Sendas Distribuidora - Q2 2024

Transcript

Belmiro de Figueiredo Gomes (CEO)

Thank you all so much, and good morning, everyone. First of all, I want to thank you for your presence and welcome you all to our earnings call for the second quarter of 2024. This is a quarter where we had opportunities to welcome over 2,000 new employees, which we hired now in the second quarter, and especially another 2 million new monthly customers with an increase in the tickets.

As you've seen in our presentation and release, Assaí was able to reach a milestone of 79 million customers, an increase of 7 million compared to what we achieved last year in the second quarter. So seven million plus represents over 2 million customers, almost 3 million people visiting our stores, whether the new stores or the existing stores in the company.

The fiftieth anniversary campaign, we showed, a video about, and we plan to, provide more details about, because Assaí traditionally has spectacular campaigns, not only, when it comes to awards and activation, but also to keep loyalty active. And we're the company that's most present in Brazilian households.

We're the company that has, physical stores with the biggest amount of traffic and people visiting year-over-year. We have been overcoming expectations, so the company can continue to innovate and be a reference in the market. Before we move on to the numbers, I want to talk about the environment in the market.

We still feel consumers and the overall B2B customer is quite pressured by debt, interest rates, some changes also in consumer habits that make us have an environment with a level of debt and purchase power that's below expectations for this moment in the year. The inflation, in our perspective, is in line with what's expected, by us and the government, with a variation level up or down, which is not maybe that relevant.

It's not such a big change from an inflation and deflation perspective. We also see a significant reduction in trade down that we had in the first two years of the pandemic. But also, we've been seeing that what's impacting the market as a whole is, a movement with a reduction of the sizes of the packaging in certain categories of products.

Since we came from an inflation period that was really high, where income didn't keep up, and a lot of the movements that industries and suppliers had to keep their volumes of sales were really related to changing the size of packages. So within the strategy for the second quarter was really, above all, to preserve our cash position, keep up with our level of competitiveness, and keep focused on store maturity, promoting a sequential increase of our gross profits and keeping up coherence and consistency, especially in our results.

We'll see this when I show you the slides, the evolution of the gross profit throughout the three years and keeping up coherence, and keeping up the deadline periods as well. And so this could, of course, lead to something that maybe is not that healthy for the companies.

So of course, discipline and expense controls, maintaining the level of services in stores. The company continues to expand with over 10 stores. Now, we had already mentioned previously... Sorry, guys, we had a small technical issue, but we'll be coming back in just a few seconds. Okay, we're back now. Could you repeat the last phrase, Belmiro? Okay. Can you share the screen of the presentation?

Sorry about that. We'll... We had a shutdown here for some reason. Now, everyone fell off, and we'll be joining back in just a second. Can you share the screen again, please? And the team had already talked about the expansion traditionally, which is the focus in Assaí when it comes to growth. The team has been, ever since April, Anderson, of course, can give you some more input.

We had 80 new services deployed in the existing stores, which includes new services, butchery, bakery, and cold cuts. And this makes the 2 million new customers come from other formats in the food sector, also attracted by not only the location and execution of the stores, but also the new services.

So I think that's the main highlight when we look at the second quarter. And, same stores was close to 3%, with a balance in the growth of the same stores and also the growth of the expansion. So we had a growth of 11% compared to last year, 34% in two years, which represents in the last two years or 24 months.

We've been anchoring this, since Vitor will talk about the cash generation as well in these 24 months, but we had over BRL 5 billion in additional amounts. So the company is still working on its investments, growing in expansion, and we have important store openings in the second semester. Guarujá, which is something we could highlight, the new unit in Guarulhos, São José do Rio Preto.

We're trying to open this year, beginning of next year, in some markets and regions where Assaí is not present, with major opportunities, and we should also go over the milestone of 300 stores this year. Probably by the end of the campaign, well, we're at the end of our anniversary campaign.

The EBITDA and the pre-IFRS version, as we all know, we have this trend with the purchase of the Extra store in the Extra stores, which increased the levels of rent in these locations, and we're really highlighting this, and the best way to view this pre-IFRS EBITDA is BRL 965 million, and a growth of 18% compared to the previous year, higher than the sales, and that highlights that Assaí has 100% of the EBITDA, which is cash.

In the pre-IFRS version, we have a margin that's 7.2%, and LAIR evolution with profits before income tax, and we also had the impacts from the subvention that we had last year, we don't have this year.

Then you see this ratio between the profits and the net income, but you can see the efficient operation in the company, and we have a financial expense that is due to the level of leverage that's pretty high due to the interest rates, but the company has been very focused on deleveraging.

I'm not gonna get into too much of the details here because Vitor will cover this later on, but we really know the power of the cash generation in this business. So our leverage continues to be reduced, and we have an EBITDA that is more robust when you split this by the 12 months.

Our focus is really this leverage projection, and so it's important to highlight that this level does not consider possible discounts on receivables, which are whether they're discounted or not, and the company has this projection for our net debt to EBITDA of 3.2 till the end of the year.

But anyways, on this second slide, you can see how things have been evolving in stores, and with the Extra conversions, now we already have sales of over 25% of the average in the company. And from the 10 main stores, when it comes to customer flows, nine are conversions. The stores that are very well located, we're talking about the project, and you can see the evolution of the EBITDA, especially.

Of course, these stores are not mature, so you can have an idea that maybe the first store, which like two years of ever since the opening, so the most of the stores are gonna continue with their second year full of work and, then after, we'll be completing the 24-month cycle, and we've been working on some initiatives to balance out sales and EBITDA margin maturity.

So the sales should reach BRL 26 million, and the EBITDA margin pre-IFRS, without the impact of the leases. Of course, you have the property tax impact, but it's about 5.4%, which means an EBITDA margin evolution of 1 percentage point if you already look at this from December onwards, so 6 months.

December 2023 to the end of June 2024, the company has been really focused on improving this store network and the maturity ramp-up, when it comes to sales and margins, trying to balance out both of these points. And with this, we advanced about 140 basis points in margin compared to last year, and a growth in our revenue in the first semester when we compare with December, which, as we all know, is a very typical month with the growth of revenue of about 5%. We can move on to the next slide now.

As the process of conversions, as we all know, Assai went through a very intense project for the expansion of the conversions, and in this slide, we brought in an evolution of the gross profit.

So when you look at the amount of tickets, you can see the company more than doubled or tripled during this year and the last periods, actually, and the gross profit keeps up with the same proportion.

So if we take a look at this from our perspective, the positive results is that even when you go through such a big process with the conversion of the hypermarkets and the closings, and during this period, we really evolved in this store format, and we had two things that took place concurrently. We had the conversion and opening of the hypermarkets, plus also the inclusion of the new services with battery and other projects. So the first battery we opened was in the end of 2019 in Sinop, Mato Grosso.

So these are different occurrences, but when you look at this, due to our commercial dynamic, and even with this evolution, we had a gross profit that was very stable, 16.7 to 16.5, now in the second quarter of 2024. 2021, we still didn't start the conversions yet, but you can see gradually that the levels of gross profit get back to normality, even with all of these changes as we enter new centers and include new services. We can advance.

When we look at the expense perspective, the changes in the dynamics, there was always some skepticism in the market about the shift in formats, and this intends to provide better services to the population with higher income, and also provide some possibilities to adapt for B2B and B2C customers with better locations that were very far off, and it would be very difficult to be open in a cash-and-carry operation.

So the changes in the assortment and the changes in certain units and other stores, when we look at the level of expenses, you can notice that the expenses in the post-IFRS vision, where you don't consider the lease-... is completely stable. So 9.7% we had seen as an SG&A percentage is prior to any conversion projects for extra and prior to the inclusion of any services as well.

So it's pretty stable, 9.7-9.5. But when we look at the lease, and include the lease in this perspective, of course, these stores, as we mentioned in the beginning, they have a characteristic with the level of the property that's very different.

But the increase in the margins and sales, when we look at those 25% more, more than offsets this. And in April, especially in our vision, there's a whole another possibility for growth in the company, because, when you consider the profile of regions where the cash and carry used to operate, you kind of had a situation where you could maybe not have a higher level of saturation or the capacity to penetrate in central regions.

So I'll say it was a big innovation, which allowed for major movements, even among competition, to follow along behind us in the paths we pioneered. And as we wrap up here, I'm going to pass the floor on to Vitor, as he talks about the EBITDA and presents here. We still have some time for Q&A as well, but he's going to discuss the operational aspects, the leverage aspects, and after we'll get into the operational aspects.

Vitor Fagá de Almeida (CFO)

But great, Belmiro, thank you. Good morning, everyone. Belmiro just described a bit of the gross profit dynamic and the SG&A. And we're going to show you here through these two metrics, look at the EBITDA and see an important evolution of the EBITDA when it comes to the quarterly basis.

We've seen evolution of BRL 815 million to BRL 965 million in the comparison quarter-over-quarter. The growth of 18% that comes from an increase in sales, but also the margin expansions. When you look at the evolution in the six months, you see that there's pretty much the same format, 27% growth and an increase in the margins of 0.6 percentage points.

So once again, as a basis for this success in the maturity of our stores so far as they've been converted, but also the deployment of services, as Belmiro explained, and no doubt, the control over expenses, which allows us to grow, having an increase in our profitability when we look at the EBITDA line.

So moving ahead and looking at a bit of the financial results, we also see positive evolution in the comparison with the same period last year, where we have stability when it comes to the representation or importance of this financial result compared to the revenue and the percentage or the ratio.

But when you look at this and you compare the first quarter of this year with this quarter, you see a reduction, a nominal reduction of the expense, BRL 510 to BRL 468, but especially a dilution of these expenses. So as a percentage of the sales, it goes from 3% of the sales to 2.6% of gross sales.

So the evolution of gross profit and expense control generated an increase in EBITDA margin associated with the maintenance, if you look at the annual basis and the reduction. When you look at this in a sequential manner, we see a profit before income tax that had a very important growth rate, what they call the LAIR on the slide in Portuguese.

And when we look at this in the semester, this profit before income tax more than doubled from BRL 135 million to BRL 347 million. So this was an increase of 157%, which demonstrates we are on the right path when it comes to the strategies that the company has been adopting.

What's also important to mention is when we look at the net income, it was impacted in the comparison with last year due to the significant reduction in the positive effects of the subvention and investments. But then when we look at the semester view, we have a growth of the net profit. So we move on to BRL 258 million in this period.

Then moving on, here we have a comparison. Belmiro quickly showed this in the presentation. We have a comparison and a number that we think we should share with you, which is the cash operational cash generation. We brought in this two-year cycle, which really sets the beginning of the deliveries from the stores that were converted for the hypermarkets.

Here we presented this comparison and analysis to show you clearly how the operational cash generation was so strong. The company generated BRL 7.6 billion in cash in this period, coming from the EBITDA generation, BRL 6.8 billion in EBITDA generated, but also a positive evolution in our working capital. So it was a major evolution in the number of stores, and 64 of them were conversions and 20 were organics.

This cash generation, if you look at the investments that were required for this expansion, and these investments were very significant when it comes to the acquisition of hypermarkets, the conversion of hypermarkets, or even the opening of these 20 organic stores, but also when it comes to the refurbishing and implementation of the services, the company was able to generate the necessary cash to handle basically all of the investments.

To be more precise, 88% of this investment was funded with operational cash generation in this period. I want to remind you all that these stores are still maturing. Basically, this is an analysis we consider to be very important to share with you, because it demonstrates the strength of the company, the, and how solid it is, and that we're really on the right path to continue to grow our results.

But of course, we also have the payment of the interest rates in this period, about BRL 3.4 billion, and that's a direct consequence of our debt levels, as Belmiro mentioned, and the interest rates in this period that also reached levels that were a lot higher. So moving on, it's also worth mentioning about the, a bit of the evolution of our leverage.

This is an indicator we've been accompanying closely. This is one of our focuses in the company, as Belmiro has mentioned, and we see ongoing improvements and, reduction in the leverage. If you look at the leverage by the end of the second quarter, which was at a level of 4.25, we can see a reduction of 0.6 times, and we've – that's if you compare with the end of the second quarter this year.

And this was an evolution of 0.10, from the last quarter to now. So this is an indicator we monitor closely, and it's one of the company's focuses. Clearly, we've been looking at this, and we've been seeing the evolution of the EBITDA. The reduction of the leverage is happening, and it will happen throughout 2024, mainly due to the evolution of the EBITDA.

For 2025, we expect to have even greater contributions coming from the reduction of the net debt. Moving on to the next slide, you can see that, there's some additional information, that we were presenting, which is the total availability. So we've been working on a new interpretation on this breakdown, and we brought in what's considered cash equivalents and also the receivables that are not discounted.

So the first point that I think is worth mentioning is that we had an issuance of debentures that was really well very successful, which led to a higher cash position in the end of the quarter, and that made us discount less receivables in this period. So that's why we see this significant growth in availability, that's a total BRL 6.9 billion. You see total growth of 33%-34%.

But when we look at the breakdown with the non-discounted receivables, which is substantially greater, and that's the fruit of this expansion, which is mainly, it's another step we're taking to improve the profile of our debt. So first, reduce costs. We had the issuance considering CDI plus 125, which is substantially lower, which was CDI plus 149.

And the extension of our average term of debt, which was 28 months, but now with this issuance, it becomes 32 months as an average term. So, and so I say we'll continue to search for new opportunities. And so, also, we want to consider the average cash in the period.

So it went over to BRL 600 million, and it was BRL 640 million in the first quarter of 2024, and then, and then in the last quarter, it was over BRL 800 million reais. And then here, our practice is that we'll gradually increase this cash position, increase providing more liquidity and, increasing the financial, solidness, in this period. That's what we wanted to share with you guys about the financial indicators.Now, I will pass the floor on to Sandra, as she talks about sustainability as a strategic pillar for the company. Sandra, the floor is yours.

Sandra Vicari (VP of People Management and Sustainability)

Thank you, Vitor. Good morning, everyone. So within our sustainability strategy, which intends to really leverage prosperity for everyone, all of our initiatives are based on three pillars, which are efficient operations, developing people and communities, and the ethical and transparent operations.

And so, here we're really focused on reestablishing, reusing waste and that these would be intended to landfills, and this is all related to our, the Destino Certo program, benefiting many organizations. And we continue to develop these initiatives so that we can create a more diverse work environment based on valuing differences and back differences.

And also 40% of Black leaders in the company. And in this context, we were recognized among the companies in the B3, the Brazilian Stock Exchange, as one of the companies with the highest rates of Black leadership, and we also received some indications as the best companies for LGBTQ communities to work in, partnering with Instituto Mais Diversidade.

And through Instituto Assaí, we are promoting the donation of food, and beds and different other materials to Rio Grande do Sul, so that we can also send this throughout all of Brazil. I would also like to mention that we are highlighting some awards and recognition that we received in this quarter, because it really values our performance and the relationship with our customers, which is really essential.

For the fourth time, Assaí was recognized in the first place in the retail category for Modern Consumer, and we were elected as the, for the ninth time, as the best cash-and-carry operation in the city of São Paulo, which is based on the perception from people that live in São Paulo.

We're third place in among the best companies in the Institutional Investor and we were the only ones in the food retail on the podium. Assaí was considered the Brazilian brand that's most valuable in the food retail sector. So these are acknowledgments that really make us happy and confident so that we can continue to work to achieve a company that's more sustainable, more solid, and with greater prosperity for all of our stakeholders. So thank you, all. That's it, and I'll pass the floor on to Pamido.

Okay. Can you guys hear me? Well, thanks, Sandra. Thanks, Vitor, for the presentation. We brought in a bit more of the campaign details for the 50th anniversary at Assaí.Assaí, with the amount of 77 million tickets in a quarter, really represents a huge flow of people. It's about 38 million people passing by our stores, and it's the company that's most present in Brazilian households, with the biggest flow of customers in retail stores in Brazil.

The company operates in a continent, really, in the national territory. Traditionally, every year, we have very strong campaigns, and this is one of the decisive initiatives for this kind of expansion to make the brand really well-known and famous in the national territory and generate loyalty among customers. The 2 million customers per month we conquered in the second quarter partially come from the promotion and word-of-mouth referrals, but also services based on the quality of our culture.

This year we have a campaign that's probably the strongest campaign in Brazilian retail, the strongest one we've ever had in all years. We decided to hire a full ship from MSC Cruises, and it's gonna be in the Brazilian coast, and our customers will be able to to win 1,500 trips that are gonna... It's gonna be a raffle.

So as customers buy, the more they buy, they can expand the chances of winning and being awarded, and also the more they buy from the participating brands. We had over 50 suppliers that are the sponsors of the campaign, and besides, being highlights, because if the customers buy their products, they can expand their chances to achieve this, and they have a bunch of benefits with the expansion of the product.

So it's a campaign that really will affect our customers a lot and also will allow us to continue to move towards conquering new customers. So a first award is BRL 5 million, and then you have over 50,000 awards that they can use instantly, of about BRL 100. So we'll have. It's gonna last for four months, and we're gonna have strong promotion in different media sources and outlets.

We also shifted our registration process so that we can capture as much data as possible, enriching the basis of our CRM in our digital strategy. And Assaí has been working with future projects as well that we have, and especially want to keep our customer loyalty and conquer new customers. So an interesting data is that the company is made up of people.

Above all, the main differential is in a company is its culture, right? So within this, we're gonna be sharing this with all of the employees that have over 20 years of experience. They're all gonna go, regardless of the position they occupy in the company. So in this way, we'll also demonstrate to who is in the operation, working with the 38 million people that are in us that being in Assaí will lead to special awards, and they'll be recognized.

So well, I'm getting too excited here, so I don't want to go over too much, but I want to thank everyone working on the campaign. It was fantastic. It was a joint effort, not only in the marketing, but also the commercial and operations area.

We have a challenging period up ahead, but we have a beautiful campaign, and we believe it's going to be really good acceptance. So to anchor this, we brought 5 personalities. Each of these represent a different region in Brazil. They're very popular. We have Xande de Pilares, Michel Teló, Gabi Amarantos, and all of them represent a specific region in our country due to the diversity.

They're very popular singers and artists, and we brought them on board for this campaign. Now, we're going to show you the campaign video. It's very quick, and then we'll get into Q&A. It's great to save! At Assaí's anniversary, you can join us on this ship. 50 years, we're so happy to celebrate. BRL 20 million in prizes and awards. Come and join us. Trips with a plus one, and you're on Assaí ship. Come on, let's navigate.

5 million will change a life. As we have special sales, everyone can win something. Come and join us. Get lucky. We have plans to become a millionaire and navigate. Join us. An instant prize every single day. Fiftieth anniversary at Assaí. Assaí's fiftieth anniversary, a great show of awards and low prices!

Operator (participant)

Now, we'll start off with our Q&A session. Please remember that if you have a question, you should select the Q&A icon at the bottom part of your screen, write your name and company and language, then enter the queue. As you're announced, a request to activate your mic will appear on the screen. Then you must activate your mic to submit questions. We'd like to ask you that, all of the questions should be done at once. João, we'll open up your audio, so you may proceed.

Speaker 14

Okay. Good morning, everyone. I wanted to explore two points here. First of all, I wanted to discuss the competitive environment, Belmiro. I think we're going through this new discussion with the SKUs. And so now we're discussing this, and it would be good to get a perspective on your opinion about payments and sales with installments.

Some regions don't have demand for this kind of purchase and payment in installments, but we want to get your perspective on this, and also your vision about the growth dynamic. So we have a relatively constructive perspective when it comes to food inflation at the bank here, but I wanted to get your feel.

Do you see there's going to be a short-term acceleration, and what's your mindset? Have you seen something change compared to the messages in the last quarter?Finally, the capital structure bit and expansion for next year, and how comfortable you guys are for this expansion plan? Thank you. Thank you so much.

Belmiro de Figueiredo Gomes (CEO)

Okay, thank you, João. Well, let's split this up. So yes, there's a shift in the market, and, of course, there's always a possibility for changes in the competitive environment. We've been one of the protagonists when we placed services in stores, and in our perspective, services were just to evolve in this model. And you can see there's so many differences in levels of income, and so the model that's adequate for one region is not always adequate for all of them.

So this evolution in the model for the regions is, we requested that the, the inclusion of these services was necessary, and this inclusion demonstrates that it was a very assertive, process. And in the second quarter now, we saw a change in the pricing, in the payment term conditions. So we've been watching this very carefully.

You can search for sales with two things, margin and terms. So margin, which is what you're always going to work towards to, towards recovering, but by what we saw in the dynamic. And so it's a lot more related to the actual, wholesale operations, because when you expand the terms, the B customers that have working capital, it's really pressured.

And financial conditions, when you stretch out and double the terms for in your B2B customers, or even in, offer three installments, you have an increase in sales that should impact the market as a whole. But in our perspective, it's a strategy we don't expect, because as buying with installments...

So even with a private label, they have a priv—we even have a private label to incentivize the use of the Assaí card. But at this moment, we're not going to shift in the sense in our policy, because this did not actually reflect that much in the stores. But maybe it's more impactful for the distribution wholesale operation that our competitor has.

So if you look at the total in the market when it comes to growth in the second quarter, we're really in line with what the overall market has been seeing in the second semester. Besides the campaign, we have many adjustments we've been working on in the commercial dynamic, negotiation with suppliers, product mixes. Of course, the second quarter was slightly below expectations, but the expectations for the second semester is that it should be a more positive period.

So the company and all of its efforts to, that are necessary to change, to have a more positive second semester we're working on. But of course, this environment we were expecting or projecting in the end of last year for this year, is not at the same level of purchases we expected. The expansion plan is pretty much kept. We haven't, at this moment, had any signs.

It's always a process that we have to be reviewing, because the expansion we have up ahead will be for organic stores. And with this, differently than when we bought the acquisitions, we had to open up as quick as possible since we were already having the lease expenses. But with organic expansions, it's really a matter of decision, and you can decide the level of expansion versus debt, and we always monitor things like that.

But at this moment, we have the 15 stores expected for 2024 and the 20 stores for 2025. So a lot of the projects have already been expanding quite a bit, and that this could be something we're really expecting, but what we see at this moment, but I do hope to have answered your question.

Speaker 14

Thank you, Pamira.

Operator (participant)

So our next question is from Clara Lustosa, the sell-side at Itaú BBA. Clara, we'll open up your mic, so you proceed. Please proceed.

Clara Lustosa (Credit Research)

Thanks for taking my question. So more of a follow-up on the previous question, but I wanted to explore a bit of the same store sales and how that took place in the quarter, the evolution throughout the months, and also maybe taking advantage of the payment term and payment conditions topic.

You mentioned that maybe this is more attractive for the wholesale distribution business, but what was the performance throughout the quarter and the beginning of the third quarter when you think about B2B? Do you think that they're being more attracted by other payment conditions provided by competitors? How have you guys been working on this? I think that's the first question, more of a follow-up.

The second question is really quick. It's like a working capital one. I think you made this very clear in the release that the level of suppliers in the second quarter last year had a one-off effect. But if you could just go over a bit of how we should be looking at this level, maybe closer to 60-65 days. Eventually... Of course, offsetting some of these effects of the fourth quarter.

Belmiro de Figueiredo Gomes (CEO)

Vitor will talk about the dynamics of the working capital that we can see in the second quarter of last year. About the timing dynamic, we can see the consumers always have, as in a different dynamic. As soon as you provide a bit higher payment term, you'll increases purchases.

But right now, the cost of cash, if you increase the level of limits, you could have higher, delinquency rates. So that's something we have to be careful about and monitor and see if there's any, like, major modification. I want to remind you that we don't have the distribution wholesale channel.

We only have the sales for cash-and-carry in the stores. So of course, these two channels, they do have an overlap. 98% of the customers that buy for distribution also buy in the, cash-and-carry stores, so they normally have, like, a product mix. So if you increase the terms, you also have an increase in sales initially.

But if you don't increase this limit, what happens is you'll perform the sales initially, but then you're going to go over, which could lead to delinquency up ahead, besides the cost today of cash. So basically, I think we have to always analyze this and see how this policy will be. But according to our current policy, monitoring how we've been working on the second quarter, even if this could lead to an impact on the sales for B2B.

So of course, you have part of the B2Bs, which are the transformation public, those customers that work in food service, et cetera. But the resellers actually just want to know about payment terms and conditions and pricing, but it's hard to keep loyalty among this kind of customer, the resellers.

Vitor Fagá de Almeida (CFO)

Hi, Clara. Thanks for your question. Just about the working capital now. Yes, we did have a variation upon the working capital in the same period last year, which is a lot more marked or impacted by the difference, and the fact that the working capital in the second quarter last year having beforehand performed in a very atypical manner with an account for suppliers that was relatively high.

When you look at the history, right? Well, we described this, I think, in greater detail on page 7 of our release. But if you look at this from here forward, you see the working capital behavior is going to be very similar to what we've seen in the first quarter this year and what we're seeing in the second quarter. The cash cycle is about 5 days, basically.

So that is what we've seen, and of course, there could be some change, like 1-2 days up or down in supplier stock, et cetera. But when you look at the cycle, the cash cycle, we see this cash cycle that's a lot more similar to what the first and second quarters were.

There's, of course, a seasonality effect in the last quarter of the year, and you have a shift in this parameter considering the high volumes of sales, but this is something that we know about in the industry, and we won't behave very differently.

Speaker 14

Super clear. Thank you. Very clear. Thank you, Vitor Belmiro. Thank you.

Operator (participant)

Our next question is from Daniella Eiger, sell side at XP. Daniella, we'll open up your mic so that you may proceed.

Danniela Eiger (Partner, Head of Equity Research)

Hi, guys. Good morning. Thanks for taking my question. My question is very quick. I think most of the topics were covered already, but it's just a follow-up on the food inflation dynamic point. So Belmiro, you mentioned there's not, like, major changes in the trends, but we've seen, and even today, we saw the data on the inflation surprising downwards, and that was really led by categories that are really relevant, like protein and dairy products. So how do you see this dynamic?

I know you said you won't see too much of a change, but do you think this could be updated or changed considering the data today? But also, what are the types of levers you have for possibly working on better profitability and cash generation in a scenario where you maybe have a food inflation that's still not helping that much when it comes to the same-store sales dynamic? Thank you.

Belmiro de Figueiredo Gomes (CEO)

Thank you, Dani, and thank you for the question. When I talked about the variation here, and this year, from a comparative perspective, looking at the turbulence we had after the pandemic, from an inflation and deflation perspective, there were more sudden movements, but this year it's a lot more stable. So yes, there are variations in the month-to-month comparison, but we have one component we should keep an eye open for, which is the dollar currency issue, because even the proteins and other commodities are impacted by the dollar.

So if you have the American currency higher, which is not the level we had expected or seen, with the change in the consumer environment in the U.S., and so I think we all were kind of wondering if there could be an effect on the food inflation, just as construction materials that are also impacted, right, with the new stores, especially when we're talking about steel.

So there's also a reduction of the inflation, but that's a reduflation, as they call them in Brazil, where we have a reduction of the sizes of packaging, where you wanna have industry keep the same pricing at the same levels, but you have some occasional trends. So it's difficult to set because sometimes in the production reductions, considering climate conditions, we see the droughts and everything.

So it could be that in the second half, we'll have a different reality because of this. We do expect some variations until we reach a higher stability point from a consumer perspective. And even some of the protein and commodities had some variations, but we don't see, like, major variations for the full year. I think that's the main point. Not sure if that's clear.

Danniela Eiger (Partner, Head of Equity Research)

Okay, perfect. Thank you.

Operator (participant)

Our next question comes from Eric Huang, sell-side at Santander. Eric, we'll enable your audio so you may proceed. Please, you may proceed.

Eric Huang (Equity Research Associate)

Hey, good morning, everyone. Thanks for taking our questions. On our side, we have a quick follow-up from Dani's previous question.Dani, you talked about the dynamic of the inflation, and just if you could talk about how you've been looking at the beginning of this third quarter, and as we think about the same-store sales, you do you guys see this as an acceleration or not?

Just so we can have a better feel on how this has been advancing. And then getting back to installments, just to understand more where your partnerships are. Today, you have this partnership with FIC, and I'm not sure if you would like to maybe look into something where you guys can have more control, and even having some kind of a possible support for market changes if, or should there be, a prevailing situation with these payments conditions with installments. I think we were missing part of the answer.

Basically, we have, in retail as a whole, been below expectation, but there are different initiatives in the company to try to offset these effects. Besides what I highlighted, we included another 80 new services, which was ever since April that we're here, which will contribute in the same stores, and other pilot tests also in product categories, depending on each region and store, that also help.

So we're not just, of course, stopped watching the market. We constantly look into finding more resources and taking advantage of this as, we look into the customer flows we have today. I think our greatest heritage is customer loyalty, and of course, we're always searching for ways to, you know, work on this as long as this, of course, doesn't change the business model.

In the third quarter, as we've seen, we're really in line with the second quarter. We don't expect significant variations. And then the payments and installments, as I mentioned, I think we need to separate this discussion, right? And so I don't know if you could maybe add on to this next point here, but what we noticed in this volume of sales in three installments is not coming so much from consumers, right?

So keeping up this will not make too much of a difference, and we have to look at this, that the risk of delinquency could maybe be higher. So we're kind of following in the same direction. We're not going to be changing anything severely in the policies or restructuring a financial company or something.That will not really affect much of the dynamic now, in my opinion. That's it, Belmiro.

Belmiro de Figueiredo Gomes (CEO)

So Eric, our partnership with FIC, our financial services company, provides all of the instruments we need to work with our customers. The Assaí card allows us to perform—to offer purchases in three installments, but it also, in certain items, allows the customer to buy a smaller amount of products with a wholesale price and not a retail price.

So we also have in our stores, just to remind you, the same products have two prices, the retail and the wholesale prices, depending on the volumes the customer buys for each item. So the FIC partnership would allow us to advance as we would like with this issue.

So the issue with the installments, as Belmiro mentioned, is more of a commercial decision to not keep up this way. Well, and I think just to add on here, with the payments and installments, when we look at the numbers in the market, as we've seen in the competitive environment, the consolidated between the distribution, wholesale, and delivery wholesale operations,

as we don't have disclosure or a breakdown of all this, it could give us an impression that you could have a trend change, which is probably more of the wholesale in the sales volume. But by what we've been observing in the market and even the share of measurements, when we look at the comparables, which would be cash and carry, there's not pretty much any kind of effect there. So I don't know if that was clear, but as I saw, this topic had three different questions. I think it's worth mentioning.

Eric Huang (Equity Research Associate)

Yeah, that was very clear. Thank you, Belmiro. Thank you, Vitor.

Operator (participant)

So keeping up with our next question here from Luiz Guanais, the sell side at BTG Pactual. Luiz, we'll open up your mic so you may proceed.

Luiz Felipe Guanais (Equity Research Associate)

Hi, good morning, Belmiro, Vitor, and Gabi. Getting into a bit of the discussion on the productivity of the converted stores, I wanted to understand what the dispersion is like in these stores in different regions you've converted throughout the last two and a half, three years. And if you could also talk about the cannibalization effects in these stores upon the legacy stores at Assaí. Thank you very much.

Belmiro de Figueiredo Gomes (CEO)

Thank you, Luiz. Yeah, obviously, you have this dispersion, which is very much connected to the performance of what Extra had. So we already had this expectation that this would happen throughout the project. This was very close. Of course, there's some variations, right? Because in certain regions during this period, the closings and reopenings, you had some competitors that open up.

But in some stores, the Extra stores that were very strong, continuous, strong Assaí stores, and the ones that are weaker, continue weaker. But it's more about the population potential, income levels, and surrounding areas, and then the actual store itself. There's not much very relevant impact in this. Of course, you have cannibalization, the lower the overlap between Extra and Assaí.

Any company, really, we have presence in 25 states in Brazil, any operation you have will have a cannibalization level, and also because the offering in the environments of these stores is a lot more robust. But part of the stores that did have cannibalization, the stores, when you look at the sales per square meter, that we see an average of in the Assaí performance, which is the best in the sector, about 4,400 BRL per square meter.

We had organic stores that had 7,000, 8,000, so it was already like a bad service for customers. And we mentioned this cannibalization would be about 2 percentage points. In our project, you'll probably remember it's about 3%-4%.

But on the other hand, we preferred to migrate or maybe lose an Assaí customer in an older store with a new Assaí store than, losing them to competitors. So we're opening up in regions where we already had stores, so some level of cannibalization would exist.

Of course, the B2B public, is willing to drive farther off, and some consumers, due to the practicality of the stores or parking or the level of offerings, adjust because a lot of the stores we look at, the best indicator is looking at the sales per square meter. You'll see our stores had a really high level of saturation, so it was slightly above what we expected in the beginning of the project. But it's not a variation that's going to change the fundamentals for the decision towards the project.

When you look at the fundamentals, of course, we're looking at same-store sales, but it cannot be seen as an absolute indicator in the sector like ours, where you keep up with this major expansion and naturally you have this, self-cannibalization effect. If you look at the same stores, it, it would be like an absolute perspective, if we hadn't had any expansion.

But if you look at, from 56 million tickets in the second quarter of 2022 to 77 million tickets now within the second quarter of 2024, and you can see there's an increase of almost 20 million tickets, 7 million per month. So that means almost 13 or 12 million people. That's a huge increase, and such a big amount like this, just compare with the population of certain countries. So of course, you migrate customers from competition and-...

You migrate, like, to an older Assaí store to a newer store. And I think, you need to look at the total growth basis as well. Sometimes the same stores, of course, we know the indicator and the importance it has, but in an expansion process, it can't be the only indicator.

Luiz Felipe Guanais (Equity Research Associate)

Okay, excellent, Belmiro. Thank you so much.

Our next question comes from Felipe Rached, sell side at Goldman Sachs. Felipe, we'll enable your mic so you may proceed.

Felipe Rached (Equity Research Analyst)

Hi, guys. Good morning, Belmiro, Fagá, Gabi. I wanted to talk about the gross margin topic and then, of course, the competition. We talked about competition a lot, of course, regarding the sales, but maybe more towards the gross margins. The converted stores have a margin that's a little higher, so they probably have a positive effect in the mix.

But I wanna know if what the dynamic was like if you exclude the mix effect. So how did the gross margin behave if you consider the same store criteria? And then adding on to this, in similar markets, did you feel competition was more aggressive, or if the difference is really just in the sales level, that was mainly considering the three installments and the dispersion of B2B as well? Thank you.

Belmiro de Figueiredo Gomes (CEO)

Okay. So when you look at the gross margin and you exclude extra, although the extra stores, not all of them have the gross margin, gross profit, that's higher than the company's, right? But we're really focused on the EBITDA margin, balancing this out in the stores, and we have organic stores as well that have gross margins as well.

So, obviously, we have the clusterization of the prices, and the stores don't follow the same prices for each region and need to have differences. But when you look at the same stores and even the same assortment, the margin was very stable. I think part of the scale gains we had with this increase, as I had in the last two years, we're also reinvesting in pricing.

So the company is really keeping an eye open towards investments and competitive advantages. We're looking at the numbers, and you're seeing the total numbers. Customers themselves, we saw this even with the card, because sometimes they are afraid of getting, start taking on debt and paying in three installments, especially when it comes to food. So, of course, the market is competitive, and we're following...

It's keeping up with a really strong level, so we have to continue to innovate and bring new products, new assortments, and searching for the best pricing so we don't have, this kind, so we're not be left behind. But when you look at the gross profit, I think you can see the stability the company has, right? When you see the three-year highlights, you can see what happened, right?

Ever since Extra came into the base and the beginning of the inflation, deflation, and the margin was still quite stable all this time. So at the end of the day, what guides our price policy is our role as a complementary distributor between customers and especially B2Bs. So we search for ways to be the lowest cost channel for industry.

So this makes the margin be an important result to pay the operational costs and be more competitive when it comes from the distribution wholesale and industry itself. Yes, you did answer.

Felipe Rached (Equity Research Analyst)

Thank you so much, Belmiro.

Operator (participant)

Well, moving on, our next question comes from Vinicius Strano, the sell side at UBS. Vinicius, we'll enable your audio so you may proceed. You may proceed, Vinicius.

Vinícius Strano (Director and Lead Research Analyst)

Hey, good morning, Belmiro, Vitor, Gabi. Thanks for your question. Belmiro, what's your perception in regards to the price elasticity for consumers? If we look. This is a topic that people covered already a little bit before, but do you think it makes sense to be a little more aggressive with the price investments and try to win more on the volumes?And what have you noticed as well about the stock levels in B2B customers, and what's your growth perspectives between B2Bs and consumers up ahead?

Belmiro de Figueiredo Gomes (CEO)

Hey, thanks for the question. But when it comes to pricing, of course, the consumer's motivated by price, but that's not the only thing he considers. If you look at any surveys by Nielsen or other surveys, and even our internal surveys demonstrate that more and more the store location, level of service and service level in the store, store environment and store is all part of the decision-making process, right?

And especially good execution in the stores. So when we do one-on-ones with the investors, we invite them to visit a store and a competitor store, especially in downtown regions, so that they can see the level of service.

So the company is still competitive, and by what we've observed at this moment, consumers are looking for products that have maybe a smaller product size, and if they're in a trade-down period, they're also working on a consumption. So reducing margin would have to be a very destructive trend that could be bad for the overall market.

But also, like, a big margin movement would maybe not lead to the expected result, because you also have, from the consumers, a reality where they look at this the wholesales, the cash and carry is already a lower price channel. So normally, the price difference is, like, 12%. We're already a search for low price. If you, if it's twelve, you go to 13% or 14%, we don't know how much of a sales differential this would bring.

If we were too aggressive, we could lose margin, and we're gonna sell pretty much the same amount that we would have been selling with the margins we currently have. So if you look at B2B, we're still very careful. And while you have this scenario with high interest rates and currency, and this perception that we have where the economy is generating a little more jobs and some other indicators, but the overall perception still is that people are very cautious still with their expenses, especially with the last currency increases,

the uncertainty about the interest rates of these customers. If they're really quick to adjust, we don't see, like, major stock up trends. So if we had such, like, a cataclysm in the market that could maybe lead to higher increases, they could invest.But the cost of investing in stock today versus an expectation for gains, we look at and we see that that hasn't really happened in practical terms.

Vinícius Strano (Director and Lead Research Analyst)

Okay, perfect. Thank you, Belmiro.

Operator (participant)

Well, moving on, our next question comes from the line of Bob Ford at Bank of America. Bob, we'll enable your mic so that you may proceed. You may proceed.

Rob Ford (Analyst)

Okay, thank you very much. Good morning, everyone, and thanks for taking my question. Belmiro, how are you looking at the differentiation and competitive advantage? And besides, a greater segmentation and regionalization, are there opportunities from a seasonal perspective for more of a treasure hunt in the stores?

Belmiro de Figueiredo Gomes (CEO)

I don't know if I got this question, but about differentiation, more and more the company has been—when you see, like, when we showed you the campaign, it demonstrates how we're really trying to adapt to each region in Brazil. It's a continent. We have huge differences from one region to another, and that happens in the micro regions. So if you look at São Paulo or Campinas or the Santos region, you can see dynamics that are very different. So, Brazil is almost like you have one coffee brand per city.

So our big bet on standing out is really at the level of, services, the mix of products, and there are many other dynamics as well when it comes to, activation at the stores, and special festivities, and campaigns, and even the types of ads we put in the store to be able to stand out compared to other competitors.

So I think another differential I'll say has, that we've presented in many, areas, is that, among all cash-and-carry, we have the highest diversity in the store formats and network. So we have stores with 2,000 square meters all the way to 10,000. So in order to do this, you shift all of the logistical patterns and supply, and so this makes the company very resistant, and...

Sorry, very consistent with the numbers despite the financial issues and the interest rates, you look at the SG&A and the gross profit, and you see that consistency and continuity is pretty much the biggest milestone besides the cash EBITDA transformation. I hope to have answered.

Rob Ford (Analyst)

Hi, Belmiro, and just to ask you, how have you been thinking about, like, a treasure hunt approach or more like a seasonal approach to your mix? If Bob wants to know if we have more opportunities for, like, treasure hunt items, which are the in-and-out items, right? Where you don't have, like, frequent restock, right? Just like a one-off opportunity.

Belmiro de Figueiredo Gomes (CEO)

So yes, there's many opportunities, which we have we have different projects we're working on, and we have some news to share soon with some great opportunities. We're trying to attract and bring in more resources and having a greater share on their pocket. And of course, we can't make a huge change from a strategic perspective so quickly because we have to preserve cash and also the maturity of the extra stores, and really doing things well done is the biggest focus.

But of course, we have different projects, and as soon as this is a little more mature, we'll be sharing this with you guys. But it's just putting yourself in our place and seeing a company that's gonna start off with 300 stores, with 38 million people visiting it a month, and you see so many opportunities.

So ever since advances in the galleries now in the second quarter, all the way to other projects, with, of course, we have a limit of sales and space in the stores, so now with more solid data soon, we'll be able to bring more information. We don't want to create any false expectations, but of course, there are opportunities for the in and out. Thank you. Sorry, I didn't understand your question initially. Now it's very clear.

Operator (participant)

Thank you. Our next question comes from Tales Granello, analyst at Safra. Tales, we'll enable your mic. You may proceed.

Tales Granello (Equity Research Analyst)

Well, good morning, Belmiro and Fagá and Gabi. I have a quick question here about leverage. I think when we think about 2025, what has the company been seeing as leverage for the end of next year? What are the levels of leverage that would make the company pay interest on, equity or private capital to be able to have the fiscal or tax benefits?

Belmiro de Figueiredo Gomes (CEO)

Hi there, Tales. How's it going? On leverage, the company has been focusing on reducing the level of leverage, and we are looking for, in the midterm, a level of leverage that would be about 2x net debt to EBITDA. But what's most important, this of course, relies on the interest rate, so we have to have a financial expense that can maybe compromise 15 or 20% of our EBITDA, but not more than that. So that's what we've been discussing, and the company is still really focused on deleveraging.

So if we talk about a leverage level for the end of next year, it's still too early because of everything we're seeing in the market and the fact that we still have so much to evolve in from now all the way there. But what we can be more precise about is our leverage by the end of this year, which should be below 3.2x, and our commitment to continue to deleverage the company throughout 2025 and especially about JCP, it's still a little too early to talk about that.

Our focus is deleveraging, and it doesn't make sense to evolve into a discussion on JCP, considering that we're really focused on deleveraging, so. But then from next year onwards, then this discussion can be made in a more effective manner. Okay?

Tales Granello (Equity Research Analyst)

Thank you. Very clear. Thank you.

Operator (participant)

Our next question comes from Nicolas Larrain at JP Morgan. Nicholas, we'll enable your audio, so you may proceed.

Nicolás Larrain (Equity Research Analyst)

Well, good morning, Vitor, Belmiro, and Gabi. Thanks for taking our questions. Actually, most of the topics were already addressed, but I just wanted to maybe ask you something quickly here, looking at the quarter. What was the progression of the same-store sales throughout the quarter? Just to understand how you guys are looking at this, now for the third quarter. Thank you.

Belmiro de Figueiredo Gomes (CEO)

Thank you, Nicholas. Actually, the quarters don't necessarily repeat, because in the second quarter, you had this displacement due to the Easter period, and we had April and May stronger, but in the end of the quarter, it was a little weaker. But July already demonstrates a different sign.

Our estimates for the quarter are that are really in line with the second quarter. And even in our sector, the big changes in the quarter are not so relevant because, of course, that depends on the dynamics each company adopts. When you look at this, you see that there's levels that are very similar when you consider the progression throughout the quarter.

Nicolás Larrain (Equity Research Analyst)

Okay, perfect. Very clear. Thank you, Belmiro.

Operator (participant)

Now we're gonna head to our last question today. This is an English question from Andrew Ruben, analyst at Morgan Stanley. Andrew, we'll enable your audio. You may proceed.

Andrew Ruben (Equity Research Analyst)

Hi. Thanks very much for taking the question. A bit more on mature stores, if I may. Where are we in terms of the planned cannibalization impacts you mentioned? Are they mostly in the past, or should there be some go-forward effects as the converted stores keep maturing? And then, when we think about the normalized mature store growth, should it be at inflation, above inflation, when considering the services and other improvements, or maybe below inflation as the sales further spread out with the new store base? Thanks very much.

Belmiro de Figueiredo Gomes (CEO)

Okay, thank you, Ruben. Of course, we want to be above inflation always. The dynamics we have and the inclusion of new services, the cannibalization, this is... And so we were buying an older Assai, and now we're buying a new Assai. So when you look at this, these 2 million customers, and as we have greater maturity in the stores. I hope to have answered.

Andrew Ruben (Equity Research Analyst)

Thank you.

Operator (participant)

Okay, obrigado. Now, the Q&A session is officially ended, and we would like to pass on the word to the company for the final remarks, for the company.

Belmiro de Figueiredo Gomes (CEO)

I want to thank you all for your participation. I hope to see you on our ship in February 25, where you can shop at our stores and really have this incentive. So we're gonna be heading towards the third and fourth quarters, which are the most important periods in the year.

Operator (participant)

Thank you so much for your participation. The earnings call for the second quarter of 2024 at Assaí is officially ended. The Investor Relations Department is available to answer any possible statements and questions. Thank you all participants, and have a great day.