Guararapes Confeccoes SA

BOVESPA:GUAR3

Earnings Call Transcript 2022-Q4

[Unknown Executive]

Good afternoon, everyone. Thank you for joining us to our fourth quarter 2022 earnings conference call. As you know, we are going to start with a presentation about our results, and then we're going to have a Q&A session.

[Operator Instructions] We would like to inform you that this event is being recorded and translated simultaneously. The presentation here is in Portuguese, but you also have the English available on our IR website. Any statements about the company's prospects are based on premises of the company and are no guarantee of performance.

These were my initial announcements. And now I'd like to turn the floor over to our CEO, Oswaldo Nunes.

[Oswaldo Nunes, executive]

Hello, everyone. Good afternoon. Let's get started by talking about our strategic direction. Evolving to a specialized ecosystem is something that is clear and well defined in our agenda. Throughout the year of 2022, we advanced a lot. There were many improvements about our retail value proposition in terms of the structure, planning and distribution of our collections. This remains a priority for us in 2023, but now reaching other apparel categories.

When it comes to Midway financials within this ecosystem logic, financial services and retail will feed each other in order to maximize traffic on our platforms, increasing the penetration of Midway in our base where most of our customers do not have financial services contracted yet. I'm talking about the active customer base that reached 20 million at the end of the fourth quarter. The Midway strategy is aligned with the strategy of reinforcing retain financial solutions, exploring more our counters and will continue advancing with our credit models as well as collection in order to impact Midway results in '23. And with the impact we had in '22, the consolidated EBITDA of the company exceeded the levels of '21 because there was significant improvement on the merchandise performance.

When it comes to our default indicators, this is better than the rest of the market. We've been outperforming the market with significant initiatives to improve the ecosystem that started in '22, and that will continue in '23 such as CRM and loyalty programs that will add more value to the card within this ecosystem. The combination of loyalty with the new CRM is going to increase the value of the card in our ecosystem.

The marketplace has been developing in its strategy to complement the proposal of bringing good brands in categories where we do not have a strong own brand, complementing the price point. In logistics, we continued focused on making fast deliveries. Over 60% of e-commerce deliveries in the Southeast region of Brazil, where the demand is highly concentrated, happens in up to 2 days. We continue improving our shipping model to improve that channel experience.

About our plans, also in line with our strategy, centralizing industrial activities in Natal will bring gains and CapEx synergies with management structure, flow of raw material and finished products, gains of efficiency, operational efficiency by centralizing the intensive capital assets such as laundry and other services. And that will also enable us to increase centralization where we are more competitive in costs.

About those assets in Fortaleza, we're just finishing the studies about the website call to promote sales and the investment of those assets in a more assertive way.

Now about our gross levers. In the channels vertical, physical channels remain as an important pillar of our strategy. Of course, customers are more omnichannel and the participation of those customers in the ecosystem has been increasing. The potential to open new stores has not changed, but we understand that the short-term macro scenario requires us to be stricter in our capital allocation decisions. So our strategy is to have investments that are more focused on every point, on every front in order to protect our cash. So the opening of new Riachuelo stores is guided by our competitive position in each region.

We are more defensive in markets where we are market leaders, where we are already present in major cities and high-flow shopping malls. Now in regions and markets where we want to improve our square meter performance by evolving our proposal, we will open some specific stores depending on the opportunities, trying to find good locations in the best towns and shopping malls.

In 2022, we wanted to revitalize our store parks, and that will continue in '23 in order to increase the productivity by square meter.

Now Carter's remains a good revenue growth with good economics. Casa Riachuelo, we are just finishing this quarter, the readjustments of the mix for the stores. This was started in 2022 and the profitability of the model is going up. And this brings an opportunity for us to resume growth in an industry that is quite spread in terms of players nationally speaking.

In '22, we launched a new format for the geek audience called FANLAB, offering the main brands of characters and collectionable items. We are planning to open 3 new stores this year, and we are going to start with the store in-store model in Riachuelo stores, and this has a great potential to become a major national player.

It's important to emphasize that our investment plan is aligned with our strategy of cash protection, and we've been building at levels that are lower than our investment levels in '22 and '21.

Now talking about our digital channel strategy. We continue building the basis to accelerate this channel in a sustainable way. We know that the penetration of fashion online has grown, and omnichannel is part of our ecosystem strategy. Customers have changed their buying behavior and the competitive landscape has also changed. So the digital channel closed Q4 with a positive EBITDA, accounting for 9% of the total sales, but the strategy for '22 was to leave growth aside to focus on efficiency and cash generation. And we were able to reach that goal. And that, of course, impacted the sales of the company, and it's only natural that we would lose share at that point in time. But we'll continue evolving our website with experience, product content, shipping model, lead times, delivery times and marketing in order to accelerate that channel once again.

About the retail, we have talked about the supply planning and the review of our stores to increase productivity by square meter. We have an important opportunity of improvements to be done when we look at the performance of other apparel categories in-house.

When it comes to the plants and factories in addition to the gains of synergies by accelerating our industrial activities in Natal, we continue to focus on what our plant does the best and is more competitive. So we have opportunities in gains by negotiating raw material and rebalancing the origins of those supplies, either natural or imported.

Now when it comes to our integrated ecosystem, we have talked about the growth opportunities that are a priority in our strategic plan. I just want to highlight that CRM and loyalty are advancing as a lever in our customer base, and that will require less investments and optimize our marketing investments in order to attract new customers to our ecosystem.

It's important to emphasize that the current moment for Midway is still a moment of caution, but it's a seasonal moment. So we'll continue evolving internally with our credit and collection models, and we will prepare Midway to fulfill its role efficiently within our ecosystem, as I said earlier.

The [ BDC ] to portfolio ratio is stable with expectations of decrease in the second half of the year. So we expect to increase Midway revenue without making any pressure on credit at this point in time.

Now changing gears a little bit, but still talking about a relevant topic, debt and leverage. Right now, the market is very much concerned about liquidity, and we have a comfortable cash position to pay out our debt in the next 2 years. A combination of high liquidity and the change in the profile of generating operational cash is a great achievement of our management, and that will continue as a target for '23. Our leverage is going to go back to 1.5x the EBITDA.

We have strengthened our operating cash generation. We had great cash generation in Q4, and we will keep discipline on our cost and expenses management to maintain the sustainability of the operational gains achieved in '22 and always seeking new opportunities.

We'll continue our attention on working capital consumption. We want Midway to grow in line with the retail growth in this challenging macro scenario with restrictive credit policies as required by this time. And right now, we're focused on improving revenue generation in that portfolio without making any pressure on credit, as I just said.

Retail is going to have a positive same-store sales in the first quarter of '23. We're renewing the mix and guaranteeing a good new collection for fall and winter, and we have opportunities to close specific stores that have a low EBITDA performance, migrating significant share of the sales to nearby stores as a way to improve cash generation and capital efficiency.

We're going to execute an investment plan this year that is more focused, reducing investments in '23 as compared to '22 and '21, and we'll continue focusing on technology, opening stores, renovating stores but at a lower pace now. The technology is now more focused on continuity and evolving the main initiatives of our digitization process aligned with our strategic plan growth, its strategic plan and growth levers. We're not going to hire any new debt in '23.

And about other achievements and important advances in the year, Guararapes is now a part of the Corporate Sustainability Index at B3 that shows our solid performance in our sustainability actions. The year of 2022, especially the second half of '22, was marked by the fine-tuning of the main initiatives and projects that will support growth in the coming years. Many of those were already mentioned here today, and that's all connected to the challenges and opportunities for 2023.

We're starting the year very confident about our growth levers. We're focused on leveraging more value from our core business and also focused on increasing Midway's profitability and keeping healthy levels of cash and liquidity.

Now before I turn the floor over to Fred, who will give you a highlight and an overview of Q4, I want to inform you that the company is already working to hire a new CTO, who will head the technology and innovation area at the group.

Now I turn the floor over to Fred.

[Unknown Executive]

Thank you, Oswaldo. Good afternoon, everyone. Let's get started on Slide #6. I will tell you about the main highlights of Q4 and full year 2022.

Net revenue in Q4 achieved BRL 2.6 billion, up 4% compared to Q4 '21 and BRL 8.5 billion in 2022, up 17.1%. It's important to highlight the performance of merchandise stores. We had a great evolution with growth of over 20% in same-store sales of women's apparel. We worked really hard on improving the value proposition and the results have been very positive, although we still see opportunity to keep on evolving with our value proposition, not only in women's apparel, but for all types of apparel.

Merchandise EBITDA was really good throughout the year with about 25% growth in Q4 and 82% growth in the full year of 2022. We have recovered nominal value and margins already, even though we have a much higher share of sales in the digital channels now.

Still talking about the digital channels, as Oswaldo said, we have achieved breakeven. In Q4, we had a positive EBITDA. And of course, that had a significant effect with a negative contribution of the same-store sales in the quarter. But as we said earlier, we're very much focused on improving profitability and improving overall efficiency at the company. So although there were some negative effects of the digital channel, the total effect on the company results of that movement has been quite positive.

Midway had a 22.5% growth in Q4 and 33.3% in the full year of 2022. The scenario was much more challenging, as you know, with rate increase in delinquency or default levels. But when we look at our main indicators, we have positive news. First, increase in the coverage ratio to 93.7%. That puts us in a very comfortable position. And when we look at the short-term and long-term delinquency levels, we see very good results. We have stability in the delinquency levels of 90 days, which is really good considering the numbers we see elsewhere in the market. So Midway is in a very comfortable position, outperforming the market, the average of the market, when it comes to delinquency control.

The company has been talking about the concern with the scenario for several quarters now, and we've been talking about working with more restrictive credit but making the most of some opportunities that we saw in some risk ranges and some specific type of customers, the results were quite positive, considering the context, but the potential for Midway is still there.

Another point that I want to highlight in the quarter is our cash position. We closed the year with BRL 2.4 billion of cash, which puts us in a very comfortable position to deal the credit challenges that we see. We are not planning to contract any debt in '23 as was said earlier. And we can spend the next 2 years only using our cash position, plus our cash generation to pay out our debt without having to raise anything else. So this puts us in a very comfortable position to navigate the challenging credit scenario that we see today.

And as Oswaldo said, we are now part of the B3 ISE portfolio, which shows how the company is evolving when it comes to governance and ESG in general.

Now on Slide #7, I want to tell you about our product segment. Our same-store sales in Q4 had a decrease of 3.1%. It is marginally better than Q3 '22, however. And I want to emphasize the impact of the movements done in the digital channel that have contributed to part of that good performance in Q4. Although it was a complex scenario, considering some events such as the World Cup and adverse weather in the beginning of the quarter, but we saw a significant performance improvement after the World Cup, and that improvement continued in the beginning of 2023, which make us feel confident about a positive same-store results in Q1 '23.

We had a 8.3% growth in the sales performance in the full year of '22 compared to the full year of '21. Women's apparel was the main highlight, but we also had a significant growth in the Beauty segment. We've been able to work really well with our adjacencies of our focus or core business, and all of the evolutions that are being made in our value proposition will probably reflect in better same-store sales results in the coming quarters. Although we'll continue making adjustments in the digital channel, that will probably still impact the sales performance at least throughout the first half of '23, but with more than positive effects when we look at the overall results.

Now on Slide #8, I want to tell you about gross profit and gross margin. When we look at the full year performance, we saw an improvement of 50 basis points compared to '22. And looking at Q4, we saw a 1 basis point contraction. And we expect to continue capturing gross margin improvements from now on. However, there are different calendars that impact our gross margins, especially in what regards store inventories.

When we look at the calendar in '22 compared to '21, there were major differences. That doesn't change the margins for the full year, but it does change margins quarter-on-quarter. But when we look at the year performance, we feel that we can continue capturing margin gains based on the actions that Oswaldo mentioned in the beginning. Exploring better the integration of our retail with Guararapes, the closure of the Fortaleza stores, improvements in our value proposition. So many actions that will continue benefiting our gross margin performance in the coming years. This is not something we expect to happen in 1 or 2 quarters only, but throughout a longer period of time.

Now moving on to Slide #9. Let's talk about our EBITDA. EBITDA from products in Q4, we had an EBITDA margin of 17.4%, which is a 24.9% year-over-year growth in the nominal EBITDA -- I'm sorry, not year-over-year, but compared to the fourth quarter of '21. And for the full year, comparing 2022 to 2021, we had 82.5% growth. With this performance, we see that the retail is recovering quite well even when compared to pre-pandemic levels, taking into account the substantial increase in the digital channel share.

This channel has become positive. But considering the overall mix, this is a channel that is exerting pressure on the margins when compared to pre-pandemic levels when the participation of that channel was significantly lower.

Now on Slide 10. Let's talk about Midway. Net revenue, as I said during the highlights, has grown. An important point is that we saw a resumption of the credit portfolio. Even with interest, this is an important point to be able to resume growth of our credit portfolio with interest. That's part of the actions that we have been taking to improve our revenue performance even in a scenario that we don't expect the portfolio to grow that much, exploring invoice and other things. This is very much aligned with the priorities we mentioned earlier. We're working with a more restrictive credit scenario, but we tend to extract more value from our current portfolio.

Now on the next slide, you can see the evolution of our delinquency rates. When we look at the numbers from the third quarter to the fourth quarter, we see that there has been a stability with just a small drop of our PDA on the portfolio. That shows that the control throughout the year of 2022 shows that our loss level is quite stable and some indicators already show signs that we might have reached the peak of delinquency.

On Slide 12, you can see our credit portfolio broken down in a different way. Here, you can see cards and personal loans. Cards account for about 80% of our portfolio and personal loans account for about 20%. So in the card performance, we can see that the short over has been dropping from the beginning of the year and there was a consistent drop in Q4. And the long over, after reaching 15.9%, we had a retraction of 0.3 points in Q4, showing that our card portfolio has very positive indicators.

When it comes to personal loans, the scenario is a bit more challenging. Short over is pretty much stable, but the long over had a mild growth. We continue very restrictive, with a very restrictive policy on our personal loan portfolio. We are working only with lower risks, risks that we believe can give us positive profitability. And although we see a challenging scenario when it comes to personal loans, the actions that we have taken put us in a comfortable position considering the magnitude of the risk in the market today and the actions that have been taken in order to mitigate those risks.

Now moving on to the next slide. You can see the evolution of our coverage. Our coverage, as I said earlier, reached 93.7%. During the pandemic, there were some ups and downs, and that's pretty much due to variations in the portfolio. But when we look at our current coverage ratio compared to 2019 levels, we had a historical coverage of around 93%. And now in Q4 '22, we were able to go back to levels that are higher than those of '19, reaching 93.7%, which is more than enough for us to navigate this more challenging delinquency scenario that we still see in the credit market.

Now on Slide 14, you can see the adjusted EBITDA, showing that there is room for us to recover Midway's performance. Our EBITDA in Q4 was BRL 16 million and BRL 123 million for the full year of 2022. Last year, Midway had BRL 425 million. But it was always around BRL 350 million, BRL 400 million in contribution to the company's EBITDA. That shows that we have an important pathway to cover in order to improve Midway's performance. We think there is intense work to be done so that delinquency can decrease. And we think that Midway can significantly contribute to the company's results in the future.

On Slide 15, you can see the consolidated EBITDA results. Our adjusted EBITDA grew 5.6% from 2021 to 2022. From Q4 '21 to Q4 '22, there was a 14% decrease, but the product performance more than offset the financial performance of the segment. So that shows that we have a great lever in our business to continue improving the results, improving the product performance as well as recovering Midway's historical financial performance.

Now on Slide 16, there is another important point that contributed significantly to our results in the year, which was the good management of expenses. In Q4, we had a decrease of 11.4% in expenses compared to the same quarter the previous year. And for the full year, we had an increase of 0.9%.

Our consolidated expenses last year represented 41% of the net revenue, and we reached the end of 2022 at a level of 38%. That is quite positive. And as Oswaldo said, we're very much focused on improving our operating efficiency. We think there are improvements to be captured in the future. And that's another lever that should continue contributing to our improvement of results, together with the improvement of top line and margins.

Now changing gears a little bit. On Slide 17, you can see our leverage. At the end of the year, we closed the year with a net debt of around BRL 1.6 billion, an improvement compared to the previous quarter. It's still a mild growth compared to the end of '21. And our pre-EBITDA and IFRS leverage was 2.5% and 1.7x for the whole EBITDA.

I want to highlight our cash position once again. And here on the next slide, you can see our debt amortization schedule for the coming 24 months. We have around BRL 2 billion due in the next 2 years with a cash position of BRL 2.4 billion and with an expectation of a positive operational cash generation in the coming years.

So we are in a very comfortable position. We are not planning to roll out any of our debt. We want to use our cash to pay all our debts that mature throughout the year, and we expect that the credit crisis that we see in the market today can be left behind us. We don't expect any results because of the actions we have already taken, first, to preserve the liquidity of our company. So a cash position of BRL 2.4 billion put us in a very comfortable position; and second, the actions taken to improve operational performance, especially [ winning in ] what it refers to cash generation.

Now on Slide 19, you can see our free cash flow generation for Q4 and full year of 2022. Up until '21, we were just consuming cash. In 2022, we changed that scenario, and we started to have a positive free cash generation while we still had a strong growth in Midway portfolio and a very high CapEx of around BRL 15 million. And as Oswaldo said, we are starting '23 with better expectations of cash generation and lower investments than previous years. So that will lead to an even better free cash generation in '23 than in '22, and that will help us decrease the leverage of the company faster.

That's one of our priorities right now to make sure we have operations that continue capturing the opportunities of margin growth. But it's always important to focus on actions that will generate a positive free cash generation. We believe this is one of the main priorities of the company right now.

Now on Slide 20, you can see our investment performance in '22. It was a year of strong investments of around BRL 590 million, and as Oswaldo said, our main focus was on technology and stores. Technology over BRL 300 million in investments and around BRL 130 million in investments in new stores or remodeling of old stores. And that guarantee an important evolution in our brick-and-mortar stores that have been expended or remodeled and that has a very important role to play in our growth strategy. And technology remains as a major focus of investment at the company with our whole digitization process. We have evolved a lot and the company is now at a very mature technology level.

Looking ahead, we expect to continue on the same direction of investments in 2023. The proportion of investments in technology, remodeling and in the other fronts is expected to remain the same. But we are planning to invest BRL 450 million tops in the year of 2023, which is a significant reduction in the investment level if we compare to the levels we had in the last 3 years.

That concludes my presentation of the main highlights of our fourth quarter 2022 and full year 2022 results. And now I would like to open for questions.

[Unknown Executive]

Okay. Let's start our Q&A session. The first question is by the XP analyst, [ Denny ].

[Unknown Analyst]

I have a few questions here on my side. The first is related to what we saw in the media about a possible sales of a stake in Midway mall. So I would like Oswaldo to tell us about the strategic view for that asset. Do you think it makes sense to sell a stake that would not be necessary from the cash perspective, as Fred was just showing us with the amortization schedule? But I want to understand your point of view on that.

Now my second question is about the gross margin dynamics for products and apparel. You had specific pressures at the plant. So I want to understand how you're planning to evolve the margin. And if you can talk about the performance of women's apparel in the beginning of '23. You gave us a very positive view on this category. Maybe you can tell us what is yet to be done and explored in that segment?

[Oswaldo Nunes, executive]

About decreasing our leverage, Danni, as we said, we're going to do this organically. We do not depend on selling nonstrategic assets to decrease our leverage. Now the Board has been talking about how to deal with those assets. This is about your question about Midway mall in our own stores park.

Now about the gross margins, I will start and then Joao can add to my answer. The most important thing is to look at the year dynamic. As I said, the store inventory time line is not the same year-over-year. This changes from 1 semester to another and from 1 year to another and that can lead to differences in the quarter-on-quarter comparison. But when you look at the full year or 12 months, that has no impact. So the prospects for '23 is, yes, to continue having improvement in the full year comparison, but we may have better and worse quarters if you look at the quarterly performance only.

Fred, before we turn the floor over to Joao, I just want to remind everyone that we started in October, a process to reduce the product orders in the Northeast as part of the plans to decrease or to shut down our production there. But the fixed costs remained, of course. So that was a one-off impact that we felt in Q4 '22.

[João Braga, executive]

Yes. Just talking a bit about margins, as Fred said and Oswaldo said, we are expecting impacts in the first quarter of '23. But on the other hand, we have a new collection coming in that has been bringing very positive results. So we are very confident about delivering a gross margin that is slightly above that of 2022. And when it comes to the evolution of our value proposition, what else can we do? Well, we'll continue to work on product assertiveness in terms of quality of materials and we have also been trying to differentiate ourselves with higher added value products. So that differentiated product with higher added value will be more competitive. And we also have a great proposal here that will focus on this positive evolution.

Our teams have been working on clusterization of collections. And the different regions of the country force us to work in clustered collections. And this has been bringing great gains, not only in our revenue but also optimizing our inventories and improving our margins. And there are also improvements in our supply system. We have an SKU-based supply system, and our teams have been implementing significant improvements in all of those systems since last year. More automated, smarter and data-driven that enable us to make better decisions and to optimize our stock. So we have an initial replenish of inventory that is much more correct. And we can better manage the inventory levels between our distribution centers.

So that is impacting not only women's apparel, but also children's and men's apparel. Men's apparel was one of the greatest evolutions we had last year. And this year, we are already focusing on this category, and we believe we'll have great results in men's apparel as well.

[Unknown Executive]

Our next question is by Maria Clara, analyst at Itau Bank.

[Maria Infantozzi, analyst]

I would like to ask you about the retail inventory. We saw that the levels dropped this quarter because of the lower disruption level as well. Can you tell us about the quality of that inventory? Is there a need for promotion and sales this first quarter of '23?

And there are macro indicators that show some deflation for raw material and retail as a whole. So what is your take on that scenario? Do you think that will impact your profitability in the second quarter of '23?

[Oswaldo Nunes, executive]

Before I turn the floor over to Joao, I would like to say that last year had a very high cost inflation, and that was passed through our prices and that impacts the purchasing power of consumers. But this year, we see a gradual trend of drop in the cost of raw materials, and that should help in the sales recovery of volumes as well as recovery of margins.

[João Braga, executive]

We had, indeed, last quarter that was pressured by the macro scenario and other variables. And the promotional activities that we did helped us to renew or lower our inventory level. And we also had some product anticipations that were already predicted and that helped us to create a new dynamic with new products arriving, and now with the arrival of the fall and winter collection in the month of March, that has helped us in our mix and product offer to customers as well as in the profitability levels.

[Unknown Executive]

Our next question is Joao Andrade, analyst at Bradesco.

[João Paulo Andrade, analyst]

Congratulations on your results. My first question is about Midway, a more general question. What are the main levers that you see to normalize Midway's activities? And when do you expect that to happen? Would you expect to have a better macro scenario with lower delinquency levels? Or is there any other building block that can impact that?

Now we saw the transition expenses impacting your EBITDA. But looking ahead, can we expect a higher efficiency level, considering your comments on gross margins for '23? Thank you very much.

[Oswaldo Nunes, executive]

Can I talk about Midway, Joao?

[João Paulo Andrade, analyst]

Okay. Yes.

[Oswaldo Nunes, executive]

I think that the main goal for '22 was to stabilize the PDD on the portfolio. If it kept growing, it would be quite better. But in parallel, we have defined other activities to recover part of that EBITDA in '23. As an example, our insurance business was revisited. We had a new negotiation with an important player in the market that should improve our margins. And we have also renewed our branded contract. We have a new vendor for our branded cards, giving us favorable conditions for the coming years. And even with our current customer base, there are many results from involving better pricing, better customer segmentation such as installments and sales with interest. And we're working hard on the value proposition of Midway products within stores, which will help us face that adverse credit condition. So that will decrease the pressure with the retail sales. So in '23, we already expect many initiatives to help us recover that EBITDA.

When it comes to centralizing the industrial activities in Natal, when that is promoted and we centralize the intensive capital assets, there is important gains in product development structures that are now centered in Natal as well as production management structures, and we open up space to expand outsourcing of sewing in the workshops in the countryside of Rio Grande do Norte where the sewing costs are about 15% better than they are in the city of Natal.

And as Joao said, we also have the opportunity of revisiting sourcing of raw material with trend to get some decrease in significant costs. So that can improve our margins from now on.

[Unknown Executive]

Our next question is by Eric, sell-side analyst at Santander.

[Unknown Analyst]

On our side, we would like to understand the expense optimization and the SG&A reductions you've done in the quarter. And you also said you still see some opportunities. Where are those opportunities, more specifically speaking? And now when we look at the implementation of those initiatives, what is your take on the balance of that search for new opportunities but maintenance of structuring projects, especially digital projects? We see that you took a step back, thinking about profitability, but also trying to make the most of the growth avenues from now on.

[Unknown Executive]

Well, Eric, we have made adjustments in the second half of '22 in almost all areas. We increased store efficiency, we reviewed admin structure, service also evolved with a much higher digitization level, decreasing human service in our call center. So in the last 6 months, we had efficiency gains in almost all areas. And more recently, we saw some opportunities, especially when we focus our technology strategy on working with an ecosystem that is more focused on the Riachuelo customers and that opened up space for us to focus our technology investment in fewer fronts.

So we reprioritize the projects. The projects that look at the ecosystem in a more integrated way between retail and Midway have been receiving higher budget. And we also received some fronts to have a more open marketplace. We made a decision of having a more focused marketplace, offering products to Riachuelo customers. So that enabled us to turn off some squads that we're working on specific fronts. So that gives us a more focused marketplace.

That's just an example of how this impacts fronts that were consuming investments and generating expenses. And there's also the matter of optimizing Midway performance. First, we worked to improve efficiency. We started working on this on Q3 and even more on Q4. And now we're working to improve the effectiveness of the money that is invested in performance. Now we understand better each front, and we require return levels that are much higher from that type of investment.

So at first, we see a greater reduction and then we will resume investments but expecting much higher returns than we had in the past. So when we look at expenses, I think that we can say that everything we had in excess was already dealt with. And now it's all about efficiency. It's all about using the technology better to be more effective in performance investments.

So what we see now are opportunities to gain efficiency in virtually every front. Our strategic plan has many tools that have been mapped to make the most of those opportunities, and we want to continue improving Midway and retail performance focus on those performance improvement fronts.

[Oswaldo Nunes, executive]

I want to add something here, Fred. The cycle of strong OpEx and CapEx investments in technology to build the foundation of our digitization process and to evolve our ecosystem model, this has already been done. And now we're starting a phase of improvement or evolution of all of these products and platforms that were built in the last 3 years, years in which we invested heavily in technology. This requires less investments in OpEx and CapEx now.

And other reviews of structures, I mean, brought us a greater clarity of the structure we needed to deliver on our agenda because structure and governance is always a consequence of our strategic look and where we want to get. So of course, with a more challenging macro scenario, it's only natural that we raise the bar and start looking more into capital use efficiency in every front, OpEx or CapEx. But as Fred said, what matters is that the main projects and initiatives aligned with our strategic plan starting in '23 are all preserved, especially the growth lever for our top line retail and Midway. Now we're focused on increasing the portfolio's revenue, but that macro scenario will improve. And as Midway is more integrated into our ecosystem, we feel very confident that the results will come. The efficiencies we acquired are long-lasting, but we think there's always an opportunity to revisit what's being done and to find new fronts that can help us. That is actually a continuous work that we do.

[Unknown Executive]

Now let's take the questions we received in writing. First, [ Victor Rampazo ]. Can you talk a bit more about the financial strategy in 2015 and 2016? It was able to offset the adverse macro scenario in Brazil. Why did it not do the same in 2022?

[Oswaldo Nunes, executive]

Well, this scenario exerted a lot of pressure on credit and families revenues aligned with an increase in interest rates. Everyone was impacted by that, but I think that we were successful throughout the year and we closed the year with a better level of control over that, as was said earlier, exerting less pressure on retail. We have this private label product. And in the recent months, we were able to recover the share of our private label product, which has a more adjusted risk level. So I think the worst scenario is behind us. And now it's time for us to recover profitability. Still being cautious about the macro scenario, but we expect '23 to have higher profitability levels than '22.

[Unknown Executive]

Now our next question is by [ Roberto Cayenne ], an investor at Galapagos. The company makes use off-balanced financial services. If yes, what is the volume you raised and incurred costs in '22?

[Unknown Executive]

If you look at our balance sheet, we do have a line for that type off-balanced financial services. In December, we had BRL 170 million in that type of risk, but there is no maturity extension there. This is an operation that incurs no cost for the company. Basically, the suppliers that are interested can go and do that directly with the bank. So there is no impact on costs for the company. So we have a line in our balance sheet for that. It's a small amount and completely transparent as you can see there.

[Unknown Executive]

Thank you, Fred. Our next question is by [ Vittorio Galindo at Pantex ]. Considering the current Basel index for Midway Financial, will you have to increase capital there? How are you going to do that?

[Unknown Executive]

Well, the reduction of Midway's Basel Index is not related to the portfolio itself, but it's actually related to the increase in the cash level of the group. The group concentrates all the cash excess in Midway. And with the substantial increase we had in our cash that was sent to Midway, that value is subject to the Basel index. But it doesn't consume as much the Basel index as other assets, however. So just because you have some debts maturing throughout the year, and that will make you reduce your cash position throughout the year, that alone could already affect the Basel Index at Midway.

We had 2 percentage points in the Basel Index at Midway. But if we want, we can simply return the cash to companies, and they will be able to apply that and the Basel Index at Midway would be solved just by doing that. So that's not a concern we have. We're very comfortable with Midway's equity position.

[Unknown Executive]

Thank you, Fred. Now the last question is by [ Vladner ]. He is an individual investor and he's asking, how has the company been assessing the competition with [indiscernible]?

[Oswaldo Nunes, executive]

Well, [indiscernible] is a player that has been gaining market share favored by the macro scenario, but also favored by the lack of tax equity. But the models are completely different. We offer a more complete value proposition to customers, the importance of omnichannel and the importance of brick-and-mortar stores for apparel, retail, the offer of financial products and services. So these are major advances of our model.

Now international models don't pay the same level of taxes we pay, and that's a great advantage for them. But we have to consider our differentials here. When the tax equity is implemented, that price advantage will disappear and the customer will be able to compare the value proposition of international players and national players established in Brazil to better consider their cost benefit ratio. And that will create a more organized and transparent value chain where we will be able to stand out from the competition with our positioning, our proposal and so on and so forth. So we see opportunities to keep on growing our market share with the consolidation of the fashion retail.

[Unknown Executive]

Thank you, Oswaldo. That concludes our Q&A session. I would like to thank you all for joining us, and I want to make our IR team available to answer any further questions you might have. Thank you.

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