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

Good morning, everyone. Welcome to Alpargatas video conference for the fourth quarter of 2023 results. Today, we have with us Liel Miranda, our CEO; and Andre Natal, our CFO. This conference is being recorded and simultaneously translated to English. [Operator Instructions]. Before continuing, I'd clarify that any statements that may be made during this video conference regarding the company's business prospects, projections and operational and financial goals constitute the management's beliefs and assumptions based on information that is currently available. I'd like to now give the word to our CEO, Liel Miranda, who will start our video conference. Liel, the word is yours.

Good morning, everyone. It's a great pleasure to be here with you today to talk about Alpargatas. I joined the company a week ago, so I have very little understanding of 2023. But I would like to introduce myself first. I have over 30 years working in consumer and product goods with 2 companies, Souza Cruz, in the tobacco industry, where I was the CEO for these companies for 2 years, and also at Mondelez, before that. I had an international career working in Chile, Canada, England and China, holding global positions. And here I am onboarding which started even before the announcement in December. I have had some opportunities to be with the team and understanding the diagonals that was made in 2023 and with the turnaround plan that has been -- being implemented so far. And I'm certain we have the tools and we are on our route to regain our growth in 2024. I'm very excited with this opportunity to join Alpargatas. Everybody knows, it's a brand with a huge potential, Havaianas, right, which is [indiscernible] in Brazil. And we have -- I have the opportunity here to keep building this brand in Brazil. And also, we have lots of potential abroad, so we can go back to growing and expanding international markets. Huge potential for growth. The turnaround plan, which was introduced before and is already showing certain signs of recovery. From the strategy that we have put into practice, we are certain that focus will be the most key aspect to consolidate the turnaround financial plan and regain this momentum of growth. The most important -- channels are most important -- in the most important channels, in the most important markets, to accelerate our market leadership and, at the same time, grow those markets and those channels where we still see a lot of potential but we are still -- don't have all the power there. It's a pleasure to be here. I'm going to give the word now to Andre Natal, our CFO, who is going to be going through the results for the fourth quarter of 2023. And then I will be back to take some questions at the end.

So good morning, everyone. It's a pleasure to be here with you to share the results for the closing of our fourth quarter 2023. I'm going to the first slide. On this first slide, we would like to remind you that what we are going from is a journey. It's a journey that has several phases, different fronts. And in a turnaround process, more importantly then knowing which problems to attack, we need to know which ones we have to attack first and how to define the sequence of the priority. So defining priorities and stick with them, it's super important to understand and create the foundations for the next step. None of the steps that have been done, we are taking right now, they end here. They are a process. But it's important that we do what comes first, first, and then what comes next. So we have been trying to make this absolutely clear throughout this journey, what our priorities are, what needs to come first in this journey. So remember from the second quarter in 2023, in actually the announcement of the first quarter, we said that the most important focus was our cash, to make first adjustment that was going to be super extremely relevant to create the foundations to have the calm necessary to work on all the agenda that came after. We have to start with an agenda of controlling the leveraging of the company, which you know have been growing steadily. And we have to focus to make sure that this agenda was taken care of. We are going to show you a little bit more about the actions that have been taken and the results that we have had so far. But it's important to show that these initial movements will not stop. They continue. These are recurring processes that are in place inside the company, such as being more efficient and saving in costs that we have. So we're trying to make sure that you understand that these waves, they will come after each other, and they will be ongoing at the same time. After these first adjustments on efficiency and on the working capital discipline, we also need to recover our volumes in Brazil. You know the story well. In the past quarters, we had a large compression of volumes in Brazil, which we hadn't seen in a long time in Brazil. And this compression generated the maintenance of our operational scale and manufacturing scale. So we had a compression of results, a large compression of results, that originated from this loss in [indiscernible] which is -- has its basis on the inventory levels, as you heard before. So it was important to prioritize this agenda as well. And we are quite happy to say that it has evolved it so far a lot, and it shows signs of an operation that goes back to another level of manufacturing and inventory levels and efficiency, as well as a connection between the selling and sellout levels. And obviously, Brazil as it's the biggest operation and the biggest part of our results, it was the most important thing to come first. But this doesn't make the other agendas less important. It will be the target of our attention -- of our full attention from now on, the resumption of our international operations, which also suffered last year because of a series of different issues. But we took the opportunity last year to make a huge strategic revision, review. Liel has mentioned that he has had contact with -- has been having contact with all of these diagonals and also all of these topics that we have shared with everyone, as well as with the new strategic choices that we'd like to implement and deploy from now on in the company because we believe it's going to be a really sustainable growth model. And this goes through the resumption and rebuilding of our capabilities in our international operations. I think execution is a key topic, once these priorities are clearly defined, we are going to have the focus on executing it in a disciplined way, explore the potentials that we see for the brand and for the company. So on this next slide, we are going to explore what we have done so far. I think these are important and relevant results, but this is just the first step. It's very clear to us the challenges that lie ahead of us. But on the other hand, we also need to be proud of what we have done, what we have executed so far in terms of creating a discipline in the company. When we look at the first -- to the first graph on the left, we see our working capital cash released in the first quarter and, from that moment on, successive release of working capital cash. Even before we talk about the rewire project, which was much focused on our SNOP and a reconnection between the commercial and manufacturing and logistics carriers, so that we could have a more streamlined distribution chain and sales more connected to our manufacturing, and the purchase is more connected to the manufacturing and sales. So all of that already shows, the numbers to speak for themselves, a better connection, that we have a better connection of those processes. Of course, we have more things to evolve, this is a gradual and continuous improvement. But we certainly can see a clear evolution of the working capital cash release, not only in the accounts payables and receivables, but also in our inventories accounts, which was a structural problem that the company lived, but it's much more equated right now. On the second graph in blue on the right side, we also see that we have to break the CapEx. The company had a very large budget for the year. We have been investing a lot of money in expansion projects in the previous 2 years. And it started out 2023 with a budget of BRL 114 million in investments, and gradually, we managed to define more priorities that were more clearly seen, and make decisions to effectively reduce the capital allocation for our CapEx, and ensure that we had what was only essential, even the importance of the control of the leveraging of the company. So we end the year at a CapEx level that is close to half of what we started at the first quarter in 2023. The same for the green graph, we told you that, when it comes to expenses, a very important agenda of simplification and reduction of expenses and increase of efficiencies. We needed to do one work that was extremely detailed, and we did it throughout the second half of the year. And we found many opportunities for reducing expenses. And we also told in the second quarter of last year that we could not wait for the results of this detailed work. We have to start by reaching the low-hanging fruits in the expenses of the company. I think the graph speaks for itself as well. This has been made to a certain extent. So we brought the expenses level to a substantial decrease compared to the first quarter and in the second quarter. And from the third quarter on, we started to see the results of that reduction, 12% and 13% of reduction, respectively, and which is persistent up [indiscernible]. Obviously, this is a continuous process of reduction of expenses and gain of efficiency. The combined effect all of them, it's a very important action to contain. Everyone knows that the company was already -- the company used to have a negative leverage or it was a net cash, 0 leverage, and it came up to a level of 2.7. We mentioned in the last quarter that we didn't believe that this was going to continue to go up. We saw the leverage starting to stabilize over time and, in fact, it stopped going up and it's now decreasing. But obviously, it's important to mention that the EBITDA numbers historically published by the company are not -- they have never talking about write-offs in the extraordinary accounts. And of course, this will affect the cash accounts. Since they were very relevant in the fourth quarter, they will tie a little bit of the substantial -- a real substantial deleveraging in the yellow line. But it was important to offer you clearly, offering you adjusted numbers, to see the trajectory of deleveraging and the decrease that we have been able to produce in this first model in the fourth quarter of 2023. The leveraging adjusted by the write-offs was in the amount of 1.6x the EBITDA. From my point of view, this set of graphs that you can see on this slide are a good foundation to show the success of this first wave of actions. This is not the end of -- it's not the end of this first wave. It remains. But we, on the other hand, created the basis, the foundation for the company to aim, to find new investments, and find energy and time to work in other agendas such as the expansion of top line, strengthening of the brand and other agendas that we will be prioritizing for now on. On the next slide, we see also a very strong result in cash generation. For over a year, the company earned about over BRL 100 million a month. Overall, we have earned BRL 1.2 billion of cash. And from May and onwards last year, we maintained the standards of cash generation or cash release, which was confirmed also in the fourth quarter of 2023. This graph also speaks for itself. The company avoided a trajectory of financial stress and now we have the solid foundation that we needed to start building from now on. I would like to go back to this slide, because in a simple way we can show our value chain and our business cycle. It starts at the raw material until the sales to consumers on the right side of the screen. These are related to the fourth quarter of 2023. So we confirm here the hypothesis that we believe, and we had already mentioned to you, that we believe that the basis has been established for reconnection of the growth of the sell-out. So for the first time, we had a positive growth of the sell-out. This is very important for resuming our scale economy. The sell-in also has a very important variation compared to what we saw in the previous quarter. So it's a sell-in much closer to the sell-out we have right now. If we compare the number of pairs sold in the sell-in and sell-out, they are much closer and the adjustments happened, as you can see in the green graph, which is the adjustment to the inventory levels. We have told in the past that there was a -- that we had much more inventory than we needed in the chain. And we believe that as long as we couldn't make sure that it is -- inventory levels were normalized, we wouldn't be able to reconnect to the sell-out healthy levels. We saw a much closer reconnection in the third quarter and also in the fourth quarter. There was some adjustments in the curves that you see. But the results of this curve is much smaller than what we had seen before. So we probably are very close to the end where the adjustments in the inventory level are over. These pickup in sales and obviously connected to the reduction of our production levels, that was, to a certain degree resumed, in a certain moment of the year of 2023 we were producing minus 30%, which was a huge retraction to contain the application of working capital into finished projects. So this combined with the pickup of the sell-in, because of the season and because of the reconnection with the sell-out, we started to see our own inventories going down, having steeper decreases throughout the year. This was very important for that recovery of working capital. And as for the raw material, we maintain a very low rhythm of purchase of raw material. We found it was very important as a discipline for raw material purchase in the company to bring the inventory levels of raw material close to the operational levels. We have lots of different opinions about where the commodities prices are going. So deleveraging the strategic inventory of raw materials that we have had in 2022 happen in 2023. So this yellow line speaks for itself. So we can see how much the inventory levels went down throughout the year. Because we -- even though we had a smaller production level, we kept even more substantial decrease in the purchase level of raw material. So we saw an almost linear decrease. So we are much closer to what we have to operational level of our raw material inventory. In the next slide, I just want to point out to you that the sell-out is not so different, minus 1 throughout the year. So at a certain moment, it was minus 13, and now we are at minus 1. But on the other hand, the sell-in, the average sell-in, was minus 13%. Of course, this is -- all of these numbers for the Havaianas Brazil. And this minus 13%, that was almost minus 20 at a certain point of the year, explains a good part of the scale compressions and the margin compressions that we saw throughout the year and which are much connected to the leveraging or deleveraging of the inventory levels that we saw in our chain throughout the year. You can see that the production in average was minus 24%, but it was, at a certain moment of the year, we were producing less -- even less. So this also shows an important evolution in the decisions we made. At a certain moment this impacted our costs, because we needed to lose our manufacturing scale. However, we ended the year with the resumption of this production scale, being able to see the wins in the productivity levels that we introduced in our factories. On the next slide, we see the sell-out and sell-in numbers that I mentioned before. And we have already shown to you in the first and the second quarter, there was a huge disconnection between the 2 bars. This was the biggest part of our adjustment. And the third and fourth quarters, these numbers, these 2 bars are much closer, which, for us, is very important for us as a symptom of what is to come ahead of us. On the next slide, we can see the effects of all of the things I mentioned before, on our gross margin and EBITDA margin. As for the gross margin, we have a sequence of evolution, a small evolution, of 1 percentage point. But it's important to remember that all of those margins are contaminated because of the effects of the write-offs. These are nonrecurring effects and they are -- they arise from decisions that have been made in previous years of accumulating inventory of certain products. But when we clean up these numbers and we made sure we did that so they were in a comparable basis. When we clean the write-offs, we come to a gross margin adjusted of 45%, which is superior even to the margins we had in the fourth quarter of 2021. There is a series of adjustments and actions behind of that. There is an [indiscernible] work that has been made inside the manufacturing, and gain productivity and efficiency and balancing of our production lines. That's a very important work that has been done, which makes us have a stronger gross margin, adjusted gross margin. And it's important to mention that we found -- we managed to reach this gross margin manufacturing minus 10 million pairs compared to what we used to manufacture. So if we imagine that the Brazilian business is going to grow and we grow together with the category, and we go back to that -- to a scale similar to the one we used to have, we should also have favorable effects here. When we look at the blue graphs, we see not only elements of this resumption of scale, we got very close to breakeven of the Brazil operation in the second quarter. We had minus 1% of EBITDA margin without the adjustments. Obviously, this hurt a lot -- the results of those quarters hurt a lot the overall results of the year. But when you look at the leveraging, this has been much more contained, not only because of those cash effects, but also because of recovery of this EBITDA level. Once again, it's important to mention that the write-offs are in surge. So when we clean up the write-offs, we come to an EBITDA margin adjusted of 25%, which is similar to the one obtained in the fourth quarter of 2021 at a much larger manufacturing scale that we had at that time. Obviously, this one has been affected by all of the elements that I mentioned previously, of the resumption of the manufacturing scale, but also because of the 0 basis budget in all actions taken. As for the operationals -- international operations, we had a hard quarter. The other quarters historically, they are negative in EBITDA margin because these are borders where the seasons are against our main product. Europe, for example, we have a very low level of products sold, in this fourth quarter, we sell much more during the summer. So the fourth quarter is much less relevant and much more concentrated on Asia and Pacific territories, the APAC. It's traditionally weak, seasonally weak quarter. And this quarter, in particular, the fourth quarter 2023, we saw an event of destocking movement in APAC, similar to what we saw in Brazil, we watched in Brazil in the first and second quarter in Brazil. In Asia, in the Pacific region, this is happening right now, this destocking movement, which was also a result of decisions that had been made previously, of increasing our inventory levels in those regions. So somehow, these inventories had to be drained and they started to be drained. It's simple to realize that this volume that was small, a volume of 6 million pairs. Obviously, it's not enough to reduce all of the effects. Obviously, it's not possible to have any kind of reasonable margin over sales of 3 million pairs -- 3.5 million pairs. This is what generated the biggest part of this compression of margin. The scaling factor is -- accounts for 64%. Of course, there is some inefficiency effects, especially related to the new logistics operation in Europe. We have already mentioned this previously. But certainly, the scale effect was extremely relevant, accounting for 64%. And we don't see any reasons in this quarter to make any kind of suppositions about the next quarters, EBITDA levels of the company. This was the results -- the onetime results of a never seen before situation. Here, I'd like to show you some important adjustments that we made into our balance sheet with -- I won't go into the small items, but especially to mention that we have about BRL 1.6 billion in total adjustments. And these adjustments are concentrated mainly in the goodwill impairment of both Ioasys and Rothy's -- Ioasys and Rothy's. So we always have to be checking the recoverability test, running those tests, and we conducted them running, their projections for growth and reduction and also the capital costs for those businesses. So the reduction was a reduction of both goodwill for both Ioasys and Rothy's goodwill impairment. So we have this overall reduction of BRL 1.6 billion, which is added to all the reductions we have seen and which are not adjusted to our -- in our EBITDA, in our write-offs of inventory of both raw material and finished goods. There is an important reduction of items in our balance sheet that are connected to those evaluations that have their Rothy's and criteria inside the accounting practices and the accounting principles that are used in the market. Now I'm going to give the word to Rafael who is going to detail in deep a little -- dive a little bit deeper into the numbers of the quarter. Rafael?

Thank you, Andre. Moving on now to the quarter's figures. I think Andre gave a lot of details about the Havaianas Brazil. We ended the quarter seeing a reduction of minus 3% in volume with a pretty much flat result in sales. It's important to mention that this was the first 1% positive growth of the sell-out in the year. And as Andre, margin, we started the year by -- with 0 sell-out. In this yellow line -- orange line, we see a decrease -- the evolution of the decrease of the inventory levels. And this summarize all the evolution that Andre described in detail of the inventory levels. Moving on to our international operations, we saw a very weak -- we saw very weak results. Our volume went down very steeply, especially affected by the EMEA with minus 48% in volume and minus 6% in revenue. And we also saw a minus 60% in volume and minus 53% in net sales. In the North America, we saw a decrease in volume of minus 27% and 9% in net values. Moving on to our distributors markets. Going to the gross profit margins. We ended at BRL 354 million compared to BRL 440 million of the fourth quarter 2022. It's important to highlight the effect of the write-offs, which, adding Brazilian internationals, ended up to BRL 77 million in the quarter. And we had adjusted these write-off costs, our gross profit margin would go from 35% to 40%. It would have been 5% percent points better. As Andre mentioned before, we saw an improvement, a good improvement in the costs of our manufacturing when we make the adjustment via the write-off, especially because of the productivity in the factories. The reduction of raw materials is starting to be -- is seen now in our figures. And we are certain that this benefits will appear even more of the reduction in the raw material prices and the best -- better utilization of our manufacturing. Moving on to expenses. We saw fourth quarter with a growth of 5% in the consolidated expenses compared to the fourth quarter 2022. It's important to mention that we have some expenses especially related to distribution, which were above the fourth quarter of 2022, in the resumption of our distribution in Brazil of larger volumes, especially with this strong challenge of costs which we are going to face now in 2024. And we also saw an effect of BRL 3 million related to the simplification of our structure. Our 0 ZBB packages went down 1% compared to the last quarter in the ZBB package. As for the marketing, there was a decrease in 20% in the consolidated numbers, which was affected mainly by the international. The international numbers saw a decrease of minus 35% year-over-year, and in Brazil with loss of about minus 10% marketing in Brazil. Moving on, we reached our normalized EBITDA of BRL 60 million. We have an EBITDA coming of other operations positive BRL 7 million, adding up to BRL 67 million normalized EBITDA. And we have here a very strong effect of the extraordinary item that Andre -- and also in the goodwill impairment of both Rothy's and Ioasys reaching our statutory EBITDA, which was negative BRL 1.1 billion. And moving on to our net financial position. We lapped a net debt of BRL 817 million in September '23 to a net debt of BRL 551 million for December 2023. This is explained that mainly by the working capital -- net working capital release and the inventory reduction. When we look at the sum of this operational flow plus CapEx, we see that we generated BRL 279 million to reach the end of the year with a net debt much lower than we have already had throughout the year of 2023. Moving on to the working capital. There was an important reduction of inventories. And it is particularly important to mention that both -- it happened both in raw material and finished goods. And in terms of receivables, we reduced it, 23 days in the receivables, which are clearly the effects of the rewire and better planning of demand and sales, which has started to show up in our inventory levels. There is still a lot of work to do. We expect to have better improvements for 2024. As for the receivable, the accounts receivable, we reduced 11 days of our receivables compared to the fourth quarter 2022. Looking at our suppliers or our accounts payables, it's decreased a lot throughout the year. throughout 2023, both because we reduced strongly our written of buying raw materials, but also because of the cost of the raw materials themselves, which decreases a lot. Now with the resumption of raw materials, in the manufacturing level, that is still normalized but much closer to our historical manufacturing level, we go back to our accounts payable. So certainly, it will go gradually throughout 2024 with the normalization of our manufacturing operations. Speaking of Rothy's specifically, and speaking of the results for the order, there was an increase of 21% in the net revenue compared to the fourth quarter 2022. One more quarter of positive EBITDA of BRL 5 million, we also had seen a positive EBITDA margin in the third quarter. So now it was a little bit more relevant than the previous quarter. And also of $6 million in as -- of net profit in the fourth quarter. As you have already heard, in 2023, we had seen a very important evolution in the gross margin, being delivered by Rothy's, connected both to the improvement in their manufacturing in their factory in China and also reduction of the last-mile costs of the e-commerce, resulting in the sequential evolution of results. It's important to mention that Rothy's closed the 2023, with this fourth quarter, with very stable cash. So they didn't burn their cash in 2023 after the results that we saw in the fourth quarter of 2023. We are moving now to our Q&A. We're going to release you to ask the questions.

The first question is going to be by Guilherme Vilela, JPMorgan.

Good morning, everybody. Thank you for your presentation. My question is about this operational levels of Havaianas Brazil. When you look at the Havaianas EBITDA of BRL 20 million, BRL 24 million, without the write-offs, we can see that there was a significant improvement in the SG&A rate. Inside those little boxes, which were -- which ones were the boxes that most contributed to this improvement in the operational levels? And is this sustainable for 2024? Do you believe -- you mentioned the inventory levels, that is -- has been cleaned up in a certain way. Do you believe that this tendency is going to be maintained for 2024?

Can you repeat your second question, please, Guilherme?

My second question was about if this improvement in the operational levels can be expected. Is it sustainable for 2024, given the destocking of the channels, since you have proceeded in your destocking of inventory. So is it sustainable when you look at the first half of 2024?

Thank you for your questions. I think they are -- they talk about one very important topic. That's why we first attacked this agenda. I will start with your second question. Obviously, there are 2 angles that we can look from, to keep higher margin rates, we need 2 things. First of all, we need to keep this operational level that we had at the end of the year. And the answer for this first part is, yes, we believe that the operational scale -- there are no reasons inside the structure of the company to results in the sell-in disconnecting from the sell-out. The results, as you saw in the graphs we showed, it's important to mention that the sell-out are always an estimated. It's not an objective, an accurate account of what was exactly the accurate number, figures for the pairs sold in all consumers in all of our thousands of points of sales across Brazil. We don't have a number. So according to the estimate, even though there is some inaccuracy, we can see the trend of the numbers. So the numbers have confirmed in the narrative that we have been building -- have been telling you that we believed that there was one more quarter where we would have seen an adjustment and then the next step would be to have almost a 0 difference between the sell-in and sell-out. I would say that we have no structural reason to see one more occasion of destocking. The sell-in should, in fact, reconnect to the sell-out. This is what is in our estimate for the year, in our perspective for the year, and we are going to go back to growing. Of course, this includes that the sell-in has recovered -- that has been recovered in the year 2023. Since we have drained our inventories, we believe that the 2 numbers will walk hand-in-hand. As for considering the operational scale in Brazil, we believe that this number is going to continue to stable throughout 2024. The second half, which is also important for this -- if margin efficiency is seen is that we maintain our discipline in the expenses, we had a very important adjustment in our expenses at first, which was extremely relevant. We decreased it 13%, all of our packages in our ZBB, our zero-based budget. This number was maintained in the fourth quarter. And what we can see for 2024 is that this efficiency levels should be maintained throughout the year. As I mentioned before, we work it very closely. And in many details, in this first year, we did -- we got more of the low-hanging fruits. And in the second year, we have many analysis on water support and we mapped a series of opportunities that will be tackled in this zero-based budget process. It's not only the process of creating a line side in the company, but also making permanent adjustments to our expenses. Of course, that part of these adjustments, part of them need to be retaken. But on the other hand, we have other actions that are being implemented right now at the beginning of this year as we speak, which should maintain or even amplify this level of efficiency that we have seen so far. So I would say that this SG&A efficiency should be permanent. And it's something important for what we saw in terms of generating results for Brazil. I'm going to invite Rafael just to complement, maybe breaking the breakdown a little bit of the numbers as you requested.

Asking your first question -- answering your first question, Guilherme, when we look as the breakdown only looking at the Brazilian operation, we saw a reduction of about 10% in marketing in the quarter compared to the year-over-year numbers. And we also had a reduction in the G&A, general and administrative expenses. So those 2 accounts bring back the reduction of expenses in Brazil now. And it's important to reinforce that we mentioned a lot of this throughout the call we had last quarter that's the marketing -- reduction in marketing expenses is not structural. We have been working to have savings coming from other expense lines, so we can resume our marketing investments even to higher levels of our recent history. And -- so we can contribute to the growth of our top line and to make our operational leverage, we'll move on. So for 2024, structurally speaking, we do not expect to have a decrease in the marketing expenses, but we do expect a decrease in the expenses and all the other lines, so we can increase our expenses in marketing. What brought our expenses up a little bit in Brazil were the expenses with sales, except for marketing, especially with distribution that we -- where we saw a reasonable growth compared to the fourth quarter '22. Just as a reminder, this process of resuming the leveraging in Brazil, we were much more concerned with resuming this demand. So in 2024, our focus becomes much more the costs of our logistics to make sure that we can go back to lower levels of logistics -- in our logistics operations costs.

Next question is from Larissa with XP.

I have two questions. The first is considering the adjustments you have been making in the company, if you have anything related to timing, especially for the write-offs to make sure that the right write-offs have been made and also for the past end of the adjustments. If you have any updates on that? And second question, I'd like to take the opportunity and speak to Liel. I know you -- Liel has a very little time on the Chair and CEO. But I'd like to let Liel talk a little bit about the opportunities that he has already identified in the conversation that he has had internally.

Thank you, Larissa, for your questions. I will start by taking your first question, and then I will give the word to Liel to talk about his perceptions -- his perspectives. So Larissa, as for the write-offs, it's important to call attention for some points. The first is that the write-off of products follows a criteria, and it's very important that we make sure we use this policy for write-offs. It's an evaluation that we have to have because our accounting principles demand and we needed to have homogeneity, we need to have a constant adjustments. We cannot subjectively decide. This is objectively made. So we have these criteria that we apply. For raw material, we have different criteria for the aging of the collections and so on in the finished products, and we attain ourselves to these principles. So this is a criteria that are defined. And what's going to define it is timing of adjustments. Again, I think it's important that you look to the set of all adjustments that have been made through all '23. I would say that we had over BRL 2 billion in adjustments considering the impairments and the write-offs of raw material and finished goods. So there is a series of redemptions that were made which are consequences of decisions that were previews to this moment and some of the decisions to the inventory. These are all like decisions that were made like several years ago, like 2, 3 years ago, for different collections of products that were brought and for change and applied to our inventory. And some of them were not -- didn't have much of a good sales. So the adjustments were great, but the timing or possible with future adjustments for write-offs will happen as these criteria pushes toward this. On the other hand, it's important to notice that these adjustments are noncash adjustments. They were already -- when they were produced or manufactured, they were obviously they had a cash effects, but the write-off or no write-off products is a noncash product that follows timing accounting principles that have specific criteria, as I mentioned before. So for our interpretation of the real cash generation of the company, we are trying to show you that even with the adjustments inside our reported EBITDA levels, we are making this disclosure. So you can realize that what the real results were behind those numbers. So what I'm trying to say is that, first of all, I cannot anticipate any kind of write-offs until it actually happens. So nowadays, we have a plan to address these kind of products that are in the inventory. They are sellable products. And of course, inside our criteria is as long as we realize that there are products which have quality problems or they don't have market value, they are written off. But all the other products in the inventory, they are products that have a commercial potential. So we are going to seek solutions -- market solutions. And if at any moment we find apart -- that apart of these products or the accounting criteria point that we should go towards the write-off, we will then proceed with these adjustments. On the other hand, I would like to emphasize that this shouldn't have a strong relevance from the perspective of interpreting the levels of results of cash generation of the company. We always have to be making those adjustments, and that's why we are opening and disclosing these numbers. So all of these other margins that we have in performance. I gave you this number -- the figures with write-offs and without write-offs, so you could see that. Well, having said that, in the second point of your first question about the SNOP, all of these processes, our processes that will be continuously addressed and improved. We saw important evolutions with the arrival of our Global Supply Chain VP. He is dedicated to fixing those processes. And the numbers that we see now, which reduce a reduction in inventory, lowering of our manufacturing numbers much more connected to what we are actually sell-in to consumers, our sell-out. We managed to make all of this draining of working capital. We are waiting for the market to absorb all of the products that were in the inventory in our chain. Of course, there is a permanent evolution, as I said. So it will keep happening, we still have to improve as for the predictive demand models and the streamlining of this process. But now -- nowadays, this process involves lots of people in the company and everyone works closely with the Vice President to see what his forecast for demand for -- what his forecast for this, what we have planned for that period and make sure that from the purchase of the raw material to the commercial actions we take today are actually speaking to each other. I would say that a good part of the route has been walked. And this makes us calm to say that we have a process that is very well organized. But that doesn't mean that we're going to stop here. We still have room for improvement. We have some new adjustments to be made. Even though we have made most of the most important adjustments, I think there are evolutions to come. And we can still streamline our processes. Let's listen to Liel now to his perceptions.

Hello, Larissa, thank you for your question. Well, as I said before, there are 3 parts of my -- to my perception, the foundations of the company are very solid. We have a very strong brand with strong international presence. And this is a great asset, a great foundation for us to create -- to generate the growth. We have a great footprint of both the factory and distribution. We are present in thousands of points of sales. We have thousands of partners, wholesalers, retailers. This scale allows us, as we demonstrated before, to explore cost reduction and improvements at our top line numbers as we go back to our operational scale. And the third thing is we have a long-term vision for the company. This stockholders and stakeholders, everyone has a vision. So the company is over 100 years old, and we have this perspective of growing in the long term. So the power of the brand, the scalability of the footprint and also this commitment to the long term gives me the perception that I am at a company that has a huge potential for growth from now on. The second part is much more the current moment this transition, the turnaround that has been started by the team which, as you have seen, the first result is what is the ones that were the most immediate and most needed, Andre mentioned. We needed to avoid to have any kind of leverage financial problems. So we see positive signs for that. And of course, we will continue to working with that. The second part is to go back to the level of the Brazil operations, the operational excellence and where we also see some positive signs. The third, obviously, will be the strategic revision, mainly of the international markets, which is a third priority for us if you want to put this way. So in addition to what we see in the numbers, the size we see for the turnaround are positive. And we already have the actions and priorities to move on, especially in 2024 and the upcoming years. I think my perspective is that we believe that with focus and a combination of protecting where we are already strong and build on the opportunities where we can grow, we are going to go back to growing -- the company will go back to growing. And when I mentioned focus, I mean, focus on channels, focus on international markets, focus on categories where we are already market leaders. While at the same time, we look for other opportunities for growth. I think the first example of focus was mentioned in the release. We are separating the management of the international markets to give more focus to the European and Brazilian markets. So focus on their markets specifically. And we are creating a business unit that is focused only on what we call distributors or export markets, which are all the other markets. This is the first sign, a good example of focus that I -- we are giving absolute focus in Brazil, in Europe for both teams, responsible for those 2 geographies and creating a new business unit to focus all the other markets where we have a huge potential. And prior to that point, maybe we're not exploring because of the lack of time of the teams which are responsible for Europe and for Brazil. So we are going to be talking a lot about that in the next quarters of how we are deploying this focus to try to generate results faster for the company. I do hope that you have a positive perception of my week, reminding me that I have been here in the company for a week only.

Next question is by João Soares with Citibank.

Liel, welcome to the company. I wish you a lot of success. Andre, I have two questions. First of all, I want to -- I know it's a still very recent this diagnosis. I would like to explore this point about the international markets because the perception of a certain simplification, reduction of the complexity -- of the geographies complexity. I think it was before there were several geographies that were strategic for the company, each one of them presented individual challenges. So am I understanding it right, I want to -- how you see this road map of recovery for the international operations considering that 2024 is still seeing a challenging year with work orders -- the level of orders placed still a little bit below what was expected? And secondly, I'd like to explore a little bit the write-offs. And also the cost per pair if this is reflecting -- if this margin of the raw material margin is appearing because of the lowering of the cost of raw materials, what is the margin that you can see for 2024, considering all the improvements that you had in 2023 and will have in 2024?

Thank you, João, for your question -- for your questions, in fact. I'll start by answering -- I will answer a little bit of both questions. And Liel and Rafael, they might complement my 2 answers. So thinking of the international markets, I think the first important thing to say is what I mentioned at the beginning. Obviously, we needed to prioritize this -- define what was a priority. And naturally, throughout 2023, which was a very important year for the company because of everything we saw so far on our slides and because of all the advancements we made in our agendas. It was super important that we clearly defined our priorities for 2023. And obviously, to change the capital structure and the leverage and in our discipline of expenses in the company was extremely important as a first step to create the foundations and give us the energy to do everything we want to do. I think there is a huge opportunity in the international markets. But in order to do that in the right way and exploring its full potential, we needed to have those priorities executed before. So this has been somehow made. But remember, this is still a continuous process. Along the second half of the year, we have an opportunity to have a deep dive in the international markets. And I think we -- there were many takeaways from the analysis that we ran. These were not analyses made by 1 or 2 people, lots of people participated in these analyses that were made and they were based on data, research, survey. It was not diagnosing or diagnosis that was based only on the perception of individuals. There was a lot of analysis and a lot of data to go with. Liel, as I said, has had the opportunity to looking at this work in detail and he can also comment on his perception about that. So this -- all of this work has been shared, and it's important to create a convergence in the company across all the areas in order to make sure we are on the same page of where we are right now, what has brought us here where we are right now. And I think I would say you were quite right. There is not the only reason -- an only factor that we can blame more for having a worse performance for the international markets in 2023 than it was compared to the previous years. 2023 was a more typical year for the international markets, but we looked at back in 15 years of data, trying to understand the performance and we looked at -- we broke it down by country. And we looked at a level of detail that was not -- we were not capable of looking at, but we came to some -- we got some takeaways that are very important -- some learnings, which are very important. I think that we -- what we mentioned of simplification of our footprint is connected to what Liel mentioned of us having focus. Maybe one of the biggest learnings from this time working internationally is that the company's spread across many geographies without any kind of consistency, both from the commercial or sell-in or distribution perspectives. And also, when we look at the volatility of volumes, I'm not talking specifically about the decrease in the demand of volumes for 2023. I'm talking about several occasions. We saw that we are spreading over 120 countries. And when you see this -- the strategy of more breaking into those markets, the pricing, the volume levels over the years what we saw demonstrate to us that there was a footprint, it was very inconsistent over time. Again, I'm not talking about 1 year, talking about a series of years. So it shows a lot of inconsistency in this market, the way we approach at each one of those markets. So it's important to make clear for us that the international business is not a dogma. It's an opportunity. We're not in 120 countries. Just to be able to say we are in 120 questions -- 120 countries, we want to have each -- that each one of those countries is contributed to the overall results of the company. When we look at the balance sheet for each one of the countries, we even realized that in many countries, we're actually making a loss. So we don't think that we are going to make this anymore. This is not an objective of the business. We don't want to be in as many countries as we can. So even though we are in 120 countries, in some countries where we would like to be much more present, we still invested in those places. So we diluted our investment in some places where we had -- we didn't have good, relevant, consistent results. And on the other hand, we lacked investment in certain very important markets where -- which were relevant to build a very relevant international market. The good thing is that we don't have any kind of symptoms. We had lots of data to look at that there is any kind of tiredness towards of our brand by the opposite. We are top of mind in most of the places where we are working. And the consideration of our consumers for our products is still high. So what we need to have from our point of view is the sense of a prioritization, focus and stability so that we are able to work on businesses which are profitable and that doesn't mean that we are not going to try to break into markets and try to make some investments to have an operation with a certain level of profitability but spread over so many countries with this level of subinvestment and inconsistency is something that we wouldn't like to repeat, and we won't do it. So I would like to leave it much clear this message that's been in 120 countries is not like a management that's important to us. What is relevant to us is to make things which are really contributive to the brand and for our position in market. Another important thing is that when we look at the data -- all of this data, there is a huge market and very little explored in flip flops, which is what we do well. This is what we are recognized all over the world, and we have lots of space to growing flip flops in relevant markets with profitability with the right level of investment in the brand in those markets and with a better execution. So overall, this is the focus that we are going -- the direction we're going to go. We're going to have an opportunity in our next Investor's Day to share this with -- in more detail to all of you. But I think it is clear -- this diagnosis is quite clear, and this converges with everything you sense upon.

Just one thing, let me jump in to complement what Andre mentioned. In addition to having focus in the business, we also have to the capabilities. We talked a lot about -- in order to be meaningfully present internationally speaking, we needed to create the capability. So it's not a matter of prioritizing, but being prepared because we -- so we can actually win in those markets. So the SNOP processes, they have to continue to allow our logistics efficiency, not only in Brazil but all internationally become a capability. There is a series of capabilities, so investment in brands, capability of building brands in those markets that we have already started, and we will move them on with the prioritization and focus on the markets that we have a short-term potential. We are convinced that our international strategy will go to the next level soon. And also speaking of the correct investments in marketing in our brand, it's important to complement what Rafael mentioned. The 13% reduction in the OBZ, that reduction does not include in the marketing. We are treating market totally apart from the other expenses because we believe that the marketing is something that we want to avoid, something the best when we saw that expenses in SG&A increased, so we decreased our marketing expenses, our market investments. So this is a negative that we don't want to go into any more. Once we have a positive, we want to simplify gain efficiency in what's not essential in the extra clauses that we have created over time, so we can have more energy to make the right investments on our branding in the correct places, in the correct geographies and in marketing as a whole. As for your second question as well, in the cost per pair, I can say that we go with a lot in our capabilities -- in our manufacturing capabilities -- our -- capabilities of our manufacturing lines. We made an incredible work in terms of productivity -- of our workforce productivity and optimization of our manufacturing processes. It doesn't mean that's over. We will keep working on that. We have clear goals to continue to gain efficiency. We have some investment projects, which are actually very little money. They don't involve any kind of relevant allocation of cash. But still, we found some projects which had a huge potential for return on investment, especially because these projects will generate additional gains inside this discussion of manufacturing productivity and manufacturing efficiency. On the other hand, we went almost to 0 when it came to our additional raw material purchase. Because of that, we could make very little use of the decrease of prices of our raw material. Of course, there is something, but it's very small. I don't want to make any guidance on where the commodities are showing. We avoided to have any kind of opinion from that. You know that I worked for over 20 years working with commodities. And I know that we don't know where commodities will go. But having said that, we know that if the raw materials maintain the same level where they are right now. But of course, I cannot guarantee this will happen. But if this happens, if this unfolds like that, there will be margin to add profitability to our margin per pair out of these gains from the price of raw materials. But again, we don't have any opinions on the pricing of commodities. What I was trying to say is that there is a lot of profitability in the cost per pair. What we did right now was to reduce our inventory. Now that inventory is normalized size, we go into a second moment of the moment, which is recycling the inventory with a smaller price, which will eventually help us to make more economies to our cost per pair.

We're going to go to the next question by [ Charles ] with Safra -- Bank Safra.

Liel and Andre. I have two quick questions. First of all, it's a follow-up on the international operations. I think you were clear about what you intend to do to improve the international operations. But in your mind, do you think this process of reorganizing international operations will end in 2024 or will move on to 2025? And I would like to understand what would be a normalized cash flow cycle for the company thinking of when all of the adjustments have been performed?

Charles, thank you for the questions. I'm going to take the first one and the second one is going to be taken by Rafael. About the timing of the international markets and equation, it's important to say that the international markets will be a huge focus for us in 2024. In the release, we mentioned our restructuring of the business units. Liel mentioned that as well. Now we put together all of the markets that we operating through distributors into an only business unit to have more focus and coherence in our commercial approach and so on and operational approach as a whole. So this is one of the elements. We are bringing new leadership who is onboarding the company at the end of this month, should be in-charge of the operations in Europe, which is our largest international market and certainly has a series of opportunities to be explored. They all were mapped over the last months. There was a lot of data analysis with -- in conversation with the Europe's team. So we have a very clear agenda to be executed. Of course, it is agenda. It's not a 3-month agenda. It's not something that's going to be concluded quickly. It's not like reduce the CapEx or stopping to make one specific investments and agenda of building of -- for instance, this destocking movement existing in Asia, and it happened and affected the fourth quarter in Asia, and we believe it will probably continue throughout a part of 2024. So there is this execution throughout 2024. And obviously, as you know, in our business, the seasons have very clearly defined it date. So it's hard to tell for sure when -- which of those actions will be in place, when the summer in the North Hemisphere starts. Probably, the full results of these actions will be seen in 2025, probably. But it's important to emphasize that when we mapped several opportunities for on rising expenses inside the structures -- the international structures in several fronts, both the operations but also in SG&A. And these actions are being implemented as we speak from the -- since the beginning of the year with some growth of volume in all of the international regions. We see some expansion. It's not a recovery to the scale that we once had in the past. There are several effects that we need to leverage. We don't think it's going to be a very short recovery, but we think it's important to mention that there is a certain level of volume decompression that will be rolled out throughout 2024. And this should happen -- this should help, we want to have all the problems resolved now at the end of January. Of course, this will happen throughout the year. But obviously, with these first effects, we certainly expect not to have the same EBITDA level we had in 2023 as a whole. We believe that the EBITDA level in 2024 should see a substantial increase for obvious effects of increase in the bottom. And because of this economy expenses, you know we don't give any kind of guidance. So we cannot tell you any figures in terms of where we think it will be at. But it's important to bear in mind that the opportunities are mapped. The things are happening. The things are being deployed. The results should see an improvement throughout the year. But this is something that takes a few months to be implemented and felt. So probably, we will be seeing them mostly in 2025. And Rafael is going to tackle the second part of your question about the cash cycle.

As for our main working capital lines and the cash flow cycle, you saw that we had an important evolution both in the accounts receivable as well as the inventory levels. When we look at the inventory levels, we are still above medium-term levels that we have had in the past. So as a consequence of this entire process of improving our operational capabilities as [ SPNO ] and demand planning, we believe that our average inventory level will keep decreasing throughout 2024. This is a topic that we will continue to address not only in 2024 but also in the next years. As for accounts receivable, we believe that this is not where the biggest gains will come from. There was some important reduction there in the fourth quarter of 2023 compared to the fourth quarter of 2022, but we don't expect additional gains. However, in our accounts payable, there is a double effect that we suffered in 2023 because of the very relevant purchase of raw materials. Our raw material purchase went up to -- reached up to 55% our average purchase levels considering also that we were -- we paid much less than we were -- we had purchased in 2022 and 2021. So what we see as gains from now on is still related to an additional reduction of our average time inventory. I don't believe that we are going to have any kind of accounts payable differences as we pay raw -- we buy raw materials at a more normalized pace, we believe that we're going to see an evolution in 2024 in our working capital lines and working capital cycle.

Since we don't have any more questions, we are going to have Andre with a closing.

Well, that's it, guys. I think the -- it was clear for you that in a process of turnaround process, it's important to show you the trends that are ahead of us, the symptoms that we find behind what can be seen more immediately the numbers and all. So we have been trying to show you a movie, not only the picture. And inside the movie, all of these elements, including what we are focusing on to be able to build on for the future, I think we are engaged. The team is motivated. We have a clear plan. We have a shared plan and a shared diagnosis of our priorities, and these are the foundations, which is an alignment between all of us or the continuity of this agenda. We have had very good signs in these agendas, but we also see that there is a very good potential for the company from now on. We will continue working on this agenda, and I think we will still have a large benefit from it in the future. I'd like to thank you for this opportunity. I think it is clear where we are at. And we are going to be in touch in the next quarters, in the next releases. Good morning, everyone. Have a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]