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[Audio Gap] earnings conference call. We have simultaneous translation available for this conference. If you need translation, please click on the interpretation icon on the bottom of your screen and choose your preferred language, either Portuguese or English. If you're listening to this video conference in English, be aware that you can mute the original audio in Portuguese by clicking on mute original audio. We would like to inform you that this video conference is being recorded, and the recording will be made available on the company's IR website where all the earnings-related materials are also available.
[Operator Instructions] We would like to highlight that the information shared in any forward-looking statements that may be made during this conference related to Guararapes business prospects, projections, and operational and financial targets are based on the beliefs and assumptions of the company's management and on information currently available to the company. Forward-looking statements are no guarantee of performance. They involve risks, uncertainties, and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future performance of the company and could cause results to differ materially from those expressed in such forward-looking statements.
Now I would like to turn the floor over to Mr. Oswaldo Nunes, CEO of the company. Mr. Nunes, you have the floor.
Good afternoon, everyone. Thank you for joining us this morning. I will start by talking about our ecosystem and this new competitor landscape. We continue strengthening and connecting the different elements to build our lifestyle product and financial services ecosystem. When we look at the competitor landscape that is being formed, we see as potential direct competitors, specialists.
There are many fashion players that already operate with an omnichannel model evolving to a platform and ecosystem model. Today, we are playing anchored on the elements of the ecosystem that are more advanced in terms of consistency and maturity as a result of the investments we made in technology, digital platforms and in the omnichannel model in the last 2 years. These elements are the evolution and growth of our core and our brands. We are continuously working on our products, collections, increasing our assortment, curatorship with our own products, first-party products and also third-party products in our marketplace.
We have better logistics to support and delivery availability as one of the elements that will differentiate us from the competitors. And this is a consequence of all the evolution that we are promoting in data analytics and our demand engine, pricing system, distribution system and markdowns. We're also anchored on the verticals that are adjacent to our core and our specialist brands like Carter's, Casa Riachuelo and now FANLAB. This serves different profiles of customers. We're going to open the third store now in the fourth quarter of the year. And these specialist brands still have a lot of room to grow, integrated in our ecosystem. And we are looking into the possibilities of growth with new formats and specialist brands to position ourselves and build differentiating elements in this ecosystem.
Midway as a financial product and services platform will also evolve to offer complete financial solutions to our customers within this integrated ecosystem. And Midway is key as a differentiating element to lever the brands and their value propositions, engaging customers. And we are also focusing on this omnichannel model with a supply chain and logistics chain integrated into all that. We continue strengthening the role of the store and the employees who are now more digital. We continue evolving with new services and mobility of the stores providing more convenience and operational efficiency to our brick-and-mortar store operations.
Integrated logistics and the omnichannel model have also been evolving in terms of their lead indicators from comprising the ship from store, ship from distribution center and the last mile. Within this dimension, we're testing and learning from great partnerships and third-party products in last mile service so that we can find the best way forward, for our carrier will decide whether we should acquire or build in-house an engine to connect regional partnerships and other places to cover the last mile in order to gain efficiency and improve customer experience. And that's all great, but we think this is not enough to win this game in the future. So we need to keep on evolving and to speed up the building of other important elements in this ecosystem that are still in a modeling phase or in a pilot phase. So we continue to focus our efforts to evolve in analysis and experience, which are 2 key elements for all of the components in this ecosystem.
We are now going into a second cycle of evolution of our e-commerce and marketplace platform as well as Midway financial platform. There are many great things in our pipeline to improve the experience and also increase complementarity and enhance experience. We also have a new CRM and a loyalty model that will enable us to scale personalized journeys to increase engagement with the brands and the digital platforms.
We now have a pilot of a relationship program with a selected customer base. Probably by the end of this quarter, we'll be able to start testing how elastic and flexible this program is as well as our cashback engine. We know we have a lot to evolve in terms of content and entertainment as part of the business. This is a new challenge and the international players have advanced a lot in this field already.
In the ESG agenda, we are integrating with the industry to build a more robust agenda for ESG. We are watching from up close every day, every detail of the productive process in terms of use of materials, waste and people and environment. We're evolving a lot in that field, but there is still opportunity to improve. And finally, we'll continue to strengthen all of these topics that are really important for our strategy and the building of our ecosystem. These are topics that will prepare the company for the future we need to keep our competitiveness and they are also growth levers in the short term.
Now let me give you some highlights of the quarter. The tripod, evolution in products, experience, and good communication has helped us to get a great acceptance of the new level of cost and average price. That led us to a robust growth in sales of 24% against the second quarter of 2021 and robust margin of 53.2%, up 4.6 percentage points in the quarter.
The sales growth with a good combination of volume and margin increase promoted a good growth of the consolidated EBITDA. We increased quality as well, and for several quarters now, we have seen that the apparel categories have kept a robust growth of 31% here against 2021 with margins of 57.6% in the quarter, a quite sound and healthy combination because of lower temperatures in the quarter. And now we don't have any more lockdowns and people are more concerned about the way they look when they go out.
The strengthening of our core business in the apparel categories has been since the second quarter of 2019. So this is a consistent trend, which has been sustained, but we still see opportunities in important adjacent categories to our core, and we're working on them. The EBITDA of merchandise more than doubled compared to the second quarter of 2021, thanks to a good combination of growth and gross margins. And the consolidated EBITDA also achieved great growth, a 28% increase compared to the second quarter of 2021 in spite of the challenging macroeconomic scenario for the combined businesses of the company. We know that Brazil has a history of challenging macroeconomic scenarios, but we learned to manage our business in this scenario.
I think that we are at the worst moment because we have high interest rates and high inflation rates, pressure in consumption and income, but we are prepared to deal with this scenario. The retail core has been growing consistently for several quarters now, and it will continue to perform well because of the improvement we have implemented and the risk of the new portfolios has already adjusted and the PDD of the second quarter is already expected to improve in the fourth quarter.
Midway is growing organically. Its base of digital accounts, we already have 2 million accounts. Personal loans and the use of PIX are doing well. The other products have transactional volumes that are still marginal, but they have a great growth potential. We have a great -- a lot of homework to do here to lever Midway's revenue even more. When we look at the customer dimension, our NPS indicator in physical channels are being kept quite high, and in the digital channel, we're still evolving because of the improvements in the platforms and journeys. So we have already achieved a quality zone in this indicator as well.
When we look at the customers that buy the most, we see that we have a base of 17.4 million active customers in our ecosystem, an evolution of almost 12% against the second quarter of 2021. And we have a great opportunity to continue growing because this customer base buys 3x as much as other customers.
Now the inventories are still being adjusted to gain more efficiency and to grow in line with inflation, and they have grown in line with inflation in the last quarter and also in line with our sales plan. In June, we had a small efficiency gain in our inventory. The greatest degree of price increases have already been incorporated, but we think that we still have great opportunities in this area, and we're working on that.
We keep a constant concern about our internal improvements to increase productivity, and we want to use technology more and more to automate processes and to gain operational efficiency. And we're confident that the internal improvements that we promote are sustainable and that they will contribute to improve our future results.
And to conclude, we are confident about the short term and the last quarter of 2022, and we are optimistic about the company in the long term because our foundation is stronger every day.
Now I'd like to turn the floor over to Tulio, who will give you further details about our results, and our team will be here available to answer your questions later. Tulio?
Thank you, Oswaldo. Good afternoon, everyone. So I'd like to get started on Slide 9. Here, you can see our mandala. It shows what we've been working on and what our priorities have been in recent years here at the company. We've been talking a lot about this continuous search for consistency in all of our fronts. The main driver is sales consistency in our pipeline. The company has been delivering this quite consistently since the second quarter of 2019. I think there are many elements involved in this, and I'll talk about each one of them during the presentation. That goes from the redesign of our products, a review of processes, governance, monitoring of targets, and results. Important work has been made on expenses as well. That is all of the main fronts have been evolving, and they are on this continuous improvement journey.
When we talk about top line and margins, that is the most important part, of course, but operational discipline and controls is also key. And new elements will bring pressure on the results. This is clearly what is happening with the elements of the digital transformation, and we're going to talk about that as well.
Since mid-2021, the company has been communicating this level of demand and maturity. It's been dealing with digital transformation to bring these evolutions to customers. But we want to find a good balance point when it comes to profitability and the projected investments.
Moving on to the next slide. Now we can talk about the company's top line. We're talking about a merchandise net revenue of BRL 1.598 billion, a 24% growth compared to the second quarter of 2021. Now when we look at same-store sales, that is a 19.5% increase. But as I said, the most important part here is the consistency trajectory, not only in the short term as we can see on the right-hand side of the slide, but since the second quarter of 2019, as I said earlier. Since then, many elements have been worked on in the core business of the company.
In a more recent past, I'd like to remind you because we talked a lot about that in our previous conference calls, but it is important to talk about the main access, as Oswaldo said, the improvement in products, quality and sourcing. This is probably a key access for improvement, not only in national suppliers, but also international suppliers, and this interrelationship with our plans. Joao's and Claudia team are leading that way. And on that front, the women's area has found a pathway, and we have seen significant growth, and that improves our core business quite dramatically. For men's, we have been seeing strong numbers as well. As we said in the first quarter, we were expecting men's products to become more consistent, and the numbers in the second quarter clearly showed the beginning of that movement. In kids' products, I mean, the pathway had already been defined for children's products as a whole, but also for Carter's brand.
And the team is now more mature, aware of our value proposition. The value for any money mechanics is now more consistent and that shows quite clearly the movement that the company started to adopt in the month of March.
As we said in the first quarter conference call, starting in March, the company started to pass-through the pressure that we got on our costs and the brands were able to absorb that price increase, keeping a top line performance. Of course, this is only possible when you have an appropriate value proposition and a brand that is able to express all of that value.
Now moving on to the next slide. You can see the numbers of our merchandise gross profit. These numbers summarize the quality of our top line. BRL 850 million in the second quarter of '21. Similar to the -- actually a 35% growth compared to the second quarter of '21, which reflects what I just said, and the margins are now achieving a high-performance level, a 4.6 percentage point increase compared to '21 and 2.9 percentage points compared to 2019. This is very much related to what I just said, the ability of the brand to absorb the price increases and all of the performance improvements and appropriation of our collection and products.
Now on the next slide, you can see our EBITDA from products. And whenever our top line performs as it is performing, and especially with the strong combination of robust same-store sales combined with expansion of gross margins, the company has been working on gains of productivity. And year after year since 2014, this has become a routine in our company. So it's natural that this positive gap in profitability can be seen.
We went from an EBITDA of products of BRL 101 million or BRL 129 million in the second quarter of '19 to BRL 222 million in the second quarter of '22 million. This is related to that consistency I mentioned on the first slide, continues improvement and evolution quarter-after-quarter. This is what makes it possible for things to evolve in such a solid and consistent way.
Now on the next slide. Let's talk about Midway Financeira. On the left-hand side of the slide, you can see the numbers of our credit portfolio of up to 180 days. In terms of absolute value -- and this is boosted by the off-brand. We have almost BRL 5 million in our total credit portfolio, but the interest portfolio that contributes the most to the results of the financial operations accounts for 38% of the total. In the second quarter of '19, it accounted for 52%. So we still see some opportunity here. When we do the math in terms of absolute values, it's almost the same. But we still see some opportunity to expand the share of the portfolio with interest to increase the revenue and increase the financial margins to our financial operations.
On the right-hand side of the slide -- we talked about that already in the first quarter. But anyway, throughout 2021, until the third quarter of '21, the company was seeing a level of portfolio that was inherited from the peak of the crisis. So the company stepped on the brake on the level of risk. So we had a smaller portfolio with a credit quality profile that was much better. So in 2021, we did a reversion of our provision for expected credit loss because of the reality at the time. But now the cycle has been inverted. Since the fourth quarter of 2021, we resumed the provision for expected credit loss, and we did that again in the first quarter of '22, and now again in the second quarter of '22. And with now a marginal increase on delinquency levels, especially in our branded card -- and this is an important point. Part of this movement is related to the cycle of the business, as I said earlier, but part is also due to the increase in the margins of the provision for credit loss.
Now on the next slide. You can see further details about what I just said. Look, how interesting when we look at the blue line, which is the Riachuelo card covering the main operations and main volumes. In March '22, we saw a growth in the delinquency level, but pretty much at the same levels as the end of 2021. But when we compare to June '21, we see a more significant growth. So when we see the needs of provision of that quarter compared to this, we have these 2 components. We have part of an increase of the provision, part an increase in losses. And when we look at the numbers from within, the greatest pressure comes from the operations of our branded card, as I just said, especially the offers transactional.
If we look at personal loans, the number has been dropping. We talked about that briefly in the first quarter, and the slope is quite intense. And there are some elements involved here. The credit profile of our customers is of lower risk right now. We inherited this since the peak of the pandemic, and we cap this profile of customers in our portfolio. And more recently, with the macroeconomic scenario that have made our credit policies become more conservative as well as our collection activities that have become a bit more active. And this has been done to protect our credit portfolio and to protect ourselves from the delinquency numbers.
Now on the next slide, the numbers show you a bit about the resumption of the financial margin. So the top line of the financial operations that I mentioned a second ago. This is related to the percentage of interest rate portfolio and also the size of those portfolios as well as duration. If the customer stays for longer with longer financing terms, that also helps with this level of revenue. So in 2020 and 2021, we saw that there was a valley because of the reduction of the portfolios and their associated risk. And now the curve shows that the volumes are coming back, but still at lower levels than the second quarter of '19, a 10% reduction here when compared to 2019.
So in Midway's result, we can see that there is a cycle that partly comes from the recomposition of the financial margins and part from the recomposition of the provision for expected credit loss and also a marginal increase of the delinquency levels, especially in our branded card operations.
So when we look at the results of Midway Financeira, we see this year-over-year pressure because of the topics I just mentioned. We went from BRL 90 million in second quarter '19 or BRL 88 million in the second quarter '21 to BRL 21 million in the second quarter of 2022. So it is important to understand how this works in order to understand how these results have been achieved.
Now on the next slide, the consolidated financial performance. First, talking about retail, the consistency of top line sales and margins. We have recently talked about the financial operations. So now we go back to the consolidated performance.
Operating expenses, this is a point we've been working on for a long time now. As I said, this quarter of 2022 and the whole year of 2022 has been no different. We're always searching for new opportunities or new elements that will make the company have a lighter structure to operate in this challenging macroeconomic scenario that Oswaldo talked about, but keeping our possibilities to growth and the profitability level for the group.
So compared to 2019, we had some new expenses related to the digital transformation. So the performance is very close to breakeven in this channel. That's what we want. But of course, we have some pressures when we look at this from a different perspective. But there has been moderate growth and all of our work on productivity continue active quarter after quarter.
Now in terms of our adjusted EBITDA. On the right-hand side of the quarter -- of the slide, sorry, the composition of our EBITDA from products was very strong. Midway EBITDA, even with that cycle and the increase in delinquency levels, we had a 28% growth in our adjusted EBITDA this quarter compared to the second quarter of '21, achieving BRL 262 million in the second quarter of 2022.
Now let's talk a bit about the leverage level and the debt level and cash consumption. On the right-hand side of the slide, we can see that since June 2019, the net debt of the company has increased BRL 611 million. So looking at the magnitude of the net debt, that's quite reasonable for a company of this size, considering the increase since 2019. But there are 2 main elements here that led to this cash consumption. One is the investment in the digital transformation, all of the elements related to our digital channels. So expenses related to the operations as a whole and also investments made in property, systems and all of that.
As a reminder, when we talk about results that are close to the breakeven point, we're talking about an EBITDA of almost 0. But of course, this has cash consumption because we have also working capital as a whole. So the working capital is also related to the activities of the Midway Financeira, as I said earlier.
In terms of the leverage level, we saw an increase this quarter because of the EBITDA pressure. So the denominator had an important effect. But when the cycle of the financial operations is completed and the consolidated EBITDA of the group expands in a more dramatic way, then we think this number will go back to historic levels as we showed you in the chart on the left-hand side of this slide.
Now moving on to the next slide. We can see here the numbers related to the group's financial cycle. The cycle went from 151 days to 170 days. Inventories, the margins shrunk a little bit. And also suppliers, we had a 12% reduction. This is related to all of the challenges in the supply chain that we've been talking to you about. The main suppliers are demanded by many clients. National and international sourcing is very much in high demand, which pressures these numbers. And receivables, the resumption of our credit portfolio has led to an increase in the numbers we see here in the receivables chart.
Now CapEx. Investments in fixed assets, we had a total of BRL 163 million in the quarter, pretty similar to what we've been sharing in recent quarters. A significant representativeness here in technology, investments in technology, and we are also prioritizing renovations and also the transformation of the new stores.
So this concludes our initial remarks, and now we are all available to answer your questions. Thank you very much.
[Operator Instructions] The first question is by Ruben Couto from Santander.
I have 2 questions. The first one is about your sales performance in July and early August. With the strong growth of the second quarter, was that boosted by the cold temperatures and do you expect this growth to be sustained in the coming quarter? Now the second question is about the improvement of your online operations. We saw a reduction of logistic costs in Midway online as well. But is this more because of gains of efficiency or dilution of costs because this channel is growing? Can you give us further details about that?
Well, before I turn the floor over to my colleagues, what I can say is that in July, we saw a small drop in the flow. It was not cold during that month, but the number of items per purchase has been kept the same. And in August, we see that the flow is coming back to regular levels with the campaign for Father's Day, as expected. Now we still don't know what to expect. The end of July saw a slowdown in our flow, but now it's going back to normal. So we're quite optimistic about the quarter. We hope to close the quarter with top line growth. Anything to add here, Tulio?
I just want to add to what Oswaldo said. In the month of July, yes, we saw an effect of a lack of cold temperatures, but we also made an important change. As part of our repositioning movement in June, we have an event called [ Mau da Casa ] that was pretty much incurred in prices. But this year, we are changing our positioning and this was much more incurred in product and value than in price. This leads to margin gains, but it also affects the total volume sold. But this is very much in line with the changes in our value proposition.
Father's Day is doing well. A good response to our product. And in terms of the online efficiency gain, yes, these are structural gains. Quarter after quarter, we've been gaining efficiency in all of the resources that we take to the online operations, shipping, and online performance. So we are able to keep a good pace sending products to our customers with shorter lead times.
In Sao Paulo, more than 40% of the deliveries happen in up to 2 days. And at the same time, we are reducing shipping costs. We are reducing shipping costs by around 30% because of all of our logistics operations. And as we gain strength in organic media, we can reduce the investments in paid media. So this is going quite strong. And what we want is to have a balanced ratio in our online sales. Our phygital customers are more and more relevant, as we said earlier, and we want a balanced equation of costs for those customers. So the gains have been quite consistent.
Now our next question is by Maria Clara, sell-side analyst at Itau.
Here at Itau, we would like to understand the magnitude of the gross margin gains in your retail division. Should this be sustained from now on? What do you expect to see in the short term when it comes to the behavior of this margin?
Part of the margin gains that we saw in the second quarter was related to the lower temperature. So the colder weather in the season, and also the good performance of our sales that has gross margins that are better than the gross margins of our inventory as a whole. But in spite of the seasonal effects, we expect to keep on seeing margin gains in the coming quarters as well. Joao, would you like to add anything?
That's all Oswaldo. I think you said this earlier. Our teams have been committed to evolving the value proposition of our collections with more appropriate products and a greater assortment of products as well. We are working to have a more consistent and more robust sourcing. We're also working on clusterizations. I always say that Brazil has different tastes and different pockets as well as different weathers. And since we're present in this great territory, in this great diversity, we are working on our collections and on the distribution. And this leads to significant gains.
I would also like to highlight the efficiencies we've had using our supply system that is now based on SKU, and we are implementing improvements to our systems using data analytics, technology, and improving our -- the tools we have in-house. So now we can make better decisions about our inventory.
We're also working on store culture, and we're aiming for a better balance between our offer and our distribution centers. So our plan is to deliver those gross margins. Our commitment is to have levels a bit above those of 2019. That's the work we've been doing so far.
Now we have a question by Renan Sartorio, sell-side analyst from Bradesco.
I would like to ask you about the drop in the coverage levels of Midway. What is the rationale behind that? And also about Casa Riachuelo, do you see a recovery there? And when do you expect this recovery to happen?
This is Tulio speaking. I think there are a few things here. The provision for expected loss at Midway, the cyclic demand was something I tried to explain during my presentation, but the whole reversion that we did in 2021 is being rebuilt throughout 2022. And there are 2 ways to look at this. If we look at this from the perspective of provision of up to 180 days, we have a provision inventory of 6.8%. Since I have a delinquency level at the card of around 4.5% and the delinquency levels of the personal loan is going down since June '21, going from 27%, 28% to 13%, then the 6.8% is quite appropriate for the expected credit loss.
Our provision is always defined based on the projection for future losses. So I think that the provisioning strategy is being planned along those lines. And the personal loan operations is very well controlled. Our private label operations is also very well controlled, and this pressure is coming from the branded card in the spending of transactions.
Now about Casa Riachuelo, the behavior of customers when it comes to homeware, I mean during the pandemic, that category grew 2 digits because of the pandemic. Now with this challenging macroeconomic scenario, customers will have to make choices. So they are focusing more on the fashion categories right now. But in addition to what earlier said, for the third and fourth quarters, we expect to see a gradual increase in the sales of our homeware in margins compared to 2021 and to 2019 as a result of the change of mix and our positioning, the value proposition of these categories.
This is ongoing. It is a process, right? I think that throughout the second half of the year, we're going to see better times for the homeware category. Do you have anything to add, Joao?
Yes. During the pandemic, this category grew a lot, and now we're paying attention at the different behavior of customers. Customers are no longer focusing on homeware, they are now focusing more on apparel. And what the teams are now doing is to they're working on our positioning to enhance the homework category, improving the value proposition. This is a movement we're also doing in apparel with volumes of higher added value, improving margins, improving raw materials, introduce new product lines, not only for textiles, but also fragrances. So we are reviewing this strategy and introducing products that are more in line with the needs of our customers right now.
Now let's answer the questions we received via chat. First, [ Carlos Guerrero ], sell-side analyst at Cantor. So he's asking about the provision for credit loss. I think we have already answered that question. Do you have anything to add? No? Well, Carlos, if you need any additional clarification that hasn't been made clear yet, just let us know.
Now Rafael, sell-side analyst at EQI. He says congratulations on your results, the gross margins from products can be sustained in the coming quarter, even with a smaller share of winter products in your total sales?
Yes. Yes, I think so. This is going to be better than our 2019 levels. That's what we expect.
Okay. Great. This concludes the Q&A session. Thank you all so much for joining us. And our IR team is available should you have any other questions. Have a great afternoon, everyone. Thank you.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]