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Companhia Brasileira de Distribuição (NYSE:CBD) Q3 2023 Earnings Call Transcript

Companhia Brasileira de Distribuição (NYSE:CBD) Q3 2023 Earnings Call Transcript October 31, 2023

Operator: Good morning, everyone, and thank you for holding. Welcome to GPA's Third Quarter of 2023 Earnings Call. [Operator Instructions]. We'd like to inform you that this video conference is being recorded and will be made available on the company's Investor Relations website, where we also have our entire earnings publication. [Operator Instructions]. We'd like to highlight that the information given in this presentation and any statements made during the earnings call about the company's business perspective, projections and operational goals are simply beliefs and assumptions of the company's administration based on currently available information. Remarks about the future are not guarantee of performance. They involve risks, uncertainties and assumptions because they refer to future events and therefore, depend on circumstances that may or may not come to pass.

Investors should understand that the general economic conditions, market conditions and other operational factors may affect GPA's future performance and lead to results that differ materially from those expressed in these forward-looking statements. We have with us today GPA's CEO, Marcelo Pimentel; and CFO & Investor Relations Director, Rafael Russowsky. I'll pass it over to Marcelo Pimentel, who will begin his presentation.

Marcelo Pimentel: Thank you. Good morning, ladies and gentlemen. Thank you for joining us for GPA's third quarter earnings call. I'm very pleased to present this quarter's results because they demonstrate our high quality and consistency results, which were due to all the improvements we saw in different operational indicators. They confirm the choices we made during the last 18 months since we started the company's turnaround process. I'm going to start with our main deliveries and talk about the progress we made in the last quarter, starting with a 10% growth in our gross revenue compared to the third quarter of last year. We saw strong acceleration in our food e-commerce, up 15% in GMV compared to 2022 as a result of a solid strategy focused on increasing sales and gaining efficiency.

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We also posted significant growth in same-store sales, a total of 6.6% with highlights for Pão de Açúcar and Proximity, which I'll discuss in more detail on the next slide. The recurrent market share gains are also an important indicator that shows we are managing to deliver what customers want and need, and we're being recognized by them for it. This quarter, we gained 0.6 percentage points according to Nielsen data. To conclude on this slide, I can't forget to mention our EBITDA margin growth, both in comparison to the third quarter of 2022 but also in comparison to the previous quarter. We've reached 7%. I'll leave the rest of the financial indicators for Rafael to discuss afterwards. As I have done in our conference calls, I'm going to comment on our progress regarding the 6 pillars that make up GPA's strategic plan.

Starting with the top line. Pão de Açúcar same-store sales went up 7.2%, maintaining growth since the first quarter of 2022. They were driven especially by a strong increase in volume, which has managed to significantly offset the high deflation of some food items such as milk, meat, oil and others. The Proximity business also posted an increase of 7.7% in same stores, even in comparison with a strong third quarter of 2022. We should see an even sharper improvement in the Minuto and Mini stores as a result of the assortment review that is being done, which leads to a better selection of products in each store. This is something that has been done with Pão de Açúcar successfully. The increase in sales is also a consequence of an increased share of perishables both in premium and mainstream brands, due to the revision made on this category, focusing on quality and competitiveness, generating more traffic and recurrence in the stores.

And as these efforts have positive outcomes on each other, the response we have received from our customers on their acceptance of our businesses value proposition allowed us to advance for the fourth quarter in a row in market share gains across all formats, meaning both self-service and for Proximity formats. Another important factor for our top line growth is undoubtedly the control of out-of-stock rates. We've reached a historic low of 5.8% in this quarter. 94.2% in inventory. This was the result of a category management effort, which allowed us to reduce inventories and maintain a constant and more precise assortments in store shelves for our clients. Another point I'd like to give you an update on is that we've concluded all conversions from Compre Bem stores to Extra Mercado, in line with our plan to unify the value proposition of the mainstream formats.

This was a low investment project, which will allow us to capture benefits like expanding the assortment of our own brand products, especially Qualitá. Benefits from the Extra card and the Extra Clube app with tailored discounts participating in the Stix loyalty program and monitoring customers' NPS. The good news is that we can already see profitability bouncing back in converted stores this quarter. Continuing with our themes and the customers and NPS pillar. We saw an increase of 10 points compared to the same period last year. The main highlight was our service improvement with store team training, a focused effort to reduce SKUs, installing self-checkout kiosks, which were our main offender and projects to improve price perception. We also posted significant growth in the premium and valuable customer base due to the modernization program for the Pão de Açúcar MICE and a new customer segmentation based on consumption and frequency.

We have also made efforts to recover Pão de Açúcar's value proposition. On the digital front, we recorded a 15% increase in GMV, the highest growth rate in the last 5 quarters with double-digit growth in both 1P and 3P partnerships where we maintained our leading position in supermarket sales on the main platforms. Over the last quarters, e-commerce has gone through an important process to increase efficiency, which has allowed for a significant reduction in expenses with no impact on sales growth as you were able to see. Among the actions we've taken, we migrated 100% of the online sales operations from distribution centers to the stores, which has allowed us to fully integrate on and off-line, improving profitability with a significant reduction in cost structuring, which added to the stores margins.

At the end of September, we also announced an investment in Adobe's CDP, or customer data platform, a tool that will allow us to hyper-personalize consumer experience at scale, boosting our premium customer base and boosting sales on digital and brick-and-mortar channels. Moving forward, we have an update on the expansion plan. This quarter, we opened 20 stores, of which 18 were Proximity stores and 2 were new Pão de Açúcar in the cities of Atibaia, where we opened our first store and Sorocaba in the state of Sao Paulo. As a reminder, our expansion strategy is to focus on Proximity stores, especially Minuto Pão de Açúcar, which is a more mature format with high capillarity potential focused on AB targets that can quickly achieve maturity and good performance.

And to conclude on this slide, under the profitability pillar, I would like to highlight the gross margin indicators and our efforts to improve expenses and EBITDA, which have reached 7% this quarter. Rafael will give you some more color on this shortly. And wrapping up this overview of our strategic pillars in ESG and culture, we continue to deliver on our goals and action fronts. I'm very excited to announce that we've reached 41% of women in leadership positions, which came as a result of new hires and also promotions for women who participate in the company's development programs. Gender equality is a genuine commitment for all GPA leaders. Seeing these advances makes me personally very happy. With regard to combating climate change, we have cut Scope 1 and 2 gas emissions by 11%.

This is the result of projects and actions carried out in our stores. Across our value chain, we continue to make progress on our commitment to animal welfare, especially cage-free eggs. We have already achieved 65% of sales of cage-free eggs, in the Pão de Açúcar stores in pursuit of our goal of achieving 100% of sales across all brands by 2028. And finally, on the topic of social impact and creating opportunities, we launched the program to support the development of the GPA Institute's partner social organizations. We also supported the project, which works on creating awareness on healthy eating habits and reducing waste by donating food to communities in need. Those were my main messages for you. Now I'll hand over to Rafael, who will discuss the company's financial performance.

An aisle lined with shelves of fresh and frozen foods in a supermarket store.

Rafael Russowsky: Thank you, Marcelo. Good morning, everyone, and thank you for joining us. First of all, I would like to point out that with the completion of Éxito's spinoff process in August and the distribution of 83% of the shares we held in the company, our financial results now account for the remaining 13% stake at market value. Therefore, the result of discontinued operations presented in our financial statements includes 1 month of Éxito's results in addition to the impact of the discontinuation of hypermarket stores. The figures presented next represent continuing operations unless otherwise indicated. Starting on Slide 9, we present the total turnover of Novo GPA Brasil, which reached BRL 5.1 billion in Q3 2023, up 10% compared to Q3 2022.

Excluding gas stations, the increase was 9.5%, driven by a significant same-store sales, increase of 5.7% and the expansion plan with the opening of 49 new stores since the beginning of 2023, including 20 in the third quarter alone. The same-store sales indicator, considering the entire perimeter of Novo GPA Brasil, grew by 6.6% with the Pão de Açúcar brand standing out with an increase of 7.2%. As Marcelo commented, this growth was driven by a strong increase in volume, which significantly offset the impact of food deflation this quarter. This evolution reflects the consistency in customer delivery, which has strengthened the brand and brought more and more premium and valuable customers to our stores. Including the new stores, the sales increase in the brand remained strong at 11.6%.

The Proximity format showed an increase of 7.7% in same-store sales and strong growth of 21.7%, including expansion. The good performance of the Proximity format can also be seen in the 2.2 percentage point increase in market share compared to small markets in the greater Sao Paulo area. In the Extra Mercado brand, same-store sales growth reached 2.5%, similar to the increase in total sales. Food deflation plays a more significant role in this format, but we managed to accelerate volume growth especially in perishables, mitigating the deflationary effect. Moving on to the performance of gas stations, we saw strong growth of 18.2% in sales as volumes increased. And finally, we had a significant increase of 15% in e-commerce sales, totaling BRL 47 million with both sales channel, 1P and 3P showing double-digit growth.

I would also like to point out that we have implemented significant initiatives in recent quarters to increase the efficiency of the e-commerce operations. In particular, the closure of the dedicated VC and consequently with sales starting 100% from the stores this quarter. This move allowed for a complete integration between e-commerce and store operations with incremental sales for the fixed structure as well as a significant reduction in expenses related to the VC. On Slide 10, we present the financial performance of Novo GPA Brasil, which excludes the effects of the international perimeter. Gross profit reached BRL 1.2 billion with margin of 25.1%. As you can see in the chart at the top, we have seen a gradual improvement in margin over the last 4 quarters, which amounted to 1.3 percentage points.

This result reflects the successful execution of the turnaround plan with emphasis on continued sales growth that is outperforming the market, gains in commercial margin and reduction in losses. Adjusted EBITDA totaled BRL 333 million with a margin of 7%, resulting in an increase of 0.7 percentage point compared to the previous quarter and 1.2 percentage points compared to the third quarter of '22. It's worth highlighting the work done on expenses through the implementation of zero-based budgeting, which enabled us to capture significant efficiencies. Moving on to Slide 11, we come to the consolidated financial performance. The chart on the left shows our continued net income has reached BRL 809 million compared to a loss in the same period last year.

As the chart shows, we had a positive impact of BRL 804 million this quarter related to Cnova. This impact refers to the reversal of the noncash provision for accumulated losses relating to the 34% stake we hold in Cnova. This reversal is due to Casino's intention to acquire our stake as well as the absence of any current or future financial obligation of GPA towards Cnova and our intention to sell the asset. On the right is the net profit from discontinued operations with a loss of BRL 2.1 billion. Almost all of the losses related to the conclusion of Éxito's Group spin-off process, which generated a write-off of BRL 2.1 billion, most of which refers to the recognition of the exchange rate devaluation of the Colombian peso against the Brazilian real during the investment period.

Excluding these effects, the net loss would have been BRL 22 million. Now on Slide 12, on the left, we present the managerial operating cash flow. This quarter, we had a small operating consumption of BRL 9 million compared to a consumption of BRL 305 million in Q3 '23. This evolution was due to the improvement in the operating result, as we mentioned earlier, as well as an important 8-day advance in merchandise working capital. The chart on the right shows net debt, which reached BRL 3 billion at the end of the period with a reduction of BRL 507 million over the last 12 months. Leverage, measured by adjusted EBITDA, stood at 2.5x compared to 3x in Q3 '22. It's worth highlighting that this advance in GPA's financial performance is the result of the rigorous operational management we are implementing.

We're also rigorously implementing our financial deleveraging plan in order to achieve a capital structure that is in line with our operations. In this context, we had significant developments this quarter. We concluded the sale of the Barra da Tijuca site in Rio de Janeiro, totaling BRL 247 million. We received BRL 52 million from the sale of other non-core assets, and we announced an agreement of the sale of our remaining stake in Éxito for around BRL 790 million. These recent developments further increase our confidence that we are on the right path to delivering increasingly consistent and sustainable results. This completes my presentation, and we can now move to the Q&A session.

Operator: [Operator Instructions]. We'll start with the first question from Dani, an analyst from XP.

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