Sendas Distribuidora S.A. (NYSE:ASAI) Q1 2023 Earnings Call Transcript May 5, 2023

Operator: [starts abruptly] during the call regarding business perspectives, forecasts and operational targets at Asai represent assumptions and beliefs of the company as well as information that’s currently available. Future statements are not a guarantee of performance. They involve risks and uncertainties and assumptions because they refer to future events that depend on circumstances that could or not occur. Investors, should understand the economic conditions in the market and other operational factors that affect the performance in the future at Asai and need to results that materially defer from those in such statements in the future. Now, I’ll pass on the floor to Gabrielle Helu, the Investor Relations Director, Asai.

Gabrielle Helu: Thank you and good morning, ladies and gentlemen. so much for participating in our earnings call for the first quarter of ’23, at Asai. I’d like to present the executives present here. So, we have Belmiro de Gomes, our CEO; Daniela Sabbag, our CFO; Wlamir dos Anjos, Operational and Logistics VP, and Anderson Castilho, Operational VP. Before we start the presentation, I’ll pass the floor on to Belmiro for his initial remarks. Belmiro?

Gabrielle Helu: Thank you, Gabi. Good morning everyone. I wanted to thank you all for your presence in the first quarter of ’23. So, of course this is a quarter that is super important considering the last general shareholders meeting where we had a shift in the controller and now the company has no defined control. So, true corporation now. And on the eighth, now we’ll have the new board taking place. The board was elected in the last general shareholders meeting. So we have very skillful professionals that are going to help and support the company, during this transition period. So this of course helps us with the governance issues, but also contributing strongly to the business. And Asai keeps this history of growth that’s so high, over 30% in the first quarter, the total growth of 33% with an important highlight to the same store, the sales space.

And so we had important contributions with the expansion in the stores that were converted. And so, so we have some important share gains of almost 2.4% [ph]. It was the biggest share as essay has ever had in all of its historical track record. And we add a volume of sales of BRL4 billion compared to the first quarter of the previous year. So I also wanted to highlight our special thanks to the store teams that are in the day-to-day operations, working with almost a hundred million people that go by all of our stores in this first quarter in many different operations. And the company had a significant increase in the flow with over 16 million tickets. And overall these added up to BRL16.6 billion, the 33% growth, then the strong contribution in the expansion we had.

So I want to highlight that we’ve been keeping up a balance point between our growth and sales and the administration or management of the same store sale park. And this is a relevant amount, so it’s the biggest amount we’ve ever had of stores, new stores. At the same time, we have 60 new openings that took place in 2022 and over 29 openings in 2021. So this balance point in the ramp-up and the operation we believe was very strong. And so the gross margin, even despite this amount of stores, continues to be super stable compared to the previous year, with an increase of 0.1%[ph]. So this represents the fact that the new units are new stores are noting detractors are confiscating margins. Then other highlight is the discipline for these expenses.

So the cash-and-carry operation is a low cost business. So when we look at the variation of expenses that we’ve had compared to the previous period, it’s a lot more related to this bigger amount of stores. So it’s natural that a bigger amount of stores would have this during this ramp-up period a level of operational expenses that’s higher due to the amount of personnel or the media, that we work on, or all of the different activations that take place in the storm maturity. But in our perspective, we did have a balance point in these expenses. And with this, the operational aspects of the business has been extremely stable. The 33% growth in sales also brings an important increase in the gross profit and an EBITDA margin that’s relatively stabilized with 0.3% drop and a small variation considering that most of our store network about 40% was already open with this recently open stores, in the last two years.

So the net income has an impact, of course due to the cost of the carryover of the deck. We’re going through this period where you have a very dangerous combination of interest rates, the highest real interest rate in the world with food inflation at about zero, which generates pressure at a moment where the company’s going through this growth and an important growth trend for growth. And so we open up another three stores. These are three more conversions adding up to a total amount of sales of 266 stores in all of Brazil. And so we have another 28 stores under construction. We have 13 stores from the conversions of the hypermarkets that were acquired, and 15 organics, which were already expected. And so they’ll be opened throughout 2023 at bringing in even more contribution or acceleration in this growth process for the company, and of course, completing the hypermarket conversion project as we’ll.

We can advance, so now moving on to the project with the extra stores. It was the biggest conversion project for stores. And when we talk about these conversions from hypermarkets into cash-and-carry stores, it is a conversion that’s really impacting. So it’s different than when you convert like a brand to another brand or cash-and-carry to cash-and-carry conversion from a hypermarket to cash-and-carry operation requires structural construction work and refurbishing the model of the acquisition of the commercial spots. We just bought the commercial spot. We have no liabilities or risks involved in the operation from a labor contingency perspective or personnel perspective. So the stores to make sure we’re emptied out and we didn’t have any furniture left or anything else, they were completely remade.

Others are still under construction in these stores have only like five months of operation basically. So during the first quarter, we were mainly focused to the stores that were open in ’22. They needed to complete this process with the, the ABL and galleries aspects of these stores. Just the extra stores, for example, that came from last year. They had about 727 store shops and an ABL area. That’s really big as well. And so the adhesion of stores in these store of other shops in these stores really big. We have 46% vacancy because we’re just finishing the construction work now. But as these others businesses occupy these store areas in our store, this will attract more customers as well. So the stores are performing in line with what we estimate for this extra project at about 70% of this sales percentage.

So even with less of this op — than five months of operation, these stores have already been delivering a sales level that’s above the historical average in the entire Asai network, when they’ve performed close to about BRL22 million of monthly sales in the first quarter, which is a quarter that, as we all know, is a quarter that’s very challenging. And the positive point was that as we highlighted in the beginning of the project, these stores have a EBIDA margin that we never have in the organic stores. So this was already an important contribution to the five months of life in the first quarter after the opening cycle of 5%, after the IFRS 16 perspective. So that we have in the other store, park or network. So sales are at 2.2 times compared to what extra had before.

And 3.2 when we just compare the food perimeter since the hypermarkets, as we all know, have a real high sales of electronics and home appliances that the cash-and-carry operation normally doesn’t work with. So we understand the anxiety towards this project. We understand the anxiety or the immediate approach that this project could maybe bring, but just as any other project for growth, first you need invest, then you can reap. So, just as all of the growth processes, you always have this investment phase and then the maturity and our stores are recently opened, so they’re still going through this curve with a maximum of minimum levels expected. So we’ve been following this process and we reinforced our credibility and our different points and how these stores are going to contribute strongly to SA and how they’re going to be a very important differential in the future considering that they are in regions that are have high density.

So of course, with this kind of magnitude and this amount of stores, when we take a look at the ticket’s added in these stores, we have about almost four or 5 million custom tickets more per month. And of course, each store requires this kind of adjustment in its ramp-up curve. So adjustments when it comes to the margin assortments and competitive advantages, depending on the regions where these stores are part of are included. So the maturity curves follow along, of course, the difficulties in the market. We have a moment in the market that’s more challenging with consumers, a lot more focused on basics. And so this of course — this affects the overall store network in the company. So we can move on to the next slide, and I’ll pass this to Danny as she can highlight the adjusted EBITDA and the net income.

And then I’ll cover this a little more up ahead.

Gabrielle Helu: Thank you, Belmiro. Good Morning everyone. So, moving on here to the presentation. When we see slide four, you can see the EBITDA graph and the analysis of important increases BRL200 million year-over-year. And I wanted to mention three important points on this performance. So first what Belmiro already mentioned that’s important to highlight is the expansion. So a margin that we consider to be very resilient considering this strong expansion in the past 12 months, when we opened 59 stores. So we would expect a pressure that’s even more significant but the performance is really unique when it comes to the conversions that reach maturity quickly or even the quality of the organic stores we open. This really helps to keep up this level that we consider to be very sustainable up ahead.

So about the pre-Op expenses with this expansion, we always highlight that we have over 10 beeps in this quarter of expenses that are related to the stores that were open. So when we take a look at the this from a recurring perspective, the EBIDA reported would be a pressure of about 20 beeps and up 30 beeps. And when it comes to this pressure point in the margin, it’s important to mention that in the second quarter We had some margin pressures at about 50 beeps in the third and fourth quarter. So what I want to say here is that the pressure in the margins in the first quarter from a sequential perspective, quarter, quarter is a lot lower than what we noticed in the second semester of ‘22. Moving on to the next slide, we understand the financial earnings and cash generations of the earnings over BRL630 million, equivalent to 4.2% of the revenue.

And then excluding the lease interest at about BRL200 million, we have a net expense of BRL428 million representing this two point 78% of the sales. So this earning that’s affected by the CDI, it went up 34% and we had a CDI in the quarter of 243, to 325. And this is the main impact. But we also have a significant volume of the average debt in the quarter, which is a little bit higher than the debt that we had in the first quarter of ’23 in ’22, sorry due to the fundraising we had to implement to be able to fund the expansion. So the debt position was 10.9, but now it’s 12.7, besides the interest that’s embedded here. So when we look at the net debt, we end the quarter with 8.1 already considering the credit card receivables, and we have a leverage level of 2 78.

And that’s when we bring in the graph here at the bottom part. So we can show you that this level is really in line with the levels we’ve observed in the second and third quarters of ’22. And in line with the expectations we have for everything we projected in this huge expansion project we’ve been delivering. So even in the next quarters and the second and third quarter of ’23, we’ll be noticing a level that’s very similar to the first quarter of ’23. Everything’s kind of under control. Everything’s within the covenants we have combined with and agreed upon with the banks. We’ve been reinforcing this with Gabi in the meetings with Palm and myself, but we want to make it very clear that we don’t have any risks to of not fulfilling our covenant.

The deleveraging process is really keeping up to date with the calendar of this entire conversion project and expansion of the company, and that we foresee some deleveraging in the fourth quarter really in line with the levels we’ve reached in the fourth quarter of ’22, of 2.2. So it should be a very similar level, and we wanted to transmit this kind of comfort to you. And while we’re speaking about the cash generation accumulated in the past 12 months, We had a cash generation about BRL3 billion, and this made it possible for us to fund all of our investments, including the payments for the commercial real estate. And when it comes to debt and cash generation, it’s really in-line with our estimates if we consider all of the maturity of the 59 stores and the stores that are being that are reaching maturity, the organic stores as well.

And we see that above all of this, we have to reinforce that we have ’22 stores in construction phase. And finally, to end my part of the presentation, moving on to the next slide with the net income, as we highlighted during the presentation, we have operational results that are very resilient, but of course they still reflect all of these high investments that we’ve had in the expansion. And with this maturity expected, we want to highlight that the net income is really impacted by all of the maturity process that’s in progress. So as Belmiro mentioned, I want to highlight the issue with the organic conversions and the sales levels, the margin levels. All of this has been translated into greater productivity of sales per square meter, but also profits that in the future will end up reaping the quality of this expansion.

So amidst this context, we reached a quarter with BRL72 million of profit or net income, which is really impacted by the scenario with high interest rates that we’ve been facing in the country. These are my comments. Now, I’ll pass the floor back to BRL so that he can talk about our App and ESG. Belmiro?

Gabrielle Helu: Thanks Denny. And we launched our new App.Asai. I think a lot of people ask about our strategy and Asai for all of the online resources. And we really believe in the fidgeted strategy. We are one of the companies as the second biggest retailer in the country with a huge amount of people visiting over a hundred million people coming to our stores. And we believe that there are many opportunities in the app. You have a CRM base with over 7 million customers registered. It was the fifth app that was most downloaded in when we opened with over 30% of the tickets identified. And this helps us, I identify and the improve the purchase experience in the physical environment of our source. But we were also able to work with some other issues because since we work with end customers and also B2B customers in different types of sectors, we were able to offer special deals, special sales; customers that are registered can have some specific discounts, that are focused on their kind of profile.

We also have our campaigns and other initiatives that are performed together with suppliers. We have a very strong digital resource, and this has been very successful. This app will help us when it comes to greater customer loyalty and also to help ramp-up the new extra stores where you can also have the a level of information and the behavior of the purchases of our customers and our different target audiences as we’ve never had before. So I want to thank our team working on this launch. We should be reaping some very positive results in this fidgeted strategy that we’ve been advancing with. Now, on the next slide, when we get into ESG, obviously due to the size of the company 75, we have a very important role with social responsibility. And SA is always a reference and a benchmark when it comes to our relationship with society and esg.

So we have different initiatives. Now in the first quarter, of course, looking at the amount of store openings, and the company has been very much aware of this, and we were elected as the eighth best cash-and-carry operations in Sao Paulo, performing the assessments of the best in class. And even with such a big amount of stores here in Sao Paulo, you can see that the company’s on the right path. I wanted to highlight the GPTW index among the 10 best companies to work at with people with disabilities. And Asai is one of the very few people that have more than the minimum requirement. We have 5.4, even though the minimum require is only 5%, and a huge amount of employees that are over 50 as well, and other initiatives. So before we move on to Q&A, what we look at up ahead is that we see a challenging environment for all of the companies in Brazil.

It’s a lot more challenging. Consumers, as I mentioned, are a little more focused on basics and being more careful when they shop. We have a important slowdown in when we look at the earnings in the first quarter. In our perspective, the operational aspects are very well protected. But of course, as I, since we’re in this moment, we have the biggest investment in growth. Kind of pays the cost of this process. With the interest rate that’s so high in Brazil, we have the highest interest rate in the world. Basically, when you look at the food perimeter, it’s still the highest in the world because our inflation is pretty practically zero, and interest is so high. So when you have this mismatch and with the interest rate, we’re going to continue to be pressured when it comes to leverage.

So we keep up with our expansion plan. Most of this needs to be completed with the project, with the extra stores. We did have some difficulties with obtaining licenses, but most of them are already under construction. But of course now we’re being more careful with this new project so that it can really reflect the current interest rates versus the inflation that is existing at the moment in the sector. So this makes the company be more careful. Although we’ve announced the 40 stores this year, none of the projects were canceled. The, the organic stores, we can decide about when we’re going to start building. And of course, we’re going to have this new balance work to search for a drop in the, in our leverage position. But of course, we want to balance this out with our growth rates.

So the market as a whole has been working on this and high interest rates cost that are very high, this makes it makes us have to be more careful. So the company is really focused on the ramp-up for the storm maturity, keeping a healthy balance point between margins and the growth in sales. And our expectation is the stability. And we’re going to be landing at the end of the year with this net ratio of 2.2 times, just as we highlighted in some other moments. So these are the big challenges we’re looking at up ahead. And having said that, I would like to end and open up to Q&A.

Q&A Session

Gabrielle Helu: Thank you all. [Operator instructions] So let’s move on to the first question from Jean [indiscernible], the sell side analyst at Citi. Jerome will open up your audio so you can proceed.

Gabrielle Helu: So the next question is from Chima Cruz, the Sell side analyst will open up your mike so that you may proceed. Please check.

Gabrielle Helu: The next question is from Vinicius the sell side analyst at ATG. We will oh, enable your audio, so you may proceed.

Gabrielle Helu: Well, the next questions from Vinicius the sell side analyst [indiscernible] we will enable your audio so you may proceed.

Gabrielle Helu: The next questions from Ruben Couto, he’s our sell side analyst from Santander.

Gabrielle Helu: Continuing, the next question is from Daniella Egger from the XP sell site Analyst will enable your audio, so you may proceed, Daniella.

Gabrielle Helu: Moving on. The next question is from Joseph Jordano, the Sell side analyst from JP Morgan. Joseph will open up your a your audio you can proceed please.

Gabrielle Helu: Moving on. The next question is from Irma Sgarz from Goldman Sachs, Irma. We’ll open up your mic so you may proceed, please.

Gabrielle Helu: Moving on, now we’re going to go to our last question, which is in English. It’s from Andrew Ruben, our sell side analyst at Morgan Stanley. Andrew, we’ll open up your mic, so you may proceed, please, Andrew.

Gabrielle Helu: Sessions officially ended, and now we’ll pass the floor back to the company for their final remarks.

Gabrielle Helu: Thanks, Everyone. Participating. of course, we discussed the main points and covered them in a very transparent way with the questions, concerns, and advantages we’ve been able to achieve. There is a challenging environment. The companies at this really on the right track. And so we’re based on growth. We’re looking at the future. We want to invest and we want to reap these results up ahead. So we know that this moment is a moment that has a combination of high interest. We’re opening up most of the new stores, and this is going to lead to a more, a stronger company that’s going to be better positioned. So we have good things and we need to have patience and work on this maturity of the stores we open up in the first quarters.

And there’s some other factors that we need to look at that go beyond the company’s interest. When it comes to interest rates. That’s we all expect this interest rate can be a little softer. And in our perspective, it was a lot more positive.