Azzas 2154 S.A. (AZZA3) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to our video conference call for the earnings of 4Q 2023. Today, we have with us our Strategy and IR Director, Bianca; and our CFO, Rafael Sachete. Before I begin, I'd like to congratulate all women. Today is a very important day. All women all around the world, women that really make a difference. I read something today that's very interesting, that all of us came from women. So we are all very grateful, especially our brands that for 52 years have been worn on women's feet. So in a more comprehensive manner our year 2023, before I talk about 4Q specifically, it was a striking year. Once again, it shows our capability in adapting how fast and agile we are to understand the scenario and understand important lessons. So we have growth of 45% in the transformation of the revenues in our company. A number of interesting initiatives were implemented across 2022. And in the first quarter of 2023, we found a more complex market with a need to adapt so that the main focus would be robust growth of our top line, but even more than that, improving our operating efficiency so that we would improve our margins. And I'd like to highlight that in 1Q '23, our margin was pretty much flat compared to 2022. And 2Q, we leveraged 0.3 basis points. And in the third quarter, 200 basis points and then 220. So the company is at a different level of EBITDA margin. We lowered the working capital over net revenues, especially in accounts table. That's why we have very solid cash flow, BRL 275 million invested in CapEx and almost BRL 200 million in acquisitions, BRL 296 million paying dividends and interest on loan capital. So in 2023, in addition to maintaining our growth, we really focused on improving our financial performance. That was our commitment and I'm sure that all of you remember that during all our interactions, we were very emphatic, saying that the priority for 2023 was to grow operationally and execute. So that was my opening remark. After that, we'll present some more specific highlights about our brands and channels. Rafael Sachete will talk about the financial highlights. And before Q&A, we'll give you an update up to the limits of the law, about the integration process of our integration and merger with the Soma Group. And we have the attachments if you'd like to look into the details of our brand and essence. Now, going straight into our important highlights. Specifically about 4Q '23, BRL 1.8 billion in revenues, that was our record, almost BRL 2 billion for the quarter. In 2019, we had BRL 2 billion for the whole year. That's just a comment. So it really shows that Arezzo & Co in 2023 is completely different than our track record. We had interesting leverage in gross margin, that's what helped top line less sales on sale. We had less promotions compared to 2022. And during the entire fourth quarter, we did strong work on gross margin with a leverage of 240 basis points, that led to gross profit growing between 2.8% more than the gross revenue. That led on to recurring EBITDA of BRL 221 million because of the efficiency and expenses and an increase in 90 basis points, that includes the U.S. operations. So the growth in the EBITDA for Brazil is 200 basis points. Net income, BRL 126 million, much more growth and ROIC, 27.4%. I won't mention all these figures, but we are very proud to have exceeded the mark of BRL 6 billion. That was pretty much a dream and thought it was unattainable. And we'd like to highlight our 5-year business plan. And with Reserva in October 2020, our revenues for BRL 6 billion would be for 2024. So we are 1 year ahead of our business plan, thanks to our capability in executing with a lot of power that we put into that in our performance, that's very strong at Arezzo & Co. And recurring EBITDA for the year, BRL 801 million, net income BRL 420 million. And our ability to have invested in CapEx, inorganic growth, paying V2 acquisitions. In addition to that record distribution of dividends. So that shows that we have strong cash generation capability. 5.6 million active customers distribution in monobrand stores, 1,062 points of sale and multibrand partners that really support the capillarity of our sales that achieving almost 8,000 points of sale and record sales, BRL 20.6 million pairs. Now, about our brands and channels, I have some highlights. Our mother brand, the brand that started everything. Since 2021 it has been on a continuous process of strengthening its brand, making it even younger. We have guerrilla marketing, focusing on this brand to ensure that the brand experience is the best as possible. But I'd like to mention the recurrence continuity and consistency of 3 people in addition to the dozens of influencers that work for our company. There is a strategy. Since 2022 was based on having Gisele Bundchen as the star that opens up the campaign when we switch campaigns. That was the day before yesterday here in Brazil. And for the first time globally, Gisele Bundchen is also being used in the U.S. And then we have Silvia Braz, who has the strong power of conversion. They want to wear what she wears. And Livianu, who is more about a fashion profile. So there are different profiles in each celebrity that you use. So we have BRL 433 million revenues at Arezzo. And in the distribution of the Arezzo brand is B2B and the revenues in the total generation at the end is over BRL 3 billion. So Schutz is the brand that we're really focusing on. It's been growing. And in the fourth quarter, after the Investor Day, we had a conference with Itau Bank, and I mentioned, it was very clear about the Schutz moment. So there was huge growth in 2021 and 2022 in multibrand distribution, distributing a profile that's different. We began rebranding. We covered the brand team. And in 2024, we're launching the winter collection with a transformation that's still in the beginning, but we're ready with the Schutz plan. And across 2024, you'll see many changes, especially in August. When we're ready to renovate 3 stores in Sao Paulo and 2 in Rio de Janeiro. So we have new branding focused on lifestyle. That's a process that we really believe that in 2024, we'll bring on a lot of growth for Schutz, especially the brand, and in the year BRL 1.1 billion in revenues. So over BRL 1 billion in Brazil is rare. In Anacapri, after Investor Day, even though there is growth, it's very much focused on selling. So you can see that the brand pretty much doesn't have B2C besides the E- Commerce, and there's the Morumbi store and franchise and multibrand with a lot of orders, orders are growing with solid growth of 21%. And AR&Co, I have to congratulate Rony and the entire team that are responsible for their legacy brands. So they achieved 174 stores in 2023, growth of 100% pre-deal with Arezzo & Co, which is mainly focusing on the franchise channel even though revenue isn't that high, it gives you capillarity and even helps in E-commerce. So when you open a store in a given region, E-commerce usually grows 50% more than the average of E-commerce in that region. So we know that opening stores in strategic areas also help to grow E-commerce. And in the year, AR&Co achieved BRL 1.5 billion in revenues in 2019, BRL 200 some. So 4 to 5x the growth in 2023, solid growth of 26.3%. And now, our concern is to maintain the brand desire, be careful with distribution, be selective where it's sold, especially in multibrand. Obviously, that can have an impact in what we already had in the fourth quarter and brand generation in that channel. So we have some deliberate actions in the brand. We know it's a very assertive brand on that path to 2154. In sell-out, the sales of franchises and owned stores and DTC which is outside the sale of multibrand. We had solid growth more than the total revenues, 15% for the quarter and in the year, BRL 5 billion, so a growth of 16%. This side is very interesting. It shows how our institution is very balanced in the 4 main channels in which we operate. So it's basically 1/4 for E-commerce, which is very relevant to consider. What happens with our brand? 1/4th of owned stores, 1/4th of franchise and 1/4th of multibrands. So it's a multichannel company with operating efficiency in all the channels. We have efficiency edge with E-commerce. And one of our assumptions is a relation of one company in the science of franchise that frequently is doing well in our multi-brand in a B2B system that we own. So we can have the store owner access our system and purchase, eliminating intermediates and increasing our margin in our sales cost and also speed. I would like to talk about synergies, and this is a great investment. Now, I will pass to Rafael Sachete. He's going to talk about the financial highlights, our fourth quarter and the year 2023.

Good morning, everyone. I would like to also congratulate all women, buyers of Arezzo & Co, our stakeholders and investors, Happy International Women's Day for everyone. This is our financial data. We had a great quarter record in sales, reiterating each channel, the positive performance of our brands and the B2C, with a 29% growth in E-commerce, 15% growth in our own stores, strengthening the moment of the brands and direct connection with our consumers. As mentioned at the beginning of the third quarter in multibrand, we've been doing a selective adjustment on the basis, especially AR&Co, which made the channel be flat in the fourth quarter, but this is a short-term trend, and we see a year of 2024 with good growth within the multibrand channel. Next slide, we also have our revenue of the year, a solid growth of 16% inside the group, focusing greatly on the direct sales to consumer, B2C. Our E-commerce grew 24.7%, and our own store grew 21%. In franchise and multibrand, solid growth in 11.9% franchise and 29% in multibrand, which strengthens the capillarity of our business model of Arezzo & Co according to each distribution channel. Now, our financial statements. I have already talked about the revenue. We had a great performance with 240 basis points growth, plus direct sales, which increased the value of sales and consequently, our gross margin and also a cycle that we mentioned and informing our investors for the year of 2024 where we would focus on profitability of the business. Throughout the whole year, with fewer sales, fewer discounts, especially on Black Friday, where we had a robust growth with better margins than we obtained in 2022. About the gross margin, we had a drop in the U.S. operations year-over-year. And for 2024, we have a trend of consistent improvement in our U.S. operations. For our SG&A, this is an important comment. This slide shows a growth of 11.9% but in 2022, we started at a base of BRL 20 million, which migrated in expenses for depreciation and amortization of rents and leasing. This was a comment in our earnings release in 2022. Excluding this effect, the growth would be 8% being below the gross revenue and net revenue, which shows our consistency of AR&Co and meeting one of the principles, which is to take care of SG&A and cost management and keep it growing in levels lower than our revenue. Our net income, we had good leverage which is an important part of the company and a cycle of high financial expenses, especially because of the interest rates, which is still higher than we imagined, but we were able to leverage this financial growth. Now our ROIC, I would like to comment that we had a growth of 34% year-over-year. And capital allocation and working capital, strong work in inventory, which has been dropping consistently quarter-over-quarter. So it's important to mention how much we have to be careful in this inventory adjustment in fashion. And we have to do this carefully aiming at the results. And in 2024, we will continue working consistently to work our levels of inventory days. For our suppliers since the first quarter of 2023, we've been mentioning that we had an adjustment in the first quarter granting more time for the investors, and we would go back to the base compared to last year, and we were able to achieve that and reduced and improved our number of days year-over-year, and this tends to be our deadline for 2024. And we had a slight growth in number of days of the distribution center with a little bit more time and for end consumers in the B2C. This wasn't a change in policy. So as you can see, for the year of 2024, these are the same figures that we had in 2023 with this structural analysis of working capital over revenues. So our ROIC 17.7% in accounting. With these adjustments, our working capital, we had the lowest capital allocation in CapEx in the fourth quarter year-over-year, generating great cash in the period. We reduced the leverage of the company for 0.7% of EBITDA, BRL 7 million in available cash and net debt of BRL 25 million. So I would like to pass the floor to Alexandre Birman for our association with Soma.

Congratulations, Sachete. And for the entire team of financial management that we're able to use our resources the best way possible, generating a very interesting amount of cash, very well employed for our future growth. Before we go to the Q&A, I would like to update our moment of Arezzo & Co that goes beyond the details of the transaction in our combination association with the Soma Group. Before I explain more broadly, I would pass the floor back to Sachete so he could give us some flavor of the regulatory implications before we talk about the consolidation of this closure. As you all know, we signed the association contract in the beginning of February. Afterwards, we worked with our financial advisers and counsel and we started with our request of association in February 29. And the best understanding and information that we are receiving from our lawyers and assistance. This is a transaction that should be approved by the authorities in a time period of 30 days and 15 additional days for legal oppositions from third party. So we're talking about 45 days. Our expectation based on our counsellor is that by the mid-April, we will have approval. Then we will have the assemblies and after approval at the assemblies, we will start joining the companies. But after the approval by CADE we can start working at a more operational level, more strategically and even capturing synergies of revenue or operating together with strategic evolution. Congratulations Sachete and Gabriel and the entire Soma Group for the efficiency for being able to start this process so quickly. I will allow a few minutes from your time to give you a more broad view of why we did this transaction. We were together on February 5 for our announcement. Since then, the company focused on its internal audit for the closure of 2023. So I would like to talk more deeply about why we're doing this? Arezzo & Co is marked by era's. In the '70s, after 1972, when Arezzo was created, it was the foundation of the business. In the '80s, we were able to implement our production phase with 1 million pairs of shoes produced in the company that started from scratch. In the '90s, 1991, we opened the first Arezzo store, where we call the era of retail. After that opening, we opened many franchises, and we were pioneer in franchising for fashion in Brazil. After few years, Schutz started in parallel to Arezzo. In 2007, we started the corporate era. 25% of this new company Schutz in combination with Arezzo aiming at having more capital for growth and also learning about strategy, a better structured budget, meritocracy and governance, and this was very positive. And after our IPO in 2011, we started consolidating the shoes industry in Brazil. We started with a market share below 15%. And during the decade of 2011 to 2019, we call the era of consolidation of the shoes industry with acquiring more than 30% of market share. Right after a few months, after the challenges that the pandemic caused in the companies, and we were able to adapt very quickly to that scenario. We started our organic growth. So we tested our capacity of integrating with Vans. And after our association with Reserva, we were able to join with a company that had a very good awareness with young people. So Arezzo & Co with Rony from Reserva implemented this new era. We're one year ahead of our strategy. We generated very good results. Since then, we've tested, acquiring smaller brands with a very good positioning and a very clear positioning with the consumers, but the scalability of these brands has a much longer time line than we needed to continue this inorganic expansion era. And we wanted to bring the best company of congratulations to Roberto and the Soma team, which were able to build a platform from a brand that is excellent, generating a lot of value. So instead of continuing with the small acquisitions, we were excellent leverages of Reserva. So that's why we joined with Soma Group. When they ask me about this movement, it reminds me of our roadshow in 2011 where investors asked us, "why are you going public?" And my answer was, well, we have 25% for the investment fund, and the IPO was a consequence of a movement when you bring investors to your company, you not only want to grow that invested capital. So the IPO in 2011 was a consequence. 2007 was the decision that led us to the IPO. So our decision to grow new markets, expanding the entire addressable market and first in men's apparel, we have to think why Arezzo & Co decided to do that. So we're creating this new base, this new company, in these almost 4 years of Arezzo & Co. And now, we're giving continuity to this movement. So it really is a continuity of the market that is the wardrobe of a couple. We have a percentage of less than 15% of Soma of airing. So it really focuses on men's apparel. So I think this gives you a little bit more flavor. Now, about the transaction, I think it's worth saying that, of course, we have this separation of the companies and 2 of them, we can highlight the leadership in shoes and handbags. So people from the Birman family 27 years with us. And we started in 1991 and Rony from vertical of men's apparel and Chagu Edengi for apparel with this Britain family that knows everything about clothing. So this shows that the cultures and the foundation of the companies will be preserved and in parallel, we have 4 C levels that support our business ahead of operations, of ahead of technology, of management, E-commerce and our strategic CFO. So all this was communicated. We have Cassiano, Rafael, Maurício, Marco and an amazing team that will work together with the best processes so that we can operate the most efficient way possible. So we're very confident of the brand we design and since the announcement, we are structuring the Dream team. We have a consulting firm diagnosing all these levers to generate value, and we want to generate revenue for the business. And Roberto says this a lot, both in gross margin. We're going to focus on revenue, and we're not that much concerned with operating efficiency and generating cash, but the Soma Group wants a desire to be best in class in women's apparel. They don't sell shoes and handbags. All the fashion brands in the world have a minimum revenue of 25% in shoes and handbags. So we know that the day we have this approval from CADE will have a dream team ready for handbag, shoes and a new unit to manage products that is ready to work with the Soma Group brands, and we know this will be our first play. In addition, the Hering Group that was brilliantly included in the Soma Group, creating levers and support for the business to improve sourcing and improving distribution processes, improving store format layout and Thiago focusing on that movement with as a CEO and using all the legacy and learning from his father, Fabio that was great for Hering. And together with Arezzo & Co have been working together with him and using the expertise that Arezzo has in franchises more verticalized in supply. And it's important about the new plant that we're going to have in [ Sarah ] We're going to have 21% of sourcing. So in our origin as an industry, we are ready to support customers and adding more value and speed for our consumers. And to continue that brilliant work that Soma has done with Hering and get even more value out of that. And all the initiatives for growth that are in the women's apparel business, especially FARM Rio had an opportunity to learn more about on-site operations. And what they did with FARM Rio is amazing. And now Roberto is going to have more time to allocate in women apparel verticals. We know that they will have very fast growth, a notable growth. And you can see all the work that they have done through the desire that consumers have for the brand. And operating efficiency that's also being considered. So all processes are well mapped out. We have 3 waves to implement. The first one that goes till the end of 2024 and then 2025, 2026, we have the third wave that aims at a deeper change in the supply model for the apparel business. And in that case, already had learned more from that chain from cotton up to textiles and creating the apparel, so we can decrease the employee capital and inventory levels that's much higher actually in shoes. That's a future wave, but we don't see any technical barriers that would hinder us from improving that efficiency. So now I'd like to begin our Q&A session.

So the first question is from Thiago Macruz from Itau Bank. He's asking, we see a positive dynamic of gross margin in this quarter. I'd like to understand that dynamic better. How much was mix and how much was a change in the promotional dynamics?

Thank you, Thiago, for your question. We have 3 priority effects regarding gross margin. First one is an increase in gross margin. And I can say 55% of that increase came from multichannel and 45% because of the improvement in the discount performance and support to franchises regarding the gross margin. And we also have the U.S. operations and the drop in gross margin there. So the mix is 55%, 54% coming from a mix, 45% less discounts, not only in B2B but also B2C and also the U.S. operation.

Next question is from João Pedro Soares from Citi. He has a couple of questions. I'll read the first. I'd like to hear your outlook for 2024, particularly the perspective for footwear and handbag volumes. I imagine that the volume would be the main driver for revenues in 2024. How do you expect to expedite that metric? Do you have any expectations of changing the price in any of the brands? Or are you comfortable with the current levels?

Thank you, João. This is Alexandre. Thank you for your question. I'll talk about volume. So in 2023, it was affected by the closing of My Shoes operations. That was a strategy because in shoe wear we didn't want to go into that class of C. So it was a 50% drop in volume. In addition, I'd like to highlight, when you have an improvement in full price sales, you need less volume because there's no use to grow volume and then sell at a higher rate of discounts. So I'd like to say it's interesting that concern from analysts. And since our IPO in 2011, showing our volume has the industrial track record, most of the companies that operate with brands in our industry, I don't have to mention the names here, they do not disclose their volumes. No luxury brands talk about volume. So we're not a beverage industry that has efficiency. So if volume drops, you will increase the cost of goods sold and then the margin. I'd like to say that our concern in terms of efficiency and full price sales and decreasing leftover products and the improvements going into your question that won't have any price changes for 2024. The prices are flat in the sell-in list, but the important thing is in sell-out because you have less discount, your average ticket goes up, and that's our objective. February was marked by high or less sales and markdown and we had a growth at the end of 10%. So that dynamic of this closing volume I don't think you should consider that it's something that would change the performance and market share and consequently, the financial performance of Arezzo & Co.

Next question from [indiscernible] He is asking DTC is clearly doing well. It'd be interesting to explore the drivers in this case. You've shown relevant growth in the number of pieces sold, and I imagine that, that has been one of the important drivers for the quarter. Is that correct? How do you see the growth in DTC for 2024? And he's also asking about Multibrand. Yes, step by step. Let's take it a step on a step-by-step basis, Bianca.

I'll start off with AR&Co. Once again, thank you for your question for AR&Co. So DTC growth is strongly supported by E-commerce growth. E-commerce is very strong in AR&Co, thanks to operating efficiency, especially the omni aspect, with almost 40% of the sales generated in e-commerce are delivered by the store. Rony is excellent and his team is excellent to implement that idea. The Reserva sales team remodeling the digital sales that are delivered by E-commerce. And, like I mentioned, when you open new stores in locations where the brand was not seen, consequently, E-commerce will grow a lot in that region. So that's about DTC for AR&Co. And about future growth for AR&Co, I'd say that we're one year ahead of the business plan, and we have a growth that's mainly focusing on health and growth, looking at the long term. What would be structured growth for 2024. So the brand really focuses on the Reserva brand, which is the mother brand, and you've probably seen many cases, especially when you have iconographic brands and symbols that represent the brand. When you see everyone wearing that brand in the midterm, it lowers sales. So we don't want to lower our Reserva sales. And therefore, we have to limit the growth for the long term, and that's fundamental. We have Officina, and that has a huge potential for growth, a pipeline of 30 stores that will open in the next 2 to 3 years. We also have an important initiative that's already mature, and we're defining the best multi-brand model, which is Reserva Go. Today, it's mainly focused on sell-in and in sell-out the monobrand Reserva Go have to fit the format or in the mix model through accessories, backpacks and adding to the shoe universe. So that said, the focus of AR&Co is efficiency in operations. And in 2024, the growth will not be the same because we're reaching the limit for the brand, and that's part of any brand. It's not that we're slowing down sales. It's that we have a market share that's already bringing in what's enough, what we deem as enough. And then having the freedom to focus on men's apparel in 2025, we can focus on new brands that would be a part of men's fashion, Officina, Baw and even Reserva.

Still about AR&Co, he's asking about the multibrand channel. At what point are you in the strategic review process? Are you comfortable in expediting the channel? Can you imagine a great balance of the multibrand mix with AR&Co?

Yes, we are comfortable. We're still not focused on growth. We're focusing on stability. We're selling to some marketplaces and online retailers. And according to our objective, we didn't have the profile for continuity for the brand. We've reduced some cases in multibrand and opening franchises for the brands to encourage the monobrand desire. And in 2024, maybe the first quarter, the multibrand Reserva sales won't be like the first quarter of '23. But for the year of 2024, we will see stability in that, but it's not the growth that we expect in that channel.

Last question from Jean is about taxes. So about the potential tax increase given the provisional measure, 11.85, what's the current company position? We see some companies obtaining a court order that will preserve the presume credit?

That's an interesting point. Let's go into the details for Arezzo & Co. There's no appeal that would remove the social contribution tax and those were judged in 2019 and 2020 by the Supreme Court. So we have an ongoing conversation in reading that environment with our legal advisers about that provisional measure. So they're following that closely on how courts will behave in that based on case law, because companies that have presumed credit and companies that no longer entitled to appeal, they shouldn't have to include the income tax and social contribution tax the amounts relative to those benefits. So the company is monitoring and analyzing that on a continuous basis. And we believe that our shares are valid, and they should be greater than the new regulations. So we'll continuously monitor the evolution in court of those actions or file new claims or new claims on behalf of our company.

The next question is from Irma from Goldman Sachs. She is asking, could you mention more details about how you see the evolution of the Schutz brand in 2024? As of when can we count on more growth? And how would that impact margins? And what are the learnings that you're leveraging to avoid any cannibalization against any brands?

I have an invitation to look at the details in that. So I'd invite you to come over to Arezzo & Co and talk to me in Luciana and the Schutz team because there are a lot of details in that. So I'll just give you a high-level vision of the moment that the Schutz brand is going through right now. And as the Schutz founder, I'm the person that's most interested in being the fashion designer that it has always been. And in the past years, it's been losing that because of growth. When you think of Coach brand in the U.S. that happened and now it's a case of a comeback and the Capi Group for instance, brought Michael Kors into the Coach group, and that's very much based on using the logo to sell products. So Schutz grew a lot based on some products that make the logo, very vocal on products and a lot of desire in multibrand. So it's essential in that market, but it can be done in a more sophisticated manner. So the improvement in the evolution of the brand desire of Arezzo was through the deliberate strategic plan. The year that we started in 2021, 2022, with the evolution, we had an objective of also improving the brand desire for Schutz taking it to the lifestyle concept. So the plan is still the same, meaning bringing in apparel, decreasing the product offer and average price more 15% and increased sales through the categories. So the plan is the same, and we are executing the same plan from 2022 and 2023. But it wasn't enough to achieve what we wanted in a faster way. We've reviewed the entire execution. We've had important changes in management. And today, what do we expect for 2024? We've hired an Italian branding agency, which is a result from the learning experience with Paris, Texas. We started that out in January and February, we had an immersion with the entire Schutz team in Milan. So we're rescuing the DNA because Schutz is Schutz. We don't really have to change much. It's about bringing back the essence from the brand from 2010, a bold sexy brand and sexy and not sexy for a while. Some said it was vulgar and that came back in style. You see the international brands that have this product profile are growing a lot. And we see a lot of transparency now in February and March and bringing back femininity and Schutz is great at that type of positioning. So it's been designed for the summer of 2024. The architectural project was not successful that we inaugurated and started in the first quarter of 2024. So now, we trust that what we're designing also by the Italian studio will give us an incredible brand experience and inaugurate 5 stores on the same day in August '24. So you'll see that. And the winter campaign, you can check out Instagram. You'll see a younger brand, a more feminine brand. We have the biggest international model called Amelia Gray. She's a model for the biggest fashion brands in the world. She's from the U.S. originally. So there's a long-term maturity process. And 2024 will be brilliant for Schutz, but it's going to be on a step-by-step basis. You asked for some more details, but if you could visit us, we can give you some even more details.

The next question is still from Irma. She's asking, already considering the future and with the merger with Soma in mind, are there any projects or brands for which you're studying a potential simplification or even closing to reduce complexity?

Yes, small brands were studying doing that, but that's an ongoing project, but we have to know where to focus energy. So Roberto can talk more about the brand, what is happening with some of the brands. We had changes in the brand's creative for the 2024 collection. So it's a very important synergy there. Arezzo, FARM and Reserva are the brands that will drive growth. These are the brands that we need to continue growth. And Hering has a very solid base today with very efficient operations. And you will see for the winter change in Hering to be more fashion, a cleaner brand to drive desire for the brand. And the brands that I didn't mention are those brands, Anacapri, I had mentioned, but our business used unit of the brand and the head of the brand we need the executives from the brand to pull growth. And the levers are the ones that I would be focusing on. But it's very clear that our capacity of managing a large brand portfolio is only possible because of the organizational structure with the team's leadership and marketing teams, and that's how we expect to keep and foster growth in general.

Next question from Thiago Macruz from Itau. He is asking, a very good job was done with expenses in 2023. How much space do you still see for this type of initiative in 2024?

Broadly speaking, Sachete can give you more details.

We reduced almost BRL 100 million in our budget for SG&A for 2023. And this does generate efficiency. We think that the most part was already done. We're creating a new strategy that will include this giant in fashion in Latin America. So for 2024, we will create this holding, although obviously, we do have synergies in the short term. We will have a duplicity of expenses, which is part of it, and also investments with the branding company to create this identity. So it's all part of that process. We're ready for those expenses. But in general, our due diligence for operations and gaining efficiency and expenses is very expansive and it will continue to evolve. Excellent point, [ Chagwen ] The expenses evolve in time, and we have a team that continuously takes care of that. As Alexandre said, the main part and adjustments that we have to do in the structure and the brand portfolio was already done. And we have a very confident vision of our growth in revenue of the company. So with this merger, this is a huge driver that will bring value and revenue. We are doing all the due diligence so that this growth doesn't increase the growth of structures and expenses in the same proportion. So we will have important leverage on SG&A due to this growth of revenue and with doing some reduction in demobilization of our structure. It's what happened with AR&Co. It grew 5x its revenue and consequently had a reduction of expenses over net revenue that was very significant, and we can generate value for our shareholders with that.

Next question, Vinicius Strano from UBS. He is asking, how are you thinking about passing on prices regarding the potential increase in taxes for investments in some ventures?

Well, talk about presume credit. So we're monitoring very closely and seeing a more favorable scenario for those companies that have assumed profit. This is something that we've been working on. We know that some jumps in price is something we would never do, but we might have a line of product or a specific brand in which we will adjust pricing. We've done this in the past 2 years in one way or another. So these price adjustments will be monitored, and we will monitor the impacts of this tax changes in our financial statement and propose some actions of small prices adjustments in other brands. But in the short term, we don't see the need for the Arezzo & Co brands for the moment. Perfect, Sachete. Thank you.

Next question is from Pedro Pinto from BBI. I would like to listen in more details how the operations in new as will work in 2024? How much of the fourth quarter should be impacted in the following quarters? What are the operational adjustments that still need to be done?

Alexandre here, thank you for your question, Pedro. The adjustments were made, we closed 2 stores that were reducing our bottom line and reduced the structure on site in the U.S. Synergy with some other areas of AR&Co in Brazil that were pretty much separate last year, a reduction of investments. So you can expect a slight drop in sales might even grow in the fourth quarter but will have some impact in the first quarter of 2024. A change in the bottom line, which was our focus and trying to reach breakeven and even positive results in the next quarters and strong maintenance of E-commerce, which is where we have the best margins, a better management, and we're very close to the department stores. And according to the sales in February and the collection that will be delivered in August already we're showing growth. So we know that this year is a year of its stability. It was my fault. I invested a lot in the past years in the U.S. operations. And so that I can have time in this new movement with the Soma Group. Our allocations for the U.S. operation will be reduced. Just some more information, the closing of these 2 stores alone reduced our occupation cost, USD 2.3 million per year. So it is one of the ways that will help us to pave the way for the breakeven in the second half of 2024. Perfect. To respect time, I will only take 2 more questions.

Next question from Maher Eric from Santander. Looking at the leverage. It follows a very comfortable level, but we see a more relevant volume in 2024. What are the plans for these dates?

Arezzo & Co always had a profile of low leverage. We've been working for short term for lower cost. But now after the merger, we have to structure better and look at a long-term leverage of the combined company, which would also be comfortable, but maybe 3 to 5 years of debt. And we know from the media that Soma just issued a longer CRI. So I think that, that's not something that concerns us. Credit conditions of Arezzo & Co are excellent and the credit market is still very open for us and the costs are very competitive. So we're very comfortable with this. Thank you.

Last question from Pedro from Safra Bank. What are you thinking about allocation of capital and time between the brands? Is it the business as is or AR&Co with Soma's merger?

Well, I'll talk about both about. About Arezzo & Co, post-merger. Our time allocation, considering my time and energy, Roberto, not having Hering under him. He will be able to dedicate time to the women's apparel brands. So we have this rebranding moment of Animale and also Pharma allocating capital is still being analyzed. And we just opened a store, a Firm in London with excellent results. The second one will be opening in Paris, so we can explore and benefit from the Olympic Games franchise, also opening in Dubai with a local group that brings international brands to the Emirates. So a greater allocation with that. About the total of the company, the Arezzo brand is opening a new architectural concept at Iguatemi Mall for Mother's Day going beyond BRL 24 million in sales per year, which is a huge success. We believe in this architectural concept, and it will be very positive. We have important allocation at Schutz stores and continue to expand other brand stores. So if I put capital, I need to invest time, so please to run hand in hand, as I mentioned before. So in a nutshell, allocation FARM Rio, Schutz, renovating Arezzo architecture that will increase sales so we can roll it out. And those are the main players to allocate capital.

Thank you, Alexandre. Thank you, everyone, for your questions. The ones that we didn't answer, we will answer afterwards. Thank you, everyone, for being here for such an important moment. The year of 2024 will be one that will go down in our history. The stores are amazing. The results in February and March are amazing. So I'm sure that you will fall in love with our products and Happy International Women's Day for all of you on behalf of Arezzo & Co. Let's go towards 2054.