Sendas Distribuidora Q4 2023 Earnings Call Transcript

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Operator

Good morning, everyone, and thank you for waiting. Welcome to the earnings call for the 3rd Q4 of 2023. If you need the simultaneous translation, we have this available on our platform on Zoom. In order to access this, please select the Interpretation button through the icon on the globe at the bottom part of your screen and choose your language of preference, Portuguese or English. We'd like to let you know that this earnings call is being recorded and will be provided on the IR website of the company at ir.sia.com.pr, where you can also find the earnings release.

Operator

During our presentation, all participants will have their mics off. Soon after, we'll begin our Q and A session. We'd like to instruct you that you submit all your questions at once. All of the information in this presentation and possible statements that could be made during the earnings call related to business perspectives, forecasts and operational targets at Assai represent beliefs and assumptions of the company's management as well as information that is currently available. Future statements are not insurance of performance.

Operator

They involve risks, uncertainties and assumptions as they refer to future events and thus rely on circumstances that may or not occur. So investors should understand that other operational conditions and market conditions could affect the performance that I'll say in the 2 results that differ materially than those mentioned in future statements. Now I will pass on the floor to Gabriel Le Lou, our Investor Relations Director. Welcome, everyone, to our earnings call for the Q4 at 2023. Today, we have with us Bill Meru Gomez, our CEO Daniela Zapaglia, CFO of La Mehta Zunjis, our VP for Commercial VP and Logistics and Anir Zonka Sheena, our Operations VP.

Operator

Before we begin the presentation, I'll pass the baton to Vomira for his initial remarks. Vomira? Thank you, Pepe. I would like to thank you all for being here in this earnings call as we present the numbers in the Q4 of 2023 and of course the closing of 2023 as a full year, which was very symbolic going outside history and a year where we have the closing of an internal process with the expansion conversion of our stores. So the numbers we see now in our results during 2023 are numbers that reflect the over 82,000 employees in our company that are operating different stores and logistical centers and offices and administrative functions as well.

Operator

That's all of us apart within your management, within your board and throughout 2023, I'd say became a true corporation with the exit of the former controller shareholder in a year where we have an environment of deflation in the food sector that's very strong. So in our perspective, we ended the Q4 in a very positive way. The company is ending the Q4 with 16% growth in total throughout the year where we had no inflation and we saw, as you probably saw, the household inflation was 0 point 50% ending the year of 2023. And the 16% are very relevant as they come along after the Q4 of 2020 2 where we had a total growth of 38% due to the fact that the growth in the Q4 of 2022 had an important cycle of openings with 38 new stores opened in the Q4 of 2022. So the 16% really makes the company at the end of the Q4 reach a level of growth of 60% in 2 years.

Operator

So when you add up both years of growth and this is representing the growth of the 4th quarter represents an increase of R2.7 billion dollars which were added on to sales. The 4th quarter continues its process for expansion of the 27 stores opened last year and 12 of these were done in the Q4 and then with this SINZIA with 188 stores under operation, we're still missing 2 stores for the closing of the extra project. The main stores have already been opened. And in our vision, we'll provide some more details the number of this important project with the conversion from the perception of results and earnings, but also the achievement of new customers considering it was a new positioning, demonstrates the company is really on the right track to perform this project, making us have a growth of almost 60% in 2 years and almost 90% when you look at the 3 year period where you actually have a strong cycle of expansion and new store openings that the company went through. So what we've seen throughout this Q4 is an improvement in the Q4 ever since the second half of November.

Operator

Throughout 2023, we saw an environment of deflation, debt among consumers, greater caution to have the volumes of purchases, but especially the RBTP public that at this moment when you have a drop in prices, all of it becomes a little more cautious with how they're going to set up their stocks, which impacts the volumes in the second and third quarters. And this is not repeated in the Q4. So from the second half of November, we already noticed an improvement in volumes and we ended the 4th quarter with a progression in sales of approximately 3% and an important market share gain in the Q4, but also in the end of 2023 with a positive combination in the Q4 of growth in the sales of the same store space and tickets as well as the volumes. And so of course, this scenario we've seen throughout 2023 makes us have cash and carry and say not be immune to the economic scenario when it comes to debt in the families and the trade downs. But in our vision, they also brought it also brought benefits when we look at the the gains of customers and the amounts of tickets that were performed.

Operator

In this scenario, a more difficult and complicated economy. We can see that customers start searching for our channel as a source of supply. Those customers that need to keep their supplies in their business, but also families that are searching for ways to save. Even in a period where you have a drop in inflation, the volume of purchases for replenishment and home supplies kept very strong in the growth rates. So we ended the year with a growth of our tickets, that's a very positive, 79,000,000 tickets in this Q4, a total of 290,000,000 tickets.

Operator

And this represents a store flow of approximately 420,000,000 people throughout the year of 2023. And from this volume 45,000,000 of people have been visiting our stores ever since December. So just as everyone knows, we went through an intense store opening process for organic stores, but also for conversions. Alongside this process, we also had important changes in our business model, changes that in our perception keep the characteristics of Assai of having a strategy that is quite bold, anticipating any changes in the market and especially anticipate any purchase trends and movements in the end customers. So the penetration has been even greater in the Brazilian households and customers.

Operator

And this comes from the strategy, the conversion process with extra stores and our entrance into more regional, more central regions to be closer to the mid and high income public and closer to customers that are in the food service sector was a strategy that was very precise. The innovation of the batteries and the coke cuts and bakeries, increasing service levels and improving customer service made us in 2023, have one of the biggest achievements in the year because we became the company for physical store commerce, regardless of the sector that's most present in Brazilian households. We were able to reach 1 in every 4 households that are currently in Brazil. In some cities and regions, especially in the Southeast and major regions, we are already close to almost 50% penetration in the households. But, we've been able to enter new social levels as well.

Operator

So this combination and change in the business model, especially including new services, stores in more downtown regions and an increase in occupation costs in these stores also represented a possible issue where maybe we would lose the cash and care model. But I think this is very strong in the Q4 when we see the efforts of the team combining productivity gains, ongoing maturity of the stores. And due to the strong process and the expansion we went through, but also the culture in the company, which is a low cost culture, searching for ways to do more with keeping up a strong balance in the purchase experience really is demonstrated through the drop in expenses and expenses have a reduction compared to the Q4 of about 90 bps considering the productivity gains we had and the fact that the stores open and that cycle of new stores open in the end of 2022 is already in this process for maturity. And this team effort made us have a better level of expenses, which also allowed us to invest more in our competitive advantage, especially in the stores that are reaching maturity. And so this is a brief mix of our strategy.

Operator

We have this impact of 15 bps. And this is also impacted by the smaller volume of openings. And as we can see, a strong expansion cycle, which increased the gross margins. So that's also, as you can see in our earnings release and this presentation, we're really focusing on our pre IFRS vision, considering that this in our perception reflects our operational performance better because it's a lot more connected to the cash generation and it's the EBITDA that's already considering the lease. And when we closed the Q4, we reached 6.1 percent, a nominal value that's above our increase in sales and especially considering that even with the impacts of the second and third quarters, the end of 2023 brings in an EBITDA and a pre and post IFRS vision that is really connected to what we've seen throughout 2022.

Operator

Fulfilling the guidance provided by this administration at the end of last year, where even in the environment we were in with deflation that could impact the EBITDA at a pre operational level, this would be stable compared to last year. And so the company, as you all know, went through a very important cycle of investments. The total amount of investments in the year is over R5 1,000,000,000 through the carryover we had, with the CapEx and the stores opened and all the rest of the payments as well that we had to be made, to GPA, which ended now in January 2024. But the company, even in this process, with strong expansion, that almost doubling in size, almost 60% growth in the last 2 years, the company kept its strong cash generation and this operational cash generation reached $4,600,000,000 in 2023. Now we all know that the execution of this conversion project and the acquisition of the commercial points, the organic stores and the investment costs increased our debt levels and Danny will talk about this a little more.

Operator

And it also pressured the financial expenses considering the level of leverage in the company. But even with this entire cycle and this strong opening process, the net income reaches 1.9% and a total per year of 1.2%. And at this moment, where the company gets back to the closing of the project focused on deleveraging. This is a line that we think should have a strong increase from now on. You can advance on to the next page, please.

Operator

So we did bring in a bit of this, considering the magnitude and relevance of the project, how the conversion network has been behaving. So of course, this shifted position was important and it's the first time I think that cash and carry can really get into major regions and big cities and locations where due to restrictions in the real estate market and difficulty to get approvals, it becomes very difficult to add this organic store throughout 2023. Even with this environment, this was not only the silic rate or the higher interest rate. And we see that the store network so the average we see So we have an average of revenue of $20,000,000 going to $28,000,000 in the end of the Q4, which is very close to those three times we had mentioned, which was the objective of the company. And in our perception, we still have a lot of ramp up and growth in our sales.

Operator

So when we look at this in an isolated way, only in the food sector perimeter, since we also don't sell home appliances, which is something that hypermarkets had it very strong. This multiple can reach over 3.8 times very close to the target of the project, which was about 3 times more. So another behavior is that the growth in sales is also accompanied by maturity in the pre IFRS and EBITDA vision. And as we all know, these stores do have a occupation cost that's higher. And so they also have an average ticket that's a lot higher.

Operator

There's also the issues with the commercial galleries as we can should also bring in some important profitability gains, leaving 2.6 in the first quarter to 5.6, which is in the closing of the Q4 and also very close to the legacy network that here we want to remind you that the higher cost is already affected in this margin perspective. So once again, covering the EBITDA pre IFRS and also in the post IFRS vision, which is the base for cash generation of the company, you can see this evolution, the evolution of the maturity expense, the discipline and the consistency and efforts of the commercial area to adjust the product mix, which is very important to ramp up the stores, commercial dynamics, communication in our marketing teams, promotional campaigns. And then at the end, you can see this positive set of factors. And this also makes the company have an important leak in its growth, demonstrating how these conversions and how this expansion has been very precise, even though it did lead to a higher leverage level than what we imagined in the beginning of the project. So with this, the value of the EBITDA is completely stable even with 115 stores.

Operator

This percentage is quite stable. And we have an increase of 20% compared to the previous year and 33% when we look at this Q4. So the EBITDA the post IFRS EBITDA also has a shift in geographies considering that most stores are already operating and the leases we have are already completely operational. So now I would like to pass the floor on to Gabrielle as she talks about the net income and our leverage level. Hi, this is Daniela.

Operator

Good morning, everyone. And now we're going to move on to slide 5, where we get into our earnings and our net income. So in the Q4, our earnings reached 736,000,000 and if we exclude interest on the liability on the lease interest, the results reached almost 2.6 percent of sales of the net sales and DKK478 1,000,000. So this increase is about a bit more than RMB200 1,000,000 year over year. And in the full year, we have a financial result of $1,800,000,000 $800,000,000 more.

Operator

Now when we get into the effects, the main effect, so we can see a bigger volume in the gross debt, especially when we consider the the maturities of the debts and commitments in the company for 2024 sorry, the commitments in 2023. But throughout the year, we were able to have a CRI in July, and then we had some fundraising for the maturities in 'twenty four. Operationalize. So then we also have a smaller effect from an accounting perception, which is the capitalized interest due to the final phase of the conversion project. And so in the quarter, we have a capitalized interest that's lower and all the rest is in the IFRS 16.

Operator

And in the year, this effect is over 400,000,000 dollars and in the cost of the net debt is 344. So in the year, we have the impact of the average interest, which also affects our debt and went from 12.4 in 22 to approximately 13 in this average interest in 2023. So these are the main effects. And of course, we have an impact in our net income, which ended the quarter with BRL3.3 million and the greatest level in the year with a margin of 1.9% with all of the seasonality in the quarter. And we also had operational leverage that was very important in the quarter as it was very positive and we have the quality of expansion maturity of these 115 stores in the last 3 years also helps a lot and leads to this net income in the quarter.

Operator

So with this, we can also demonstrate the resilience of our business model, even in a context with inflation, sorry, deflation in 2023 and interest that's so high. And so in our year, our profit reaches $776,000,000 and a margin of 1.2. Then we reached the cash generation side and leverage. And so as Bommito mentioned, BRL4.6 billion, and this is a growth of 453,000,000 year over year. So this result comes from the growth of the pre EBITDA that grew 20% leveraged by everything we had already discussed with the sales growth, maturity of the stores and the control of expenses, as we mentioned, and also an improvement and it's important to highlight the improvement of our cash cycle, which at the end of the day is translated into a lower need for working capital.

Operator

And so we can see this generation is sufficient to fund all of the investments and expansion and the payments. And however, we still have this high level of interest that affects the cost of the debt of $1,800,000,000 So we'll end the year with a net debt of $13,100,000 percent and our leverage reached 3.8 percent. And so the results you see here on this graph, on the blue line of this graph, the 3.8 and this leverage came above what we expected, especially due to this operational generation and everything we mentioned with the maturity. And we had mentioned that in the Investor Day, we had talked about how the leverage in 2022 and the end of 2022 was representing a reduction of 0.3 times. So this drop of 0.6 year over year is even higher than this sign we presented there.

Operator

And so here, I think we can really everything we've seen from analysts, we can really surprise. And when we consider the leverage has between 0.8, 0.9 on receivables and this number includes the receivables in the company. When we look at the gray line, we have the vision represented here that we normally used to disclose until the Q2. But here we don't have the receivables and also the payment of the real estate, the commercial real estate. And also in 2023, we paid 2,400,000,000 in the installments in the acquisition of the commercial stock.

Operator

And in January, we already paid off the last installment, which was RMB900 1,000,000. So in the concept of the covenants for financial contracts, our leverage was 179, which was a lot lower than the limit we have of 3 times, which represents a difference of almost 6,000,000,000 dollars compared to our very comfortable position with our covenants. And so when we get into the deleveraging process for 2024, it should be continuing this process to intensify the deleveraging of the company with an ongoing and growing cash generation and the end of the payments as well, as I mentioned previously, as well as a lower level of investments that we have for 24 with 15 stores due to our last factor that contributed to the deleveraging, which is also a lower level of interest in 2024. So now I finished my slides here and I'll pass it on to Vamilu to finish our presentation. Hi, Danny.

Operator

Thank you so much. And I'll go back to highlighting what this 3 year period was all about considering that this when we had the decision to search for stores in downtown regions and put more services, all this happened in 2020 2021. We had a whole another reality in interest rates in Brazil with you, that it was a low rate. But the movement we had that was quite bold and strategic to position new stores demonstrates that from a perception of results, it was a very positive movement. We had a strong level of investment.

Operator

The company invested, the cost of debt and what we already had in previous debt, a total amount of about R16 R1,000,000,000 but the company was able to generate over 11,000,000,000 already in this period. So the generation of cash is a strong we have a strong cash generation operation. And this is one of the important milestones in the company. And this makes this level of leverage, fund a project at a beginning, middle and end. And when we complete this project, we'll start seeing the deleveraging process in spirit.

Operator

But all of this allowed the company went from 184 stores to 188 stores with R39 billion dollars and over R73 million dollars R1 of the biggest companies in Brazil, one of the biggest private employers in Brazil and we're able to keep our strong cash generation. So in 2023, although there have been, turbulence in the year, the maintenance of the pre IFRS IBDAR really gives us the certainty and trust of the strong deleveraging trend we're facing in the near future. We can move on. About ESG, as we also need to highlight Assai is a reference. We had many highlights now throughout the Q4.

Operator

And I say it was kept very present in sustainability index. We also kept our carbon efficiency index. We had an advance of over 10% reduction in the emissions of scope 1 and 2 with an increase in the reuse of waste. I want to thank all of our sustainability team and different departments involved. This is all part of the culture of the company and part of our business model.

Operator

Within the decisions that really make the company, keep on a sustainable trend, but also be sustainable when it comes to social responsibility. In our role of responsibility with over 480 tons of food delivered to over the 54 social organizations, and work that continued in 2023 besides the strong work we've done during the period of the pandemic with all of the efforts that Assai performed in the communities for in. But we also had an important seal, which is about a woman on board. And we have important advances to be made as well as the inclusion of people that are over 50. So the indicators in the company of course represent ongoing improvements and they had an important evolution of 43% of black individuals, 25% women in leadership positions and the amount of employees that have disabilities, which is above the legal quota minimum, which is 5.4.

Operator

And that's an important achievement with a company that's over 82,000 employees. This year you'll see in the report, some of our strategic pillars in this revision of the work we performed. And this is all based in 3 pillars. So the operations that are efficient, we're just seeing our climate impacts, Of course, always promoting, the guarantee of responsible supplies, continuing our work with the development of people and communities that where we are present in a country, there's a lot of social inequality like Brazil and a big difference from one region to another. And then of course, we always try to encourage entrepreneurs and we perform many different projects with the SI Academy.

Operator

And we try to also implement a very entrepreneurial vision, of course, keeping the ethics and transparency in our business based on the best practices and ASG mentioned in the overall market. Moving ahead in 2024, we have a strong focus to deleverage. We've been highlighting a conversion project, which had a beginning, middle and end. And now we've completely finished it. The last part of the stores we had of the installment we had to pay to GPA, we paid in January, but the level of debt in the company in the Q1 should drop compared to the Q4, which allows us to set a positive scenario in the leverage position.

Operator

And we expect that at this moment, we'll see a reduction in the leverage considering the indicator index that we had already highlighted in the Investor Day we had in 2023. And this is due to the fact that we ended our payments to GPA. We have a reduction in the levels of investments and expansion. We have 15 stores expected for 2024 And so we have a huge difference when it comes to the level of investments the company performed in the last few years to this level we're in now. And when we add this all up alongside what we've already seen in the Q4, the growth of the sales, maturity of the stores leading to greater cash generation combined with a rate that's also part of the expectation of the reduction in the interest rates today that allow us to have improvements in our net income and also the reduction of the financial costs and deleveraging the company.

Operator

So when you look at the macro scenario, you can see the levels of expenses we delivered in the Q4, which are, of course, a result of the operational efficiency and they're sustainable in the long run and they of course, the company will continue to balance out its competitive advantage, the ramp up of the stores and this will also lead to an evolution of the EBITDA margin in 2024 compared to what we had now in 2023 with a series of opportunities with profitability of the assets as well as improve in this network of stores. We saw a lot of stores that have maturity and this gives us the opportunity to explore our galleries better and include new categories of products, and adjustments in the evolution also in the service areas. And of course, we can estimate a scenario that's more positive in 24 than what we had in 2023 besides our continuity in the strategy. So from my side on the presentation, this is pretty much it. Now I'll pass the floor back to Gabriela Lu, our IR Director.

Operator

So thank you, Belmidio. We're going to start the Q and A session now. Now we'll begin our Q and A session. Queue as you announce. A request to activate your mic will appear on the screen.

Operator

Then you must activate your mic to submit questions. Our first question comes from Thiago Macros, our sales agent at Itau. Thiago, open up your mic, so you may proceed, please. Hi, guys. Good morning and congratulations about the quarter year.

Operator

My question is related to sales in the first in the beginning of the year. We've received some feedback that the return of the food inflation has helped with the sales in the beginning of the year. But I wanted to ask you guys if you guys have experimented something like this, if you guys have seen this happen and if there is an expectation of a possible recovery in the stock levels of the B2B customers. Do you guys consider this to be reasonable that this would happen in the next periods in 2024? And finally, great work controlling expenses this quarter.

Operator

But I just wanted to understand if we can imagine that this is a whole new journey and that these expenses really changed in the levels they had before. So thank you, Chuck. We'll set the answers here. The beginning of the year has been very positive, a lot more positive and in line with what we saw. And the Q4 was a little more positive also.

Operator

And now we wanted to pass the floor on to Vamil as we talked about expectations for inflation and stocks others. So we'll also talk about our expenses as we had an important reduction in the Q4. We invested more in our competitive advantages and have been working on being more aggressive in this process and this is really connected to expense discipline. Vladimir, you can start. Good morning, everyone.

Operator

Thank you for the question, Tiago. When it comes to inflation here, we have an expectation this year of about 4% to 5% inflation. We still see a scenario of volatility in commodities, which is a reality ever since forever. But when we look at the industrialized products, we have an expectation for inflation. But of course, the inflation helped in the 1st days of the year.

Operator

So just as we grow in our volumes in the 4th quarter, this something that's very important for us because customers are buying at the same store base. And so when we look at the stock in B2B, we still have to be a little bit careful. I believe that the purchase movement and taking care of the working capital that these small entrepreneurs will, be kept. I don't think we're gonna have like greater stock than normal, but of course the improvement in the sales and the macro scenario will make them, by greater volumes. But if I don't think we're going to have any problems with this.

Operator

Now I'll pass the floor back to Anders Sol so he can talk about expenses. Thank you, Javier. Thank you, Thiago, Javier and everyone. I think expenses were a big highlight and it demonstrates our discipline and our team and the stores. And we know that it's always about controlling line after line.

Operator

So we have another point that's very important that we mentioned with the maturity of the stores. We worked at over 60 stores last year plus the year before and we still have important productivity gains in the stores with the value proposition we presented in our stores in the past few years with more services like battery, cafes, all of this really brought greater maturity and experience and lessons learned. So this helped us control more of our costs. So we can have low so we can be a low price operator. So we think this cost reduction is sustainable.

Operator

Of course, we always have to control the expenses on an ongoing base. So we always have to be as efficient possible to be able to keep our expenses in mind. And so I think it is feasible and we are super controlled when it comes to expenses. But I think the main effort with the team is to start productivity being more efficient so that we can keep these levels of expenses low. And I think that's pretty much it.

Operator

Thank you. Excellent, guys. Thanks for the answers. As we move on, our next question is from Felipe Casimiro, our sell side analyst at Bradesco BPI. Felipe, we'll open up your mics.

Operator

You may proceed. Please, you may proceed. Thank you. Good morning, everyone. First question here is, could you give us a little more details on the drivers and the drop of the gross margin in the Q4?

Operator

Just so we can understand the trend up ahead. So the Q4 is very seasonal and this time the gross margin went below 17%. No, you can answer, Belmira, already. But the Q4 has two combinations of factors. We were searching for more operational efficiency.

Operator

So as we saw, we would have an important reduction in expenses. We had a mix of investments in competitive advantage. We also have an impact from the previous year, considering that the stores will open up in the end of 2022, considering that we had a new mix of services and many different agreements with suppliers as well for the store openings. And when we consider the drop in margins, we have approximately 0.40 or 0.30, which would be equivalent to the agreements for the store openings. And the Q4 of 'twenty two was had a huge amount of stores open, especially extras where we had some important renegotiations and we highlighted in the call that from a deadline perception and also support for the suppliers we had achieved some gains in our perception.

Operator

This positioning brings us an opportunity that's very important to have a lower cost format and lower sales format, for individuals and businesses. So obviously, having a cash and carry store such as the Congoya store, and when you have an amount of almost 10,000 SKUs, And so this also represented a lot in the Q4. Always we always have to expect to maintain the gross margin. And you also have the store maturity. So you have a big amount of stores still and the objective of these stores as always the main objective is of course to consider our EBITDA curve free IFRS will always search for sales improvements and that's why it's gonna be more important than expense.

Operator

So there's also an effect in the gross profit as we search for ways to be more competitive, but we don't we do imagine a stable level in the gross margin. Okay. Perfect. Thank you so much. And then my second and last question is about CapEx.

Operator

We think this has been a very recurring topic. And in the last quarter. And so 80,000,000 per store, I think this was in a year. So is there another initiative to reduce expenses per store in the next 2 years, for example? Yes.

Operator

Okay. Thank you, Felipe. We do have initiatives, and I think we also have to look into the fact that if we have the store conversions and when we look at this, we have had quite a bit of expertise with the conversions we had in an initial batch. When I say it was still a GPA subsidiary and the stores that came from extra, such as Kokonas, for example, is a store that has over 40,000 square meters of built area. So these stores have a structure reinforcement process that is more expensive.

Operator

This normally doesn't happen in an organic store. So this, of course, pressured the investment line with, of course, with the amount of ABLs or the extra stores and gatherings we have at the store at the stores. But what we try to do in the conversions of these stores is that even if there was an investment, they would have an OpEx and maintenance level that's just as an organic network, store network. So we didn't leave anything for later when it comes to execution. Even though we would have to handle a higher investment, we could even postpone certain services that would have to be done year a year or 2 later, but it would be a lot more expensive to do this with the store open.

Operator

So the switch and the firefighting system, which is different, but especially when it comes to the stores that require higher investments considering the size. So this amount of course changes a lot according to the store network and then you also have the execution of organic stores, which are stores with a big area. We have stores that are being built, with over 15,000 or 16,000 square meters plus the hypermarket. So yes, there have been many initiatives to reduce CapEx. We had a really high cycle due to food and also construction materials, but also other equipment like pallet ports, metals, air conditioning and firefighting systems that also were impacted.

Operator

So this is also connected to the size of the stores. If you notice our average sale per store, how that grows as well. So this is connected to the sizes as well. If we have a store that's 4,000 square meters, it's one amount or 9,000 will be another amount. So, of course, it's a high investment, but we must also consider that this store network adds on an area in the sales area, but also the constructed area, galleries, and especially parking areas.

Operator

So a lot of the projects we have for the new stores are mainly because on average, an organic store had 400 parking spots and the stores that came from Extra had an average of 800 parking spots. So this allows us to work in other categories without bottlenecks that we would see in certain cash and carry stores where there's a lack of parking spots on the weekends, for example. Okay. That sounds perfect. Thank you.

Operator

Next question is from Vinicius Estrano. He is our sales side analyst at UBS. Vinicius, we will open up your mic, so you may proceed. Vinicius? Hi, guys.

Operator

Good morning and thanks for taking my question. You are presenting major evolution, the maturity of the conversions stores, but I wanted to know more about the organic stores. So for example, do you think you'd give us a little more detail on the performance of these stores, the legacy stores compared to these conversion stores? And any comments on same store sales or possible cannibalization stores? And any kind of perception towards the future about the store network would be great.

Operator

And another point also that called our attention in the CRI was a level sorry, in the quarter was a reduction of the stock levels. So could you also explore some of the drivers in the stock improvements and how we can consider the dynamics for working capital up ahead? Well, thank you, Vinicius. I'll start answering and then I'll pass it on to Vladimir to talk about the stock. So cannibalization was something that we already expected would happen in the beginning of the project, although it was low in our perception due to the fact that historically, Assai will not have stores close to where the extra hypermarkets were because we used to be part of the same group.

Operator

But even so, BTB customers that represent about 40% of our sales, and these kind of customers sometimes drive a little farther to find cheaper prices. So customers sometimes would buy at a store in Nacos Arenitas, which was organic, but then we now can buy closer. It might not be in. So we had an impact about 2% to 3% of cannibalization in the legacy network that was impacted by the extra project, which was already expected by the company's numbers. Part of the same store sales do have part of the store that already mature that influences this.

Operator

So most of the store openings that were done in 22 in Q4, took place in a sequential manner between October, November, December. So most of them in November, December. And there should be a higher impact on our same stores, with the Q1 of 2024, but the legacy network is still stable. So when you look at the Q4, there is still if we were to exclude the restore maturity factor, we still have the same store. So that's positive.

Operator

Of course, not in the total amount that we presented here. But what's important to highlight is that for the store network converted that use the expertise we had the organic network, but also the organic store network will also be benefiting from the conversion project extra. So most of the services and included now there's some mentioned that were highlighted within the extra store network will now be replicated also in the organic store network. So same dynamics of categories and even other realities of suppliers and commercial conditions that also benefit the organic network. So the legacy stores, organic stores also receive benefits from the extra stores.

Operator

Even if we just consider the maturity effect, there was still a positive impact, although it's still a small percentage. So cannibalization is in line with what we expected. The expectations for 2024 is that as most of the services that are being included in the organic stores, so we still have a quite a big batch to be delivered. We'll also lead to growth in this store network, before the extra conversion project. And I'll pass the floor on to Lemmy to just talk about the stock a bit now.

Operator

Thank you. Vladimir, I think you're on mute. I think Lamir just had a connection issue. Well, I will answer the rest of this, but I can give you a little bit of the inputs on the stock. I think that may have some issues, technical issues, but the stock has like a normalization line in the Q4 considering that especially in the end of 2022 with the new stores, you open up with a higher amount of employees and stock and higher level of expense, spend margins that are lower, of course.

Operator

But when you look at the pre EBITDA curve that we demonstrated throughout the quarter, it's the first time we show this kind of ramp up due to the importance that the conversion stores had to investors. But this also happens in the opposite side with this talk. Until you balance things out between categories, product mixes, what we sell more in one store or the other, makes you have to have a higher stock initially. But in our vision, now we've reached a normalization and level that is sustainable for stock levels. I hope that's clear.

Operator

That's great. Thank you so much, Bommito. Moving on, our next question is from Luis Guanaiz, our sell side analyst at BTG. Luis, we'll open up your mic so that you can proceed. Hi, good morning.

Operator

My question is about competition. Could you talk about this competitive environment a bit from the end of last year as well as the beginning of this year with that scenario of the acceleration in the inflation that we mentioned at the beginning of the call, but also hopping into the second question that's related is if you could help us think about this growth at a marginal level when we consider this year and the next years as well, what do you think will be taking place in the share gains or productivity gains? And now you also mentioned some initiatives that are taking place in the stores. So if you could mention this. Okay.

Operator

Yes, sure. Thank you, Bhaenys. What we expect is when we look at other competitors in cash and carry, the value proposition is very unique compared to the rest of the market. And so when it comes to entering higher social levels and also supply of B2B customers with service where we have high focuses, our vision is that this will help us attract customers from 3 different segments, competitors that operate in the same format as us and also have an unfortunate impact in the retail processes considering that these new stores, including cafes, higher levels of service, lighting, cleaning, makes the store become more attractive for the replenishment purchases as well. So we've seen this increase in the flow, especially in these stores that are more central and the extra stores with very strong customers coming in from retails, especially in the most but also in the supermarkets.

Operator

So we also see another factor that supports us and helps us with this, which is the increases in logistical costs in Brazil, which, if you've seen in the middle of last year, there was a decision from the Supreme Court about the measure of the new truck driver law that also impacts a series of obligations in companies and industries that operate door to door that makes the advantages and logistical costs, for delivery store to door, especially in big cities, making us become more attractive for these B2B customers that buy with us that also have an advantage of not having such a big working capital demand. So competition is always very intense. The sector went through an intense movement with high growth with regional players. And in our vision, this the numbers we saw in the Q4 demonstrate that although we're in a challenging environment with more competitive scenario, Assai was able to reach its levels of of sales per square meter and cash generation that really makes competition, adjusting its policies and trying to find ways to pay and find the best performance in the market. But the market is always very competitive.

Operator

So this, of course, that's apart from the inflation. We do have a difference in inflation in 2024, but that's not that relevant, especially when we take a look at the beginning of 2024. Gains are coming mostly related to volumes and inflation. And this also allows us to estimate that the actual consumers and customers would have a little more resources considering that we've gone through 3 years with a huge trade down effect, a switch in brands and product trade downs, which is about 10% to 12%. So, I don't expect so we do expect an improvement in the economic scenario, the interest rates that are really high at the moment.

Operator

But part of this will also allow us to capture what we've seen at least now in the beginning of the year. Our next question is from Felipe Hache, sell side analyst at Goldman Sachs. Felipe, you will enable your mic so that you can proceed. I wanted to start off with a quick follow-up on Mike Kruse's question at the beginning of the call to get into more details here. The line of personnel seems to have grown way below revenue.

Operator

So I wanted to get into a little more details that we should consider and any details you can mention would be great. So moving on to a different topic here. In the Investor Day in the end of last year, we talked about some initiatives and to increase monetization based on this initiatives you already have. And so when you consider this process, commercialization of the deficient spaces, but also some aspects related to financial services. And so maybe creating new products, considering receivables of B2B customers, credit in the stores and other initiatives that are very interesting.

Operator

I wanted to let you know if you could give us an update on how you expect these initiatives to move on in 2024, if there's a different focus and any other details would be very important. I think as soon I'll be talking about the new services. Some of these have higher levels of prioritization. So of course, there's a series of new initiatives and we should provide some new visibility. We should also see possibilities of gains and also execution.

Operator

And also some we'll have some more solid data. But of course, also from the perspective of exploring some categories of products, We actually almost finished the refurbishing work we had to do now with the starting process of the increase of flows and this will also help us with the allocation of this space. There's an intention to explore these advertising spaces. So we can also see that in December, we had 45,000,000 people coming through our stores. And so in total, we're talking about 450,000,000.

Operator

So this represents an opportunity not only to explore major stores, but also stores that have big spaces and for the advertising media and not only for our supplier, which is the Nestle, Products, etcetera, but even for companies in other segments. So considering also customers in class A, B, C. And so, yes, the company does expect to generate important raise raise importance of revenue. And of course, in the maturity phase, the main focus initially was to guarantee the execution from a product sale perception and that's the core. Then now we'll start seeing a focus of having a bigger volume for expansion.

Operator

And this also leads to possibility of having more maturity in new categories and so that as they can continue being a reference, I'll pass this on to Anderson to talk about productivity gains as well. Well, Felipe, once again, thank you and good morning. Actually, when we look at expansion, we haven't seen major volumes open, but in every store we open, we have like our top four. And the expectation is that we have a new team, it's an experienced, but we always look at good level of service, which is a concern we have in our operation. As you mentioned already, previously, we tried to find in this value proposition ways to stand out.

Operator

And so we consider that we do have a big differential in this model. But of course, we had the experiences and the maturity and lessons learned in the new services. There's no major structure change. Actually, now I think we have a value proposition that is very positive already. We're going to focus on providing excellent services to customers.

Operator

And when you open up a store, the level of maturity requires some natural changes and adjustments at some moment or another. And the store that sells more, you position more people there if the store sells a little less to adjust the team. But at the same time, you have a lesson learned and gains in productivity in the operation. So I think we've been maturing positively and we've been working on this team to deliver more productivity. And the main point is productivity, scale gains and so that we can deliver better services.

Operator

So that's what we've been working with over the years. Thank you. Very clear. Now moving on, our next question is from Jean Suarez, the sell side analyst at Citi. Ron will enable your audio so you can proceed.

Operator

Please, you may proceed. Okay. Thank you. Good morning. First of all, I wanted to hear from about you in regards to the organic expansion.

Operator

And also when it comes to competition, one point I thought was interesting is that you mentioned bringing customers from traditional retail and attracting these people. So where do you see bigger opportunities? Which states or markets do you think you can attract this kind of customers to do like their monthly shopping or also their replenishment shopping and explore how we can see this mix evolving between B2B customers and B2C customers? And the second question is also about the CapEx. I think it's clear that you'll have smaller CapEx when you look at organic versus conversions, but I wanted to understand if we can quantify this and we have a number of about 70,000,000 I wanted to understand how you can compare this up ahead and what's the sustainable levels of the CapEx per batch?

Operator

So for the organic store network, and so I'll say from all of the players in Brazil, is one of the players that has the biggest expertise. We have stores with a 1,400 square meters up until stores of 10,000 with all the differentials that this brings. So we have a group of stores that we mentioned in your investor day and also other opportunities. And we can see that we have stores that are different sizes. So to give you an idea, the organic store network in this year, we have stores that are set 4,000 meters, but others that are even bigger, so are smaller.

Operator

So in the Southeast, the expansion in SERE is really well distributed, but we have other expansions also in the North and Macapa, Pele, Manaus. And so even in Guarulhos, we have stores there. So the store network is still that we want to highlight that the expertise to operate allows us to have a broader perception when it comes to organic growth. So we're assessing projects that have 3,000 square meters and even others that are 8,000 square meters. So the search for these kind of customers really grew with the inclusion of these new services and location of these other location stores as well.

Operator

So most of the expertise with the extra stores will help us in the organic expansion as well. So we're going to be opening up a store between Tabale Doris and Zutra, which is the first store in the region of 400,000 inhabitants. And so even in the Southeast or metropolitan region of Sao Paulo and Rio de Janeiro, we saw major opportunities for us. And the other network stores in the Northeast and Northern Brazil, where Assai already has pretty good level of penetration, but there's still room for growth, such as Manaus, Belay and Macapa. But as you balance things out with these stores and you bring them into more downtown regions with a bigger offering of services.

Operator

Cash and carry also stops being searched for only for like monthly shopping. So we've seen a bigger search for, smaller shoppings as well, for customers that used to mix our channel with other channels and even for customers that aren't used to performing big purchases. So when you look at this public's worker, government workers or people that receive monthly salary, buying a big monthly shopping is more interesting. But there's also a lot of people that are informal and they buy daily. Right?

Operator

They don't have, like, a monthly salary. So we can also service this kind of customer now as they are used to buying smaller purchases here and there. So our objective is to continue to penetrate about 25% penetration demonstrates this. And for CapEx effects, there's a big variation. So the project also has some variations in the sales area.

Operator

For organic stores, we should still be working with the R70 $1,000,000 as mentioned with the projects that we expected for this year in 2024, where we hold on to a few stores. Besides this one in Guarulhos, we also want to highlight the statue of things, we're going to be doing the reopening now with the store in Villa Maria, the first cash and carry in Brazil. And that we were able to renegotiate this with it's a very important store as well. We also have project for our store in Guadagena and Princess Hayes. These are other stores that are very heavy when it comes to investment perspectives.

Operator

So what's the balance point for this project, right? The ROIC when we look at the invested capital versus the expectation for sales and what we generate working cash versus working capital in these stores. And so we should probably give us a we should have a network of organic stores that's going to be a little more mixed. So not only stores that are like 6,000 square meters, 7000 square meters. So we would see stores that are 3, 4000.

Operator

And we see that there's room to continue to advance. I think that my answer was a little long here, but I hope that was clear. I wanted to give you a little more info here. So maybe just to focus here, do you think that this greater investment versus competition, you guys have been investing more? And I wanted to understand a bit of this dynamic comparing with other players.

Operator

So we see values that are a little smaller, for some players. In organic stores, no, because if it's a comparable project, I don't think there's going to be a difference in the value between what we do or what another player can do. For organic stores, it's a lot simpler than you. You have this variation according to the size of the project. So if you have a project for stores that are a lot greater, there will be a big variation.

Operator

So if you consider from a construction project perception, it's going to cost maybe 30,000,000. So to not only look at the average investment per store, you have to look at the average per well, is it possible to have a store with 40,000,000? Yes. There's some stores that are going to cost that, but of course, the volume of sales in the store is not going to be the same as a store that maybe cost 70 or 80,000,000 to build. So the Guadagena project is a big store there.

Operator

It's our 1st store there in Guadagena. So it's a store that we expect to sell about 380 to 400 1,000,000. So that's really important to look at because we always have to consider the average revenue perception perspective per store. So we have 280 stores with over 20,000,000 in revenue, over 20,000,000 in revenue. So in the conversions, yes, we do have a great investment in CapEx and stores where you have a conversion of a store, you're going to have to you're going to choose the stores that require less investments, which are normally ground level stores or smaller stores.

Operator

So in the extra store network, when we looked at our competitors, for example, that the hypermarkets before that were ground level stores, the conversions cost is a lot lower than the conversion cost for a store that's on multiple floors where you have underground parking and all of this. So the cost to increase the load on the flooring, to 3 or 400, 3 or 4 tons, is a lot higher, which is what we require in our store format. So what this estimates is the expectation and how this is It can only be a metric, an isolated metric, right, per store? Next question is from Hu Bing Kaul to our sales analyst at Sandler. Ruben, we'll enable your audio, so you may proceed.

Operator

Please Ruben, you can proceed. I think all of my points were already covered, but I just have a last follow-up here on the discussion of expenses to give us some tangibility here. Do you think you can quantify the relevance of the pre op expenses in the Q4 of 'twenty two when you had a lot of store openings? And how much and comparing this with how much this was now in 'twenty three? Thank you.

Operator

Well, in 'twenty three, it was very low. In 'twenty three, you had, pre op expenses that were impacting. Of course, I wouldn't be able to quantify this, but I think Gabriela can send you this information later because in 'twenty three, it's not that relevant. In 'twenty two, it is. In 'twenty two, we had an impact of our expenses still.

Operator

So we already expected that in the Q4 of 'twenty two, there would be an impact. So then you have the effect of the store ramp up. Normally as I went from 14 stores to 288 stores. So, but certainly year over year, we were adding on a new store network, but of course, a proportional level was never that significant as it was in the industry too. And so So margins that are lower and all of this, of course, reflects the ramp that was expected.

Operator

So I think that in 'twenty two, we had about half 0.70 or 0.50 beeps of pre operational expenses. But I think Gabrielli can get back to you with this information in greater precision. And not only pre op, but also there's another aspect that we also highlighted. But because we have new stores, you have costs that are a lot higher at the beginning of the operation and you're searching for ways to attract customers in stores that are more in downtown regions. Customers also have a sales curve that is gradual.

Operator

And then, of course, it makes you, you have to work with this higher expense level initially. So, yeah, I can also get in the rest of the information with Gabby later on. But, also, I think this point really calls our attention, which is where these expenses actually helped you guys to make the decision to invest a little more on your competitive advantages in this quarter. And I think this is a pretty different dynamic compared to what you guys were discussing throughout the year, where the elasticity and price investments wasn't really bringing major returns that would be equivalent. So you guys weren't working on this that much.

Operator

So could you notice what changed from now on, to have this elasticity? Is it something related to the profile of stores and the socioeconomic level. So, of course, we were balancing out this process throughout the quarter, but the perception in the Q4, considering that we already estimated this, considering the volume of sales where you would have a dilution in expenses and that we would have room for investments. And so you can notice that there's more caution from customers throughout the entire year. In December, you have the festivities and, of course, you have parties and celebrations.

Operator

So if there's a moment where you could use the strategy that was a little different, the investments that we had in markets and prices, you would sell at a lower margin, but you wouldn't bring any impact on the volume. But in November, with the entrance of the 13 salary people received and also in December, this equation would maybe be a little different. And that's what happened. So it was really supported by the lower expenses. With the stores in this and the conversions.

Operator

So the next question is Alexandre Camilo, the sales analyst at Morgan Stanley. We will enable your audience. You may proceed. Please, you may proceed. So thanks, for taking my question.

Operator

I think most of the questions are already asked answered, but I wanted to talk about a point regarding the forfeit. And in the Q4, it was $1,500,000 and this was related to suppliers of products. But then when you compare these 1.5 or 1.1 compared to the numbers that you guys have provided in the Q3. We can see that there's an increase in this forfeit factor and this was mostly related to the point with products. So I just wanted to understand if the effect for the 3rd to the 4th quarter was something that's more seasonal, or if there's something different involved that impacted this.

Operator

Okay. Great. So, this is not our decision. It's a supplier that decides to do this with the deadlines and contracts and terms. But our suppliers, of course, obviously, this is something where they can decide to discount this, which doesn't depend on our agreements.

Operator

So we register these operations. So our perception is that we have high interest, the cash position is tight for everyone, And it's natural that these players will have an increase of their volumes discounts to be able to handle expenses at the end of the year, especially in the 13th salary. So this is an operation with the supplier. So we just monitor these activities considering the agreements we have, but this is a decision from the supplier, as well as, so the discount on receivables is one of the oldest kind of operations in the history, right? So it's just something we create in the market, but this is a decision of the suppliers, and so that we can they can define the anticipation.

Operator

And so we'd search for this with the banks we have agreements with. Okay. Perfect. Very clear. So our last question comes from Joseph Giordano, the sales side analyst.

Operator

So I wanted to explore this issue with the price. What you guys have seen as a gap and we've been starting to see how Assai is transferring less prices as the main So then the second question is about the working capital. We've seen an extension about 10 days excluding the forfeit and also in the suppliers. So I wanted to understand if this is structural, if we should see these 75 days we've seen get back to those, 60 or lower than 60. Okay.

Operator

Thank you. Lemmy will answer this. Remember, 4FA is a decision of the supplier. So just about competition here. Obviously, we look at these competitive movements.

Operator

And for competition, we have the variation store over store, cluster over cluster. So it could be that in a certain period, it depends. So it's kind of like you have to consider 2 or even more that according to competition, whether it's national or major, it doesn't matter from a competitive perspective, the company becomes more competitive. So it's a lot more individualized. So the size of the company and the amount of places we're located in, you can't say it's a single policy, right?

Operator

The strategy is operated according to the region's reign and if you have a regional competitor that's more competitive, that will also be more competitive. So It seems like we had an issue with the connection. We'll be coming back in just a few seconds. We did have a technical issue here The company continues to work with deleveraging and we're continuing to search for ways to consider growth. And this is a positive expectation for 2024.

Operator

So I want to thank all of my team for the work that has been done throughout 2023. As I mentioned, I didn't discuss all of the numbers here, but this is all because of the 450,000,000 people that visited our stores and bought from us and also our daily efforts done by the major team we have those able to build a company that tripled in size in the past 3 years with a growth CAGR of 28% and a company that always grew with its own cash generation ever since we switched the assay model. We never received any investments from former controllers. It's like the company has always generated strong leverage, deleveraging capacity. And now we consider that we'll be able to deliver as we already invested in important, important differential, our value proposition and what we have been working towards to keep this kind of differential in the market.

Operator

Thank you all so much. The earnings call for the Q4 at Assai in 2023 is officially ended. The Investor Relations department is willing to answer any future questions that may exist. Please have a wonderful day and thank you for participating.

Earnings Conference Call
Sendas Distribuidora Q4 2023
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