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

Good morning, all. Welcome to our Video Conference to Communicate Alpargatas 2022 Third Quarter Results. Today, we have with us Beto Funari, our CEO; and Julian Garrido, our CFO. [Operator Instructions] Before proceeding, I would like to clarify that forward-looking statements that may be made during this video conference relating to Alpargatas' business prospects, projections and operating and financial targets are beliefs and premises of the company's Board being made with basis on information that is currently available. Now I'll turn to Beto, our CEO, who will start this video conference.

Good morning, everyone. I hope you are all well. Thank you for being here for this video conference of results for our third quarter. I would like to get started, highlighting our businesses, by showing you our business highlights. Today, I'm going to be talking about the highlights as well as points for attention so we can get in detail a little bit into the dynamics of our businesses, but to start out with our highlights. Our consolidated net revenue in this third quarter reached BRL 1.1 billion and our net profit was BRL 45 million. We are going to explain a little bit later on in detail. The highlights were the increase in the performance of the international operations of 15% is in the volume. We've aligned to what we had said in the second quarter about the phasing throughout this year. I'm going to talk a little bit more about that as well. The company has overall had a net revenue of 12% [ with international ] constant currency -- so reaching double digit in constant currency net profit. I'm going to talk a little bit more about that as well. And in Brazil, in addition to the double-digit growth, we also grew our market share, both in value and in EBITDA. So we are having sequence gains of share in the specialized market share and specialized shoe wear market. It's also the third quarter in which we increased our gross margin. In Brazil, it grew 120 basis percentage points, which was also an important advancement, the expansion of our gross margin in our main market, which is Brazil, which took us to a recurring EBITDA of BRL 184 million, which was 70% of the net revenue pretty much stabilized compared to last quarters -- the last year's third quarter. As for the point of attention, there are 5 points of attention we're going to be covering today throughout the presentation. They are all points of attention related to the management and also things to be clarified to the market. First of all, we are going to be talking about the decrease of 6% in the volumes sold in Brazil. We're also going to talk about the restructuring of the U.S. operation. We are undergoing a restructuring process, as we had already mentioned, and we had a decrease of 62% in our operations. We are going to talk about the operation -- international operation's gross margin, which decreased 900 basis points. We're going to talk about SG&A increase of 13%, which excludes other operational expenses. And I'm going to talk about Rothy's net revenue of 2% increase. From the perspective of management, the 2 points that need attention over the next few quarters is the volume in Brazil and restructuring in the U.S. The other 3 points of attention we understand, they were important in this quarter, but we understand that they are points that have already evolved as we advance in our actions and initiatives. So let me cover the points for attention right now. And after that, we will open for the Q&A. Let's start with Havaianas Brazil operations. As I mentioned, we had a decrease in 6% in volume. And we have a gain in the market share in the food channel of 2 points in volume and 3% in value. And we see, again, the strength of our brand. In the specialized channels, in food channel, we had a sequence of gains of share and double-digit growth in the food channel. It's extremely important to mention, concerning the cost pressure that we have, our units economic protected advancing this third quarter. The revenue per pair increased -- reached BRL 14, an increase of 19% in the net revenue per pair. 15% of that was pricing gains and 4% the mix advancement. So we are seeing an increase above our inflation of costs -- the inflation of our costs. And our mix contributed to 4% of those results. Our richest mix already represent 50% of our sales. To give you something as a basis, in the first quarter, that represented 40% only. So we are advancing both [indiscernible] per pair. This is very important in this environment, which we are living in. Against and fighting this scenario of inflation.

I see messages that the audio was cracking. Just a second. We are having some latency on Beto's transmission, we'll be back soon. I'll just ask you for one minute -- for you to wait for a minute so we can get our audio and video back to work.

So I'm going to repeat the information on this slide, just to make sure we are on the same page. Once again, we are going to approach on the next slide. The fall we had in the volume of 6%. I want to reinforce that, in Brazil, we keep advancing both in volume and in value. The value growing more than the volume gains. And we also advanced in the specialized channels. And we keep advancing from July on in these specialized channels with a double-digit growth. And I want to emphasize that we are protecting and accelerating our -- the unit economic of the brands. The net revenue per pair reached BRL 14, growing 19%. What is the composition of those 19% of gain? 15% comes from increasing prices into the new collection and 4% arising from the mix -- richer mix, which we saw 40% in the first quarter to 50% in the third quarter, showing the power of the brand, both ensuring the gains in pricing as well easing the improvement in the mix. This impacts the gross profit per pair, which reached 6%, increasing 22% and reaching our recurring EBITDA per pair of BRL 3 or 11% growth. Let's talk about our point of attention for the loss of the volume. This loss in volume reflects the decrease of the flip-flop sales in the food channel. This [indiscernible] suffering crossing elasticity because of the inflation of all the products in the food channels. As you know, there was a peak of inflation in Brazil of food of 15%. And this food inflation is 5% over the official inflation rate in IPCA. So we gained a traction, but not enough to compensate for this reduction in purchase because people have lost their power of purchase in the food channels. What are we doing? We are trying to leverage purchase buying pools. Why? When people go to the specialized channels, it's a planned purchase, especially in our stores, you are planning to buy Havaianas in the food channels. Due to this reduction in the purchase power of consumers, we have to boost the purchase buying pools. So we're investing more in media, especially TV, we are stronger now in the third quarter to stimulate the purchase buying pools of our products. We are leveraging the celebration days here in Brazil, such as the Soccer World Cup to come in November as well as the gifts and promotional days, such as Black Friday, which we're going to participate this year and increasingly, significantly displays and extra points of sales. It's difficult to leverage this purchase power because it needs to be recovered by consumers, but we are advancing the purchases by [indiscernible] and we are increasing in our execution in point of sales and we have a segmentation of mix focused on this specialized channel, and this is helping us to offset the losses we had in the food channel. Of course, the weighting is different and we cannot completely cover for the loss we had in the food channels. In the international business, we had positive growth. We had a growth of 15% in our volume and a growth in constant currency of 12% increase, which was affected specifically by the geographic mix. In the U.S., there was an increase in distribution channels. I would like to emphasize that this growth in the volume was boosted by service level that reached 85% OTIF plus OTIF, on time in full, compared to the second quarter. As we commented in our last release, there was a recovery in the service levels and we managed to follow the sell-out increase and replenish the products we sold quicker and capture on this benefit. EMEA, our main business units outside Brazil, grew 17% in volume and 21% in net revenue, showing also our capacity to pass on price and improvements to the mix of products. We've seen the international in the first 9 months of this year compared to the first 9 months of 2021, we see a growth of 5% in volume and 8% in net revenue. In EMEA, our main business unit, grew double-digits, 11% in volume and 15% in net revenue in the first 9 months of this year compared to the first 9 months '21. I would like to highlight a few important points here. First of all, in the year-to-date, we have a gross margin per pair, which is protected. It's more or less in line with our results of last year, a decrease of [indiscernible] even though there is a higher weight of Latin America in those results. However, we see a positive impact on our international EBITDA. They affected [indiscernible] gross margin. However, this geographic mix is good for our EBITDA. In the year-to-date, the accumulated we have [indiscernible] the margin of 17% aligned to the rest of the brand. And in the third quarter, the distributing [indiscernible] an EBITDA of 22%. They are higher than the average for the company. Why am I highlighting that? Because in the international businesses, our main business, Europe is strong and growing our unit economics. And you see the weight of the distributors who are coming are better considering the EBITDA or the profitability with a margin of 22% in the third quarter alone. Let's go into the second point of attention, which is our operations in the American market. We worked with a few initiatives to try to reach continuous growth in 2023. Sustainable -- this sustainable growth has 3 pillars. The first one is inside our portfolio. We have just finished our segmentation of portfolio, which allows for a better premium division of our products. We have more drops of products planned for next year. So we can address and explore all the selling days we have since the spring to the summer, having more drops, allowing us to have more capacity to generate more replenishment with more price levels, larger price range that we have a stronger catalog using this distinguished drops. Therefore, in the portfolio [indiscernible] we evolved it a lot. In our go-to-market strategy, we continue to accelerate our sales through the flagship. In the quarter, we had a growth of over 30% the havaianas.com. It's still small compared to the total amount, but it's gaining traction and accelerating. And more than that, we are generating -- we have an important tool to generate with the end of our transition at Amazon. We still don't see -- we don't have a conclusion. That's still a point to [indiscernible] and we have not yet made a decision. However, we still suffer from this effect. Amazon still [indiscernible] what to do with the new model for 2023. [indiscernible] So in the first 9 months, no official sales was -- they grew 6x, which increased. We are trying [indiscernible] sort of a cleaning up of those sellers on Amazon so we can have a cleaner and more direct-to-consumer reach for next year. For the perspective of dimensioning of the off-price, we have a real idea of what we can offer in the U.S. And considering the EBITDA, we have an increase of our [indiscernible] per pair, our price per pair advances [indiscernible] constant currency. It's twice the average price of the international market. So USA has this very large advantage in unit economics. It advanced inside this channel restructuring in 30% compared to the -- in the first 9 months of this year compared to the first 9 months of last year. [indiscernible] This new channel strategy [indiscernible] 55% in the price per pair, which is making us [indiscernible] our gross margin of 11% [indiscernible] which is growing 11% in the third quarter and it's a gross margin that is quite positive. So it leads us to have a very healthy unit economics. And finalizing our strategy for channels, we can finally -- we will finally unleash this growth. We're also advancing and reinforcing -- strengthening the team. We have a new marketing director who has been in Brazil -- recently has been to Brazil recently. And we also have a new merchandising director, who is a key person in this new strategy to prioritize the brands in different channels who also had [indiscernible] in Brazil last week. We are evolving analytics and performance marketing and learning with Rothy's how to evolve this, to manage this healthily. And another point of attention is our high [indiscernible] logistic prices and we have to result that as well to unleash this sustainable growth in 2023. We are advancing in the U.S. It's not something that's going to be resolved overnight or this year, but it will [indiscernible] basis for sustainable growth in 2023. For Rothy's, Rothy's saw a growth in their net revenue of 2% compared to the third quarter 2021. BRL 38 million of net revenue and EBITDA of BRL 11 million. I'm going to show you how we are advancing these operational indicators later on. And I would like to reinforce that this 2% was a phasing of the initiatives that's happened in the second quarter of this year. And last year, they only happened in the third quarter. We saw an increase in net revenue compared to the third quarter last year. Investments grew 70%. So [indiscernible] to the EBITDA, but they are investments. And the second and third quarter keep [indiscernible] of BRL 11 million. Divestments for the second quarter and third quarter are of BRL 18 million [indiscernible] performance marketing and SG&A structuring for these stores. What we see in the second and third quarter is that we have a rationalization of portfolio, having better gross margins and we saw an increase in the prices which were there [indiscernible] received by consumers, allowing us to have better improvement in our unit economics to advance in the fourth quarter for the year. [indiscernible] of Rothy's, what I would like to highlight here, I've already talked about the [indiscernible] and the year-to-date coincidentally [indiscernible] in the first 9 months, there was a growth of 34% in our net revenue [indiscernible] investments. There was an increase of 74%. Those BRL 18 million [indiscernible] The initiatives we have are revamping the gross margin. You see that from the first quarter to the third quarter, there was an evolution. We have already 90 basis points in the gross margin, showing already an expansion compared to the second quarter, which has accelerated in the third quarter, starting in the second and accelerated in the third quarter, and that's important [indiscernible] because we have a rationalization of our portfolio and increasing pricing. The acquisition of clients saw a leap from -- of 33%, reaching 2.8 million clients, our client base. Why is this number important? Because 53% of our revenue comes from recurring purchase. So we have a high recurring purchases in the stores. We went from 6 to 15 stores and in-store sales increased 30% and contribution of the physical stores to the net revenue went from the 6% to 9%, and that helps us. So the operational indicators are growing direct -- in the correct direction. And in this year, we already told you, we are investing to make -- to bring this business back to the level of growth and to gain scale so we can have a path to profitability in the future. These were the highlights. Those were the points for attention. Now I'm going to have Julian. Julian is going to have some more points of attention. And then I'm going to be back here for the Q&A session.

Good morning, everyone. Thank you, Beto. I'm going to highlight with you the highlights, which are 4. The first one -- the first financial highlight is the gross profit on the left side. Talking about those bars, we see a growth of from BRL 459 million to BRL 503 million, 9% increase in constant currency. We see that Brazil went from BRL 308 million to BRL 356 million, a growth of 15% and international business saw a decrease of 3%. When we look under that, we're talking about the gross margin for the quarter. We see a variation of 47.4% -- from 47.4% to 48.2%, 0.8 points. When we look at Havaianas, we see minus 1.2pp, Havaianas Brazil 1.2pp. That made the gross margin grow 1.2 percentage points. And this decrease we saw above of 3% mix Havaianas International go down 9 percentage points, 9.3 percentage points. When we compare this gross margin to the previous quarter of 52.2%, there was a decrease of minus 5.7%. So Brazil has been increasing 2.5% increase, Havaianas Brazil, compared to the second quarter. On the right side -- on the upper right side, I am going to talk about the evolution of the gross margin in Brazil as we have been telling from the first quarter -- since the first quarter. This is a graph by month. The graph before you, we showed you the quarters. The green line is 2022. What we see clearly is that we went from 31% of gross profit over the net sales or the gross margin to 38% and now 44% in September. A reminder, in January [indiscernible] of the raw material inflation that we had and the [indiscernible] costs used this lower -- this older stock of raw material. We improved that [indiscernible] our purchase of raw material [indiscernible] and this resulted [indiscernible] so we had to roll it out into the production and into our results, and that's what we see here. This benefit of this increase in the prices of material -- raw material purchased is rolling out to the results. It's important to mention that because the international operations has sees a delay on this effect. In this quarter [indiscernible] they are still [indiscernible] using the inventory, specifically in EMEA. Looking at the inventory, they purchased it back then, which was a very expensive inventory that Brazil has already got rid of. So it is natural to see this evolution in the inventory prices. Obviously, there is also an exchange rate effect because EMEA bought this inventory when reais -- Brazilian reais was valued. So what we see in Brazil [indiscernible] this is going to happen as well as an evolution in the international businesses. So there is this delay in the international and of the exchange rate effect. And as Beto mentioned, this is geographic. The U.S. [indiscernible] in gross margin has a higher percentage because of our distributors. But of course, when I look at the EBITDA, my lower line, this is positive, especially the APAC and LATAM growth shows an improvement to the EBITDA because there is no -- not this SG&A costs as if we were operating directly there. Let's look at our next highlight, it's the EBITDA. What I would like to emphasize here is a comparison between quarter-over-quarter. So how one quarter compares to the other? When we look at that, what the evolution was like? We see clearly [indiscernible] increase of our price increase strategy. The [indiscernible] coming from Brazil, offsetting the COGS and the SG&A, but I also like to highlight a little bit this SG&A and showing this increase of 13%. We had an investment in our sales structure. I didn't have the sales structure in the third quarter 2021 [indiscernible] investments and also investment in technology inside the structure. We have more people. And the highlight -- one of the main highlights is the high wages where we more than doubled the quantity of headcount. Of course, there is a return. We see a return from high wages as well. What we already started in this quarter and we don't see is the restructuring of this international operations. The simplification we are cutting one layer between battle and this structure. And obviously, the benefit will be seen soon and we will continue with the OBZ work. The third highlight I'd like to show you is the net profit -- the operational profit. And to make it easier for you to understand, we separated on the left side, what is operational profit and on the right side, the complete -- until we get to the consolidated profit. The operational profit, as I mentioned before, when I compare to what I had in the third quarter 2021 and to this quarter in 2022, we had minus 5% EBITDA, recurring EBITDA due to everything we saw in the international operations. And as for depreciation and amortization, we are investing more. We involved over BRL 300 million in the CapEx throughout this year. So it's natural to have this higher depreciation. So on the right-hand side, the first line is the same explanation we saw on the left side. And the non-operational items are non-recurring. One very important is the revenue like the IRS. The benefits we call -- we have in Brazil, we already expect it to happen. But there is something very important, which refers to the U.S.A. So this is the income tax. In Brazil, we have [indiscernible] fiscal benefit, which is not in our balance. We have the right to it. But why is it not in our balance sheet because we have to have perspective or good perspectives for the future. When we start to have profit [indiscernible] as if it's something as if I was not paying taxes. So I waived the taxes. So this year, the USA saw negative results because I have a lot of this income tax accumulated, which has not been activated, but I have the right. So this comes straight into the results. So when it's positive -- I use this benefit when I have a negative profit, it comes straight to our results. I don't create that in my results ledger, but it will be seen in the future. The Rothy's equity, the depreciation and also the investment and the income taxes as well as the non-creation of this asset, which doesn't mean you don't have the right. Whenever I have a positive results, I'm going to use this benefit -- this tax [indiscernible] benefits, which I am entitled to use. The last highlight is the net financial position. On the left side, we were at BRL 678 million in September [indiscernible] now in September 2022, we are ending at BRL 809 million. The first result is the CapEx. The second, the remuneration of the shareholders. And we also have a point here about the working capital, which is connected to our inventory, inventory of raw material as well as of finished products. So I'm drawing a comparison here between what I had in September 2021. We had an increase in the raw material. So we also saw an increase in the inventory, as I mentioned here. So this is what it is, the working capital. And we also had a new strategy that we didn't -- we were not able to implement last year, which was of anticipating the production to send to Europe right now, and this is happening in this quarter. Just a reminder, last year, we produced -- the majority of the products we produced in January and February, as I mentioned. And for economic reasons, world economic reasons, we had a difficulty to have this OTIF, as Beto mentioned, this on time in full service level. And this year, we are more prepared, we are better prepared. Then the products which are going to be in Europe next year are leaving now. This is a picture of September. So in September this year, we have this volume that I didn't have in September last year at this size. So this is the largest variations. This is all I had to share with you. And now I'll get back to Beto so we can have our Q&A started.

[Operator Instructions] We have a few people with their hands raised. Following the order, first, we have Thiago Suedt from XP Investments.

What we would like to approach here from our side is basically 2 topics. I think basically, we went through all of them before. But first of all, from the perspective of the loss in the volume in Brazil, it would be nice to understand a little bit better the expectation for the initiatives that Beto mentioned of adjusting a little bit to the operations in Brazil to engage consumers to purchase buying pools in this quarter, especially in the food channels. I want to understand a little bit the positive effect that you expect to have from those initiatives from now on? And the second topic would be about the international markets. I think another thing here what Beto mentioned about the U.S.A. It would be nice if you guys could give us an overview of what you expect for a more normalized operations of the U.S. operations in the future, thinking of this clearance of sellers -- this removal of sellers -- of indirect sellers in the Amazon website and this website improvements. What do you expect? And when do you expect? What's the timing for that to happen? And connected to all of that, when do you guys expect that this operation is actually going to reach a breakeven point? So undergo all of this inventory adjustment. And what do you expect in its results for the American operations after this breakeven point has been reached?

Two very important questions. These are from the point of attention. These are the 2 main points for attention that we believe to be most critical from the results. These are points we need to evolve on. I gave you -- I offered this update of how we'll see them today. Our sell-out volume in Brazil is our main focus. The initiatives I mentioned are to accelerate our sell-out in the food channels. The food channel, it's the main channel in Brazil. We have specifically an indirect channel to support them, to sell to them. So we believe our inventory in this channel, but we have to have a better sell-out so we can have a turnover of this inventory and have our sell-in. This sell-out to consumers, in all of our analysis, are being impacted by a smaller purchase power. The inflation, the purchasing power is much above the official IPCA inflation rate. And of course, our flip-flop sales is affected -- pretty much is the same one you had in the past. You have to spend all the things you had at the supermarket. So of course, food is going to be a priority. And our flip-flops are going to see a decrease in its sales. So we have to follow-up on how much of the purchasing power recovers faster or not in the Brazilian market. We are monitoring up close of how the measures will affect, but there is still a deficit in this purchasing power. And in the third quarter, we see this crossing elasticity. What we see for the next quarter is that we are going to have a pressure in the sell-in, because the food market, the food channel will still be pressured in the next quarters. So I don't think we're going to be able to increase our sell-in. I think we will still be under pressure of the basket of products which are undergoing this inflation and being affected by the decreased purchasing power of Brazilians. So I have this expectation to keep seeing this pressure on the sell-in in the food channels, partially mitigated by the [indiscernible] we have in the food and specialized channels. But we believe that our revenue will still be positive, both because of the mix and because of the price increase. But we don't have a perspective in the food channel to see a positive increase. We think we'll still be pressured in the food channels and we are going to have our sell-in pressured by that, and we are monitoring that. As for the American market, what is the breakeven point? The breakeven point is the same results -- when we look at the last year's results, you can have an idea of what the breakeven point is for the American market. We are improving in our unit economics. It's better than before. And what we see now is that in 2023, we will still be a point -- a moment of transition in the U.S. I don't think -- but I see a very good transition for next year. We are going to update you on our next quarter's release at the beginning of next year. We have to define this new model for the marketplaces that we are following up close. And what we are seeing in the U.S. right now as well is that since we had sell-out -- lower sell-out numbers in the department stores in the U.S., we already started at a smaller [indiscernible] more on the replenishing of products than in the pre-sales. And on the perspective of the mid-term, we are confident to reach this breakeven point. So in 2023, we're going to see a transition -- this period of transition again. But I don't see that we are going [indiscernible] to be reaching the breakeven point, but the economic scenario is strong. So since we gained scale, we see all the gears working and responding very well. These are the 2 points for attention. We don't see an improvement of those 2 points for attention right now, but we will keep you up-to-date in our next quarter's release.

Our next question now comes from Bob Ford.

Could you tell us a little bit about the answer of the market through innovation and through your enhanced capacity? And how we could think of the innovation from now on? And how do you think about reducing the unauthorized dealers?

Bob, there was a little bit of a breakdown of your question. Can you please repeat your question?

Yes. Can you tell me a little bit more about the answer of the market to innovation, specifically, the demand for the enhanced capability? And how can we -- what can you think about this from [indiscernible] now on? And where are the non-authorized dealers getting product from? And how do you think to address that? How do you think -- how do you intend to address that?

I understood that your question is about innovation and about non-authorized sellers at Amazon in the U.S., well done. Let me start with the second and then I'll go back to the first. What we saw was a lead in last year of almost 6x more unauthorized dealers in the U.S. In other words, there is a market interested in Havaianas at Amazon. And from the 1P to the 3P model, you lose the most [indiscernible] which is the Buy Box from Amazon. So when you lose your Buy Boxes, unauthorized sellers grow. And to give an idea, over -- now we have over 600 unauthorized sellers. They were less than 100. When you are a Buy Box, the Amazon controls that. So they don't allow them to occupy the Buy Box. So they are not so relevant. So we are trying to get to this cleaning in a certain way or clearance. So how do you do that? By winning the Buy Box again. That's extremely important. And in the moment, the market -- the model we are looking at from now on, how we can establish a model that we can gain and control a Buy Box without lowering our prices. This is the challenging -- looking from the challenge perspective. But looking from the interesting perspective is that we have a demand. The market is heated at Amazon. We came to sell about 400,000 pairs last year through Amazon. So there is an important demand to be captured there seized by us. So we're looking at that in a way that we don't reduce the prices and how we can create a model, I'm going to connect it to your first question. We understand that the biggest opportunity in the U.S. is also this capacity to create a more premium portfolio, bringing a brand that's increasingly more positioned as a fashion brand as we do in Europe. And to do that, we cannot lower our prices at Amazon. Otherwise, you [indiscernible] creates a tension in our strategy. So we are trying to come up with a strategy that rebalances, but also positions the brand in a way that it can capture the innovations, capture and take the effect on this innovation, you mentioned. Nowadays, in Europe, we have a better, richer and more premium mix of flip-flops. I'm going to give you an example. The U.S. are the market that sells the most of this [indiscernible] Havaianas. Secondly, we see a bigger demand for our sandals in Havaianas. So we have a strong portfolio to address this market in next year. And as we are leaders in leading the women's market, we have some innovations for the kids market and for the men's market. Behind me, you can see the Crocs for kids. And we also have what we are positioning as more fashion in the U.S. But in order to reach those more -- this richer mix, we have to stop competing through prices at Amazon. So this rebalancing, this has to be very careful in 2023, and we have to understand how we are going to play there with the segments of portfolio in categories. What is important to reinforce is that the brand in the U.S. has capacity to position in this fashion [indiscernible] room, in this fashion space. That's what we see in our e-commerce. We are growing all of our indicators of the e-commerce, and there are 2 very strong indicators. One of them is that there is a very strong demand for Havaianas, especially for our more basic mix of products, which has been right now addressed by these unauthorized sellers. It's not the interest of Amazon to sell through those unauthorized sellers. They also have the interest of controlling these unauthorized dealers. And this is going to demand a little bit more of time to find and to get to make this rebalance. And from the point of view of strategy of products, we had an important reformulation because now we created drops which are segmented. So we can bring novelties in the different seasons and created this seasonal demand, this novelty at the stores and create a replenishment -- a faster replenishment of products at the stores. This was very well accepted by customers. But they -- what they do is to repurchase what was their sales of last year. So with more drops, we can have more orders to replenish their inventories, but I think this is going to help us to regain this level of sales that we used to have in the past. So this segmentation of the portfolio more into a fashion industry, including not only premium flip-flops, but also sandals, is a strategy. But this demands us to do it gradually. And we are not going to be able to deploy this 100% next year, but we are certainly going to advance health -- on a more healthy basis. And in 2024, we're going to be able to accelerate that. So it's a process. It's proving to be a little bit slower than what we -- the way we would like to be, but it's going to be more sustainable. We have to be more resilient and more patient now to fix this process in the U.S. The brand is strong. It has awareness. But there are [indiscernible] which we are extremely strong. And it's the brand that has this unaddressed demand that we are going to tap in the future.

And where are the authorized dealers getting their products from, Beto?

Bob, can you please repeat your question?

Where are the unauthorized dealers getting these products?

Bob, it's harder to identify the origin because these are very small sellers. We imagine that they might purchase products in Brazil. Those parallel markets usually are from Brazil. We don't know the [indiscernible] in Brazil, but there is a large quantity of those resellers and with a small quantity. So they are able to get into the U.S. not paying taxes because they take with them a very small quantity of products. So again, understanding this mechanism, the [indiscernible] these unauthorized and small sellers, they migrate. So when you make a transition, they take advantage. So whenever you -- we fix that, they will move to another market rather than try to keep finding a way to work in this market. So we need some time, but we are going to address and adjust all of that. We just need more time.

Thank you, Bob, for your question. Let's go to Joao Soares from Citibank.

[indiscernible] for the questions. The first one is just to clarify, Beto, you mentioned in the first question, you mentioned that the inventory in the food channel is healthy. But you also mentioned that sell-in should probably is going to keep suffering. I just want to understand if you start to have improvement in the sell-out, you are still going to have pressure on the sell-in because of your inventory levels in the food channel. Just to make clear, the connection between those 2 points. And the second question is about this dynamic that you mentioned this crossing or cross elasticity, which is a new term. Is there any way you were going to rethink your price strategy? We can see consistently an improvement in the revenue per pair in Brazil. And now that you were going to go to Black Friday, I imagine there is a policy that is going to capture more a little bit on promotions on special pricing? And last question, if you allow me is about Rothy's, given the level of investment you have right now, what is the expectation? I know that you cannot give us any kind of guidance on the market, but if you can give an idea on the growth of Rothy's for the future?

Thank you, Joao Soares. Let me address your question, sell-in, sell-out. The important message here is that we're going to activate the sell-out in a strong -- in a more -- in a stronger way to recover our sell-in faster. But we don't see this happening instantaneously. There is a process that we are going to capture on that. We are going to suffer from that. Our sell-in is going to suffer. But the market is like [ minus 1, minus 2, plus 1, plus 2 ]. Nowadays, what I see is these numbers as probably negative because of this crossing or cross elasticity. We probably need a few more months before the purchasing power of our -- of the consumers in Brazil recovery. It's not under our control. What we can do is to focus on the strategy to make to increase the purchase by impose. So this sell-in should still struggle and suffer even though we have a very positive sell-out, a positive sell-out. So this is how the food channel works, and this is the main impact, and this is where we see the cross elasticity. Everything we see nowadays about the cross elasticity, when we look at the elasticity and brand, there is no reason for us to improve our prices, to decrease our prices. So we keep to have our RGM strategy. And we will hope to keep seeing a healthy net revenue per pair in the mix. We have a few regional opportunities, but they don't -- do not affect the whole of the pricing strategy in Brazil in the sell-in, sell-out mechanism. So we don't want to affect the revenue per pair. And this is what we see as something that we are going to have a carryover in our business. We don't see this coming back. What we see is that we need a bigger time to see the recovery of the volume increase in Brazil. As for Rothy's, the growth of Rothy's, there was this 34% increase in 9 months. It's healthy, a healthy recovery, we like this number. And we see that the investments are starting to create a new -- a new foundation for the scale of Rothy's. So what we intend is to finish this first round of investment this year and work so that we can grow like continuously. We like the number 34%. We are going now into the [ third ] quarter, which usually it's a very important quarter for Rothy's. There are the seasonal dates, that there is a seasonal holidays. And the most important part of the message I would like you to take with you is we see an improvement, the improvement in gross margin per unit. So there was a rationalization of the portfolio. We cut -- we cut off the items that had low profitability in our mix. Most -- almost the entirety of our inventory goes in freight by sea, not by air. And we have the perspective of a better mix of portfolio and gross margin, that's going to help us in the future to have more funding without penalizing the results. But this is a process. Our growth is healthy. There is potential to grow more, of course. We see there is a potential to grow more. And the fact, we have 2.8 million of our customer base, it gives us some comfort, makes us comfortable in terms of loyalty and recurrency. So our level of recurrency -- recurrent purchase and loyalty remains intact. So we aim to gain more customers, of course. And we have a new line of sneakers that was released in September. And we still have a healthy level in our core business in the main products. So we are well positioned to reach this sustainable growth and to generate this margin that we want.

The next question is by Joseph Giordano, JPMorgan.

Julian, Beto and Rafael. I have 3 simple questions. The first one, looking at a little bit further ahead in time, thinking of next year, I'd like to have an update from you about how your expansion of the manufacturing project is? I think it's a great tool inside your strategy. So I'd like to understand where you are at and what are the main deployments expected for the very short term? And about Brazil, I see that the brand is quite healthy. We see a great pricing. And I would like to explore with you 2 points inside the RGM strategy, I would like to understand a little more, what is innovation inside this price increase versus the core business? And I would like to understand how much the Beyond Core contributes nowadays to that purpose? And secondly, I'd like to explore a little bit more the market share of the new specialized channels. So we see that your company has a continuous market share in the food channel, but I want to see how you see the evolution for the boutiques, right, the specialized channels?

Joseph, thank you for your question. All right. Thank you for the question about the ILAP, the industrial improvement program. I think it's important an update. We inaugurated our mixing center for tests in October last month, the mixing center to give you an idea has a capacity, for 38 million pairs, it has a shipping, daily shipping of 1.3 million pairs. And most importantly, among other benefits, it cuts in 50% the lead time. So that's extremely important for next year for us. We're going to have a ramp-up of volume and to start to operate in January. So from last year on, we will get a new benefit in the replenishment of the products in the North Hemisphere.

Okay, Beto. But what happens now with the pre-orders, the pre-sales in Europe?

We have a healthy pre-orders sales and the volume of this pre-order sales, we are already producing those. I'll talk a little also about the capacity gains in our production. Historically, we produce -- we produce historically from the pre-sales, about 25% or to 30% to Europe. This year we got a bigger basis, 50% of our production is from the pre-sales in Europe. So this is going to be shipped to Europe as we -- it's being produced and shipped as we speak. And this is going to be in the inventories in the Europe. [indiscernible] to be available for the sell-in for the sales for the season. So from the operational point of view, our ILAP program is very positive right now and we see that getting better. And as you saw, the service levels was already much better than previously we had. The mixing center will start to give benefits, to provide benefits, and there is a period for a ramp-up, of course, which is a critical moment. And Europe is guaranteed, they have their replenishment guaranteed from this initial of the operations. And in Brazil, we have better service levels and we have the capacity for peaking for the fractioned orders and support our strategies for the specialized channels. Again, ramp-up in Brazil, in the first quarter next year and maybe to grow that when we go into the summer in Brazil next year. So the mixing center is a reason of happiness for us right now. We see the embedded technology that it has the new team operating this mixing center. So several benefits here. And another benefit here goes into the improvement for our capability -- capabilities, manufacturing capabilities. We already can see those benefits popping up in the fourth quarter. Specifically in Brazil, we will have a better capability for manufacturing to guarantee inventory. And this is also, of course, going to help with international operations. We have the factory of Santa Rita that recovered quickly from the fire we had. Santa Rita is the factory where we produce the smaller volumes and the most specialized and premium SKUs. I was there and I was impressed with the recovery. They actually are able to produce smaller volumes with a higher level of efficiency. So this is going to help us in the growth in the Beyond Core. For the Beyond Core, we are not capturing all the entire benefits for the ILAP. Basically, for the sandals, we are flat. We are growing 30% in the international. And from next year on, we are going to have more capability to grow in Brazil in Beyond Core, especially in sandals and accelerate this growth in the U.S. and Europe, as I mentioned earlier, there is a large demand for sandals. I hope this is going to help us in this new mix, as I mentioned to you. And the new technologies we are bringing are going to allow for -- to make the flip-flops more premium, which is a important part inside our RGM and in the mix portfolio. So in the specialized channel in Brazil, it's an important focus for us. We have nowadays an internal structure as Julian described it to us in our -- we have a new commercial structure, both for the food channel and for the specialized channels. We have a new area of operational excellence. And if we're going to see activities happening this for fourth quarter, we're going to have novelties when you go to the point of sales, you're going to see new displays, new executions for our sales. And we're going to be advancing strongly in the specialized channels, expanding the direct and our OTIF capabilities, our OTIF capacities, on timing full capacities. This is the evolution. We are evolving in 2 fronts, the services with more segmentation and services to them. And we are also using this new approach of more frequent drops. This is extremely important for the specialized channels, both in Brazil and in the international businesses. The demand in the international -- this is something interesting. The demand for the specialized channels is very similar in Brazil and abroad. So the focus for the specialized channels is this [indiscernible], a portfolio with better segmentation and a strategy of more frequent collection drops and products that are going to help us to create this more premium aspect inside our portfolio. I think I've covered the 3 points. Have I answered your questions?

Joseph, thank you for your question. We are going to finish here our Q&A, and let's go on now to Beto's final message.

I would like to thank you for your time today. We are still convict of our thesis for mid- and long-term business. In 2022, we're going to have a very strong focus in this last quarter in growing our volume in EMEA, APAC, and in LatAm businesses. And the distributors markets in -- we see opportunities in all of those distributor markets in Brazil. We have a pressure in volumes. However, we had a growth in the revenue. We are working on needs, but we understand that these depends on macro effects, specifically in the purchasing power of our consumers, specifically in the food channels. But we are working hardly to protect our healthy -- our EBITDA margin. Havaianas Brazil is showing this evolution in the gross margin, and there was an increase in pricing. We're working in the correction of the route in the U.S.A. We believe that in 2023, we still will be ongoing with this transition, but I will bring you up to date on that in our next meeting. We also have the -- our convicted. We are also sure of our medium and long-term strategy for Rothy's. Our growth continues and our brand, Havaianas, still has a lot of competitive advantage. And we see a combined potential with the Rothy's, and Rothy's now on this path to profitability, and we will update you on these news in the next release. I thank you for your time. And I'm making myself available, me, Julian, and my team to have this individual and face-to-face contact in case you want to.

Thank you all.

Good morning. Good morning, everyone. The Investor Relations team is available for new -- for any questions you might have. Thank you all. [Statements in English on this transcript were spoken by an interpreter present on the live call.]