Sendas Distribuidora S.A. (NYSE:ASAI) Q1 2024 Earnings Call Transcript

Sendas Distribuidora S.A. (NYSE:ASAI) Q1 2024 Earnings Call Transcript April 25, 2024

Sendas Distribuidora S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning everyone and thank you for waiting. Welcome to the Earnings Call for the First Quarter of 2024 Assaí Atacadista. I want to highlight that if you do need simultaneous translation, we have this tool available on our platform. To access, please select the interpretation button through the globe icon on the bottom part of your screen and choose your language of preference, Portuguese or English. This earnings call is being recorded and will be provided on the IR website in the company at ir.assai.com.br where you can already find the earnings release. During the presentation all of the participants will have their mics off. Soon after, we’ll begin the Q&A session. To submit a question, please select the Q&A icon on the bottom part of your screen.

Write your name, company and language to enter the queue. As you’re announced, a request to activate your mic will appear on the screen. Then you must activate your mic to submit questions. All questions should be submitted at once. We want to highlight that the information in this presentation possible statements that could be made during the earnings call related to business perspectives, forecasts, and operational and financial targets at Assaí represent beliefs and assumptions of the company’s management, as well as information that’s currently available. Future statements are not a guarantee of performance. They involve risks, uncertainties and assumptions because they relate to future events and thus rely on circumstances that could or not occur.

Investors must understand that general economic conditions, market conditions and other factors may affect the future performance at Assaí and lead to results that differ materially from those listed in such future statements. Now we’ll pass the floor on to Gabrielle Helú, the Investor Relations Director at Assaí.

Gabrielle Helú: Good morning, ladies and gentlemen, and thank you for participating in our earnings call for the first quarter of 2024. I want to present our executives present today during this discussion. We have our CEO, Belmiro Gomes; and our four VPs, Vitor Fagá, the VP for Finances and Investor Relations; Wlamir dos Anjos, Commercial and Logistics VP; Anderson Castilho, the Operations VP; and Sandra Vicari, VP for People and Sustainability. Before we begin the presentation, I’ll pass the floor on to Belmiro for his initial remarks. Please, Belmiro.

Belmiro Gomes: Okay, thank you Gabi. Thank you ladies and gentlemen, for your participation in one more earnings call at Assaí. Our VPs, I want to thank you for your presence also as they’ll be participating in this presentation and also Vitor. He’s – warm welcome. He just joined our team recently. He is going to talk about our financial aspects and other contributions. So welcome Vitor. And now, as we get into the presentation, I wanted to thank our team from all the different areas. I want to thank our board as well for their support and interaction with the company. And also we want to thank the 76 million customers that have been visiting all of our stores. During the first quarter, we had an increase of 13% in the customer flow.

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Q&A Session

As you can see, we like highlighting this a lot and really looking at this in a nominal way. 76 million means a progressive of over 10 million tickets within the first quarter. More than 3 million customers in these three first months on average per month, due to the conversion work. So, to summarize this, it really demonstrates the resistance, the business model, the precision and the value proposition and the strategies also for plans we worked on with changes in the actual model. We’re going to disclose this more during the presentation. And of course, within this evolution, I think Assaí has been one of the main protagonists in the food market. In the first quarter now, the company reached 293 stores under operation, which means that till the end of the year, Assaí will go over 300 stores in activity in Brazil.

And in the first quarter we had some openings that are very important. Our second unit in Macapá, our first unit that was installed four or five years ago, which is a very productive unit. It’s a market that’s very logistically challenging. And another unit in Vila Maria, which is very significant, where we had our first cash and carry store set up when macro arrived in 1972. And it’s a very important unit also in Cidade Tiradentes, which is another unit in Cuiabá. And we just opened the second store in Espírito Santo. And also moving on with the expansion plan that Assaí has for that market. So we just went through a huge expansion process, 28 openings and 80 openings when we add up the last 24. So there’s still a good amount of the stores that are in expansion that are still in maturity phases.

Considering the numbers in the first quarter, they consolidate the level of expenses. And the changes that take place in our business model did not change the proposal of our business model, which is really to be the best cost option for customers and final consumers, and also for B2B customers, as well as search for ways to conquer new markets and customers, and especially new social levels in different regions. And we’re going to talk about this throughout our presentation. So the conversion project was basically finished. The level of EBITDA that we deliver within this first quarter, as you saw in the earnings release, it really makes the company get back to the levels of pre-IFRS EBITDA margin levels that we had before we began the conversion process.

It was a really important evolution, 38% in the EBITDA margin and the pre-IFRS EBITDA. So we’re really highlighting this because in the last strategic projects we had, they really changed our lease expenses because now we’re operating within the store network with stores that are more central. And as we consider this from a real estate perspective, they’re basically irreplicable in Brazil. So our EBITDA margin progression, as we’re going to look at up ahead, brings the company to consolidation these numbers and within advance, that’s very important in the same stores in the quarter. So this quarter has two important impacts. We have the calendar effect with Easter, which is not that significant in our sector, but we also have the 29 February, which has a significant impact.

So with this, we delivered R$18.8 billion in revenue, 14% growth compared to last year. And considering the combination of the progression of the same stores that I highlighted, but also considering the progression of the 20 new units that were opened in the last 12 months, and if we were to calculate this, we’ll see that from the 28 units, 14 of these are organic and 14 are conversions, then we reach an average sale of R$18.2 million or R$18. million in these units that were recently opened. Of course, they come in to their curve also for maturity and progression, but a level that’s higher than what we noticed in the market. The company also registered an increase in the market share in the same store vision, which we believe really demonstrates this precision, especially with the conversion project.

The net income that Vitor will also highlight a little more we have two points to highlight here. With the layer evolution in the first quarter, the base was really impacted by the conversions we had recently worked on. At the end of 2022, in the first quarter, as we’ll see, we had about 60 new stores that had started their margin curves. And another highlight in the quarter is demonstrating the capacity to generate cash in the company and the business model, which really makes us reduce the level of leverage and related to the fourth quarter [indiscernible] because we know there is a seasonality effect that’s very strong. And all of this allows us to re estimate the net debt-to-EBITDA levels now for the end of 2024. We talked about this in the Investor Day with a net debt-to-EBITDA ratio of 3.5, which will now allow us to re estimate another level that’s lower than 3.2. And we’re going to make sure this can be even lower than this in the next quarters.

We can move on to the next page. So here we can see we have an evolution in the conversion project, as we all know. We highlighted this in other opportunities with the purchase of the Extra Híper points. And this was all part of a strategy at Assaí, with our entrance into the central regions with a more challenging project, where, as I’ve mentioned, we even had 18,000 people, sometimes working simultaneously in civil construction. These stores are in regions where our model was not that present yet. So it really considered an increase of consumers and an increase in capacity for sales and margin generation. We look at the profits in the first quarter. We have a progression in that group of 47, which were 23%, and the pre-IFRS margin doubles from the first quarter to this one now and a progression in the sales of about 20 – about 18%, which leads to an average level of R$26 million.

So the store network, the Extra store networks that are still in the beginning, they still have been around for less than 24 months, but they deliver a pre-IFRS margin level that’s in line with the company overall. And that’s visible when we look at the pre-IFRS EBITDA if not, we wouldn’t have had that progression of 90 bips that you all saw. You can advance on to the next page, please. So the gross profit here we really demonstrate the capacity to generate value because the EBITDA will have a combination, but then you have the gross profit that really demonstrates the strategy adopted. The gross profit in this period went up from 186%. And so in 2019 we were doing R$1 billion; in the first quarter, this went up to R$2.8 billion and with an increase in the gross margin of 15.3% to 16.3%.

And that was all part of this strategic rationale for the evolution. Because this increase in the gross profit was necessary to cover the model where some modifications made in the last few years, which included an increase in the product mix and a search for improving purchase experiences and the deployment of stores in the central regions where the cost of lease and IPTU property tax were greater than what we had already considered. But in our plan, there was already a change in the Cash & Carry format to be able to enter these higher social levels. And also as we include these new services, besides improving the purchase experience, we also consider the increase in replenishment. So when you look at Brazil, we have, when we divide both publics between the 40% B2B and 60% B2C, we’ve been trying to, besides the monthly shopping or bulk shopping, also be a replenishment purchase option.

So we don’t rely that much on inflation periods when this big bulk shopping is the best option for most families. But when we look at the Brazilian market, we see an increase in labor and the amount of informal workers as well, and really small businesses. So we can see it’s a kind of labor that doesn’t receive like a monthly salary, but a daily payment, right? So this went up to about 15.3% of maze, which is like an individual company. They are Uber drivers or they make daily wages. It’s normally more difficult for them to have like one big bulk shopping. So a lot of the operations made in this model [indiscernible] present a better purchase experience. They intend to keep this resilience be an option for prices for businesses, bakeries, grocery stores, that are going to supply themselves in the food service, but also – regardless of the final consumer, the B2C customer wants to have a smaller amount in a replenishment purchase.

We want to be positioned and well in this. And this made the company a lot more resilient to be able to face any scenario or any adverse scenario or external turbulence we may face. You can advance, please. I think this is really visible with all of the changes. So the fourth quarter always has this kind of seasonality effect. And we had a lot of discussions about the changes made in the business models, the stores in downtown areas, including new services and all of this. So it provides this kind of level of disclosure, right. So if you discount the lease and the pre-IFRS, you’ll see that the level of expenses at SAE, that was 9.5, now closed at 9.4. Even with all of these changes, the increase in the mix, the increase in the services that we place in the stores and the rental calculations reflect the company’s position having stores in more central regions.

And I think this demonstrates it was very precise, especially for customers in Brazil, where we have a metropolitan area with major density, logistical challenges and traffic. And having these more downtown stores becomes an important option for consumers as they also become consumers and businesses in the surrounding areas. So in the conversion process, most of the leases should consider a dilution curve. Still, since most of our leases consider fixed values, and as you reach maturity and they continue in this maturity process, this expense continues to be diluted, but more than offset by the increase in the gross profits. Moving on to the next slide, before I move on, all of this combination is visible in the pre-IFRS EBITDA. So the company had levels of investments that are really high to be able to reach this other positioning.

And the company is the second biggest food sector player in the Brazilian market. We’ve been having a constant sales progression, but we’ve also considered balancing out the growth of our sales but also balancing out the results. So we always mentioned the hypermarket project was a project with the beginning, middle and end. And now when we have these stores contributing more generating cash, Vitor will talk about this process in this deleveraging process and this is going to really be visible and return to this new level, right. So we go to R$670 million and this demonstrates the fact that this strategy adopted and with the correct strategy and precise strategy, the company becomes a lot stronger to continue advancing from now on with organic projects and new opportunities as well.

As we mentioned last year, we became the company’s most present in the Brazilian households, one in every four buys at an ASAI store in the São Paulo region. So we still see a lot of opportunities in many other states. So then finally, you have the EBITDA issue and we’ll pass this on to Vitor and he’s going to get into more of the financial details.

Vitor Fagá: Thank you, Belmiro. Well guys, now we’re going to talk about the impacts of our financial results because understanding these impacts is fundamental to also look at the layer and the net income and the variations compared to the last period. So in the first quarter this year, the financial results were impacted by four main events and they also bring a pretty big difference and considerations when we consider the same period in the previous year. First of all, the completion of the payment for the acquisition of the hypermarkets, besides this, the MTM of the swap instruments we have for some debt tools we have that are considering IPCA-plus or the pre and we swap that to CDI. So this swap operation also was adjusted.

And the third factor is the non-capitalization of some interest related to stores that were in this conversion process. And finally, the reduction of CDI. In this period, I want to highlight that two of these factors, the MTM as well as the capitalized interest are non-cash effects. And these two effects jointly add up to over R$100 million in the first quarter. When we take a look at the layer, this is mainly impacted layer would be the profits before income tax. And this is mainly due to the maturity of the new stores and the control on expense dilution, as we can see in details. And also when we consider the growth of the financial results that I did provided in details, considering these four factors and this growth is important as it demonstrates the results in the profitability of the company due to the store maturity process and dilution of expenses.

And finally, we reached the net income which had a growth of 19%. As Belmiro mentioned in the beginning of the presentation, as a consequence of this evolution in the financial results and the profits before interest that we just observed, but also considering the comparison with the previous year, it’s impacted by the end of the subvention for investments, which modified our comparison basis and leads to this growth of 19% in the period. Next slide please. Now we’re talking about cash generation. So we had a cash generation that was very significant in the period. We were able to have operational cash generation of R$4.9 billion in the last 12 months. And one important point to highlight is the growth, considering the cash generation we had in the end of the first quarter last year of R$1.7 billion.

So this was a significant cash generation growth when we compared 12 months with the same period. And even when we compare this in a sequence, the cash generation that we had, which ended in December 2023, throughout the year, this cash generation we notice now in the first quarter is R$300 million higher. So this demonstrates that the evolution of the conversion process in the stores and the EBITDA growth was really reflected in the cash generation. And besides this, it’s important to also notice that we had an improvement in the working capital cycle, an improvement of almost five days, 4.6 days, impacted mainly by an improvement in the levels of stock. We described this movement and the details in this process in the release, so that you can get a better feel on this evolution as a consequence of all of this cash generation and the CapEx and the cost of the debt, we have, when we compare the 12 months, we have a net debt that’s pretty much stable, R$13.7 billion to R$13.8 billion.

And the main factor here is the deleveraging process the company is experiencing, as we can see on the right side of the graph. So the reduction of the leverage where at the end of the first quarter was 469 times EBITDA, and now it goes on to 365 times the EBITDA. So it’s almost a reduction of almost one times 0.94. And it’s important to see that this reduction in the leverage was due to the evolution of this EBITDA. So we can see in the bottom part of the graph, there’s an evolution of R$2.9 billion in accumulated EBITDA in the first quarter to R$3.7 billion now. So the deleveraging has been taking place through this strong operational evolution and the growth of the EBITDA. And as we can see, the net debt was kept pretty much stable in this period.

So these were the comments guys about the financial expenses and results and cash generation and leverage. And now, I’ll pass this on to Sandra as she’ll be talking about the ESG initiatives in the company. Sandra, please.

Sandra Vicari: Okay. Thank you, Vitor. Good morning, everyone. Ladies and gentlemen, as Vitor mentioned, I’m bringing the vision of our sustainability initiatives in this period where within our strategy for sustainability. We’ve been trying to evolve more and more with our commitment to the best responsible operational practices, trying to minimize our impact environmentally. Our strategy has also been to leverage the prosperity to everyone. And this is sustained by three pillars. So first, I want to highlight the pillar of official operations where in this quarter, we had an important highlight, considering our reductions of emissions where we were able to reduce 9.5% of the Scope 1 emissions. We continued in line with our target of 38% reduction till the 2030.

We also considered over 40% of waste coming from operation through recycling practices, composting and reduction of food waste. And here I want to highlight our correct disposal program, which avoided that over 370 tons of fruits, vegetables and projects would be sent to landfills. And that also demonstrates our commitment to this. And in this period, we also performed the third edition of the premium this award for the top Log Assaí. And it considers the suppliers that support this process for supplying the stores with excellence and we also consider the sustainability category this year where we’re able to also recognize the best practices of our suppliers in regards to fighting climate change. In the development – people, development and community pillar, we’ve been investing strongly in the training and development of our over 80,000 employees.

And we’ve also been promoting initiatives constantly that contribute to the very diverse labor environment where we can provide the resources so that everyone can be valued and respected. As you can see in our slide, our numbers reflect this. And I wanted to highlight that our over 43% of black people in leadership positions, which is something that makes us very proud, pride. We also have amount of people with disabilities that’s above the legal quota for over eight years and 25% – over 25% women in leadership positions. We were also recognized for the second year consecutively in the ranking diversities, reaffirming our commitment to equality and inclusion. And we are also committed to food safety and food security in the communities where we’re present.

This quarter, we donated over 140 million tons of food. And we also became signatories to the pact against hunger, reinforcing our commitment towards fighting hunger in our country. And finally, in the ethical and transparent pillar, we had the disclosure of our Annual Report for 2023. And it demonstrates our results and how we reach these throughout the year. And it also reflects how our strategy for sustainability, it permeates the entire company, reinforcing our transparency towards all of our stakeholders. Our commitment to sustainability is an ongoing process and we plan to continue to evolve and especially contribute to have a more sustainable future with greater prosperity for everyone. So that’s what I wanted to share and I’ll pass the word on to Belmiro.

Belmiro Gomes: Well, thank you, Sandra. I think that brings in an interesting chapter. When we look up ahead, we can see in my presentation also Vitor’s presentation with a leverage issue in other calls, which is the biggest focus. The company is a big cash generator and Assaí has always – the last time we received resources was in 2010, we were always able to grow and grow a lot becoming one of the biggest companies in its most present in households, with our own cash coordination, and the biggest risk we had for payment to GPA was just done now in January 2024. So we have no more payments. And now the company has a stronger cash generation, considering the maturity, as we can see this together. And also this reduction, of course, now the interest curve is stressing us a bit and we have a reduction in the interest rates as well, which should help reduce our levels of financial expenses.

We have 15 stores expected for this year 2024, and then we’ll go back to a level of expansion of about 20 stores or so for 2025. So this year, as we mentioned, we have a slow – a lower level of investments compared to what we had in previous years and within this period – this process of balancing our ongoing growth, but also the deleveraging. And we also have major opportunities when it comes to digital as well as category adjustments. As I mentioned, we still have about 30% or more than 20% of our store network still in maturity. Most of these stores have some opportunities that the company has been searching for ways to explore in different projects, and we’ve been working on these in certain regions in Brazil. And our size and capillarity allows us to work on different tests, and this model should continue advancing.

So there’s still some category adjustments, and I think there’s still opportunities in some of the commercial galleries as well that continue to have this deployment process, and now an initiative for commercialization as well for advertising, places – spaces. So when we look at 2024, of course, we have all of the uncertainties. We still see consumers quite pressured, although we did see constant drops in unemployment rates. The purchase power of the population is still pressured by debt levels, most of them with high quantities of delinquency. But that makes our model continue to be attractive, because saving money is important regardless of the social level or level of income the person has, which places us in a very good situation compared to the other food formats.

It’s a little bit more favorable within this scenario. And when it comes to inflation, depending – except for some very big external factors, we’re estimating that the food inflation will be about 3% to 4% and a gradual recovery in the traded pandemic, but nothing too strong for 2024. So the numbers in the first quarter already demonstrate this. Once again, the consistency of the company and what we presented within this strategic plan for growth that we were able to demonstrate – but we do hope this year will be less adverse than last year. So now I’ll pass the floor back to Gabi, as we begin the Q&A.