Azzas 2154 S.A. (AZZA3) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for participating in our earnings call for the results for 2Q '26. I have with me our Director of Investor Relations, M&A and Strategy, Bianca Faim; and our CFO, Eric Alexandre Alencar. So today, we'll start off with the message that I've prepared for you, and then we'll talk about the highlights for the quarter, a deep dive into our 4 business units. Afterwards, Eric will go into the financial results. And lastly, the most important part, we will be available to take your questions. Well, in a more comprehensive manner, about our second quarter, the operating results, meaning our income statement does not fully reflect the strength of our brand. In fact, it's much different than our capability in sell-in and sell-out. And what we've always mentioned during challenging times that it's about the branding. So the positive side of our results, we had strong cash generation. That's work that we've been doing since 2Q '25 with the company strongly focusing on that. So good working capital inventory we had resulting in BRL 356 million. And we have clarity about our challenges, revenues, EBITDA profitability. So we are strongly focused looking to improve our performance for the half year. A positive highlight, I would say, or at least neutral is our results in sell-out, even with the effects of the World Cup. In total, for the Azzas Group, we had a decrease of 1.9%, excluding Basic, which we'll talk more about later, we had an increase of 0.3%, reflecting 2025, even with the internal and external challenges. When we look at the revenues with sell-in and sell-out for the sell-in of franchisees, the result was deliberate. We have over 1,500 franchisees when we look at all the brands. For the Arezzo brand, it's the pioneer in the fashion franchisees in Brazil. So we have a relationship of one generation after the other with them. And in all moments, our focus is the long term. Even though it affects our short-term results, the numbers that you can see here show how we're supporting our franchisees. -- obviously, because we are correcting the course of the leftover products from the other season. And we have projects that have been implemented to improve that. So in the first half of the year, our franchisees in shoes and bags, I would say, had a sell-out of minus 4%, and we didn't deliver summer collection in June. So the reduction was minus -- was 21%. In June, the shoes and bags increased 22%. So we're really focusing on that to improve sell-in and sell-out for franchisees that have a 22% increase. When I talk about shoes and bags, I'll give you the absolute numbers on that. Obviously, the drop in sell-in, part because of franchisees and partly because of multi-brand and mainly Vans, and that's -- I'll explain about that because that's not under control. So there had an operational deleveraging of our business in this quarter. So when you look at the snapshot, it's very bad. But when we look at the film, it's a dynamic that will be overcome and the sell-in that goes fast in operational leverage. In sell-in, especially franchisees, they have a very low cost of service. So the conversion between gross profit and EBITDA margin is very high. Sales expenses are 7% to 10% depending on the brand and channel, so franchisee or multi-brand. So you have a decrease of 3.3% in sell-in channels. It has a very high impact to the bottom line, different when you look at sell-out, even though the sales are high, gross margin high, but the cost of service is high. So the leverage is a result of lower sell-in, as I explained. About the future, the biggest correction and the capability of increasing sell-in was already done. In the third quarter, we can balance -- we're balancing out the sell-out and sell-in of the franchisee network. It was painful work, but very important. The main effect that we're measuring the health of our franchisees is the delinquency rate. So for bags, it's just 6.4% of the total receivables. So we made some tough decisions. We decided to preserve the longevity of our franchise network. We focused on operations and obviously, the partnership aspects that are public that we had some debates as of May 12. In the beginning, it took away some of our focus in energy. But now we have a group of people that are extremely dedicated that are engaged in that topic so that the management is completely focused on the business. Going into the second half, focusing on growth. Obviously, it won't be stratospheric, but especially in profitability and continuing to focus on cash generation. So what are the levers of our business besides the standard operation. and operating cost. We have the strategic alternatives of FARM Rio as the material fact announced in -- on July 19, we have Morgan Stanley to focus on strategic alternatives for FARM Rio. The process is still according to schedule. All the accounting and legal aspects are well detailed, but it's worth noting that the decision was made in the operation is still in the phase of preparation as planned. So we will inform the market at the right time. The other level to generate results is the consolidation of the Hering turnaround. So in this first half, we see an increase in gross margin and especially cash generation. We have BRL 97 million in cash generation. I'll talk more about that later. That was for the quarter. When we look at the consolidated numbers for the half year, that number is very positive. So 2025 drained a lot of our cash flow. But now even though there's contraction in revenues, there's a traffic change in the capital employed and consequently, cash generation. About the highlights, we have total revenues of BRL 3.4 billion with an impact of the sell-in by 7.1%, which is negative. And in the Azzas Group of BRL 3.4 billion in one single quarter. So that shows the robustness in our ability. As you can see, the sell-in, we had deleverage. If it went too fast, we would have a historical positive bias of the entire business. So cash -- operating cash generation was BRL 357 million, 3x greater than 2Q '25. Here are some highlights, but obviously, we have some lowlights as well. Highlights, gross margin as a result of lower sales and markdown, especially in the Basic apparel business line. Obviously, with the change in the mix, there was an increase of 1.3 percentage points Basic was 60.6%. So gross margin was very healthy and Basic was a gross margin of 40.4% and an increase of 1.2 basis points year-over-year. Sell-out channels totalized BRL 1.7 billion. We have this within our income statement, does not include sell-out from the franchises. Excluding BU Basic, we had plus 0.3%, a reduction of 31 days in our financial cycle. So highlighting our stock days, which is 15 days less than Q2 2025. Even with a large volume of summer products in our distribution centers, this happened in July. This is a highlight because if we were not invoiced in July, the stocks will be lower. Our operational cash generation was strong. The figures are here. I won't be repeating myself. About the lowlights, as I said, nobody is in a country to have a revenue retraction even with all the explanations that were mentioned. They are corrections from the past. We work with the company to have constant growth. We know that a company that does not grow does not have longevity. So this is what also happened in our results in this quarter. It was -- expenses grew 5.3% with a retraction of revenue of 7.1%, generating this deleveraging we mentioned. Occasional expenses were very well management. There was a saving of 6.5% compared to same period last year. So our EBITDA Eric is going to explain this further, was BRL 279.6 million with a retraction that was big compared to last year. Of course, this figure is uncomfortable, but we have control and management over it. This is a company that is here for the future and an occasional result from a quarter, of course, makes us dissatisfied, but also more willing to struggle to get this performance back, our history of growth. And we knew that the decisions that have happened in this quarter were crucial for the longevity of our business. I'm going to highlight some issues about our 4 business units. Starting with shoes and bags. Our gross revenue was BRL 966.5 million. Here, due to the bigger impact of sell-in, there was a retraction of 12%. This result was positive of 12% in July, and it tends to normalize in the third quarter compared to 2025. The first quarter, the gross revenue of this unit was near BRL 2 billion. About the revenue per channel, our own stores grew 4%. E-commerce also deliberately reduced the sales with markdowns had a retraction of 6%. Multi-brand channel, we're going to explain, impacted by the Vans brand had a retraction of 20% and the franchises, as I mentioned, a reduction of 21.5%, while sell-out in the franchises had an increase as well. And we're going to the last line here of this page. So you can see how these figures in absolute numbers are strong. The total invoicing for the franchise channel in shoes and bags was BRL 210.2 million, whereas the sell-out of this network in this period was BRL 524 million. That is here, this coefficient that we measure so deeply sell-out for sell-in was 2.5x, a growth of 22% versus the same coefficient in Q2 last year. Now about the sell-out revenue to the first point here, first bullet point of this page, a positive highlight for our main brands, Arezzo grew 12.3%, even with the effect from the World Cup. This is a result of the better collection and a reduction in sales in markdown and the Schutz brand that for so many years, we presented to you difficulties in finding their position and find the essence of the brand. We've talked about this for many years. It was great work done by the -- from the leadership of Rafaela Furlanetto and the team, putting the Schutz brand very positively. It has healthy growth in owned stores, growing 7.7%. We're going to talk about Sara Jessica Parker. Schutz with this positioning that is young and connected has Marina Ruy Barbosa as its ambassador for the summer collection, very much connected to the brand. About the work with Sarah Jessica Parker for winter this year, which was almost accidentally. I think I've mentioned she came for a beverage brand here for Carnival, and we got 1 day from her. It was a great repercussion. This model obsess shoes resonated very well with the Arezzo brand. So we had a deal with her multi-structure. We have a mini series with her for the second semester of 2026. We recorded it in New York. The results in the beginning of summer in August have been surprisingly positive. Now about the turnaround from the Vans brand. Vans is under new leadership. Thiago Markus, he was -- has been working in the company since he was 15. He has this entrepreneurship project together with David and Fernando, great experience in the sneakers segment. He's in charge of the Vans brand, and he has been very efficient in his work, focusing on reviewing the production cycle using what we had in the past with a bigger participation in sourcing done in Brazil, which gives us more flexibility and better margins. Of course, we're increasing the purchasing and the furnishing of the brand and commercial activities to accelerate sell-out. We'll have a second semester with challenges from the Vans brand results. We are aware. But our project forecast that for December results are going to be positive. The actions are very well implemented and 2027 in Vans brand is going to start growing again. Some highlights about the campaign that I mentioned with Sarah Jessica Parker. We had the first 7 days of the campaign since its launch last week, more than 6 million views in digital channels, 70 organic articles. I think everybody was somehow impacted very aggressively in Sao Paulo, in Iguatemi. This generates very strong brand awareness, especially be shoes, the black and white had sold almost 100%. So this campaign was very successful. Continuing this process of recovering our sell-in. This week, we had on Monday and Tuesday, we were in Campo Bom. We had the biggest launch in the history of our franchisees. We had the honor to count with the presence of our founder, Anderson Birman from Arezzo brand in Campo Bom, talking to our franchisees that have been with us for 20, 30 years. The trust in the brand is positive. The initial results from sales is strong. And in parallel here in Sao Paulo in a large event in Paulista Avenue, we had more than 500 multi-brand store owners. If you are in Sao Paulo, it is still a set up. You can schedule that with our team to see the strength of our brand, Arezzo Shoes and Anacapri and Vicenza. Here are some of the pictures of the great events. Congratulations to the team. I'm sure that with this energy, our sell-in in 2026 will be positive for the next semester. Now about our business unit, Fashion women. Our gross revenue was very expressive, BRL 1.4 billion, despite a slight contraction compared to last year. Absolute figures are huge. We had in the semester revenue of BRL 2.7 billion, growth in this -- in Q2 of our own stores. This shows health in our sell-out, slight retraction in e-commerce, as mentioned also for shoes and bags. We are in a process that expects selling with discounts. This is positive for reduction of stocks. So the health of our business regarding sales at full price stock and cash generation is positive. The retraction with multi-brands, the store owner profile is more sensitive to macroeconomic variations. Interest rates impact our store owners. We have very small sales deadline. So we work with a very low level of default is a prerequisite. So here, we had credit restrictions for several clients deliberately aiming at our high -- low level of default. In the international market, this retraction is due to exchange issues in dollars, FARM Rio operations, as I mentioned in the third bullet in this slide, grew 4.3%. We're going to show highlights about strong branding and sales work with opening of 4 pop-ups that FARM had in June and July. Highlights here for the sell-out brands for Cris Barros with a very expressive growth of 20%, Carol Bassi, 14%, the other brands also growing and multi-brands, as mentioned. Here is a sales of the pop-up stores from Farm large events moving $1.5 million in this period, overcoming 100% our goal. So this made that the European stores, London and Paris, they had a sell-out of 41% in this period. So we are still to measure the branding -- the current branding effect. It's hundreds of thousands of people worldwide that are still visiting these stores to the end of summer now in August. They're going to have a very positive impact in the expansion and the global branding for the FARM Rio brand. Now for Fashion Men, we had a revenue of BRL 420 million, flat compared to last year. We had in our own stores growing 2.6% e-commerce for the same reasons mentioned before, retraction of 4.2%. Multi-brand here growing due mainly to the continuous improvement of the Go brand. The sneakers business for Reserva grew, boosting multi-brands and for the same reasons mentioned for shoes and bags, deliberate retraction for the improvement in the health of our franchisees, which caused a retraction of 18.6%. The Oficina brand is a highlight in the base of 30% of growth in Q2, keeping a growth of 7.6% in this second semester. And now lastly, about our Basic business unit, continuous process that is going to be deeper here in what are the performance KPIs that we're measuring today at Hering. In absolute figures, a revenue of BRL 559 million, retraction of 12% year-over-year and an improvement compared to the first quarter that had a drop of 18%. Although, of course, there are some seasonal aspects that impact sell-in. The sell-out channels with a reduction equally for our own stores and e-commerce around 14% due to a strong reduction of sales in markdown. So this increase in gross margin for Hering is totally explained by a great control of stocks that brought great cash generation and healthy sales and for our clients. The sell-in channels in a continuous process to normalize the stock for the network, we had a positive highlight here for the improvement in gross margin. And on the next page, more specifically about the main KPIs for the Hering brand. Our main goal is to recover profitability, expansion margin, cash generation based on stock reduction and an improvement of the capital employed. Therefore, we had a reduction of 25% in the sales of products at discount prices. This is very positive for the business, not only for cash generation, but also for branding for you to have paid for clients at full price. The reduction in stock is very relevant. It goes from a total of 214 days in Q2 '25, and it drops to 149 days. Our goal is to get to 130 days. So it's very, very close to this goal. Actually, some products were at fault, but we chose that we cannot want a great bonus. We chose to be more conservative in our purchases. Several Hering products, especially winter buffers and others had a reduction of purchase that was deliberate, and they were missing in the stores. We know that. So define the ideal level is a process. It is the first semester in our new management for Hering and this process is part of it. But in doubt, we chose for a drastic reduction of stocks, as you see here. So that led to cash generation of BRL 160 billion for the half year and a reduction of BRL 163 million in the same period year-over-year. So the delta is BRL 326 million for Hering, and that's very important. The team is very much set up with a high level of confidence. So next week, we'll have a kickoff for Christmas sales. So a big convention on August 19 with our internal team. And I'm absolutely sure that we're prepared to have a second half with better results, but specifically the fourth quarter. There's a milestone in September on the 3, launching the Brazil T-shirt. It's replacing the one that had a historical name, and we believe this fits better with Brazil, calling it Brazil. It used to be called Pronto. And here are some highlights in product engineering that's very deep, very detailed basically 9 months of work over 18 different sewing processes from the label to other aspects, improving the fabric label and lowering the price drastically in sell-out, it will be sold at BRL 49.99 and improving the gross margin. So I'm absolutely sure that how this T-shirt is bringing B2C consumers into the base. So with a huge share of the market in Brazil that Hering had lost in the past year. So this process was a lot of engineering and predictability in demand. So the T-shirt is made completely internally. we decided to focus the entire production -- Hering production chain on Basic products so that we could have productivity and high scale. So when you visit, you can see that our plants are more productive because they have less variations and the products are -- that are -- would be made outside the company in Brazil or abroad. This is about Father's Day in Hering. It was very strong. That's giving the essence that the brand has with Thiaguinho, a very strong personality that has a big outreach in our country. Those are my opening points about the second quarter and business perspective. Now Eric Alencar, our CFO, floor is yours.

Thank you, Alexandre. Good morning, everyone. It's a pleasure to be here with you in Bianca for our earnings results for 2Q '26. So starting off with the financial results on Slide 16. In the second quarter of '26, gross revenues of continued brands was BRL 3.4 billion, a decrease of 7.1% year-over-year with specific dynamics between the channels. The sell-out channels totaled BRL 1.7 billion. It was 1.9% drop with owned stores growing 0.9%. Owned stores, the highlight goes for -- goes to Arezzo with a 12% growth, Schutz, 8% growth and Cris Barros with strong growth of 42% and sell-in dropped 13.6%, reflecting the priority of covering the inventory of the franchisee network and conservative purchasing from multi-brand channels, given high interest rate scenario in the country. So the lower share of summer in shoes and bags in 2Q '26 being more representative in June this year. In abroad, revenues dropped 4%, reflecting the depreciation of the real compared to the dollar, a 12.9% drop and a lower share in revenues of the spring and summer collection in 2Q '26 in FARM Rio. By adjusting the FX effects, the international revenues would have grown 5.9%. Net revenues totaled BRL 2.7 billion, a drop of 8.2%. The deductions account for 20.6% of gross revenues, an increase of 0.6 percentage points year-over-year, in line with the first quarter of '26. The variation is essentially from better generation of tax benefits in the fashion, women and men business units with a 1 percentage point increase in gross revenues and taxes increased 0.4 percentage points. Increase in the tax is mainly explained given the higher share of the sell-out channels and the incidence of ISS on royalties in 2026. These factors were partially offset by a 0.8 percentage point improvement resulting from the decrease in returns in shoes and bags and Basic, and that's something we've been talking about for a while now that in this quarter finally brought on positive results that we were mentioning. Recurring gross profit reached BRL 1.5 billion, which is an increase of 130 basis points in gross margin and ending at 56.2% in the quarter. By excluding the basic business unit, gross profit was BRL 1.6 billion and 130 basis points over the second quarter of 2025. Gross margin is explained by the lower markdowns and higher participation of the sell-out channels in revenues, overcoming the impact of the increase in the deductions of gross revenues. In the Basic unit, gross profit was 40.4% with an increase of 1.2 percentage points, reaching 105 basis points, even with the higher share of sell-out channels in the quarter. The increase in the Basic gross margin shows the better quality of Hering and decrease in the pressure to flow the off inventory in the previous year as expected according to our plans. Recurring expenses ex depreciation totaled BRL 1.1 billion, an increase of 5.3% year-over-year, representing 43.3% of net revenues. These expenses increased 9.5%, reflecting mainly or in the fixed expenses in the net opening of stores, recognizing the increase. The variable expenses increased 3% recognizing bad debt in the multi-brand channels in this quarter being offset by better management of shipping and commissions. So we have a decrease of 6.4% in the annual comparison of expenses. So on Slide 17, -- no actually, next slide is 22. Recurring EBITDA totaled BRL 330 million, a drop of 29.1% year-over-year with a margin of 14.2% and a decrease of 430 basis points. Even though you have a gain in gross margin, the decrease in net revenues shows the operational deleverage and EBITDA margin decreased 430 basis points. The recurring EBITDA is 39% under the second quarter of '25. Net financial expense totaled BRL 187.6 million compared to BRL 199.5 million in 2Q '25. That is mainly a reflection of the lower impact of the FX rate as the contracts were determined with lower rates in the previous year, decreasing the interval between the hired or the contracted FX rates. So recurring net income was BRL 106.5 million, 4% under year-over-year. Income tax and social contribution has a positive impact and recurring net income for the quarter, BRL 106 million with a net margin of 4%. Now moving on to the following slide about cash generation and working capital. Once again, these items were the highlights for the quarter, as Alexandre already mentioned for us to us today. The operational cash generation achieved BRL 356 million, over 3x the BRL 106 million in 2Q '25 with the conversion of 105% of the EBITDA in cash generation. In the post-CapEx division, we have BRL 1.6 billion conversion of 105% of the EBITDA to IFRS. In the past months, we achieved BRL 1.3 billion in cash generation, 1.6 -- BRL 1.3 billion post CapEx and the conversion of the EBITDA for the period. In the quarter, the investment activities were BRL 26 million. So that resulted in a cash generation increase of BRL 122 million. In the next slide, you'll see the factors behind the high cash generation. The financial cycle ended the quarter at 93 days, a reduction of 39 days year-over-year with a better -- with an improvement in all steps of the cycle in the last 12 months. By excluding the provisions in inventory loss, the impacts that were adjusted in recurring EBIT and improvement of the financial cycle will adjust it from 31 days to 29 and an improvement in inventory days, 15 days, accounts receivable 5 days and an improvement of supplier days by 11. So Basic achieved a reduction in inventory as well and post CapEx, BRL 97 million with a consumption of BRL 56 million in the first quarter last year. Now we're moving on to the last slide to talk about company indebtedness and ended the quarter with a cash position of BRL 1.1 billion and net debt of BRL 2.2 million, a reduction of BRL 39.9 million year-over-year. So we had a leverage of net debt EBITDA recurring over the last 12 months, reflecting it even though there was cash generation, the gross debt ended at BRL 3.3 billion, and it's a complex situation in the country this year. We extended the profile of our debt concentrated 82% of them in the long term. So 43% of what it was in second quarter last year. In addition to BRL 964 million in credit card receivables, reinforcing the liquidity and the financial flexibility of the company in the short-term. That's the summary of my presentation. Now we'll open up for Q&A.

Thank you very much. Thank you, Eric. Thank you, Alex. Let's move on to the first question, and this is from Luiz Guanais from BTG. It's about sell-in. He's asking would be interesting to hear the inventory cleanup that you've done with the franchisee and multi-brand channels in the past quarters, not only in Hering, but also others. And how do we go into the second half for these channels?

Luiz, thank you for your question. So this work started at the end of 2025. We had sell-out and sell-in that was historically at healthy levels of 2x. However, in the beginning of 2025, end of 2024, it reached 1.8x. So that's a coefficient. That's part of the main KPIs that our team analyzes because the health of our franchisees is essential for a long-lasting company. So that work was done, and you can see the results in the second quarter, no less than minus 4% in sell-out and a decrease of 21% in sell-in. So now you can expect that balancing out the performance of sell-out and performance of sell-in.

Next question is from Vinicius Strano from UBS. He has 2 questions. The first one is about FARM Brazil. Can you give us some more flavor about the FARM performance in Brazil? How do you see sell-out, sell-in? And what's the evaluation about the level and quality of inventory for the brand?

Thank you, Vinicius, for your question. I'll start off with the second part. Inventory level, I would say, is extremely healthy. It's the lowest level that we've had in apparel for our group by far, very fast sales that FARM has even in some specific categories, I would say that it's very optimized and according to our assumption for the group is strong cash generation and inventory reduction. And we also have opportunities to review the quality and the intensity of the FARM stocks. As for the sell-out performance to worth highlighting that the '24, '26 cycle in FARM doubled in size virtually. So it's a very strong expansion cycle that we knew that in this time period in 2026, especially in the second semester, what we had invested, the seeds have been planted and they were being -- the fruits were being coming. So when we started this process to analyze and how to maintain this growth with FARM and at the same time, with the premise from Azzas Group of the reduction of inventory, reduction in CapEx, it's a bit contradictory. So this work that Morgan Stanley was hired to carry out is here to bring a new cycle that is very well designed. Our strategic planning is very well designed, but we are at this transition moment from a very virtuous cycle with strong investment in the past 2 years in this brand and a plateau in this growth due to actually being very high value. It's the biggest brand in women's apparel in Brazil by far. FARM alone this year is going to have this revenue globally BRL 3.5 billion. And now it is going through a reinvestment. It is the actions are fantastic. The branding is strong. You will have collabs with FARM from the second semester from Stanley. I don't know if I'm allowed to say it, I'm not, okay, a partnership with an international collab that we will be launching in the second half of 2026. I think we can say it. We can say it. There is a collab with FARM with Real Madrid and Diesel. It's going to be very strong. So we are very confident that in terms of awareness and distribution, the brand is doing well, but it needs a new cycle of investment that is being well designed and well matured. About sell-in, the brand has a distribution that is very -- that covers all of Brazil. The growth that we have with FARM last year was very strong. It was beyond our expectation in the first year. So it's normal that it stabilizes this year.

Thanks, Alexandre. Vinicius' second question is about the scenario of expenses and points of efficiency. The question is, how do you see the scenario of expenses for the future? And what do you see as potential points of efficiency that can be captured?

Vinicius, thank you for your question. We know we grew 5.3% in our SG&A. Breaking this down, we go to fixed expenses, a bit over 9.5%, especially in CTO, which is occupation in lease and a lot of investments in the expansion of FARM internationally that Alexandre mentioned is one of our pillars for growth in the company now. In the variable expenses, we grew less than inflation. We grew 3% and the main growth came from PDD, which we have BRL 13 million that we recognized as losses from doubtful debtors, even with our default dropping. We were conservative in the more -- in the older accounts receivable, recognizing that the chances are that this number is going down. But of the others, consultancy, travel, that we were diligent and it dropped at 6.4%. About the future, we talk a lot about this. We are an industry with high gross margins. So we need to sell. We made the decision to hold sell-in. Once we go back, the relation -- the ratio between SG&A and sales is going to normalize. So this being said, the SG&A work continues. We see lots of opportunity, people, commissions, marketing, freight, and storage, we have a plan ongoing that is going to have impact more to the end of 2027 because its execution takes some time. I hope it was helpful.

Next question from Danniela from XP. She asks about gross margin and working capital. In the quarter, cash generation and gross margin, especially working capital were positive highlights, but both end up being strongly related to the situation of stock adjustment where you're not growing. How should we consider the dynamic for working capital and gross margin with when you recover growth?

It's Eric, again, Danniela, I'm going to speak and then maybe Alexandre wants to contribute. Thank you for your question. It's an important point. I think from this vision from the time that you're getting away with inventory, you're working with the worst scenario for gross margin. This is the nature of the industry. So the trend for the gross margin in the channel has to be positive, which contributes for the margin ahead. Once you're reducing stock and working on that, this is how you're going to reduce. And we managed to have an expansion in margin even in this scenario. Of course, how did we manage to do that? We could with a bigger mix of sell-out and sell-in with a bigger gross margin and also a lower level of markdown in our brands, as Alexandre mentioned. When we talk about the cycle of working capital with the reduction of inventory, we managed -- it was an energy shock to reducing the cycle in 31 days. So we adjust inventory. If you look at our working capital cycle, it is one of the best in the market today. Then we have the cash generation that we have of BRL 280 million, BRL 50 million came from reducing sales. Reduce sales, we don't need working capital sell-in, but BRL 220 million, BRL 30 million came from the structural improvement that we're doing. So going forward, we believe that most of the working capital is gone -- has been mostly captured. What we need going forward is to ensure the maintenance of this level of working capital and recovery of sell-in now that the relationship between sell-in and sell-out are healthier. What's interesting for you to get to know is we work a lot with working capital over net revenue. Today, about 25%. The goal for the future is to reduce this number drastically, not that, but to grow that indicator, keeping this healthy level that we reached.

Eric, excellent actions, Danny, thank you for the question. I don't have anything to add, but to say, Danny, that on Monday, on the 17th, I adjusted my agenda. I don't think Bianca even knows it. I'm going to be able to participate in the XP conference in Rio de Janeiro with a restricted time frame, but it's going to be a pleasure to be with you.

Danny has a second question, Eric, about the change in the stock provisioning rules. She wants to understand what the change was and if this stock has been mostly sold or it's going to benefit the margin in the next quarters.