Sendas Distribuidora Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2023

There are 1 speakers on the call.

Operator

Morning, everyone, and thank you for waiting. Welcome to the earnings call for our Q3 in 'twenty three at Assai atacagisa. I want to highlight that if you do need translation, we have this tool available on our platform. In order to do so, please select We'd like to let you know that this earnings call is being recorded and will be available on the IR website of the company at ir. Assai.com.br, where you can already find the earnings release.

Operator

So during the presentation, All participations will have their mics off. Soon after, we'll begin our Q and A answer session. So to submit questions, please select the Q and A icon at the bottom part of your screen. Write your name, company and language, enter the queue. As you announced, your request to activate your mic will appear on your screen.

Operator

And then you should activate your mic to submit your questions. We also want to highlight that the information in this presentation and possible statements that could be made during the earnings call related to business perspectives, forecasts and operational targets and financial targets at Assai represent beliefs and assumptions of the company's management as well as information currently available. Future statements are not a guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events and thus may depend on circumstances that could not occur. Investors must comprehend that general economic conditions, market conditions and other operational factors may affect the future performance of Assai and lead to results that differ materially from those listed in such future statements.

Operator

Now, we'll pass the floor on to Gabrielle Lau, our Investor Relations Director at Assai. Hello, everyone. Good morning. Thank you for participating in our earnings call for the Q3 of 'twenty three. Today, we have Belmiro Gomez, our CEO Daniela Sabag, our CFO Vladimir de Zanges, our Commercial VP and Anderson Castillo, our Operations VP.

Operator

As normal, Normally, we'll submit the floor to Belmira for his initial remarks. Thank you, Gabi. Good morning, everyone. Ladies and gentlemen, I want to thank you all for your participation during our earnings call for the Q3. The Q3 of 'twenty three had this big highlight, which has been on the news and media, which is the fact that Assai is the company in the food sector that has the greatest presence in Brazilian households.

Operator

We reached 25% of all Brazilian households. So 1 in every 4 households visits an Assai store. This is a result of our value proposition and our expansion plan with a big amount of stores, but especially The business model that within our different projects that we're going to discuss up ahead in the conversions has allowed us to reach this important milestone. Since above all, the company that's in this major expansion project and will attract new customers, providing guarantee that This was determined in our project and it can be achieved. Besides this, we also have the acknowledgment and recognition of cash and carry brand that's most admired in Brazil with an award that was granted by Estadon.

Operator

So before we begin the presentation, I want to thank all of our customers for this acknowledgment and recognition. We can move on to the first page. Then the Q3 is Still in a market scenario that we all know is very challenging with numbers that are very positive from the perspective of sales evolutions, and we reached a gross sales level of BRL18.5 billion. We were able to reach in the last 12 months a total level of over BRL70 1,000,000,000 in revenue. And as a consequence of strong expansion, 52 stores in the last 12 months.

Operator

We have over 100 stores that were opened in the last 36 months. Part of these store openings come from the conversion project with the hypermarkets, which was necessary and required many different adjustments in our business Toro and even in our value proposition, adding on services, changing the assortment and the mix. So this proposal, which is something we had already been developing through previous conversions, organic stores deployed in downtown areas, really what we had already been developing. So I want to thank our team from different areas, almost 80,000 people. I I want to thank them all for the results and numbers achieved in the Q3.

Operator

And in the Q3, we also finished, as we all know, Assai went through some shareholding structure changes with Casino's exit. And in the Q3, we had the last change in our Board. With the exit of the last member that represented Casinos, Mr. Felipe Alarco and Enes Pesana coming in. I want to thank our board as well for the support and all of the work that has been performed within this new phase of the company as a non rolling shareholder company with a true corporation profile.

Operator

So our performance is very strong. We've been advancing our expansion plan. We entered the 3rd quarter with another state in Brazil, which is the state of Espirito Santo, which is the store you can see on the screen. This is a store that was built and complete and Espiritu Santo continue our expansion plan. Moving on to sales, besides the BRL70 1,000,000,000 to BRL18.5 billion In revenue in this Q3, this represents an evolution when it comes to the Q2 of over BRL1 1,000,000,000.

Operator

So we have a very strong base That is a bit complicated compared to last year because we started opening these extra stores at around August last year. So you have growth rates that are going to be adjusted over time. But we kind of call your attention to look at the total growth rates and also look at the growth rates in the sequential evolution throughout the quarters in 2023. Within the Q3, I think even with the amount of stores, as we had mentioned, an important achievement that the company reached the highest level of EBITDA margins in the year. And we're bringing this EBITDA margin in both views.

Operator

Although the IFRS standards mentioned that we should highlight this, we also believe that the pre IFRS vision reflect the company's numbers better and the analysis of the analysts. And so we're also delivering an EBITDA margin of 5.4% in the pre IFRS vision, which is the same margin that we considered in the previous year before beginning of this process. And when we consider the amount of stores opened in the period, the pre expiration costs and a lot of the stores that are still ramping up and other costs we have in the Chintelle store is more productive in our view with positive numbers. So the same stores in the quarter have a series of different effects. The main point is that we're experiencing a moment Of deflation in food prices, some categories that are very important in the food market And some of them have a price progression as well.

Operator

And so, as a products of milk, as well as other commodities as beans and other categories. And so these are more connected to agricultural factors and external factors as well. But at the moment, when you have deflation that's concentrated into different categories, then normally these movements consider 1 or 2 categories. But then at this moment, we have at least 5 categories that are really important with deflation. And this kind of changes the dynamic of the business, especially in the individual legal entity public because When there's a drop in prices, they're a little more careful in their volumes and the amount of stock.

Operator

And this, of course, impacts the same stores, which is negative by 0.9. There's also an impact besides the deflation, which is the group of stores that considers a bit of the cannibalization in this project with the amount of almost 100 stores and also the conversions at Extra. At a moment where we closed extra, we had some benefits in the amount of stores in last year. And so there was already a forecast within the beginning of the project that we would have some cannibalization compared to the base in 2021 and also throughout 'twenty two at the period where Extra! Was closed down.

Operator

And now these stores naturally, as they as we open these stores at Extra, we also have an impact in same stores, which also leads to an impact When we consider the numbers in 2023 2022. So a big highlight is expansion, which allowed the company, even with deflation, negative price points could advance in the $3,000,000,000 in revenue, leading to a growth of 22%. So this growth comes supported by an increase in the amount of tickets and customers. We have 15,000,000 tickets additionally in this Q3 compared to last year. And When we consider the regularity of the purchases that customers perform at Cash and Carry, this shows the size of the dimension of the new customers that we've been able to attract into these new stores.

Operator

And so is what's going to make us the company that's most present in Brazilian households. And so even with this big amount of stores, this project is still underway, and we were able to keep a gross margin that's very stable compared to last year, demonstrating that our business model, whether the food sector and also the value proposition of Assai is extremely resilient and resistant to all of this. And Considering the very strong level of stability, even with all of the changes and challenging economic scenario and even going through a very intense cycle of store openings, We're able to reach the highest level of EBITDA margin of 7.1. And as I mentioned, stability of 5.2 5.4, sorry, in the pre IFRS vision compared to the period before the beginning of the IFRS. The net income is something that Dani will highlight up ahead, but of course, there's an impact in the investment levels The company performed on the cost of the carryover in this debt.

Operator

And so we're going to end with a BRL185 1,000,000 in the quarter. An important highlight in our vision is that cash generation. Historically Assai has grown, generates on cash. And we're going to Talk about this up ahead as well about our cash generation that reaches $4,900,000,000 in the last 12 months. Most of the biggest investments we performed in growth An expansion, you can advance now, is really supported by the strong cash generation, which is a traditional When we look at this today and Danny will give you the overview on the debt in the company, when we look at even our current debt level, most of them most of it comes from the split process of GPA.

Operator

And what we want to highlight here is that the company is probably performing one of the biggest projects in the food sector, which is the acquisition of the commercial spots at Extra. And so when you add all of this to our organic expansion, this is part of our growth and our expansion that the company has been mentioning in the market. And so when we look at this overall period, we're bringing in a vision from the end of 2020 until the end of Q3. The end of 2020, we had a company with revenue of BRL39 1,000,000,000 and 184 stores under operation. And so at the end of September 'twenty three, we have a company And we still consider this is not stabilized because all of the benefits of the store openings and other conversions and also maturity ramp.

Operator

And so the company was capable of going from BRL39 billion to BRL70 billion, which is an add of BRL31 1,000,000,000 in revenue. And just this additional revenue would all be the 3rd player in the food in the Brazilian food sector. So in order to do this, we had to perform investments plus cash generation is really our important lever. We generated BRL9.4 billion in this period And this supported our investments in store conversions, organic expansion from 6.8%, part of this payments of the acquisition of the commercial spots as well. And our CapEx also for maintenance is relatively stable.

Operator

So about $800,000,000 that was invested in this period. It's not only the maintenance of the stores, but also some other areas and expansion. And so the company distributed $400,000,000 in dividends in this period. But we had a cost of debt, which is above what we mentioned, especially when we had the acquisition project for the hypermarkets. There was another expectation about Saliq.

Operator

But even so, with these BRL3.3 billion, we were able to have this variation in the cash flow of BRL4.6 highlighting the 9.4%. And this was important to support all of the investments the company performed at this during this period. So within these processes and the expansion that had been done. Assai was a company that had 14 stores only when GPA purchased this in 2028 or 2010, and the company has been generating cash and growing, but there was also a need to perform a movement that would be stronger with the acquisition of the hypermarkets. You can advance to the next slide.

Operator

And this movement is not only related to take you on the same model to a new region, but it's also related to modifying the cash and carry model, which is the channel with the biggest penetration in Brazilian households. Cash and carry today is a sector that really has the biggest volume of sales. And within the sector, We have the objective of always standing out and differentiating our operations, innovating. So the conversion project with the hypermarkets is not only about taking more of the same. We had already developed some important new projects and new stores and organic stores with a model that could allow us to enter the downtown areas in the cities and also work with a different target audience, a different income level and make B2B customers that are especially in the food service sector could have a quicker option for supplying their operations.

Operator

Everyone knows about the difficulties and logistic challenges in big metropolitan centers in Brazil and the cost of logistics in Brazil is so high that makes it difficult for the industry to perform during their deliveries. And so to be able to enter these new opportunities, we bought these spots that increased the level of leverage in the company. But when it comes to It's probably one of the most challenging projects, and we were converting to hypermarkets for the cash and carry operations. But I also believe that at this moment, as we formed this project with all of the different entities participating, we can really see a change and a shift in behavior and how the Brazilian family supply their homes and businesses as well. So we know about the importance of this project and this project has been on a growing maturity curve.

Operator

We highlighted this in our shareholding base with potential investors, analysts about the company's expectations to triple the amount of sales. This multiple in sales reached in the Q3 2.7 times, even with the stores still on average 10 months of operation only. And so we still have a ramp up and maturity that needs to be captured, adjusted according to each market and each store reality. These stores already deliver a gross revenue of 13% above average in the history of the company. And when we look at the 47 stores that were opened in 'twenty two, The EBITDA margin in our pre IFRS vision already delivers a historical level in the company of 5.4, which is still strong with this ramp up to capture.

Operator

So why is this vision as a pre IFRS vision? Well, because of the dynamic of the behavior in the Li, which is different than what we had, where most of this was prospecting the spots, detecting and building the new locations. And so with this margin, we already go for 7%. The It's around the right path and that the customers came in, gave back and we for the return on capital, we have to that in the project, we have to guarantee that the customers like the value proposition and also come back and give back to one of the Assai stores, right? So that's the return on invested capital as well.

Operator

And so here, we have both views on the pre and post IFRS because you have this dynamic with different aspects. But in our vision, both of the EBITDA margins Even in the space And the adjusted EBITDA, It's still not what we would imagine in a mature store network because there's many stores that are still in this maintenance phase. And I also want to highlight the discipline with our expense control because at the end of the day, we have Deflation in the top line for the same volumes was negative pricing and a lot of the expense lines still follow an inflation level with the payroll and a series of other expenses. There's a lot of discipline among the team to keep these levels of EBITDA and really thank Everyone for the efforts in the operational areas that have been very careful with this, keeping the operational costs so that we could deliver the EBITDA level that we had seen in the Q3 in the pre and post vision. So this is a bit lower than what we expected, but considering the amount of stores, we consider this to be very positive as an evolution.

Operator

We can move on. And here, I want to move on to Dani. We also mentioned The aspects on the company's obligations, adjustments in the debt, considering this transition as well where the company stops being just a subsidiary of the controller, but also a true corporation. And so, Tani, the floor is yours. Thank you, Baumido.

Operator

Thank you, everyone. Good morning. And And now we're going to talk about the financial results in the quarter. And this is a result that added up to about BRL 737,000,000. It's an increase of very significant, 77% impacting the company's results and an increment of almost BRL300 1,000,000.

Operator

So when we talk about this blue part here in this bar and We mentioned the financial expenses coming from the cost of the net debt. We have a level of BRL506 1,000,000, an increase of 61% compared to the previous year, and it represents 3% of our net sales. So it's a super important level. And these results in the period were, of course, impacted by the high level of interest, but also considering the higher level of debt because we have almost BRL 2,000,000,000 additional in the debt. And so this will also mention the we even talked about this in the second quarter where we had an issuance of a CRI.

Operator

We had already announced this in the Q3. And we completed this fundraising initiative of €1,100,000,000 with a CDI plus €26,000,000 at a cost of the debt, which is actually lower than the cost in the company. And so in this quarter, we also have an accounting effect. It's important to mention that we should mention the reduction of the capitalized interest. So at this quarter, the effect is only BRL 53,000,000 and this is because last year, this impact was BRL 247,000,000.

Operator

And so this is, of course, interconnected to the advances in the expansion project. So Now we're already at the final phase and we have these values dropping more and more. Now moving on to the second part of our slide as we talk about cash generation. The Omidyru has already mentioned the highlight here, but in the last 12 months, the cash generation in the company has reached almost $5,000,000,000 So very relevant growth of $1,700,000,000 year over year. And this comes from greater EBITDA in the company from the pre IFRS vision and also has been growing over $373,000,000 and of course, due to better cash working capital management.

Operator

So this strong cash generation, When you look at this, well, it was essential For this important level of investments, and so We have a total of BRL4.7 billion. So this is basically paying off the level of investments. And on the other hand, we have the negative effect considering the level of the interest that increased the cost of the net debt. So the variation we see here on this net debt going from BRL 7,300,000,000 to BRL 8,600,000,000 is basically due to the effect of the interest rate that negatively affected our debt. And so this is why when we consider this concept, We reached 2.7 times the EBITDA.

Operator

And in this quarter, we bring in this new concept where we add up all of the receivables and the balance payable from this acquisition. And in this concept, we can reach 4.4x EBITDA. So that's where we see this reduction before we move on to the next slide where we're going to be discussing this concept. And an important highlight with transition of this 4.4x EBITDA, which in the previous year was 0.2x net debt to EBITDA. So we can move on to the next slide.

Operator

And here, we can see This vision of the leverage, as you can all see and you're used to seeing us present these 8,600,000,000 We also go back to the non discounted receivables, and we can also add up the total receivables And the total balance and this concept, as I mentioned previously, reached 4.4x the EBITDA. And this reduction Chen is already considering the previous year of 0.2. We can bring the view and the history of this leverage. And so we can also bring these elements. We can also mention the seasonality of the Q4 in 'twenty two, and we see this level that is very similar ever since the Q2 of 'twenty two.

Operator

So the Q4, of course, has a seasonality and the other quarters as well seem to be very similar. And then in the Q4 sorry, in the Q3 of 2023, these 4.4 are very comparable to the 467 in the Q3 of 2022. So I think here, it's worth mentioning that we are mentioning the closing of the conversion project. And Here we see growing cash generation, which we've highlighted a lot. So the cash generation grew about 54%, $1,700,000,000 And this is really what's going to add speed to the deleveraging of the company at a speed, at an even greater speed than this drop of 0.2 that we noticed here in the last 12 months.

Operator

So of course, along with this, we have lower cost of debt coming from the interest and all of this leads to greater deleveraging, which we will, of course, notice in the next quarters. So I think these are the main highlights on the slide. And now we'll pass the floor back to Belmiro for his comments on profit and of course, the final slides. Right, Omido? Yes.

Operator

Thanks for that. Well, the net income, of course, is impacted by the carryover cost of the debt. But in our vision, the project was Very significant and determining factor, although there are some impacts now. At this moment, we are building this company when it comes to the value proposition and customers. And it's a company that's growing very strongly.

Operator

So in the quarter, one of the biggest impact is not in the sales of performance, but this still of course affects higher level of debt among consumers and interest rates that are higher than what we expected of course in the beginning of the project. But it also demonstrates that the resilience of our business model, even with all of these factors, even with high interest, even deflation And even with the environment for purchases still being a little cautious on behalf of the consumers, the company continues to deliver positive results. And in this Q3, we have an impact of renegotiation that we had to perform with the controllers exit. We Two topics that are very relevant and they're the only two topics that were pending. We have no other aspects related to Casino.

Operator

But with Casino stopping to be the Shareholder of the company, we had to redo the contracts for a batch of stores since they had a clause that considered the contracts would be canceled if the controller left and there is an impact marginally in the Q3 with the waivers achieved with the financial institutions that also considered changes in the contracts if the controllers left. So as we noticed, considering that the conversion project is a project that has a beginning, middle and end. So this project is now reaching its final phase. And we still have 2 payments that are very relevant, 1 hour in the Q4 and another one to be made In the Q1 of 'twenty four, in regards to the commercial spots from extra stores, but we still have a big amount of stores to open. We have opened our another conversion in Rio, which in October, we also opened up a store in Foz su, an organic store and another one in San Luis Maranhao as well as another store in Fortaleza and Serra.

Operator

And now we're finishing a total of 19 stores opened this year. Now we still have a challenge in the Q4. We have some expenses even from an administrative front that also reflect a bit of preparation for the opening of another 11 or 12 units we should be opening in the Q4. So that we can complete that Conversion project for the hypermarkets that from then on the company will of course have cash generation from the current store network, the growing The amount of new units and along with the expectations for interest rates should definitely lead to a readjustment in the levels of investments, which will help us deleverage and reach the levels of net income that the company had before. Now when it comes from an operational aspect, that's pretty much it.

Operator

And I want to pass on, I want to move on to the next slide where we have some important ESG advances. Assai is a big reference for investors and an important benchmark when you look If you can talk to our IR team and our sustainability department, you'll see how much we've advanced in this. And now in the Q3, the company is the only company in food retail that's within the B3 indicator called the IG Virus with over 25 percent of women in leadership positions and 43% of leadership positions occupied by black people. So This is a constant initiative and it's an ongoing effort when it comes to inclusion, but the company is very proud of being promoting within our social responsibility pillar these different aspects and not only consider our employees, but also considering the fact that we're a company with the biggest presence in Brazilian households with diversity in our stores with employees and customers, which It really helps us achieve this social responsibility. So we have different highlights in ESG, but we also have 2 important achievements in the Assai Institute, where we launched a call for Resparchesi Saldaniet through our institute and through our Mais Escola cart, which is a project we started in Santare in the Amazon region.

Operator

Now in the Q3, that will benefit over 2,000 families within the Amazon region and in other areas as well with major poverty, with financial resources as well that can be used for food for buying food. So we have important advances also with waste, achieving the gold seal and certification in the Brazilian program and also a reduction of scope 1 and 2 emissions. And of course, if you're interested in getting to know more about ESG with greater details, look at our stability report and see how many different initiatives the company has been implementing in this role of social responsibility. I would like to end Before I move on and pass the floor to Gabi, so that we can discuss some Q and A as well. Thank you.

Operator

Okay. Now we can move on to Q and A as we follow on with the queue of questions. Now we'll begin our Q and A session, guys. As your name is announced, a request to open up your mic will appear on your screen. Then you should activate your mic and submit your question.

Operator

As we begin, our first question comes from Dani Ager, our sell side analyst at XP. Dani, we'll open up your mic so that you may proceed. Please? Good morning, Tomiro, Danny, Gabi. Thank you for taking my question.

Operator

I have two questions actually. The first one is more of a perspective mixing the short and midterm, which is I would like you guys to give us a little color on how the dynamic with the evolution of same store Indicators and volumes have behaved in October. And we would mention this This would mention an inflection on the consumer perspective when it comes to deflation that has been pressuring results over time. And also when it comes to the renegotiation of leases and how we can think about the impact and the profitability of the company as a whole, because there's only 28 stores. And by what I understand, we have 10 to 20 bps on pressure.

Operator

And so We just want to know if you would imagine a more relevant impact on the company as a whole. And then the second point is, as you mentioned, the issue with the deleveraging and this expectation to accelerate this after the Q1. You also talked about the readjustments in the level of investments. And I think it's interesting if you could also mention some discussions on this point and what this would be When it comes to the adjustments in the store format and you even talked about the stores that are under construction that are expected for 2024. But I wanted to understand what would be this readjustment and possible levers as well that you're looking at?

Operator

If you consider the scenario with the drop in interest rates, a little more gradual. And that we could imagine, of course, depending on other dynamics in the macro scenario. I think these are the main points. So thank you, Danny. As we move on to this a bit, I think September was a very positive month, we started off with a 49 year campaign, and this was very strong adherence.

Operator

And so what we've seen so far is the same levels in regards to the Q3. So we noticed that there's not a big change in the dynamic When it comes to the perspective of stability and pricing, but you have the same concern with and Consumers also keep their standards of consumption. So what we've seen so far is very similar to what we've seen in the Q3. Of course, there is an expectation when you are a little more positive. When you consider the impacts of the pandemic that would affect some of the purchases as well, There is a bit of an expectation for December, but we want to be a little more cautious and conservative.

Operator

So what we've seen is that consumers are keeping up their levels of Just as B2B customers are also very careful and cautious because they're also pressured when it comes to working capital. So you see pretty much a similar dynamic as a Q3. But the lease with Peninsula Fund was an impact that in this group of 28 stores, when we look at, of These stores are very relevant stores. But when you look at the total base in the company, it's a very marginal impact. There is an impact, but This 10 or 20 is then going to go to 0.2 or something like that.

Operator

So it's not that relevant when you look at the overall numbers in the company and when you look at the future. Now when it comes to investments, there is a drop, which is already going to be natural. We're closing the and ending the major project with the conversion of the hypermarkets, which allows us to get back to the organic projects and some stores in Returns Unifar are already being constructed now. And so throughout the Q4, we should balance this out to understand exactly what the level of investments for 'twenty four will be. But this is a big focus in the company to deleverage as we so we can reduce our debt if interest rates continue to be kept high.

Operator

But even though interest rates continue to be high, I think the main point is really our cash generation capacity that makes the business solid with the cash generation of the legacy stores and also all the new stores really in the pre IFRS EBITDA vision. You can see that historically, our conversion rate from EBITDA to cash is 100%. So we've always been able to convert the EBITDA into cash. And if you look at our balance of accounts of taxes To monetize, these are dropping as well. So the new stores also come in with strong cash generation, which is above all the strength that will allow us to deleverage the company.

Operator

I hope that answered your question. Yes, you did answer. Thank you so much, Bamido. Thank you. Now moving on.

Operator

Our next question comes from Maria Clara Infantosi, the sales side analyst at Itau. Maria, we'll open up your mic. You may proceed. Hi, Bommido. Hi, everyone.

Operator

Thank you for taking my question. On our side here at Itau, we wanted to understand how your mindset is in regards to the perspectives for growth in the revenue in 2024. On one side, the food deflation should prevail. In the 1st semester of the year, the competitive environment is a little more complex. But On the other hand, the conversions are doing really well and the ramp up has been evolving quarter over quarter with the uplift in sales.

Operator

And I wanted to understand How we could consider the buildup of the productivity versus the daily expansion? And I even want to mention the issue with the organic expansion as well. If you guys can mention a bit of the Main locations that you're looking at when it comes to opening up this new stay in Ipirito Santo as well? Okay. Thank you, Maria Clara.

Operator

And about the organic expansion, as you mentioned, we already have some stores that are under construction. We also will have some completion in this expansion pipe for the next year. We already have some regions in certain areas that where you see Assai is divided into many different regions. We have construction projects in the north, in the northeast, in the southeast as well. We just opened up an initiative in the south in Fozu Grosso.

Operator

So there's not a specific region, but even in areas we're already present, there are many different cities where, for example, in Rio, we have one of our biggest market shares. And in Angra dos Reis, it's a very big city where we don't even have any store yet in that region and other areas in Sao Paulo like cities like Sao Jose de Rio Preto where we're starting our first store there. So we still intend to enter cities that have 300,000 to 400,000 inhabitants that are very relevant, but don't have an Assai store yet. So when it comes to revenue for 'twenty four, of course, this is going to depend on how many of these stores And organic stores, we're going to be able to add to our base in 'twenty four. I think in 2024, the deflation scenario and the prices in our perspective, I think Vlany can even talk about this a little more, right?

Operator

Do you expect that we're going to have prices dropping more or are we already at a plateau? I'll ask Vlany to pop in right now. Maria Clade. Good morning, everyone. Also, I think just about the inflation aspect, our expectation really is we have when we take a look at commodities, for example, these variations in prices are really a perfect combination really as we've seen in the last quarter that we ended.

Operator

So we had, at the same time, many different commodities dropping in pricing. So we don't expect or imagine that this is going to happen with the price reduction up ahead, but It's really volatile because now we have currency issues. We also have issues with the war, petroleum, oil costs and even the impacts in the petroleum costs. So there are many other factors. And sometimes it's a little difficult to expect or foresee what will happen.

Operator

But what we've monitored throughout the quarters and months is the normalization of the average price When you see the overall basket and there are pressure, soy going up or going back at 29%, and you have sugar going up a bit as well. And so there's a bit of a balance, but we don't see that much room for big peaks in prices, there's a bigger reduction in pricing of commodities. But on the other hand, we've seen an impact in all of the rest the assortment where you leave dairy and you see the basic commodities with a small inflation that comes along, but we see more stability in the average price of sales up ahead. So we're not seeing maybe well, there could be maybe some factor related to the war that's happening in Ukraine and the Middle East that could maybe even impact the commodity prices. But this is very uncertain and it's difficult to foresee anything in the sense when it comes to inflation.

Operator

So it's a topic that's very complex. But we had imagined that at this point in time, we wouldn't have the impact of the deflation. And so we were expecting the deflation in the first quarter in the 1st semester, but now it happened in the 2nd semester. But we do imagine a price stability from now on. It's clear that we still haven't closed the guidance for the expansion in 2024.

Operator

But now how many openings are you expecting for this year? In 2023, it's going to be about 30 stores. And then 2024, we're going to expect the Q4. We're going to wait on this and see. We have like 7 under construction, but we're going to wait for the Q4 to closed this number, but of course, we have the opening of new organic stores, many different initiatives and work that needs to be done with the approvals and the licenses.

Operator

The company has a Big amount of projects in the land bank, but we have to balance deleveraging as well and the amount of stores that are going to be open. And we're going to have to wait for the Q4 to be able to disclose the definite number of new stores. Okay. Thank you. Well, moving on.

Operator

The next question is from Vinicius Strano, the sell side analyst at UBS. Vinicius, we'll open up your mics. You may proceed. You may proceed, Vinicius, please. Good morning, everyone, and thank you for taking my question.

Operator

Here on the dynamic of working capital, could you guys talk about what you're seeing when it comes to levers that could improve our working capital ahead? And also, if you could talk about what would be a more normalized timing for stocks and suppliers, I think that would be great. And another point also would be if you could discuss the mix between individual and legal entity customers in the converted stores at Exchar and how this mix is going to evolve up ahead? And also when it comes to the converted stores, if you could discuss a bit of the gross margin in this store network of 47 stores you mentioned. Thank you.

Operator

Thank you, Vinicius. And I think I'm going to start from backwards forward. And I'm going to talk about Aspen may talk about the working capital level stock, supplier level and what the expectation is from now on. So for the converted stores, they already have a gross margin that's greater and we had already expected this. We highlighted this in the beginning of the project.

Operator

When you consider the product mix and the purchase power, it's a little different. But they do work with a margin that's higher than what we expected. So then, of course, you have greater participation from the consumers in these stores, but their stores are still ramping up. So we do expect to continue to advance with them a little longer to see what the level of stability will be in certain stores. And then of course, you have this aspect with A lot of the stores that are not standard or homogeneous, there are some stores in regions that we already expected that are more downtown or central regions have higher adherence, especially for BTD customers and also utilizes that have stores that are very close to our then use our store for supplying their own stores.

Operator

So we know how it's become more complex and expensive to perform door to door distribution. And I think it's valid. You probably saw some of the changes in the laws and rules in Brazil for transportation that will make logistics even more expensive, which is the new driver law. That will make it even more difficult for the distribution door to door by industries and delivery wholesalers. And so, especially in the downtown areas, which has made this store format and this model really be a quick supply format for this B2B customer.

Operator

They don't have to have like a minimum purchase. They can buy the quantity they need and they have access to different brands, qualities and types of products, especially for perishable goods, which allows us to have strong adherence. But of course, they do we did, of course, expect that there would be a bigger participation from end customers. And there's a ramp up process to attract consuming customers and also B2B customers. And I'll pass the floor on to Lame just so he can talk about the working capital aspects as well.

Operator

Thank Thank you, Birista. About the working capital, if you notice, this is even on our release in the 3rd Q4 last year, we were operating with 8 or 9 days more in our stock due to the amount of stores and the stock structure. As we were able to balance this out a bit more, The amount of stores has been a lot smaller than what we've seen last year. And if you look at this reduced by 8 or 9 days of working capital sorry, then our stock. And this has been kept at about 44, 45.

Operator

And so this is the trend from now on. So we want to keep the stock levels at these levels, but also the Negotiations for deadlines, which take place monthly and quarterly as well. So we can keep a very healthy relationship Fortes and also a strong discipline in our working capital. And so When it comes to the expansion, we won't see many variations. And so we should imagine a trend in this sense and this should be expanded as well now in the Q4 with the expansion in the level of stock.

Operator

And this is a normalization in the amount of days as well that we should be looking at quarter over quarter without too much of a variation. So the team has been able to work on this with a commercial logistics and operation area with a lot of discipline and a rigorous approach towards stock levels without harming sales, with rupture levels at normal levels and within what we expect for the company. And so the stock issue is pretty much stable in Assai. I hope that answers your question. That's fine.

Operator

Thank you, Vladimir. Thank you, Vamil. Thank you. So moving on now, the next quarter is from Joseph Giordano, the sell side analyst at JPMorgan. Joseph, we'll open up your mics.

Operator

You may proceed. You can proceed, Joseph. Hi, there. Good morning, everyone. Good morning, Vamil, Dani and Zami.

Operator

Thanks, everyone. Thanks for taking my question. I want to explore this issue with the CapEx a bit. When it comes to deleveraging the company, what would be a level CapEx level for these new 30 stores? I know that This is our guidance that's not that strong yet in these 30 stores.

Operator

But what would be a CapEx level that the company believes is reasonable for 2024. And then going back a bit to the working capital issue, I would like to explore a bit of what is possible to improve even in this initiative. Thank you, Joseph. I think maybe there was a misinterpretation because when we talked about 30 stores, we're talking about the 30 stores in 2023, which considers Conversions and organic stores for 2024, we have 7 stores that are under construction and we're still going to define during the Q4 what will be the amount of stores and then of course the amount of CapEx we'll consider. But for 2024, it wouldn't be 30 stores.

Operator

We were considering minimum of 20 units or 25 units at most. But throughout the Q4, we're going to review this. I think when we talked about 30 stores, we're talking about 2023. We have 7 for 2024 that are already under construction that we need to open, especially in remote locations, Manaus, Macapa and other regions that are very far that are under construction already. But the total amount for 'twenty four will be defined now throughout the Q4.

Operator

As we look at expansion and we look at the spots and locations that have the best returns on investments, but of course also considering the company's level of leverage. And from a working capital perspective, as we mentioned, we've already performed many improvements. Of course, we're always searching for bigger changes and improvements, working capital, improvement of terms with our suppliers. But at this moment, we're just presenting to the Market that there will be stability in our working capital at the levels we've seen in the Q3. And if I could also contribute, I think it's important to say that we have a big concern, to say that we have a big concern, Joseph, with, of course, you consider you want to Try and increase in the terms with Sibraiso that could interfere in your competitive advantage, reduce stocks and Even harm sales maybe depending.

Operator

So we try to find a balance between ratio between the stock and terms. And if we can keep this balance point, we're going to be in a very healthy position in the company from now on. So it's more about maintenance than Gaining any differences. Of course, we always want to improve our conditions and our terms with our ratio of days and stock, but I think we're at a level that's very healthy right now. Okay, perfect.

Operator

Thank you so much. Thank you. Moving on, our next question is from Eric Huanggi, the self ad analyst at Santander. Eric will open up your audio so you can begin. Please you may proceed.

Operator

Good morning, everyone, and thank you for taking our questions. So on our side, I think we have two questions that are pretty much in line. One, you mentioned you entered the state of Espaes de Santos. So it's more about understanding what the level of receptivity is in the state, the competitive environment and also understand potential expansion for more stores there and how you're looking at this environment. And on the other hand, when you consider organic expansions, we want to understand what we can expect when it comes to the sales levels in these stores.

Operator

Are they going to be more in line with what we had seen in the legacy stores or maybe more in line with the expansion stores? I think we want to understand a bit more about the economics in this organic expansion stores. Thank you so much. Thank you, Eric. Well, it's Brigitte Santo.

Operator

We should have already entered this market a long time ago, but we opened our first store in Serra Lupasagua. And I want to talk about this a bit, the receptivity at Serra has been and also what we've been doing in Espiritu Santo, and then we'll get back on discussing the level of sales. Hi, there. I think Espirito Santo was very positive. We were very anxious to enter the business the community there, customers welcomed us very well there.

Operator

And the value proposition there for our store, whether When it comes to services, level of service, the mix of products, which is something we're very careful about, we always talk about this issue with the regionality. To give you an idea, We started a unit there where we added about 1500 new SKUs registered as we always want to look at the regional population characteristics. So we want to reach the region delivering a value proposition that is really unique, working with customers that have a better level of service, but also providing local products. And this is always very positive. So the store has been very successful.

Operator

We have already been working in this process for organic expansion. Next year, we'll have another store in Quintaria as well. That's all we're already starting to build now. So this is going to strengthen our brand presence a lot more. And when we look at Ezeja, this region is Pizza Santa.

Operator

I think the store opening was fantastic. We got it right. We had a great start. The market Understood Assai's entrance as a very strong differential. And now we're not just the Assai from the Southeast, but And Assai from Isidis to San, so that's strong.

Operator

With the 2nd story, we thought that it's going to strengthen our position even more. And also this regionalized perspective, which was very important with the local brand, local culture, local team. And so This caution, which has really been important, and so this has been a very careful process we've been doing. So We also had a complementary point, which is, Of course, we can't mention all of the stores. We have some organic projects as well in downtown regions that are also connected to the conversion stores as So we have a conversion spot from a former macro store in Via Maria that has high expectations.

Operator

It's in the northern region of Sao Paulo and some other organic stores. But overall, organic stores should lead to we have More revenue expected from the legacy stores, maybe one or another exceptions in the more downtown regions that could have exceptional levels of revenue? Atacajes. So moving on, our next question is from Alejandra Lamioco, Good morning and thank you for taking our question. When we get back to the point on the openings and When we talk about more of a long term, we want to understand how you're considering expansion when it comes to stores and also When it comes to markets where there are not other cash and carry formats that are not necessarily Assai brands, but compared to other locations where you already operate with at least one brand, especially when it comes to the city live volume, I think that would be interesting to look at.

Operator

Thanks. Okay. Thank you, Alexandre. I think at the end of the day, There's nowhere in Brazil where there's no cash and carry brand present. So of course, there's always some kind of competition level that's pretty high in most cases.

Operator

And we see a big amount of players operating in the sector in Brazil. So in our expansion projects, we have regions that are very significant such as San Preto or other places where in the state of Sao Paulo and Rio where we don't even have stores in yet. And Another example is Foz de Guacu. We just opened a store in the southern region. We already have stores in Parana, but our closest store is Maringa that's 400 kilometers away.

Operator

So the company has been continuing to work with a big amount of stores in cities that are actually big cities with 300,000 inhabitants sometimes, we don't even have a store yet, where we have a city with 600,000 or 700,000 inhabitants and we only have 1 single store. So within this pipeline of organic stores, we've been looking at cost of deployment, returns on investments, etcetera, and defined which are the priority projects. So it's difficult to balance this out because we can't say, look, it's going to be this region or this city. But just as the store networks, the new stores, we always also We consider it's pretty fragmented and spread around all regions in Brazil. Of course, we have a bigger focus in becoming very established in states we're already in and in big cities where we're not present in yet, such as Sao Jose and Angulo de Teijes, which would be good examples.

Operator

I hope I answered your question. Thank you, Alexandre. Okay, yes, that's perfect, Omido. Thank you so much. So moving on, the next question is from Irma Skaerts, a sell side analyst at Goldman Sachs.

Operator

Irma, we'll open up your mic so you can proceed. You may proceed, please. Good afternoon. Actually, good morning. And I have a question and a follow-up here From Joseph's question about CapEx.

Operator

Theoretically, I understand it's only 7 stores that you have under construction and we'll So have maybe a definition more specifically on the plan for organic openings. So what's the CapEx level that we should expect Even if just for those 7 stores, I understand it's a very specific store network, it's a little smaller, maybe there's some points out of the curve. But Generally speaking, I think this is one of the main reasons for this question, which is due to the strong inflation in the costs of the stores in the last few years due to many different external factors. And I think it's very important to get some alignment on this and have this kind of clear in the minds of the investors. And from the logistics perspective, do you think that today you already have the necessary infrastructure for DCs and logistical infrastructure for DCs and logistical network you need to continue to support this new batch of store openings?

Operator

Or do you have other projects that you're looking at as well up ahead to expand this capacity, not only for 'twenty four, but for the next 2 or 3 years? Well, I'm going to pass the floor on to Bamir on logistics, and then I'll get back to CapEx. Well Irma, good morning. About our logistics, what we did is, if we look at 2021 2022, considering this movement with the expansion that we had in the acquisition of the commercial spots from hypermarkets. We've already prepared the logistics.

Operator

We performed investments in Pernambuco, Sao Paulo, Rio, Para and in the last 2 years. But what we've been doing with logistics is According to as we grow our operation and the amount of stores are expanded, then we adjust our logistical structure. So to give you an idea, we have a model where the stores operate as a mini DCs. So we have stores that operate 100% directly from the suppliers and industry. So this is a big advantage in our model because it's different than other operations with other retail operations where in supermarkets or hypermarkets where you rely on logistics to be able to operate in our format, we can open up a store anywhere in the country and we don't depend on logistics.

Operator

But as we grow, we'll invest, of course. And We do have some things we're looking at as potential opportunities in the Midwest region, but we're still setting this, nothing to find yet. And as the operation grows, We invest gradually. So the investments are very low. CapEx is normally very low because we don't We normally lease DCs, and we don't have to perform major capital investments in our logistical operation.

Operator

But Well, we look at the operation as it grows in each region and we structure the necessary support. But for 2024, we should have some kind of investment in the Midwest region, where we grew a lot and we didn't have any major investments there. We have a small DC in Goiania, we'll maybe expanded a bit in that region, but we still don't have anything else. We're still performing the studies. Just as we haven't defined the amount of stores, we also haven't defined the investments for logistics in 2024 and 'twenty five.

Operator

But we will have this a little more up ahead. And so the logistics grows as the operation grows. So to give you an idea, what makes us very comfortable with all of this is the fact that we can grow and open up stores anywhere in the country without depending on the logistical structure. So this is the biggest strong point in our business. So I would like to have answered your question.

Operator

So there was an inflation in the construction work. The peak was probably last year and the beginning of this year, but we did see some materials, especially like steel and cement, keeping up at high levels. But today, when you look at the cost of square meters for an organic store compared to the past, there's already a drop of about 8% compared to what this would be in the same period last year. So it's not like the prices are cheap. Of course, they went up just Food items also went up during the pandemic period.

Operator

But from the 7 that are underway, they have a total investment BRL450 1,000,000 to BRL500 1,000,000. And this, of course, is not coming into the CapEx of 2024. But we have to mention, of course, the maintenance costs and we have to consider the services we're working on, but there's also a carryover of the stores in this that's going to drop for drop in 2024. So we'll see the amount of stores and this will probably mention the amount of investments the company will form in 2024. Okay.

Operator

Thank you. Now moving on to our next question is from Jean Soares, a sell side analyst at Citi. Two questions two points here on my side. First, Filmedo, I feel like your discourse is a little more cautious on store openings for next year. I could be wrong in my interpretation, but what if I'm right, what would be keeping you from having a more clear perspective on the store openings for next year.

Operator

Is this related to some kind of restriction in the balance sheet where our process is a little more difficult to map out store openings. Anyways, if I'm right here, what could be in some way harming or hindering your visibility. And the second point is really quick. It's just when you look at the G and A, There's a very interesting control level. In the last quarter, it dropped 8% year over year.

Operator

This year, it's flat. So can we imagine that this quarter, the BRL200 1,000,000 will be could be annualized at a stable level looking at the SG and A up ahead. Well, when you look at the I think the SG and A is something we've been able to keep controlled when you look at the operational level. This has, of course, had the impact of the stores and conversions. In the administrative front, when you there's a drop when you look at the proportional results compared to the sales, of course, with the exit of the controller, costs with the board and the cost sharing agreements.

Operator

But of course, the company always has the need to enter new areas and start new projects. But of course, we do expect a dilution in administrative costs. And this is an important point because as we grow, Administrative costs are not going to keep up the same level of growth in the sales. But then for 2024, our caution is just because we're going to define this during the Q4, Considering that the company now is at this true corporation phase, we're being a little more cautious with how we present information in a more precise manner. So the fact is really that we haven't made this decision yet.

Operator

So we have many projects in our land bank, but what we're looking at in 2024 is really finding a balance point between expansion and leverage. So when you have uncertainty in the interest rates and the drops of the interest rates, that also generates uncertainties about investments and expansion. So how are we accelerating this? Well, one of the levers is holding on investments. So within the scenario of interest rates, We see the interest rates, while we have a very certain interest rate drop, then we could be a little more optimistic.

Operator

But the investments in Expansions are really a decision that depend on us. So the major costs come from when we decide to perform a construction project. Once we start a project, we have to Keep it up till the end. So And then we just have to define what's going to be the target of the amount of stores for the next year. So about competition, We've seen some markets that became a lot more saturated in some way, and we even saw that some players changed their expansion plans.

Operator

So this is not in any way influencing your decision, is it? No, I think the biggest decision really is the level of leverage, Take advantage of your pronounced saturation. If you can imagine that cash and carries are all the same, then you're going to say, oh, we're saturated, but that's not the case. We don't have onefour of the stores in Brazil. We have about 8% of these stores, and we have onefour penetration among the Brazilian population.

Operator

So There is a big differential when it comes to the proposal advances and of course in a market with a big amount of players. But actually, The main decision point is really the leverage. We also had impact, as Irma mentioned, with the cost of construction that we've been able to also reduce gradually. And we do hope to disclose this number now in the Q4 as well. Okay, perfect.

Operator

Thank you so much, guys. Well, thank you all. We've ended our Q and A session at this point in time. And now we would like to pass the floor back to Belmiro for his final remarks. Well, thank you.

Operator

And I think that, first of all, I just want to thank you all for your participation, those of you who have participated On this call, and I want to thank my team as well since 2023 2022 due to the amount of stores and the new units created. It's been a big challenge involving different areas and departments. When we look up ahead, we see a scenario So that still does not have that much visibility when it comes to changes in purchase powers. But if you separate the fact The general context and scenario, the company has continued to keep up with a stability level. And I think We would even expect to have higher impacts considering the expansion project or the impact and deflation, but company continues to be very resilient, very strong and stable, very predictable when it comes to the sequence perspective.

Operator

And this is The group and the company as a whole, all of its members and employees are working to keep this up. And so we want to continue to advance, gain market share and open new stores, generate job opportunities and then, of course, completing this process, which was, as I mentioned a few times before, was one of the projects that has been most challenging for execution within the Brazilian food sector due to the amount of square meters involved, the galleries and the stores and the stores, the amount of people we had to have working on this. But of course, now we start seeing the results and reaping these fruits and contributions from sales, cash generation perspective. And this allowed the company to be more solid, stronger to face the year 'twenty four, 'twenty five and 'twenty six, 'twenty seven and 'twenty eight. So we always look at the long term.

Operator

Historically, inorganic, so it takes maybe 2, 3, 4, 5 years even to approve the project. And so between the point where we make the decision and actually open up stores. So looking at the long term, when you look at the positive numbers, you can see See that there is a very positive expectation for the company in the mid or long term. So I think these are the main comments. And I want to thank my team as they were with me in this earnings call.

Operator

And I want to thank all of the Board members as well that have really supported and worked hard in this transition phase with all of these different changes that took place with Cazino's exit. But we're really on the right path now to have a company that is a stronger cash generator with a bigger volume sales, conquering more and more households in Brazil. So on my side, that's it. Thank you all. The Assai earnings call for the Q3 of 'twenty three is officially ended.

Operator

The Investor Relations department is available to clarify any questions. Thank you all so much, participants, and have an excellent day.

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Key Takeaways

  • Assaí reached a record 25% household penetration in Brazil, meaning 1 in 4 Brazilian homes visits an Assaí store, driven by rapid store expansion and its cash-and-carry value proposition.
  • In Q3 2023, gross sales hit R$18.5 billion (R$70.1 billion over the last 12 months) with 52 new stores opened in the past year and over 100 added in the last three years, including the conversion of Extra hypermarkets.
  • The company delivered its highest EBITDA margin of the year at 7.1% IFRS (5.4% pre-IFRS), maintaining stable gross margins despite food deflation in at least five key categories that weighed on same-store sales (–0.9%).
  • Assaí generated R$4.9 billion of cash in the last 12 months, ending Q3 with net debt of R$8.6 billion and a 4.4× EBITDA leverage ratio (including acquisition payables), and expects to accelerate deleveraging as new stores mature and interest rates stabilize.
  • On ESG, Assaí is the only food retailer in B3’s ISE index, with 25% women and 43% black professionals in leadership, plus initiatives like the Assaí Institute’s Amazon relief program supporting over 2,000 families.
A.I. generated. May contain errors.
Earnings Conference Call
Sendas Distribuidora Q3 2023
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