20% in Brazil, we managed still to have a good reduction in the inventory levels, accelerating the inventory decrease of finished goods in this quarter.

Moving on to Havaiana's International BMU. We saw a volume decrease of 40%, year-over-year against the Third Quarter with a net revenue decrease of minus 24% in Europe, as we had mentioned before, with the exchange of our logistics partner, all the consequences that arise from that in the beginning of the season.

We ended up having not many products available for sale for consumers and which generated orders -- cancellation of orders, and this impacted [ is allowed ] throughout the period in the region and obviously, the entire replacement of inventory that happens in the middle of the season at the end of the season, and it's recognized in the Third Quarter. So the Third Quarter was still very impacted by all the consequences that we had as logistic issues in our service levels.

In the U.S., we started to see some evolution both in volume and revenue. especially due to our B2B and off-price accounts in key accounts. It's important that we -- to say that we saw a growth in the revenue per pair that was reasonable. And in the markets where we operate through distributors, especially in the Southeastern Asia and Latin America, we still see a very strong decrease in volumes, especially in the Southeastern Asia due to all the inventory that was created at the end of the second half of second year last year, and we are still ongoing this normalization of inventory levels.

As you saw this normalization of inventory happens in Brazil a few months in our distribution distributors markets, it's the same we are going to have this year as a year for normalizing the inventory level. So next year, we can start with a more normalized level.

Going to the P&L. Talking about our gross profit, there was a decrease of 26% in Brazil and 35% international. The gross margin went down 5.5% compared to the Third Quarter last year, but there was an important evolution when we look at the sequence compared to the Second Quarter of this year. It was a 9.7% increase compared to the Second Quarter '23 as a result of the improvements that we have made into the manufacturing processes and also as a consequence to the reduction of the cost of our raw materials.

It's important to emphasize that we had in this quarter some write-offs, some additional write-offs above the usual level, which added up to about 9.4 million, especially concerning finish the products and concentrated in the categories that we call beyond the core. And it's important to emphasize that we are going to see these write-offs did not happen only in the Third Quarter, and they were not going to also pop up in the next 6 Quarters in any reasonable amount, especially related to these categories of sandals and slides.

As for the external warehouse that we have been hiring and that had a strong impact in our previous quarters due to our high level of inventory finished products, we can see an improvement quarter-over-quarter in this external hiring of warehouses. We had a strong reduction. It was at about the level of only 1 million expenses for that purpose. We are still not a normalized level but we felt a smaller impact of this hiring of external warehouses.

In terms of Havaiana's International, we saw 52.3% gross margin, impacted by the deleveraging operational deleveraging and also for the high production costs that we had in the second half of last year. So it's important to remember that a good part that what we sold in the Third Quarter is still an inventory of the products that were manufactured in that period when our manufacturing costs were higher.

So we can see this -- still is impacting the international operations. Going to expenses, we saw a decrease in year-over-year considering the Third Quarter in our SG&A overall SG&A. It's important to emphasize that our SG&A excluded the marketing went down, Specifically because of the reduction in payroll of minus 8% year-over-year, but also with the expenses in distribution of 4 million and additional cost of 3 million in [indiscernible].

We also saw a reduction in marketing of 24% year-over-year. It's important to emphasize that this reduction is much more connected to the quarterly phasing of our marketing budget that was different this year compared to the last year. And also with a very strong reduction of what we call nonworking marketing, which are expenses that are not effectively -- that not effectively reach -- that are not effectively is marketing that reaches the final consumers.

As Luiz mentioned in his opening remarks, we have a very strong performance in campaign -- marketing campaign in this Third Quarter to simulate the for Fourth Quarter results in Brazil.

Moving now to our EBITDA. We saw an EBITDA of 77 million normalized EBITDA, for Havaianas. An important decrease considering the Third Quarter of 2022, which was very influenced by the decrease in volume that we saw, but also by the increase in the cost [ per pair]. And as we said in our SG&A, excluding the marketing and order expenses. I'm sorry, the graph does not show all the information that I need, but the PowerPoint presentation that you were going to find in our website, you can see all the numbers properly.

Moving on to the next slide here also about the we start with Havaianas EBITDA, 7 million, and we reached our corporate EBITDA of 70 million normalized at 7 million, the EBITDA for Ioasys. And we had an extraordinary items of 18 million. Its original items are specifically effects of our simplification. So there are many [ losses ] related to payroll expenses reduction and some other small expenses that add up to 2.8 million, reaching our corporate EBITDA of 59 million.

As for our net financial position, we closed the quarter at net financial position of 109 million, better than the last quarter with cash generation concentrated in the operational flow as Andre and Luiz mentioned previously, especially concerning our decrease in working capital, which was due to our inventory level decrease. And also with a very low CapEx level that we had seen in previous quarters. So this way, we managed to generate 109 million in operational operating income.

Going to our working capital a little bit more. We had -- we saw a decrease of 13% of our inventory of our overall inventory level considering a good decrease in our finished products of 99 million and also 75 million in reduction of our raw material. It's important that we say that we see -- that we see the medium-term raw material prices normalize, going in the direction in a clear direction of improvement.

As for our accounts receivable, we saw a reduction of 12 days reduction in the year-over-year net receivables. We have been focusing at the top line in the cash preservation. So we are not really making any contingencies of deadline. So we're being actually very conservative even at moments of harder top line results. And in this account of suppliers, we had a reduction due to the reduction of raw material and also to the reduction of the cost of raw materials.

We saw a very relevant decrease and reduction in the Third Quarter. And as our productions resume growth, so we can meet future demand. Once we have the normalized inventory levels, we should see the supplier account to grow in the future.

Moving on to the next slide. Talking about ROIs. Roughly saw quarter with net revenue of 30 million, minus 1% year-over-year compared to the Third Quarter, explained by the e-commerce. The e-commerce operation resulted in this decrease. The increase -- e-commerce decreased year-over-year in an environment of hard top line results. On the other hand, a very good and important evolution of gross margin. We saw an evolution of 7.3% in gross margin year-over-year and the gross margin of the quarter is already above 60%.

So that's an important level for evolution of our -- of the ROIs gross margin, explained by the reduction of the [ price ] costs from China to the U.S., also improvements to manufacturing costs in China and also reduction of costs inside the logistics operation within U.S.A. and there is also an effect of the mix of products, which also accounts for this overall improvement of gross margin.

ROI closed the quarter with a minus $6 million in EBITDA. And we also had told you that the seasonality is lower in the Third Quarter in the U.S., we probably would expect it to have negative EBITDA, but it was an EBITDA better than the EBITDA fell reaching in the last year. And we also had a loss net of $7 million.

Now we are moving to the Q&A.

[Rafael Estides, executive]

So the first question from Guilherme Vilela with JPMorgan.

[Guilherme Vilela, analyst]

[interpreted] Good morning, everyone. I would like to talk a little bit about what you mentioned about the selling expenses, the marketing expenses, excuse me. How you see this from now on? As we saw in the release, it was the account that saw the largest increase compared to the other accounts mean the -- considering the expenses, please correct me if I'm wrong, but I would also like to hear from you seasonally, the importance of the Fourth Quarter. So do you have any visibility for the sell-out that is going to be expected for the Fourth Quarter?

[Andre Natal, executive]

[interpreted] First of all, thank you for your question. I think it's important to mention about the marketing expenses is that the entire diagnosis that we have run so far looking the long-term history and all of the marketing records we had and how this evolved over time, considering the evolution of our revenue. All of this diagnosis points to the direction that we are actually -- should have more investments than lower investments in marketing, especially, we should be working in how we use this marketing budget.

What percentage and to what we are indicating this marketing budget. I would like to mention that the direction we see when you're look in absolute numbers along the history of the company, this number doesn't decrease year-over-year. Usually, there was a small slight increase year-over-year, but certainly, it has been compressed over years because of the revenue.

We don't agree with this path. We understand that this path would be much more to support everything that we are doing. So we should have more relevant investments in marketing. And this is basically what we see from now on.

Everything that we're talking about expenses reduction, including the expenses that we have been able to compressed, they don't include the marketing account. We are not having any kind of the compressions that we understand that are due in terms of efficiency are much more compared in the other -- all the other accounts in the SG&A, especially to prioritize the marketing from now on.

When we talk about the future -- so just to wrap up as part of the marketing budget for the future should be to remain stable or to grow over the next years in the future, this should be the direction we are going to see. But we don't have a number or a guidance of how this is going to happen or what the marketing budget will be for the next year. These numbers are still being discussed.

As for the Fourth Quarter, we see that the dynamics of the reduction of inventory levels in the chain has been seen -- has been happened and we don't have any large [ discons ] that will impact our selling. The path that we see for the future. And in the Third Quarter, it was sell-out path that was an improvement year-over-year-over-year. So September better than August, obviously better than July. So this is a trend that is somehow positive and inspiring.

On the other hand, we don't have a visibility of what is to come in the future. So we trust the potential of the campaigns that we mentioned that we have been launched. -- recently, and we trust the brand and our collections and all the commercial actions we are carrying out to incentivate allowed. However, on the other hand, we still don't have even the numbers of October to have a first impression of how this trend has been proven to be kept or not considering the month of September.

Of course, we're going to have the seasonality effect at play. And it's important to remember that we have our operational challenges. So we continue with our rewire project and the coordination of our planning team and the management of our inventory, our delivery cycle, et cetera, to meet the line the demand that will appear again, and we will have to face that.

We see a positive trend year-over-year in this category. So when we have this flat sellout right now compared to the Third Quarter last year. This is because of a category that is growing. So when we look -- we lost some share compared to the end of last year, but now we understand that we should grow together with the category and the category show trends of continuous improvement.

So I would say that we have a positive trend for the category and for our own growth. Once since we shared -- we lost share we should go back -- we should resume our growth together with the growth of the category. But how much of it is going to be materialized in the Fourth Quarter, it's hard to forecast right now. We believe that the main pain that prevented us from resuming growth was the mismatch between sell-in and sellout. As the sell-in is more on level with the sellout, we are going to be able to uncompress our scale significantly over time. I don't know if you have any compliments you would like to mention.

[Unknown Executive]

[interpreted] Complementing what Andre said. We are talking about the dynamics of the Brazil operations. The answer was based on Brazil's operations. But going back to the marketing discussion. Marketing has to -- like big components. They're working money and not working money. The working money is the 1 you spend to create content with artists that participate photographers influencers and so on. It's the money that the consumer doesn't actually see that. And then you have the other piece of that which is the 1 that you spend on purchasing space in the media.

So nowadays in Brazil, we have the perception that we are investing less than we should be giving the benchmarks that we already know. So we see an opportunity to be tapped. Since we have the right campaigns, campaigns that are proven to have an effect on the perception of the brand and on its -- and that have an impact on volume, these campaigns will continue. I think the first big movement this year was to improve the financial results. So didn't invest over the last years in marketing. This year, we decided in spite of the pressure that we have in the results, which are much below the levels of what we expect.

We decided to keep the investments in marketing as it had been planned originally. Outside Brazil. I think there are 3 dynamics quite different. In the U.S., the U.S. has been delivering everything that it was bound that should deliver throughout the years. They made all the corrections they needed at the beginning of the year. It went back to growth in the e-commerce, understanding better the leverages to better perform in the e-commerce both through the havaianas.com as well as through our e-commerce partners.

In Europe, we still believe that next year is going to be a hard year. Europe works with longer cycles. And right now, we are taking orders for next year, which really affected us is since our sales is seasonal in the summer. And since our clients are very large and organized, if we did not serve them inside of the service levels that we offered. We are perceived as an operation that cannot be trusted. So we -- they did not dedicate the room in the space to our brand that we had before.

So our priority right now is to regain the confidence from our clients through improvement service level. So I don't see big bets or big transformations in Europe for 2024. It's quite the opposite. Once you operate well, execute well, within good service levels to establish a good basis for growth. And we have confidence that Europe is a little bit -- shows more readiness right now considering 2024. And you have all of the distribution markets Asia, Africa, Latin America, they are going through a profound revision of which is the role of each country in terms of growth, profitability in terms of what they present in terms of capabilities to execute from our distributors.

So we are going to going to go into something more continuous with different levels of expectation. So we can create the Europe and U.S.A. of the future in some of those bets, in some of those countries. So there is a lot of work ahead of us to be done. We are learning, we are finding out a lot we are discovering a lot. There is a lot of operational inconsistency.

So we have made a decision to, in the second half, not to start selling crazily to the market without having this diagnosis very well defined [ in the study ]. We are seeing a little bit of the deleveraging of this inventory. They have very large inventory levels for some years, and I think we're going to be able to give you some more information over the next months about how the strategy for these markets is going to evolve. I don't expect big improvements to these distribution markets in the upcoming months.

[Rafael Estides, executive]

[interpreted] Your question next question is from Felipe Cassimiro with Bradesco BBI.

[Felipe Cassimiro de Freitas, analyst]

[interpreted] Good morning, everyone. Good morning, Luiz, Andre and Rafael. It called my attention, Andre, your comment on growth with the brand. This called my attention because now grow with the market. Nowadays, the volume is at 187 million pairs. And this is a relevant gap considering the records. We move in 2021, we had to 2020, which had a relevant 231 million fares sold.

So just trying to understand what is your idea of a normalized annual amount of pairs to be sold? Because we discuss a lot with everyone how quickly you can go to this level above 200 and 200 million pairs sold annually. Can you give us some light some understanding on this topic?

And my second question is the simplification sounds 1 of the most present words in the head of the management in the mindset of the management. So simplification of portfolio, where is the -- where are you with concerning SKUs simplification? And where are you at the simplification of payroll and structures? Are there more things to come in the future? Is this all finished? How do you see that?

[Andre Natal, executive]

[interpreted] I will start from your last question, and Luiz will help me. To take on part of your questions. So about the structures, as I mentioned before, we have been doing a work -- an important work with the support of a consulting company that had already been started in the company of understanding the structures that we have to reach an optimal structure and now we are accelerating. These works concentrating with benchmarking and external support from this consulting company.

This takes some months to be carried out. So this should be ended by the end of the year. with some actions to be mapped in this planning and which should be implemented next year. On the other hand, as I said in the previous quarter, and I repeat it again in this quarter, we understood we shouldn't be waiting until the end of this diagnosing.

So we would find -- we could find the low-hanging fruit and better opportunities to make the first adjustment. So this is about the organizational structures. But this is also about other discretionary expenses. So all the factors have some opportunities and some of them are obvious and these are the ones that we attack at first, and some of them require previous work before we could reach a higher level of simplification, centralization over time.

So I would say that, yes, we have already started part of this adjustment that you mentioned and that you can see in the Third Quarter's figures, this comes -- this arises from simplification of structures. In opportunities that we mapped, but this is not over. We don't have a super bullet for that. We have several actions in different fronts that are already ongoing. And certainly, we will go deeper into this work. We are studying in more detail right now, the responsibilities.

It's my responsibility and responsibility of controlling area, -- and that's a super important and sensible topic to ensure our effectiveness, agility and so on, and we are going deeper into the other fronts that we call much matrix expenses that are going to deal with all the other expenses ranging from printing paper to engineering works or any other types of expenses in consulting and IT and so on.

All of this is being discussed right now in this work that is ongoing. And we don't have a guidance right now on we do have a reference for a first preliminary assessment without actually having a goal, a clear goal of where we want to get at but this was mentioned to give and share some of the potential idea that of the things we identified initially in superficial assessment.

So for the time being, nothing has changed and we don't have any guidance, and we will not offer any guidance on that, but we will go deeper in our studies to get there. Luiz, would you like to complement?

[Luiz Fernando de Saint Edmond, executive]

[interpreted] Well, as for the portfolio simplification, the cycles of innovation, sales delivery are long. So we are talking about a cycle, the innovation cycle that starts 2 years before the product actually reaches the market. So these are trends -- fashion trends that we have to follow or product development in the sell-in that varies a lot from country to country. Brazil has shorter -- slightly shorter cycles between the innovation and the product to be found in the market.

So the U.S.A. is also different, due to seasonality, obviously. So this portfolio -- these measures for restriction portfolio takes some time before you see the practical consequences in the results. On the other hand, our studies show that we had a quantity of products or items or SKUs with minimal impact level.

So this is the old story of looking at the tail and when we compare the impact of volume versus innovation without much detail at the very beginning. We think that now we are ready to introduce to you in the future, a theoretical structure of a better portfolio framework that is educating the portfolio that's going to be released for the '24 '25 collection.

It presents an important reduction in the complexity that we used to have. We are always careful to look at the market trends first. to understand where we have market share opportunities, especially in Brazil, where we have opportunities to grow the brand in these places, the portfolio and has a very important role to develop the brand in these countries where we have -- we are less relevant than compared to Brazil. And at the same time, this structure allows us to balance whatever is recurring and shouldn't be changed year-over-year and which provides an important base for our business, which needs to be news, more renovation than innovation.

We have an excess of innovation in the portfolio that didn't actually generate incremental results with much more substitution that incrementality. So we are compressing a little bit the intensity and frequency of those renovations. And we are clearly developing the new bets over time, we are not going to have big banks, all at 1 of a new product in the market.

First, we're going to learn in pilot markets. So in the next year, we can scale it up and follow what works. So in addition, like considering what works, we're going to add new variations. If you remember, for example, the glitter product was launched for the Carnival. We documented that, and we created a portfolio and created a pattern of how this should be developed and at the same time, we are equating this for each market. It doesn't make sense to make the launch of a product that has high cost globally.

There are markets where are much more adequate to receive products of higher price. I don't want to mention any specific countries. But clearly, the organization of portfolio versus the organization of the roles of the countries of the stage we have in each 1 of the countries which we're calling brand growth model is going to be very important from now on.

So the portfolio is being simplified. It will be much more simplified for the upcoming year, but the simplification maybe is the year that everyone is bearing in mind, but we are actually being more accurate considering the opportunities we have.

So you're being more accurate and less erratic, less tier creating complexities and investments that do not are not justifiable in our results. As for your question concerning the volume, we don't have any volume guidance. Clearly, in Brazil, we are always going should depend on macroeconomical factories. This is a product that is hyper distributed and penetrates all the social levels.

So it depends on the population growth, depends on inflation, depends on families indebtedness and all of this has an impact on the consumption of our products. So -- but the numbers you saw the numbers of sellout. The sellout is reasonable -- reasonably stable. We started much -- actually much worse at the beginning of the year because of our share position or because of the market performance, but the 200 more -- 200-plus pairs, million pairs sold is what should be in the same basis, the starting point for us for every year.

The difference is that we clearly had an adjustment, a very large adjustment in inventory. So if you normalize that over the past 2 or 3 years, and I understand that the market didn't grow that much. You were going to reach the conclusion that you're going to have a match between selling and sell out. And what we expect is in practice is that there is a convergence between the sell-in and sellout over the next quarters. We have made many of the adjustments that were due. It doesn't mean that all of them have been completed, especially because of the very high cost of capital right now, not only for us but also for our clients. I don't want -- we don't want to betting high inventory levels right now.

Our manufacturing efficiency has been improving, allowing us to make a faster catch up with the demands that arise. So I would expect the market to behave within the 200, 200-plus million pairs, always having in mind the effect of the real price over the past years due to -- because of the price the cost pressures, the adjustments were much above inflation. I believe this -- I hope this is not going to be necessary again.

So we believe that our price is going to be in line with inflation, maybe a small impact because of the evolution of our mix of products. So we were going to have much less pressure. The capability of our consumers to purchase our product. So without giving you any guidance in the short term, I would say that in the short term, we are going to see convergence of sell-in and sellout. And naturally, the sellout is not impacted by -- won't be impacted by these huge inventory variations that we had.

[Rafael Estides, executive]

[interpreted] Next question is by [ Donny with XP ].

[Unknown Analyst]

[interpreted] I have 2 questions. First, considering the operational adjustments. I'd like to explore some of the points. The first 1 is about the pricing or price positioning. How you're thinking about the price positioning, especially for 2024 and onwards? Considering that this has been a very important lever to compensate the volume decrease we probably we'll see a normalization of this volume, right? But I want to know about this balance between volume and price. And the footprint in the international operations. If you're looking at possible closing of operations in any markets in the future?

And my second question, Luiz mentioned about the service levels that act somehow affected negatively the image of the company and the trust in the company's performance. You talked a lot about on time in full improvements, but recent feedback is that the service levels have actually decreased maybe due to the adjustments you have been made. I'd like to understand how this [ OTIF ] will happen and how this will be improved or not or will worsen in the upcoming future.

[Unknown Executive]

[interpreted] Well, let me first tackle the pricing about the international markets. We won't give you any guidance on pricing. But as a policy overall, the pricing should be in line with inflation. And benefited from the mix portfolio. The improvement of our mix in the revenue doesn't mean better profitability. This is 1 of our analysis. We found out that our products, even that have a higher price, not necessarily have translated into better margins for the company.

So this is something we are being careful about, and we are following a little bit more to understand the effect on the margin, not necessarily on the top line, on the revenue, but having said that, as a philosophy and policy, we want that the affordability is maintained. So the prices should be in line with the inflation.

One of the things we know we have to do in the long term is to make our portfolio more premium. However, at the same time, we have left some reasonable gaps in the entry points in the first 2 price segments in which our competitors have positioned. So there are some initiatives that are ongoing right now to develop products and solutions to tap. These 2 slots where the affordability is very important in attended, especially because these are 2 slots that are where products are purchased by people who are less privileged in a financial point of view.

So in an intelligent way, we have been finding solutions for some segments in some markets. As an overall policy, we would like to have the pricing ongoing hand-in-hand with inflation. As for our internationalization. It goes through the success in Europe. And in Europe, it doesn't mean Europe. There are 4 countries that actually make a difference in Europe for us where the brand is really relevant and where there is real potential and this translates into the positioning of Havaianas and the way that Havaianas is worn, we had users and attitudes large study where we understood not only the size of the population, but also how this population interact with several types of products in the open shoes market and similar and similar products.

And nowadays, we are sure that those 4 countries in Europe have a very large feet with Havaianas its brand positioning and with our products themselves. After that, there is the U.S., there is -- there are no companies in the world that can be called global or international if they are not relevant in the United States. So we are satisfied with the evolution that we have had so far this year. But we also know that we need to invest in the U.S..

We need to learn in the U.S. and we need to be very consistent to keep evolving in the U.S. in continue maintaining our relevance in that market. So these are large cycles that at the end of the day, they matter and they have effect in the short-term relevance. And the other 120 countries where we are present.

As I said, we are creating clusters. And we know the work is not over yet. We know that some countries are easier. Some countries are more profitable, some are less profitable. But basically, we're doing what we said we would do back then, and maybe we have not yet completed the work that we said that we're going to go from the market mean the company is an exporting company in a way that we push the products into this company, and we wanted to have the commitment to develop the market, not only find the distributors to push the product into the market and got help us.

So for this purpose, we're going to concentrate our bets in less countries where there is a brand and product fees -- and this work has not yet been done. As soon as it is completed, we are going to give you more transparency so you can understand better our findings and decisions. Andre, I think there was 1 more question, wasn't it?

[Andre Natal, executive]

There was one more question, which concerned the deliveries -- the [ OCF ] in Brazil, the service levels in Brazil. I understand you have your own sources, but I think there are 2 sides to your -- to answer your question. First of all, we can say that we have not reached the operation and consistency of deliveries and we are away from the efficiency level that we believe we have the potential to have.

But on the other hand, looking at the half of all glasses that our [ OCF ] level service level numbers have been improving. So there is a sequential improvement since the beginning of the rewire and now with the arrival of our new VP in the area of supply to organize this receipt of orders of placement of orders in the sequence of the orders in the organization between factories and order taking directed to the inventories that we have.

So there is a series of different operational challenges that at the end of the day are going to hit our deliveries needs and the -- considering the demands we have in the seasonal peak seasonal demand. So I think we -- you're far away from having this transformation of our operational cycle completely finished. There is still a lot to cover, a lot of ground to cover, but we have seen our on-time in full [ if ] levels improve sequentially.

So this is a positive trend in the last earnings release, I commented in 1 of your questions that we have established policy policies for certain products, and we are involving now in certain predictive models, so we can -- we can have a more accurate forecast unless this arrangement and mismatch maybe 1 of the most critical factors that increase our capacity to deliver is when we sell what's not in the inventory.

So when you sell that, you add dozens of days to our operational cycle. And at the end of the day, this is going to hit the delivery time, the lead time for our clients. So we have been carrying out several actions to reduce the cycle and to have the best and most accurate possible in terms of the sequence of production and delivery and in logistics. And we have been making adaptations to our mixing center.

There is a structural adaptation that we started in the beginning of the Third Quarter to be able to have level of delivery that is more on par with the demand. But we are also in a ramp-up period for the [ mixing centers ]. So we are in the first year of operations. So we have this expectation that the mix center itself is going to be able to dispatch to ship more efficiently over the next months because of the operations that we -- the actions that we are carrying out.

Altogether, we should see continuous improvement in our levels and capacities of delivering in our [ OTF ]. And at the end of the day, this is going to also impact the cost efficiency of our operation. But as I said, we all said there is a lot of work to be done. The symptoms are good. The trends are good, but there is still a lot to be done.

[Unknown Executive]

[interpreted] Andre mentioned several important points. I just would like to clarify 1 important thing about your statement [ Denny ]. I don't know where your sources are, but affect our on-time in full level [ if ] level has been improving significantly over the year. But this is an average, a large average.

So if you go to certain stores in some regions, you were going to see that you are going to have more noise in our own stores and franchise stores. they have limited capacity for inventory. And since we had a lot of inventory that was not being sold as much as it should be sold because of the huge complexity of portfolio and a huge quantity of innovations the frequency of deliveries that we should have the frequency and the production we should have for specific items to avoid the out-of-stock items.

This has created some complications to us, specifically in these channels. In the distributor channel, in the food channel, we have not seen this same level of noise that you mentioned. But maybe your source more connected to the channels I mentioned. And part of these problems they come much more not from the simplification, but from the mixing center, they were gigantic changes.

Maybe you don't have an idea of how much it was, but we concentrated the entire operations of peaking warehousing and shipment of all the products in an only place -- in an only warehouse, a new warehouse with new layout, new personnel, new challenges to be faced and its operation started at the very beginning of this year.

So there is this learning curve that we see and the warehouses that we used to have in our factories were used to create a location of equipment and to increase our manufacturing capacity. So the learning curve was somehow struggled to us.

As Andre said, we are ongoing totally this correction, both from the operational and from the structural point of view of the original project of the mixing center, and it's still not over. It's probably going to be over closer to the beginning of next year. And to add to that, we saw a second quarter where we saw a huge adjustment in the internal and retail inventory levels.

So the operation cooled down. So from overnight, we saw the sell-out to improve a lot. The inventories were adjusted. So now the rhythm of the operations has to keep up. As to catch up, we see a challenge now over the past 2 or 3 months, a challenge to catch up with the -- and to have productivity, manufacturing gains to be able to meet the demand per region and per product correctly, especially now at the end of the year, when it's our sales peak in Brazil.

It's not a worry. It's a point of attention. And there are several action plans ongoing to correct this topic. But I wouldn't at all connect this to the simplification. It's quite the opposite part of the results we have been are arising from simplification. We are investing them we are reinvesting them to make sure that the execution of the brand and execution of our operation is better made.

[Rafael Estides, executive]

[interpreted] And now the last question, João Soares from Citibank.

[João Pedro Soares, analyst]

[interpreted] Two quick questions. The first 1 is about the cost [ prepare ]. I'd like to hear a little bit about the cost per pair margin. As you absorb cheaper raw material, I'd like to understand this curve a little bit. And the second 1 is about the expenses, you mentioned the marketing expenses and focusing much more on the working money rather than on nonworking money. I would like to understand a little bit better, like looking at the big picture, there were some new expenses. There were some distribution expenses that weighted the SG&A. But thinking in a curve how this should happen in the future?

[Luiz Fernando de Saint Edmond, executive]

Thank you, João for your questions. Well, for your first question, you are right, we see an evolution in the cost per pair I think that if we look sequentially we are having a significant improvement in the cost per pair. And this is not only due to the factor you mentioned of the raw material.

This factor of raw material is actually going to impact us even more because remember that we were pretty much not buying raw material at these cheaper prices. We had a lot of inventory of raw material, right? We had assembled a very large inventory of raw material at higher prices.

So we were draining from a stocked raw material prices that were much higher than the 1 that are in market right now. It's too bad that the commodities that we -- the main commodities we buy went from to a 20-year low price, but we couldn't actually take advantage of this opportunity because of the inventory levels and because of the working capital levels we have.

So at that moment, throughout the Second and Third -- the First, Second and Third Quarters, we had a preference for much more to have liquidity rather than for preserving our cash and rather trying to gain more inventory at a higher price, that wouldn't make any sense because of the high level of inventories we already had.

So we opted for not making this movement. And as a result, you see very little of this reduction this average reduction in the raw material costs in our products. But there are other effects that actually are being seen now in these effects and have had a large impact all the measures we took in the manufacturing aspects to adequate the expenses and the payroll and the expenses overall costs to the manufacturing level we have right now.

This obviously has created a partial -- at least a partial adjustment to our scale effect. In the first moment, when the volume goes down a lot, you have a scale economy. But as the year left, we gained a lot of productivity in processes, and we managed to balance better the use of our factories. And as a result, we managed to find this decrease cost per pair , especially when we look at the Second and Third Quarter compared to the first, we see the COGS converging to lower production costs in a significantly lower level than the average in the past.

The COGS prepare saw an evolution of 1.8 less per pair when you compare the Second and the Third Quarter of this year. If you look at the year-over-year, there is still economy scale that has an effect here. But here, like quarter-over-quarter, we have seen a reduction. And as times go by, we expect to remain in this new level of productivity with this balanced level of production, starting now to go back to acquiring purchasing raw material at a much reduced level -- must reduced our cost to the cost of the raw materials we had in our inventory.

We will keep on following new opportunities for cost reduction. And we still see certain difference between the different raw materials, the different costs for products producing in different factories. So which means that there is optimization to be addressed, how to find out the way to reduce the production costs by addressing these internal manufacturing issues.

The raw material prices, I think this is a factor that's going to impact us positively from now on. And now in the second question, I'm not sure exactly what you want to explore, but I want you -- I understand you want to discuss the overall marketing costs. Can you clarify your second question?

Well, I will start answering the question as I understood the question. If that's another question, you can follow up with me and clarify. When we look at the marketing expenses level in the company overall for many years, it never decreased it. We got the last 15 years of history, and we have seen a growing level in marketing investments.

On the other hand, when we look at other metrics, for instance, marketing compared to the revenue. Yes, there was a compression over the years. And this compression took this investment in marketing below -- to a figure below what we believe is reasonable. This is 1 of the diagnosis we have made.

So there was the SG&A grew in other accounts disproportionately to the volume and somehow this was affected by marketing. Marketing was a discretionary account that was the simplest 1 to be adjusted. So over time, this seems to have been 1 effect that led the marketing expenses should decrease compared to the revenue. This is 1 of the first points we believe that we are going to -- we should reverse from now on.

Secondly, when you look at this [ not mean -- ] this figure of marketing expenses, the [ nonworking ] money had disproportional and unreasonable figure. So from now on, we're going to work more in the working money that is going to reach consumers and help the image of the brand. So we understand that not only the investment level the aggregated -- the added investment level should be more towards growth than improvement, but also the allocation of the marketing expenses in the working money and being supportive to the brand growth and to the attributes we want to reinforce with our project is the idea for the future.

This adjustment is not something only related to Brazil. these diagnosis that we are running right now across the world in all the geographies, the diagnosis for Europe and the U.S. also contribute to this understanding. We see that this movement we have been reducing the marketing investments compared to what is reasonable in the market. And we were located in a way that was not supporting the brand. And it was more related to trade marketing and not the front line, so we would like to reverse this trend. And overall, this is what you're going to see as a trend from now on.

We don't have any guidance. We won't tell you what level of marketing investment is going to exist for the next year. But I wouldn't like you to understand that we won't have any kind of adjustment that's going to sacrifice the brand quite the opposite. We tend to increasingly support the brand.

[Operator]

[interpreted] Back to Luiz, to have his final remarks.

[Luiz Fernando de Saint Edmond, executive]

Thank you Andre, Rafael. I think in summary, we are not satisfied with the results. There are a lot of improvements to be made. But on the other hand, the evolution from the diagnosis that we made that were very well made concerning the short-term priorities that we made, they were clear. And this work is more invisible for you because it's not going to result -- to generate 2 yield results in the short term. results, but we are working heavily on the planning for the future in the planning the 3 2, 5-year plan for each 1 of the geographies.

What is the role of each 1 of the international markets, which is the portfolio to be addressed in each one. The profitability work that had started and also the manufacturing process that -- processes work that had been -- had started. And above all, we continue to have super committed employees and excellent professionals that have been supporting us and everyday inspire me about the future and the potential of the company for the future.

So there is a hard and long path ahead of us, the results are below what we expected, but the improvements are very evident internally. Thank you all very much for your participation. We will remain available to you, and I wish you all a good day and a good week.