Guararapes Confeccoes SA

BOVESPA:GUAR3

Earnings Call Analysis

Company Reports Growth and Margin Expansion

In the recent quarter, the company saw its revenues grow by 5.4%, resulting in a full-year increase of 4% for 2023. There was expansion across all business lines with a 6.3% increase in consolidated gross profit for Q4 and 4.5% for the year. EBITDA significantly rose by 32.9% in Q4, lifting margins from 15% to 19%, and an 8.4% growth for the year along with an increased margin of 11.7%. Expenses were managed effectively, witnessing a 2.2% drop compared to the previous year, despite an increase in profit-sharing payments. Innovations and inventory adjustments led to predictions of consistent revenue growth and same-store sales in upcoming quarters. Notably, the company generated BRL 1 billion in cash for the last year, marked by better cash management and operational improvements, including a 36% reduction in investment year-over-year that greatly improved cash generation. Leverage levels dropped from 1.7x to 1x, indicating a solid financial position as the company heads into 2024 with positive expectations.

Recovery and Growth Amidst Challenges

The company experienced a solid fourth quarter, signaling the start of a robust recovery process. Although the 6% improvement in same-store sales was a deceleration from the 11% seen in the previous quarter, it still represented two consecutive quarters of vigorous growth. Annual results also showed progress, with a severe reduction in inventory levels and a strategic reduction in capital expenditures (CapEx) from BRL 600 million to BRL 377 million, ultimately improving cash generation.

Operational Efficiency and Margin Improvement

Particularly encouraging was retail gross margin enhancement—apparel margins increased by 1.3 percentage points from the last quarter. The company achieved an earnings before interest, taxes, depreciation, and amortization (EBITDA) of BRL 518 million, marking a 33% year-over-year increase. Net income more than doubled from BRL 100 million to BRL 230 million. The company also reported strong free cash flow generation of BRL 1 billion, which is an impressive recovery considering previous leverage issues.

Strategic Focus and Business Expansion

The narrative for the upcoming year focuses on improving accessibility to fashion and continued store growth, reaching 411 stores nationwide. The company is committed to a democratic approach in product pricing and design, aiming to meet the diverse needs of different social classes. This approach has successfully improved volumes without damaging margins. The company also highlighted the success of Midway, emphasizing its improved management and performance as key drivers of overall results.

Robust Financial Performance and Expense Management

In terms of financials, net revenue growth sat at 5.4% for Q4 and 4% on the year. A remarkable turnaround in retail gross profit was notable in Q4, and a focus on expense management led to a significant reduction in expenses over income from 38% in 2022 to 35.7% in 2023, bolstering EBITDA margins. Additionally, inventory levels were aggressively brought down to pre-COVID levels, setting the stage for increased innovation and reduced markdowns moving forward.

Technology and Store Investment Alignment

Investments in technology took precedence, accounting for two-thirds of CapEx, signaling a future-focused business strategy. The company continued investing in store renovations and supply chain enhancements, indicating a robust plan to tackle challenges and drive long-term value creation. This is aligned with the company's goal to build a stronger foundation while also addressing contemporary market demands .

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon, everyone. Thank you for joining us for our fourth quarter 2023 earnings conference call. We will get started with some opening remarks by Andre Farber, our CEO. Then Fred Oldani, our CFO, will comment on this quarter's performance. Francisco Santos, the Head of Midway Financeira, is also here with us, and all of them will be available for the Q&A session.

[Operator Instructions] Let me also 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 were the housekeeping remarks. And now I turn the floor over to our CEO, Andre.

[Andre Farber, executive]

Thank you, Eiza. Thank you all for joining us today. I will start by giving you the highlights of the quarter. Then I'll turn the floor over to Fred, and then we'll have a Q&A session.

We're very happy with the fourth quarter results and the full-year results. We saw a solid result, with improvement in many of the company's indicators. And this actually creates a balanced result across the country. This is a beginning of a recovery process, and we believe that we'll continue to see improvement in our indicators in the coming quarters.

So we saw improvement in same-store sales. In Q3, we had an 11% improvement. Now we had a 6% improvement, slightly below the improvement we saw in Q3. This could have been better, but I will talk a bit more and give you some more light about the supply chain in a minute, but we saw 2 quarters of robust growth in same-store sales.

This quarter, we also saw improvement in the retail gross margin, especially in apparel, a 1.3 percentage point increase compared to last quarter. We told you last quarter that we saw some potential in terms of margin recovery. And in the coming quarters, we expect to see this margin improvement continuing.

So our EBITDA, we had consolidated EBITDA of BRL 518 million, up almost 33% boosted, especially by Midway that achieved an EBITDA of BRL 124 million, a great improvement year-over-year. We saw stabilization of our financial results. Our team worked really well. [ Frank ] joined in September 2022, kickstarting this whole process, and we expect to see great results in the near future, consistent work at Midway.

We're still being careful when it comes to credit granting, but we're managing the whole portfolio, and we're still conservative when it comes to risk taking. Net income more than doubled year-over-year from BRL 100 million to BRL 230 million.

Now for the full year 2023, we also have some highlights. Our inventory level decreased. This all started with a better inventory management. We closed the year with minus 23 days of finished-goods inventory. And we also prioritized our management and focused on CapEx details, lowering CapEx levels to BRL 377 million from almost BRL 600 million in the past. So this improves cash generation.

And we achieved free cash flow generation of BRL 1 billion, a huge improvement compared to 2022. So this relates to inventory to CapEx. And since I joined the company, there were many levers that we focused on because we knew that the company had an issue when it came to leverage, and we knew that we had to improve cash generation, and we did that not at the expense of the future, but actually by implementing efficiency measures that led to this cash flow generation of BRL 1 billion.

And so leverage dropped substantially to onetime only, we're very happy about this. This is a much more acceptable leverage level. The risk level is much lower as well. And we'll continue to deleverage the company in the coming quarters.

And finally, we're still very much committed to a sustainable business. We have many initiatives ongoing that make our products more sustainable. And we have been invited to join the [ ISC ] portfolio for the second year in a row.

So let me comment on the a 6.3% improvement in same-store sales. We could have achieved double digits here if we had not had problems in our supply chain. But we had supply chain disruptions, especially in November, and this got in our way. We have no problems when it comes to positioning or consumer demand. This was actually caused by an internal problem that we face.

So in May last year, we changed the SAP at the plant, and we worked really hard to make sure we would have enough inventory the following months. So we didn't suffer in May, June and July and August. We had strong results, with great volume in July and August, you saw that in Q3 results.

But with the swap of the SAP, we lost visibility on some of the variables at the plant, and this was an obstacle, and we were not able to supply the demand at the same speed, the same pace we were used to. So that created disruption. And that's why we did not achieve the double digits that we expected.

But this is still a very robust result. This is improving in several fronts, as you can see, and the most important point is that we know we don't have a value proposition problem. This was only an internal issue.

Now next slide, we had significant improvement in EBITDA. We saw improvement in Q4 when it came to merchandise and also substantial improvement at Midway. Midway was a highlight. We're very confident about the way we're managing this business. So our income also grew a lot. As a result, you can see that income almost doubled year-over-year.

Cash generation almost tripled to BRL 661 million. I have already told you about the different levers that we focused on in order to achieve those results, and that helped us in our leverage level. So here, you can see that our net debt went from BRL 1.6 billion to BRL 1 billion, drop of BRL 1.7 to BRL 1 billion, which puts the company in a much more comfortable leverage position as compared to last year.

I've been talking to the team about working consistently and focusing on the core levers of our business to improve our results. And there is a lot of value to be unlocked here at the company if we continue working as such and focusing on discipline.

So once again, like I said in the previous 2 quarters, these are our strategic pillars. So I'd like to give you some more color on these pillars and how they helped us to achieve those results. When it comes to product obsession, we want to improve our products.

We want to manage the different categories in a more strategic way, in a more focused way, prioritizing our key categories such as women's and men's clothings as well as kids and making the right decisions to prioritize those categories that helps us with our growth, and it's key to have this well-defined strategic view.

We know that in the fashion business, it's all about availability. Having the right product available at the right time makes all the difference. So we've been improving the management of our distribution chain. Our model has been improving, and this is going to boost sales because we're going to have the right product at the right time for consumers. And we're also going to reduce markdowns to improve margins at the company.

Just to give you an example of what product session means. We have several levers within this pillar. This is a very thorough type of work.

Now when it comes to democratizing access to fashion, we finished the year with 411 stores. We are present all around the country, and we work with different social classes, with work, with clustered, prices and products to be more democratic and to meet the needs of the different audiences. And this is what's happening. We did that last year.

And part of these consistent results in same-store sales is related to increase in volume in some of the categories that had price reduction. And we were able to do all of that increase in margins, as you saw. So we're confident that with greater volumes, working on product design, we can be more accessible and affordable and generate volume without affecting our margins.

And our assets must be worth more. We have ongoing initiatives that are now bearing fruit. The main highlight is Midway, as we mentioned earlier, and we expect these results to continue strong. This is an asset that we're managing better and it's now generating better results. We have an integrated chain. We have made investments in our industrial [ plants ], and that is a differential.

We are expecting the plant volume to grow from 25% to 30% this year. This is going to make us stronger. And we're going to be able to bring better margins to the company, and we'll be we're active with this more integrated chain.

And finally, when it comes to operational efficiency, you saw that we did all of that while generating more cash and reducing inventory levels. And we're doing all of that with a low G&A growth. So this will maintain margins. And within this platform, we see that we have great growth levers without the need of making major investments.

We said that last quarter, I am saying this once again, and I can affirm that we'll continue working on these initiatives, and we're going on a pathway that will generate great results when it comes to top line and bottom line growth.

Fred will give you further details about our performance, and I'll be back at the end for the Q&A session. Thank you.

[Frederico de Oldani, executive]

Thank you, Andre. Let me get started on Slide 11. Starting with our net revenue growth. We had a growth of 5.4% in Q4 and 4% in the full year 2023. And we had growth in all of our business lines.

Our consolidated gross profit dropped 6.3% in Q4 -- actually grew 6.3% in Q4. And for the full year, we had a 4.5% gross growth, with margin expansion in the consolidated numbers. In spite of the drop of product gross margins, and I'll give you further details about that in the coming slides.

Now moving on to Slide 12. Our EBITDA grew by 32.9% in Q4, with margin expansions from 15% to 19%. And the consolidated numbers for the full year, we had an 8.4% growth and margin expansion from 11.2% to 11.7%.

Now let's talk a bit about expenses. Although we had growth of 5.9% in Q4, this was because of the profit-sharing payments, which were much higher in 2023 than in 2024 because of the improvement in results.

Now if we look at the expenses throughout the year, in spite of that effect, we had a drop of 2.2% compared to 2022. This is a significant reduction of expenses over income, which in '22 was 38%, getting to 25 -- 35.7% in 2023. So this is what led to our EBITDA margins in 2023.

Now let me tell you a bit more about the retail segment. On Slide 14, you can see our product performance throughout the year. It's important to highlight the difference in results from Q1 to Q2. In Q1, we had stability as compared to the previous year. And then we had significant recovery in Q2 with a 7.9% growth and the same-store sales growth in both quarters, both Q3 and Q4.

Andre mentioned the factors that impacted the growth in Q4 as compared to Q3, but it's quite clear that we are now starting a new performance phase when it comes to the retail segment, and we expect consistent revenue and same-store sales growth in the coming quarters.

Now on the following slide, let's talk about retail gross profit. Here, you can see the performance throughout the year. As you probably know, our Q3 was a bit more challenging when it comes to margins, especially due to the weaker sales in Q1 and mainly Q2.

We had more excess inventory in the winter season, and so Q3 had a more significant drop of retail gross margins because we had to create sales and promotions to adjust our winter inventory.

But as I said earlier, in Q4, we were already expecting margin recovery. And our retail gross margin grew again to 50.6%. Our apparel gross margin is greater than our retail gross margin in general because there are electronics and homeware that pulled the margin down. But our apparel gross margin continues to be quite healthy at 54.5%.

Now on Slide 16, there is a very relevant point that should be mentioned, and Andre already touched upon this, which is about normalizing the inventory of finished products at the company here. We can clearly see that we had an increase during the pandemic. We went from 110 days in -- before COVID to around 130 days of inventory for almost 3 years.

But now we have worked really hard to bring back inventory levels to pre-pandemic numbers. So now we are once again at below 110 days of inventory. And this gives us a great expectation for the coming quarters. Our retail gross margins during 2023 was mostly related to bringing inventory to -- back to pre-pandemic levels.

So we worked really hard to do that in 2023. But now in 2024, we can have greater levels of innovation, and we might not need to work with high markdown levels now in 2024, especially as compared to Q2 and Q3 2023. So this is quite positive. And the year of 2023 for retail was a year of major adjustments.

Now in Q4, we can already see some reversal. We closed the year with lower inventory levels, growth of revenue and margin expansion once again, which is the scenario that we expect to see in 2024 again. We made major adjustments, which should bear fruit in the coming quarters.

Now on Slide 18, we can comment on Midway's performance When we look at the portfolio, we can see that it was quite stable in Q4 as compared to Q3, BRL 5.5 billion in the total of the credit portfolio, so a drop as compared to the previous year because we've been very careful when granting credit. We're managing risk with discipline, so that this won't cause any problems for our retail operations.

But in spite of all that, we did not lose share in sales with credit card in retail. This has been stable throughout the year, with some peaks at some points in time. So that shows that we were able to manage the quality of our portfolio while without impacting our retail operations. And here, we can also see delinquency coming down.

Both for credit cards and personal loans, we see that loan overdue numbers are going down. We were expecting this to happen throughout the year. We mostly thought this would happen from Q2 to Q3, but that was actually stronger from Q3 to Q4. But we knew that the actions we took would lead to lower delinquency rates. And Q4 confirmed our expectations.

So for risk management, the way we manage risk, we knew that delinquency rates would go down. And that was one of the main factors that lead to the good performance at Midway in Q4 and also throughout the whole year of 2023.

So finally, our coverage levels, we closed the year at 93.7% coverage, an improvement compared to the previous quarter. We increased coverage, but we closed the year at the same levels of Q4 2022. The delinquency prospects now are better than they were in Q4 2022. So we are at a great position when it comes to coverage, and we think that we are well prepared to navigate the year of 2024 very well in our financial business.

Now Slide 22, let me comment on other financial indicators. Free cash flow, we generated BRL 1 billion in cash last year, significant improvement compared to the previous year. There are some drivers that led to this result. Part of that is associated to a better cash management and operational results, but there are also other levers that we can highlight, like improvement in working capital. Almost BRL 200 million of this cash generation is due to change in working capital. And IR, we're able to offset many tax credits that we had. So we saved a lot of money in IR or income tax.

Also, we did a very thorough cash management. We were able to save a lot last year without creating any type of risk for the company. So we're now starting a cycle of lower investment levels than we had in the previous 3 years, but we're still at appropriate levels for us to deliver on our growth agenda.

And we also had a positive effect of asset sales. We sold plot in Fortaleza, an aircraft at the end of '22, and we were paid throughout 2023. So our cash generation is quite sound and healthy, showing the great capacity of our company to transform results into cash generation.

We've been commenting on this for several quarters now. We said we would focus mainly on cash generation and deleveraging the company. So we're very happy with the results that we have delivered in cash generation.

Now on the next slide, you can see how this cash generation had a positive effect on our leverage level. Leverage went down from 1.7x to 1x net year-over-year. Looking at the pre-IFRS 16 numbers, the deleverage drop was even greater. So we saw a significant deleverage throughout the year. We closed the year at 1x with a cash position of BRL 2.4 billion, which is almost the same level of the end of 2022, but we also amortized substantial volume of debt.

So we've closed the year of '23, again, without any expectations of raising cash throughout '24. Our cash position at the end of '23 can cover about 2.5 years. Without the need of any type of refinancing or refunding, we are at a very comfortable cash position, and we expect to continue with our debt amortization schedule throughout 2024, just like we did in 2023.

Now on Slide 24, you can see our investment breakdown. We invested BRL 377 million in '23, down 36% year-over-year, as we said earlier, and this greatly helped our cash generation. But an important point here is that the current levels are close to the levels expected for '24. So this type of investment level is focusing on building the future for the company. We're still investing in technology.

Almost 2/3 of our investment is in technology, but we have also been investing a lot in stores, either new stores and especially corridors, but also remodels or refurbishment to update our stores. We're working hard to have an optimum level of investments that will not impact our growth front. So that level, close to BRL 400 million, is considered quite sustainable for us. We think this is a good level of investments for 2024.

So these were the main highlights of our results. Now I'd like to turn the floor back to Andre to tell you more about our expectations for 2024.

[Andre Farber, executive]

Thank you, Fred. Well, throughout the presentation, you heard us focusing on the best and telling you where our results came from, but we're also planning the future. And we believe that the levers we've been focusing on will continue to generate results in '24. So for this year, we believe in continuing this strategy with laser focus on discipline.

We don't think that we'll have to increase our investment levels for now at least, nor inventory levels. We think that we can have growth and continue to be competitive in building the future that we want.

We're going to increase EBITDA and continue with margin recovery. These are key elements of this EBITDA increase. So we'll focus on margin recovery, either because of the inventory adjustments that we did in '23 or because of the initiatives that we are now creating. We see great opportunities when it comes to margin recovery. And we expect to close the year with even lower leverage levels than last year.

So we're very confident that the company will have a leverage level that is closer to our cruise levels, and this will not create any problems for projects that strengthen our core business.

This is great news because we have a great team working together. I've been at the company for 10 months now, and I see that we have a very confident team. And we see that the strategy being implemented in practice and bearing the first fruit, and we believe that the year of '24 will continue to see significant results improvement.

So this concludes our presentation. And now I think we can open for questions.

Right, [ Eiza ]?

[Operator]

That's right. Let's start our Q&A session now. Our first question is by Maria Clara, analyst at Itau BBA.

[Maria Infantozzi, analyst]

Congratulations on your results. I'd like I'd like you to give us some more color about Midway's results. You said that we were expecting to see this improvement gaining traction from [ not one ]. So what are the main drivers boosting performance? Is that related to provision, even with a potential increase in coverage levels? And this makes you confident to reaccelerate credit granting in the future? Can you tell us more about that?

And can you also tell us about the relationship between this credit granting acceleration in retail sales in the coming quarters?

[Andre Farber, executive]

Maria, thank you for your question. We have been building these results throughout the whole year of 2023, and we expect this to continue in 2024 at Midway. And although we had a portfolio reduction, we were able to increase our top line, and that was also followed by improved in delinquency rates and cost efficiency. So these three fronts will continue to generate results.

Now about your second question, we're looking at 2024 with great expectations. It seems like default rates have reached their peak when it comes to -- when we joined us to inflation rates, interest rates households -- household income, we see that we can start running a few tests to expand the portfolio, and we think that this can be done throughout the year, but we'll keep Midway at this level of profitability in spite of all that.

Now in the product label, we were able to increase the PL portfolio, the personal loans portfolio, even with restricted credit renting. So this is working well. Then we learn more about the customers when we do that, and then we can expand are offered to this customer later on.

[Maria Infantozzi, analyst]

Would you like to talk about the impact on retail now?

[Andre Farber, executive]

Yes, we're keeping up with growth and retail is not being impacted. PL continues to grow in spite of all that. Even though we're careful, we're still a benchmark when it comes to credit card share, which is now at 35%.

Yes, we know that whenever we open credit, we can have positive impacts on retail, but our mindset is that of discipline. We don't want to take any measure that can impact us negatively in the future. So I think that Midway's team is very well disciplined. We're improving our governance level and our credit engine. And we are gaining a lot of expertise.

This company has been working for decades now, and we are now at a more sophisticated level of management. And we know that opening up credit can generate benefits for the whole ecosystem, but we're being very disciplined.

[Operator]

Next question is by Eric Huang, an analyst at Santander.

[Eric Huang, analyst]

I would like to focus on retail. We saw that minor disruption in Q4 because of that issue you faced. Is that normalized, inventory integration and all of that? And also, looking ahead, when do you think that we'll start to see the benefits of this normalization of the whole supply chain?

Now going back to Midway, which was the major highlight in your results this quarter, looking back, what do you think made all the difference when -- for you to outperform all of your peers in terms of profitability levels?

[Andre Farber, executive]

Thank you for your question, Eric. We did a major turnaround at Midway at the end of 2022. So this process has been running for some time now. And I would say, there is no one specific factor, but we did review our leadership that started to focus more on the financial business. We also focused on the core business and retail.

And also, the pricing model and credit concession model were reviewed. We also improved our collection capacity. We also reviewed our insurance business. Especially in times of crisis, these businesses are more resilient. So we have now a very profitable business.

So all these factors together led to the improvement to the results that we saw last year, together with cost discipline that led to the results that we saw. So this will now enable us to focus more on expanding the portfolio from now on.

Also, we went back to managing the -- our financial business together with retail. These are synergistic businesses, and the financial company has a very important role in funding sales. So our retail business is probably the best fish [ bowl ] for us to come and fish our customers.

So we integrated both channels, which was key. And of course, combined with all of the factors that Fred mentioned, I think that that's what put Midway at the performance levels that we saw.

Now going back to your first question, Eric, about disruption we faced, disruptions in systems are usually long. We swapped the SAP starting in May. And then we started to see the results starting in September. But still with positive results, you saw our same-store sales numbers in Q3.

But then in the second half of December, we had high disruption levels at the best time for retail. We lost a lot of sales in the second half of December even with the holiday season because we were not able to keep pace with that spinning wheel.

So now we are working hard to decrease the impact of that disruption. And we started focusing even more on that in January, and the numbers are much better now in March. The results are quite consistent now, at reasonable levels, with controlled margins.

So there is no radical turnaround of all of this. We're still suffering with the effects of this disruption, and we expect to see those effects go away by April or May.

[Operator]

Next question by Pedro, an analyst at Safra. Pedro, you have the floor.

[Unknown Analyst]

I actually have two questions. First, you talked about better pricing of your financial products during the quarter. So what about rotating credit? How does it fit this new policy? And now when it comes to inventory, you had a 23-day improvement year-over-year. So 2024 should have levels that are similar to those of 2023, can you confirm that?

[Andre Farber, executive]

Okay. I'll start by answering your question about inventory. Inventory has seasonality effect throughout the year. At the end of the year, we have the lowest level of inventory of the year. And of course, inventory will grow from Q1 to Q2. And then from Q2 to Q3, it's a bit more stable. And then from Q3 to Q4, inventory levels dropped significantly.

So what's happening now is that we're going to go back to a more normal seasonality level. So you have to see what to expect in terms of seasonality. But in Q3 and Q4, we're going to have lower levels than those of 2023.

Those 110 days, this is not yet our final goal. Our final goal is lower than that, but a lot of fine-tuning is needed to lower inventory levels to below 110 days. That will depend on many actions that we're working on, improving integration with the plant, improving our supply levels.

There are many fronts that we're working on. But as I said, 110 days is not considered the optimal level yet. For the coming years, we want to have even lower inventory levels because we went to work in a more integrated fashion with where our [ app ] is particularly.

Just to add something, we see here potential to decrease inventory levels but also potential to qualify inventory. So you might say, "Well, you had lower inventory levels because of the disruption you faced." No, we were already working on decrease in inventory levels regardless of the disruption because we had higher inventory levels the previous years and also after the winter season. So we had a lot of new products and older products.

But now we have linked this up, and we want to close 2024 with inventory levels at least at the same level of '23, but with a better qualification. '23 is already better than '22, and we expect '24 to be better than '23. Of course, we have to do it right with the different collections, especially the winter collection. So everything can change, if we make mistakes along the way. But our plan is along those lines.

We believe that the inventory of 2023 is at the right level, but maybe the balance is not ideal with the disruption. We had a lack of new products that sell more, so we had a lot of the leftovers of the winter collection, but they're already better than they were in 2022. And there are still things to improve.

So -- now about Midway, oh, yes, about rotating credit, we are 100% compliant. We did not operate with rotating credit we would offer installments. So that was already closer to the model described by the regulation. So rotating credit would only impact a small share of our results.

Now for overdue revenue would stop accruing after 60 days. So for 400% to 100%, actually, the impact is much lower than that. There is an impact in some part of the revenue, but we believe that's not going to be marginal for the results of 2024. But we are compliant with the regulation, and we expect a low impact on the 2024 results.

[Operator]

Next question by Joao Andrade Bradesco and analyst at Bradesco.

[João Paulo Andrade, analyst]

Congratulations on your results. Now my first question is about cash. You talked about inventory, but how much more of working capital improvement can we see in 2024? And what would be the main levers to generate cash in the future?

Maybe you talked about asset sales or also being a bit more strict with the financial company. Andre also talked about product pricing. Can you tell us more about this journey? What type of initiative are you considering from now on in order to bring more benefits to this pillar?

[Frederico de Oldani, executive]

Okay. I'll start talking about cash generation and then Andre can talk about our push-and-pull model. When it comes to cash the numbers of 2023 were much higher than a more normalized year's number. There are some one-off factors that are not expected to be seen in 2024.

'24, we expect to see robust cash generation but not at the same levels of '23. And why? Well, we still have some working capital improvement to be implemented, but we are not going to see the same level of inventory reduction like we saw from '22 to '23.

The financial company portfolio is expected to grow in '24 [Technical Difficulty] have a great working capital level from '22 to '23, should not happen at the same levels from '23 to '24. So we should not get to the same levels of cash generation, but we still expect to see robust cash generation in 2024.

Yes, there is still efficiency to capture when it comes to inventory, and we've been working on several other fronts, but working with an optimal working capital is key.

And you can see that in a more direct way in inventory, but we also worked hard in taxes and payments. And in many other fronts, that should bear some fruit in 2024. But my main takeaway message is do not expect the same numbers we achieved in 2023 for 2024, but you can still expect robust cash generation and substantially higher than the financial obligations for the year.

So we're going to generate enough cash to cover our debt and to amortize some of the debt throughout 2024. The cash-generation levers are quicker to capture. You can work on inventory and other issues.

Now when it comes to operational results levers, they are more medium term. They depend on improvements in the chain, product, management, industrial plant management, e-commerce, and they take longer.

So what we expect is not to see improvement in cash generation against 2023 because 2023 had strong cash generation, but we can have cash improvement related to operational results. But as I said, those take a bit longer.

Now when it comes to the push-and-pull model, this makes all the difference in our business, then we can have products that are available for consumers and also products that have a lower level of markdowns.

We have a logistics and distribution chain that is very well prepared for that. We have a DC and Guarulhos, one of the most modern DCs in Brazil and maybe in the world for fashion distribution. We can dose the amounts that are sent to the stores. And we have changed our shipping model, sending lower quantities to the stores, letting the stores pull more. So this is already happening.

And now we're making some fine-tuning on those doses, depending on the type of product and the performance. So this is already happening. And of course, it's not enough to have the product available in the DC. You also need to have a more reactive industrial plant. So we have a long way to go to make our plant more reactive.

We are currently focusing more on the link between the distribution center and the stores. So we have seen some benefits already, and we expect to see other benefits this year, which is something that is already making us happy, but we know that we have a long way to go in the coming years as well.

So we're working with discipline and consistency. We know that's not very exciting, but it's a long and complex type of work that needs to be done. We've been able to see the first benefits of this work, but this is something that will require a few years for us to be able to collect all of the benefits.

[João Paulo Andrade, analyst]

Great. Thank you very much and congratulations once again on your results.

[Operator]

Our next question is by Victor, and it was sent in writing. Let me read the question. He said, "Congratulations on your results, especially Midways results. Can you explain the provisioning dynamics at Midway, especially when it comes to provision for bad debt?"

[Andre Farber, executive]

We're continuing increasing coverage above [ Basin's ] minimum level. For 2024, the results will be 100% operational. We increased provisioning a bit in spite of a 2024 scenario, that seems to be a bit better.

[Operator]

Thank you. All the other questions that were sent in writing were already answered during the session. So this completes our Q&A session. Once again, I would like to thank you all for joining us, and our IR team is available, should you have any other questions. Have a great afternoon. Thank you.

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