Companhia Brasileira de Distribuicao (CBD) Q4 2019 Earnings Call Transcript

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Companhia Brasileira de Distribuicao  (NYSE:CBD)

Q4 2019 Earnings Call

Feb. 20, 2020, 8:30 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning, ladies and gentlemen, and thank you for waiting. Welcome to the GPA Conference Call to present the Results for the Fourth Quarter of 2019 and for the Year of 2019. This event is also being broadcasted via webcast, which can be accessed at, with the corresponding presentation. The slide selection will be managed by you. There will be a replay option for this call after the end of this presentation.

We inform you that the Company’s press release is also available at its IR website. This event is being recorded, and all participants will be in a listen-only mode during the Company’s presentation. After GPA’s remarks are completed, there will be a question-and-answer session, when further instructions will be provided.

[Operator Instructions] Before proceeding, let me mention that forward-looking statements are being made under — that related to the beliefs and assumptions of GPA management, our beliefs and assumptions of the management as well as currently available information. They are not assurance of performance and they involve risks, uncertainties and assumptions, and depend on circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of GPA, and could cause results to differ materially from those expressed in such forward-looking statements.

Now, I’d like to turnover to Mrs. Isabela Cadenassi, Investor Relations Officer of the Company. You may proceed, madam.

Isabela CadenassiInvestor Relations Officer

Good morning. Welcome to our conference call for the results of the fourth quarter of 2019. Ronaldo Iabrudi, the Vice Chairman of the Board, Peter Estermann, CEO, Christophe Hidalgo, CFO, Belmiro Gomes, the President of Assai, and Faical, President of Multivarejo. Peter, turn over to you.

Peter Paul Lorenco EstermannChief Executive Officer

Thank you, Isabela. I’d like to thank everyone who’s attending this call. I thank you for your interest in listening to our conference call for the results of the fourth quarter of 2019 and for the year of 2019.

Let me start by saying that we are very pleased to have completed the year of 2019 as the largest food retail company of South America. As you know, at the end of last year, we completed the acquisition of 96.5% of the Exito Group. And with that, we have strengthened and expanded our operation in the group. Another important point that I’d like to highlight, that this was done with the highest levels of transparency and governance as you could follow up.

I am very pleased that we are completing the process of transferring GPA to Novo Mercado, and we are migrating this process and it’s — probably expect to conclude that in the first quarter. This is a leader, and in 2019, it has had its highest performance of sales in the last three years. These are the Exito’s results. This is because their performance was very good and also because of the strategy they developed involving innovation.

Basically, there were three pillars that consolidated this strategy. First, the expansion of value formats. Very similar to the strategy we use at GPA Brazil also because of the omni-channel strategy related to the joint work and the synergies that the company has used in the past years, that totaled almost 75% growth, and obviously, the contribution of complementary businesses, including real estate businesses. We have many real estate businesses. And also, in Exito Colombia, we have millions of users there and the two-year program, one of the main issuers of credit cards in Colombia, with over 50,000 different stores.

We’ll have more details on the Exito’s results, but its business has contributed to the results of GPA, BRL2.4 billion in EBITDA and a very high margin of 12.4% in the consolidation of its operations in December. It’s important to say that in Colombia, December is a very seasonal month — highly seasonal month. In Brazil, we are very pleased to say that Faical is now reaching us. He was an executive from the Company with over 25 years in the market, and now has become CEO. And during the 12 years he has been with the Company, he worked in several areas in multi-retail, and now he’s being the CEO of Multivarejo. And he will also give you the details on the activities he has been leading.

Assai had a very good performance. We’ll also provide more details about that. The Assai banner of the wholesaler has shown advances in customer traffic and market share month after month, despite a strong comparison base of previous months. I’m very pleased and very confident of the work plan that Belmiro has led with his team and with the results that we have estimated for this year.

2019 was a year of consolidation of the review processes and the strategy of GPA portfolio, especially involving Multivarejo. We also get more details later in this call about that. It’s important to say that we have also opened 122 new stores between conversions, renovations and new stores in the Generation 7 model of Pao de Acucar, and 70% of the renovation of Extra Super and Compre Bem.

It’s also important to note the consolidation of GPA’s position as an absolute leader in the food retail business in e-commerce, it was in over 40% growth in the year, leveraged by Express Delivery model, ship from store, 116 stores of the company have that, and the Click & Collect 119 stores, provide the service. We have our private-label strategy with 2.7% [Phonetic], and we hope to reach about 20% until the end of the year. I’m very optimistic about 2020. The outlook is more positive from the macroeconomic perspective.

We are at the beginning of the process of a continuous and gradual resumption of the market. And also with the new interest rate levels, we believe that Brazilian families will have higher purchasing power. At the Extra group, Exito Group also have very good perspective. The GDP is expected to grow by 3.5%, and also a gradual reduction in the unemployment rate, which reinforces our position and the importance of GPA being exposed to different types of economies in South America.

For Assai, we have a very bold plan for expansion, the largest ever as we announced at the end of last year that will strengthen the regional presence of these brand in markets and regions where we have not reached yet. We have very good growth opportunities that — and Belmiro is going to talk more about that. Our expansion plan is very ambitious with Assai, and we hope to reach over BRL50 billion in revenue with Assai.

In Multivarejo, our focus is in the execution of optimizing the portfolio of stores, recovery of hypermarkets, because that’s the format that will dedicate more efforts to — in Multivarejo. And with the focus of our execution, I would like to renew our confidence in the execution of the strategy and delivering better results, supported by continuous quality and efficiency — operational efficiency.

Christophe is now going to make comments about the financial aspects.

Cristophe Jose HidalgoChief Financial Officer

Good morning, everyone, and thank you for participating in this conference call regarding the fourth quarter of 2019 and the year of 2019. We’ll start this presentation saying about the main results of the GPA consolidated, consider the post-IFRS 16 accounting standard. The December results for the Exito Group are part of these figures.

Now on Slide 4 [Phonetic], I would like to highlight that we have a very strong growth of rate in growth sales. This is leveraged by a significant and profitable performance of Assai of about 22% in the year, and we also have some contribution across revenue of Exito in December of BRL2.4 billion. The gross margin have reached 21.3% of sales in the fourth quarter and 21.5% in the year, showing that Assai is more representative and also reflecting more investments in Multivarejo to improve competitiveness — price competitiveness in all formats, and also to leverage the open — reopening of stores that have been renovated.

There’s also been a significant dilution of 60 bps in the year-end in the quarter, favored by expense control efforts in Multivarejo and Assai. Still on Slide 4 [Phonetic], the adjusted EBITDA has shown an advance of 13.3% in the quarter and 7.9% in the year. This result is done mainly by improvements of profitability of Assai and the positive impact of the first consolidation of Exito as mentioned before.

With that, we have completed the year of the GPA consolidated shareowners of BRL790 million, a 1.4% margin. This result was approximately impacted by BRL150 million post-tax costs related to the business that consolidated the purchase of Exito.

Now on Slide 4, we see that the financial result was BRL442 million in the quarter, 2.5% of net sales and BRL1.2 billion in the year that’s equivalent to 2.1% of sales. The main component of this financial result — consolidated result, has to do with the expenses due to the purchase of Exito.

As to indebtedness, we are in line with what was planned, and has to do with our shares in the group of Exito and also the sales of interest in Via Varejo and also the cash consolidation of Exito. As a consequence, the net debt adjusted totaled BRL6.1 billion and 1.5 times the adjusted EBITDA pro forma — adjusted pro forma. That’s a good level for this scenario of low interest rates and economic uptake. We hope to maintain this leverage level by generating operational cash and also the monetization of several assets.

We have maintained a high level of capex in the year that reached BRL2.1 billion, which is in line with our strategy of strengthening of the portfolio. We have also seen a significant number of new store openings of Assai, 22 stores. The banner already represents 54% of sales in Brazil, and we will be even more representative by opening new stores and by converting Hiper Extra.

We also completed the first phase of the transformation of Multivarejo by means of the renovation of 22 stores of Pao de Acucar, the opening of 10 stores of Minuto Pao de Acucar and the conversion of 77 Extra Super and Mercado Extra and 15 Compre Bem. In this first stage, will be followed by other stages for this year to build a portfolio, which is ever more adherent to the competitive scenario of the country.

I end my presentation with the main indicators. I turn the call over to Belmiro, who will make comments about Assai.

Belmiro de Figueiredo GomesOfficer of Cash and Carry Business

Good morning, everyone. Thank you, Christophe. As has already been mentioned by Peter and Christophe, the fourth quarter was extraordinary, the best since the Company started its renovation initiative. Fourth quarter has an additional number of sales of BRL1.5 billion. This was a result of the higher traffic in the new stores, and 2.8 million clients were added for the quarter on the average per month, and it’s about one country of the size of Uruguay and have added to our business.

So, 13 new stores were opened in different states. Assai is now present in Rondonia and also in Amapa, with the opening in Macapa unit. The fourth quarter was very positive with a record of stores being opened. And we also have internal factors that allowed us, even with all the difficulties faced with this challenge of opening stores in different countries in Brazil. We had an increase of 100 bps in relation to the previous quarter from 16.1% to 17.1%. This improvement is a result of the mix of stores opening and the complex and the network of stores that were opened.

We did not need as happened in the previous year an additional effort for the opening, and the calendar also helped us when there was a natural motivation for this increase. And we have also — you can see that the strength of the banner. And in Rondonia, for example, was one of the best openings for the first phase. And we noticed that there is a knowledge, a recognition of the banner, and especially by the small businesses, when Assai arrived with its proposition of value.

In the fourth quarter, we had important gains. We had the lowest level of out of stock and it was favored by the commercial margin and telesales had an important impact, but the overall result was very positive in terms of margin. And considering the expenses, even considering all the efforts made for the opening new stores, we have a lot of training and qualification efforts to allow us for this opening of the stores, we were very disciplined in the control of expenses. So, we kind of set off all the effects caused by the expenses, and the expenses were very stable in relation to the previous years amounting to 10.1 in relation to the gross sales.

The fourth quarter delivers an extremely important result. As mentioned before, we reached an EBITDA of 7%, which is a record for the — for our Assai. We managed to deliver in the fourth quarter the number of stores that were planned to be opened, and the results were as expected.

2019 was a very positive year for Assai. We grew by 22%, 55% — 50% in two years. In 2017, we reached BRL20 million. In 2019, we exceeded BRL3.4 billion in sales. And after the 22 stores opened in last year, now we have a maturation of this network of stores. And even if no store were opened, the revenue would reach BRL34 million, considering the annualization of the stores that have been opened.

Gross profit added 10 bps and the market share reaches 29%. 22 stores were opened, 40 stores in two years. And in 2019, expenses dropped. We had a reduction in expenses, and that allowed us to capture all the improvements and deliver it in the EBITDA results, which was established 6.3% as a percentage basis, but instead of BRL1.380 billion, we reached BRL1.740 billion for 2019.

And some points that I would like to highlight are the following. We continuously seek for excellence at the store in our service provided to the client. Our focus is ever more on the setting of the story, the structures of the work and purchase experience. Last year, Assai received a number of prizes. And what led to that was basically an improvement, which was the problem that we used to have that is related to delivering a very pleasant sales experience, offering mix necessary for the customer, be them individual or corporate. And this is a result of our engagement, our teamwork, our culture.

In 2019, in addition to financial numbers, we also have to mention the value of the investments we made. More than BRL1.5 billion and we created more than 7,000 new job openings. And more than 5,000 people are working in our civil construction works. And we built more than 120,000 square meters. And the 22 new stores have 28 kilometers for a product, and we are able to serve 3 million clients in addition to delivering the EBITDA margin. So, we reached 3.6% in terms of net revenue. And Assai has been able to maintain its path of strong growth without affecting the margin or having any relevant impact, which would be natural in a period of expansion. And we have been very assertive in our efforts, focused on our organic stores.

And about 2020, we estimate that this is going to be a year of strong expansion at the organic level. And we have 17 construction sites on the way and Dunas Parque [Phonetic ] is a park that we have been putting a lot of effort on, and we understand that this organic dimension has a period of about two years. And we have extremely important works. One of them is Varejista, Petropolis. There is another unit, which is extremely important in [Indecipherable].

Assai is likely to open stores in another 11 states in Brazil. Our focus is also on Rio de Janeiro and they include organic and conversion stores. Last year, we focused our intention in the north region of Brazil. And we are — this year, we are focused in the northeastern region and suggest Caruaru and this is going to be the year of the most expansion of the banner. And together with that, we also have some conversion projects, as mentioned by Peter, and Faical is also going to give some details. And now we are in negotiation with Multivarejo.

We have identified some stores for conversion. We have realized a number of conversions last year, 17 stores in total with a margin above 7%. That was extremely assertive, and this is a positioning of the company so that we can adapt to the format required by the region. So, the 20 units have an expectation that we are going to sell 2.5, adding BRL3 billion in additional sales and generating BRL200 million to our EBITDA. The stores in Jundiai is very important. It’s very well located, and it’s very aligned with Assai format. It’s already in the process of conversion, Compre Bem also. And this year, the process of conversion will start still this year.

As to the market, we have seen a significant change in the market. Of course, like any other market, retail starts to face high level of competitiveness, but 2019 as 2020 and 2021, we understand the impact of competitiveness will be set off by other aspects such as assertiveness and other initiatives. So, we intend to reach BRL50 billion in sales, considering the level of revenues and with our self-sustainable operation, which has been a hallmark of our brand.

Assai expansion has been carried out by the generation of its own cash. And we have also seen an improvement for 2020 with a network of stores, which are at a higher level. And this is also going to be favored by the drop in interest rate. And this has made the real estate value of some properties to play a significant role in our business, such as the unit in Sao Bernardo, allowing Assai to penetrate in regions where the format of the business will be very favored. Considering the ramp-up and the profitability, we expect to go beyond BRL1 billion in investment and generate 8,000 new job openings.

I would like to thank all Assai team for all the efforts made last year. It required a lot of energy from all the areas involved for as to expansion and as for renovation. So, I would like to thank for all the engagement and determination of our team that allowed us start to ’20 with very positive figures. I would like to summarize Compre Bem banner. As everybody knows, we had 13 stores in 2019. In 2019, the — 13 stores for 2018 and we doubled the number of stores in 2019. And 60% of the banner is about two months of operation. Some numbers are very positive.

We concentrated 15 stores in the interior region of Sao Paulo. There are some cities with about 15,000 inhabitants. So these cities have — very important for us, offering good opportunities, and we understand the format of this store is very positive. And we have seen a growth of sales of about 70% and the 15 stores that I mentioned are recording already 70%, considering Assai and Compre Bem. This is what I had to say. And now I’m going to turn the floor to Faical.

Jorge FaicalPresident of Multivarejo

Thank you, Belmiro. It is my pleasure to be part of this conference call and to share with you the main accomplishments of Multivarejo for ’20 and our expectations for 2020. Our gross revenue last year accounted for BRL28.7 billion, very similar to the previous year, a mild growth of 0.01%. This scenario reflected a very challenging scenario in 2019, where a lot of investments were made in competitiveness throughout the year, especially more focus on the last quarter. It’s important to highlight that we had a significant reduction of SG&A expenses. There was a 1.3% reduction in the year, 0.4% — 40 bps, that was very important in our continuous disciplined process of controlling our expenses.

From the operational perspective, 2019 was a year that concentrated a lot of effort in the portfolio transformation plan for our stores. Our goal is to make our stores increasingly more efficient to the group and adapting our stores to the customer needs and market requirements, especially more regional markets that have transformed very quickly.

In Multivarejo, in total, we have 880 stores, out of which 112 have been through renovation or conversion. We have made structural changes in about 15% of our units. We have renovated 112, and we also opened 10 new stores in the proximity model of Pao de Acucar. Between renovations, conversions or portfolio adjustments, Extra Super is a point to highlight. We renovated 70% of the units there. They are charging to two new banners in the past years, but especially in 2019. 92 stores were converted from Extra supermarket to Mercado Extra and to Compre Bem. The results were very positive, both for Mercado Extra and Compre Bem banners. So last year, we had in total 100 stores of Mercado Extra, and as Belmiro mentioned, 28 stores in the Compre Bem format.

At Pao de Acucar, we renovated 20 stores along the year using the new concept that we call Generation 7. This concept after these stores were reopened after the renovation, it was a 7% performance rate higher than the stores that were not renovated. These new stores account for 40% of the total sales of the banner and they totaled 46 stores in the end of 2019.

Also in the proximity format, that is very good for our new portfolio of stores, we opened new stores in this Minuto Pao de Acucar format. Now we are resuming the opening of new stores after four years, during which we have reestablished our operational procedures. This format has provided a very assertive value proposition. They are showing continuous growth in sales for seven quarters in a row with more market share and more profitability.

At Extra Hiper, one of the business that was the most challenging one in 2019, I’m sure that this is going to be the focus of our efforts for 2020. We have reached a significant segmentation model to be more assertive in our initiatives to resume sales and profitability. This Hiper Mercado stores are divided in two segments. One is the high-performing stores with EBITDA over 6% and stores that will be converted to Assai or will be closed or sold.

It’s also important to highlight our digital strategy, that’s Slide number 12. It is strong and we are quickly delivering our ecosystem between brick-and-mortar and digital assets. We have 240 physical stores, almost 900 units that can be a platform to accelerate the digital portfolio. Our food e-commerce is a leader in the market with a positive performance that was above 40%. It was leveraged by significant improvement of the services delivered to consumers, and especially because of the logistics model of Express Delivery. These models operate in about 120 units all over Brazil.

Our loyalty program, which is something we oftentimes talk about, has 20 million customers enrolled, a significant number for the country. This is one of the largest databases with more knowledge about consumers in the country. We’re using this very rich database to perform — to perfect the apps that are being used. They have reached over 11 million downloads.

I would also like to highlight the accelerated advance of the James Delivery program that has already reached 19 cities, with a significant GMV growth of 400 — above 440%, with a 15-percent-fold increase month after month, with a significant growth in number of orders, has increased significantly since the beginning of operations. We announced two new things last year and we hold high expectations for that.

First one was the Stix loyalty program, which is a platform where you redeem and earn points that was launched at the end of last year. This is an unheard program in the retail business, and our partner is Raia drugstore in Brazil. It has already been approved by the authorities and its expected to be launched in the second half of the year. And when it’s launched, it will already have more than 15 million — 50 million loyal customers considering both companies.

The second new thing was the acquisition of Cheftime. This is a pioneering foodtech start-up with food kits and meal kits. In the beginning of its operations, they have sold over 200,000 meals. That’s very good figure for an operation that’s going to be escalated in the next month.

Now back to Slide 10. I would like to give you more details about our plans for the future in terms of increased sales and profitability. I will divide those future plans in two programs. First, a very short term, things are already going on, on stores in the first quarter. One of the first effects that we expect for the first quarter, whether it is in sales or profitability, have to do with the renovations we had in last year.

Although we suffered a little bit for the fact that we were renovating stores and opening new stores, now we are reaping the fruit of these renovations that were conducted last year. So these stores will become more mature and Compre Bem, Mercado Extra and Pao de Acucar are part of that. After they were reopened, they have recovered many customers, including those that have already walked away from those formats in the past. Now they went back and they are buying those stores again gradually, but those stores are contributing to the results of the first quarter.

Another concrete contribution for the first quarter is a double-digit growth in proximity formats and also the continued growth in food e-commerce. Those businesses have started their activities at an expedited pace, kept their growth level. And despite their size in terms of contribution, it’s important to say that when they add up, proximity and e-commerce, they account for 15% of Multivarejo.

At Extra Hiper, we have a different rate of promotional plans and communication. We segment those promotional plans between regions and stores that have had an increasing level of competitiveness. Those communication and promotional plans are highly focused on seasonality. There were very strong promotional campaigns for carnival this week. In March, we also have a non-recurring store for Easter that we are really going to tap into, especially for the second quarter of March — second half of March. And for private-label brands, we have also had a significant contribution in sales and in profitability.

If we look even further in the medium term, so that will be after the second quarter of the year, there are several plans that are being prepared. So these impacts will be felt in the second half of the year. Just to simplify, I’m just going to divide between what is positive, the formats that have had good results, so have four good news in Multivarejo. We will have more of that. The first of that is in the Extra Mercado, very successful conversions, and we will complete the conversions of 49 stores of Extra Supermercados, so we’ll no longer have the Extra Supermercado banner in 2020, they will all be converted to Mercado Extra. The second point is the continuity of the Generation 7 process of Pao de Acucar. In addition to converting 20 new stores that will be converted from the old generation to Generation 7, we will resume the organic growth for this banner. We will announce at least five new stores for 2020.

As for e-commerce, we expect to increase e-commerce operations in another 50 units across Brazil. We really want to saturate places where we are already present in food e-commerce. And as we mentioned at GPA Day, we want to reinforce the marketplace launch in the middle of the year. That’s a very important point for food e-commerce.

We have between 20 stores to 30 stores that we will renovate to the format Minuto Pao de Acucar. That’s a more robust and resilient and more profitable model. And we will resume growth in a faster — at a faster pace. And finally, and as Peter mentioned and Belmiro mentioned, our main focus for 2020 is Extra Hipermercado. We have a very strong plan for sales and profitability for the second quarter and involving a value proposition that will be more aggressive totally reviewed for the non-food segment, especially focused on electronics.

In parallel, we also revised our price policies that will be segmented in the Hiper stores. They will be more assertive in the local market. And another important point has to do with our operational efficiency for supply. This means a reduction of out-of-stock products on the shelf. New processes and tools will be used, including new control systems. As part of operational efficiency, we expect to reduce the levels of out of stock. They will be done especially through two pillars, one is reducing the assortment of products that will lead high levels of out of stock, and also a more stringent refurbishment policy or control especially for perishable products.

I would like to wrap up by saying that there will be a review of the Extra Hiper store portfolios. 30 stores have already been identified and they will be either converted or sold or closed. Internally, we are calling this plan 10/10/10. So the first 10 stores this year will be turned into Assai and then in 2021, another 10 stores will be converted to Assai, and the other 10 stores will be either sold or closed during this period of time.

Hipermercado works with 110 stores. So if 30 stores will no longer exist as part of the Hipermercado portfolio, the other 80 remaining stores will be the ones that are high-performance stores and operational initiatives that I’ve mentioned before will be a priority there, especially reinforcing the competitive edge of this market and based on differentiation in perishable or non-food products. And we’ll do that in each store to recover the profitability of the stores that they once had.

And to end my presentation, I am sure that we are doing the right thing, considering the plans that we are going to implement and the ensuing results. We are going to accelerate lots of business, which are successful and are doing well and recover the stores or the businesses that had a decline in the past few years. Multivarejo will be mainly focused on discipline and on the implementation of retail-specific or specific processes. And precision will be fundamental to maintain the sustainability of the business. This is the year we are going to do the basics in a very proper manner.

I would like to thank for the team efficiency or the effort of the team is highly engaged. And this is very important for us, especially for those who are working at stores. And 2020 will be differentiated and will be important for this turnaround of Multivarejo.

And I turn the call back to Christophe.

Cristophe Jose HidalgoChief Financial Officer

Thank you. As we have mentioned in the beginning of the presentation, the month — we had one month of performance of Exito Group already included in our results. And I would like to provide some visibility on the figures with Exito and I would like to share our optimism related to this positive performance of Exito and how this is going to bring about in terms of results for GPA Group.

The pro forma of Exito, I’m going to be focused on this. Specifically considering the 12 months of operation, had a net revenue of BRL10.8 billion. And this is driven by the better performance that was observed in the behavior of sales in Colombia for the past three years. And as a consequence, an adjusted EBITDA of about BRL1.5 billion and a high margin of 8.3% of the sales.

2019 was marked by the strengthening of the portfolio of Exito, and which is what is also happening here by means of converting and opening stores and 22 FreshMarket and two assortment and the perspective that we can share for 2020.

For Colombia specifically, we can see in the following slide, I believe that for this year, we are going to be able to open from 20 to 24 additional stores in Colombia. And considering opening, conversion and renovation, Colombia is Exito’s main markets, and we see major opportunities for growth in retail and additional businesses. And this is basically related to the real estate sector.

Our expectations in terms of margin is to maintain the level of EBITDA, which is going to continue being solid as we captured in 2019. And we intend to allocate $110 million of capex for us to optimize the complex, strengthen innovation and encourage digital transformation.

And with this, I wrap up the presentation of the fourth quarter and for the full year of 2019. And I will start the Q&A session. Thank you.

Questions and Answers:


Thank you. We now start the Q&A session. [Operator Instructions] The first question comes from Joseph Giordano, J.P. Morgan. You may proceed, sir.

Joseph GiordanoJ.P. Morgan — Analyst

Hello. Good morning, everyone. Thank you very much for answering my question. I’m going to divide it into two parts. The first one is related to Assai, which I believe was the major highlight of the Company. I would like to understand what’s the margin trend for the year as you see it. I think this 7% margin year-on-year was a major highlight and I would like to know what you expect about this margin.

And looking at Multivarejo, this is where everybody was negatively surprised. I would like to understand about the gross margin. I would like to have more details about it. You mentioned a more promotional environment. So, I would like to understand how does it come about? How do you see it? Or if it’s pressurized by the competition and if you see the pressure of competition?

And the second point is in order to ramp up the store after the opening, for how long do you need to be so promotional to bring the results back? And now focusing on food, which we believe that this has been your focus after the divestment of Via Varejo, I would like to know what you intend to do to renovate this category? Are you considering a partnership? Would you like to renew the partnership with Via Varejo in different terms? Or are you going to focus on direct sales? Thank you.

Belmiro de Figueiredo GomesOfficer of Cash and Carry Business

Joseph, thank you very much for your question. This is Belmiro speaking. Via Varejo has left the Company, so we are looking at the total margin. Since 2019 had a record sale considering the number of stores, there may be some pressure on margin, but that doesn’t mean that we will dilute margin. We expect that in 2020 we will have the margin maintained. In the other years, you had some acceleration when we could grow the margin and sales.

Considering the expansion and considering the size of the expansion, the expectation of gains is 0.10 points, 0.20 points. I do not think we should expect more than that. But we also have to consider all the new inaugurations, and we have seen that. In the beginning of 2020, we show no signs of dilution of this growth, even considering all the numbers of stores opened. I hope I answered your question. Thank you.

Jorge FaicalPresident of Multivarejo

In relation to Multivarejo, Giordano, first, I would like to talk about the gross margin. In the first quarter, what we have been doing is to balance the mix among banners. If we’re growing more in Pao de Acucar in the Generation 7 format, with the proximity format, this format have gross margins which are higher, and they help us balance the mix. Another point to the promotions, we encourage promotions not across Brazil, but rather in competitive regions. We segment our promotional strategy in a more accurate manner when we choose the categories and then the promotions will also have support behind it with the negotiations with the suppliers.

As to foods, where we were negatively impacted according to results, so we started new negotiations with our private labels, also include electronics. Our mix has been favored according to the categories, especially related to electronics and cellphones, whose margins are above the average. So, we go back to a level of negotiation, establishing independent strategies. And along the year, this will help us to renovate the stocks and inventories in Company and also on focused strategies and taking advantage of all the traffic that we bring to the supermarket. We have about 9,000 tickets per day and we are going to take advantage of all this traffic to leverage the non-food sectors in our stores.

Joseph GiordanoJ.P. Morgan — Analyst

Okay. Perfect. Thank you.


Next question is by Guilherme Assis with Safra.

Guilherme AssisSafra — Analyst

Good morning, everyone. Thank you very much for taking my question. I would like to go back to the topic that have been discussed a little. But more specifically, I would like to focus on hypermarket format. We have seen competitors, especially Carrefour, saying that they adopted a strategy to reduce the gap of pricing in relation to retailer Atacadao, which is their format. And this price gap is below 10%. I would like to understand how you have seen this movement.

And I understand that you’re focusing on your strategy on regional segmentation, but I would like to understand if you have any parameter related to this to improve competitiveness of hyper in relation to the wholetailer in terms of price differential in relation to the wholetailer? So this is one of the question.

The second question is that I would like to understand a little bit more about what you mentioned in the release and you touched upon very quickly at the call related to the monetization of assets. Last year, we heard some news about the potential sale of Exito. So, I would like to know if this is your expectation, if there is any timing for you that you’re planning for this to happen and how has been the search for assets. Thank you.

Cristophe Jose HidalgoChief Financial Officer

Guilherme, thank you very much for your question. First off, it’s important to understand that the competitive scenario of the wholesale is not only cash and carry. It’s not only the segment of wholetailer. There has been an expressive growth associated with the growth of the number of stores, but the regionals — the regional stores have solid operations considering the regions where they operate.

But it’s important to mention that there has been a strong growth in the online sales, and this also affects the competitiveness. So what — when we talk about the future, we also consider all those dimensions. We are not going to be looking only at the reduction of gap against the wholesale market because this depends on a promotional strategy that needs to be reviewed considering all the wholesale. So it also depends on cost reduction so that we can generate a value proposition, which can be healthier to the customers. This is under discussion.

We still do not have a definite position or which way to take, but we have been considering important proposals that will be discussed with you in the future. It’s important to mention that considering all those negotiations and movements that we are going to use our private labels, whose cost and quality perception is very important. And this is going to be a part of our portfolio of actions related to the wholesale.

Guilherme AssisSafra — Analyst

Okay. Thank you. Could I add — you mentioned this gap in relation to the wholetailer, but this is a strategy that has been adopted by Carrefour. But my real question is the following. Considering that you have a competitor that has already done this action, I would like to understand how you’re going to go about it because this is going to affect not only your competitiveness, but also in relation to the competitor who has already done this action.

How do you see this movement of a competitor as an offense to the sales? Because we have seen a difference in performance, but this difference in performance can be clearly seen in the sales. I ask you this because this was not included in the discussion of the management so far.

Belmiro de Figueiredo GomesOfficer of Cash and Carry Business

This is Belmiro from Assai. Well, Carrefour has not done anything because it’s already is the difference between channels. So it’s just communicated. I don’t think that they did anything, but if you take the new levels of Nielsen, it’s from 8% to 10%. That’s the difference. There’s no movement to the sand. It’s almost unbelievable that you can maintain a policy like that, because the audience is absolutely different when there is a movement in price in the market.

If you put a product in an offer at a hypermarket, even if it’s 30% lower, they will take just three products. If it is a company’s purchase, maybe they’ll take a whole stock. So you will see that price differences in the food market from a cash and carry to a hypermarket is of 10%. That’s the usual difference. Of course, if you consider proximity or supermarket, maybe this gap is 15% to 18%.

It is true that supermarket also is a competitor of wholetailers, but it’s also a competitor of other retailer formats. And it could be something that was communicated by Carrefour, but we have not seen this margin of 10%, so we are very skeptical about that. Maybe this was just a communication of something that already exists.

Jorge FaicalPresident of Multivarejo

I’d just like to add, Guilherme, that in the year, in the food business in hypermarket, we have not lost a market share. Our market share was focused — loss was focused on non-food products.

Peter Paul Lorenco EstermannChief Executive Officer

Good morning, Guilherme. Regarding the monetization of assets, you asked whether we are doing that, but we are constantly analyzing the opportunities to monetize assets. Some are in the short term, others are in the medium term. Those that we believe to be realistic and that account for values about BRL3 billion and that also encompass non-core assets, especially in Brazil, so I’m talking about warehouses or plots of land, so talking about assets like this. So this portfolio of possible monetization of the real state of some stores and that we estimate as a mature valuation that can be reached. So, when we have that, if it is appropriate, then we take that into consideration.

We also have shares at Cnova. We have interest in it. And considering the situation of gas stations and considering the situation of Uruguay and Argentina, we have all that under our radar. I know there was a leak of information related to the operations in Uruguay, but we are reflecting on it. But no negotiations have moved forward to the point that anything needs to be communicated to the market. This is true not only for Uruguay assets, but also for other assets. I can confirm you that we are analyzing the possibilities and there will be significant monetization of assets in the upcoming month.

Guilherme AssisSafra — Analyst

That was very clear. Thank you.


Gustavo Oliveira from UBS, you may proceed with your question.

Gustavo OliveiraUBS — Analyst

Good morning. Thank you for taking my call. I’ve got into the call later, so I’d like to understand this Multivarejo activities. You said that this will be done related to promotional activities, especially in Hiper markets and also non-food segments. This is what I gathered. In the first and in the second quarter of 2020, do you believe that everything that you’re doing to revert sales in hypermarkets will lead to an even greater impact on the gross revenue in this first half of the year or in this year? And what could be done differently in addition to promotions or price strategies, maybe the fact that you have lost scale in the non-food segments with the sales of Via Varejo?

And I don’t know if you still have a partnership with Via Varejo in e-commerce. So, I would like to understand those two effects on sales and on margin, and what can be done in addition to just price strategies, maybe partnerships.

Belmiro de Figueiredo GomesOfficer of Cash and Carry Business

Gustavo, thank you for your call. Of course, the promotional intensity needs to be taken to a high level and that puts pressure on margin, not only in the fourth quarter as we’ve had, but we want to ensure high levels of sale and we are pursuing improvements in margin through initiatives as the one that I’ve mentioned in my report by reducing out-of-stock products on the shelves or reducing out-of-stock levels in animal protein, especially in the fourth quarter related to the increased prices in beef, for example. We have had significant problems of out of stock, so we’ll no longer have this impact in the first quarter.

These are effects that put a lot of pressure on our margins, but we are finding new ways to mitigate those problems or to revert this scenario. In terms of the non-food segments that had a lot of impact on Q4, the mix of products is healthier that strengthened categories, such as household articles, and they have margins above 30%. This segment help us build a healthier portfolio of products for sales. We no longer have partnerships or joint operations with Via Varejo. Since the beginning of January, we have our own contracts. And as I mentioned in the previous question, we have more fluidity in sales and also in stock levels with significant good results along the year. I hope that I answered your question.

Gustavo OliveiraUBS — Analyst

Yes, it was very helpful. The gross margin that was maintained along the year was 27%, last year 28%, and there was an abrupt drop to 24% in Multivarejo for the last quarter. As far as I could understand, maybe this result was the worse. And you expect improvements for the upcoming quarters, so levels will be higher than 24% or do you believe that there will be much pressure in the beginning of the year?

Jorge FaicalPresident of Multivarejo

No. As I mentioned, the fourth quarter, despite the effects of higher competition in the market as a general and in several categories, there are also non-recurring effects related to animal protein, problems of out of stock, specifically for animal protein, and also in the non-food segments, in appliances. And Black Friday was also part of the fourth quarter and that has put pressure on the margin, taking it down especially in the electronics segment. The food segment was very resilient, except for the animal protein segment. But the non-food segment had a significant negative impact, but these are non-recurring items that will no longer be seen in other quarters despite of the levels of promotions.


Ladies and gentlemen, our next question will be asked in English from Andrew — Morgan Stanley. You may proceed, sir.

Andrew RubenMorgan Stanley — Analyst

Hi, thank you for taking the questions. So two questions here. The first one on Assai. Comps decelerated in the second half, but gross margins were an upside surprise. So, I was curious how you think about the right level of pricing, the competitive backdrop and the balance of sales and gross margin. And then the second question on Multivarejo. You mentioned reduced SG&A. And I was wondering if you could go into more detail on some of the specific expense initiatives. And what gives you confidence that you can reduce expenses without seeing an impact to sales? Thank you.

Peter Paul Lorenco EstermannChief Executive Officer

Andrew, thank you for your question. First, one of the lines that have become effective in 2019 and then will continue to be implemented in 2020 are the reductions of SG&A expenses, of G&A specifically. We are building a plan to reduce 40 bps in 2020 that will not affect at all the level of services provided to customers. So this is one of the most important pillars of our expense reduction plan, but obviously, expense reduction is a continuing goal. And in each one of our units, we are constantly implementing benchmarking exercises, including internal benchmarkings with Assai looking for integrated solutions, especially in lines that will not impact customer service.

Cristophe Jose HidalgoChief Financial Officer

Thank you for your call — for your question. The balance of margin in the fourth quarter includes several components that will explain the additional 1 percentage point in the margin. There are some stores where the commercial margins were more — is more stable than in previous years. Our sales — the phone call sales business was no longer a focus. Since we have 5% margin difference between the price we sell to companies versus the price we sell to individual consumers, there was a positive effect in the fourth quarter.

Also, the mix of out of stocks, 0.30 difference. 30% of that has to do with the reduction in the volume of out of stocks, the lowest volume of out of stocks we had at Assai ever. And the last component of that is the opening of new stores. Our commercial department designs different strategies in different places. Many of the new stores were opened in cities where there was already an Assai store. So it’s a different strategy. So the fact that you had a lot of new openings in November or December, and not in October or September, for example, this led to higher volume of sales with lower margins. But the gain was about 0.20. And if you consider all these components, it reaches 1% in the fourth quarter. And I hope I’ve answered to your questions.


We continue with a question of Tobias with Citibank.

Tobias StingelinCitibank — Analyst

Good morning, everyone. I would like to talk about Multivarejo because about one year, we have the guidance that the margin would be about 5% in Multivarejo. And the following semester was very scary and you made lots of notification trying to improve the margin, since so many actions have happened with the renovation and now the changes. And we also have a very competitive scenario. And now that you were more encouraged with the maturation of those stores, would there be more converted stores, Hiper, Extra Hiper being converted?

You have the positive impacts, but there are many effects that have been felt in 2019. So, I would like to understand how we are going to go about so that we have an idea of what to expect in the next 12 months. I know you prepared the guidance and this has been mentioned in the release, but there are also some negative impacts affecting you. So, how can we see the result? What result can we possibly expect?

Jorge FaicalPresident of Multivarejo

Tobias, this is Faical. Thank you very much for your question. Of course, we are working for the continuous improvement of the EBITDA of 2019. Of course, 2019 was not favorable to us. We are not going to provide a very concrete guidance. Of course, we are going to focus on a number, which is higher than what we were able to deliver in 2019. As I said in the beginning, we can divide roughly Multivarejo into what is doing well, what’s not going well. Out of what is not going well in the Extra format, we had also made a division.

Those stores whose results are very negative and where we do not see any possibility of recovery, we are going to get rid of them, either converting them into Assai where we can optimize the assets and the sale multiplier has shown to be quite significant, or when there is no possibility to convert into Assai and if there is no Assai ready to be converted, we are going to sell or close the operation. And then we no longer would have a negative contribution to EBITDA. This is a very important point.

Considering the businesses that are performing well, I can mention Pao de Acucar. Pao de Acucar accounts — 40% of Pao de Acucar is already in the new generation format and all the 40 — 20 stores that are going to be converted this year and this would account for about 60%. However, there is 40% of stores that need some sort of renovation. So there is another plan for those stores, which have not adopted this new model. And we have a plan with promotions or we are also looking at renovating the assortment. In other words, we are focusing on the basics. As I said, we are using a precision strategy and we are looking at all the areas so that we can improve our EBITDA for 2020 as a whole. I hope I was able to answer your question. Thank you.

Tobias StingelinCitibank — Analyst

I understand this. When we look at the results, we have the impression that the margin and the sales of Pao de Acucar banner is in the process of reformulation. So, we have the positive impact coming from the renovations. There’s the maturation that will come. And this is something that you will capture. But still, there is a number of other stores that need to be reformed. As you said, there are 20 stores planned to be reformed. My question is the following.

Are they — I understand that they are being reformed for better performance, but you have to close the store, you have to close part of the store, and you will have to attract customers. So there are good aspects, there are good items that are going to mature. But there are some negative aspects related to the investments.

Jorge FaicalPresident of Multivarejo

I don’t know if I was clear, so I’m going to try to answer your question. I’m going to divide into two parts. First, the number of renovations or conversions that we carried out in 2019 was a very high number. We involved more than 110 units. And we are now talking about the conversion of Pao de Acucar of 20 units and 20 units of Hipermercado, so the number is much less. So the impact that we saw in 2019 will not be reflected at the same intensity in 2020.

On the other hand, Pao de Acucar, especially when we talk about the generation for conversions, they had an impact in the fourth quarter which was associated to the renovations and also the effort that you make in the reinauguration of the store. Even considering this marginal impact in the drop of results, there is a gradual margin expected to grow. And these renovated stores will provide us a better performance for our business.

Tobias StingelinCitibank — Analyst

Okay. Thank you. Have a good day, you all.


The Q&A session has been completed. I would like to turn the conference over to the Company management for the final remarks.

Peter Paul Lorenco EstermannChief Executive Officer

I would like to thank you all for attending this conference call. We have been focusing our efforts on operational improvement on the execution of our strategy. And as Belmiro and Faical also said, all the strategic guidelines, all the fronts adopted last year have evolved in a significant level. We are going to start to have better results from the execution of the strategies in 2020. And considering this positive perspective of a better macro environment, which is funded by the better employment levels, and as a consequence the consuming market, together with all the initiatives that we have adopted, I would like to reiterate our commitment to evolve continuously and providing a better experience to our customers and delivering the results expected for this year. Have a good day, and thank you all.


GPA conference call has come to an end. The IR department of the group will be available to take any other questions you might have. We would like to thank you for your participation, and have a good day.

Duration: 82 minutes

Call participants:

Isabela CadenassiInvestor Relations Officer

Peter Paul Lorenco EstermannChief Executive Officer

Cristophe Jose HidalgoChief Financial Officer

Belmiro de Figueiredo GomesOfficer of Cash and Carry Business

Jorge FaicalPresident of Multivarejo

Joseph GiordanoJ.P. Morgan — Analyst

Guilherme AssisSafra — Analyst

Gustavo OliveiraUBS — Analyst

Andrew RubenMorgan Stanley — Analyst

Tobias StingelinCitibank — Analyst

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