Arezzo Industria e Comercio SA

BOVESPA:ARZZ3

Earnings Call Transcript 2024-Q3

[Alexandre Birman, executive]

Good morning, everyone. Thank you for participating in our video conference call for the results of 3Q '24. We have with us our CFO, Rafael Sachete; and our IR Director and Strategy Director, Tobias Stingelin.

Before going to the presentation, I'd like to take a few minutes to talk about the -- everyone that's engaged in the process. We have -- it's been over 9 months after the signing. So Azzas 2154 is officially being born today, even though we had over 50 calls since our IPO in 2011. And we are very emotional as this is the first day of the first call of the dozens to come for Azzas 2154.

During this process, we showed our capability of execution, which is the landmark of our company and the speed that we have to execute between signing and closing, the antitrust agency approval, the naming, the framework, the principles of our corporate framework, hundreds of workshops during these months to determine the best framework, so it's clear where we're going to act. So a lot of time that was dedicated to that, and that's how we put focus on the business.

I'd like to thank the team with incredible people from the Soma Group, the Arezzo&Co Legacy. Now we are all Azzas 2154. We spent days and nights to close the results and have all the opinions, all the audits, all the accounting matches and all the pro forma aspects from the past year so that we can have a clear understanding of our performance and truly understand the business. We were also able to structure the integration in accounting, tax, treasury as well as [ FP&A ] so that we can have very detailed controls of our revenues, be it brands, channels, the income statement for each store, the cost centers, which is the foundation for our budget for 2025. I'll talk more about that later.

I'd like to thank Roberto Jatahy, my partner for the opportunity and for actively contributing in building the first quarter of Azzas 2154.

We have some key words that show what we've done in these past months and where we're focusing our work on. Even though we've dedicated all the energy and time to have such an incredible and complex company, we did not lose our focus in the core business. We were able to protect the team that was focused on building, and we were also able to focus on the business with all our brand directors and all the sales and marketing departments. And the result of all of that was solid growth, even though we're coming from a base that had a lot of growth in all the companies.

We achieved [ 12.2% ] growth, meaning the delta in this quarter alone, we generated BRL 400 million approximately. So that's the clear strategy of our business, to be a multi-brand company that -- multichannel that acts in many different segments of fashion. And obviously, ideally, all the brands and channels should grow consistently. But when that is spread out a little more, we have different cycles because we have some brands that are more mature than others, others are growing, and we had a growth of over 10%.

As the delivery, the main assumption was to turn around the Hering brand, a brand that is a passion in Brazil, a legacy of our country. When I tell people that, that's the 10th corporate taxpayer number that we had in the history of Brazil, that shows you the strength of the legacy. So we had a growth of 13.1%, growth same-store sales, 14.9% and we've recovered the trust of our franchisees that grew 8% and consolidated B2B in a growth of 4.4%.

We were very efficient and fast in launching not only for store owners, but also end users, achieving millions of revenues at the end for the Hering and Farm shoes. That was launched last week in an incredible way that the brand does with a lot of differential, bringing on a lot of desire. We have a bestseller product that has over 20% sales in the first week.

Now we're focusing on 2 key words, efficiency and simplification. So we started the budgeting process 2025 since July, constantly evolving. We have a 3-day meeting every month with the C level of the company. We have very detailed controls not only in the income statement, but also the return of the capital employed and cash return for each brand. We've been making important decisions that will simplify our portfolio and maximize our returns. That's what we will focus on in 2025. And all of that is based on a lot of excitement, a lot of will power and a lot of passion for what we're building.

Now, I've already mentioned some of the highlights. And we are the biggest fashion company in Brazil that includes all fashion categories. So this quarter, the gross revenues, BRL 3.7 billion, growth of 2.2% in 9 -- year-to-date 9 months, close to BRL 10 billion of revenues achieved. The EBITDA of BRL 477 million, considering the pro forma concepts that were explained, and Rafael will go into further detail about that. And in these 9 months, the EBITDA was BRL 1.3 billion. The margin -- EBITDA margin for this quarter is 15.7%. We expected a decrease because of the [ expenses Pro ] deal.

We were -- There are some expenses that are operational, travel and workshops. So we know that as of the fourth quarter, we'll reach a different level in margin improvement and stabilization. And especially in 2025, in this robust process that's being built, our main assumption is to grow the top line and generate a lot of efficiency for the bottom line, not only EBITDA margin, but also in cash conversion.

Now let's take a deep dive into a structured way to our 4 business units. So with our legacy in shoe wear and accessories, we have satisfactory results. Even though we were coming from a strong base of growth, we could use that as a reason, but we still believe that we can build better results. Same-store sales, positive level, 7.7%. It's not an indicator that is making us upset. Total sellout comes from results that we believe is positive, mainly driven by e-commerce showing the resilience of that channel. It's worth noting that e-commerce for shoe wear we had full price, high gross margin and consequently great bottom line.

Highlight for the Arezzo brand, that continues solid growth in high single-digits. And even though Vans had the highest growth among the shoe wear brands, it contributed to the slowdown because it was growing 20%, 20-some percent. And in this quarter, it grew high single-digits. But it was one of the biggest growth.

The point of attention, and this is part -- this is -- upsets us a bit because we did invest time and resources, but we're still not on track for the Schutz brand. It's really hard to choose the positioning that will please an opinion leader that lost a little bit of the market in Brazil, where it grew with local products, and that change has been difficult. These choices aren't easy, and the brand had negative results. Even though it's not absurd, it dropped 3.5% in this quarter, still not the results that we want though.

So, when we look at this consolidated shoe wear and accessories, grows 3.9% in the domestic market for high summer and Christmas. We've already delivered most for -- of that in October. We should reach high single-digits for the fourth quarter. We're working to focus on getting the Schutz brand right and having it account for 25%, so we can have a better growth in 2025.

Now going on to the business unit of women's apparel. Here are my highlights, and I'd like to congratulate them on the work well done. This was planted years ago in the international market for Farm that grew 33.7% in BRL, given the growth of the brand in the European market and the strong growth in department stores in the U.S. and e-commerce. We're in a moment of an important decision to follow -- to which path we're going to follow for global Farm. We have a high demand for store openings. We're opening some stores to increase our share in the U.S. market.

We're going to open 2 more stores in London. England has been one of the best markets for global Farm, and that also helps to grow e-commerce. When you open a store, you create more awareness and consequently, you're growing e-commerce sales and the desire for -- coming from big department stores.

In the Brazilian market, 5 brands grew over 10%, still a point of attention for the premium brands that have a significant volume and are adjusting. But the trend -- and especially considering the orders for the winter collection will be delivered in the first quarter of '25 with positive results. So we have Animale and [ NV ].

As I mentioned from the beginning, last week, we launched a well-done process. Congratulations to the Farm team. They were working together with the technical team, and we launched the [ Cano ] sandals with expanded polymer. And it's very light with great anatomy that has already shown strong results in sales. Check out our Instagram, and you can see how strong we launched Farm shoes last week.

Now our highlight -- major highlight, as we mentioned, looking at gross revenue, BRL 713 million. This is democratic apparel and based -- mainly based on Hering, with very strong growth in same-store sales, 15%, with proven results in e-commerce. And here, we have very healthy margins. The [ selling ] goes to show our capacity of taking off in this new Hering moment, our partners, store owners, especially the franchisees and the 25-plus that account for over 50% of our sales with a growth that's even higher than 8%. So 4Q results should continue to increase that exponentially, showing that the Hering business is on track to remain solid and bringing in great results to the Azzas 2154 Group.

Now let's go into our last but not least, BU. I would like to welcome and greet our new CEO, Ruy Kameyama. He's been doing an amazing job to stabilize and define the strategic priorities for 2025. We had strong sales growth supported by great growth in e-commerce, and we have brands desires such as Reserva, Reserva Go also growing dramatically, supporting the whole Oficina, opening stores, generate leverage on D0. We don't even have to wait for the stores to mature. The stores are open and they get great sales right away. So we have a great pipeline to expand in Oficina. And in the Reserva Go, we're going to create an amazing line of shoe wear and accessories to provide more casual shoe wear to the market.

And as a strategic priority for 2025, we're going to try to balance a healthy sales growth, maybe some reduction, but mostly improving the return on capital employed and also a greater focus on cash generation. So these were the highlights about our BUs.

And now I'd like to turn the floor over to our CFO, Rafael Sachete.

[Rafael Sachete, executive]

Thank you, Alexandre. Good morning, everyone. Welcome to our first earnings conference call for Azzas 2154. I'm going to share the results of the combined company for the third quarter of 2024. We are going to talk about the pro forma numbers. We looked at the third quarter of '23 of our old company and now in the third quarter of '24 our combined company. We got BRL 3.6 billion of revenue, up 12.2%, highly impacted by the growth of BU in men's apparel and also women's apparel as well as the democratic apparel, especially in direct sales to consumer and also great relevance in the e-commerce channel.

Now gross income, we had growth of 11% with a margin pressure of 50 basis points, which can be explained by a positive impact of the channel mix that is helping the performance of gross income, and it's been impacted negatively by 2 main factors. First, the PIS/Cofins impact that were calculated and paid in the months of July and August in the women's apparel and democratic apparel lines, and also another negative effect of the lower gross margins this quarter because of sales and cleanup of inventory levels in the men's apparel and women's apparel business. The end of the winter season also had an impact of greater promotions and sales.

Now in terms of expenses, we have some type of expense pressure this quarter. When we talk about expenses, we always break them down into fixed, variable and one-off. And fixed expenses, we were quite disciplined, and we had a growth of 7% below our revenue line. And this is our goal at the group to keep fixed expenses well under control. Our variable expenses grew by 13% this quarter, in line with the revenue growth, especially because the direct sales to consumer channel has a bit more variable expenses. And in one-off expenses or discretionary expenses, we had a more substantial increase, and this is due to the investments in building the future of Azzas 2154.

We had a period of lower efficiency with the creation of the Soma brand company. We had to bring all of the old Soma brands into this new company, and that generated costs and inefficiencies, but this is not going to impact us again in 2025 because we're going to do the transition of these stores to [indiscernible].

Now, shoe wear lines in Farm also require heavy investments to build teams, to produce samples, marketing, visual merchandising, planning, and there are no corresponding revenues this quarter so that combined they can offset all of these expenses. And in the coming quarters, we will have more than enough revenue to cover the level of investment made.

And finally, expenses with travel and consultancy that are inherent to the merger process, that are not considered as one-off expenses, but that also impacted our quarter. So we had an EBITDA of BRL 463 million and 160 basis points of pressure.

Now net income, we closed the quarter with recurring pro forma net income of BRL 163 million, 23.8% drop quarter-over-quarter, and this is due to the highest financial expenses because of the higher leverage of the company, higher expenses with AVP and mainly due to the provision for income tax and social contribution of BRL 90 million. And we are now provisioning this for the whole 2024 with regards to the incentivized operations of the Fashion Act. Excluding that, we would have BRL 250 million of net income this quarter.

On Slide 10, you can see the reconciliation of the pro forma EBITDA and the pro forma recurring EBITDA going from BRL 351 million to BRL 476 million. The main impact is BRL 139 million of expenses. And we had to pay early some expenses that were forecasted for Q4. So the impact of this on Q4 should be milder, and we're going to work really hard so that the expenses related to the integration are very low starting on Q4, BRL 9.1 million of expenses of equalizing the 2 companies, and that's not for 2024, but before that and BRL 10.5 million of ILP expenses of the combined companies in the quarter without cash effect. And finally, BRL 259 million of -- BRL 212.9 million of cash related to accounting practices, and we had BRL 212.9 million accounting credit. So as a result, we amount to BRL 476 million of EBITDA in Q3 2024.

Now let's look at the reconciliation of net income. We went from a pro forma net income of BRL 83 million to a recurring pro forma net income of BRL 163.8 million. The main impacts were BRL 54.3 million in the first [ column ], that were explained in the previous slide, so the sum of all of the items I mentioned in the previous slide, BRL 10 million of depreciation and amortization of accounting adjustments and the premium of the [ Hering ] company and BRL 67.2 million of a positive effect of income tax and BRL 191 million of a deferred asset that was written down from the old Soma Group. They had this deferred income tax and social contribution asset. And when we merged the 2 companies, we had to write down this asset, and there is no cash effect because this was a deferred asset of long-term to be recovered. So this is not going to have any effect on the company's cash in the medium-term.

Now on Slide 13, you can see the company's net debt, which has now reached 1.1x over EBITDA, BRL 1.6 million. And this is EBITDA pre-IRFS. The company closed the quarter with BRL 766 million in cash, and we don't have lots of debt maturing in the coming quarters. It's also important to mention our cash generation capacity and the robust balance sheet and the accounts receivable of the company, which is now over BRL 900 million in credit cards, an asset that is easy to settle and has a very low credit risk. So we're very confident about our balance sheet position and the financial soundness of our company.

Now we can start the Q&A session. Thank you very much for joining once again.

[Unknown Executive]

We have some questions coming in to Sachete [ and ] [ Alexandre ]. First question by [ Danny Eiger ].

Sachete, she would like to know about the dynamics of the gross margins. Can you give us a bit more details about the drivers that led to this drop in gross margins in women's and men's apparel?

[Rafael Sachete, executive]

Sure, and thank you for your question. We do have some effects, as I commented in our presentation. The first is related to PIS/Cofins. PIS/Cofins impact will not be felt again. We had this impact in July and August, and our strategic decision was not to set up a provision because this is not recurring. And we also had discounts in women's apparel and Hering Co. Arezzo&Co and not only our apparel, but the whole market had more excess items during the winter time because it wasn't cold enough.

In men's apparel, we have higher inventory levels. So the impact was heavier in Q3, and there should be some effect in Q4, but we're working hard to reduce this inventory level and have a 2025 of great efficiency and equalized inventory levels. In terms of women's apparel, we have to be more accurate in our collections. That was the main factor and also the winter season, but we think that Q4 and 2025 will have margin levels that are more comparable to 2023. So margin improvements as compared to Q3.

[Unknown Executive]

Okay, Sachete. Now about working capital. I would like to know about the payment terms to suppliers and what was the main reason for the improvement we saw?

[Rafael Sachete, executive]

Thank you, [ Danny] for your second question. Well, the second quarter of 2023 in our old company, Arezzo&Co, we had decreased the payment terms. So there was a negative impact on working capital. And now with better payment terms, we're actually equalizing what we experienced in Q2. It's not actually any change in practice or policies, but we're going to work in the financial department to improve the working capital of our new company, and we believe this is an important driver to generate value for our shareholders, and this is strategic for the merger, but not only in accounts payable, but also in accounts receivable, inventory and the whole financial cycle of our business with a major focus for Q4 and 2025. Cash generation and working capital are extremely relevant levers in our opinion.

[Unknown Executive]

Now the third question, this is a question that many people asked. The question is, you said that you're close to defining the budget for 2025 with great focus on efficiency and cash generation. Do you see the potential of gains in expenses also from now on?

[Rafael Sachete, executive]

Thank you for your question. Yes, this question was asked by many people. As Alexandre said, we have a very mature and structured process that was built jointly with the leadership and support of our Board and a great focus of our management. And we are tracking closely all of the KPIs, not only growth, but also cash generation, ROIC and a deep analysis of where we're going to focus our energy, our focus and our resources.

This is not the moment to give you any guidance. We know that the expectations are high. But you should know that our focus, attention, quality and competence of all the executives and leaders working at Azzas are on growth, but mainly cash generation and on margin improvement. So this is going to be the driver for 2025. Having said that, you can expect evolution. We're not going to give you any numbers as guidance for now.

[Unknown Executive]

This is from Luiz Guanais. It's a bit different.

So I understand that some factors that pressured the margin could -- should be diluted in the coming quarters. Do you see any expense lines such as marketing that could be increased to try to increase growth and speed up the synergies captured between Arezzo and Soma?

[Rafael Sachete, executive]

We see a huge number of opportunities in terms of expense reduction, efficiency. And not necessarily cutting down on these expenses, just working together and focusing on best practices has given us a lot of evolution, knowledge and wisdom. We've been focusing on adjusting these expenses already, and we have a lot of work that is being done by [indiscernible] company together with our team, where some corporate areas and some frameworks were already working together and capturing these synergies. Among them, finance department, some consulting. We're doing a lot of work on freight and shipping. So it's an ongoing process. It won't be concluded in Q1. It will advance throughout all of 2025, and then the margin will gradually be seen in our results.

In addition, Luiz, it's important to note that we focused a lot on structuring the business in the third quarter. So the expense level that are non-recurring will be in this quarter. So you should expect the deal expenses in 4Q will be much lower compared to what [ you'll ] see now. And as I mentioned in the beginning, we shouldn't have any relevant expenses in terms of restructuring for 2025.

Lastly, all of the levers to generate value in revenue, such as Farm shoes, Hering shoes and [indiscernible] and the levers regarding Hering company with multi-brand projects, in-season supply and increasing the assertiveness in planning, will bring us important leverage in terms of revenues for 2025 and also a decrease in fixed expenses and some eventual expenses. So we trust that these levers will decrease the expenses.

About marketing. We have a strategy where we give the brands autonomy in marketing. And some major negotiations are being conducted because of the size of the group. It's to maximize and not -- to achieve more consumers and not reduce that expenses, being stronger with the same amount of money that we used before.

[Unknown Executive]

Guanais has a follow-up question. And this also came up. This is for Alexandra, I believe.

Could you talk about price positioning in shoe wear and how you see the brand evolution?

[Alexandre Birman, executive]

Thank you for your question. So when we talk about shoe wear, there are many brands that act differently. I'm going to start off with Anacapri. For the first quarter of 2024, we tried to increase the markup in Anacapri. And since this brand is focused on Class B, we felt that the volume lowered. And that partly explains the negative results that we had in 3Q '24, and which was still a result of that strategy. We started off a process to improve and negotiate the purchase of raw materials, a few suppliers work with Anacapri. And [ cost plus ] -- and controlled outsourcing system, we were able to review many of the Anacapri costs, and we started a new sourcing process, importing the product -- the raw material from China, the [ uppers ]. And this happened in the beginning of -- in 1Q this year and the sellout was very high for this product.

So we increased the momentum in that and the results were exceptional. So we proved that we can supply -- work on the supply so we don't affect the margin. So during '22-'23, Arezzo had that. And in 2024, it stabilized and even lowered now. So we don't work with the price as a lever to improve margin. We want to offer the best value for money for our consumers, and that's one of the big highlights in the Arezzo brand.

And lastly, with Schutz, we are not satisfied with the Schutz target price. It's not adding value that we believe would be the best balance for the volume that the brand needs because it's a BRL 1 billion brand. So there's price sensitivity. It's currently operating an average price over BRL 690. For comparison, Arezzo is BRL 370. So we're endeavoring our efforts to go to BRL 590 for the core styles in the brand.

So our culture is to focus on working on price even with the brand strategy, but never affecting the gross margin because of our [ cost plus ] [ system ]. We always focus on product engineering. That's the idea behind our brands.

[Unknown Executive]

This is from Vinicius Strano from UBS. This is also a recurring question about the inventory levels at Hering and Reserva.

Sachete you already mentioned that, but would you like to add to that?

[Alexandre Birman, executive]

Thank you for your question. About AR&Co, we have entry level that's much higher than what we expected. and we're going to maintain consistent work that [ Ruy ] has been spearheading to clean up inventory and have adequate inventory levels according to the brand size and growth that should continue in Q4. We'll strongly work so that we have a lower impact to the margin than what we had in Q3 and bring Reserva to solid growth, generating value and cash flow and adequate inventory levels. I'd like to remind you that men's fashion is more recurring in terms of style and colors. So we can maintain some inventory levels until we completely adjust the supply chain.

About Hering, we've had excellent inventory adjustments, improving the industrial process and planning through Roberto Jatahy. This process has strongly evolved, and now we have solid growth of revenues. The company has adequate inventory levels in our opinion, even lower than the levels that we saw in the past, especially when we look at the company moving forward based on the growth that we're delivering and the growth that we believe we will still deliver. So the efficiency level that we see in Hering is very good.

And when we look at the franchisee, which is very important, it's important to see their inventory levels. And the sell-out performance is very good. The sell-in growth is lower than sell-out. That means that franchisees are facing -- or have less inventory levels, less gross margin. So the sell-in replenishment level for the upcoming quarters should grow. That's how we see inventory for AR&Co and for Hering.

[Unknown Executive]

Next question is from Joao Soares.

Switching gears a little. This is for Alexandre. So how should we think of sell-out? And how much is the industry and how much is already reflecting the measures that you present for day 1? What should we consider in this performance translating better into B2B?

[Alexandre Birman, executive]

I'll start with the second part. Sorry about that. Joao, I'll start off with the second part of your question. How do we translate that into B2B? That effect is already taking place. In the beginning, we mentioned that they are the channels that we control, own stores and e-commerce. We need to show that growth so we can bring in the partners, the franchisees and multi-brand. That already happened in Q3, especially in franchisees with a growth of 8%. The orders that we have for Q4, that already took place in October, that number will grow strongly. So that's already a fact.

So we have a virtual cycle for -- to grow the sell-out and consequently, the need to replenish inventory as Rafael Sachete mentioned.

About brand performance compared to the market, the brand was definitely an outlier. When you look at consolidated growth of the Hering brand sell-out of 20% and 14.4% -- no, actually, 28.8% total, including store openings and sell-out, no player showed that in sell-out and same-store sales of 14.9%. And more interesting, it's not about the price. That's the growth in volume, in tickets.

So the main objective was just to attract more [ attention ] and desire to the Hering brand is already showing that, the strategy for high summer, and you can see the pictures from Bruna Marquezine in our presentation, but the best in 2024 is yet to come. We have -- we'll have the [ boldest ], the newest Christmas campaign in Brazil, and most mentioned. Hering will be the [indiscernible] in -- of Christmas. We're emphasizing the fish with the Hering brand logo in a creative manner. So we will increase the volume.

And we believe that Hering will continue to be the outlier in the apparel industry, gaining market share different than it was in the past when it was mixed with department stores and being a mono brand, a valuable brand that not only sells basic products, but also smart products for men and women. And when we look at the consolidated Hering, it's even -- because of kids, we haven't invested in it as we wish. And it had an interesting [ wait ] with the Hering brand. So when you consider the growth of the adult categories alone, they're much stronger than the figures that were presented here.

[Unknown Executive]

Last question from Joao, but this came up a lot as well.

Could you clarify the policies -- apparently, you're provisioning correctly. Does it make sense to maintain that policy to review that?

[Alexandre Birman, executive]

That's a great question. About provisions and tax payments of the [indiscernible], so the company's decision up to the time being is to not provision and not pay PIS and Cofins tax on any of the grants. Because here, the understanding is that PIS and Cofins is a tax that's on revenue and the grants are not just that. Their government support to support that operations and companies and in given regions of the country.

And about presumed credit, where we are not going to provision income tax and social contribution because of the recurrence and it's no longer appealable because presumed credit should not pay tax in the grant. And finally, about the fashion law in Rio de Janeiro, we are provisioning the amount. We started provisioning since January for Soma and AR&Co. And it's worth noting that it's just provision. So that impact does not generate a cash effect up to January where we will have countermeasures that are important to use the premium from the Hering company. I think that's worth mentioning.

And don't forget the study of the logistics network using what we have in Espirito Santo if we can't reverse those state tax issues.

[Unknown Executive]

Yes, that's correct, Alexandre. A question from Joseph Giordano from JPMorgan.

What's the current process of the integration process in back office? How do you see -- what kind of opportunities do you see in terms of efficiency with the one single platform?

[Alexandre Birman, executive]

I'll start. So, thank you for the question. We're in the beginning. We'd like to highlight the financial departments. We've just hired a Director to implement our shared services center. We're determining the site location in [ Campo Bom ], we're at the end of the design process. So we have a lot to add to our back office and create a structured shared services center. That's in the initial phase. We have many departments that have redundancies. So we're being very careful, very cautious. So we don't affect what's most important, which is the independence and strength of our brands that bring on revenues with a high gross margin. That's the assumption.

So over to Sachete to give us some more flavor on that, of our daily work.

[Rafael Sachete, executive]

Now about the corporate department. This department is going to constantly evolve and gain synergies. So there's no big bang in this transformation. The first step has been taken. We're gathering all of the leaders, all of the leaderships. They are now mostly unified under one leadership and with a structure in place to share best practices, unified contract services support with gains of efficiency since day 1. And as we develop the shared services process, we are going to see recurring gains in the coming quarters in all of the corporate areas of the company, not only finances, but also shipping. We have freight contracts, technology contracts, licenses for software use, Internet links, many fronts that involve the whole of the business's back office that will lead to good levers for Azzas in 2025.

[Unknown Executive]

Now [ Gustavo Sartini ] has a question.

What are the brands and BUs with the greatest potential to improve profitability?

[Alexandre Birman, executive]

This is Alexandre speaking. We are now focusing on maintaining the accelerated growth of our men's apparel business. However, this is where we see the greatest contraction of profitability in Q3 '24. And as a consequence, we've been working to raise awareness and focus on selling more, but with more excess. So we see an opportunity here. Likewise, we haven't shown you, but we had a major lever in the Hering brand. We had 13% sales growth with 30% leverage of bottom line. So we have room for improvement there. Fixed expenses at Hering, they are well controlled. So this top line lever will lead to great bottom line leverage as well.

Now looking at the company overall, the Schutz brand, because of the decrease in sales, expenses are still high. So we need to resume growth here because we want to keep this expense level, because this is basically expenses in marketing. And finally, about channels, some brands can use as internal benchmark a margin improvement for digital channel sales. So this is where we've been focusing. And in 2025, we want to have this whole methodology of a more present management in the multi-brand channel because this is the channel of greatest leverage and greatest margin growth in our business. And we believe that many brands still have a low penetration in these -- this multi-brand business.

[Unknown Executive]

Now a question from [indiscernible].

About the Farm U.S. sales performance, that is now positive. Can you share your growth expectations for the coming quarters and about the profitability of the brand internationally?

[Alexandre Birman, executive]

Thank you for your question. The results of the third quarter were way above average. And this 33% growth will probably not be kept as an average, but you can expect growth above 20% or 25%. Profitability in 2025 has been excellent as fruit of stabilization of fixed expenses because in spite of the opening of new stores that we had during the year, these are stores that are already generating a positive margin or flat at the bottom line.

And for 2025 and 2026, right now, we are taking a deep dive on the strategic definition because the brand is at a great momentum, especially in the U.S., the U.K. and France. And yes, we can accelerate this growth, invest a bit more and improve margins in the short-term or we can choose to have a more gradual growth and continue improving margin. So this is a strategic definition that is being discussed right now. And we think that the virtue is in the middle. So we are going to make this definition in a smart way, but the business has already proven itself and can keep an excellent top line growth and very good margins as we saw in '24.

[Unknown Executive]

Now Irma from Goldman Sachs wants to go back to the issue of Hering.

You already talked about that, but she says, it was really good to see a strong same-store sales at Hering. What is the volume growth like? And do you expect the same behavior from now on? And she wants to talk about multi-brand and franchisees of Hering.

[Alexandre Birman, executive]

This is Alexandre speaking. So the growth came mostly from volumes. Like-for-like at Hering, so basic T-shirts do not have any price increases. We see some elasticity in more premium products with an excellent turnaround, although they still account for a low share of the sales. As an example, the Super [ Premium ] T-shirt is being sold at Hering at BRL 199, which is much higher than the average Hering T-shirt. So small volume, but with a great turnaround. So with -- Hering with this new strengthened position can add products with higher value, and that doesn't mean that we are increasing prices of core products. These prices are going to be maintained because we know that this is a great attractiveness of the Hering store.

About franchisees in the 25 plus that account for over 50% of the network, the continuous willingness to invest in mega stores is really high. And initially, we were not thinking about converting stores to mega stores in the franchisees, but this is happening quite fast. So we're going to invest more in this in '25 and beyond.

And when it comes to multi-brand, we have now implemented a methodology to generate savings and analyze micro regions in Brazil. In detail, we have had a few tests in the Northeast, and we have seen amazing growth, like 50% growth of the multi-brand stores. And in '25, we'll start internalizing the sales force in some regions, especially in [ Sao Paulo ], and this is going to give us greater control in the point of sales and a better reading of sell-out, and this is going to help us grow Hering's multi-brand sales.

Although the capillarity is great, and this is a business of great revenue, we think that through best practices and making the most of the [ know-how ] and the shoe wear business is being well implemented by the Commercial Director of Hering, Rafael, and we believe that Hering's multi-brand is going to bring amazing fruits to our business. Now about -- with the shoe wear segment, that is also going to help sales in the brand.

[Unknown Executive]

Now we have a question from [indiscernible] from Itau.

About the cost and expenses synergies, can you talk about the fronts that are going to be worked on first? And if you have any examples, that would be great.

[Rafael Sachete, executive]

Sure. There are many fronts we've been working on. And the growth premises came first. So we invested first on the revenue levers in Hering, Farm and Schutz. And then we focused all of our efforts to build our road map of the opportunities to reduce SG&A where we are going to see most of the levers in the short-term. We also structured the corporate area, unifying structures and leadership. This is an important lever as well and also the technology area with contracts, with software house, service providers, Internet links. We also have a relevant lever there in our technology area, both in CapEx and OpEx, and also contract services and facilities are important fronts for our [ store park ] and our corporate structure. These are relevant contracts.

The marketing department, as we mentioned in the previous answer, is relevant. The magnitude of the investment we've been making as a combined company is large. And now we are negotiating reductions of the average price paid for the service without reducing the magnitude of the investments. So we want to leverage our marketing through our investments. So these are the main fronts.

We have also been conducting an important study on freight that should bring some gains, but this hasn't been completed yet. And finally, our tax strategy that was redesigned through the structure of the Arezzo, Soma and AR&Co groups, analyzing the best tax benefits and the best tax structure, which will also help us.

[Unknown Executive]

Now we have a question by [ Jo ] from JPMorgan.

Can you comment on the study of portfolio rationalization you're conducting?

[Alexandre Birman, executive]

This is Alexandre speaking. I don't know if you remember, but our last slide of the Investors Day presentation broke down all of our brands into different BUs and grouped them by macro units. It was clear at different points in time the different brand groups that we have and the strategic objective of each one of the brands. What we want is balance between profitability, growth potential and market share gain. This is quite sensitive, and we've been studying really hard, a lot of science, a lot of numbers being studied so that we can make the right decisions. We don't want to hurry in deciding and eliminating brands that are not generating margins in the short-term. But that -- maybe in the future they can be major growth engines for our business.

So identifying which brands have a good potential and which don't, have been the foundation of our work. This is a scientific work that we have been carrying out. Some decisions have already been made and others are on the way. They are maturing right now, but we're probably going to focus our energy on where we can invest even more, even though the brand may already be mature, or in brands that have a potential to achieve a revenue that can be relevant for the Azzas 2154.

We believe that by the first quarter of '25, we must have some definitive announcements about this process to make to you. But this is an ongoing process in any brand portfolio around the world. If you look at the decisions of major fashion groups that have abandoned some market segments or abandoned brands because they realized that was just a trend that would have no sustainability in the long run. So this is not something only -- that applies only to Azzas 2154. So this is not an issue that should be discussed in a recurring way. We can discuss it now at first, but this is now going to be a part of this ongoing analysis of any business. And we can talk about profitability and disinvestments, because we want to maximize the return on capital employed and this is our premise that we want to focus on.

[Unknown Executive]

Yes, we saved a lot of time for questions because we knew that there would be many questions. And we have here a question that was made by many different analysts.

The question is, Sachete, can we expect in the fourth quarter the expenses to grow more in line with revenue?

[Rafael Sachete, executive]

Yes, we're very confident on the company's top line, which is going to be quite healthy in the fourth quarter. October we had a good sell-out performance with great sell-in growth. The portfolio is quite robust for our sell-in. And now we have some important weeks with Black Friday and then Christmas. And our expenses level are very well controlled. So right now, we can say that our vision now on November 14th is a healthy balance between expenses and revenues for the near future.

[Unknown Executive]

Now I turn the floor over for Alexandre for his final remarks.

[Alexandre Birman, executive]

Thank you, everyone, who is part of this historical milestone. November 14, 2024 will go down in history. This is the first call of the Azzas 2154 Group. There's a lot, but this is just the beginning. We're writing the first pages of a book that will go until 2154. A lot will happen. It's a moment of a lot of challenges, achievements. I'd like to thank the entire team, especially our Board of Directors who have been very strategic in our direction. So we're counting on everyone to buy a lot of Christmas presents with our dozens of brands. We know that any Christmas tree will be full of gifts. We have many brands for that, and we'll have an excellent 4Q '24 on the path to 2154. Thank you, team.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]