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

Good morning, everybody. Welcome to our Alpargatas videoconference for the results concerning the second quarter of 2023. Today, we have with us Luiz Edmond, our CEO; and Andre Natal, our CFO. This videoconference is being recorded and translated simultaneously into English language. The Q&A will be made this way. After the finishing of the first presentation, we would like you who want to make a question, raise your hand in the Zoom bar and wait with your microphones closed until you are addressed to ask your question. Before continuing, I'd like to make sure that any forward-looking statements that may be made, or projections or targets are only beliefs, premises of the Board of the company with -- based on information that are available currently. I'd like to now give the floor to Luiz, who will start our videoconference. Luiz, you can start, please.

Thank you very much, Rafael. Good morning, everybody, and welcome. Over the last 4 months, we started a process of turnaround of Alpargatas. Unfortunately, the results of the quarter remain bad and poor, but they are a reflex of the adjustment -- short-term adjustments we are making, starting with the correction in the levels of inventory in the whole chain. Andre will talk a little bit more about that in his presentation. And the impact that this should have in our results and this has had in our results. We had a complete diagnosis of the main process of the company, looking at the evolution of the performance over the last years, with the aim of simplifying operations. We have defined a few priorities for the short term, which will start generating results in the next quarters. And mainly, initiatives that will make the company be better prepared to generate sustainable growth over the next years. I'll give you a few examples today of that. We have prioritized initiatives that have a direct impact on our cash flow. For example, orders to actually reactivate sell-out and to be more competitive in some points and where we lost competitiveness over the latest price increases. We managed to stabilize our market share. Even though we are below our peak over the past years, we are still well above the history -- historical level pre-COVID. We have detailed visibility of the entire inventory -- the entire inventory in the whole chain, making adjustments to the policies of the inventory to avoid the recurrence of these issue in the future. The reduction of inventory will allow a better optimization of the logistics costs, our [ resignation ] costs and transportation costs. Immediate adjustments of some structures that affect our overhead and our manufacturing capacity aligned with the revisions being made. Overall revision of the CapEx, aiming at a bigger increase of cash flow and better return on investments, given the higher cost of capital that we have right now. In light of this complexity, we have started a complete revision of the portfolio and the structure, aiming at the optimization of the top line, incrementality, reduction of SKUs and building of our brand. We are going to do more -- but less but bigger innovations in the future, piloting first and -- scaling up first if we believe there is a real potential to be something relevant inside the company. Through the rewire process that we are conducting, we are redesigning the SNOP, sales and operations processes, which are the basis for our plans for purchasing, manufacturing and distribution and storage with a better end-to-end management. Improvements in this process will generate meaningful savings with the elimination of the losses we have been facing with write-offs for the products, finished products and raw materials. Over the next months, in addition to giving continuity to the initiatives already ongoing, we will include more, such as the launch of a new two product that replaces another one with higher quality, higher margin, and which will be more competitive in the segments of lower price. We are relaunching the OBZ with that -- with clear objectives of capture of expenses reduction, visibility of the rentability of our portfolio per channel, per country, per segment, and products focused on our resources, and not spread too much our resources all over and not becoming relevant in several of the markets where we are. Relaunch of the business cycle, revisiting the strategic priorities of the company for the next 5 years, leveraging the recent learnings. We are developing a growth model for Havaianas, introducing markets, adequating portfolio, the go-to-market and the investments level to give support to the growth level that we expect. We are also having a deep dive in the international markets, especially in the U.S. and in Europe. This week, I will be in Europe with our team to follow up the evolution of the business and the priorities we have to address, with a special focus on the improvement of our operational efficiency. Something that, once again, was not as we had expected this year, or specifically, in the summer. In summary, we have several opportunities for improvement in the short and long terms. A lot of work ahead of us, and also the certainty that we have a team that is aligned to those priorities and willing to undergo these transformations. Results will come with time -- over time, with -- being certain that we are in the right path, we have to be patient and have the determination and discipline to make it happen. Now I give the word to Andre, who is going to go a little bit more in detail into our results.

It's on -- now Andre. Well, good morning, everybody. Good morning, Luiz. Good morning, everybody. Speaking a little bit about our results. I would like to say that, obviously, since the last quarter, the last release we had, we -- we made a deep dive into the diagnosis of the results of the company. And looking at the results, we need to understand that it is still a hard result, and we don't see any new reasons. So it's the same root cause as we had already discussed it previously with the market. I'm going to try to explore the consequences that have been, I think, the profits and losses of the results for this quarter. But it's important to reemphasize that we are in the cycle of adjustments. As Luiz mentioned, there is a time for implementing those measures. They are ongoing right now. And in fact, we do need to be patient so that these measures can demonstrate and translate into better numbers in a more visible way. I would like to emphasize one important thing, which is this EBITDA margin contraction. We tried to explain this in larger blocks in the less opportunity and the contraction of the EBITDA we see in this quarter compared to 1 year ago is 60% explained by this economy of scale. And on the next slides, I will try to explore a little bit more this explanation, which is on the backstage of these results, but this is a result we understand should be temporary. So the actions in time should, over the next quarters, eliminate this reason, and we should recover the size of the operations that we had before. 25% of this EBITDA contraction is about efficiency itself, which is also an issue being addressed right now, and I will also be talking a little bit about that throughout the call, which involves the contraction of expenses. The expenses over the years were -- was incompatible to the growth of our sales volumes, which means that we need to make important adjustments. We are right now studying those opportunities for simplification and centralization that we are going to explore throughout this presentation as well. Obviously, we also have no recurring effect that throughout the release and especially in the management's notice, to give a little bit more -- to cast little bit more of light over that so the market can understand and adjust the share prices as it is relevant. But about 30% of the EBITDA contractions are of recurring. No recurring. So moving on to this slide. We created it to show you in a very simple way, everything that happened concerning the volumes and its reflexes in our inventory levels and the inventory levels throughout our chain. And this is a highlight, because the biggest part of the effect we see directly or indirectly affecting our profits and losses is based on the volumes that we see here represented in these different breakdowns. On the top, you can see very simply, our business cycles. So the purchase of raw material, production sell-in and sell-out in the channels that we are being indirectly represented. This is the sell-in, and they are going to sell to the final consumer, which is the sell-out. Also part of this sell-out is made by us directly to -- in the consumers. And on the lower part, we see that between the connections of these chains on the top, there is some inventory that's going to suffer variation, based on the dynamics that the forces that are in operation at the top items. The first one I would like to emphasize is a minus 3% in the sellout. The market as a whole, we understand that even though there is not very accurate and very comprehensive data for all the segments and all the channels, we do believe and there is a strong evidence in the channels where we can have a good reading that to the market as a whole is performing in a not very healthy manner in this first half of the year. This is our year-to-date, by the way, figures. And this is the sellout that we estimate for Havaianas to our end consumers. So this performance of minus 3 percentage points, when we go to the previous chain item, we see that there is a minus 70% in selling. The difference between those two numbers is what you have in the lower layer, which is a contraction in the chain of about 17%, which is what we estimate for this year to date. This represents about a little bit more than 10 million pairs in the estimates we have. This is a cycle that is already ongoing. We mentioned it being the first quarter of the year. And this graph at the bottom represent -- shows that this cycle of adjustments is starting the first quarter and continues in the second quarter. This cycle results from a market performance. That was not very good, but this is when you look at the market because of the economic performance overall in the market, but also because of larger inventory levels that we should have had in the past. But now we are in this process of reduction of inventory in all of the chains of debt that we have. When we break this down, what I -- it's not on the slide, but what you can see is that even in the retail, both in the two chains, have shown loss of levels of inventory over this period. What we can see in this graph at the bottom is that it's hard to tell accurately when this cycle of adjustments is going to be over. But it seems to be -- most of the adjustments to be made seems to have been already made. We have figures evidenced that we are much closer than we were in the last quarter to the end of this adjustment cycle in the inventory levels. And this is a very important variable for the forces that we understand that are going to be working in the second half of the year, which means that as the cycle of adjustment is over we should see the sell-in block to be much closer to this allowed figure. In other words, our performance, once normalized inventory levels in the entire chain, we should see this volume performance, which is going to, at the end of the day, directly hit our P&L. This green block should converge to the average sell-out performance. Of course, we have all the variations and all the initiatives that we're making to make sure that our sellout is going to grow, and we have evidence that -- and readings from survey and research that says that we have an instability of our market share. Even though year-over-year, we see a very small variation compared to the peak of the market share we saw during the epidemic. But it's still a market share that is above our pre-pandemic levels and our historic levels. So it's a market share level today is inside instability. So this sell-out performance is not totally disconnected to what the market has been living over time, at least in the channels that we can see. The most important forces here is that this adjustment of inventory levels are very close to being concluded. It's hard to be totally accurate about how many months we are going to have in this decrease of inventories, but our sell-in should be navigating much closer to our sellout levels, and this should be translated into new effects into our chain. Direct and indirect volume increase should be seen from now on and in the next months and somehow reflect all of our other figures. Looking at the left side of this screen, we see that we had a very important adjustment in production. Year-over-year was a little bit higher than the adjustment that we saw in the sell-in, especially at the beginning of the year, as you can see in this blue graph at the bottom. We still had an accumulation of the finished products in the inventory, and up to June, we opened that information to you, a breakdown from month-to-month, so you can understand our results and everything that's happening in the company. Up to June, from December last year to June, we see that this inventory level of finished goods is going toward instability. When we look behind -- as for the raw material, we had a very strong and very meaningful and relevant adjustment. It's important to say that's a bit -- the manufacturing adjustment is minus 23%. And over the last month, it has been even stronger. And this is what has made this inventory of finished products to go to a stability, even showing some decrease, but the effective decrease of this inventory, this is what we forecast internally. This is much more connected to a better performance of the sell-in that should be connected to this chain adjustments. So this is an adjustment that's going to work backwards here in this line that you can see. And in the raw material, we also have a very strong adjustment very early at the beginning of the year. In the first months of the years, you can see we had very high -- an elevated level of raw material inventory at the end of last year. And this obviously -- and this, combined with a decrease in manufacturing that was not immediate in the beginning of the year, led us to a contraction in the level of our raw material inventory. So this has a positive and negative aspects. Positively, we can say that this helps to free up working capital, we would be talking a little bit more about that during the Q&A. But there is also a negative impact, because this is going to hold back a little bit our capacity to recognizing the COGS level, the effect of the raw material decrease prices. The raw materials are being consumed, and they are at about 20% smaller than we used to see in the last quarter of last year when we accumulated the majority of this inventory. So the fact that nowadays, we are buying much less than we used to buy in the past, in that moment, makes us take more time to recycle this raw material inventory and to have a better and more competitive price. But our purchase levels today are much inferior to what we used to have. This business cycle explains very well not only our working capital fluctuation, but also -- as the graph on the right of the slide normalizes completely, we should also see this blue graph go down. And then we are going to see all of this inventory, new inventory coming into the sales, and our production costs are going to decrease compared to the costs for the manufacturing we see that now in our inventory. So there's a little bit of the forces that you see here on this slide. And on the next slide, I'd like to emphasize -- that this decrease, looking at the quarter specifically, this volume decrease is quite severe. You can see there was a decrease of 20% of volume. This is what is affecting us directly and indirectly at our bottom line and net revenue decrease of about 13% and net sales. But as I had already mentioned to you, in the first quarter, the sell-out has been close to zero in the first quarter 2023, which suggested a recovery movement, but the performance in the second quarter was still below what we expected and desired. And these obviously showed all of this cascading that you can see, even with all of the investments and the adjustments in the production capacity and in the raw material inventory. This didn't allow us to drain all of -- bring out all of the inventory that -- the high levels of inventory we used to have -- we had at that moment, and we would have -- would like to have depleted so far. If you look at this level of the inventory, we can see from December to June 2023, on 100 basis, the trend that we see is that there was an increased trend at the beginning of the year. But then in February, we started this adjustment cycle of our internal inventories, both of finished products and raw material for production. So we already see a small effect of the inventory levels of finished products. And do we understand this trend in the finished products is going to accelerate in the second half of the year? And the entire cycle is actually realized that we planned for the sellout and making sure that we make all of our sales against our inventory. We should have the cycle accelerating up to the end of the year, starting in the second half. Now looking at international sales. We also saw a decrease in the international sales. There was a year-over-year decrease of minus 27%. Performance here is much below that we saw last year and what we planned for this year. We have already talked about this topic. We don't have a new reason to explain. This is an unfolding of the same operational problems that we had in the shipping, delivery and operational executions for the European market, which led us to delay. There is a series of details here in these operational issues, but as a practice, the commercial consequences that we delayed our -- our orders, and we were not able to fulfill all of the orders that have been placed, which led us to have a cancellation -- a relevant cancellation of orders that had already been made. So there is, of course, a downside, because the consequence is that we lost the sales we had already made. But looking at the half full glass is that we did not actually lose demand for the products. It was mainly and moreover an operational issue. Of course, we have to make sure this won't happen again. But there is also this initiative of changing our logistic partner. There was a migration of the logistic partners. So now we think we have a better development. So we now have the best development of the SOP -- SNOP in Brazil to better coordinate with the operational cycle in Europe to make sure that we here in Brazil follow exactly what needs to be done to facilitate the fulfillment in sales in Europe. So there are a number of items being discussed, so this one won't be repeated again. But the concrete fact of this operational struggle is this shortage of 27% in our volume year-over-year. In the U.S., we still see a very challenging market. And in the second quarter, particularly with the different driving forces that we saw in the first quarter that we discussed here, there was an important development of the off-price market in the U.S. in the first quarter. There was a contraction of the wholesale markets. And we see a very good development of the volume, better than we expected. However, with the average price that compensated this effect because it was more of a discounted product market in the first quarter than we had predicted. In the second quarter, we have different driving forces, as I said. We have less representative of this off-price market. But on the other hand, a higher acceleration. And the start of results more concrete from the actions that we have been taking, thinking of the electronic -- the online operations of Havaianas in the United States. So about 18% of this, our volume came from these online operations. And with month-over-month performance in June, we saw a very strong acceleration when we look at the online sales. Again, a result of our actions on this topic. When we look at the distributors, markets -- speaking mainly of Asia and LATAM. Once again, we see the same reasons that we had mentioned and consequences of higher inventory levels that were created at the end of last year that still have not reached normalization, and there was a contraction of volume in this market, which was also relevant. Moving on to the last slide I have for you. I would like to go back a little bit to the driving forces. And now that I have shown the numbers, I'd like to discuss a little bit more, the direct and implications -- direct and indirect implications, and in fact -- and also some of the actions that we have already started mentioned, which are ongoing or will be implemented shortly over the next weeks or months. Maybe the most important impacting forward, the results is this disconnection between sell-in and sellout. This is not exactly a performance that calls the attention that much in the sellout, but certainly very disconnected between sell-in and sellout because of this lack of inventory in the channel. And this has made us -- this has taken us to make adjustments to our manufacturing capacities. And when we look at the factories and when we look at the production costs in the lines, we see clearly the start of the effect of the decreasing the raw material costs, but it is still being overcompensated by the fixed costs. Even though we have reduced our fixed costs, it's still above the levels it should be. So one compensates -- there is a delay in recycling all of our inventory. It also makes it hard for us to see this contraction of the COGS and should be -- this should be reflected in our P&L pair price. The production cost is of the same mix sold, not exactly the same produced -- manufactured, but the same product sold, so we're going to have basis for comparison in our COGS. We already see the contraction in the cost of production, even with those effects that I mentioned before. But obviously, as we recycle our inventory and the effect of the lower cost of raw materials is start to be seen in those costs, manufacturing costs and together with the increase of the volume growth, the sell-in and sellout should be more equivalent. These effects of the dilution of the fixed costs will be seen more evidently. And we will see a contraction in our COGS per pair. Obviously, we also have indirect effects of this disconnection between sell-in and sellout numbers, which are going to reach our storage costs. We still have a very relevant inventory level, and there was a lot of -- of these costs this year were due to the external inventory costs. We see this being reduced but [there is still] a high level in the first half of the year. And inside the projections that we have nowadays, given the expectations we have of contracting our inventory -- in-house inventories level, we should see as well, the expenses level should decrease as well compared to what we have nowadays, considering external storage costs. When you look at another indirect effect of this compensation between sell-out and sell-in is the write-off costs. It's obviously a consequence, because as we have too much inventory and this inventory is not recycled, we start to have struggles related to the durability of the raw material and the -- and [span] life of our products and inventory. This write-off is higher than the historical numbers of the company. We understand that, but we cannot avoid it completely given the size of inventory that has been built and accumulated over the last years of -- last month of last year, especially. There is also another effect, which is not exactly directly connected to the sell-in, sellout this compass, but which is connected to the structure that we allowed to happen in terms of costs. I'm talking about SG&A costs. So there is structures. There are IT consultancy costs, all sorts of costs that in this front, that will be attacked through the OBZ program, which also has an important effect. It explains for -- it accounts for about 25% of the EBITDA decrease in the quarter. And obviously, there is a potential there to be addressed. And this is not connected to the selling. It's allowed, so it doesn't depend on us. It's much more connected to internal actions. And these are very clear leverage is that we can leverage -- that we can put into movement. We have already started a cycle of simplification of our portfolio. Obviously, we cannot go through the entire cycle of lowering our inventory levels if we don't simplify our portfolio. So possibly in 1 or 2 years, we would go back to the same situation of inventory, given that the complexity of inventory has increased a lot over the next -- the less than 90 days. It was very clear and visible to us how much the complexity of portfolio produces other implications for the business that had not been foreseen, considering the levels of what we had predicted to sell and what we actually sold. This is a structuring measure, and this is -- will be in the background of our actions over the next months, so we can have positive unfolding of those simplification of portfolio and its results being unfolded in the next year. Of course, there is another important topic is the simplification of the structure, given the perspective we have of growth of volume. That was part of the plans of the company. Over the last years, we grew in cost, we grew in structure, and this implied in higher expenses. And this has proven to be incompatible to our sales, volume sales growth. So the SG&A has shown itself incompatible. So our SG&A grew 24% year-over-year. So it was an increase of the structure, which was quite relevant. And we are working hard on that right now. We are taking some severe measures to attack that. And looking ahead of us, we already have a consultancy company engaged in this kind of measures. And we already have a prediagnosis that you can see here at the bottom of the slide, where we see both based on benchmarks studies and also of the historical evolution of our expenses line by line, we can see already a size -- not exactly an accurate, detailed plan of how these adjustments are going to be made. But certainly, we can measure the size of the opportunity for reduction of expenses, which is between BRL 80 million and BRL 120 million for the annualized costs and expenses. This is a work that is just being started. So this is a prediagnosis only. And this is the work of about -- that it should last of about 15 weeks. And this is what -- how much it should last. And over this period, we should be detailing -- having a detailed breakdown of the lines and actions that should lead to this compression of costs of between BRL 80 million to BRL 120 million. Obviously, as this takes some time, we are in movement right now, and we have already started a cycle of adjustments. So what we had in terms of discretionary expenses that could be frozen or discarded more immediately -- were made. So obviously, in the results of this quarter that we are releasing right now, there is very little or almost nothing of those initiatives. But some of them are already ongoing. So we have already created a first cycle of internal adjustment that was -- impacted company expenses as well as structures that we identified quickly. And we should see this unfolding over the months, but with very small effect in the short term or in this quarter. But obviously, in the next months, over coming months, we are going to be detailing this detailed plan of the simplification of the structure and the structure. And this is going to result, of course, in the improvement of the operational efficiencies. As I said, we have already made a good adjustment in the manufacturing, but we still don't have the COGS being seen. And this is going to be seen clearly, especially in the operational adjustments we have already performed at the factories and that whose results should be seen from now on. And last, there is a whole set of discussions about operational processes that we have [ adapted and rewired ] internally, which I have already mentioned, which is this a better connection between operational processes in Brazil -- between Brazil and the international markets. But more than that, also in the policies that we should be reactivated or revised the operational policies that are going to result in the necessary adjustments so we don't see the same problem being recurring -- recurrent in the future. We have already started using some predictive models. And we can already see the beginning of this correction -- of this prediction, mistakes that we used to have. Of course, these mistakes in the prediction are partly the explanation of these mistakes we have made of accumulating this very high level of inventory. But it's also about the policy on building inventory, both for raw material and for finished products, so that we can be more -- look at the details and make a better connection between what -- between that and what is being sold. But our desire to sell, but more -- to use more -- our predictive models more based on analytical on the data. This is special, so that we have a more streamlined process with less risk of missing the prediction sales. I think that's it. I think at the end of the day, these are all actions that are ongoing. We also have implemented a few actions that we managed to implement more quickly. We have managed to release some cash flow. I think it's the first time that we have made in the last 13 months. So in other words, in the last 13 months, consecutive months, we have been in the process of consuming our cash. And in this first quarter -- in this last quarter, the second quarter, we started to release our cash, liquidly speaking, even after the investment of CapEx. So this is already connected to the lines that we have already mentioned before. This focus of the company of reducing strongly our inventory, selling against our inventory and in containing our raw materials levels as well. And we have also made another CapEx adjustment -- CapEx level adjustments. There was a variation over the last 10 months, last weeks, paying more attention to the projects that we had ongoing. And we adjusted them and freeze part of the CapEx that was not still compromised, was not addressed to this level of solidity so we could start generating more cash and to hold our leveraging process. So we saw a contraction in the EBITDA because of all the effects I have mentioned. But the cash flow burn level was very small. It was not -- it was not a cash flow that produced this increasing deleveraging. Over the past 3 or 4 months, we had a release of the cash flow, and this has brought some relief to this leveraging. Of course, we have to contain this leveraging of the company. And if all of the cycle that we have described, it happens, sell-in, sellout being equalized and going -- having the COGS level returning, we should release some working capital, and we should have a reduction of deleveraging over the next months to come. Of course, all of these might need some more adjustment, and this could reflect in different adjustments in different -- in a different timing of adjustment. But overall, there is a trend that this is going to happen structurally. And this is how we are conducting our planning from now on. I'm going to ask Rafael now to talk about the numbers in a more detailed manner. And then a [indiscernible] after that, can open for Q&A.

Thank you very much, Andre. I'm going to move on with our gross profit and P&L and detailing of our cash flow, starting with the gross profit and gross margin. And of Havaianas and only Havaianas. In this quarter, we had a gross margin consolidated Brazil international of 41.2%, a decrease of 11.14 percentage points. In Brazil, we saw a negative variation of 12.6%. And internationally speaking, 9.4 percentage points decrease, giving a little bit of -- casting a little bit of -- casting a little bit of light on what explains this decrease in the gross margin. Considering all the adjustments that we are seeing -- we had in Brazil, we can say that about half of this decrease is related to our inefficiency of costs. The other half is related to those additional costs. For instance, the [ RAF ] of raw material in Brazil was BRL 17 million and additional consultancy costs of BRL 12 million, another third-party warehouse of BRL 3 million and other costs of about BRL 1.3 million. In the international operations, we have an increase in fixed storage costs in Europe with this new service provider -- with this logistics partner that we are -- we have engaged with, which accounted for about half of the overall gross margin. So about 4.7 percentage points decrease. And the other half is connected to the production cost impact that we have seen since the second half of last year, moment when we produced a good part of the products that we sold in this quarter in Europe and when we saw a very high cost of production. Going a little bit into expenses. And again, only Havaianas. We saw growth in operational expenses of about 3% in the quarter. In the market, we increased at about 3%. Ex-marketing saw an increase of 7% of expenses, growth of expenses. And our SG&A grew 26%. Inside this [indiscernible] marketing sales expenses that grew 7%. And the biggest contribution were the distribution expenses that represented a BRL 12.5 million increase year-over-year. And also the increase with personnel. So people in the commercial structure in Brazil or outside Brazil. And in addition to that, we had additional costs of BRL 4.9 million related to BRL 4.7 million of clients that asked for judicial recovery. And in the G&A, we had a BRL 12.6 million of impact from the top management employees that have left the company in the second quarter. So generating this impact of BRL 12.6 million in the G&A. If we make this adjustment, if we removed this, our G&A would have grown 1.5% year-over-year and not the 26% that has been indicated. On the other hand, in the line of other expenses, we have the one-off positive impact of BRL 33 million compared to the long-term incentive reversal related to these top management changes that we saw in the second quarter. Moving on to our EBITDA. We go from the total EBITDA Havaianas of the second quarter '22 of BRL 178 million. We have a decrease of BRL 90 million for our EBITDA in the second quarter '23, which is related to all of these forces, driving forces that go through our gross profit. 104 accounts for volume, 86 positive results for the price mix. And obviously, our COGS cost with a negative impact of minus BRL 74 million. And then BRL 81 million, given the EBITDA year-over-year decreased BRL 81 million decrease, reaching the [BRL 7 million ] normalized EBITDA that we see there. On this next slide, we start speaking about Alpargatas' consolidated results. We start here from -- with the BRL 7 million of normalized EBITDA for Havaianas that you saw on the previous slide. We had a negative BRL 2 million of EBITDA for Ioasys, reaching a normalized EBITDA Alpargatas of BRL 5 million positive. And in addition to that, we had extraordinary items mainly related to the closing causes of our two main satellite factories. They added up to minus BRL 30 million and our statutory EBITDA of minus BRL 8 million, so resulting in Alpargatas' normalized EBITDA of BRL 4.8 million. Speaking of our net financial position in the first quarter, here, I'm talking about the evolution only in this quarter. We closed the first quarter 2023 at BRL 890 million negative of net financial position. So [indiscernible] of BRL 890 million. As Andre mentioned, we had a cash generation operational flow -- and which arrive from the better operational flow, adding up to BRL 79 million positive, resulting in a minus 17 nonoperational flow. In addition to that, we had this consumption of nonoperational flow reaching the end of our second quarter at 926 negative as net debt in June 2023. Telling a little bit more about our working capital details, as Andre mentioned before, we had cash generation, cash [indiscernible] coming from the reduction of inventories of BRL 107 million, the reduction in the inventory. A good part of that BRL 89 million came from the raw material reduction, and BRL 15 million came from the finished [ goods ] reduction. We also had a very good important improvement of accounts receivable, BRL 162 million, a reduction of 19 days of sales when we compare to the same quarter of last year. In the line of suppliers, obviously, we compensate for part of this effect. As we talked a lot about this, we reduced a lot of our purchase of raw materials, as Andre mentioned before. And these aligned with the fact that the raw material costs are lower. This impacts our line of suppliers that decreased 21% at the quarter and represented an increase 135 -- a drop of BRL 135 million. Moving on to the last slide. Going on Rothy's performance. Rothy's in this quarter saw a performance that was still very challenging considering its top line, with minus 6% year-over-year. With a reminder that the second quarter of the year, we had -- had a growth of 86%. But it's still a very challenging moment. On the other hand, all of the focus that the company has been positioning in the preservation of its cash has generated some positive results. We saw an evolution of the gross margin in the year-over-year, 7.3 percentage gross margin evolution year-over-year, explained mainly by the freight costs. But also, we saw an important evolution of SG&A and marketing expense compared to last year that led to the company to reach this positive EBITDA of BRL 1 million and also net income of BRL 1 million positive in the quarter. I think that was about it. I think we're going to open for Q&A right now. And we are going to be inviting you, considering the order of the people who raised their hands.

The first person is Felipe Cassimiro from Bradesco.

I'll like to explore, first of all, the graph about the inventory evolution of finished goods. I'd like to understand if you could open a little bit more, the breakdown of the core products versus beyond the core inventory levels. What is the representative of each one of these groups of the products inside the finished -- finished goods levels? Because it helps understand a little bit more the normalization of inventory for now on. How are you going to handle each one of the size of the portfolio products? I understand that the beyond the core products present a bigger difficulty in being sold and making this sellout and sell-in the normalized compared to the core products. And the second question is to understand a little bit more the forces in Europe. I understand that cancellation occurred mainly for the integration and logistic products, but we have -- we already passed the summer, which is the high season, and the second half of the year is historically weaker. So what is your mind for the recovery of the sales in Europe? And what is your concrete action plan for recovery of sales in Europe?

I will get started, Luiz, tackling. Felipe, thank you very much for your question. Very good points that you have raised. First of all, we're speaking of the inventory level. We saw over the past months an increase in the average quality of the inventory, which are fruit of all of these efforts in the beginning of a better operational sequence. SNOP has gained a lot of attention here inside every wire. And when we look at the inventory of the finished goods, it's 73% of products, which are timeless. Products which are not specific collections or from any year, they are our top sellers. When we look at the products which are part of collections, 12% of the volume are related to collection items or current collection items. Only 15% are in other categories. So it's an inventory, let's say, 85% of this inventory is concentrated in being timeless or our top sellers, top-selling items, and 12% of our ongoing -- ongoing collection. When we compare that to December, these percentages were much different, and they were much less concentrated in the top-selling products, which have a higher capacity, should be sold faster. From this total, only 12% are part of the Beyond the Core which you asked about. Of course, in value, this breakdown is a little bit different. It's not absolutely different because the Beyond the Core is a little bit more expensive than the core items, the flip flop items. So when we look at the value of the inventory, this breakdown is a little bit different. And you are right that the initiatives are different for both types of inventories. But I would say that the explanation that the inventory has not yet decreased, it's not because of this adjustment in the breakdowns of our inventory levels. Of course, we know that there is a disconnection of the Beyond the Core between what was produced and what was actually absorbed by the marketing, the Beyond the Core breaking down, but this is not the main reason by far of the accumulation of inventory. The accumulation of inventory and the long time to see the decrease is this disconnection between the sell-in and sellout. It's an adjustment that is happening in the chain of the company, and it should allow us to sell all of these inventory we have. Of course, I'm not going to go into the details of the colors and sizes of all of our products. But we have all of these action plans and all of these explanations in very -- in much more detail. What I can tell you is that the quality of this inventory is reasonably well adjusted. And this is in line with the plan that I have mentioned before with you that from now to the end of the year, we should be everything -- being connected, the sell-in and sellout, and also seeing substantially the [indiscernible] inventory levels. This is our internal premises, and this is what we are working on. Luiz, I'm not sure you would like to bring anything else. I think Felipe's question is super relevant. And overall, what matters the most is the release of our working capital. Release of our storage space that were taken by this inventory, old inventory that are being released little by little. It doesn't have a large impact. And the Beyond the Core, this represents a small part of the total of our inventory levels. But you're right, in terms of [days] of inventory compared to what our sales levels, probably the Beyond the Core is a little bit more challenging. It's going to take a little bit more time to be sold. I'm going to call the recurring inventory -- what I'm going to call the recurring inventory or what's Andre called timeless inventory, that is core. It's much more about the planning than anything else to be sold, especially considering that we are going towards the end of the year. When we have an important ramp-up of the sales volumes in Brazil, we are sure to be able to resolve that. We have stopped the inventory growth to continue to move on. And this has been happening over the last quarters. The Beyond the Core is something that we -- we'll probably stop talking about -- in the future, we're going to be talking about -- more specifically about product lines. We have the sneakers, we have sandals, we have slides. Distinctive things which we -- and they need a distinctive treatment. They have different fraction in the market. So some of the things we will even rethink whether or not we are going to participate in the future. Or we are going maybe to rethink the prioritization, especially in these trials of expanding the usage occasions of our brand outside the wet occasion and beach occasion. As for Europe, you are right. The main focus right now for Europe is to make sure that the operations there are able to run with a higher level of efficiency and mainly delivering what we promised to our clients there. The Northern Hemisphere, both Europe and U.S.A. have a demand for service level. Or in other words, to deliver what you promised to deliver to them, which is very demanding. You have to deliver at the right time and the right quantity. And because it's more seasonal and it's much more based in the summer than in the rest of the year. In the year, when you look at the beginning of the summer when you don't deliver what you had expected, obviously, the spaces for selling, if you [indiscernible] the summer, the selling spaces are transferred to other producers, to other competitors. So it's very hard to -- to compete in the summer. If you start bad the summer, you will [indiscernible] the summer. So this is the reality for the year -- summer [ 2023. ] I came to Europe, and I'm going there next week. We have just recruited and we started this week our new head of supply. It's a person who has a lot of know-how, young, with a lot of potential, but also very strong but technical, have a long and strong impact in the company. He's going to be with me in this visit throughout Europe to ensure that we have the structure, the information, the data, the correct focus so that this won't happen again. And I understand that this is a promise that has already been made in the past. I can't do anything about that, but nowadays, the understanding is very -- there is a very clear understanding that our operations needed to be corrected. And as you don't deliver what clients expect for 2 years in a row, the clients start to feel a little bit hesitant about us. So we have to rebuild this credibility and relationship with our clients, with our distributors. But all the indications are that the brand continues very strong and that our clients want us to actually succeed. They want to sell us. So we just have to do our homework.

Thank you very much, Felipe. Next question by Daniela from XP.

Two questions. The first one is a light follow-up on the SNOP, maybe a little bit deeper there. We hear this feedback from yourselves, saying that there is a lot of space, a lot of room for improvement in the SNOP. And this, combined with other macro and strategic points, has led you to this high inventory levels that you mentioned. I don't know you mentioned consultancy, a third-party consultancy hired. I don't know if they are focused on this. I'd like to hear a little bit how you are -- you aim and how you expect to address this better efficiency of the inventory. And the second question about all of the adjustments you have mentioned so far about the structure, about inventory. I would like to understand a little bit, what the expectations -- or your understanding about the timing. You said that there should be some effect being felt in the result in the future, and some of them coming positively from this recovery and normalization of the chain. But I'd like to understand better, what we can understand in terms of phasing out of these adjustments? This adjustment -- these negative adjustments in terms of structure and write-off of inventories, thinking of the next quarters to come. This would help us to understand a little bit better. And one last quick understanding about the head of supply, if he will be understanding the international operations only or n the whole operation of the company.

Andre, can you take -- should I take...

I'll start, Luiz, and you complement. Daniela, thank you very much for your question. Very important point that you raised. I highlighted the coordination of the SNOP. It's extremely critical. Especially to be vertically integrated, there is a necessary coordination between what we have made in terms of sales efforts and in terms of what we have in terms of our manufacturing productive and our logistics in between. If we don't have all of these very streamlined and working very well and focused on data analysis and focused on statistics, that is shared by everyone -- information that is available to everyone and that -- and good planning and database, more analytical database. We hardly will -- wouldn't go back to this situation again of this adjustment between inventory and sales as we had in the past. So this project rewired that I mentioned, it had already been started by [ Beto ]. Its objective focus on this issue, and there is a consultancy work with that. It's not the same consultancy that I mentioned. I was talking about another consultancy that is focused on the compression of costs in the OBZ side. There is another consultancy working on this rewire, and the objective is not to bring -- to give us a report at the end of the work. You should actually help us to have a hands-on work and conduct this SNOP rewire and more founded on data. And this goes through a lot of items. First of all, we had a very long time of prediction. The prediction time was very different. There was a big mistake there. So it was almost unavoidable to have a very large inventory level at a certain moment. So one topic which is addressed through the simplification of portfolio. So we cannot have 50,000 types of items. And because we are going to suffer with the predictability of the sales -- but on the other hand, the processes have to use predictive models. The processes we're using, we're not using those predictive models, and they were not basically the primary basis of the sales forecast. And the SNOP starts exactly with the sales forecast models. If you have the goals or visions or even a forecast, this is going to be cascaded down back in a set of decisions that will not going to be connected to what's actually happening in the market. So it's fundamental that we have this reconnection with forecast models that look at data more clearly, and we have already realized it. And this has already happened inside the company. Already adjusting the forecast, we are already yet at the benchmark that we want to reach for the forecast sales prediction, but it's already much better than the levels we had a few months ago. So we are already seeing this reconnection. On the other hand, the same happens in the policies for inventory. Based on the SNOP, the inventory policies should rebalance the decisions of raw material purchase, based on the SKU policy on colors and so on. If these -- those policies are not clearly put, the forecast decisions are going to be disconnected from the optimal levels of inventory for raw material. There should be a policy that we produce based on our demand forecast and on our service levels expected. So the production should be connected to that and seek an optimal range, aiming to reach that service level that we have defined. So this policy have just been recreated inside of this project in the rewire. So just giving you some idea of concrete initiatives which are all part of this project. And obviously, this is not something that I'm going -- I'm not going to implement an inventory policy -- a new policy inventory on one day and the next day, I'm going to have a correction. It's going to take a while, but we already have a better coordination of this cycle. And looking at a longer-term horizon, we want to have these inventory levels that are more compatible with the sales levels predicted. This is a little bit of what we -- I would like to talk about the -- your first question. And about the timing, there are several different times. The first topic, which is the inventory level adjustment. These depends a little bit on a variable that is this reconnection of the inventory levels in the market in the chain. And once this happens, this is going to generate a positive cycle that's going to affect several things. First of all, a decrease in our inventory levels, internal inventory levels; secondly, in the rescaling of our production levels; and last, in the higher, more severe recycling of our raw material that is cheaper now. Obviously, this is a cycle. So you start by adjusting the inventory levels first. I would say that this starts maybe in the end of the third quarter with this actual reconnection of sell-in, sellout. I cannot be absolutely clear or accurate on when this is going to happen. But this should -- reconnection should happen, and our inventory levels are going to happen -- to decrease more steadily over the months until the end of the year. And there is another cycle of adjustment, which is the expenses adjustment. There are two fronts there. One front is more in-depth, in detail, and we are starting this work right now. As I mentioned before, it's a technology that all the industry has about the OBZ, but it requires a time to have some data analysis and the implementation of initiatives and looking at the contracts one by one and the cost is then defining the actions that should be carried out in order to reach this objective of decreasing. On the other side, there is a part of the adjustments that which were things which were more visible and more obvious than we anticipated ourselves. And because of the pressure, we understood that we needed to carry that out fast. Some of the things have already been implemented, but we were going to need some more, most to see that's being actually having an impact in the results, more of a clear impact in the results. Many things we have already mentioned, they are going to be present over the next months, and we are going to try to bring to you the information as much as we can and be transparent to you and to tell you, realize inside the numbers. To show you so that you can see how each one of the initiatives is being delivered, is being implemented. And how this is impacting each one of the numbers so you can sort of project what would be the results in a longer time in the future. But I would say that the second half of the year, is it still a second half -- a half of a year where these are going to be being implemented and they are going to be yielding results in a more gradual time? And some of the results are going to be seen in the longer term. But I would say, next year should be a very different year based on the shape of the P&L results.

Daniela, Luiz speaking here. Just complementing what Andre mentioned earlier. I think our -- we have the same anxiety that you have. Our -- my initial focus was mainly to rebuild the foundations of the company and help us grow in the future sustainably and efficiently. And we came across this situation of the inventory that is much, much higher than I had imagined at first. So it's a combination of several factors. But clearly, the sellout is not growing. It is flat or decreasing a little bit. So it doesn't help. On the other hand, you have the driving forces for the retailers that are pressured by high interest rates in Brazil. So just like us, they see sales stable or sell-out going down a little bit. And they are also pressured with high inventory levels and high working capital costs, given the -- the interest rate -- the high interest rate in Brazil. In addition to that, high inventory levels in-house, and this cannot be -- we cannot have a write-off the size of the inventory we have, unfortunately. And we cannot sell everything, discounting 70%, 80%. So we are trying to be patient so as to do that in an intelligent way without pressuring our prices of the other products down to try to preserve our profitability future, but sometimes making some difficult decisions. So we cannot produce if we don't have demand. We have to make adjustments to minimally compensate the decrease in the volume so we don't carry on this structure of producing and not selling. So this is some of the effects that Andre mentioned earlier on. And that have effects on the leverage. So nowadays, we have two types of impact. The loss of the -- the reduction of the inventory levels because of this inequality between sell-in and sellout. And as a result, producing much lower level than what we could have produced, actually. We are going to depend a lot on what's going to happen in the market in the second half of the year. If the sell-in and sellout catch up, we have seen a slight increase trend in the market. If we went through the fourth quarter comparing to the last year when we had the Omicron -- the COVID virus, right? So in the second quarter, we had many impacts of several holidays we had in April and in May in Brazil. But you see clearly, a perception that things are going back into place, they are falling into place, and we have also the feeling from our main clients who went for the first quarter, like pressuring their levels of inventories and are going back into the game little by little. But again, without -- we don't want to have irresponsible initiatives that are going to pressure our prices and profitability in the future. In the long term, we think that we have already corrected 2/3 of the problems we had. And now, we have the benefits of the summer ramp-up in Brazil that should help us in the end -- until the end of the year to bring our inventory levels to more reasonable levels. As for the SNOP, we do have a consultancy, a third-party consultancy company that has a lot of expertise. We are having a total revision of our processes, the processes that were very weak. Data and algorithms are being reviewed, as well as our tracks and boundaries. We cannot just accept that we have bad data at the beginning, we are going to have a bad data at the end. We need to have more modeling. We need to have more checks and balances. We have already reduced setting 50% the Mist sales predictions. And our -- this is our total focus, me, Adriano -- I'm sorry, Gabriel, Head of Manufacturing; Adriano, who is arriving right now; and the sales team in Brazil, who is now going to expand the learnings from Brazil into Europe and the U.S. Adriano is coming to be the Global Head of Supply. He's going to have responsibility over the entire operation of the company and changing a little bit the mindset we used to have. That our products, our operation stop when the products reach the ports of the country. You want a head of supply who is also responsible for the operations in other countries. We are going to have the specific teams in each one of the countries. And he is going to be responsible in his team about the technical side and general side. There are many -- too many opportunities for improvement.

Next question from Bob Ford, Bank of America. Bob, you can go on with your question. Bob? Bob Ford? Are you there? Maybe you are on mute? Oh, there you go. There you go. Thank you.

Good morning, Luiz, Andre, Rafael. Can you explain the write-off of the raw materials? So they expired because they were poorly managed, or -- and looking at the competitive advantage horizon in Brazil, how do you expect the sell-in and sellout should behave compared -- considering the other players in the market?

I would say that the raw material write-off, I cannot give you complete details. I can -- we can even have a follow-up later on, Bob. But we have from everything -- a little bit of everything. We have special rubbers, transfers. Transfers are those that go on top of the sole, on the top sole. Like those kind of prints that go on top of the flip flops. There is a series of items which are comprised inside items from previous collections from previous years. So when we try to reconcile everything, we thought it was too much. Part of this transfer, for example, is going to be resolved, we're going to change the technology. We are already changing the technology being used. Transfer, as far as it -- as crazy as it sounds, it has an expiry date. The -- after the transfer has been applied, after a few months, it loses quality. Print quality. So now, we have bought and implemented machines for direct transfer into the product, which gives a much higher durability, and this is going to start in the next collection. But I think our team can make a follow-up with you and make some more comments about write-off there. There are too many things to be mentioned here. Again, many of them are related to mistakes in the planning. Or bets -- disproportional bets on products that actually didn't generate the sales that had been expected from them. So they were not used it as a consequence, and they don't have much of a use right now. So there is no other way rather than making the write-off of what is in excess. The second question, Bob, can you repeat your question once again, please? Just to make sure we got it.

You're talking about the forces of sell-in and sellout. It was about the competitive environment. And how do you expect the sell-in and sellout are going to behave?

The market is a competitive market in Brazil. It was already competitive. Havaianas has a very high market share, close to 80% of the total of open shoes. And a large part of the volume which are not sold by us is sold at very discounted prices compared to our prices. So there are products that are sold at a very low price. And basically, the volume that exists is because they sell at a very discounted price compared to our products. So during the COVID, Havaianas benefited a lot because the operations was very well -- was ran very well. And we manufacture and deliver, especially to the main clients, especially to the ones that were open during the period of the pandemic. And not necessarily our competitors did the same. So that was the moment when we gained a lot of share. We reached our historical high -- highest share market point. And after that, the competition goes back into the game. So they start to have a more relevant participation in the market. This also happens with our price increase that happened. We increased our prices because of the increase in costs. So we sort of opened up a room for them to position themselves start, especially in the entry price product in a strong way. So they gained some market share there. And again, we are not, today, at the highest level of market share we have already had. We lost about half of what we had gained during the COVID period. But the most important thing for me is that our market share has been stable in the last 6 months with a small trend, upward trend to be celebrated. We cannot yet celebrate, but this makes us very confident to make price adjustments and -- and price point adjustments over time. So we don't have any pressure to make any kind of a disproportional adjustment or to start selling products at a lower price. Our goal is to sell quality products at good price and not to be compete for the super discounted market. We are, of course, going to participate with a few options there at this discounted market. But inside this market, there are several opportunities there waiting for us, where there is much lower participation of us. One of the markets that we have a lower participation is the men's market. So it's an opportunity for the future compared to the women's and the kids' market, which is -- we have even a smaller participation than we have in males there, immense participation. And these are some good of the opportunities, only looking at the flip flop market outlook. But I would say that looking at the market in general, I would say the market has proven to be stable. There was some time where our price relation was not so good, but our price has been stabilized for levels a little bit lower than historical price, but inside the manageable room that we can manage with our brand, our products, our execution in the market. So I'm satisfied. I think we are on the right path and we will continue to improve until the end of the year. I would like to highlight the operation of our stores. We have over 500 stores where the volume has been surprising me positively in a very positive way. I hope it continues like that. Our operations are getting better. Our service level in our service to our consumers has been improving since our new distribution center. We lost the momentum. Our -- of all on time in full level is much more reasonable than it used to be. It's still not at an ITO level at optimal level, but the level for our OT for our stores have improved. Maybe in the next quarter, we're going to bring this in more detail to show all of that to you.

The next question by Joao Soares from Citibank. Joao Soares, if you still would like to ask your question, please go ahead. Moving on. Joseph from JPMorgan. Would you like to go on with your question, please?

Rafael, Andre, Luiz. Thank you for taking my call. And my question. My questions are super clear. We're talking about production. In the past, we talked about the growth of our manufacturing and low flexibility. I'd like to explore with you a little bit in the two fronts that you opened. The planning -- the production planning, to understand if there is actually a bottleneck from the point of view of manufacturing that really demanded all of these CapEx or as much CapEx as the plan dedicated to it. I would like to understand if there is this problem. And secondly, also about this front is how much the complexity of this mix of products of less quantity added to this operation? And then I would like to hear about the return on the capital invested for these products. And Luiz, you are a head of the company as if you were the CEO in the company for a long term. But we understand that you are an internal CEO. We are in a process of transitioning the company. So I'd like to hear a little bit from you, Luiz, how you see this transition process in the company. And maybe understand if you were going to -- like if you can talk a little bit about this time frame and if you're going to be in the company for a little longer than expected. And what might be the provider of this new CEO for the company?

Joseph, let me take this question first about the CEO. I was surprised that nobody had asked it before. My agreement with the council of the company, the Board of the company is to make the transition to the new CEO, helping the new Board to recruit a new CEO, but not to be in the position just like holding the chair for him. The company needed urgency -- had urgency in correcting some of the paths that we were going. And I have been in the Board for a while. So on the same time, we know that the desire of growth of the company, the desire of the main shareholders of the company, the controlling shareholders of being here in the long term and make the company develop all of its potential. So on the same time, we cannot have an internal CEO, a temporary CEO for too long. We need to have a CEO who has a long-term point of view and who can execute things in the short term in his own way. So I decided that we were going to work as if I was going to be here for a long time, with a sense of urgency to address the short-term issues, but at the same time, laying the foundations for the long term until this new CEO arrives. I have my own restrictions, my own personal plan. So my commitment is to make this transition in a smooth way whenever it should happen, but we are working to have a CEO on the chair full-time, starting in January 1, 2024. There is no guarantees that is -- it's going to happen, and it could even happen before. But it's going to depend on the availability of this person to take on the chair. But inside this profile, we are looking for someone who is like a high profile, lots of knowledge about the market, the strategic thinking, a person who has a high knowledge of brands. And on the other hand, a person who has good understanding of what is a verticalized company, its manufacturing and its distribution models. We cannot just look at the sales, the top line or the volume or operational -- operationally speaking. So we want to detail here the profile. But the profile is very well defined. It's very well detailed. We know what we want, and we have consulting companies working with us. I didn't want to say again, consultancy company. So we have headhunters actually working with us. They are already prospecting and mapping the market for names. And we hope that in the next 2 to 3 months, we can come to the right conclusion of who this person should be, and that there will be a transition period until this person can be 100% in charge of the company. Over this period, and for my surprise and satisfaction, the team has been working with me, ignoring all of these details. They are working with -- taking into consideration the sense of urgency we have and at the same time, putting a lot of effort into the transformation to make sure this team is going to be working with the new CEO and creating the conditions, the foundations to make the company grow consistently in the future.

Your other question, I can take it, Luiz, about the expansion of production. Thank you, Joseph, for your questions. In the other two questions, I can start, and Luiz, you can complement. The expansion of our production, there was an effect. There was the boost of volume that we had in the post-pandemic or even during the pandemic. We talked a little bit about this and about the retail market open and selling and to manage the continuity of our operations without any pains. But this provided us a volume that made us -- make us have capacity usage of our manufacturing close to 100%. Looking at that moment and assuming that this would continue, the pace and with all the ambition that we had and with all of the planning we had for the company and thinking of the international expenditure, the expansion as well, and all the ambitions we had in the business plans led us to have the belief that soon enough, you would be having a restriction in our manufacturing capacity. So we needed that investment. That was the background that was present at the moment of the decisions that were made for the CapEx allocated for the expansion of the factories. Now, with the -- we can see that these volumes have not been materialized. And we even have signals of contraction of volumes, because all of the forces that we have shown you, the recovery of the inventory levels in the chain, we saw that we have year-to-date of minus 23% of our manufacturing capacity year-over-year. And still, when we look at the sales itself, this volume is even smaller. So we don't think this is the recurring production level as the demand cycles are adjusted and go back to grow. We should go back to a more normalized level of production, but on the other hand, we also don't see an emergency or urgency. We don't treat this manufacturing restriction as a problem in the near future to be addressed. As for the complexity, I think this is also a very good question. Over the past months, we went very deeply into a diagnosis of the effect of this complexity. And it was seen clearly in all the analysis and discussions that we had with the Board and with the executive team and with all of the partners of the company. We saw that this complexity justified very little, our sales and results, but it added up to a lot of the complexity and high levels of inventory that we accumulated over this period. So it was very clear to everybody, a certain convergence to everyone that this level of a portfolio. And unfolding, we're not healthy, so we should recalibrate what is the optimal level of innovation, how this innovation should be working within the ratio of the portfolio, the level of prioritization of innovation, what innovation that is disruptive and how much effort we put into that. And having more -- maybe more innovation in the best-selling products to have more return and more profitability. This type of discussion is super alive in the company, but it's connected to what you put, which is the market adjustment. But we have already made some short-term measures -- we have taken some short-term measures to adjust the level of innovation in the company. Luiz, would you like to complement?

I don't want to give you the impression that we are not going to have innovation, but the way to innovate is going to be different. The company has been renewing its portfolio for a long time in a very successful well. And when I talk about renovation, I mean new colors, new accessories or new little details. When you break into a new segment where the distribution channels are different, the price dynamics are different, the execution is different, and you not necessarily have the product that has proved to be success of over the next 20, 30, 50 years, as we have for the basic flip-flops. There is much more risk there. So we have to relearn innovation, maybe piloting a little bit more in some markets before scaling up globally, where you actually bet in the higher risks where there is risks of inventories, risks of investments. Those are, let's call, more daring innovation that has to be better studied. We have to remodel the way we do that. But going back to your original question, if we knew everything that we know nowadays, back then, obviously, the level of investment in CapEx wouldn't have been the same that it was. There wouldn't be the need for that. Things are all connected. The portfolio with a lot of innovation and generate a lot of complexity in the factory. So the factory is lost to productivity, capacity. So they had to invest. So all of that were consequences, and we are trying to unlock in the short term, all of those effects. At the same time, I'm very satisfied with the evolution of our manufacturing area. We reached now over this last quarter, the least -- the historical lowest point of complaints for substitution or replacement of products. So the products are at the best moment it has ever been. We don't have a 100% satisfaction level, but we have a satisfaction level much higher than our historical levels. And our efficiency will show up as well, especially in the last quarter, when the factories will have to start working at a level closer to its full capacity of production. When you pressure the system, we are going to know exactly what the gains that we had from our investments were. I think that's it.

And let's go to the last call. The last question on the call, Gabriela from Safra -- Banco Safra.

I have two questions here from my side. You commented that with the support of the consulting company, you are -- you foresee to reduce between BRL 80 million to BRL 120 million in expenses. What is the -- when is this expense reduction due? And I'd like to understand what was the sell-in and sellout in the first quarter of -- the first month of the third quarter 2023, if you can give these numbers.

Let's go, Gabriela. Thank you for your question -- for both of your questions about this estimated in the expenses reduction. This is our first very raw -- looking at the raw data, this is not a goal, okay? This is just a sort of a potential reduction in expenses. We still don't have the road map for the adjustments. This is the first diagnosis, looking at the data, we did two things. First, we looked at our raw data over the past 12 months in terms of costs. And this allows for a series of comparison to benchmarks, other manufacturing companies, other companies in the market, comparisons to our own results -- historical results. And we also carried out an evolution of the historical evolution of our expenses to understand a little bit what the evolutions in line -- happen from line to line and what could call our attention as opportunities for reducing our expenses. Based on this level of details, we are trying to develop an initiative that is going to be deployed. So this work is going to start to be implemented from now on and in the next months. Having said that, at the end of this work, let's say that we confirm that this is a range. These expenses reduction should be a recurring annualized expenses reduction from the implementation of the actions. I cannot tell you right now if all of the actions we are going to map are going to be instant reductions. Moment -- instant reduction action or if there are going to be reduction actions that are going to take longer to be felt. Usually, it's a mix of both. Some measures can be contracts that are going to be reviewed or revised, or other things are actually things that we have to prepare before we reduce the cost. So this mix of initiatives actually also include the mapping of how these things will be implemented. Now I cannot exactly precise to you how the phasing out of these actions will happen, because they are not yet detailed or met. But we should see something like that in like a 12-month period after all of them have been implemented. So after mapping everything, we should need a few more months to be able to implement everything. So these reductions should be seen over the year of 2024. Another point is that part of those adjustments, we are showing the data year -- last 12 data -- last 12 months' data, but we are already working on more immediate actions that don't require a more deep dive of the initiative. So part of these actions should already start to reflect gradually over our results. Especially from now on to the end of the year, I cannot anticipate how much of that is going to be same. But what I can tell you is that we are already doing, and we are trying -- going to try to help you perceiving the results in the future when they are released, what came from this effort that I am telling you about right now, this effort that we have deployed over the past 2 months. Gabriela, there is a lot of things which are already ongoing. And the beauty of this gap opened by -- or mapped by the consultancy is that we haven't seen some of those things, some of those things we have already seen. And in addition to the implementation of the OBZ and after the low-hanging fruits are captured, we should have a good process of implementation of OBZ to give us continuous gains over time. So I would say that the majority of the benefits are going to be seen over the next 6 quarters. So by the end of 2024, you should be able to see these benefits annualized and reinstated for the upcoming years. But on the other hand, a revision of the OBZ processes, rules, benchmarks and owners of the packages should allow us to improve over time. Companies that implemented OBZ with success, they have seen their SG&A fall compared to the inflation over time. So this is what we also expect for us. There are other things which are low -- short-term, in less than 6 quarters and in the next 6 months. And you had another question, right?

The other question, Gabriela, is we still don't have -- I don't have the reading of the sellout. What I can tell you is that over the last month, Luiz has even mentioned that our share is stable right now. It's leasing in the channels that we can actually measure. That means that our sellout, especially comparing to the third and fourth quarter should be comparable to what is seen in the market. So we should sort of walk in line with what happens to the market. Whatever you see for the market for the expansion of the retail and our market to our industry, in particular, we should also see the same for our sellout. We have some signs that we are going towards stability, but we don't have a reading for the first month. We have a macroeconomic modeling in Brazil, Gabriela. I would like to see this happening more between the median and long terms, what we model and what we see in our sellout. Part of our sellout comes from Nielsen data, part of our data comes from sampling. But the model shows an important correlation with the GDP of the country, but also with the levels of debt of individuals in Brazil, with the money available to be actually spent on products. So we have an interesting outlook. We have an expectation that in the second half of the year is going to be good. It's not going to be the most significant thing. The sellout adjustment is going to be mainly the adjustment in the inventory levels throughout the chain, as we have already mentioned. But it would be good, of course, to have a higher pressure of the sellout on our inventory. This would certainly help us to go back to our right inventory levels. At the same time, it's important to mention that our company is coming from history, a very strong focus on selling. We -- our company has a strong history records of pushing the products to our clients. Over time, we are going to steer a little bit away from that direction and focus more on the sellout. We wanted that our company is more worried about the sellout, caring more about the layout of the portfolio, about the usage of the spaces at the points of sale, especially in the places where we have a higher turnover and where they can have more inventory to be sold, so we can have the right promotions, the right joint business plan. We have been proving that over the last year with our -- over the last years with our clients, and this will continue to happen. There is an important cultural fitting now of our organizational sales team, and we start -- stop talking about sell-in and talk more about sellout. Our sell-in will become something more of something automatized and sellout is going to be where we can actually make a difference.

I think that's it, right, Rafael? Thank you all very much for your questions. I'm going to go now to Luiz for the final considerations.

Luiz, we don't need any more to be here for a long time. It was a [ difficult ] quarter. Once again, we are doing what we believe. That is going to really make a difference for the company in the long term, which is to make this inventory level adjustments, improvement of the processes that have led us to this situation. So it won't happen again. In other fronts, whether it is top line, whether it's cost, whether it's in Brazil, whether it is internationally, to make a better planning cycle. We are certain that the employees in the company are engaged and that we have a good diagnosis, and the action plans will start to yield the results that we want to see. So we can bring the company back in the path of growth. We are very confident about the potential of the company. And we are very confident about the dedication of the people we have and in the progress, we see right now. I think the results will come over time. I want to thank you for your participation. Have you all a great day and see you next time. Bye-bye.