Alpargatas S.A. (ALPA4) Earnings Call Transcript & Summary

Hello, good morning, everyone. Welcome to Alpargatas video conference for the results of the third quarter 2021. Today, we have here with us Berto Funari, our CEO; and Julian Garrido, our CFO. This video conference is being recorded and translated simultaneously into English. [Operator Instructions] Before proceeding, we want to make it clear that any statements that may be made throughout this conference regarding the company's business prospects, operating and financial projections and goals are beliefs and assumptions of the Board of Directors based on the information that is currently available. Forward-looking statements are not a guarantee of future performance. I would like to bring you back to our CEO, who will start our video conference. Berto, please go on.

Good morning, everyone. It's a big pleasure to be here once again for our conversation. It's even a bigger pleasure to open with this image of our dear Rebecca and our outfit and our shoes, Havaianas, celebrating this campaign that is much connected to the way we have been conducting our business in this very difficult year. Today, I presented the results but I also would like to bring a series of announcements which are very important for our future, demonstrating our conviction in the long-term results of Alpargatas as well as for -- as of Havaianas brand. Starting with the third quarter, I would like to tell you that it was a quarter that we had record results, which was also a record last year. This quarter was boost by the international results, both in our big bets as well as by our investments and our distributing markets where we start to see signs of recovery. Remember that these distributing markets have suffered more. And especially in Asia, they still suffer restrictions. So we start to see signs of recovery in a long path that we have along us for full recovery. In addition to that, Alpargatas in its consolidation has reached record results in the second consecutive quarter. So the third quarter of 2021 is the best quarter of Alpargatas in its history. And it's also nice that we bring to you expansion of the 4 points of margin expansion of EBITDA versus the third quarter 2020 in a scenario of where we are suffering high pressure of costs. So we are growing, reaching records and expanding our margins, which brings us confidence in this scenario of large pressure -- strong pressure of costs and inflation. Another point that I would like to highlight is that the accumulated of the 9 months, we have reached the international markets' previous records in 25 million pairs sold. And we passed the mark of BRL 1 billion of revenue, and we multiplied threefold -- twofold the EBITDA margin and reached 11 percentage points in the margin -- in the EBITDA margin for Havaianas. Given this scenario, we are also announcing an anticipated distribution of dividends in the amount of BRL 150 million, Julian will be talking about this. This is the biggest distribution of dividends in the history of Alpargatas. And it's also important milestone for us. In addition to that, looking ahead of us and looking at our long-term vision, we are announcing investments and organizational transformations to face the new opportunities we see and the large potential that Havaianas has for the next year. This investment is of BRL 600 million in capacity in our manufacturing and also in our logistics network. I'm going to emphasize a lot of this throughout this presentation. And this year, we should reach BRL 300 million of investments. And next year, we are going to reach BRL 600 million. I'm going to explain to you the strategic rationale and the benefits that this is going to bring to our companies. I'm going to start with the highlights. First, the larger numbers. In the third quarter, we saw consistency, and I have already talked about the main highlights boosted by the growth of Havaianas. Even with a strong comparison with the third quarter of last year, we reached a net revenue of BRL 1.6 billion, 13% higher than last year, an EBITDA of BRL 200 million, 43% higher than -- versus third quarter last year. So the EBITDA is growing faster than the sales. And the EBITDA margin went up to 19%, 4 points higher than the third quarter 2020. As for the third quarter 2019, the volume grew 11% and revenue grew 33%. In terms of volume, Havaianas sold 68 million pairs of shoes, a growth of 3% versus the third quarter of last year, reaching a revenue of BRL 976 million, 9% higher the third quarter of last year with a EBITDA margin of 18%, and this consolidates the brand as the top-performing brand in the Brazilian and global, speaking of the lifestyle shoes. Therefore, this is the best quarter of Alpargatas. And overall, with this revenue of BRL 1,068,000,000, we reached the running rate very close to BRL 4 billion with Havaianas. Osklen also had a very -- a quarter of a recovery with very expressive growth of 67% in its volume, a growth revenue of 60%, which was boosted by the revenue coming from the same-store sales, which grew 69% versus the third quarter last year. And this result translates into the EBITDA and margin also in double digits for Osklen. Also a very strong quarter for Osklen, and very important is recovery by Osklen. Going deeper into Havaianas. We reached, with Havaianas, net revenue of BRL 976 million, a growth of 9%. EBITDA going up 5%, reaching BRL 178 million. This result was boosted by the international markets. The volume of international markets grew 23%. The net revenue, in reals, 8%. I'm going to talk a little bit about the mix, the geographic mix of channels. And we had gross revenue of gross margin per pair of 7%, suffering with the impact of the cost of growth. But the operational leverage allowed us to reach a recurring EBITDA of 167% against the third quarter of last year, which expanded in 2 percentage points. Havaianas Brazil, 76% of our business grew 1% in volume, 63 million pairs. Net revenue reached BRL 742 million, over 10%. Havaianas Brazil, which was suffering -- is still suffering with its margin, gross margin because of the pressure of costs, the gross margin per pair went down 3%. And EBITDA, it's pretty much flat, going down 1% only with EBITDA margin of 24%. As you can remember, in last quarter, I explained that in the second half, the margins are better than the first semester -- the first half usually. So this 24% is a better margin than in the first half of the year. Brazil's EBITDA overall was 23% higher than the accumulated for the first half of the year, therefore suffering with the gross margin but a good performance of our EBITDA. As for our strategic -- digital strategic pillar, we have very good news to share with you. Compared to the pre-pandemic levels, we tripled sales. It's sales, not revenue. And we have some interesting and important highlights. If you consider our flagship mobile, which is in over 15 countries around the world, and havaianas.com is one client, it is the largest -- third largest client of the company. It's a very important milestone. It demonstrates this movement in our strategic intention of growing in the online DTC. And Brazil's stores are all 100% omnichannel. We started the rollout for the infinite shelves into our own stores to then roll it out to our franchise stores. Our Brazil's DTC physical also showed expressive results and we reached over 500 stores in Brazil. Another important milestone is our own store of the Tmall. The Chinese market suffered this half of year. We had the strategic decision of not promoting our brand in China, trying to protect our price point for the future and have margins to invest. But in terms of market share, this was the right bat. The market suffered. The overall flip-flops market went down, but we kept our market share of 21%, which is 3x the market share of the second competitor in the market. In the B2B, we continue with a very strong rhythm. Amazon is our fifth largest client. Amazon -- havaianas.com, our third largest global client. Amazon, our fifth, we have very strong growth in Brazil, EMEA and North America with Amazon's revenue growing 2.5x -- excuse me, volume 2.5x higher and revenue, 3.0x higher. And with a highlight for our revenue growth management. Any other Asian countries, the brand always was on the spot. We were the brand that sold the most in the Southeast Asian countries during this festival. We are also evolving to other channels in the Target and Walmart Plus -- Target Plus and Walmart. So our DTC online is -- shows a very important evolution, which is the biggest growing channel for the company. Now I would like to talk a little bit about our digital pillar about Ioasys. Ioasys, as you might remember, was announced that it was acquired at the beginning of May. We had the integration process which ran very well. And from then on, we had a growth in the team of 50%. That's quite important. We have more than 45 professionals, new professionals allocated in the 5 Alpa tribes. I'm very honored to share with you that Ioasys also captured more clients and accelerated its revenues above our expectations. We've evolved a lot. We are prioritizing 5 fronts with focus on strategic alignment. Those fronts are organized into tribes and squads and they encompass 5 main areas, 5 fronts, which we call quick wins. Inside the quick wins, we are going to structure a technology lab and innovation based on agile methodologies to give raise to the chain. We are -- we have our team focusing on what we call Global Flagship 2.0. We really believe in this channel. This is the biggest channel of the company, as you saw. So we are prioritizing to launch the version 2.0 and bringing a bigger balance between our brand experience and optimization of sales conversion. And continuing our focus on this brand experience of this important flagship we have nowadays in over 15 countries, and we should be advancing even more in the next quarter of next year. The second front is very important. As you know, increasingly, growth and iconic brands are built through directioning to specific audiences, it's what we call targeted audiences. So we are getting deeper with the study and monitoring of target audiences. We are bringing digital technology and analytics on analytics and AI to deepen our knowledge of the targeted audience as in creating new channels where we can expand our coverage of our targeted audiences and make the rollout of our innovations with more accuracy and accelerate a lot to the acquisition of customers at a lower costs. In addition to that, this audience platform is going to be extremely important for our expansion beyond the core for our Beyond the Core portfolio, which is already growing a lot. So we will get back to that a little later. The next important work is the [ HavaLovers ] work, which is the users who have a very strong tendency to go beyond flip-flops and being in constant contact with the brand. This is a big number in Brazil. 58% of the Brazilian population is part of this HavaLovers. We are making a rollout into EMEA and North America, and we are trying to capture this large opportunity of conversion and increasing the quantity of products and the lifetime value of our HavaLovers. We also created something innovative, the Hava Community or -- Hava Community. It's a brand community with the biggest HavaLovers where we can have a quick instantaneous insights, where we can try out pilot initiatives and we can also have great engagements. And many of those HavaLovers become large influencers for the brand. The third one is our omni. We believe that our future consists of the omni journey, both in B2B and D2C. But in the D2C, we are going to accelerate the rollout of technologies in the D2C, both in-store as well as for the entire chain. We are going to insert even more the vision of the user in this ecosystem and interactions. We have projects in several areas and platforms, including apps, including social commerce, including customization, personalization, including innovative experiences in store. And we are going to tie everything up, would it tie it all together with data and analytics. In addition to that, we are going to use the Ioasys strength to tie our omni journey to our industrial and logistics excellence. So Ioasys is going to be leveraging our investment in our supply chain. The fourth area is services and new businesses. We are going to offer support to the strategic development of the B2B ecosystem with digital solutions, relationship programs for the specialized channel. Remember that we are advancing a lot in our specialized channels of shoewear and also fashion, and we are going to expand this array of channels. And as we created those squads and tribes, we are explaining our agile mindset. And then we bring a platform for training and development of people, which is going to feed all of this system. So this is a big step we are taking. We are very happy with the Ioasys evolution inside out and also Ioasys clients. Speaking of the innovation pillar, this is very important in our brand-building. All the work we have been carrying out over the last few years and especially accelerating this year, both with collabs and also with revenues. I would like to say -- to be very proud to say that we had a partnership with the Paralympics and Olympic Brazilian teams, our athletes wearing our iconic flip-flops. This generated incredible engagement and collabs of high engagement. The BAPE brought incredible results. We had a line in front of the store before opening. The products sold out in 20 minutes. The same happened to our international countries and in Asia operations. Our strategic partnership with [ Farm ] has been a very nice collab as well and also bringing very relevant results. The Joshua Vides is a design studio called Reality To Idea, much oriented to the U.S.A. to specifically American-targeted audience. The great partnership we had with Oreo, which brought in innovation in execution, generating other engagement inside the self-service and the food channel; and Marvel collab, which is an incredible success and reinforcing even further our partnership with all the Disney licensee franchises. Marvel, to give you an idea, we had a sell-in of 1 million pairs and this is already going very fast. So it was a strong collab. The Children's Day was very impacted by this partnership of Marvel collab. Even Beyond the Core, we had growth in revenue of 2x superior to our 3 quarter 2020. Our Beyond the Core was increased by our portfolio of sliders, which drives this growth. We have 8x more different styles in sliders or -- if you visit our store, our e-commerce, you're going to see a range of them. Some of them are behind me. You can see them here in the video. That's very important. And therefore, we boosted, with the Juliet effect, our ambassador for our Havaianas sliders. And we brought with her 45,000 new followers on Instagram, 5,000 new followers on Twitter. And in addition to that, we had a strategic step with the launch of the casual of Havaianas tennis shoes. We had a rollout of this product into 400 stores, physical points of sales. Nowadays, this product is available and it reached 6% of our sales at our own stores. And this shows a huge acceptance of the product by our audience. Having even a recurrence rate, and we have 3 models available in this market and we think we found a way, a formula. We are going to continue to refine it and touch up on it, but we are very excited with the initial results so far. For the pillar, sustainability, where we try to bring sustainable solutions, both in reverse logistics but also in launches of new materials, I would like to highlight that the launch of our tennis shoes launch brought all the models produced from renewable sources with rice, grain and vegetable oil. More of 50% of the soles are produced with recyclable materials and a specific line called routes has more than 60% of renewable sources of materials. We have a rollout of this program for -- of our reverse logistics program, which is called Havaianas Recycle. In Europe, we already have 80 points of collection in 8 different countries. Once again, the presence of the brand in the sustainability matter and in our connection with the consumer who is conscious and responsible, our connection gets stronger. And another important aspect is the connection of the brand with our society and with the causes that are aligned to the spirits of Havaianas, our soles and principles. So we therefore sponsored our Olympics and Paralympics Brazilian team, which reinforced our support to sports and the importance of sending part of this revenue to sports in Brazil. So now I have with you Julian Garrido.

Good morning, everyone. Thank you, Berto. Good morning, everyone. Let's go into the details of our results a little further here. Let's follow the sequence over the next slides of results of net results and a few results I'm going to be showing. The first slide is focused on the third quarter, going from left to right. So net revenue, growth of 33% versus 2019. We have been focusing a lot on volume and also bringing the RGM. So strong growth here in the net revenue. Also, the gross margin, Berto talked about the pressure that we have been suffering, especially in this quarter. It's something that we see that is going to be carried out to -- carried on to the next quarter but we have our structure. Our margin pillars, RGM, for example, that I will talk to you a little more about it further on. We had a decrease of minus 2% versus 2019. And I'm always comparing to 2019 and 2020. As you can see, the 2 bars and the orange 1 is this year, 2021. We have been protecting to the margin without sacrificing investments. Quite to the opposite, in fact. We have been investing in our capacity, in our marketing, in our brand. We are not going to do anything that's going to sacrifice this growth or compromise the growth. We see positive results when compared to 2019 of 2 percentage points going to 19% and also protecting our net profit with a substantial growth compared to last year. Just remember that in 2019, 2020, we had adjustments in our balance sheet and nonrecurring items. And also this net profit growth always comes from the growth of EBITDA, very healthy and sustainable this result. In the next slide, now opening, as I said, from top to down, the volume and then the liquid -- the net revenue. We have previous years, we saw an increase of 13% between '19 and '20, 1% related to Havaianas Brazil, and the highlights to the international markets, which is in a superior level than we had pre pandemic 2019 with BRL 5,876 million. Going to the right, we have a growth of our net revenue of about 15%, strong growth. We also have a strong work of the RGM especially in Brazil. But if you look at our international operations, it has also contributing from 162 from 2019 to 204, so our pillars of growth and focusing. And we have been calibrating our RGM so that we can have this volume growth consolidated. On our next page, we can go into the gross profit. It's a growth of 6% from BRL 494 million to BRL 525 million. The highlight here is the growth of the international operations from BRL 142 million to BRL 165 million, 15% up. On the right side, we have the percentage which is about 3% coming from Brazil. Remember, our focus is growth of volume. We have the tools, the structuring tools, the RGM and other tools, which are the tools that affected the gross margin. Yes, we have a growth in Brazil and Brazil, we have over 22% of growth only in the third quarter. This is going to stop. We don't -- this is where it comes our restructuring side and approach into this result. Next slide. Going to the SG&A expenses, we see an operational leverage comparing to last year. We broke down marketing and we put it on the right side, I'll get there in a while. But the focus here is to say that in addition to having this growth from BRL 268 million to BRL 275 million, the percentage over the revenue decreased. It went from 28% to 26%. So this is a work of the OBZ. It's also work of nonrecurring items that we had with our restructuring but especially the control. We have over 13%. We're expanding the OBZ into our international operations. And as I said before, without sacrificing investments, market investments or restructuring investments. Inside the structural investments in the third quarter, we have investments made in the IT, in our security area, in our digital area, in the UX area still gaining productivity and marketing. We increased it from BRL 75 million to BRL 79 million. So in the consolidated results, we are still strong investing. In other words, managing our RGM, growing our volume, protecting our EBITDA margins without stopping with our strong investment in our brands. Next slide. Here, we start to see the evolution of our revenue growth management or RGM, as I said before. It's also important to look at this RGM over a longer period of time. You look at the net costs, you administrate, you manage your revenue growth management. When I look at the last month of this year, you see strength of the RGM offsetting this -- the CPV over these 9 months. This gives me a bigger benefit. I have my market investments so we see a delta of this RGM of -- and this CPV, which is the pressure of costs is being managed through the RGM pillar. Now we start to analyze the EBITDA. I'll be quite very quick here. The focus here is on this very small minus 2 where you have extraordinary items. To remind you, in 2019-2020, we had extraordinary items that were only passing, they were not recurring. So next year, we won't have any more IFRS as nonrecurring. It has already become recurring. And we won't pretty much have any kind -- no difference between the 2 EBITDAs, as it should be. On the next slide, you can see the evolution of our net revenue in millions. We are comparing the net profit of the third quarter 2020 with the net profit of this quarter 2021. I'm going from the left to right. So from minus BRL 3 million to BRL 158 million, a growth of BRL 160 million. Let's understand why. First, the EBITDA, this first column. This is an operational improvement. It's a delta versus what we used to have. I'm bringing more EBITDA than I brought previously. As a result, financial result -- we are also -- we have also increased. But let's remember, last year, we had that kind of COVID funds to protect us and which we didn't use. And this year, we didn't have this, therefore resulting in positive results and better than last year. Also, we had the exchange rate variation which was favorable to us. I'm going to focus on these nonrecurring items. The fifth bar, blue bar, which shows 37. I had a match between 2020. I had negative impacts of those nonrecurring items in 2020, like expenses impact from COVID, as I told you, that we needed to -- cost that like were onetime costs that we didn't have this year. So this benefits us, benefits our results in 37. And also due to the sale of Mizuno, which consumed our net profit, as I don't have this operation anymore, this also brought up positive results. In summary, BRL 168 million better in terms of net profits arising from operation. Nonrecurring items from last year were not present this year, and discontinued operations of Mizuno generating this benefit. Moving on, talking about the net financial position. It's positive. We have a very healthy position, net financial position. We continue to grow, going from the left to right, BRL 318 million of net financial position positive to BRL 678 million, BRL 360 million more, 38% more. Where did it come from? On the left, operational flow. On the right, no operational flow. We see that this comes from the operational flow, BRL 580 million-plus coming from the societal EBITDA. And it's important to say that out of those BRL 580 million, we invested cash flow, BRL 290 million over the past 12 months. In other words, we are reinvesting. We are creating CapEx or capacity, production capacity, which is going to bring benefits to us in the following years. And if you look at the end, if you look at the bars here in the middle, very well under control. These last ones, the yellow 1 minus 89 and BRL 182 million is related to the M&A. We used our cash flow to make the purchase of Ioasys, the acquisition. And the cash generated from the discontinued operation of Mizuno resulted in BRL 182 million. So the receivables resulted. The overall message is BRL 360 million of variation up coming from our operational flow, coming from our EBITDA and having investments in CapEx as never before seen in the company, accumulated as it has been seen so far, and we are going to see more of that in our next year. Next slide. Here is the high operational leverage and the protection of the EBITDA. We see the RGM improving versus previous years, more than double digit. Our expenses going down from 40% to 34%. I'm also referring to 2019. And they add to the prepare of 16%, very healthy compared to the previous 2 third quarters of the last 2 years, reminding you that our strategic pillars, RGM, OBZ, they are not projects, they are constant operations. We are calibrating them to aim at this growth -- volume growth and, of course, help our ecosystem. Next slide, please. Here, the return. This return here is our net profit on the left side, at the bottom, we see a stronger growth of 6% points. And the more we see those results coming, the tendencies to see those results to improve in the capital employed. We have been managing our cash flow very well, also using the cash to benefit us with margin benefits. And on the right-hand side, the good news is that the distribution of those dividends to our shareholders. Here at the bottom on the right, we see the dividend. I am, therefore, anticipating BRL 137 million. And the interest on capital, we are already making part of it in this quarter. There is more of that. From what we can tell, based on our results, I cannot tell you right now how much this is going to be, but we are announcing this deliberation of BRL 157 million of dividends. Our cash continues strong. Our results continue to be strong. And as we saw here at the bottom, and we said that the CapEx in millions, the cash over the 12 months concerns -- here actually concerned about the last 9 months of BRL 185 million. And we show you that out of those BRL 186 million, we focus a lot on this digital part in the CapEx and OpEx and also in the manufacturing efficiency and supply chain. And our maintenance capacity is also part of this growth of increase of margins that we have been working on. So I would like to go on to the next slide and give you now Berto.

Julian, thank you very much. Let's talk a little bit about the future. I would like to talk a little bit about the momentum of the company. It's sustainable, it's strong, it's healthy. And we are already thinking of our new cycle of growth. It's important that we enjoy these good moments to feed this new cycle of growth. And we are taking a very important step. And here, I would like to highlight on this slide. We have several competitive advantages. Since the strong -- strength of the brand, our presence in over 175 countries directly or with distributors. And we know this takes years to build and this strength of the brand doesn't -- is not built overnight. But I also would like to reinforce that one of our main competitive advantages is our product, our technology, our proprietary technology of our products, our process of manufacturing, which is proprietary, which is almost impossible, nearly impossible to replicate and do this in scale. I would like to reinforce that we have a competitive advantage that is very important, and that we can leverage this competitive advantage to bring other big benefits that I'm going to show you now. So to help our acceleration of growth and strengthen our competitive advantage, we are announcing for next year a CapEx of BRL 600 million in 2022, added to the BRL 300 million in the same project, in the same focus. We are reaching, in 2 years, BRL 900 million, which are going to be directed to the expansion of the manufacturing capacity or capability, optimization of our logistics network. We are going to structure our distribution centers that we have nowadays in Brazil and to create a new distribution center in Paraiba -- in the state of Paraiba in Brazil. We are going to design this logistics network to meet our multichannel operations. We are going to invest in this CapEx in new technology of production and processes to support this growth of footwear portfolio and to increase our efficiency and cost reductions. This is what we call excellence in manufacturing and logistics. This is the name of the program. And this is going to be allocated, prioritizing our factories. You know that we have 4 factories: in Carpina, in Pernambuco, Montes Claros. We have the factory of Campina Grande and Santa Rita, which are converting, which was predominantly a Mizuno factory. We are converting into an Havaianas factory and using this basis to meet the demand and start implementing these new technologies that we see. Therefore, we are also making available new distribution centers, improving our capacity to meet with better levels of services and capabilities. And also having Ioasys to boost our digital automation, which is very important in our manufacturing area. So what is -- are the benefits that this investment is going to generate? First and most importantly, the meat of the future demand that we might have, and I would like to emphasize, with emphasis on sustainability. Everything we're doing in this investment, we'll have this approach of being sustainable and will improve our profile of carbon emissions. In addition, we are going to receive a benefit being the best-in-class with customization for multichannel. We have already evolved in the level of services over the last 3 years, but we also believe that we have much to improve here as well. It's an incredible opportunity to be taken here. But therefore, we need the structural investments to be able to capture this opportunity. And the third and most obvious, we're going to reduce our costs, optimizing our automation. We are bringing capacity to scale to a global level, our technologies and also a pipeline of technology that are going to accelerate the development of new products for the brand. In addition to that, all of that is going to have analytics capacity and systematization through Ioasys. So therefore, the investment is going to reach BRL 900 million in 2 years. And this is a key to meet this demand, future demand and potential that we have as a growth for Havaianas in Brazil and big bats in the multichannels, expansion of portfolio and our approach, sustainable approach. In addition to that, we have another announcement important to our new cycle of growth. As you know, this delivery of results does not come automatically. It comes with an incredible Alpargatas team that we are developing, we are assembling, we are making them better. A team that is concerned about diversity and inclusion. And in the building of construct, a culture that is increasingly more connected with society that leaves the experience that we have for the brands. The strength of our brands, combined with the celebration of this expansion portfolio rhythm opens up a new front of growth, organic and inorganic growth. So to lead this new front, we are creating a new area of growth. This area will be responsible for leading the expansion of Beyond the Core of Havaianas aligned with our strategic objective of amplifying and expanding the opportunities for usage for different environments for use of Havaianas. This focus on the footwear is important. And we are going to do that, creating a new lifestyle. That's where the other categories of products come in. But our focus will be shoewear. In addition to that, we are going to reinforce our growth with the inorganic growth, looking at potential new brands, new services that we can integrate into our operations and brands and future brands and digital solutions. We believe a lot that there are digital solutions that we need to bring and reinforce our competitive advantage package. So Leandro Medeiros, who has been in the company since 2019, takes the position of Vice President of the new growth area. In addition to that, we are making a movement in Havaianas Brazil to make this new growth -- cycle of growth, focused in multichannel in Brazil, focused on expanding our introduction to all regions in Brazil. And also to capture this potential of direct channels in addition to online sales and Beyond the Core. So I have the pleasure to announce that Ana Bogus brings 27 years of experience leading business units in Brazil and internationally. And recently, she was at Happy, which is a technology startup. So she takes the position of VP of our BMU units to lead this new cycle of growth. In addition to that, with the integration of Ioasys and everything extremely positive that has been happening, Ioasys starts to take on the activities of our digital channels of Havaianas, with the goal, as I said before, of leveraging our digital transformation and bringing dynamics to our digital channels. In addition to that, we are going to strengthen the development of our global marketing strategy of the Havaianas brands using projects, as I said, called HavaLovers and others, which are going to expand our core brands and our Beyond the Core brands. And also building this portfolio of innovative products and user experience. Mafe, Maria Fernando Albuquerque who has been with us since October 2019. Since November, she's going to take on as the VP of Marketing of Havaianas. And it's a pleasure to see a talent of our company who has been for here with us, who has been delivering an incredible marketing experience in the market. It's incredible to see that we are building a real pipeline of talent inside the company. Very well. With having said that, I open this for questions and answers.

We have a question here by [ Natalia ]. She asked us to talk about the high inventory products, finished products with the proportion to our revenue.

So the height in our finished projects is connected to our growth. So actually, it went down, which was from 23.9% to 23.2% is a historically a very healthy level, but it grew in absolute numbers because we are growing about 20% with this growth volume to meet our demand. So inside of this math, you also see the raw materials. And we made a construction of safety inventory. As you know, we are going unaffected in terms of our supply chain of raw material, and we increased our inventory of critical raw material. So this is an improvement from the point of view of percentages, and we are investing in the strategic inventory to ensure opportunities for our business. Of course, we have this pressure. The demand is strong, both in Brazil and internationally. So we are working actually to increase even further these inventory levels because the demand is still growing.

Another question that we have here from Nicolas by JPMorgan. Nicolas, he asked us to talk about the trends in costs and also about the participation of Beyond the Core in Brazil, sales and volume.

I think we can emphasize with the Beyond the Core, information we have already provided on this slide, right? Well, let's talk about the cost first. As I said, they costs are -- it's not going away. The pressure of the inflation on the raw material and freight continues in Brazil and globally, not only for Alpargatas but for all companies. What we have been doing is to manage, and as I mentioned before, with our RGM for over the 9 months, we managed this, trying to calibrate not to lose in the effect the results on volume. So we have lots of investments, as we said, on our CapEx that has been used this year. And the CapEx that's going to be introduced next year, which helps us with the capacity of production. And also the RGM. RGM is not a project. It's a permanent thing. We calibrate it, we adjust but it has been helping us also to protect our EBITDA. We saw the growth of the EBITDA with the OBZ so our margin structures are still strong. In what stage are we? This is a question that I always receive. We are at a -- in a stage of evolution. The RGM in Brazil has already seen many opportunities. RGM is not only increasing prices portfolio. It's user services. And of course, this helps our margins. The costs, as we have been following, there is a pressure of costs. Yes, it will continue. And yes, we will continue to use our tools to protect our results in necessary investments. The brand is too strong. So it helps us about that. And as Berto mentioned, we have money also to have strategic inventories. We didn't have a shortage or a breakage. At a certain point, was not only about the price, it was all about having the raw material available to manufacture as there is a strong demand for this raw material in our market. And also the management that we mentioned going from single sourcing and going to multi-sourcing, which has also been helping us to mitigate part of this increase of costs. As I said, it was 22% only in Brazil. You saw that our EBITDA didn't suffer like that. And that's because we have been gradually working on our pillars. The Beyond the Core is well. Beyond the Core is helping in our core line, which is the shoewear. With our launches, we come with successes, and we are seeing at the very beginning with the Beyond the Core. I would like only to reinforce because this is the biggest question that many people are probably talking about this. The scenario that we see today is a scenario that we are working for the future. So yes, we are going to have a pressure from costs. The cost inflation has not been reducing, has not been decreasing. Yes, we are going to have a pressure on our gross margin, especially in Brazil because we have the FX scenario. And this is the scenario we are working on. We are not working with a more optimistic scenario. We are working with our current scenario. Inside of this current scenario, this is -- we have to consider what we do with that. What we do with that is to protect our volumes. After that, making an RGM that doesn't compromise our volumes that brings improvements in mitigation. And again, the RGM doesn't bring immediate mitigation. It takes a while to work. So we are accelerating this time, but there is a time for it to work. You see that over 9 months, it more than compensates for the costs, but we have to work because the pressure of growth on the gross margin will continue. So we have to continue working. There is nothing we are not doing here inside the company that we're not questioning. If this is not contributing to the long-term growth of the company, we don't execute it. This is simple. I think we should make it clear for you that, yes, it's a pressure of pressure on the gross margin but we are working on that.

I have a question here from [ Sara ] by [ Dhalia ]. She's asking how the offer of logistics is in the importation. If you have any kind of bottleneck of freight. And how are the freight costs?

I'm going to talk about the logistics. It's a challenging environment. It happens every month. It's difficult to talk about one single month. But right now, we have been managing if there is any kind of breakage or rupture is a minimal one. If it's something that we had to send out 1 day in the worst-case scenario, we send it to the next month. We send out the next month with the -- we ship the next month. So this has not been compromising the business. The bottleneck is a reality. It's not only in Brazil. You have ports which are congestion. Right now, they are saturated in the U.S., in China, all over the world. And right now, we are managing that. And sometimes, we are delaying from 1 month to another. This happens but it's not a shortage or a breakage or a rupture. We don't have anything accumulated. There is a small backlog that can be -- that is manageable. I think about the costs Julian can talk about.

We are not protected from what's happening in the market to everyone. The difference is that, first, we build partnerships and that we also work with this planning so that there is no unfoldings. Of course, we try to concentrate on the routes that have more flow. We have pressure in the routes that have less flow. And the cost, we manage and once again, the RGM helps us to fix part of that. There is business intelligence behind that, including SOP management. We included this SOP management with the arrival of Simone. So this vision and anticipation, if you wait until the last minute, certainly, it's going to cost you more. But as we have a planning, this doesn't affect us much. It is a pressure that we are going to see in the future, not only for Alpargatas, not only in Brazil, for the entire world. This takes some time. It's not overnight that we're going to leave this moment of pressure of costs. But the secret here is the management, try not to have many impacts and trying to make partnerships with our clients than in the larger routes and sync this with our clients to try to dilute this cost. And it is there. We have been managing the EBITDA and our net profit as well. This is our scenario, as Berto said. If it gets better, awesome. But we are not counting that this is going to get better. So that's all we have been doing.

Two questions by Richard from Bradesco. The first one is if we can talk a little bit about the average price in the international market, especially in the U.S. which is offer pressure of prices. If this was recurring or if it's recurring or punctual. And if we can detail a little bit more how the CapEx will be allocated in the investments.

Richard, thank you for your questions. Great question about the international prices. They were -- the increase -- the pressure was functional. I'm going to explain here. In the U.S.A., we saw a recovery of consumption, very strong. However -- therefore, it came with a pressure with a high promotional pressure. It's a market that is extremely promotional and we are not immune to that. In parallel to that, there is -- there was a phenomenon in China. In this recovery of China, there was a high promotional pressure or special prices pressure. And we decided to make the decision of investing in the U.S.A. so that we can continue to build and grow in the U.S.A. So therefore, we sacrificed a little bit the pricing. But with certain that we are going to have the RMG rollout in the U.S.A. That's all of -- everything that's going to come out of that's going to be positive and also having -- that we are going to have growth in the -- we have growth in the direct channels. In China, it was a strategic decision. You know that we are building a long-term business in China. The opportunity there is a long-term opportunity so we decided not to go inside price points. The price point is extremely healthy in China with a gross margin which are extremely healthy. So we decided not to just suffer a little bit in volume in this first moment. But not impact, not to take on the adventure to try to grow in the market share because it's going to harm us in the future. So the decision has proven to be right from the standpoint of view of market. We didn't lose market share. We kept it. And the market started not reacting to this promotional investments in China. And we were able to protect the price point of the brand. So we have to keep the price point in China. We don't see this pressure in other countries. In Europe, everything is fine. We have July very weak and we have September -- and August and September, which were extremely strong. We had a record in our D2C channels in our physical stores in September. So in Europe, the RGM is well. RGM is bringing the benefits in the first year in Europe. There is still a lot of opportunities there for the RGM. And what you see in the mix of the international, when you consolidate everything, is that we are seeing a recovery in the distributing markets, especially in Latin America, Africa and Middle East. So that brings our mix of price a little bit down when you look at a geographical perspective. So once again, I'm trying to repeat this again and again, but internationally speaking, we always have to have a vision. I like to look from September to September because we understand what it is like the entire cycle of the business internationally speaking, where we have a very strong weight in the North Hemisphere. So this is what is happening. We think that the American market will continue to be strong. However, we are managing this with the RGM and with the new collection coming out and with incredible products, the brand has this elasticity so that we can reach best -- better price points. We emphasize that acquiring new clients is important. We have a high recurrence. And in China, we are defending our pricing -- price points because we are at a more initial stage.

Detailing a little bit more the CapEx, the BRL 600 million that are going to be invested. I would say to you that is 80% goes into our manufacturing capabilities and capacity, capability nowadays our big priority and 20% to prepare ourselves for future technologies. So inside capacity and capabilities, new technologies are integrated and large and increasing efficiency. This is the profile of the CapEx both of the BRL 600 million and of the BRL 900 million. So again, 80% is into capacity, aggregating efficiency and costs; and 20%, we are investing ahead of the curve, looking ahead in the horizon in like 2 or 3 years to be prepared for the future. So our strategy here is because we have a competitive advantage, we are ahead of the curve in a controlled way so we can be prepared up there. Another point of the profile is the approach of sustainability that we are having in our CapEx. We are looking at this as a very big opportunity to reduce our carbon footprint. And we are going to be bringing more information about this in the upcoming months.

We finished our Q&A session. Now I give you Berto to bring the final considerations.

Okay, so this is the slide I really enjoy to present in all of our calls. It shows the strength and the potential of Havaianas. This is the mobile, the recurring average over 12 months. You see this acceleration curve as we spoke, we have the acceleration of growth with expansion of margins on the left side. The line you have our running rate of revenue by Havaianas getting close to BRL 3.9 billion. We are scratching the BRL 4 billion mark. And in the previous, we had already -- in the previous rolling, we had already surpassed BRL 800 million. Once again, in a very challenging scenario for the gross margins and to match what we have been talking about investments. You can see the jump in the volume from 240 million to 265 million pairs in the running rate. Of course, this should exceed the capacity of production must exceed that. So over 2 years, it's an expressive jump from 22 million pairs. You see this is a substantial movement and we are making this investment, thinking of our capacity for manufacturing. On the right side, we have very important metrics. I'm going to reinforce, our main goal is volume. We are not going to make any -- embark on adventures with the RGM to lose volume. Our RGM methodologies about growing our revenues and production. It's not only about the par, each one of the -- it's not only about pair revenue. You see that we jumped from 11 to 15 There is also the effect of the international markets but Brazil has also similar results. So this reflects in the average margin. However, I would like to show you that's in the EBITDA margin per pair, that this is -- there is more money remaining. So from each [ real ] a larger bottom line goes to our investments. We have to support this growth with the people and the brand. And we are never going to compromise our investment in the brand for short-term results. So once again, this is not inefficiency, this is investment in the future so that we can go on with this huge virtuous cycle that we are and have been creating with Havaianas. This is all we had to talk about today. I would like to reinforce that we are very proud of our results. I hope we have been able to show our vision for the future. I also want to show you, open to all of you that we have a scenario that is challenging ahead of us in terms of gross margin but we are ready to face and we are already facing this issue. At a certain moment, this will cease. But right now, we are prepared and equipped to face this storm that we are facing. We have the fourth quarter. That is one more quarter that's going -- that has everything to be even better and even a more -- one more quarter of records, record results. We have this view for Brazil and for the international markets. So when you look at 2019 and last year, we believe that we have a tendency of positive trends and working with all of the challenges but with a lot of responsibility without to grow volume now to up there. So we are going to be available to you, me and my team. Any suggestions you might have to us to improve, we are going to accept. So have a great day and a wonderful holiday in Brazil next week.