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

Good morning all. Welcome to Alpargata's video conference to communicate its earnings release quarter 4 2022. This video conference is being recorded and simultaneously translated into English. The Q&A is going to be made this way. [Operator Instructions] Before we start, I would like to clarify that forward-looking statements that may be made during this video conference relating to Alpargata's business prospects, projections and operating and financial targets are beliefs and premises of the company's Board being made with base on information that is currently available, not constituting of guaranteeing that such forward-looking statements will become material. Now I'll turn to Beto, our CEO, who will start this video conference. Beto, please you can get started.

Good morning, everyone. I hope you are well. Today in this conference, I have with me Rafael Estides, who is going to be presenting with me. I have the authorization of Julian Garrido that he cannot be with us today because he is undergoing a current issue of illness in his family and he couldn't be here today. And since we are in this period of handover, he will be available after this conference call in case you have any interest in asking any specific questions. Today, I'm going to be here with Rafael Estides and we are going to be approaching all the subjects related to the results of the company. I will start by Alpargata's results, the consolidated result first, where we reached BRL 4.2 billion net revenue, which is a growth of about 6%. Our recurring EBITDA of BRL 689 million gives us EBITDA margin of 16.5%, which retracted 2.8% points compared to 2021. We have an income continued operations of BRL 184 million. And behind these consolidated results, our Havaianas brand saw a volume decrease of 5% in the year and a constant currency net revenue with a growth of 9%, so BMU Brazil and international markets included. And we finished the year with Rothy's, which we have a 49% stake with a 26% increase in the net revenue. So clearly, our performance was somehow disappointing. It doesn't reflect the potential of our business and the quality of our team. And this low performance resulted in results -- financial results, which were below expectations for the 2022 year. I would like to reinforce that we have identified the main factors that contributed to this negative effect on results. And that's important because further on, I'm going to be talking to you also about our action plan to make sure that these restraining factors are worked on and that we can drive gradual sustainable recovery towards our full potential. I also want to reinforce that our thesis does not change, our model of creation of value is based on creating volume, generating volume and expanding our margins. But I also want to reinforce with you that we are implementing right now a program which focuses on efficiency and simplification of the company. Yes, we are addressing our cost basis but we also keep focused on growth. So our thesis for growth is growth or the expansion of margins, and we reinforce that these thesis can be materialized in the mid and long term. The #1 restraining factor is a retraction of 15 million pairs sold in Brazil. We are going to go into more details into these why we sold minus 15 million pairs, but this is a reduction in our sellout and sell-through numbers. As you know, our business model is sell out and sell through. Our revenue is a reflection on our selling that is generated on our sellouts and sell-through numbers, which were 70% of our volume is still in our indirect channels. If you consider all the channels, our sell-out only decreased 2%. If we only look at the indirect channel or -- which we call grocery channel, we went down 4%, and that's a very important point to raise. Our main issue is with the grocery channel, where we saw this very steep decrease. We are going to be talking more about this today. It's also important to reinforce that we started the year seeing a growth of the sell-in and sell-through growth, so we are -- we started the year last year with a restriction in our manufacturing capacities. The turnaround happens mainly in the second half of the year, mainly in the third quarter and still the fourth quarter still sees a decrease -- trend of decrease, which was smaller than the third quarter, but is still decreasing. To give you an idea, the second half in the grocery channel in 2022, we had a 8% decrease in the sell-out numbers. We are going to give you in a little bit more detail what the action plan is to address this main issue and to transform it into a factor to resume growth. So this effect of 15 million pairs sold starts to offer a path for correction. So we have a long chain, and we have -- there is some time before we can react and see the results appear, so we are reacting right now and it will take a bit to get there. So these numbers can be seen. The second restraining factor was the impact on the cost of products sold on the COGS. As you remember, since the third quarter of last year, there was an expressive growth in the cost of our raw materials, which was above 40%. And we took several actions to mitigate and reduce this effect of the raw material inflation, but with the loss in the volume in the fourth quarter, we started to have a sort of unleveraging. So we had a year with 2 distinct halves. The first half, we needed to attack the issue of the raw material cost inflation, and we did do that. In fact, we finished the year already with a positive adjustment in prices. However, we saw a problem with the leveraging. The impact was -- the increase of the COGS was of BRL 1.32 per pair in the year. What is the most important thing to emphasize is that part of this impact is related to the additional costs as we had because of the reduction of volumes. We are going to address this today a little bit later. In Brazil specifically, if we subtracted this impact of losing the leverage of volume, in addition to the effects of the external pressures that we had because we had to hire other distribution centers to hold all of this inventory not sold. So this considered those external factors, our margins grew aligned to what we expected. However, we were affected by this loss of volume numbers. The third restraining factor was retractioning of 1 million pairs in the U.S. Of course, it is not a very high number compared to the 15 million in Brazil, but there was an effect in our bottom line, our EBITDA, I'm also going to update you on this concerning this subject. And as I said, we always have this perspective that's in the high season being in 2023, we're going to see recovery in the U.S. And the fourth restraining factor and which affected our adjustment in the selling volume was the consumption of operational -- of working capital before CapEx. So we try to accommodate this effect, but especially in the second half of the year, this made us have a negative impact of BRL 327 million in our cash flow. So I want to make it clear that we have identified 4 factors, which are being addressed. As such, we can focus on a gradual recovery of our business. It's also important to notice that we had advancements in terms of our restructuring in 2022. The main and foremost is our market participation in our key markets, Brazil, Europe, where we grew our market share. In Brazil, we already have a very strong market share, and we still grew 1.2 percentage points, and we also grew double digit in sell-out in Europe and countries in the Southeastern countries in Asia. Obviously, this double digit, reflecting high market share. This is a very important reflection of the health of the business. Secondly, this is very important for our thesis of mid- and long-term growth basis, the increase of our capacity manufacturing and logistics capacity. We saw an advance in our on-time in full indicator which means our service levels. We saw an advancement of 12.5 percentage points both in the channels and in the regions compared to 2021. Obviously, this new logistics center, our mixing center, our newest mixing center reduced our lead times and ensured us to give efficiency, especially for the specialized channels in Brazil and international ones. And we expect to see more advancements in this indicator, which is very important for our business. The mix in center is also going to help us to reduce this impact of the external distribution centers hired. So having said that, this is something that is going to help us to handle these extra expenses. The second positive point was an increase in our manufacturing capacity. We saw a 7% increase in our capacity to produce pairs in the year, especially in the main lines of products. So we already grew 82% of the capacity of production for our Havaianas Brazil. So this is happening to specific lines of products that offer support to give a better mixing of products to the market. So we are increasing the capacity of our logistics, supply chain and manufacturing, which will support our recovery in 2023. In addition to that, we had important advancements in our digital transformation. The highlight in our priority for our digital transformation is in our D2C or direct-to-consumer channel. We saw an expressive growth of our e-commerce in Brazil. I would like to highlight a 24% increase in Brazil and also an increase of the omni sales growing exponentially, an important growth in the U.S., the growth in the U.S. in the second half. If you remember, we implemented the same Havaianas we have in Brazil. We rolled it out in the U.S. and in Europe, and this generated a lever and a change in the trend. In the second half, we grew over 50% in the U.S. and in the fourth quarter over 70%. We are advancing in our CRM. Our CRM is advancing the same proportion, and this data is also very important for the strategies of channels, that is also applicable for our B2B channels and also for our negotiations with Amazon. So that's a very important transformation -- digital transformation. It's a continuous and gradual work that will bring benefits as this becomes more relevant. Our D2C channels are more representative in the international markets. And this is a direct driver of the pillars of growth. In addition to that, it's very important to reinforce that this is connected to our brand strength. We made an important advancement to our portfolio, both in Brazil and internationally speaking, we have a richer mix of products and more oriented to our positioning of the brand as a fashion brand. So this mix effect is of 3 percentage points in Brazil, which is a very important mix indicator, and we also have this mix improvement in our sell-through figures. So there is no difference between our mix selling and the mix sellout, quite the opposite, we actually see an opportunity of offering a richer sellout mix, which should happen gradually. And this contributed in addition to the price adjustments and should continue to contribute, so we can evolve even further in our revenue per pair that grew in 2022 overall. So that [ Audio Gap ]. The other pillar of growth was our sustainability pillar, not only by releasing our investor relations strategy and our sustainability report, which was released last year, but also because of our project recycle, which is affecting positively our brand health. And finally, we have Rothy's here. We have been present there since May. We are already participating since March last year in the company. And in this new management cycle, we see a recovery of growth of 26% in the net revenue in 2022 and the path to profitability which is in line with our conversations with Rothy's - our Rothy's partners. I'm going to come back to that in a moment. So talking about the plan -- the action plan to address the restraining factors, as I told you, the third and fourth quarter somehow were disappointing, and the fourth quarter had a disappointing and had an impact in the overall year results. Still, we reached a net revenue of BRL 1.1 billion. It's superior to any other numbers we have ever had in our history, but it's still below expectation. So, we want to generate more value, and we will focus our actions on that. We had a recurring EBITDA of BRL 153 million and a net loss of minus BRL 21 million. Havaianas grew 3% in net revenue, and we had a 5% growth of current recurring currency with BRL 147 million of recurring EBITDA and BRL 81 million of recurring net profit. As for the Rothy's, we can already see a path to profitability that starts to delineate in the horizon and show us the opportunities to have growth of Rothy's and expand the margins as well. The EBITDA was of minus $3 million and net loss of $4 million. Now advancing to Havaianas Brazil, now speaking of the different geographies of the Havaianas operations. And this is a very important slide to show you and talk more, talk deeper about the challenge we see here, and address the sellout decrease we saw, which is the #1 factor to recover our business. We had fourth quarter with a minus -- decrease of minus 12% in the volume and an increase of net revenue in 2%, so a very healthy relation in our mix price of 14%. We had, again, a market share gain in the grocery channel -- remember, it's the biggest season we have. So we grew 77% in volume, excuse me, we held a volume of 77% in this grocery channel. And we grew 1 percentage point in market share from 81% to 82%. So that's a very important indicator to us. So we are having a trade-off between value and volume here. So what happened about [indiscernible], which was one of our -- one restraining factor for our results. I want to take some time in this call to explain that. As I said, we started out the year with some restrictions in our manufacturing capacities and positive sell-out and sell-through, where we saw some economical uncertainty but good signs of sell-outs and sell-through. We saw positive trend there. At that moment, obviously, our main constraint was the increasing inflation of the raw material prices. We finished the first quarter last year, that's an important number, which we did not release, because it indicated a positive trend, but it's important to explain to you what happened. So this is why we're showing you right now. So in the first quarter, we had sell-out and sell-through of 5% increase. And in the grocery channel, the same. But in the second quarter and on, we start to see a difference between the grocery channel and the other channels, while the other channels showed growth, even though it was below the first quarter, it was still positive. The grocery channel saw a 5% decrease in volume in the second quarter. In the third quarter, it was the worst quarter in the year which have had very bad results in September. So we saw a 7% decrease in volume. And in the grocery channel, we saw a minus 11% decrease in the volume. We created an aggressive reaction. You saw in our investments, quickly responding, trying to resume the growth in sellout and sell-through. This very steep decrease in sell-outs and sell-through requires adjustment, but this doesn't happen overnight. So we implemented those actions, mitigated as best as we could in the third quarter, generating this a little bit better results in the fourth quarter. So this minus 11% decrease in the grocery channel was still a decrease, but up 6% in the fourth quarter. And in the other channels, we saw a better recovery. Why is that important to be mentioned? Because in this grocery channel, where is our indirect chain of distributors and all the supermarkets that we sell through them, they have inventory. So when the sell-out goes down, this coverage of inventory, which is calculated in days growth, even though we are monitoring volume and avoiding this volume to grow in the inventory of the retail. So the fundamental mission here is to reverse this trend of decrease in the sell-out and sell-through, and that's what we have been doing since the third quarter by making investments, and we started 2023 with even more investments in distribution, end point of sale as well as in advertising. We are going to have historically the highest investment amount in the first quarter of 2023, where we'll be aiming to accelerate our sell-in and sell-out. This is something that takes some time to kick off because we have all the indirect chain to go through, but that's an important movement because the same way when we see a decrease in the sell-out and sell-through, we have a rebound effect when we see the same for the growth of the sell-in and sell-out. So we're still in the moment of recovery. It's not going to be a leap from the previous moment to now, but we are following up close this trend of recovery, specifically and mainly in the grocery channel. Since in the other channels, we have a positive growth trend in volume. So we expect 8 to 9 growth in the specialized channels. So specialized at footwear stores and also in our D2C, which also shows a very positive trend. Okay. I'm going to talk about the international markets now. In the international markets, we had a fourth quarter, remind you that in the third quarter in EMEA, it's a low third quarter. It's not an important third quarter, just as the U.S. Still, we grew 7% in volume. Our net revenue in constant currency grew 19%. I would like to remind you of the RGM actions that we took last year. So the international market is in a previous phase that we have already been through here in Brazil. EMEA saw closing volume close to double digit and increase of 20% in constant currency. The other market is -- distributor markets grew double digits. Here, we saw 2 different dynamics, 2 different movements. In Latin America, we saw very large growth, and in some of the distributor markets, we had a positive sell-out because of the recovery of the tourism. In Asia, for example, this is very important, and we expect this to grow again in 2023. But we also had -- we had a rupture in the supply chain for Asia and we see -- we have a very positive outlook for this year for the recovery of the tourism in Asia. And in the U.S., we still are being negative numbers. Still, it's important to remember it's low season. I'd like to reinforce the growth of our Havaianas.com, which saw an increase of 70%. Quick update in the U.S., we are attacking -- it's not a new strategy exactly, but inside our focus and prioritization, we are going to capitalize on the strength of our brand, a brand that is focused on fashion. All the surveys and studies confirm that our brand has a fashion appeal in the U.S. We ran a very important benchmark studies in the U.S. we set at other brands that saw recovering growth through a positioning -- fashion positioning of their brands. So we're making important movements that are -- so we are going to focus on digital first, which goes through different channels. The havaianas.com which becomes the center, the core of our B2C and marketplaces, Amazon, which is the most important, but not only we're also opening fashion marketplaces at Amazon, our movement, which is ongoing right now. It is already moving into 3P model. So it's a sales model where we control inventory, we control portfolio, we control the price points, and at the same time, we focus on the FPA, we start to gain priority in the prime and also mitigate the numbers of unauthorized sellers at Amazon. It's a process to have this migration completed. We are fighting against time, so we can be there in the high season at a better position and better positioned. But this is something that is ongoing. What's important to say that the marketplace, Amazon starts to be with this new model -- a great generator for traffic for our havaianas.com that will impact our CRM that is growing the same growth numbers as our havaianas.com. With more data, we can use this data to what we are calling commercial renovation in our B2B. What are we seeing in the U.S. retail landscape is that increasingly more the independent fashion stores, they search for resellers that have data on consumers and can react quickly with inventory figures and adjustments. You probably are looking at the market, and you see that the retailers are adjusting their inventories. They are reducing their inventories, having write-offs for the inventories. And what we see for both for the U.S. and for the Europe is that the pre-sales have an important role, but it's smaller, and retailers and department stores are betting on the replenishment throughout the season, and we are positioning ourselves for that purpose. In addition to that, we are creating new fashion clients. We have mapped, for example, here anthropology, among others, and we are positioning the brand with important executions just as we have in the successful results in Europe. With the portfolio adjusted to this retail U.S. calendar -- U.S. retail calendar. So we're going to have more frequent drops and better opportunities for execution at the point of sales in our B2B. This is a quick update. I'm going to be available to give you more details in case you have any questions. As for Rothy's, we had a fourth quarter, growing 10% the net revenue, which reached $54 million, we had investments of. [ Audio Gap ] this is connected strictly to marketing. We ran a brand campaign in the second quarter. As such, you have a market share gain and you have long-lasting effect. And we also have a cost of acquisition of consumers more productive allowing us to have a better return with the same dollar we spend and also seeing our same-store sales advancing also being positive in double digits. Therefore, investments are also focused on continuing our expansion, responsible expansion -- expansion of our own physical stores, which is very important for Rothy's ecosystem. As such, our path to profitability advances at an EBITDA of BRL 3 million. And there is this commitment of path to profitability is already inside and our model for Rothy's, and here I break it down into more details on net revenue that reached BRL 183 million, which was above pre-COVID numbers. Total number of customers giving the high recurrency of consumers. More than 40% of our clients come back to purchase again another pair, and our OTP of 18 months also is very healthy. So we are reaching nearly 3 million clients, and it's important to show this evolution. This is below what we expected, but it's an important indicator and it's an important step for the path to profitability strategy. The evolution of the gross profit is already at 2.1%. And we also saw many challenges for Rothy's, and we are working together with Rothy's team to capitalize on all of the strengths. So once again, the investments in the year for market mainly in stores, our own stores increased, which we needed to have to see this recovery in growth, and here is also the new bases. We have 2 important additions to the team for Rothy's team, a new Chief Marketing Officer and a Chief Merchandising Officer who were hired. Those are top talents from the retail industry in the U.S. And we are soon to see effects of this new leadership at Rothy's. Here I'm going to have Rafael here to explain to you the gross profit figures.

Thank you very much, Beto. I'm going to explain to you guys the main lines of our P&L, starting with the gross profit. And here, speaking of Havaianas only, we reached BRL 144 million in gross profit in the fourth quarter, pretty much stable compared to the fourth quarter 2021, but with a decrease of 4% in Brazil and a growth of -- in the gross profit of 70% in the international markets. When we look at the gross margin, we had BRL 40.9 million which is a decrease of 2.2 percentage points in Brazil, 39.3%, which is a liquidity of almost 3 percental points in the international markets, 48.7%, which is a decrease of 0.6 percentage points in the Havaianas international business. I think it's important to mention here on the right side of this slide, what contributed to this decrease in the gross margin in Brazil. So we have a positive net effect in our gross profits coming from the adjustments of the price points per pair and the decrease in volume. These impacts, the cost per pair impacted BRL 58 million, our gross margin and also an increase of BRL 36 million in our manufacturing expenses compared to the previous quarter. And out of those BRL 28 million are related to additional costs we had in this quarter specifically for write-offs and additional hiring of distribution centers. As Beto said, it is a consequence of this decreasing the demand and volume in Brazil, which was expected, what we had expected. So we had a higher inventory than we had foreseen, we had forecasted and that allowed us to incur into those write-offs of finished products and in additional hiring of external distribution centers. And this is connected very much to our technology of transfer of our prints, which has defined useful life. [indiscernible]. If we adjust those BRL 29 million, our gross margin would have been up 42.5%, a little bit higher than the numbers for the last year of BRL 41.9 million. Going to our EBITDA -- recurring EBITDA, we had a decrease of BRL 46 million. This can be explained for what happened to the gross profit and also the growth in SG&A. When you look at the SG&A, recurring SG&A, it grew 9%. So actually, it's not a very expressive growth. But since our revenue grew below this value, this ended up impacting our EBITDA margin, inside the recurring SG&A of 9%, we have a few restraining factors, especially in the EDD where we made the provision of BRL 6.7 million by specific clients, as we said in the opening of the release, we had an increase in the marketing expenses, but also increase the recurring SG&A. On the other hand, the D&A decreased year-over-year in the fourth quarter. In the next slide, I'm going to explain the extraordinary items that we mentioned before for the fourth quarter 2022. Remember that we classified as extraordinary items to our results only what was related to the commercial areas. So we had BRL 40.6 million in write-offs for the U.S.A. and China markets related to this accumulation of inventory and redefinition of the inventory models because of the issues we had with Amazon in the U.S. So this impacted our CPV, our costs, in the extraordinary expenses that added up to BRL 65.5 million. We had amounts related to the restructuring, implemented at the end of the year in EMEA and APAC. As you know, we changed the leadership for this region. There was a simplification in our leadership report. We removed it one layer to get to the head closer to the operations. And there is some cost here with the layoffs of our personnel due to the simplification of this structure and also restructuring of outsourced partners. This is connected to the restructuring of our shared services center. We had a shared service center that was outsourced, and we are closing this model, and we are bringing these activities in-house now, and this has resulted in some one-off expenses related to this movement. Inside these other line others of BRL 15.9 million, we had the closing of the satellite factories inside of the ILEP. We closed the factories that were the least productive since we are advanced with the ILEP program in our manufactories, we have this one-off expenses related to the lay off of a part of the personnel that were located in those satellite factories that have been closed. And that way we reach our recurring EBITDA of BRL 152.6 million, and we reached BRL 147.2 million, which is recurring Havaianas EBITDA, which we saw in the previous slide. Now moving on to the EBIT. Our recurring operational profit -- we had a recurring operational profit of BRL 110 million in the fourth quarter 2022 compared to BRL 144 million in the fourth quarter 2021. Here, this can be explained by the smallest -- the negative variation of BRL 27 million EBITDA and depreciation and amortization of BRL 7 million in depreciation and amortization, and we -- this is how we explain this decreasing recurring operational profit for Alpargatas as a whole. Moving on to our consolidated profit for continued operations, we had an impact of the extraordinary nonoperational factors, those adding up to BRL 106 million. In addition to that other numbers that totalized at BRL 17 million and BRL 35 billion, reaching a minus BRL 21 million in our consolidated continued operations. Now speaking to Alpargatas consolidated. We closed December with BRL 612 million of net debt consumption of cash of BRL 1.028 billion in the year, much explained because of the fluctuation in the working capital, I'm going to go into more details of that on the next slide. So we had a variation of BRL 177 million in the working capital and this BRL 701 million in CapEx, out of which BRL 60 million are related to the ILEP, our investment is in the ILEP program, ILEP program. Here coming a little bit into our this consumption of working capital, so we bring here the main lines, which is accounts receivable in inventory. Inside that, we had an increase of BRL 361 million, so a consumption of BRL 361 million compared to the fourth quarter 2021. Out of this BRL 361 million, BRL 174 million are explained by -- since we had the debentures [indiscernible] last year, we didn't have the -- needed to have these financials, so we decided to bring it to zero. So this resulted in BRL 176 million. In addition to that, we had an increase of 11 days in the average price of accounts receivables. This is part of our negotiations with our clients for both price and deadlines since we are still having problems with the volume in a challenging in volumes sold. So our expectation is that this is going to be reduced carefully and gradually. So we don't put more pressure on our volumes in Brazil. In addition to that, variation in price and volume, since we have a big adjustment in the price of our products over the year, this impacted in BRL 59 million this line of accounts receivable. Going into inventory, we had an increase of BRL 373 million of overall inventory inside those BRL 373 million, BRL 279 million can be explained by finished products, BRL 84 million explained by raw material. In our finished products, we have an effect, as you know, we have been talking about since the third quarter last year. We have been increasing our strategic inventory in the EMEA region to ensure a better service level than we had in 2022, therefore, generating effect of BRL 42 million because we're anticipating the shipping of merchandise to this region, we have an increase of costs as well. This impacts BRL 93 million our line of inventory. And the difference is given to the decrease in the demand impact, making us accumulate inventory of finished products. Getting back to Beto now, we'll be talking about our priorities for the year 2023, Beto.

Thank you, Rafael. Before opening up for Q&A, I would like to also to bring to you the priorities for the year 2023. So we can also address those during the Q&A. All right. We have 3 large priorities for 2023. Of course, we have the potential for growth, and we're still focused on that, but we are making key choices here. We are going to concentrate in Brazil, both our investments to generate sell-out volume as well as to accelerate our specialized D2C channels, which nowadays, a volume of 30% of our business and in revenue 35%. And clearly, it's a channel that has been growing and we have the potential to generate growth here clearly. The second important point is our international markets. We are making -- we are having very specific choices there of where to invest in terms of geographical locations. So we are going to prioritize Europe and U.S. as well as in the channels we are prioritizing and we are going to prioritize our D2C and our B2B oriented to fashion in those markets. And finally, Rothy's, as said, with a path to profitability growth. Rothy's is showing a very healthy growth in its core products, which is very important, so we can start developing secondary men's and accessory categories. All of that is still with a very good in the path to profitability. I think the additional points are in the next few pillars. We are with the strong actions of simplification. What does that mean? In the last 2 years, given the accelerated rate of growth that we had and the needs of the business to be structured for our strategy, for our future strategy, we made investments and we financed with growth rates. So in this moment, we feel that we shouldn't stop investing. We will continue investing in the mid and long term, but look at our costs, both in SG&A. In our manufacturing expenses, and corporate expenses and find reductions through simplification. What does that mean? We're going to cut off a few projects, eliminate activities, and this is going to result in an opportunity for simplification of our operations. We have already implemented a simplification in the EMEA and APAC regions. As you remember, we eliminated the international areas. So nowadays, we have North American Caribbean in EMEA and APAC are only BMU, we are calling EA Europe, Asia and Africa, and we have LATAM under Ana Bogus, who is in charge of the BME Brazil. EMEA and APAC, where we had several layers, which were historically built with general managers and structures in different countries. In APAC itself, we did there a work of eliminating layers and we got closer to our clients -- we became closer to our clients. We put more focus on our D2C and also on our area of operational excellence for our commercial management. This has already been communicated, implemented, and this is already being deployed very now in this year. These generate savings, but mainly, we want to be close to the market. That's what we're looking for. And secondly, we are attacking 2 important cost centers in our SG&A. We are recalibrating our operational expenses in Brazil. Looking at how we distribute our resources for go-to-market. We are attacking our variables and sales expenses. Here, there is some important numbers such as freight and commissions that we pay. And we are also looking into the corporate areas with the reduction of our SG&A. It's important to highlighted that with the business of other businesses, Argentina, Mizuno, Osklen, we still have an important job that has not been done yet, and it has to be done of capture -- of actually eliminating. This has already been mapping -- mapped, and we are going to execute to this plan. In addition to that, what we need to do is to have a reduction of complexity that helps in our work of efficiency. Efficiency is an important agenda. If you look since 2018, the line that goes up the most is in the manufacturing in our CPV, it's in our manufacturing expenses, and we believe that with the investments, especially over the last few years in automation and in gains and improvement of our machinery, now it's time to capture higher levels of manufacturing productivity. We are attacking inefficiencies. In other words, workforce to produce the same number of pairs. We have to gain productivity, and we closed it in January, we closed our biggest factory in Alagoa Nova, 900 employees. This satellite store was -- factory was closed. We are concentrating and gaining efficiency. We are accelerating this agenda right now with the arrival of Gabriel in the company, and we are attacking the lines that are not directly connected to production. In other words, direct workforce and also overall expenses connected to manufacturing and manufacturing industrial expenses. We had this extraordinary costs. The biggest restraint for our industrial operations was our transfer line of products. There is a technology that has a shelf life, which is smaller. We're going to eliminate this technology by replacing it to direct printing. So we already have 2 machines -- 2 pieces of machine. So we gain productivity, and we eliminated those losses through the -- that we have through the write-offs of finished goods that have a short shelf life. In addition to that, another thing that is in line of the implemented is the elimination of those external warehouse -- extra warehouses because we are going to have a better systems to calibrate the demand and to react quickly, to demand fluctuation as well with the opening of our mixing center that will reduce those expenses, and also our write-offs of inventory in U.S.A. and China also reduces expenses with the inventory. And that was fundamental to be done, so we can have this more efficient basis. And in addition to that, we have a very strong focus on extracting the gains from the ILEP program, both benefiting from the COGS, cost of goods sold as well as in the working capital. As you saw in Rafael's presentation, there was an increase in the level of our inventory. And nowadays, we have an important program of reducing. I'm sorry if we are a little bit longer than we should have taken, but I would like to open it now for our Q&A session.

[Operator Instructions] So the first person is [ Daniela ] from [ XP ].

Good morning, everyone. Thank you for your presentation. It was very clear I have 2 questions. The first one maybe a little bit connected to the initiatives that you presented to us, Beto, about the adjustments that you are working on, looking at this, trying to bring this mid- and long-term sustainability and growth. I'd like to understand how we can think of that over time. Rafael, when you said that there are some gradual adjustments, that has some adjustments that need to be carried out over time. So adjustment of inventory, do you foresee any other kind of adjustments to come in the future? Or are you -- have you extinguished all adjustments and you have to stabilized the levels of the inventory or this part of efficiency gains, what is the time frame that you think you can actually adjust to the company? And then I would go into the point of the workforce. You have had this change of Julian being replaced by Andrea and this came after several other adjustments in the structure, so I also would like to understand if we can see any other changes on the people employed by the company. And also my second question is associated much more to a short term. In terms of investments to the grocery channel, it's very clear, Beto, that this is a thing that is much outside your control since the macro effect is actually affecting the disposable income of consumers. So it's not easy for you because people have to have a trade-off between buying food at the grocery store or buying flip flops there. So for me, it's not clear if investing marketing in this moment is going, in fact, to generate effect, thinking of this shortening of the disposable income of Brazilian consumers. So I'd like to understand a little bit how you are thinking about to this market investment to accelerate this grocery chat, especially because you were actually marketing -- gaining market share, so we were outperforming the competition, even though we were losing because of the macroeconomic context in Brazil.

Thank you, [ Dani ] for your question. Excellent questions, all of them. So I think the first question is much connected to understanding how the sequence will happen of the simplification and efficiency cycles. Our program is solid, robust and complete. Many of the actions are already ongoing. So I have mentioned a few of them. If you consider the restraining factors that happened in the second quarter -- in the second half of '22, which generated the negative results in the fourth quarter -- the external distribution centers, the outsourced distribution centers are one example. We are reducing those. And I think that after this second quarter, this should be normalized. I wish this was made overnight. But unfortunately, there is a whole process. So we don't compromise the service levels in our operations. We have already reduced it. We started January with last warehouses, external warehouses hired, but we also -- of course, we have to accompany the increase in sales. So it's a sequence that we should start to see in the second quarter -- in the second half of the year this reduction and the mixing center gaining more prominence and also gaining and adding to these efficiencies. So we are in this phase of ramp-up of our mixing center in Northeast and Brazil. It's happening right now. And it is -- has already started in January. So we started operating the mixing center in January, this is going to be gradual. The same of the transfer technology to direct printing technology, this doesn't happen overnight, and we cannot eliminate totally quickly. However, we already have some locks in the manufacturing. We have revised all the policy of inventories for our raw material. And we have added a few locks in the system. We lowered the levels that trigger purchase of raw materials, so we can be more restrictive and increase in lower levels. Today, the investments we have made and considering the capacity we have, we believe and can do that without actually undermining our service level. There is always this balance between service level and inventory. Remember that until last year, we worked with this scenario of lack of capacity for productivity. Now the change kind of inverted and changed it for the best, now we have this capacity of good service levels in EMEA and in APAC, this has been already implemented. We start out the year. We entered the year with programs of hiring. We closed the factory in the city of Alagoa Nova, all of these restructurings in EMEA and APAC, and now we are going deeper and eliminate activities. There is going to be an important role of the improvement of the processes. We see opportunities. This is a company that grew its cost at the bottom line. So this is a good news. We have some fat to be cut down, and there's -- we are going to do that through phases. So there is a first stage in the first quarter -- in the first half of the year. And then we are going to advance more in this agenda. I'm going to talk to you a little bit more about the succession of our CFO. Andrea has a very important expertise. I'm going to talk about this further in the future. But it's going to be one of the roles of Andrea to look into this to cut about BRL 2 billion in expenses through our OBZ product -- OBZ project. So Gabriel also who was hired is leading the manufacturing with this perspective. So again, the adjustments will happen gradually. We are positioned to make this happen gradually. We have the support of a consulting company that is delivering a good and important work to help us understand the effect to these measures we will have. I don't think this program will stop in 2023. I think we will go enter 2024 with this. We saw a large opportunity inside the company to attack this baseline of costs and to have more efficient processes. In terms of workforce of personnel, if you look at the last 15 months, we had about 40% of the executive team being new positions or new people in those positions. It's higher than I wish it was. However, there are 2 ways to look at that. It's necessary because the scenario of the company -- the conditions of the company have changed it. And I think the mistake we could make here is to believe that doing the same things I did over the past years will generate different results in a landscape that is going to generate an agenda of simplification and gaining efficiency -- gains of efficiency. So the measures we took in this concerning employees was aiming at this new scenario. It's not the idea in terms of change and the stability of the team, but it's in favor of the growth of our company to generate more working capital. It's not as simple -- these changes are not simple, but I think they are necessary. I think to try to do what we did and to be accommodated being the growth rates. Havaianas now is 50% larger than it was in 2018. So now we have to conceive a plan to balance this out. In terms of the succession, the arrival of Gabriel and Andrea, I want to focus on the stability of the team and mainly as any team that has new people in new positions, do we need to play as one and to work cooperatively as much as we can. Julian had a very important fundamental participation in the restructuring of our businesses in supporting all of this agenda of growth. I am very thankful to his work. And it's an unfortunate coincidence that he has a problem -- a health problem, a health issue in his family. He is going to be available to you. He's going to support us in this hand over to Andrea, and Andrea arrived with very clear goals. The first one is to restrengthen our processes, including Investor Relations area, to increase our efficiencies and also look into the allocation of capital. There is a lot of opportunities for our working capital. There is a lot of opportunity in our cash generation, flow -- cash flow generation. And we think this can add value, and we can invest for the purpose. Now we have the infrastructure to make this happen. So Andrea comes onboard in this important moment. Maybe 3 or 4 moments, his expertise would be less relevant. Nowadays, it's fundamental, and we see that being applied in the mid- to long-term. He's very excited because to join us after this successful career that he has. So he certainly would like to make a difference for Havaianas and have another successful cycle following this successful cycle he's closing right now in his career. We are very glad to see a person of this level raising our company. And Gabriel, who arrived in the end of October, beginning of November last year, has a very quick understanding, had a quick grasp of how our factories work, connecting to our factory employees, and he is already attacking all of these constraining factors that we show to you. I understand you're concerned, but we're going to stabilize the team. And this is a team that is much more prepared to this team, to this landscape of -- a challenging landscape of macroeconomic challenges. And I want to go one step back, 50% of our sell-out is through imports. Therefore, we rely on investments on marketing and activation at point of sale. And 50% of our sell-out is planned. And we have been running since August and September, a model to understand econometric model in Brazil. So we already know, for instance, that our revenue -- that the revenue of customers who go to the grocery channel is key to be successful in this channel. However, the climate is also impactful. For example, in October and November, we were impacted because of the climate effects we had. And inside of this econometric model, we also found out that we have a very important work of activating products through marketing. Again, why? Because people purchase out of the imports. People react, and we have studies to allocate our investments. People react to a best positioning of the displays at the stores and a good architecturing of the price points at the grocery channel -- in the grocery channel. So as crazy as it might sound, our distribution in the grocery channel is of -- still of 33%. We grew 2% or 3%, and we still have opportunities. Our numerical distribution of 33% where the brand can influence 50% of the purchase decision is a very important factor. Another important point is that we still lose sales because of the stock out. Having said all of that, we are measuring and controlling all of that weekly in the grocery channels. And what we saw is that this increase in investments has already increased the point -- the sales per point of sale which has already reached the level of 2022 -- 2021. So we see this recovery. And of course, with a bigger distribution system, you increase the revenue. In the specialized shoe stores, which is already 33% of the revenue depends on market investments or investment in the marketing of the brand. So there is not much to be saved here in terms of investments. Our thesis here is that saving in marketing here is not a good idea because our main problem is sell-out and sell-through. If I said, if we had the sell-out and sell-through, moving those pointers to positive numbers, we're going to have a rebound effect, so this fundamental we have to gain efficiency in the other lines of the P&L. So this is a new reality we are facing right now. We are going to have this reallocation of resources, and we have to invest. We cannot go without investing. This company has a very strong pillar, the health of its brand. So let's use it. One big point is that we are going to try to find savings where we have fat to be cut and generate competitive advantage for us. Thank you, Danny, for your question.

The next question is from João Soares, Citibank.

I think Danny mentioned 2 important points. I would like to explore a little bit further this matter of pricing. Beto, it's clear that there are no positioning -- no change in the positioning of the pricing of your company, and you're attacking the issues of demand and volume via marketing strategy, which is very well resolved with this econometric model, you mentioned. But it's important to mention here, Beto, you don't have to go into too many details, but the timing is important to have an idea. As an analyst, it's important for me to understand, to better draw up the situation of the company. When should we see this improvement in sell-out? And consequently, when should there be an improvement in the selling since those inventories have been sold. And also, there is also the issue of efficiency that should kick up even sooner than we imagine, right? So Beto, is this important like about the timing, the deadline or forecast of time? And the second question that I have, it's about cash flow. We saw a challenging year. As Rafael mentioned, there was a very challenging year in the working capital aspect of the business, but it seems to be very depending on demand, both for the receivables and for the inventory. So 2023 shall still be a challenging year. So I'd like you to share what do you expect for the cash flow generation in 2023?