[Foreign Language]
Good morning, everyone, and thank you for waiting. Welcome to the video conference to present Alpargatas' third quarter 2025 results. I would like to highlight that for those who need simultaneous translation, this tool is available on the platform. To access it, simply click the button interpretation via the globe icon at the bottom of the screen and choose your preferred language, Brazilian Portuguese or English. For those listening to this video conference already in English, there is an option to mute the original Portuguese audio by clicking on Mute Original Audio option. Please note that this video conference is being recorded and it will be made available on the company's Investor Relations website, ri.alpargatas.com.br where full earnings release materials can also be found. The presentation can be downloaded and is available in the chat icon, including an English version. During the company's presentation, all participants will have their microphones disabled. After the presentation, we will begin the Q&A session. To ask questions, click the Q&A icon at the bottom of your screen and type your question to enter the queue. When your name is announced, a prompt to activate your microphone will appear on your screen. At that point, you should turn on your microphone to ask your question. We recommend that you ask all of your questions at once.
[Foreign language]
We emphasize that information contained in this presentation, as well as any statements that may be made during the video conference regarding business outlook, projections, and operational and financial goals of Alpargatas are based on the beliefs and assumptions of the company's management, as well as on currently available information. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions, as they refer to future events and, therefore, depend on circumstances that may or may not occur. Investors should be aware that general economic conditions, market conditions and other operational factors may affect Alpargatas' future performance and lead to results that differ materially from those expressing such forward-looking statements. Today, we are joined by the company's executives, Mr. Liel Miranda, our CEO, Mr. André Natal, CFO and Investor Relations Officer, and Ms. Melina Rodriguez, Investor Relations Director. I now hand the floor over to Mr. Liel.
[Foreign language]
Good morning.
[Foreign language]
Thank you all for being here with us today. As usual, we are going to start by giving you an overview of Alpargatas' businesses in the third quarter. And I think it's important to start by talking about the growth of Brazil and international. In the international market, we saw a third quarter where in all of our geographies, we reached growth in sellout, which means the results of all efforts, communication, marketing, and distribution that have been deployed over the past years. Europe grew 2%, U.S.A. grew above 30% in sellout. And in the IDM, in this international distribution markets, which suffered in the first half of the year due to variables in markets where we have specific problems to handle reached in the third quarter 5.3% of growth. Reverting the trend, we saw the negative trend in the first half of the year. In Brazil, we saw the growth trend that we already saw in the first half of the year, both in sell-out, which means the final sale to end consumers, as well as market share gains, especially in the modern channel, where we measure using Nielsen. And finally, in the Specialized channel, which is a big opportunity for Alpargatas to grow, in all recent quarters, we have been growing there. And this quarter was not different. We grew 3.5% in the Specialized channel.
[Foreign language]
As for marketing, we had the summer in the international market where we deployed a lot of efforts, and these efforts have resulted in good achievements, both for the brand recognition and also operational results. We have just been recognized as the most desired fashion brand in a very well respected list, And Havaianas was crowned as the most desired fashion item in the world. In Brazil, we start summer, as we know, with a communication campaign, and this year, this communication campaign is being reinforced. In the past years, we used it to have a more restricted geography for this communication, And this year we are having better efficiency and are widening these market investments in Brazil. It's going to be a national campaign to be deployed in all media outlets, which has actually debuted a few weeks ago.
[Foreign language]
And last, we also know the large opportunity Alpargatas has in the portfolios of kids and men's products, in which our market share is a little bit smaller than our market share for the women's product. So they are all growing and more accelerated than the overall growth of the company. In this case, this segment grew 13% in the third quarter. So as for the growth, we see good results across all geographies, all segments, and this is the result of a lot of hard work in all the previous quarters.
[Foreign language]
When it comes to simplification of our operations, We continue with our agenda policies and strategy over efficiency and we keep reducing our fixed expenses when we compare to the basis of 2022, we are still growing. We confirm a total reduction of 17% of fixed expenses reduction compared to 2022 impacting all of our margins. And the last movement we made as part of this agenda was the migration of the shared services center, which used to be outsourced. And this was brought in-house, allowing us to keep moving in this journey of simplification and efficiency improvement. Because other areas in the company will be able to be simplified, automatized, generating cost reduction and synergies.
[Foreign language]
As for the enablers that we need for our future growth, One variable that we spoke a lot about in the previous quarters was the service levels to our clients. And we see the on-time in full service levels, which is the capacity to deliver on the date promised and in the amount promised. And the fuel rate, which is the total amount of deliveries, also is still growing. So our capacity to resolve a historic problem of logistics and distribution to our clients is being addressed at the moment.
[Foreign language]
[Foreign language]
As for the inventory management, which was also a problem we saw in the past, we have been having this discipline of working always focusing on sell-out. All the distribution we make and deliveries to our internal clients and distributors is based on the reading of what they are selling to end users or to resellers. Therefore, we avoid an accumulation of inventory in the chain. This has been carried out with discipline in all geographies, and we see that in this quarter. And last, as for capital allocation, we have a proposal for reducing our capital structure, which was announced last quarter, and which should be implemented by the end of the fourth quarter of this year. And as for the investments, they are still being allocated with efficiency. And our ROIC increased 7 percentile points year over year. These are all signs of this management and discipline.
And last, as you saw the announcement we made yesterday, Alpargatas Board made the call of not exercising the purchase of Rothy's, which means we are still significant investors of Rothy's. So we'll keep working with the other shareholders and the management team in the U.S. as we have done in the past, seeking more growth and more development for this company, but maintaining our current capital participation at Rothy's stake.
[Foreign language]
Now I give the floor to André, who will take you through the numbers of all of those results.
[Foreign language]
Good morning, everyone. It's a pleasure to be here with you to share a little bit of the numbers specifically for the third quarter. I think this is a quarter which is important because it consolidates a series of advancements we were seeing in several fronts along the journey and which we deemed as priority. So the results we are reaching right now are a first evidence that some of the pathways we had chosen are actually yielding the good results for the company.
[Foreign language]
When we look at the global map of growth, we had important growth volume in all regions, across all regions in the world. As we always had, the third wave of adjustments that we prioritized was about the international markets. And this is an important quarter from this perspective because it shows significant volume growth in all international volumes, 15% in U.S., 8% in Europe, considering that they are already at the end of the peak season, and 5% in the international distribution markets which encompass Latin America, Africa, and Asia. So it's meaningful, it's a meaningful result, followed by a meaningful growth in revenue.
[Foreign language]
In Brazil we had a small retraction in volume compared to one year ago, but this is expected. We were already warning in the first and second quarters of the year that we had carried out a strategy of anticipation of sellout to our distribution. So there was sort of an expectation that we were going to retract a little bit our sellout. As Liel said, we respect a fine management based on sell-out, so this retraction, decreasing volume is in place for accommodating sell-in and sell-out, which is never the same, but we're always going to be trying to balance them out. So this adjustment is much more a symptom of this choice of being disciplined between a sell-out and having our sell-ins always focusing on this final sale to consumers, the sell-out.
[Foreign language]
Now moving on to the cash generation, we generate BRL 255 million. This is an important mark because we have reached 10 consecutive quarters of generating positive cash. Over this period, we accumulated over BRL 1.3 billion, which is an important milestone, and made this graph on the right-hand side possible, this leverage of the company. We reached this very high ground of 2.7 leverage, and this prioritization of what is really important in this discipline was what actually allowed us to reverse this trend and bring our leverage into negative levels, as you can see right now. So in other words, right now we have more cash than we have debt in the company. And this is what resulted in us proposing to the shareholders to reduce our capital structure which has already been approved in an assembly of BRL 850 million.
[Foreign language]
Moving on, we can see the working capital variation is pretty much neutral. We have some important effect of inventory reduction on the one hand and on the other hand we have a reduction in raw material prices and commodities that we need to purchase. And as a result, we have a certain reduction in the working capital. So the working capital follows the normal.
[Foreign language]
When we look at the CapEx, our investment was pretty much the same as our previous quarter in the second quarter. And this is within our annual plan, which was approved by our General Assembly at the beginning of the year. And the yearly prediction of investment is BRL 220 million. And we follow the implementation of the major marketing campaigns to be within this budget provision.
[Foreign language]
Now moving on to Brazil's results. Brazil saw a sell-out increase of 1%. When you look at the last months, consolidated number, this is closer to, this is the metrics that we should pursue in the long term, and this is what we use as a basis for our discussions every month after month and decide on the pathways from now on of how we manage our inventory levels so we can make the movements which are coherent with our sales position without generating a surplus of inventory in the market. In this moment right now there is an accumulation of inventory of 3.5 million pairs and this is normal because in Brazil in the third quarter is when the retail is stocking up for the summer sales in the fourth quarter and the first quarter 2026. So this is absolutely normal to have this some accumulation in inventory and we have reached this 3.5 million accumulation even though we had this retraction of 3% in the sellout. Again, to accommodate parts of the sales we had already anticipated in the first quarter as you must remember.
[Foreign language]
Moving on to our gross profit and gross margin, we have had a strong recovery compared to one and two years ago. And even when compared to the period when we had even higher volumes, such as in 2021 and 2022. This obviously is generated by several things, but continuously we have been demonstrating efforts in our manufacturing activities in addition to a management of a product, which is very careful and gradually making our mix of products more premium than before, which led us to generating an expansion in margins. If you compare to the previous quarter, we saw a higher gross profit per pair because of this scale, higher scale. Moving on now to the SG&A expenses, this is a permanent agenda for the company and of course this is one of the first items we addressed in our China round, but this will not stop. We keep looking for efficiencies and opportunities to be more efficient.
[Foreign language]
So when we look at this bar graph on the left, we can see an important route of reducing in the expenses connected to an increased margin, which leads us to the EBITDA graph on the right side, which led us to having a 30% EBITDA margin in the third quarter, which is an all-time record. So that's an important milestone. And this is the result of several things I mentioned, price discipline, management based on sell-outs, efficiency management, and so on. And all of that connected to the manufacturing efficiency lead us to this meaningful result. And this is the work of a large and dedicated team that made us reach those numbers.
[Foreign language]
Moving on to the international operations, we mentioned several times that this was something that depends on regaining scale and recovering the scale. If we did that, we would be able to reach desirable returns. So when we look at that, we saw that we had important growth in all regions. Europe closed the peak season with a volume expansion, and that was an important symptom that we wanted to see in this operation, and Europe did not only that, but did that with a very good, healthy numbers, you know, considering the channels and prices that we have in operation right now in Europe. So, this growth that happened in Europe we understand to be solid and a good foundation for a positive future.
[Foreign language]
In the U.S., while we are still working in the business model transition that is going to kick off next year, at the same time, we are making sure we manage our operations well. So, in this quarter, we see an important growth in the volume sold, also a growth in the revenue in terms of an important numbers of growth in terms of channel and profitability. And for the international distribution markets, we also see a growth in volume sold after having a first half of the year of reduction in sales. We believe this is also important to consolidate our scale, to reduce expenses and have increasing margins in this region.
[Foreign language]
As such, we reached a gross margin of 63%, which is three percentage points higher than last year, and which is already above the levels we were at in 2022, when we had a bigger sales scale. So these results are based on the recovery of sales, but also in all the efficiency that we have gained over time.
[Foreign language]
As for the expenses for the international markets, we also see a reduction, important reduction in fixed expenses. We went from 89-68 on the left-hand side graph. And there is also a smaller reduction in the marketing expenses. But this is absolutely related to a few reasons. First of all, it's the seasonality. We had a second quarter which was stronger. Here we're only showing you the third quarters, so we cannot see that here on the graph. But basically, our second quarter was stronger. We concentrated our marketing expenses there than we used to, and we removed a little bit of this investment in the third quarter.
[Foreign language]
Another reason is that last year we had the Olympics, which justified the increasing market expenses we had in Europe. And now we are returning to the normalized levels of investment. These are basically the two results when you look at this larger nine-month time series. There is also a decrease of marketing expenses in the U.S., but it goes back to the historical levels of marketing expenses because in 2024 we had an increase of that, so we are back to what we understand being a normalized historical level of marketing expenses in the U.S. Even though there is apparent retraction, when you look at a longer time span, you know, expenses remain untouched. So we are not looking for efficiencies by cutting off investments in marketing just to make sure everyone is on the same page here about that.
[Foreign language]
And last, I would emphasize the EBITDA margin that we, in the last past two years, in the third quarter, we had margins which were below 21%, like difficult moments in the international internationalism. And now we are back to minus three in line with our seasonal expectation and in line with what we had in 2021-2022, which was yielded by this better gross margin, but also by a better disciplined expenses or expenditure management.
[Foreign language]
Last, I'd like to emphasize that Rothy's has reached its 12th consecutive quarter of expansion in its EBITDA. So we have expanded in all of those 12 quarters, some expansion in EBITDA, even including this problem with the tariff in the United States. We found other means of reaching efficiency, resulting in important operations. Over the last few quarters, we have been compensating the tariff effect and moving on this trajectory of growing margin and strengthening our EBITDA.
[Foreign language]
This is what we had for you in terms of figures, and now we are going on to the Q&A. Satisfied with the results that consolidated the advancements we saw, but at the same time with an outlook of doing much more in the future.
[Foreign language]
We will now begin the Q&A session. As a reminder, to ask a question, please click the Q&A icon at the bottom of your screen and type your question to enter the queue. When your name is announced, a prompt to activate your microphone will appear on your screen. At that point, please turn on your microphone to answer a question. We kindly ask that all questions are asked at once.
[Foreign Language]
Let's start with our first question. It's from Dani, sell-side analyst with AppSpeak.
[Foreign language]
Good morning, everyone. Thank you for taking my question and congratulations for your results, especially for these long-term results. I have two questions from my side. The first one is to Liel and Natal. I think we were with you during the investors day and you showed several opportunities that you see for the future in the outlook of the company. you even mentioned, right, in your results, this metaphor of climbing higher mountains. Maybe you could give us an idea for the next month. What do you see? What are the main leverages for generating value for the business in 2026?
[Foreign language]
Obviously, the international operations are the focus, but like if you could give us like three main leverages or, you know, that you can use in the short term to generate value. You know, there are several that we, I believe there are several in the midterm, but I would like to understand a little bit what is the most important thing so we can monitor, you know, for value generation for 2026 and ask for the gross margin. There is a, it was a very strong gross margin.
[Foreign Language]
So I'd like to understand how we can see these as being sustainable from now on, because whether or not you like the channel that you have been struggling the most, which is the grocery channel in Brazil, and which has probably the worst return on the mix of products, because you have the most basic products being sold there, not the premium one. So maybe if you could make us understand what you see for the future or what's actually part of the strong gross margin that you have had in this quarter, last quarter. Thank you.
[Foreign language]
Thank you, Dani, for your question. I will answer first and then André can compliment about the margin. What do we believe in terms of opportunities for generational value is what we presented to you during the OPA day, a reminder that we don't give any kind of guidance and expectations or any kind of a forward-looking statement. You know, the desires we have, which are not new but are materializing right now, are first of all the specialized channels in Brazil. This represents about half of the market, and we have a significantly small market share there compared to the grocery channel. We grew in this quarter 3.5% in the specialized channels, which is accelerated compared to the overall growth we had. And this is because of the focus we are having on growing this channel. We have been trying to improve our on-time in full service, right? We are reaching 80%, way, way better than it used to be in the past.
[Foreign language]
We have launched lines of man's products and kid's products, which is much more directed to this specialized channel, which has been helping the growth. And also the commercial focus of working with them and developing our operations there. So in Brazil, our specialized channel represents this mountain to be climbed here in Brazil in the next years and quarters.
[Foreign language]
Speaking of the second opportunity starting next year, is the business model change in the U.S. As we mentioned before, we didn't have a distribution scale since we had a small operation there and because of that we couldn't grow. And all of that combined with a strong own operation costs that we had in there because we had since the management of storage of the products as well as all the way through the sales to the end-user. Next year we are going to change this business model as you know we are going to we have made a partnership with a distributor that has decades of of experience in the U.S. Eastman Group, and we believe our capacity for distribution is going to be way, way bigger than we have ever had there.
And this should boost our market share and returns. On the other side, since we are going to have a distributor participation, we are going to be focusing on what's the most important part, which is developing products and marketing in campaigns, and all of the operational costs are going to be borne by our commercial partners. I would say that the U.S.A. is the second largest opportunity for value creation for the business.
[Foreign language]
And the third, which applies to all geographies, and it's a journey we are already in, we are much more disciplined in our pricing management, you know, in terms of generating value through sales. So, our choice of channels, our policy for discounts, and our portfolio strategy has been generating more value with the same number of pairs sold, with the same number we have been reaching higher margins, and this should continue to be an important lever to generate value.
[Foreign langauge]
And the third, which applies to all geographies, and it's a journey we are already in, we are much more disciplined in our pricing management, you know, in terms of generating value through sales. So, our choice of channels, our policy for discounts, and our portfolio strategy has been generating more value with the same number of pairs sold, with the same number we have been reaching higher margins, and this should continue to be an important lever to generate value.
[Foreign language]
André here. About the margin, I think it's an important point, and I'm going to use this to talk a little bit connected to what Liel mentioned of price management. We have had a very disciplined pricing management. But if you look at compared to what we had a year ago, we had an average price in Brazil which is about 10% higher than the third quarter in 2024. And this is not an effect of a price increase, in fact. This was a problem we had in the problem of excessive price increase, and we don't have this problem anymore.
[Foreign language]
Instead, we have a better mixing of the products, which leads to better results and higher margin rates. So when you look at this evolution of the gross margin, if you compare the figures of the third quarter compared to a few years ago, we see that the top line per pair has expanded, but with basically flat COGS expenditure. And if you look at the cost of goods sold, COGS, and you analyze that throughout all the variables that we face, there is the raw material, which has been flat with the exchange rate pretty much flat and with a smaller volume, and our COGS move it actually sideways, like the variation of our cost of goods sold was of cents, and there is something interesting to look at in there.
At the same time, we have a better mix of more premium products that yielded us to get better results. The gains in efficiency we had in our manufacturing system were enough to offset these better products, mix-up products. So you have this virtual cycle of the mix in the revenue that doesn't result in increase of prices in manufacturing because at the same time, we gained a lot of efficiency in our operation.
[Foreign language]
So, you know, you don't provide guidance. So I don't know how much this is going to be sustainable or if we're going to keep these gross margin. But either way, what I can tell you is that these efficiency gains that we have mentioned and which are the foundation for these numbers, these are things that are here to stay. None of that are random for this quarter that would show these results and justify those results. On the other hand, you need to remember always that we are always buying commodities that are exposed to the exchange rate variation.
[Foreign language]
So I cannot know how this is going to be in the future, what price levels will be in the future. But yes, if we think from the perspective of what we have done, we have made an important movement in the company. And from this perspective, I can say this is here to stay, but the margin levels from Now, one will be based on all the other effects, as I mentioned before, commodities, prices, variation and all the variation in the exchange rate.
[Foreign language]
Thank you for taking my question. I appreciate it.
[Foreign language]
The next question is by Vinícius Strano, sell-side analyst with UBS. Vinicius, please open up your microphone and ask your question. Vinicius, go ahead. Go ahead.
[Foreign language]
Good morning, Liel, Natal, Melina. Thanks for taking my question. First of all, I'd like to explain a little bit to the gross margin in Brazil. It was a very strong evolution. I would like to explore a little bit the operational leverage because we still have volumes which which are much below the peaks we saw in the past and yet you have a very expressive margin. So maybe you can talk a little bit how about your gains in operational levels can help you in the margins in the future and as for the U.S. I would like to hear from you how you see the level of the negative contribution of the American market right now and how you are working this hands-over to the instrument Group partnership, and what is the minimum scale you imagine for the U.S. in order to make it profitable next year? And yes, about the United States operation, I'd like to see how you see the brand image and the perception you have about your competition or the competitive landscape in the U.S. So I would like to understand in summary a little bit the potential you see for the U.S. market.
[Foreign language]
Thank you, Vinícius, for your question. I will start with your second question speaking about the American market. Obviously, you remember we always disclaim here that we don't give guidance, so I can and tell you where we are and what the strategy is. But the situation for the U.S. market is 2025 is a clean or clear year. It's a year where Alpargatas Fear of God is operating in the U.S. as it used to operate previously. All the positive results which are coming right now are already the fruit of our efforts to improve our sales and commercial execution in the very format we are operating right now. and this has yielded positive results. The volume, the 30% volume increase shows that.
Secondly, it's a market where people are, the promotions are, the special price are very important. And we have focused on the channels which offer more profitability rather than in discount channels. You know, this is a policy we have for all the geographies. You know, we want to rely more on full price channels than discount price channels. The combination of all of that with the operational efficiency that we have been pursuing in all of our functions, in all our roles, in all our areas of efficiently managing our costs has resulted in a very strong loss as we used to have in the American operation. You know, the results actually impacted the results for all the international operations.
The last third quarters in the previous years were very negative. This year was still negative, but was already much normalized, you know, compared to the 2021-2022 operational year. So we actually have resolved the big loss we had in the U.S., bringing this to a historically normalized level.
We have focused on the channels which offer more profitability rather than in discount channels. You know, this is a policy we have for all the geographies. You know, we want to rely more on full price channels than discount price channels. The combination of all of that with the operational efficiency that we have been pursuing in all of our functions, in all our roles, in all our areas of efficiently managing our costs has resulted in very strong losses we used to have in the American operation. You know, the results actually impacted the results for all the international operations. The last third quarters in the previous years were very negative. This year was still negative, but was already much normalized, you know, compared to the 2021, 2022 operational year.
We actually have resolved the big loss we had in the U.S., bringing this to historically normalized levels. This is what we managed to achieve in 2025. The handover is completely planned and is being executed. We already have a sales and commercial and distribution contract with our Eastman Group. It will be kicked off in January. From January on, we expect that our distributor, Eastman Group, will take the heavy on us, Brandon, to more doors. As a result, we are going to have an expansion in volume. I cannot tell you exactly what it is, but we expect it after so many years selling flat sales in the U.S. We believe that we have potential. I think it is kind of obvious, right? The potential of the American market is much bigger for Havaianas. We expect to increase this substantially.
As we said before, the U.S. is a very fragmented and competitive market. Even though we have a very low volume, we are the second top of mind brand in the U.S. by consumers. You know, so this demonstrates the potential we have. We are a well-known brand with a positive image with consumers, you know, which relies on many years of brand building in the U.S., however limited by our lack of capacity, so as to say, to distribute well, which we expect to fix now with this new partnership. I cannot give you any numbers for 2026 or any kind of a guidance of expectation, but what I can tell is that results for 2025 are normalized, you know, back to years such as 2021, 2022, where we saw growth in volume, and we expect that in 2026 we are going to accelerate in that direction. Natal, can you complement with anything I have said?
Hi, Vinícius, thanks for your question. This operational leveraging, it's important. There is an analysis I'd like to mention that we presented during our investors' day. We have already tried to analyze our gross margin, looking at all the scale loss we had, you know, considering the peak of volume in 2022 and all the way up to now. You certainly have seen these analyses, but you can go and look again. With that number of volume that we had back then, we were already reaching record margins if adjusted, if the scale was adjusted to our current scale. Considering that if the scale could go back to that levels, again, these are not building blocks that we can put on top of each other, right? Things change, commodities change.
There is, as I answered in Dani's question previously, but there are many things that could change, there are many variables, but if all of that remains constant, we still have scale gains in manufacturing. If we manage to go back to manufacturing the same volume we were manufacturing in 2021, but we have to, you know, mention something important that in addition to the operational leveraging, there is also an important EBITDA impact there because of our efficiency gains. When we look at our EBITDA margin per pair that we had in Brazil in 2021, in the third quarter, four years ago, it was at BRL 2.95, about that. And now our margin is BRL 5. It is almost a 73% growth in this EBITDA margin, very meaningful, very relevant.
When we look at this margin EBITDA per pair, when we break it down, over 100% of this is because of efficiency gains in our operation. In fact, we have a negative effect of this scale loss, which is extremely relevant to, you know, which could add another BRL 1.80 on top of that. We increased our efficiency strongly enough to offset this loss of scale and yet to increase our margins. As we go back to our manufacturing levels, we should be able to add more to these gains. Again, I cannot give you a number where we can get to because of all the variables that impact, but just to give you an idea of how much these scale loss in the last four years have impacted operations and how much we can regain that in the future, how much of this is possible.
Okay, thank you for taking my question and for answering thoroughly, André and Liel.
Now the next question is from João Soares, Sell-Side Analyst of Citibank. João, open up your microphone and ask your question. João, go ahead.
[Foreign language]
I'm sorry. I was having a technical problem here. First of all, I would like to congratulate you. I think you made one of the fastest and most efficient turnarounds I have ever seen in the market, so congratulations to all management. In Brazil, our operations, you have resolved it, you have concluded a turnaround in Brazil. I think it's important what Vinícius brought up about the operational leveraging and about the margins in the international operations
I think one important point is to understand Europe's moment. There was a good volume sold this quarter, and I think based on that, you can already have an idea of the pre-ordering levels for 2026. I would like to understand a little bit what you see for the European market. I would like to understand what kind of scale would make our operations a little bit more comparable to our Brazilian margins. You know, I want to understand how much of this operational scale can contribute to your margin abroad. The marketing expenses, how do you understand the phase-out of the marketing expenses? This quarter was a positive surprise. I would like to understand how much it is sustainable and how much you are looking at this marketing expenses, if you are going to hold this, if this is a sustainable level of a market investment considering every quarter.
Thank you, João, for your question.
I'll start by taking the question on the European market, and Natal can complement. I think the forces in Europe, as you know, it's, you know, our operation there is restricted to four to five months in the year. We are extremely seasonality dependent, which limits our growth capacity. You know, so our make the game or lose the game happens over this time of the year. Having said that, what happened this year in Europe was a turnaround in the volume decrease. After three years of decrease in 2022, 2023, 2024, we saw an increase of about 4%-5% compared to the past year in the volume.
This is obviously the result of all the numbers that have been, all the efforts that have been made to resolve the on-time in full problem, you know, which was a big offender to our negative results in previous years. We have already had like 30% of OTF in previous years. This year we already reached 80%, and we can go even further. Again, the on-time in full service level was one important variable. Secondly, we resumed our investments in brand image marketing, and we reduced what we call performance marketing, which is more of a promotional market, you know. This has given a new strength to the brand image. I do not know if you have been following, but Havaianas and the flip-flops category are back to top fashion in Europe. This was back to the fashion.
The biggest proof of that is that we were in as the queen of, as the top item in this list of most desired fashion items in Europe. You know, there is a big influence of Europe in there. 2025 was definitely a turnaround year in Europe. We resolved a big part of our on-time in full KPI problem. We resumed the growth of brand value. All of this is important to make our clients trustful to place bigger orders in 2026. We expect in 2026 to have a growth bigger than 2025 since we are now in a positive cycle. Since 2022, 2023, and 2024, we were seeing a negative trend where people like were losing sales and they were reducing the amount of the orders.
We expected that since we have made this turnaround, we are going to continue every year in a growing trend in terms of orders and sales. The second point is that we have been putting a lot of effort in what we have been calling to expand summer. We have launched some products. In the fall now, we started with colors that dialogue more to this season with communication that addresses more this season of the year. We are trying to remind consumers in Europe that you should and you can wear Havaianas from spring to fall. This should expand our sales performance for a larger, you know, timeline. This should help us go back to the level, to the sales level we had and volume levels we had in the past. We are happy about the results in 2025.
More than the growth in sales, we have rebuilt our foundations of the business. This is important because we can accelerate our gains and growth in 2026.
Thanks, no further questions.
Hey, João, André here. First of all, I'd like to thank you for your words. I think we have the same feeling. Of course, we always want to do better, but we have to be able to look back and look at the journey, the turnaround journey we had. I think it was a winning situation for Alpargatas management team. We should be proud of that. As for the marketing question, the first thing to highlight is that all the efficiency gains and all the mindset that we have been holding is to gain efficiency in the discretionary expenditures so we can make a more investment in our brand image development.
Any phase-out or any composition or breakdown or in the marketing for geographies should not be interpreted as a reduction or as a sacrifice of a value generation of the company. It's quite the opposite. This is where we are, we always, this in a disciplined way, we want to keep consistency in the investment in our brand throughout, you know, the years. Especially for the international market, I mentioned during the presentation, but I'm going to emphasize it again. In this quarter specifically, there were some phasing. We spent a little bit more in marketing in the second quarter than is usual. We invested a little bit less in marketing in the third quarter than usual. In Brazil, there was the same.
When we look at the nine-month window of marketing investments and compare it to one year, you know, to the first nine months of 2024, the differences are very clear and can be well explained. The only difference in Europe is the expenditure we had because of the Olympic Games. Everybody else, you know, removes those effects. Everything else is equivalent, you know, of course, considering the phasing of the distribution of the investments in the different quarters. Also considering that in the U.S., we went back to investing at historic levels in the American market, you know. We believe that this is a normalized level for the U.S. market. These are the effects. Just to make it clear that the EBITDA or the EBITDA evolution in the margin is not so much affected.
We made a small math, like a simple math here to show that if in this third quarter, in the international operations, if we neutralize this phasing effect over the second and third quarter and use the year-to-date rate in this longer window, in this longer period of time, the evolution we had in EBITDA margin was 20 percentage points. It would have been 18 points or close to that. That means that yes, there is a phasing that affected the EBITDA, but the running rate would also have led to a substantial EBITDA expansion, which is connected to what we mentioned, like reduction in expenditures. There is just this 2% in the phasing, this distribution breakdown of marketing different quarters. In Brazil, we invested a little bit less in marketing, but the EBITDA margin would have been exactly the same or very, very close.
We made this math, and this variation would have been of like 1%. There is no intention at all. Liel highlighted this in his comments that we are going to have an end-of-year campaign where we are going to recompose the marketing expenditure levels, which are historical. We should not expect any kind of sacrificing marketing in any of the geographies for the fourth quarter of this year, okay? Just to make it clear.
Thank you for taking my question. Sorry, just one more thing. When we look, considering the scale we have now, what is the margin levels that you expect for the operation, considering the scale you see, manufacturing scale you see for next year, you know, just to give an idea, because the scale, manufacturing scale is extremely relevant, and I am still struggling to understand the sustainable profitability.
João, I would like to love you. I would love to give you this figure. We are building this budget and planning for, we had a very detailed discussion this week. It is under plan, and we should have the final version in the beginning of December to the board. This visibility is going to be there. Again, as we cannot, and we do not give guidances, we can only speak of that qualitatively. What I can tell is in the U.S., we see an expectation. We have an expectation for the business model. The numbers we had as a basis for the U.S. will not be valid anymore. We are going to reduce our expenditures tremendously in the U.S.
On the other hand, we are always going to, we are also going to have a little bit of the distributor's margin, but we should have a positive contribution to the EBITDA margins in the international operations due to that. We believe it's going to be a healthy effect. This is going to be a healthy effect in the company's profitability. As for the operational leverage, the market that moves the pointer there is Europe because there we are, we have a more premium positioning. We have a strong gross margin, but we still have a small EBITDA margin considering to what we believe is our potential there. This there in Europe is connected to the volume. We have direct operations, so we have fixed expenses.
We have to grow the amount we sell there, you know, and this is growing, you know, we have pre-orders which are growing. We have symptoms that we are going to manage to do that next year. I cannot give you a number, and I cannot tell you where we expect to get to. We do expect and we want to have a consistent movement and sustainable movement.
Okay, thank you and congratulations once again.
The next question is by Guilherme Adami Vilela, sell-side analyst with JP Morgan. Guilherme, we will open up your microphone. Please go ahead and ask your question. Guilherme, go ahead.
Good morning, everybody. Thanks for taking my questions. My first question is about Rothy's. Do you exercise the call of not acquiring the company?
I would like to understand a little bit more what is your, like, the understanding of Rothy's in your portfolio of a brand. You know, I understand that there is no, I understand that this indicates that this is not a very, like, much synergy with your operation. How do you see Rothy's participation? What is the, how important is Rothy's in your inventory or what is the synergy between Rothy's and your brand, Alpargatas? My second question is about the number of pairs sold in Brazil. Annually, you sell about 200 million pairs annually in Brazil. This is smaller than it was in 2021. On the other hand, management is looking much more at the sell-out than the selling.
Because you will focus more on the sell-out, can we expect that this volume is structurally lower than it was in 2021 and continuously lower? These are my two questions. Thank you for taking my question.
Guilherme, I'll start with the second question that seems easier to be answered. Actually, what happens in Brazil is that starting last year, maybe starting in 2023, we have been working with management. We have been managing the chain inventory levels, right? What we have observed is the consumer demand numbers and not the selling, not what we sell to our distributors and retailers, you know. We believe that the volume we are right now is the volume aligned with the demand that exists in Brazil.
Obviously, the large opportunity in Brazil that is materializing and we will keep pursuing is to grow our market share because this is an extremely mature category of shoes where we can grow volume through penetrating channels where we have a smaller market share, you know, segments where we do not have a very large market share as we have in our core, you know, strengths, right? Which means investing more in the men's and kids categories and also creating products that can allow people to wear our products in other usage occasions. This is already being made. We are focusing on the specialized market share and channels. This is going to happen in a sustainable way, not necessarily because we are going to be able to sell more to retailers and clients, but because the consumers are consuming, are demanding more from our products.
This is what we see for as a sustainable demand for our sellouts. As for Rothy's, nothing has changed. Rothy's is an acquisition that was made by looking at our positioning in the U.S. market, which is extremely important for any businesses in the world. Rothy's is a company that sells majority in the U.S. They have a vision of sustainable products and which sells mainly through the digital e-commerce and on-source. These are all assets or important enablers in any business. That is why Alpargatas invested in Rothy's in the past. That is why we maintain our positions as shareholders there. The management will continue with the other shareholders to make Rothy's still a company that is going to be even bigger and use this as part of our strategy in future years.
We will continue to do absolutely what we have been doing so far, which means increasing the value, the size, the scale, and profitability of Rothy's, you know, and this has not changed.
Thank you for taking my questions.
The next question is by Wellington Santana, sell-side analyst with Bank of America. Wellington, we will open your microphone so you can go ahead and ask your question. Go ahead, Wellington, ask your question.
Hello everybody, good morning. Thanks for taking our questions. I would like to ask two quick questions. They are on the international operations. First, I'd like to understand about the American market. If next year, it would make sense to look at an expansion in marketing, especially thinking that's going to be a World Cup year, considering that the Olympics, during the Olympics in Europe, you increased your marketing investments.
Last, when we look at the European market, Liel said that the flip-flops are back to fashion, right? You are a little bit more positioned as a little bit more of a premium brand in terms of fashion. How do you think to hold your market share and to hold your brand positioning given the desire of other brands to attack more these categories and take some of your market share?
Thanks for your question, Wellington. I think in the U.S. Yes, we do expect that next year is going to be an interesting year for the Havaianas brand because of the World Cup. Yes, as André said, we are going to make market investments which are necessary. We are right now building the budget and the planning for next year, which will happen until the end of this year.
I do not understand that we are going to have amounts which are substantially different from what we are practicing in market investments in the U.S. We understand that the level right now is adequate. As you saw, we reduced the market investments this year in the U.S., and we grew our volume, which means that we are using our marketing amounts much more efficiently than before. This is resulting, maybe in the past, we were using our marketing efforts too much in a promotional way, which was not helping us in the long term. We are very confident about our marketing strategy in the U.S., which has proven to be successful in 2025. We expect it to accelerate because of our partnership with Eastman Group without much big, substantial, larger investment in marketing.
As for the European market, I would say that all of the factors you mentioned, they are positive to us. You know, like flip-flop is back to fashion. Other brands are attacking more, especially luxury brands are, you know, trying to sell flip-flops. This reinforces even further our brand positioning, you know, because all luxury brands can sell flip-flops, but they are going to sell at 10 times what we sell, the price 10 times the price we sell. The only brand that is original from Brazil since 1962 is Havaianas. This attack of new players even, you know, reminds consumers of consuming this product and tends to benefit the market leader or the one that has a top-of-mind market share, which is Havaianas. That is how we see it.
Thank you very much for taking my question.
The earnings results video conference for Alpargatas' third quarter of 2025 is now concluded. The investor relations department remains available. Now we are going to address and have the closing by Liel.
In respect to everyone's time, you know, I'm not going to extend myself here. We are already over time in seven minutes. As André said, and some of you mentioned, this quarter demonstrates this journey that we are in, where we saw growth in all geographies, in all channels, and in all strategic segments. Also, we saw that we maintained our discipline in cost management, in how we supply the market, and especially discipline in pricing management. The way we work, the pricing of our products to ensure that we grow our volumes and at the same time we grow our profitability continuously and in a sustainable way. I'd like to thank you all and close our call.
The earnings results video conference for Alpargatas' third quarter of 2025 is now concluded. The investor relations department remains available to address any further questions or concerns. Thank you very much to all participants and have a great day. See you in the future. Bye-bye.