Companhia Brasileira de Distribuição (NYSE:CBD) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Good morning, everyone. And thank you for waiting. Welcome to GPA’s Q1 2023 Earnings Conference. Please note that the simultaneous translation function is available on the platform. To access this service, click the globe shaped icon labelled interpretation at the bottom side of your screen, and choose your preferred language between Portuguese and English. If you are listening to the conference in English, you can also mute the original audio in Portuguese, by selecting mute original audio. We’d like to inform you that this conference is being recorded, and will be available for replay on the Company’s IR website alongside the complete earnings release material. You can also download the presentation slide deck using the chat icon.

During the Company’s presentation all participants will be connected in listen-only mode. Following that, we will begin the Q&A session. [Operator Instructions]. We’d like to underscore that the information contained in this presentation and any statement made during this conference relative to GPA’s business prospects, projections and operational and financial targets are based on its management’s beliefs and assumptions as well as currently available information. Forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions seeing as they refer to future events and, therefore, rely on circumstances that may or may not materialize. Investors must understand that general economic conditions, the state of the market and other operating factors could affect GPA’s future performance and lead to results that are materially different from those expressed in set forward-looking statements.

Joining us today are GPA’s CEO, Marcelo Pimentel; and CFO and IRO, Guillaume Gras. I will now turn the conference over to Marcelo Pimentel, who will begin the presentation. Please, Mr. Pimentel, you may proceed.

Marcelo Pimentel: Good morning, everyone. Thank you for your interest in joining our Q1 2023 earnings conference. In this introduction, I will present some of our most important developments within the plan we devised based on our six strategic work pillars, which keep us focused on the primary goal of returning the company at large to a path of sustainable growth. Let me start with the top line pillar, which shows overall sales growth by 17.5%, picking up over the fourth quarter of 2022, an important seasonal period. The sales result was driven by our expansion with the opening and maturing of new stores, including those converted from hypermarkets and the rebound in customer traffic, especially in Pao de Acucar and proximity stores.

I’d like to draw your attention to our same-store sales growth by 6.3% versus Q1 2022, which is excellent news considering the scenario of declining consumer spending and inflation. Pao de Acucar which already accounts for 46% of the group’s total sales reported 7.5% same-store sales growth largely fostered by the increased perishable goods penetration, the result of an important work to readapt this category’s proposition as well as the assortment review project both led by our sales team. In proximity stores, we continue to see double-digit growth in same-store sales and a share of perishables 2.1 percentage points higher than in Q1 2022. We also achieved an all-time high on-shelf availability level, improving stock out by 2.2 percentage points, while managing to reduce inventory turnover by 2.7 days.

On another excellent news, in addition to sales growth, we also reported market share gain and self-service over the last six months. with our most remarkable result being recorded in March. Also on this slide is our second pillar service level measured by our NPS, which I am incredibly pleased to share with you, baked up nearly 20 points this quarter versus the first quarter of 2022 with all labels showing improvement, especially Mercado Extra, which recorded an increase by almost 24 points. At Pao de Acucar, the rise was by 17 points and even better accompanied by a larger active customer base, higher purchase frequency and increased monthly spending by customers at this store. In fact, the number of premium customers, which spent 4 times more and visit supermarkets more often and which had decreased until the third quarter of 2022, now have reported growth of about 10%.

This enhanced NPS result is a consequence of the work we did to increase on-shelf availability, improved customer service at the store, the multipurpose training of our cashier operators, which directly affects the key links issue and the installation of more self-checkout [indiscernible] in stores. And to close this slide, I’d like to talk about the headway we’ve made on the digital front with improvements on our app and other improvements focused on providing better omnichannel customer experience. We’ve reported 7% growth in this quarter with a GMV of about $402 million, which preserves our leadership position in the food retail e-commerce space. This result was largely provided by our increased assortment, especially of perishables, the greater availability of delivery times and wider range of fast delivery options.

On this front, the integration of James as a logistics engine allowed us to sustainably grow our share of same-day deliveries in 1P, which reached 70% this quarter. We’ve also updated our app, providing a simpler, more intuitive layout to offer users a more seamless and interesting experience. We’ve reported an increase of over 330,000 active users in the Pao de Acucar app, reaching over 1,200,000 users over the month. In the 3P partnerships front, we are leaders in food retail with partnerships with iFood, Rappi and others. It’s important to point out that our margin on the digital front is growing by 2.5 percentage points over the last quarters, making this channel that has a driving margin for the entire company. In the next slide, I have a few updates about our expansion plan, which is still advancing as provided.

Since 2022, we have opened 78 new stores, which this quarter alone brought in $402 million in incremental sales for the company. We’ve made headway in our top 15 stores, which are premium stores from the group located at strategic locations for the Pao de Acucar and which are a priority when it comes to the revitalization and enhancement of our model offering, for example, outstanding services such as package wrappers and also wine and cheese experts to help clients. Our expansion project is still underway, focusing on proximity stores, especially in the labels Pao de Acucar with a greater capillarity potential in the city of Sao Paulo and the entire metropolitan area as well as more verticalized regions, whereas for the Pao de Acucar label, the strategy prioritizes cities with a high potential for premium customers that hasn’t been tapped on.

Now about the profitability pillar, I will leave it to Guillaume. I just wanted to point out a few major points. First of all, being our gross margin, which over the fourth quarter of 2022 came to 24.4% and is the best margin point that we’ve reached in the last few quarters. This is a result of the headway we’ve made in our strategic pillars, most importantly, with continued improvement in same-store sales and premium formats and also the enhancement of our sales negotiations with increased penetration of perishables and reduced losses. To finish this first part of the presentation, I’d like to point out the ESG and culture pillar. On the fight to climate change, we’ve reduced greenhouse gases by 20% in the scope 1 and 2 compared to the same period last year by replacing the most pollutant machinery and also providing maintenance to our store equipment.

The efforts we have been made in the last few years allowed us to reach our reduction target expected for 2030 last year, which is excellent news. We have also released our new target for 2023, pledging to reduce our emissions by 50% through 2025, considering 2015 as the base year. In terms of promoting diversity, I’m also very pleased to talk about the headway we’ve made focusing on expanding female leadership within the company. Women positions of leadership at GPA make up 39.3% of our staff, which places us very close to our target of reaching 40% by the end of 2025. And on the social impact front, I’d like to point out the solid work we’ve done in food donation that’s being led by the GPA Institute, supported by all our stores. During this quarter, we were able to add over 380,000 meals, including donations of fruit, vegetables and other greens to our food banks and partnering organizations, helping hundreds of families.

This is work that I love to encourage and which I’m very proud of. I’d like to state the one-to state that we have also conducted initiatives for emergency support of people affected by rainfall in the North Shore of Sao Paulo in the month of February. We collected 26 tons of food and doubled our donation volumes, which came to over 52 tons of food and also over 4,000 units of 1.5 liter bottles of water. With that, I conclude my initial words and turn over to Guillaume for the details of our financial performances.

Guillaume Gras: Thank you, Marcelo. Good morning, everyone, and thank you for participating in the GPA Group earnings call. First, I’d like to point out that since completing the request to register Grupo Exito as a publicly held company in Category A and since its Level 2 VDRs were approved for trading, Exito’s results are now being reported separately from GPAs. Therefore, the financial information pertaining to the first quarter of 2023, which Grupo Exito released on May 3, can be found at the CDM and on its Investor Relations website. The impacts of Grupo Exito’s results on GPA are being considered in operations that have been discontinued as of Q4 2022. Starting with Slide 8, where we present the total revenue of Novo GPA Brazil, which reached R$4.8 billion in the first quarter of ’23, with a strong 15.4% growth.

After subtracting taxes, sales amounted to R$4.5 billion resulting in a 17.5% increase driven by new stores, the conversion to hypermarkets and the consistent resumption of customer flows in stores in recent quarters. The same-store sales indicator is up by 6.3% with a highlight on the 7.5% increase of the Pao de Acucar brand, which represents 46% of total sales. This is the fourth consecutive quarter where this brand has shown acceleration mainly marked by the progress made and the strategy to increase penetration of perishables as well as strong growth in basic groceries. The proximity format remained with strong double-digit growth at 12.4%. And this increase occurs even compared to a stronger comparison base from the first quarter of 2022.

And given the more pronounced seasonality this year with the resumption of the vacation period on the coast, after two years of restricted social isolation measures due to the pandemic. This has a punctual impact to this format because of greater exposure to Metropolitan Region. In the mainstream Mercado Extra and Compre Bem brands, same-store sales growth was 2.2% with a different performance between each brand. Mercado Extra reports consistent increase, offset by the negative impact of the business repositioning of the Compre Bem brand. At gas stations, we see a recovery in volume with same-store growth compared to the previous year at 18% due to reopening hypermarket stores after the transaction with Assai. In the same-store revenue comparison, we had a 6.4% reduction, which is due to the 21% fuel price deflation compared to Q1 2022.

And finally, in e-commerce, our GMV was R$402 million, which is 7.0% growth compared to Q1 ’22 and reached online penetration of 10.2% of total sales. As Marcelo has already mentioned, we consolidated our leadership in digital food retail, which in addition to leadership under the 1P model continues to grow in 3P partnerships where we’re already leaders in the main platforms. On Slide 9, we present the financial performance of Novo GPA Brazil, which does not include the effects of the international perimeter. I’d like to highlight that as of this quarter, we will no longer show the pro forma view ex hyper, given the immateriality of its effects on expenses 1 year after the piper markets were sold. Gross profit reached R$1.1 billion with a 24.4% margin.

As you can see in the graph on top, we have a better margin compared to the last two quarters. That is 1.8 percentage points higher than Q4 2022. This result reflects same-store growth, especially in premium formats as well as the development of commercial and business negotiations, the increased penetration of perishables and reduced losses. Compared to Q1 2022, the gross margin is down by 2.5 percentage points, in fact, impacted by high inflation, which puts high cost pressure on goods, labor and logistics and also due to adjustments from repositioning the brands and formats, which now are starting to show more effective positive results as of this quarter. Our adjusted EBITDA amounted to R$270 million with an adjusted margin of 6.0%, which is a slight increase compared to the last two quarters.

Compared to the first quarter of 2022, we show a dilution of 0.8 percentage points in SG&A with R$22 million less general and administrative expenses. This partially mitigates the effects that pressured our gross margin. Moving on now to Slide 10. We see our consolidated financial performance, which includes C Nova and the discontinued activities of the Exito Group and hypermarkets. Our continued net income dropped by R$167 million, reaching a net loss of R$315 million. And despite our consolidated adjusted EBITDA being in line with the first quarter of 2022 — sorry, ‘23, the financial result had a greater negative impact given the decrease in financial income related to the monetary restatement of extra [indiscernible] receivables and the increase in financial expenses related to the increase in the CDI rate here in Brazil.

On the chart on the right, we show the consolidated bad debt, which reached R$3 billion at the end of the period with a R$1.7 billion drop in the past 12 months. This is in line with our deleveraging plan. The company maintains a strong cash position of R$3.5 billion, which is equivalent to 3 times its short-term gross debt. And we maintain our focus on our plan for financial deleveraging with the sale of non-core assets and the advancement of the successful segregation of the Exito Group. On Slide 11, we have more details on the development of our operations schedule. As you can see here on the slide, since September ‘22, we have progressed in the segregation process. And in April ‘23, we had some significant deliveries with the end of the legal period for our position by creditors, which I should mention, completed without any challenge.

And also we completed Exito’s registration as a publicly held company with the CVM and submitted the request for a listing and including BDRs, Level 2 BDRs for trading on B3. From now on, we now await the ADR program to finish its registration with the SEC and the New York Stock Exchange to disclose our share distribution date, which should occur during the second quarter of 2023. I now conclude our financial results presentation, and I’d like to open the session for questions and answers. And please, I should remind everyone that here in this call, we have Carlos Mario and Ivana from Grupo Exito.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Felipe Cassimiro sell-side analyst with Bradesco. Felipe, we will activate your microphone so you can ask your question. Please Felipe, you may proceed.

Operator: The next question comes from Felipe Rached sell-side analyst from Goldman Sachs. Please unmute yourself so that you can ask your question. Thank you, Felipe

Operator: Our next question comes from Thiago Suedt sell-side analyst with XP. Thiago, we will now open your microphone, so you can ask your question. Please Thiago, you may proceed.

Operator: The next question comes from Nicolas [indiscernible] sell-side analyst from JPMorgan. Please unmute your microphone and feel free to ask your question.

Operator: The next question comes from Maria Luisa Guedes sell-side analyst at Citi. Please unmute your microphone and feel free to ask your question.

Operator: Our Q&A session has now been concluded. I will now turn the conference back to Marcelo Pimentel for the company’s final remarks.

Marcelo Pimentel: Once again, I’d like to thank everyone for attending our earnings conference. The results we’ve reported in this first quarter already show early progress with significant deliveries that point to our consistent planning and to the sharp focus our entire team has been working with. I always like to remember that we are in a three-year turnaround project and that being consistent in this process is critical, fundamental for its success. We had major signs of progress during this time. A month of March, like we hadn’t seen here at GPA in a long time. And this second quarter, we have already started in a different way, on another level. In April, we reported record-breaking Easter sales in different categories, and we’re also seeing a very significant seasonal period this quarter with Mother’s Day in May.

Our continued like-for-like growth this quarter, our progress on operational fronts in terms of on-shelf availability and our service level in addition to our store opening plan and our growth on the digital front. We have many levers, a lot of momentum and many deliveries ahead of us. So once again, I’d like to take the opportunity to thank the entire GPA team for their dedication in this process. Thank you to everyone, and have a great day.

Operator: GPAs earnings conference has now concluded. The company’s IR department is available to answer any questions you may have. Thank you very much for your attendance, and have a great day.