Guararapes Confeccoes SA

BOVESPA:GUAR3

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon, everyone. Thank you for joining us for our third quarter 2023 Earnings Conference Call. We'll get started with some opening remarks by Andre Farber, our CEO; then Fred Oldani, our CFO, will comment on our results. Francisco Santos, the Head of Midway Financeira is also joining us today, and all of them will be available for the Q&A session. [Operator Instructions]. This event is being recorded and simultaneously translated into English. The slides shared are in Portuguese, but the English version is available for download on our IR website.

I would like to mention that forward-looking statements that may be made during this conference related to the company's business perspectives, projections and targets are based on the beliefs and assumptions of the company and are no guarantee of performance. These are all the housekeeping remarks.

So now I'll turn the floor over to our CEO, Andre.

[Andre Farber, executive]

Good afternoon, everyone. It's great to be here with you today. This is November. I've been at the company for 6 months now. When I joined the company, I got the mission of revitalizing our core, improving our core operations, apparel, and Riachuelo store and 6 months later, I can say that this was the right decision made by the Board and we continue with the same objective, the same mission, which is to improve our core business, make Riachuelo stronger and make the apparel category stronger as well.

In our last call, I had been at the company for 2 months, and I established some strategic priorities for our team to achieve the mission of making Riachuelo stronger. And the priorities are here on Slide #4. We want to be product obsessed; democratize access to passion; we want our assets to be worth more; and we want to achieve better operational efficiency. And I'm going to tell you how this has been evolving and what lies behind each one of these priorities so that you can get to know more about our strategy. And when we're presenting the results, I will link to these priorities.

Product obsession means having the product at the right time for the right person with Riachuelo strong in apparel making and all accessory categories. So this is robust work of having skilled people creating fashion on the creative side, but also organizing our chain in order to have the supply with the right product at the right time. We also want to have markdowns at the right time, and we want the whole product change from end-to-end from the creation to the sales and the markdowns working well seamlessly. And this is very valuable to attract consumers and expand our margins.

Now passion democratization is related to adaptation in our store portfolio and products, cold stores, warm stores, stores in locations with higher purchasing power or lower purchasing power, reflecting internally everything consumers want different in order to have a differentiated value proposition right there to consumers, and we've been working hard on that. Our assets, as we mentioned earlier, we have a very well structured chain from the plant store to Midway. And we have a park of 410 stores throughout the spectrum with a lot of investment in distribution centers. We have 3 DCs in Brazil. And this is very valuable to us. Our executive committee doesn't see a need to make major investments in order to unlock more value because the investments already made throughout the years still have value to be captured, investments in technology, distribution center, in our plants.

This enable us to generate more value for Riachuelo. So this pillar here is all about coordinating our chain well, dilute the CapEx that we have made in recent years, having a more diluted CapEx from now on. You see the numbers in the coming quarters, and this also helps us in cash generation.

And finally, operational efficiency is very close to our priority #3, but it's related to our structure and everything we do, we have been able to dilute G&A, to expand margins throughout time and generate more operational results for the business.

Now on the next slide, you can see some of our numbers. I don't think this slide has moved. Oh, yes, there we are. Okay. We had a very strong quarter in terms of sales. After some time without growth in same-store sales at this level, we were able to get a double-digit growth this quarter. And when we look at the confection segment, it was even stronger now. We got growth above 13%. So we are very happy that our model is attractive to consumers, and we did all of that with larger volumes, not by impacting our prices. So we're being able to attract more consumers, Riachuelo is being attractive in spite of everything we've been talking about the retail segment and the competitions.

So we're very happy with our top line results this quarter. And that was done with a lower inventory level which is not easy, we were able to decrease this by 6 days, and I'll talk more about this dynamic of sales, inventory and margins because this is all interconnected. And we also achieved this result, generating more cash, BRL 266 million year-to-date, but we generated more than BRL 606 million more than last year, and we expect this to improve even further.

We see a challenging scenario in the financial business and the market as a whole, but we're happy because we were able to stabilize the business and Midway Financeira business is already profitable. As you can see, this quarter, we had BRL 20 million in EBITDA, and we see some rates now moving to a more positive trend. We are still very cautious, as you'll see in our materials, but we see a lot of room for improvement. And finally, we have a robust debt but also enough liquidity, and we have a comfortable cash position to comply with our obligations in the coming year or 1.5 years. So liquidity is definitely not a problem for us.

Now talking a bit more about the dynamic of sales, margin, and inventory. You're probably curious about this. I believe that the increase in sales, yes, I mean, the margin was lower, and we have 2 explanations for lower margins here. First, we had a second quarter with very high inventory levels because we had a warm winter and that was a trend that we saw until the end of the winter.

So we had to get rid of that inventory before the problem became even more serious. And of course, that affected margins. But the good news is that we have lower inventory levels now, and we are on the right track. If we hadn't removed -- I mean, decreased the inventory levels, we would have been at an inventory of 10 days, and we were able to decrease this to 6 days. So this cleaned up the company for better results in the coming quarters. So that was very positive.

But first factor to affect margins was the cleanup of our inventory with the winter items, and we're very happy with the results. And we also changed our SAP in the plant, which impacted our plant efficiency in recent months, and that also impacted our margins this quarter. I think Fred can talk more about that later, but we don't see this as a decrease in our structural margin. We expect this margin to go back to higher levels in the future. We still have some inventory cleanup to do and increasing operational efficiency. So we'll see some cash free up and reduced inventory levels. So we want to continue with our sales growth and working with lower inventory levels, which is really important in the fashion business not missing out on sales and impacting margins as little as possible.

I hope I have made this clear for you. And now I'd like to turn the floor over to Fred, who will give you further details about our numbers, and I will be available during the Q&A session to answer all of your questions. Once again, thank you.

[Frederico de Oldani, executive]

Okay. So continuing with our results presentation on Slide 8. Performance of the Retail segment and merchandise, we had a quarter of robust growth with same-store sales of 9.7% growth. When you look only at apparel, we had 3.2% -- 13.2% progress in the apparel category, which is quite robust and worth emphasizing. And although part of this performance was due to more promotional activities, as Andre mentioned, especially in the beginning of the quarter, it's worth mentioning that at the end of the quarter, when we had last promotional actions. Our results were capped at similar level then we had throughout the quarter on average.

So that shows that the growth didn't happen only because of the promotional activities, but also when we introduce new collections today, they are very well received, and we were able to keep a very good store performance even when we reduce the level of promotional activity. So as Andre commented, we are turning the page when it comes to retail performance. and growth, which was something that was hard for us in recent quarters.

Now moving on to Slide 9. Let's talk about gross profit and gross margin. we had a contraction of 3 percentage points in gross margin. In spite of that, our gross margin or merchandise grew 3.7% year-over-year. And I think that there are many factors that influence this that Andre already mentioned, like the deployment of the ERP, more promotional activities especially in the beginning of the quarter as a consequence of a weaker performance than expected during the winter season. But I think that the positive news here is that at the end of the quarter, the month of October, we saw gross margin and merchandise levels much closer to the normalized levels. And we believe that in Q4, we will deliver something that is more in line with the margins we achieved last year. So the margin drop is one-off...

[Operator]

Ladies and gentlemen, please wait while we get the speakers reconnected.

[Frederico de Oldani, executive]

We apologize for the technical difficulty. Let's get back to our presentation starting on Slide 9. So as I was telling you, we had a contraction of gross margin in Q3. And as Andre mentioned, that was due to a higher level of promotional activities in the beginning of the quarter because of a weak winter season and also efficiency that was impacted in our plant with the implementation of the new ERP. So the main message here is that we can see that from now on, starting in Q4, we expect to go back to margins that are close to the levels we had last year and with a trend of growth in sales. So that shows that we are resuming a growth cycle without strong pressure on the margins as we had in Q3.

Now on Slide 10. You can see the evolution of our inventory in the coming quarters -- in the recent quarters, we reduced 6 days and this is quite significant because we have been working in a much more efficient way to reduce our days of inventory, making the most of our integrated framework and our great logistic efficiency because of our supply model and the structure of our distribution center. So we believe that this can improve dramatically in the coming quarters as well. And a positive factor here is that this helps to free up working capital and reduce the company leverage.

And this is something we've been working hard on in order to attract as much value as possible from our logistics chain, considering all the investments that were already made real time, and that is one of the competitive differentials of Riachuelo's integrated model. And this is very in line with the missions. We mentioned earlier, operational efficiency and extracting more value from the integration between Riachuelo and Guararapes.

Now moving on to Slide 11. Merchandise EBITDA achieved BRL 142 million this quarter. That is a drop compared to last year, and that was due to a typical performance last year due to some specific factors, but I think that the result shows that we are at levels that are way above those we had during the pandemic, and there is still room for margin recovery. And I think that, that's a natural path forward as we evolve our sales performance and improve the integration of our logistics chain with the stores, reducing inventory levels. So there are many efficiencies that should help us improve our sales performance. And as a consequence, the margin performance as well in the coming quarters.

Now on the next slide, let's talk about Midway Financeira. Midway, as we told you earlier, is acting in a very conservative way. We still see challenges in the credit market. We have seen a small reduction in the portfolio which led to a mild reduction in revenue, even so -- and that is compared to Q2, of course.

But even so, our EBITDA in Q3 was almost the same we achieved in Q2. And there is no question that this is one of the financial companies that in spite of the challenging scenario, remains with positive EBITDA levels. We were able to navigate really well this landscape of challenging delinquency levels, and we expect to see an inversion in the curve soon. So from now on, we expect to resume EBITDA growth in Midway Financeira as well, although we're still cautious in accelerating credit granting.

Now on Slide 13. You can see the evolution of our portfolio and the losses. So we can see that our losses are stable. We had a trend of growth since the mid of the pandemic. I mean, during the pandemic, we had a drop in delinquency levels. But since early 2021, that was a growth in delinquency. And now from the second to the third quarter, it's the first time we see the loss level stabilizing once again.

And on Slide 14, you can see our coverage level. Our coverage ratio had a slight increase compared to Q2, achieving 92.7% of the portfolio. These are very healthy levels in line with the historical levels of the company before the pandemic. And of the financial companies, we are probably one of the most conservative ones, if not the most conservative in the provisioning levels that shows that we are in a very comfortable provision -- position considering the level of delinquency that we have seen.

Now on Slide 15, you can see our delinquency ratio in the different businesses, cards and personal loans. So for both businesses, we see that short term delinquency is going down that is happening in the short overdue, both for cards, and personal loans, but the loan overdue, so over 90 days still has a performance gap between the card business and the personal loan business. In personal loans, this is the second quarter in a row in reduction of the loan overdue payments. But in the card business, we still see sequential increase, especially for the branded card.

The [ P&L ] shows different results here, proving that the branded card is still a challenge. It's delinquency ratio, I mean, although the new waves are performing much better, the branded card business has a historical portfolio, in this quarter, we have seen some deterioration in the base. So that doesn't make us feel comfortable to accelerate growth in the branded card.

Now for personal loans, we are quite comfortable. PL has helped to keep stable the sales share of Riachuelo card and in spite of the conservative credit renting scenario, we have not felt any relevant effect of sales losses at Riachuelo due to the fact that we're being more conservative in credit granting and the delinquency dynamic and PL products is much lower than in the branded card. We are working with a credit granting level that is more profitable than it was in the past. So we think that EP is well adjusted in our renting level is appropriate for the delinquency we have today. So we think that this is an equation that is well adjusted. Our credit granting, considering the rates against delinquency show that we are operating at a conservative but profitable level when it comes to personal loans.

Now moving on, let's talk about consolidated operational performance, looking at all businesses. Looking at the expenses, we had a small growth in expenses this quarter after several quarters of decrease. It's worth mentioning that this growth is basically due to one line, which is provision for profit sharing because of the performance last year in Q3, we had a reversion of provisions, which benefited the results.

On the other hand, this year, we have results that are very close to what we estimated. So profit sharing provision is now at a more normalized level. And this explains almost all the expense growth that we have now as compared to last year. So we're being conservative in expense management, seeking all types of efficiency we can find here at the company and at the same time, we see a resumption of growth. An interesting point here is that our expenses have helped us to maintain our results in recent years where we faced a harsh growth scenario. But now we see a different scenario with growth resumption, but we believe that we can keep expenses under control and below our top line growth.

When we look at the consolidated results for all businesses, our EBITDA was BRL 184 million in Q3, still below 2022 results, but we see this trend improving in the coming quarters. When you look at the annual comparison, Q3 '22 was one of the strongest quarters last year and Q4 had a very timid performance. So at our comparison basis, 2022 had a worsening from Q3 to Q4. And this year, we expect things to be the other way around. We expect to see an improvement in Q4 as compared to Q3.

Now let's talk about cash and leverage. Our net debt is at BRL 1.7 billion, stable as compared to the previous quarter. Our leverage for covenant is at 1.9x against a covenant of 3x. In other words, we are at a very comfortable leverage level. When we look at the same quarter last year, the reduction in debt levels is dramatic. And we believe that this number should improve even more, by the end of the year we expect to see our leverage at levels below 1.5x. It was the focus of the year to deleverage the company and focus on cash generation at the same time that we prepared the company to resume growth. So we feel very comfortable knowing that the adjustment in the capital structure is happening as expected.

Our cash position continues robust, as Andre mentioned, BRL 2 billion, means we have enough cash to cover all of our obligations till the end of next year. So very comfortable liquidity position, and we'll continue with our debt amortization schedule in the coming quarters in line with what we've been doing since the beginning of the year.

Now on Slide 18, you can see cash generation. This shows how much we evolved in 2023 vis-a-vis 2022. When we look at 2022, in the first 9 months, we had BRL 340 million in cash consumption. So our cash generation was not enough to cover the investments of the company. And the company had receivables anticipated last year for the first time, which benefited cash generation last year. Now this year, we have an accumulated cash generation of BRL 266 million. And the impact of the receivables anticipation is negative for the first 9 months because we made BRL 400 million this quarter against BRL 500 million in the end of last quarter.

So cash generation ex receivables effect would have been even higher year-to-date this year. And we've been insisting on this. This was an important and significant change in the company's cash generation. So now after 3 quarters, I think that the numbers showed us very clearly and there are many factors here that help explain this number.

Inventory adjustment is an important factor that has improved our working capital level, but there are many other actions as well, and it's worth mentioning the investments and now continuing with this topic on Slide 19, you can see that year-to-date, we have BRL 280 million in CapEx. Last year, we were at BRL 440 million at the same time. So a reduction of BRL 160 million in CapEx in the first 9 months of the year. That is approximately 37% below what we had last year.

And in spite of this drop in investment, it's important to mention that we're still making investments that we consider important such as investments in technology, opening new stores, remodeling existing stores, improvement in logistics, with the rollout of the RFID in a large number of stores. So we were able to reduce our investment level without giving up on the investments we consider important to guarantee the future results of the company. So this work of optimization has helped us gain efficiency, and our investments have contributed for us to reduce our goals of reducing leverage and improving the capital structure as promised for the year.

So this concludes my presentation of the results. And now we would like to open for the question-and-answer session. Thank you very much.

[Operator]

[Operator Instructions]. The first question is by Kelvin, an analyst at Itau BBA.

[Unknown Analyst]

I actually have 2 questions. First, during the release, you said that the movement to reduce risk at Midway impacted the revenue dynamic. This was the first time -- the first quarter, we see this drop in revenue year-over-year. So do you think that the revenue will be impacted from now on, or continue to be impacted from now on. And now another question about Midway. We saw an improvement in the short-term NPL worsening in the long term, but we see other players with a better recovery dynamic and collection. Do you see anything along those lines or when do you think that you can achieve profitability in that division?

[Unknown Executive]

This quarter-on-quarter effect can be explained in 2 ways. Last year, we had the effect of the portfolios we had in the digital channel, but we believe that until the coming quarter, that's going to be solved and that generated extra revenue last year. Now about Q3, we expected it to be a bit better we had some calendar effect that left some of the revenue for October, but we believe that this can be reverted in the coming quarter.

The portfolio in the card will become more stable. In the loan, it will remain slow because of the credit we're granting, but this year-over-year effect we believe, will not be felt in Q4. About collection, we're still cautious about this. We see an effect of collection that is slightly better than we expected. So the losses of the portfolio is getting better, a bit more pressure in cards, but better in personal loans. So we are becoming more optimistic about the coming quarters.

[Operator]

Next question is by Danniela, sell-side analyst at XP.

[Danniela Eiger, analyst]

So my first question is more short term, but I would like to understand the company's mindset to a more medium and longer term results trends in Q4 compared to Q3. And the trend that I would like you to comment on in the medium and long term is the balance between growth and margin. We had a positive surprise to see your retail growth this quarter, but there was also a need to have more promotional activities, maybe because of the competition or market conditions or both because we see a more gradual demand. So what do you say this in the short term and also from a more strategic perception, the balance between growth and profitability.

And Andre talked about the strategic pillars, 6 months is not long, but it might be enough to define some strategic projects. So I'm not sure you have already mapped operational efficiencies, such as the RFID issue. I know that you have some more complexity because you're verticalized, but we see other players that have had that for some time now. One is going to a 2.0 version. The other one is already implementing this with relevant gains. So I think that there is great potential for you to capture with projects like this, not only this one, the RFID one, but other more structuring processes that you were probably mapping.

[Frederico de Oldani, executive]

Okay, Dani. I will start, and Andre can add to my answer later. The result dynamic, I mean Q4 we see a merchandise gross margin closer to the levels we had last year. So yes we see a different market condition now, a more competitive market. PMC performance is weak. Harder market, but we believe that the levels that we achieved last year are levels that in the short term, feel comfortable. But of course, Q4 is highly reliant on Christmas, and you don't have a lot of promotional activities before Christmas. But Christmas defines what the margin will be like in Q1 '24. So I think that the risk is lower here. If the Christmas is good, then in Q1, we have less promotional activities. If it's not that good, we have some more promotional activities.

But when we look in the longer run, we believe that we are starting a moment of going back to the margin levels we had last year. Well, how long will that continue? I don't know for sure. But we are implementing many actions that will take us back to that scenario. And at the same time, there are many issues that can impact our margins like stock, the fact that we have high inventory levels, this is still affecting margin, but we don't expect this to continue in many more quarters to come.

If the performance is good at the end of the year, it can almost bring our inventory levels to those similar to pre-pandemic times. So this removes the pressure on gross margin. And this is something that is easily achievable. We're also working on plant integration. The plant had a difficult quarter because of the migration of the ERP, but as I said, these are one-off issues, and we had more idleness than we usually have, but this is not something permanent that would point to a problem. So 40% of the margins that we lost in Q3 is related to plant efficiency. And this is already normalized. In the first 10 days of October, this were normalized. And ever since then, we have been producing at normalized levels.

So we see a favorable margin dynamics to go back to the levels we were operating in the past. And at the same time, we believe that the value proposition that we deliver in apparel is quite accurate quite well adjusted. And what makes us confident is that even when we reduce the level of promotional activities, sales continues to respond in a positive way. So our value proposition seems to be quite appropriate. Yes. Still talking about margin levels. Internally, we do not relate the increase in sales and same-store sales in physical stores of 11% to margin drops. We think that there is some influence, but we're doing many things at the same time, which have a positive impact on the business. And it's hard to say what is leading to what but there are many things happening at the same time.

And that is connected to your second question, while you have your strategic pillars, okay, but what are the initiatives underlying them? Well there are many I could give you some examples. So you have a better idea of what I'm talking about. But in terms of product obsession, we have been reviewing our supply model. This has started in June, and it's improving month after month.

The idea here is to have a better distribution of products in stores with lower inventory levels, which would generate less markdowns. So this improved sales and impacts margins positively. Another example, which supports this project is the RFID one, which you just mentioned. We are implementing RFID. We will close the year with 100 stores with the RFID already implemented. And then next year, we will roll out the rest for the rest of the network. So that's another example of project.

Now we reviewed our organizational structure for fashion, creating clear pillars of women's, men's, and children's apparel. We also had leadership changes, so many changes internally that would make us more accurate creating fashion in a more inspired way. And one of the projects I firmly believe in and we've invested a lot in the plants as part of the pillars, our assets should be worth more. We're working really hard with our commercial teams, and plant teams in the future, I think that our plants will have a higher use rate.

Of course, it takes some time for the chain to adapt but we think that our plant can be that are used and can have higher margins if we do things right. So I'm not sure this is going to happen in the next quarter. But in the long run, we expect to see margin expansion compared to what we had in the past, and we are working on this. So these are just some examples of the initiatives that are being implemented to improve our offer and our margins and returns.

[Operator]

Next question is by Vitor, Santander analyst.

[Unknown Analyst]

I would like to talk more about the competition in Q2 to understand the affects you felt and also I would like to know if you can benefit from these programs in terms of assortment or in any other way?

[Andre Farber, executive]

We are going through a time with complete lack of tax [ economy ]. Cross order is much more advantageous than producing locally or importing. Just so you have an idea in our calculations in terms of tax difference, it's around 100%. And this is not talk of people who want taxes or tariffs to be increased so that we can be protected. The shirt has 35% import rate, 18% of other rates, in total 80% of tariffs. So there is a lack of tax economy. And even so, we got a same-store sales growth of 11%. So even in adverse competitive conditions, we are able to serve our customers well. They have been coming to our stores.

And as far as I understand, the government is quite sensitive and has understood that this is a key issue in Brazil, not only for the textile industry, but for the market as a whole, and I see that the society is more sensitive to these issues now and understand how the lack of economy is not fair. And this is going to affect not only the textile industry, but actually, several categories in the retail market as a whole. And the government has started to regulate this.

So we expect this economy to come in the coming months. It's hard to say exactly when this is going to happen. You probably have more information than I do, but we see Brazil moving on a direction to create economy for all parties, and create less differential for those who invest in Brazil. So we're waiting to see how this will unfold in order to define whether we have to manufacture more abroad or not. But now we think that the society has understood the problem. We're committed to Brazil, and we believe that this problem will be solved in the coming months.

[Operator]

Our next question is by João Andrade, an analyst at Bradesco.

[João Paulo Andrade, analyst]

I'd like to ask about inventory. I think that you gave us a lot of color with better demand going back to last year's levels, you're talking about structural distribution processes. We know about the effect of margin improvement, inventory reduction, how do you see this in the long run? Do you think that we'll see normalization as compared to the previous year?

Or is there anything different that you expect in addition to process improvement, plant efficiency and so on. About Remessa Conforme, as a consumer with the beginning of Remessa Conforme, we saw some platforms complaining about having to pay tariffs, but we also saw a price increase in those platforms. It's hard to measure this, but have you seen any elasticity in this movement of price increase, which could be a good indication for a future tax economy coming in the coming months?

[Andre Farber, executive]

Okay, João, I'll start with your second question. There are so many things being done at the same time that makes it hard for us to understand what happened in Remessa Conforme and if this has changed our businesses demand. What we know is exactly what you said that you start to have national supply and the rules of the game are the same and still the price will go up. Of course, there is no magic. And it would be great to have equal competitive conditions to those cross-border platforms, and then we'll be able to compete even with better prices.

So going back to your first question about the behavior of inventory levels and margins throughout time. I think this is very much aligned to what we are saying here. I see the business. We have an integrated chain. And with better controls and with structural projects in the chain, I think that we can operate with lower inventory levels. Fred and the team have been working hard to reduce inventory. We were able to do that already, but I think that in next quarters, the numbers will be even better. So we hope to have a better and more efficient turnaround. And I think that we can remove another 20 or 30. This is not a promise, but this is what we expect. And every 10 days of stock means BRL 100 million of free cash flow that is freed up. So that's our internal target here.

In terms of margins we believe there is an opportunity not only to go back to the margins of the past but also to expand margins and we have structuring projects, better integration with the plant, better use rate of the plant capacity and also how we deal with markdowns, making our pricing more efficient. Just to mention 2 examples. So for the medium- and longer-term perspective, we see the company operating with a higher working capital less inventory and better margins expansion.

[Operator]

Our next question is by [indiscernible].

[Unknown Analyst]

I have a question about the operation of Midway. Looking back, we see that the whole market went through an excess credit granting and issuance of cards to many consumers in Brazil and then the crisis hit. And the banks are now limiting their presence the government tried to place a cap on interest rates. So my question for you is, considering the current scenario and this level of uncertainty, how open you are when it comes to granting credit, either for personal loans or branded credit cards. What is the profitability level that you consider the new normal or midway operations in terms of return on equity. What do you think can be considered the new normal in the operations in this current scenario of funding costs and credit availability.

[Andre Farber, executive]

Well, when we look at this, then we understand this whole market dynamic, but we have a specific situation because we also have retail. But when we look at the financial operations plus retail, considering that we expect interest rates to lower and delinquency with this excessive credit offer become more controlled. We still see a lot of value to be generated here in our operations.

Of course, the branded card offer, which can be consumed outside the retail should be analyzed carefully, but the adjacent businesses such as our insurance operations or loans, they have been behaving well. The loan operations are at levels we had pre-pandemic, so we adjusted the risk and return on loan ratio. So we are optimistic about the next 2 years. We don't see a perspective to grow product granting dramatically that market will continue limited, but there is a low cost of acquisition per customer, so we can explore this better, and we see a positive perspective in this niche market to go back to the profitability levels we had in the past, which is different from operating a stand-alone credit card business, especially in the digital world in which you don't know customers that well.

Just an important comment about the experience of digital banks last year, reinforce how important it is to have some type of competitive edge for client selection. I think that last year, showed how hard it is for you to work with credit without a competitive advantage. The digital players will disrupt the credit market, lowering profitability. That's what we heard, right, generating more competition. But after some time now, we see that there was a major increase in delinquency in those who are navigating better are those who have some type of information or relationship advantage. It's just the case for Midway integrated to Riachuelo. So we don't expect to see what we saw last year.

Now about the rotation scenario. We are not operating with rotation of credit here at Midway. We work with installments since the first overdue payment. We're looking at the discussion carefully to see how this is going to behave. But part of the revenue will go away with high delinquency and I'm talking about revolving credit.

So we think that maybe this regulation may indeed be healthy, but there might be a mismatch between revenue and delinquency. But we believe that in the medium and long term, this can be a positive effect, and the market will accommodate at better levels than it is today. Even with this possible mismatch between revenue and delinquency, we are still optimistic about 2024 compared to what we were expecting for 2023.

[Unknown Analyst]

Just a question about the cross-border competition. Of course, you and the other players in the market talk about that economy at around 80%, but the government said they would tax it, and they put 0, so it's hard to believe that this [indiscernible] rate will come soon. So based on the [indiscernible] effect that we have, which is an initial budgeting proposals considering something around 28% for next year, right, in terms of taxes? Do you think that this level of taxes plus ICMS would lead to a stabilization of the cross-border competitors share? Or would this enable some kind of market share gain to Brazilian retailers. Do you think that helps in terms of giving market share back, or would just interrupt the growth of the cross-border players?

[Unknown Executive]

Well, today, we're operating at 0 and we were able to get the growth that you saw. So I think that the government will get to 80%, otherwise, everyone will think about our productive chains here. But even if it doesn't get there, if it's like 28% plus 18% ICMS, so 40% to 50%, that is much higher than it is today, and that will make them much more -- I mean, much less attractive, and that should lead to a drop in their market share, but that's a good discussion to be held.

But today, their greatest advantage is in terms of price, I think that we talk a lot about the model, but the main advantage here is related to import taxes or tariffs. So any changes in taxation will impact us. And someone said that with higher prices, I mean, we do have some qualitative surveys showing that there seems to be first drop even before Remessa Conforme comes into force. So yes, we have a perception that this will be impacted and that the players that are now in the Brazilian market can resume their market shares, regain market share.

[Operator]

Now let's look at the questions sent in writing. The first by [indiscernible] from Reach Capital. He is asking whether it makes sense to anticipate the growth that schedule -- amortization schedule since the company generated more cash this quarter. And last year, we generated approximately BRL 700 million in cash.

[Frederico de Oldani, executive]

Well, we did have an advanced in Q1. So we closed Q2 with excess of cash. So we did have an advance of the debt that matured the coming months, and this was reported in our Q2 results, and we have an important maturity to happen in November, that we're going to pay in full. So what we can say is that we have strong cash generation in December. So we have a lot of cash, but this cash will be reduced up until November with the debt payback and then it goes up again in December.

And if things happen as planned, the end of the year will continue with high cash level, and we'll find ways to accelerate that amortization like we did in Q2 with early payment of certain debts. But December is a very relevant month for cash generation and if things go as planned, that's what we're going to do just looks like we've been doing this year. We've been paying 100% of our debt this year, and we have not renewed any new debts at Riachuelo or Guararapes. So we expect to continue paying out our debts and maybe having an early rescue as the excess of cash is confirmed.

[Operator]

And now the next question by Victor from [indiscernible] Invest. Do you see any type of sourcing, logistics or product change due to tariff changes such as [ MP at 215 ] that changes the deadlines.

[Frederico de Oldani, executive]

When we talk about these tax changes, there are many happening in parallel. The tax reform is what has the greatest potential to change logistics and tax benefits, but this will not have an impact in the short term of the reforms that we can see now. The only one that would justify rethinking our logistics and distribution and production framework would be the tax reform. But the transition time line is long, and we still lack information to understand all of its impact, and we still have a lot of time to act in case this suggests any other relevant change in our structure.

The 1,185 will lead to higher taxes. It will make it much harder to deduct your investment for income statement purposes. In our case, we think that the impact is very mild because we don't know how hard it's going to be to enable credit for income statement. But we have seen our exploration profit, which leads to a substantial decrease in income taxes. And if we lost that, we could use up to the limit of [indiscernible] and this is an effective rate that is quite low at where we are at. So in our case, the 1,185 should not lead to any relevant impact on the company.

[Operator]

So this concludes our Q&A session. Thank you all for joining us. And as usual, our team is available should you have any additional questions. Have a great afternoon.

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