Good morning, everyone. Welcome to our earnings call at Alpargatas for our first quarter of 2023. Today with us we have Luiz Edmond, our CEO, and André Natal, our CFO. This earnings call is being recorded and simultaneously translated into English. After the conclusion of this initial presentation, we'd ask that whoever would like to submit a question, please raise your hand on the Zoom tool and wait with your mic off until we call your question. Before we continue, I'd like to mention that possible statements that could be made during this earnings call related to business perspectives, forecasts, and operational targets and financial targets are beliefs and assumptions of the board and management based on information currently available. We'd like to pass on the floor to Luiz, our CEO. He'll start this earnings call. Luiz, please, you may proceed.
Thanks, Rafa. Good morning, everyone.
Pleasure to be with you guys here to discuss the earnings of our first quarter and to also speak about the future. I took over as Alpargatas CEO, five days ago, which of course represents a few challenges that we need to discuss in details, even if we consider the fact that I'm already in the board for almost five years. This is why today you'll hear a little more from André Natal, who also joined recently, and it's gonna be his first call with us. You'll hear even more from Rafa, since that's already been presenting our earnings for a little longer. In this very short period, I would like to share some observations and some remarks and considerations that I'm already sure of about the company and priorities we have here.
We have an extremely strong brand that has performing in the top performance of the best brands in the world. No uncertainties about how exceptional our brand is with such an incredible potential for development and growth, which gives us a lot of comfort to do our work. We also have a very strong and passionate team. Although we had changes in the last few months and years, today, I consider that our team is highly qualified to face the current challenges, but also the future challenges. This is the team that will take Alpa to really fulfill its full potential for growth. This potential for growth is huge. We confirm that there is a development potential with the brand and growth in Brazil and out of Brazil.
We also wanna mention that the long-term strategy defined, is really precise, and it's really in line with the potential of what needs to be performed. The internationalization, digitalization of the company, innovation, all of these will continue to be our priorities over time. The clear perception we have that in this search for accelerating growth in line with the strategy, we became a little more complicated than we'd like. The operational foundations of the company, the processes, demand, forecast, production, and structuring the production, managing stock, giving back products to the market, or deliveries of these products to the market, in time at the right quantities and mix within a market that's so dynamic, where there are many changes over time, every year. We were not prepared for adding on so much complexity in the organization.
Clearly today, you can see our results, which are most of the bad results we're facing at this moment are a consequence of the high level of complexity generated in our portfolio, in our strategies, and in the overall organization of the company about how to handle all these things and elements that were added over time. It's important to mention this is not my own conclusion. Last quarter, for example, Roberto made it very clear that our priorities this year in 2023 would be efficiency, simplification, and growth sustainably. We haven't been abandoning the company's long-term strategies, but we've been recognizing and acknowledging the need to stop and reorganize our house. Here I wanna emphasize a difference, right, which is maybe not necessarily reorganizing the kitchen, but the whole house, right?
The opportunity for improvement that exists at all levels and all phases of our process, ever since the development of our portfolio, the negotiation of this portfolio with our customers all over the world, until the actual delivery of the finished products and the execution of our products in the market. Our work will never stop after the delivery or receipt of the payment from our customers. We have a fundamental role to create demand and support our customers and really deliver our brand correctly at the POSs. I'd add on and say that you have the efficiency, simplification, sustainable growth. I wanna add on an important focus on execution and delivery of our internal and external processes that's a lot stronger.
When I talk about the focus, we have less activities, maybe a little less innovation, a little less complexity, but greater impact. Fewer and bigger. Fewer and bigger, less and more, right? Things that can generate the expected results and a huge focus on processes. Here we see the company has the processes. The company has reached this point because we have these processes, but they're either not documented or they're not enough to handle the additional complexity so that we can really be competitive in more market segments and channels.
Maybe nothing is too sexy or charming, but over time, not only the way we work and the greater focus will bring the short-term results, but also will generate the necessary conditions, so we can convert this full potential that and opportunity for growth with consistent results over time, and beyond this, that are sustainable over time. Last but not least, I would like to say that the math for growth needs to be a little more balanced between the different variables: volume, price, cost, so that we can have improved operational leverage in the company and translate this operational leverage into actual cash generation in the company, which is something that hasn't been happening. There were some variables that were stretched way too much to pay some bills. Obviously, this is not sustainable, and it's not what we want.
The Havaianas brand is very strong, but we have an important market share. We're gonna struggle and fight to keep and grow this market share in the segments we're in, but also other new segments. We need to balance this out. The growth of the volumes, the costs that will be added so that we can participate in more occasions and more markets, and to generate this complexity and the translation of all of this into the company's earnings. With this, I will pass the floor to André Natal. He'll be discussing our earnings a bit more, and then he'll get into more details with Rafa. Thank you all so much, and I do hope we can interact more in a bit, learn together about the challenges and opportunities, and really make this company a lot better than it already is.
Thank you, Luiz. Good morning, everyone. Pleasure to be here as well. I've been here for four weeks, not that much more than Luiz, but in this period, some of the biggest processes in this diagnosis, especially in regards to the main focus areas in the company, were very clear. They had already been mapped out a bit, and the reading or interpretation Luiz has in this short period of time is really in line with what I consider as well in the short period. What you can see today is that there is a major convergence in the organization towards these important levers. Luiz was precise in saying that, and what you see on the slide is that in the last few years, the company opened up important growth initiatives and opportunities.
All of them were very significant with new regions, channels. All of this will continue to be things that we believe in. There's no big change towards this kind of belief or potential. On the other hand, we can notice in the numbers and the complete elements that we have, the capabilities or capabilities in plural that would be necessary to handle this increase in complexity are maybe not at the same proportion or pace that we would need to in order to handle this expansion in so many different channels, regions and portfolios or categories of products. Of course, notwithstanding the fact that we will proceed and focus on these areas, but we really need to make these choices based on an important backstage structure that can really make it all feasible. Execution will be key.
In this trend that Luiz is mentioning, I think we can really be convinced that there's an important need to have focus in this execution and simplification of the business. What we've seen when we think about our earnings a bit, one thing that had already been an important process is that we can see these two elements in a more significant way, really that go through the absolute EBITDA reduction is due to drop in volumes. I wanna highlight two important elements. One is that in this process to prepare the company for greater level of growth, we ended up increasing the level of expenses in different initiatives. Nothing in itself can be responsible or for this aspect or result, but there is an issue with SG&A, et cetera.
You can see the margin contraction in EBITDA in this quarter. If we were to separate this into major elements with the EBITDA margin contraction per pair, in the numbers we look at, 60% of this can be due to this increase in overall expenses. The efficiency level that we're calling less efficiency, right, is responsible for 60% of the EBITDA margin contraction, and the other 40% are impacted by the direct effects of the drop in volumes. Lower volume level generating maybe a deleveraging of the scale, right? Or this is just a direct effect of this volume contraction or reduction, which is key to reestablish a positive scenario here.
You also have the indirect effects of all of this as we have less sell-out and we have less sell-in, of course, which brings this reduction in the volumes. We have higher storage costs, higher working capital consumption. This is a spiral that is not what we wanna see in the company. We thus really want to focus a lot on these two important agendas, simplification and efficiency, to be able to handle the 60% that would be responsible for the margin reduction this quarter. Not only because of the quarter, but this is an important scenario in the overall results as we had seen. Also a major focus on a spiral that can become positive.
We can start noticing the sell-out resuming the reduction of the stock in our supply chain, generating greater sell-in and a positive cycle with more scale savings, and releasing our working capital more so we can reconquer this discretionary capacity for the different levers in the business. That is kinda diluted when we have a lot of stock of raw material. We start seeing some trends or movements that could be noticed directly, but that can't be because of the stock levels that are still distant from what we would like to see. The message here, guys, is really converging with what Luiz had already mentioned, which is really focusing on this agenda and this simplification. We need to handle inefficiency by handling inefficiency.
We can't just try to add this on to other variables or pressure other initiatives. We need to attack the root of the problem, and this is very clear as the two main root causes that are really important to focus our attention on in the next periods. If you could move on, please. Here you can see just very quickly a bit of our dynamic, more specifically in the quarter. In the first indicator here, you can see the drop of the volumes of sell-in here. This is probably the main aspect we've been talking about here, which is, obviously you have this trend that already started to notice some a destocking effect, so a reduction of the stock. It was a drop that was in the sell-out. It was gradual, and it was a little more substantial.
Now it's gonna give us the first signs. Maybe we'd like to see the sell-out a little more positive, but at least in the first quarter, we can already see a sell-out that's a little closer to a flat level. It's a little hard to be precise about what could take place in the next periods with this trend. However, it is the second quarter consecutively where we will start seeing a reduction of the stock in our supply chain. Super important, so that once again, we can conquer the sell-in, sell-out dynamic, walking hand in hand. These windows here are longer 'cause we have an adjustment cycle that needs to be made, but we would love it if this connection could be stronger, quicker. We already see some product lines where you have a stronger reconnection.
In the basic lines and classic product lines, we already see this kinda stock level, a little more dimensioned or better structured. In other lines, there's still average stock, terms that are longer than what we would like. Of course, we're still gonna focus on this a lot because it's really an important part of releasing our working capital, and it's gonna be something we're gonna focus on in the next months. We are strongly focused on really being able to connect these commercial points with what we've already had in our stock so that we can have this gradual landing process of our working capital at the levels we would like it to be. Now when we look at international, the dynamic in EMEA was not very different. We have some root causes that are a little different there.
We had a relevant impact with the transition of our logistical partner there. This transition is quite natural that you'll have some impacts. When you change the operation, you have an SLA for the conversions process. It's a natural delay, right? This, of course, delayed a bit more of the inbound processes with the products in Europe as well, which generated some disruptions and interruptions till the point where we could reach the actual adequate match of what we were capturing of orders in the market and our inbound processes at the backstage. Once again, an evidence or a sign of the first thing we talked about back then with the complexity and capabilities of our operation, and how we need to adjust this to really fulfill the full potential of the brand.
Migrating to the U.S., we see a different dynamic there, which is an expansion of volumes. This expansion on one side is due to a challenging context in certain channels in the U.S. The wholesale operation in the U.S. as a whole, it's nothing exclusive to us. It's the market scenario with low appetite due to a demand effect, but also due to a stock level effect that you see in this overall supply chain. We've seen major appetite on the offline and e-commerce channels as well, which have helped us accelerate the sales in these channels, which were demanding products. This took place, and it's part of our structural strategy.
Of course, we have to be very careful of how, about, with how we handle this and the need to have the right mixes without letting this become a way to offset volumes in other channels. The off-price channel is part, it's an intrinsic part of the dynamics in the American market, and it will continue to be part in some level. This was maybe specifically a little higher than what we would imagine it would be at a recurring level. Obviously, this normally pushes the net sales downwards. When it comes to price, the net sales per price, per pair, sorry. This was offset by the volume effect that was a lot higher than the previous year, but also higher than what we had considered in our budget for volumes in this region.
Finally here, we also have an important reduction in the volumes in the distribution market. This is especially due to a recovery in the stocks at the end of 2022, which may be accelerated sales above what would be reasonable or normal for that period due to a post-pandemic recovery. Many of these markets or countries are really strong when it comes to tourism. Of course, this stock recovery took place very strongly in the fourth quarter, which obviously impacted the level of sales in the first quarter this year. Now I'm going to ask Rafael to continue to cover the other P&L lines. Of course, our overall message is that we really wanna focus on the volume dynamic, which is so relevant, so we can recover a positive trend to releasing working capital and adjusting our scale effects.
Of course, there's an important agenda that hasn't been mentioned yet that you'll see up ahead in Rafael's presentation, which is this peak in the overall G&A cost, which is super relevant year-over-year, and may be an effort the company has to prepare for future growth. We understand that we need to rebalance this, and we'll have an important focus on the sufficiency we can prepare to grow in a healthy way with a P&L that can support this growth adequately.
Thank you, André. Now I will go over the main lines on our P&L and then cash generation. Starting off with the gross profits. Here we're talking about Havaianas exclusively. Our gross profit had a drop of 11% overall, whereas 19% was a drop in Brazil, 1% international.
Our total gross margin dropped to different percentage sources. It's been a drop of 0.9 percentage points in Brazil and 9 percentage points international. The main impacts in this drop of the gross margin in Brazil, we still had additional costs for external warehouse costs, adding up to BRL 6 million in this quarter, so it's smaller than what we had in the fourth quarter last year, which had been almost BRL 15 million. We left 11 external DCs to four, but it's still an additional cost level that is relevant, and it impacts our gross profit in Brazil. We hope that these external DCs will be returned throughout the year as we reduce our volumes in the finished product stock and advance as well the ramp up of our mix as well.
I think it's important to mention also that the gross margin in Brazil does not reflect any impacts of the production cost reductions that we started to notice in this quarter. As you all know, there's a lag to be able to move on to our earnings, and we need to generate the first stock situation with the finished products. That's when we're gonna start noticing a drop in production costs relevantly in our P&L. In international, we have basically focused on three major impacts. In the drop in gross margin, first, you have the transactional currency effect at a 2.5 percentage point magnitude year-over-year. We also have an increase in fixed costs for storage in Europe.
These don't have any kind of non-recurring impact, as you can see in the external warehouse costs, but they are also subject to some simplification work and reduction. They're a little less non-recurring, and they went to 3.5 percentage points in this drop. Internationally, there's a reflection of production costs in the second semester last year. Since most of these products that are sold in the first quarter of this year were produced, and most of them were sent to Europe in the end of last year. Moving on. We'll get into expenses now with SG&A. We had an increase of 32% in marketing costs, as we had mentioned ever since the last quarter. We increased our marketing budget for the first quarter with the focus of helping to recover the sell-out in Brazil.
We had an increase of 32% in this line compared to the first quarter last year. Expenses with sales ex marketing grew 10% year-over-year. Here you mainly have an increase in freight costs and G&As that I mentioned. In the previous slide, we had an significant increase of 58% year-over-year. It's important to highlight that this increase in the G&A is really connected to the increases in commercial structure and IT digital that we noticed during last year. When we compare G&A in the first quarter with the fourth quarter, there's an increase that's smaller, although it is still quite high. This is a G&A that doesn't have the positive effect coming from the simplification initiatives that we're starting to deploy.
The line with other operational expenses is, it has growth that's very much impacted by the amortization. That obviously is a consequence of the increase of the CapEx we had in the last few years. With this, our EBITDA for Havaianas went from BRL 166 million and to BRL 62 million in the Q23. As André mentioned as well previously, we had a relevant impact in volume drops, 40% of this drop in our EBITDA. The unit EBITDA was related to this volume drop. We also have effects from these increases in the SG&A lines that I mentioned in the previous slide, reaching those BRL 62 million of normalized EBITDA for Havaianas in the first quarter. Moving on to Alpargatas and the consolidated numbers.
We go from the EBITDA of BRL 62 million in the last slide for Havaianas. We have a positive EBITDA of Ioasys reaching a normalized EBITDA of BRL 66 million. Then we had BRL 277 million of extraordinary items, reaching a consolidated negative EBITDA of BRL 212 million. Important to mention that these extraordinary items are mainly considering the provision for possible losses from [Azaleia] receivable losses that we mentioned in detail in our releases and our income statements. We also have a smaller effect with the simplification measures in the manufacturing process, with the closing of the satellite factories we had in this quarter, BRL 3.9 million. Other adjustments we had to work on adding up to BRL 4.7 million. Moving on to our net financial position and cash generation.
We closed the fourth quarter with from BRL 612 million net debt to a position of BRL 890 million net debt in the closing of March. Of course, the effect in the EBITDA we mentioned, we also have cash consumption related to working capital, and we'll get into more details about this in the next slide. BRL 114 million related to CapEx into the quarter. BRL 35 million related to earning financial results and another BRL 7 million in income tax, and we reached those BRL 890 million of the PFL in the closing for March. Moving in to a bit more details with the working capital.
We had a significant increase in stock, mainly due to the increase of BRL 90 million in finished products and an increase in the average term of our stocks of 28 days, than in accounts receivable. We had an increase of seven days on the average term, and this is an increase that's a little smaller than what we had seen in the fourth D, where we had increased 11 days. It still reflects the challenging environment that we have for the demand, with this average level, it's a little higher than we've seen in our earnings in the last quarters. For suppliers, this line was really impacted by the reduction in the raw material purchases since we have a smaller level of production expected for this year.
Since we have smaller volumes and a need to reduce the stocks in our balance sheet. This supplier line was impacted by this and also impacted by our costs in raw materials. As we mentioned, we have a reduction in this cost. The raw material line maybe is pushing or leveraging this cost reduction process, and that of course impacts the total value of our suppliers line in our balance sheet. Moving on to Rothy's. We saw a very challenging quarter. We had an EBITDA that was negative by BRL 8.8 million in the first quarter. This was a little bit better than our EBITDA in the other period, $0.6 million, and in losses, also $9 million. It's important to mention that the challenging environment in the top line in the U.S. reinforces the need to have profitability improvement measures.
In this, we can see a sequential evolution in our gross margin as we saw year-over-year. We also started to notice the use of our marketing expenses in this quarter. With this, we have a full focus on our participation at the board level, to search for these measures that can improve the company's profitability during the year.
That's it. Now we're gonna get into Q&A. If you have any questions you'd like to submit, please do raise your hand. We'll call people in order as they appear on the queue. First question here is from Danniela Eiger from XP.
Hi, guys. Good morning. Thanks, Rafa, for taking my question. I have three here. The first one is more like for Edmond.
I think you just arrived, as you had already been keeping in touch with the company and you're in line with everything that had happened, I wanted to understand what you have been thinking about. I think you even gave us some color on the release and your earnings. What are the main group adjustments that need to take place, right? You had mentioned that we shouldn't wait for these major adjustments since you're already part of the board. Maybe you already have some kind of guidance in regards to the strategic aspects. If you see any necessary adjustments. You mentioned if it was you or Natal about a positioning with the price. My feeling here is that you would maybe have to reposition yourselves.
I don't know if you would like to have an adjustment in your positioning to preserve the brand. We wanna understand what are the main adjustments and the timings, what's more like short term and what is more of a long-term strategy. My second point, for Natal maybe, you mentioned the adjustments in operational expenses, ex marketing. Also when we talk about the Brazil Latam structure, it would be great if you could maybe quantify a little more of the numbers, right? Because what would be the potential for this adjustment and also, how to consider this over the years and the next quarters. It would be great to get some visibility on what is in your hands with the margin expansions.
My last question, I really wanted to cover is about Rothy's. How have you been looking at this slowdown in the growth, which seems to not be only a Rothy's issue, but you're reducing your expenses. Of course, maybe you need to review your strategy, right? Even with investments, there was an expectation that you would maybe buy the rest of the stake eventually. Maybe this doesn't make that much sense anymore to you guys. I don't know. It would be great to get an update. Sorry for covering so many topics, and thank you. Danniela Eiger, let me start here. Maybe from the macro aspects to the micro aspects. I think Rothy's is not a good moment to talk about yet. Andrea's just arriving.
Obviously, we're present there through the board, but we're not in the day-to-day operation of the business. I don't feel comfortable at this moment to talk about the specific Rothy's strategy at this point in time. Of course, the results in the quarter were bad, especially when it comes to growth. There are many other factors, of course, but that's a growth business, right? It just needs to grow in a sustainable way as well. There are maybe some necessary adjustments in their route that need to take place, but that is a growth-focused business. Although there is a brand positioning and a product that is spectacular, and we obviously need to make growth there take place in a sustainable way as well.
The opportunity for growth with Rothy's in the U.S. is really unproportional. You need to do the job well done. At this point, it doesn't make sense to get into details at this moment. I'm very optimistic about the potential of that business from what I know about it as a consumer, for example. About the strategy, as I mentioned, the long-term strategy in the company is validated. We have no uncertainties about the potential that Havaianas has abroad. What we're doing now in the short term is to not handle the world, the entire world at once, right? Europe is a market where we're already well established, but there's also a lot of opportunities for growth. We have an operational big challenge there. Well, we had a big problem there last year, right? We prepared to provide better service.
It's a more seasonal market, relies on summer a little more. We prepared better for this. We could have a performance that was better. We can't face all of these markets at the same time. We would dilute ourselves. Europe and the U.S. started to be the biggest focuses at this point in time. Soon we'll assess other potentials. If we have success in Europe and the U.S., we're gonna be super happy for quite a while. The digitalization strategy is very obvious. The company can't be in an analogical era. The world has been evolving, but we can't do 500 things at the same time. We think we were too diluted. Within the choices to do less and greater things, the digital strategy goes through this as well.
Innovation is also the same kind of thing. Once again, the market requires innovation. We have a potential to innovate, but when we innovate, we can't do 50 things at the same time. We need to choose what will really make a difference, which is an incremental aspect, the margins and volumes and the bottom line in the company. This goes through the capacity to produce these products in our factories, considering that whenever you add something else, with changes in the shape or product, this creates some kind of a rupture, possibly. You need to have very stable processes and introduce these things in a step-by-step way, in an organized way, so that they don't cause more losses than benefits than what they can possibly bring.
Also considering the demand in the market for renewal through colors and details or through new products, so that we can address these new channels and segments as was already explored in the past. When it comes to strategy, no big changes. What the strategy requires is what we call fixing up the house or cleaning up the house. It's just a little more discipline in the actual execution. Not the theory, but the actual practice. Making the right choices, not only defining the strategy, but translating that to our actual capacity to deliver the plans. Follow up on what's working, what's not working, adjusting these things, and then add new things. We kind of threw out everything and tried to do everything.
Of course, we came from COVID, where the capacity to manage initiatives was a lot more difficult than what it would have been if everyone was at the office or at the factory. It was challenging, but this complexity ended up creating a bit of chaos in the organization at all levels. Our focus at this point in time, although it's maybe not as charming or romantic, is that we wanna make the company operate efficiently. With this efficiency needs to be translated as operational leverage. You can't increase the top line only with better prices. The issue here is that it's not about not increasing prices. Of course, we're gonna continue to work with the Revenue Growth Management and improvements in the portfolio, but you can't just increase prices. There's a limit to what consumers can pay.
Our segment is a segment with low elasticity, but it's not like there's no elasticity, right? E-elasticity, in the industry, once again, is low, but it's not zero. There's also the interconnected elasticity, right? Managing prices with our competitors, although we have a high market share, we can't ignore the price movements of our competitors and ignore the fact that we need to be competitive to protect our market share, our spaces, our distribution, and generate value over time through Revenue Growth Management with different initiatives that can be worked on. Improving discounts, efficiency and discounts, the mix, et cetera. It's not like there's only one thing or the other. Here, the translation we gave to this is improving the operational leverage of the company. We're on the contrary direction, actually. When we look at cash generation, it's the same thing.
Cash generation needs to be accretive, it needs to improve. In the last five days, we were able to confirm this pleasant surprise, which is, at this point in time, everyone in the company probably agrees that there's a need, and this makes it easier. Then, we just have to live our day-to-day activities, with focus on discipline, follow up on things, and making decisions correctly. From then on, deployment. There's nothing that differs too much from this. I think the key message here from André is not about price or not price. It's about managing the price so that it can be transformed into positive earnings for the company over time. You can only count on price to lead to the results, right? We don't wanna leave here just granting a bunch of discounts, lowering prices.
If not, we would just be doing the opposite. It's not like an insane search for volume, right? Because this will lead to possible other consequences, right? With the capacity of storage, production, transportation, et cetera. It's about balancing out the equation of the growth and having this more sustainable growth through better processes at all levels of the company. Whether this is the creation of the innovation, whether this is the planning of the demand or production, storage, and delivery of the products in the market within this minimum commitment that we have to be capable of delivering. With the internal structures that are efficient. When I'm talking about this efficiency, it's not necessarily cutting down on costs or cutting off people, but just being more efficient, really.
Centralizing the recurring processes, transactional processes, really being sure that when we add these structures, they generate value to the company. There's no big strategy change. It's just a focus on the short term so that things can happen and that we're not... Well, maybe the best example here is that we're trying to build the ceiling of the building, but the foundations are kind of on unstable, right? We need to reinforce the foundations and then build each floor in a more efficient way than what we were doing before. Okay, Danniela, moving on. Thanks for your questions. Moving on with your next questions. The counterpoint of all of this and trying to solve cost and efficiency through price or the variables. We need to actually do some intense work with the efficiency line.
Of course, Although I've already been on your side of the table, I know you would love to have a number now, right? To mention.
... still range.
It could be a range, Natal. Okay. Yeah, I've already asked this many times, but I don't wanna set a number on this yet in like four weeks or something. What I could say is you have, it's not difficult to phase, to look at the numbers and see that the numbers are all opened, and you can see the growth, at a percentage level of our SG&A. It doesn't really interact with the volumes that we have noticed. Obviously, this is a super relevant topic. What I could say from previous experience is that costs are all about the mindset, and 10% is the suppliers. At the end of the day, the cost is related to how you use the resources in the company.
Once you start an effort to change the mindset, then you need to go through the focus in the costs and the adjustments. You see, every cost is relevant. Every cost matters, and there are many different things. As you put this into practice and you add this mentality with the costs and efficiency in the company, you start noticing that this is actually greater than the executions, right? You see this potential for reduction, and then when you're actually gonna implement this mentality for the efficiency, you have results that are even more interesting than what you imagined initially. What we're trying to think about now is, of course, while we already had some initiatives, some ambitions that had been previously designed in the company.
Obviously, this work is really in-depth initiatives to review processes and cost structures, and this has been some work that has been requiring a lot of time. We're trying to split this into two phases. The first phase would be focusing on delivering these ambitions and then mapping out in the company. This, of course, if you look at the second semester this year, we would like to try to mitigate this with what would be the second semester of this SG&A ex- marketing, right? This kind of initiative already that we have in course, we would like to mention the governance and strengthen, understanding the strengthening process with the methodology and monitoring of these initiatives that have already been going on in the company.
Part of these ambitions haven't even been mapped out, and we're at this effort to, as soon as possible, spread this within the organization, and consider the second semester, demonstrating this effect. Once again, I'm not gonna give you a rate or a number, but generally, we should be capable to really contain this inflationary effect year-over-year. In the second period, we would have to review this in greater depth, with more details as well, and with what we're gonna be looking at in the next year. We would have more detailed work looking at contract by contract and item by item. I think this is the message we had, and you can count on us.
This will certainly require a lot of our time, with me and Luiz and the overall organization. It's a mentality, and it's a mindset with everyone. As a team, collectively, we must understand the importance of our efficiencies, that we can create the ways to make this feasible sustainably.
Going back to Rothy's. Today we have until 2025 to make decisions, but it's very early to say anything regarding that. It's important to remember that we own pretty much 50%, 49% of the company.
It's unquestionable that there is a need to go to the board. We still haven't had the first meeting, but certainly we are going to pay special attention in the performance of the company and in helping the company perform within the plans we were considering the moment we made the decision in the past to acquire the initial 50%. Other decisions beyond that, certainly, this is not the moment to discuss them. I'm going to ask Rafa to maybe add anything that he would like to say about office, especially the short-term dynamics, but only if you think you have something to contribute. I would just add, André. Are you done? Okay.
I'm sorry to interrupt, but I didn't want to leave the impression that we are being generic or we are sort of avoiding the question because things are not mapped yet. We don't know exactly what we should do. For the past few months, we have started mapping, and we have started working in the search of efficiency and simplification. Now it's up to us to execute this, but we need to be confident that the opportunities and the plans are correct, and then we have to decide the timing, maybe faster than when you had anticipated. Of course, we don't want to give a guidance right now. Second, we still don't know all the details, but I didn't want to give the impression, "Oh, they don't know what to do." No, we have mapped a lot of things inside the company.
This work had already started before. I'm really confident that it is going to happen. If everything works out, it's going to actually happen faster and better than we had anticipated. Yes, part of it has already been executed. Yes, some things have already started, and the benefits are coming. Excellent. Thank you very much, everyone. Thank you for the question.
Next question by João Soares from Citibank. João, do you have a question? Oh, sorry, I was unable to open my mic. Good morning. Good morning, Luiz. Good morning, Natal. Good morning, Rafa. I have two quick questions for you. Luiz, you mentioned in your opening remarks on some variables that were stretched in the past growth cycle of the company.
I think it would be interesting to hear your diagnostic first, from the board and now in the executive position, what were these variables? How can you rank them? Was it working capital? Was it investment in manufacturing, geographic complexity? It's important for us to know, in the priority list, all these variables. The second question is, I think you talked a lot about Brazil, but it seems that there is not much communication. You can improve volume, but you can improve the cost per pair and also expenses as well because you don't need to do so much marketing efforts to do the destocking. I wanted to learn about which stage we are in this evolution that you mentioned. Thank you very much. João, thank you for your questions.
If I were to make a priority list, perhaps the main impact was the fact that we made our portfolio too complex. We expanded our portfolio too much without necessarily first having the correct demand planning for it. That is translated in our current stock levels. There's a little bit of optimism with future sales and with our relationship with our clients. Maybe they had more stock than we should. A lot of things were launched in the past 18, 24 months that didn't sell. We were not as successful as we expected. Of course, that takes space in our warehouse. It uses production time in our factories. There are a bunch of side effects. Perhaps the origin was this complexity in our portfolio with several insuccesses in some of the products that were produced, not only in the cost sense.
When you enter in a store and some products are missing and other products are in excess, for me, this is a sign of inefficiency. When our portfolio had fewer SKUs, it was easier. The reaction time and the correction time of mistakes was faster. Once you double or triple the number of SKUs, things get more complex. Factories have to work more, warehouse as well. Salespeople don't know exactly what they're supposed to sell. This complexity needs to fit inside a box. We need to improve our processes and systems, so we don't depend on an MIT scientist in order to sell our portfolio. It needs to be simple. It needs to be straightforward. It can be complex at the origin, but not at the other end, not when it comes to execution.
I would say that perhaps that was the main reason, our ambition for growth. When we talk about expanding internationally and bringing innovation, we started to opening all these new fronts, we were not able to deal that in the optimal way. We added structure in the company. You see our SG&A. We added a lot of structure and then the volumes didn't happen. It's gonna take a little while before they do. Of course, that when you want to grow, you cannot create a structure for the size you are today. You need to create an infrastructure for the size you aim to be, but you cannot make too much a big mistake there. I think that we did that. It's a little bit of that excess of complexity which leads to an excess in cost. The volumes didn't happen.
Part of that can be transferred to price in order to make up for the volume, and then you enter a negative cycle, which was what André mentioned. We need to unlock that cycle or break that cycle, and that requires making choices and doing prioritization, perhaps choosing the bigger things to be the top priorities. Later the company will create the foundation to move forward. I'm certain that the potential is so big, the expectation was so big that we translated all that expectation too fast into a level of complexity that we were not ready to manage. João, just to answer your second question, which is extremely relevant when we think about sell-out and sell-in and this balance, so that it can be translated in destocking and increase in sell-in and then so we can enter that positive cycle.
I would say that in the past few months we have been observing this talking movement taking place. We estimate, of course, it's not a precise or perfect piece of information, but we believe that something that 6 million pairs have already been removed from the chain in the past months. Looking at perhaps a medium term for the main channels, we believe that we still have around 15% above the normalized levels. It's a little bit beyond. Of course it all depends on this relationship and how the sell-out will perform from now on. We believe that with time we are going to have a better convergence.
These terms start working again and we have a better leveling and a better connection between sell-out and sell-in, which would be healthier for this dynamic because these different levers, portfolio and the price decisions, they have a faster communication to the market because as everyone is with a lot of stock, these levers, they lose a little bit of their effectiveness. What you mentioned is extremely relevant and it's exactly where we want to work on in order to find a better balance when it comes to the use of our top line, improving our mix, prices, portfolio, all that. We can destock the chain and ourselves. Perfect. It's very clear. Thank you for your answers. Thank you, João, for the questions. Thank you, João.
Next question from Guilherme Vilela from JP Morgan. Hi, everyone. How are you?
I think the early diagnosis was quite good. It was an interesting conversation. I wanted to talk about pricing, something that Luiz mentioned. As you become less efficient, perhaps not efficient, but as you stop increasing prices for consumers, how can we think about marketing expenses in that scenario? Because that was the major factor for the 2022 P&L. Do you think that this reduction in the pricing that we are to expect in the following quarters, does that have a communication with a reduction in expenses and marketing expenses additionally to what we have seen in reductions of infrastructure and other changes that are happening in the company? That is my question about marketing expenses. Guilherme, I'm sorry for I had forgotten your name. First and foremost, I just wanted to go back to the first conclusion that I mentioned.
I have been here for some time, but when you look at the numbers, I have no doubt about the power of this brand. Havaianas is truly a remarkable brand. Of course it will always be attacked. Others will always try to gain market share from us. The main asset that the company owns, which is our brand, needs to be preserved and that requires investments. There is unquestionable. Besides that, marketing investments overall, it is very difficult to say that they will translate into volume in a very short term.
What I want to ensure right now, and I still haven't been able to do that, is for the marketing directions to focus on that, on strengthening our brand and strengthening our brand so it can grow and reach the potential that it has in line with the plans that we have, which are our execution capacity, production capacity. Today I don't have that assessment. Clearly investing in our brand should always be a good thing because it's a strong brand that allows us to do a premium price. It allows us to enter other markets, other countries and have a good share, et cetera, et cetera.
Having said that, if you want a number, I cannot be specific, but as a percentage of revenue it should be sustained in time. I believe that perhaps we have an exaggeration when we look over the first quarter of last year. Throughout time, this marketing %, shouldn't vary too much. It should remain stable throughout time. Certainly, this is not what we have seen in the first quarter of this year. I think you're going to be able to find out that better when you look at the coming quarters and you do the rolling of the investments or if you wait until the end of 2023. Again, we are not supposed to see major variations as a percentage of revenue.
Perhaps a few, in one quarter, you might see something different because of, I don't know, a special holiday or a new product launch. Throughout time, we are not supposed to see so big variations as we have seen in this first quarter. That's a very clear answer. Thank you very much. A second question that I had was about your cost dynamic. Since the third quarter of last year, the butadiene and styrene prices are dropping year-over-year. In your early diagnosis to re-simplify everything, how does that fit in, and how can we see this gross margin for the coming years, considering this lower pricing or this lower cost of raw material? How do you see that as well? Thank you very much. Thank you, Guilherme. Maybe perhaps I could take that one.
Just making an adjustment so you don't have any misunderstanding. We are not talking about a lower pricing. We are being very careful on the way we use our top line. We are not necessarily talking about a reduction. Pricing is a tool for growth, right? Yes, using pricing for what it's supposed to be used for, or helping us position the brand, be competitive, and not as a way to offset effects that coming from costs or inefficiency. This is the disconnection that we want to have from now on. We are not talking about price reduction. That is being deeply discussed. Actually, right after this meeting, we have another meeting about that. Just to make that clear for everyone. From the cost perspective, you are right.
The same movement that we saw last year because of the Ukraine war, with the price of oil and butadiene as well going up quite intensively. The company made decisions to have more stock at that moment, and the price of raw materials stayed higher. Together with that, there was a contraction in volume of sales. We ended with an average cost that was higher and more inventory that we wanted to have, but also an average cost of inventory which is above our marginal production cost. Since then, this movement has changed. The price of raw material has been dropping. We already see an interesting movement of decrease. Together with that, we also see some adjustments in the production cost, adjustments in the fixed cost in our factories.
This marginal production costs are dropping not just because of raw material prices, but also because of actions that we have been making in the past few weeks to reduce our manufacturing costs. You rightly pointed out that despite the fact that our marginal cost has dropped, since our stock levels are above what we want it to be, we don't have an efficient transmission from this cost because we are still draining from a stock that is positioned at a higher production cost from last year. This dynamic should happen in the future with a gradual reduction of this as we normalize our stock levels. This is going to convert to a significant lower marginal production cost that is significantly lower than what we had.
What we wanted to say about this is that we should expect that our pricing dynamic is not going to be based on cost. This is the speech that Luiz mentioned in different ways. We should see this cost going down as the whole industry sees the same movement. Oil prices are going down, and of course, that influences the whole price structure of the chain. To some degree, that is going to be transferred in price. Right now, we are perhaps not in the best moment, and it's not a recurrent thing at lot, at least from the structural point of view, which is a difficulty that we are seeing in the endpoint. The sell-out is lower than what we expected and locked at a higher cost because of the war situation, which is an extremely one of a kind event.
This composition of gross margin shouldn't be seen as a recurring movement, but a healthier gross margin that is more compatible with our brand and with our manufacturing efficiency level is going to come as soon as this stock that we have is drained. This is the dynamic that we expect, and there's no structural reason to see more compressed margins from now on when it comes to at least what they used to be. This movement of loss of gross margin is because of this unique scenario, even though it has lasted longer than what we expected. Now we need to be cautious and wait until we recover volumes and the average accounting cost converge to a scenario that we have today.
Perhaps I could go back on the topic of price. I don't want to make this call into a price discussion. In the previous quarters, we have always used this expression, Revenue Growth Management. Which includes a number of initiatives, among them, price increases for the same product throughout time to offset different effects. Many other initiatives as well, just like the optimization of discounts, having more sophisticated analysis on the types of promotions that work or versus those that don't work, introduction of products with a higher added values, having a more premium portfolio, participating in categories that have a higher value. There are a number of initiatives taking place.
Whether because we have the war situation, post-COVID cost pressures, manufacturing inefficiencies, our Revenue Growth Management was too much focused on price increases instead of considering all the other variables that are part of it. Many times or throughout the past quarters, much above the accumulated inflation from the past 12 months, especially because our internal cost inflation was much higher than the inflation to consumers. Throughout time, we shouldn't expect our price [per pair] to go up beyond inflation levels, except by adding a more positive mix or improvement in our discount structure. Are we going to grow in the price [per pair]? Inflation, inflation plus 1 or 2, 3 points, but it cannot be 100% above the inflation. You cannot have an inflation rate of 10 or 5 and increase prices in 10, 12, which of course, will bring us a consequence.
Like I said, elasticity is slow but it's not zero, and it accumulates with time in the volume effect. This cross elasticity that is translated on the price comparison because our direct competitors and also competitors from other categories that could be a substitute exist. Even with the frequency of purchase of the consumers. Havaianas is a long-lasting product, but it's also a fashion product. We need to encourage our consumers to come back and buy a second, third and fourth pair. If we cross a line of a specific price, we lose frequency. Someone is going to decide that it's not the time to get a new pair to get more pairs. We need to be smarter.
Of course, the reason why this happened is because our costs went up way above the inflation that we saw in the market, and that put a lot of pressure on us. In an attempt to protect our profitability, we did the price increases. Now that the temperature is cooling down a little bit, this equation is going to be more favorable. Less price on specific items, more pricing intelligence, and a better management of our costs, which will improve our performance of gross margin. That's what we expect. Thank you for your question, Gabi. We have received a question via chat about our leverage level and what would be the optimal capital structure in the long term. Thank you, Rafa, and thank you for the question. I think it's important to say that first, we're not worried about our leverage.
We're not at an alarming level. We don't have an urgent need of capital in the coming months. We don't see that. We didn't want to have a liable leverage. I think the leverage that resulted from the movements that we made in the past two quarters, our leverage went up in an unproportional and fast way, which is something that we don't want. It was a choice, it was the result of the results that we got, which led to that level of leverage. Both things were not wanted. Before we discuss the optimal level of capital structure for the company, this is the short-term movements that we need to pursue is this reduction of leverage.
This is what we see when we look at our focus, for the next year, Enter in this dynamic, considering the focus that we have already mentioned, focusing on working capital, focusing on sales and our sell-out operations, so we can, stimulate our selling and make this stock move. All these movements should bring us a more productive or healthier dynamic with our working capital. Of course, that is going to deobstruct our leverage. Initially, we want to reduce leverage. This is the plan and this is the focus of the company. We don't see any need. Of course, this is, open information, it's public, but it's important to remember that our, terms for this debt are quite long. This is really well structured. We don't have any concerns in the short term.
Even from the operational cash generation and the working capital dynamics, at least on the way we understand them today, and with the information and plans that we have, we believe that for the rest of the year, especially the second half of the year, we are going to see a gradual recovery on our cash generation. Of course, that has an effect on leverage. We don't have any short-term pressure, any visibility on an eventual need of extra additional capital. Of course, in the future, and when I say future, I'm talking about after we have focused on operations and gained efficiency. We want to have a leverage level that is more consistent or more predictable or more controlled by us.
I don't think we should focus on considering an optimal capital structure before we have a profitability level that is substantially higher, but also a recurrent and more controlled, long-lasting level. Once our ROI it puts us in a comfortable position when it comes to marginal costs, once we see the return levels that are consistent with time with the operations more under control, of course, we would discuss optimal capital structures. I don't want to go into specific numbers for the company, the sector, or for the specific dynamics of this company. We believe that without a doubt, the movement should be focusing on reducing leverage, this is what we are focusing on. I just wanted to highlight that. Thank you for your question. It's a very timely question about a very sensitive topic to all of us. Thank you.
Thank you for your question, Brett. We have our final question now by Gabriela Fernandes from Safra. Hi, everyone. Good morning. I have a question about stock levels that you mentioned before. I want to know about sales in the months of April. When do you expect to get a more normalized stock level? Thank you. Gabriela, this answer cannot be a generic one because you're talking about our own stock, right? The convergence of sales and stock. First, today for the main product lines, we have stock that is closer to our normalized levels. That's the first important thing to mention. Obviously, for some lines, for sandals, slides, and other items, the dynamic is a little bit beyond what we wanted.
We still have a certain level of excess, which of course bothers us. We are doing some efforts to try to connect the commercial efforts with this release of working capital for those lines of products as well. One important thing to notice is that when we look at the recent movements of stock reduction, we saw stocks dropping substantially in older collections and other lines. The new stock was created specifically because of that. The average quality of stock is better. The stock is more readier and more appropriate to our sales mix from now on. The total level is still quite high, especially in terms of value. It goes up in comparison to the previous quarter.
It's not a substantial increase, especially because we have pushed the brakes significantly on the production side, the levels are definitely above what we wanted them to be. Now we have a dynamic that requires a previous step, which is this destocking or selling of the stock to the chain. Like I said, we have already started this process, it happened to a substantial level because today we have a disconnection, which would be the optimal stock of level that customers have. That would be 15%. It's not an alarming number, but it's closer to reality. As we complete this movement, we're gonna have a better selling dynamic, and we are going to see our stock levels going down much more. It is a dynamic that takes some time before it happens.
It's not going to happen in April, but of course, it depends on our sell-out performance down the road. That is our focus for now as well. It's not going to take three years before that happens. We are talking about an effect that is going to happen by the end of the year, both in the chain in our clients, distributors and partners, as well as internal stock levels as well. It's still going to take us a few months. On average, I would say that by the end of the year, we are going to go back to proper levels. I just wanted to add with some numbers, considering the stock variation by the end of December to the end of March. There was a construction of stock for newer collections and products that are not part of a specific season.
Part of our portfolio is comprised by those products. We focused our stock composition on those products. We also build stock in our international operations. It's important to remember that in the international operations that we operate directly, Europe and the U.S. mainly, we are starting our high season, so it's regular, it's normal to see this stock increase in this quarter. Stock has been consumed around BRL 50 million from products that from older collections. Perfect. If I may ask a final question. Considering your portfolio mix for the international markets, do you still plan on increasing this mix, or are you going to hold that as well? Are you going to push the brakes a little bit when it comes to the international mix?
This year's portfolio is more adjusted than last year's portfolio, but we still haven't started the discussion on what we are going to sell next year. The cycle for the international market is quite different from Brazil's. Right now, we are preparing the portfolio for next year. While folks in Europe are selling the portfolio in the coming months based on the summer in Europe, our marketing team is working to define next year's portfolio. It's too soon to tell. There has been a reduction, we can say that. Probably, there's going to be another reduction, but not nothing too significant. We have tried some things in Europe. Probably, these things that we have tried out, we are going to filter out things that worked and things that didn't work based on the results that we see now for this summer.
It's a little bit too soon to talk about that. Perfect. Thank you very much. Thank you. Thank you, Gabi. With that, we would like to end our Q&A session. I'll hand the floor to Luis for his final remarks, and we can end the meeting. It's undeniable that our results were quite bad. It's not the first quarter, this quarter the results were quite bad. It's undeniable the potential that the brand had. The people we have with us, with a little bit more of coordination, focus, and prioritization, I'm certain that we are going to see evolution in the results in the coming quarters. At the same time, we are going to build the foundations that will allow us to grow in an accelerated pace in the future. These are our two top priorities.
We want to simplify everything inside the company based on the mapping work that we have already done and the discussions we have already had. At the same time, we want to prepare a better foundation so we can continue to be successful throughout time and we can continue to grow in a sustainable way. Thank you very much for your attendance, and I will see you all in the next quarter.