Companhia Brasileira De Distribuicao (PCAR3) Earnings Call Transcript & Summary

[Interpreted] [Operator Instructions] Good morning, everyone, and thank you for waiting. Welcome to the video conference for GPA's second quarter's earnings. [Operator Instructions] We would like to inform you that this video conference is being recorded and it will be made available on the company's Investor Relations website, where the complete earnings release material is available. You can also download the presentation by clicking on the chat icon. [Operator Instructions] We would like to emphasize that the information contained in this presentation and any statements made during the video conference about the company's business outlooks, projections and operational and financial targets are simply the company's management's beliefs and assumptions based on the information that is currently available. Statements about the future are not a guarantee of performance. They involve risks, uncertainties and assumptions as 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 operating factors may affect the company's future performance and lead to results that differ materially from those expressed in these statements about the future. With us today, we have the CEO, Marcelo Pimentel; and CFO and Investor Relations Director, Rafael Russowsky. I will now hand the floor to Marcelo Pimentel for his presentation.

[Interpreted] Thank you. Good morning, ladies and gentlemen, and thank you for joining us on this call. I'm very happy today to announce the results for the second quarter of 2024, which were marked by a significant acceleration in the conclusion of projects that make up the final year of the company's turnaround cycle, which began in 2022. We strengthened our vision of having continuous evolution by delivering this first 3-year strategy. On Slide 4, I would like to begin with this quarter's highlights. We closed the period with another solid operational advance. We achieved the best gross margin since 2020, reaching 28.2%, an increase of 1.9 percentage points compared to the second quarter of 2023. Our adjusted EBITDA margin grew by 2.1 percentage points, reaching 8.8% this quarter, an increase of 34.8% in our adjusted EBITDA compared to the second quarter of 2023. This operational delivery takes place along with improving the company's capital structure, with important events announced in recent months, ranging from the sale of noncore assets to the follow-on process, which culminated in a new corporate structure. We remind you of 2 of the most recent events in this process, which were announced recently, the sale of the company's administrative headquarters, a transaction that totaled BRL 218 million and now in June, the sale of the fuel station network worth BRL 200 million. This latest operation marks the conclusion of our asset sale plan, which began in 2023 and has been delivered stage by stage, with great consistency and discipline. The total value of the sales was BRL 1.9 billion. When added to the amount raised in our follow-on capture, we reached a total of BRL 2.6 billion. This entire movement, along with an operational improvement, reduced our financial leveraging pre-IFRS 16 from 10.6x to 2.8x over 1 year, which is extremely relevant and important for the company. Our operational improvement is also represented by operating free cash flow generation after CapEx, which was BRL 272 million in the last 12 months, an increase of BRL 498 million compared to the previous year. Following the presentation, I would also like to comment on the increase in gross revenue, 3.4% in same stores and 2.1% in total stores in the quarter, with an increase in market share in Sao Paulo and maintaining the national level. The Proximity format should be highlighted here, a 6.9% increase in same stores and 22.5% increase in total stores, as you can see in the graph on the left. It's also worth mentioning the 15.6% growth in our e-commerce business this quarter. We are the leader in food sales through this channel in Brazil, both with our own channels as well as on the main partner platforms. On the next slide, looking at each strategic pillar, we have the top line advances. Total sales reached BRL 4.8 billion in the second quarter, up 2.1%. The highlight this period was the Proximity format, with a growth of 22.5%, reflecting the rapid maturing of stores open from 2022 onwards, which continued to increase their contribution to the business' growth. It's no coincidence that our biggest advance in market share was in Sao Paulo, which is the focus of our premium business growth strategy. There we had a gain of 0.7 percentage points year-on-year. The Proximity format, on the other hand, had an even more significant increase in market share gains when compared to the small supermarket market in Greater Sao Paulo, which grew by 2.8 percentage points year-on-year. These advances confirm our strategy of expanding and refurbishing stores in Sao Paulo. This quarter, Pao de Acucar also posted same store growth of 2.7% with an increase in volume and average ticket, which shows an improvement in our growth rate in May and June, after a weaker month of April. Extra Mercado had a same-store increase of 3.4% as a result of advances and initiatives focused on improving customer experience in our stores. We expect to accelerate this growth in the next quarters with the implementation of a category management project and assortment and price reviews. Under the customer's pillar, I'm delighted to say that we have reached a level of excellence with 83 NPS points, a record number for the company that celebrates the journey that we have trailed reconnecting with our customers. This figure reflects many work fronts that we have been carrying out since 2022. They include reinforcing store staff training, revitalizing Pao de Acucar stores and improving the customer experience overall, involving a reduction in out-of-stock items, price perception, queue time, availability of products on shelves and others. This is also reflected in loyalty, which increased, and the share of wallet of our premium customers, which are essential to maintaining our business strategy. We've seen an increase of 3 percentage points in this group over the last 12 months, which adds to the growth of the premium and valuable customer base. Another important lever as part of our loyalty strategy is an increase in the share of own brand products, which continues to grow and now accounts for 23% of total sales at Pao de Acucar and 26.5% at Extra Mercado. In the first half of the year alone, we re-launched 347 products under the new Qualita brand, redefining their attributes and modernizing their packaging and we have launched 102 new products during this time. To conclude with this slide, I have some excellent news about our digital sales channel. Our e-commerce revenue grew by 15.6% this quarter, reaching BRL 524 million with a 12.6% penetration rate in total sales. This represents an increase of 1.5 percentage points compared to last year. Perishables, which are the greatest differentiator in this business, already account for 34% of the channel's sales, up 8 percentage points compared to 2023. With this result, we are maintaining our leadership position in food e-commerce in Brazil and reinforcing that not only are we the market leaders, but we also have a profitable business with a contribution margin that has a positive impact on the company's results. I have to mention that we also received, once again, the diamond seal in the Nielsen Ebit survey, which assesses customer experience in e-commerce. This is the highest position in the ranking and it demonstrates the excellence of our work. The next slide shows a summary of the expansion project and how it has been advancing. It reflects the successful advancement of Proximity stores. As we've mentioned, we opened 51 stores in the last 12 months, 10 of which took place in the second quarter with 9 proximity stores and 1 Pao de Acucar in Campinas. The new stores opened since 2022 have brought in BRL 657 million in incremental sales this quarter. It should be noted that our focus in expansion continues to be the premium Proximity format, with the Minuto Pao de Acucar brand which is maturing fast and is highly profitable. To conclude this slide, here are the highlights of the profitability pillar. Rafael will discuss more details about our financial performance and the advances and initiatives that led us to achieve this record gross margin of 28.2%, the best gross margin we have had since 2020 and adjusted EBITDA margin of 8.8%, also the best margin in the last 10 quarters. Continuing with my last slide, here is our social environmental and cultural initiatives. In the social impact pillar, we donated 10 tons of food to the people affected by floods in Rio Grande do Sul through the GPA Institute, which was added to another 64 tons collected in a donation campaign with customers, partners and employees. This was an initiative we took together with the Amigos do Bem NGO and 9 other institutions. Regarding our commitment to transparency, we published our annual sustainability report for 2023, a report with the main business initiatives integrated into our sustainability agenda and also the diversity and sustainability weeks, which were attended by more than 5,000 people. In the permanent agenda to combat climate change, we reduced Scopes 1 and 2 emissions by an additional 7% compared to the second quarter of 2023. This concludes my presentation and I'll now hand over to Rafael for his comments on our financial performance. Thank you, Rafael, over to you.

[Interpreted] Thank you, Marcelo. Good morning to everyone joining us for this conference. Starting with Slide 9, we've reported GPA's total earnings, which came to BRL 4.8 billion in the second quarter of 2024. This accounted for 2.1% growth versus Q2 2023. I'd like to highlight the Proximity format, which was the focus of our expansion and which grew by 22.5% during this period. The increase was due to an increment in same-store sales, excluding the calendar effect, by 3.4% as well as the opening of 51 new stores in the last 12 months, 10 of which took place in the second quarter of this year. Overall growth also had the impact of contrarial effects, with the closing of 7 stores during this quarter, 5 Extra Mercado stores as well as the rebalancing of the Aliados format. Both these trends were focused on optimizing our operations and increasing profitability. We should also highlight that during this quarter, we saw a major seasonal impact, seeing as Easter took place in the first quarter of the year, which led to a downturn in food retail demand in the month of April. Conversely, in the months of May and June, as you may see in the monthly growth in same-store sales on the chart, we've reversed the decrease reported in April with remarkable increases by 6.7% and 5.8% respectively. We also noticed some markets promoting strong promotional sales, especially in April. Against this backdrop, we continued with our discipline in executing the plan to continuously improve our customer experience as well as the profitability of our operations. Pao de Acucar grew by 2.7% in same-store sales mirroring significant improvements in the growth rates for May and June after a weaker April, as we mentioned before. This increase was driven both by the volume in sales as well as the increase in the average price of brand mix as well as in-store traffic. The Proximity format showed growth in same-store sales by 6.9% with strong recovery from the previous quarters. Stores opened from 2022 on continue to increase their contribution to the business with same-stores sales growth by 2 digits, which shows the quality of our expansion projects in the last few years as well as our investment strategy. We should also mention the remarkable increase by 2.8 percentage points in our market share for this format, compared with that of small grocery stores in the Sao Paulo area. In Extra Mercado, same-store sales increased by 3.4% and just as with the Pao de Acucar brand, we saw growth rates recover in the months of May and June. These were also positive highlights in the perishables categories as well as complementary groceries. Lastly, once again, we saw significant increase in e-commerce sales, which came to 15.6% with earnings by BRL 524 million in Q2 2024. This channel's overall penetration in total sales was by 12.6%, up 1.5 percentage points versus the same period last year. One pillar of our differentiation in this channel is our focus in perishables, which led to the high quality of our products as well as the picking process. All of that leveraged by the confidence our customers show in our brands. That way, 34% of our e-commerce sales was in perishables, up 8 percentage points versus 1 year ago. In addition to the accelerated growth, we have also been able to increase our profits with the digital channel, which this quarter saw its contribution margin grow to 2 digits, helping to dilute the expenses in our stores in a 100% ship-from-store operation. On Slide 10, we saw the profitability measured by gross profit and adjusted EBITDA. The second quarter of 2024 shows, once again, the efficacy and consistency of the initiatives we've introduced over the course of 2023 as well as the first results of our 2024 projects. As you can see in the chart, on the upper hand side, gross profit came to BRL 1.3 billion with a record-breaking margin of 28.2%, up by a robust 1.9 percentage points versus Q2 2023 and 1 percentage point over Q1 2024. As we've been saying in previous releases, we are sticking to our strategic discipline, evolving our profitability by realizing the gains via the projects we've initiated in 2023. We'd also like to stress in this result, the beginning of the promotional efficiency project, which, starting from our active customer base, targets the most appropriate offers to each profile so as to optimize customer experience and profitability. We should also mention the increase in our retail media revenue, which positively contributes to the increase in profitability. Our adjusted EBITDA came to BRL 396 million with an 8.8% margin reflecting the strong 2.1 percentage point increase versus Q2 2023. I'd also like to stress the increase in adjusted EBITDA over the previous year by 34.8%. Just as an illustration, the annualized adjusted EBITDA for the first quarter of 2024, historically weaker 6 months of the year for the industry, was BRL 1.534 billion versus BRL 1.305 billion in 2023 as a whole. Moving on to Slide 11, we come to our financial performance with the net profit. As you can see on the chart to the right, in Q2 2024, we saw a BRL 100 million impact, referring to the non-activation of revenue, tax credits and CSLL over our losses in the period, which we adjusted for by comparison with the same period of last year, when larger share of these credits was activated. Adjusting this effect, the net loss would go to BRL 272 million in Q2 '23 -- or from BRL 272 million in Q2 '23 to BRL 173 million in Q2 2024, an improvement by BRL 95 million. Lastly, in Q2 2024, the net loss of the discontinued activities was BRL 60 million, largely impacted by the labor contingencies with Extra Hiper that most of you already know. Moving on to Slide 12, we see the managerial cash flow for the last 12 months. In this period, we generated free operational cash flow of BRL 272 million, a BRL 498 million improvement versus the LTM that ended in the last quarter -- the second quarter of 2023. As you can see, the higher result stems largely from the larger adjusted EBITDA pre-IFRS 16, considering the payment of rents and the smaller CapEx. The cash flow after the sales of assets came to BRL 1.8 million in these 12 months, impacted largely by the sales of noncore assets and our follow-on offering. We should mention that this result includes a nonrecurring cash outlet of BRL 133 million relating to the Acordo Paulista in Q2 '24. We should also reinforce the BRL 208 million improvement in the net financial cost, largely the result of the significantly smaller debt that we've reported. On Slide 13, we have more details about our reduced debt. As you can see on the chart, we reported a decrease by BRL 1.2 billion in our net debt between the second quarter of 2023 and the second quarter of 2024. This was a result of the positive effects that I mentioned in the last slide with a generation of BRL 272 million in operational free cash flow as well as the strong execution of our noncore asset sales and the funds raised during our follow-on offering. The reduced financial leverage was also very significant. We went from leverage considering the adjusted EBITDA pre-IFRS 16 of 10.6x in Q2 '23 to 2.8x in Q2 2024. This result keeps the result on track for healthier and healthier leverage seeing as we've substantially improved our capital structure by selling our assets and with our follow-on offering and we continue to evolve our operational results. We should also remember that this quarter, we've concluded the sale of our corporate headquarters and announced the sale of our gas stations operation, concluding the noncore asset sales for the company. Cash from the sale of gas stations will also come in over the next few quarters, helping to further reduce our leverage. And that includes the cost of CDI plus 160 basis points. This was a transaction that ended at the end of July and was reported as a consequential asset operation. On that note, I conclude my presentation and open the floor for questions.

[Interpreted] [Operator Instructions] Our first question comes from Clara Lustosa, sell-side analyst with Itau.

[Interpreted] Congratulations on your results. We have 2 questions. First of all, I'd like to talk about the progress in your gross margin, more specifically about the latest initiatives with retail media as well as the promotional sales project. Could you add a little bit more color about how much these projects have contributed to the margins we've seen this quarter? And if you could also guide us through at what stage in the process you are? I know that you're still in the early stages, but if you could also qualify that and also talk about the potential you see for these projects? That would be the first question. And the second is a quicker one. The deductions as a percentage of gross sales we see that they have come back to normal, but they are still below the levels we saw last year. How could we think about this line moving on? Is this a level that should be stabilized now? We know that there are fluctuations quarter-by-quarter, but we just wanted some help with our modeling here.

[Interpreted] Thank you, Clara. I will take your first question and then turn it over to Rafael for the second. So with regard to the gross margin, I think it's important to stress, Clara, that this comes with a continued improvement. So what we would like to underscore is how important this continuous movement is. So we are building on a very solid foundation. So we're not seeing very dramatic peaks or troughs. What we could talk specifically about retail, media and promotional efficiency, these 2 are strategic projects for the business. And as you very well said, they are at very different stages of maturity. So when you look at retail media, this is a project that's further along with clear contributions to the business. And just to add some context, the contribution from retail media this quarter was already 3x the equivalent to what we had in the same quarter last year. And what retail media brought to us during these first 6 months is already more than what we had in 2023 overall. And the process is still ongoing. As you may remember, we've talked before about the purchase of the CDP tool. We are now in the process of leveraging this tool in a more clear way, meaning we are bringing more customization in our interactions with customers. So virtually 80% of the entire digital marketing push is now involving the CDP, which has allowed us to have some progress when it comes to exclusive campaigns. So campaigns, first of all, with Pao de Acucar, where brands will have their launches exclusively within Pao de Acucar and also the progress by over 2, nearly 3 screens that we've already installed in our stores as well as the personalization of push notifications according to the customers' purchase behavior. So we're speaking to the customer precisely about what's relevant to them. This adds more assertiveness to the business, which is why we're seeing this substantial increment in the participation of retail media. And what we expect is for this project to continue growing and for this channel to continue growing when it comes to the contribution to gross profit and gross margin, not only in the next few months, but we actually believe this is a project that will continue to progress in the next few years. As for promotional efficiency, this is a project that's in earlier stages than that of retail media. We're already seeing gains in the categories and stores where we're running the pilot and now as of the second half of the year, we will roll them out to the rest of the chain. So it's still a smaller impact, but we tend to notice it more clearly starting in Q3 and Q4 when this project will begin to be rolled out to other stores. Rafael?

[Interpreted] Thank you, Clara. So I'll answer what I can right now, which is this. As you know, we had a higher impact from these credits in the first quarter with these 2 lines. In the second quarter, we see a reduced impact from them. What we believe is that from now on, we will probably get closer to our historical level. We will come to a more normal level, but the impact that we see this quarter is much closer to what we have done historically. So this is what I can tell you right now.

[Interpreted] The next question will be asked by Irma Sgarz, a sell-side analyst from Goldman Sachs.

[Interpreted] I would just like to confirm something. Considering the top line and your revenue growth, obviously it always depends on some macroeconomic factors, but I'd just like to understand how much you think can still be done to generate additional growth? And how much CapEx you would require to refurbish stores? I'd also like to understand your take on this dynamic between CapEx, maintenance and top line growth and obviously, this also impacts how much you can generate in margin increases through operational leverage. So I would just like to confirm the following. Is it fair to believe that this cut in SG&A for efficiency has already taken place? Or -- and will it now depend more on improving the top line? I don't know if my question was clear, but that's what I wanted to ask.

[Interpreted] Thank you, Irma. I'm going to try to answer your question, but let us know if I missed anything. So about expansion, specifically, I should share with you our vision for our future investments, which impacts our top line growth. We're splitting this into 3 different points. First, Pao de Acucar store refurbishment. So our aim is to refurbish Pao de Acucar stores, which are in great sites in Sao Paulo. They would start as a priority, especially in stores that had become outdated and depreciated. So this is already a part of our invested CapEx and we will continue. We don't expect to change our CapEx level for this year. So we're going to continue refurbishing stores in order to have more productivity per square meter after the refurbishment. This is what we have been seeing in all the stores we've already refurbished and we've done a couple of dozen stores. So it goes from the layout from the front and then reorganizing the layout, changing categories, focusing on perishables. And after these refurbishments, we see better margins and profitability. So our first focus is to invest in refurbishing Pao de Acucar stores. Secondly, what you've also seen, to expand our penetration of e-commerce across all of our stores. So you have seen a higher penetration reaching record levels this quarter and we expect to continue having this penetration and increase it gradually. But once we can make this channel profitable, we are now very committed to expanding it, not only through the supermarkets, which have been our main focus thus far, but also by expanding and opening digital points of sale through the Pao de Acucar stores. So we also want to strengthen this growth in profitability through e-commerce. Finally, our organic expansion strategy. It has been focused on Proximity premium for Minuto Pao de Acucar in Sao Paulo. This will continue to be our focus. We've mapped many remaining points in Sao Paulo that we believe match the best geolocation for Minuto Pao de Acucar. We have a team working on this. You've seen this before. We've communicated that in the last 12 months, we've opened 51 new stores and we want to continue with this pace of expansion. So increase in sales and increase in market has been achieved through these 3 channels. And we've seen a gain in market share in Sao Paulo of 0.7%. So this is a part of our strategy to regain relevance in Sao Paulo through the Pao de Acucar brand, focusing on the premium banner. On the other hand, as we've mentioned before, we're continuing the effort that we started last year that we started with the Pao de Acucar brand for the Extra banner. So now we've seen a 60% change in profitability with the Extra banner and we're going to continue to develop it. So it's going to add value to its contribution margins, whether it is gross margins or EBITDA margins. So this will also be a great contribution. Regarding profitability growth, I spoke to someone yesterday and this is exactly what we discussed. The beauty of what we've seen in GPA is that it was exactly during the noncore asset sales project that changed our leverage drastically that we also made a strong effort to restructure our commercial operations. So this reduction in leverage was not only because of this noncore asset sale, but it came especially due to this maturity of our operation and this will continue to happen in the future. It will continue to be very relevant because the operation will start to be self-sustaining and we are confident that this will put us in a very good position from now on to keep the same levels. We think that we have the opportunity to improve. We're working hard on that. In expenses, we've had a reduction. As you know, our base 0 budget was created in 2023 and it was replicated in 2024. So we are in line with it in the first half of 2024 and there is still a lot to capture in the second half. We're confident and we're prepared to capture all of it. So we hope to still show some improvements in this line.

[Interpreted] If I can add something to what Marcelo just mentioned, I want to say that our expansion is focused on Proximity stores, especially premium stores, Minuto Pao de Acucar. With regard to these stores, we have been systematically obtaining contribution margins above the contribution margins or the consolidated margin for the entire company. So with each additional store, we have a marginal margin increase than what we have done in our consolidated figures. So that's very relevant. Another important point and I think Marcelo mentioned this, is that we are executing the base 0 budget projects. They've been giving great results and they also impact our margin, not by reducing our SG&A per se, but by increasing our margin, especially with our retail media project, which is a business that has very high margins. So on one hand, our cost is set. We still have some initiatives to reduce it, but we have an incremental revenue increase with very big margins. So this should also push our margins up in the next quarters if everything goes according to plan.

[Interpreted] The next question will be asked by Danniela, a sell-side analyst from XP.

[Interpreted] First, on the growth dynamics. You mentioned the promotional April, but how did that happen? Did you have one-off promotions? Did you follow specific formats? We just want to understand why this specific month was more impacted by this. I understand that there was also Easter as a comparison. But since you mentioned the competitive environment, I'd just like to understand why it improved so much and what we should expect for the next months? If you can give us an update on the competitive scenario, that would be great. My second question is in terms of cash generation. In fact, you have been able to deliver on deleveraging the company, especially with your operational improvements. So congratulations on your profitability for this quarter. But I'd like to understand, when your opponents or when negative factors will start to affect you, like labor disputes, although we've seen a reduction in these contingencies, they still affect your profit and cash generation negatively. So what should we expect? And how will it impact your net debt?

[Interpreted] Thank you, [ Danny ]. So about this growth, I'll be very clear, this was a one-off. So maybe the easiest way to say this is that actually April was the exception and not the rule. We had the Easter offset by a month and there was also a reduction, a cool-down after Easter, especially in early April, and then 2 weeks that were higher. So since people invested a lot in purchases during Easter and that was during the last weekend of March, this obviously caused an impact in the beginning of April. The fact is that this was felt by the entire market and the market was very aggressive in promotional initiatives, especially focusing on the top line. We, on the other hand, made a conscious decision of sticking to our value proposition, especially focusing on premium clients. So we didn't get into this price competition that was created, especially in early April, but that also took place throughout the entire month. And we choose not to get into it in order not to create confusion for the clients' value perception. And then in May and June, we went back to normal levels. We saw that we had very healthy months then across all banners. So we didn't see that effect. Another point I'd like to highlight is that Pao de Acucar is protected by Sao Paulo in general. So we've seen that gain in market share of 0.7%, which has been delivered. So we believe that this is much more of a one-off thing than a reoccurring factor. Rafael, do you have anything to say about cash generation?

[Interpreted] Yes. I think there are a couple of important points, Danny, that we should stress with regard to the work that we've been doing. One of them is our CapEx reduction project. We've been telling the market that we would like to deliver something around 3% of revenue with -- in CapEx and we have that table in our release. We saw a significant reduction when we look at the last 12 months from BRL 956 million to BRL 763 million, so BRL 203 million that leaves us absolutely on track to deliver on our plan over the course of the second half of the year. So this is an important point when it comes to preserving our cash in terms of leaving the company's finances in a more stable place. As for nonrecurring points, I think it's important to stress the fact that we're already starting to see and also a very substantial improvement in those offenders, which are those not really connected to our business anymore. And by that, I mean, especially the labor disputes relative to Extra Hiper. Last year, as we've discussed at length with the market at large, we had a significant debt by nearly BRL 500 million on this line. This year, we expect that figure to be much lower. But you can see that more clearly when we look at that table that we included in our release, showing our cash flow. We've consumed BRL 175 million of cash flow, but it's important to remember that this quarter, because of the Acordo Paulista, which was the agreement we entered into to reduce our contingency expenses with the state of Sao Paulo, we purchased a [ precatory ] letter to reduce our contingency. And with a down payment that had to be made in cash according to the law that govern this agreement, we spent BRL 133 million. This is obviously nonrecurring and one-off. So if you look at those BRL 175 million and deduct that BRL 133 million, which really was a one-off relating to the specific event, we will be talking about a cash consumption of no longer BRL 170 million, but more closely or closer to BRL 40 million. So we're starting to see our generation/cash consumption in the next few months be more normalized. I don't want to speak more than that so that I don't give you any guidance, but I can tell you that we're on the right track for the next few quarters.

[Interpreted] Our next question comes from Iago Souza, a sell-side analyst with Genial Investimentos.

[Interpreted] We have actually 2 questions. The first has to do with general and administrative expenses. I just wanted to understand a little bit better what led to the increase in that line? And should we consider this level proxy for the next few months? Or was it one-off? And my second question, I actually wanted to explore something that we're already seeing in food retail, which is installment payments. Are you using that strategy? How does that work within Pao de Acucar? And if you don't, would it make sense for Pao de Acucar to monitor that if food retail begins to adopt that strategy more commonly? Would that make sense for you?

[Interpreted] Well, thank you, Iago. I will answer your second question and turn over to Rafael for your second one. But I can tell you that no, it doesn't make sense to us. We have a different customer base and it's very different for us to offer that than it is for our competition. What it makes sense for us with our card, especially in Pao de Acucar, is the type of customer that uses the card to have the special benefits offered by that card, especially in premium categories within our stores and I'm talking about wine, special cheese and even our white label, where as a customer, you have several benefits and discounts by using the card rather than the need to pay their purchases and installments, which is why we do not feel the need to introduce installment payments in our operations. Rafael?

[Interpreted] Thank you, Marcelo. Well, Iago, I would underscore what Marcelo said. And I'd also like to say that it was cash-and-carry stores that started with the adoption of installment payments because it makes sense for their business. And remember that many customers of those -- of that business are those guys that purchased for resale. But that's not the case for our customers. So we do not -- that inventory cycle. And our business show no adherence to this type of sales leveraging device. So we do not plan to adopt that strategy in our business or in our stores. As to the expenses that you saw increasing in the SG&A line, that really is nonrecurring and has to do with specific IT expenses. We are making several changes currently to our IT infrastructure, which was essentially a requirement that we had to fulfill to enter this new process with the many changes that we're making. So simply put, this was a cost that we had to bear to make a change in our system. And we chose to include all of that at once in our bonus regime, especially because this was a quarter where we had an extremely positive result and we decided to really get out of the way something that we knew eventually we would have to do. So this is largely connected to our IT operation and we should not see this recurring in following quarters.

[Interpreted] The next question comes from Felipe Reboredo, sell-side analyst with Citi.

[Interpreted] We would like to understand the company's vision about Extra for the next few quarters. You had already said that the idea was to be a bit more competitive with the cash-and-carry stores. We wanted to understand whether you feel like your strategy has been accurate? And should we expect any changes with the Extra brand for the next few quarters? And another point that would be interesting for us would be to understand your view with regard to the company's leverage, especially thinking about '24 and '25. I don't know if you have a long-term strategy. And if you do, that would be interesting for us to understand that too.

[Interpreted] Thank you, Felipe. With regard to Extra, as we've mentioned a few times, especially now in the first half of the year, we have been talking about what we did with Pao de Acucar in the past. So we reviewed the entire assortment, reduced the number of nonproductive items, meaning items with over 200 or 300 days in -- on the shelves to really make more room for products whose demand is higher. And we're starting to see and this quarter was an example of that, higher growth within this store brand. Now one thing that's interesting to say and our prospect is for this to continue is, first of all, we're already seeing a decrease in expenses for the entire brand -- Extra brand, which reflects in improved sales, which is what we're already seeing. And second is that this assortment when we compare with the competition and I'm speaking specifically about cash-and-carry stores, an Extra grocery store or Extra supermarket will have on average twice the assortment of a cash-and-carry store. So you have 4,000 to 5,000 more SKUs in assortment than you will see in a cash-and-carry by nature. Obviously, this offers a completely different purchase experience and a completely different assortment of products to these customers. Third, we continue to see progress in our customers' purchase behavior, which is more connected to continued purchases as opposed to heavy purchases, especially for customers who live in smaller real estate. So we have benefited from that with Extra. Another path that's been extremely positive is the penetration of digital in Mercado Extra. So if you think that last year, that rate of penetration was close to 2% or 3%, it is now closer to 8%. These are new sales, profitable sales, which we want to continue growing so that Extra continues to have not only the same level of penetration that we see in the entire company, which is close to 12%, but we expect it to continue growing. So the beauty of the work that we've been doing is we have -- we are growing our sales and growing our profitability at the same time. So Extra also has a margin delta that's different from what it had in the past and we want to keep that. When you talk about strategy for the future, as it's been made clear to everyone, our strategy is to focus on our premium stores. This does not mean that we plan to move away from Extra. That's not the path. We believe that Extra has a role to play in the portfolio of our stores that we have to offer, but actually to focus on an audience where by increasing sales and increasing profitability, it makes perfect sense to keep those stores. So we do not expect any move in terms of changing this brand. We actually want to move forward in the accuracy of our strategy. As for our operations, there are always store closures and we're always monitoring the store's performance and profitability. And when it comes at a point where we believe those stores are no longer feasible, we make the decision to close and shut them down with no sense of attachment. So once we feel that that has to be done, we tend to do that as fast as possible. And obviously, we cannot give you any guidance, but we believe that our leverage will continue to decrease. This is something that we've worked on both by selling our noncore assets, as we mentioned, but also by improving our company's operational results, all of which continue to take us on a path that will translate into lower leverage. Of course, we cannot go into detail about how much per quarter that will be.

[Interpreted] The next question comes from [ Tales Piazes ], sell-side analyst with Safra.

[Interpreted] We have 2 questions. First, about the Aliados format and what do you expect for next year maybe in terms of growth? And we know that the focus will be on profitability. And we also like to understand a little bit about the sales performance in June. Was it closer to what you had in May and June? And maybe following up on the question about your cash flow and other expenses, in the last 12 months, we have close to BRL 900 million in this line. And we understand that you can't give too much color, but we know there was BRL 130 million in judicial deposits, but what would be a recurring level? Or what should we expect moving forward from this line?

[Interpreted] With regard to our allies, I think that we came to a point of stability on this channel. And the focus was largely on reviewing the mix of products so that we can have a better productivity mix and that's what we've been doing. And in the second quarter, it has come in line with what we had planned for the gross margin at large, contributing to the company's gross margin overall. So we are happy to see that we've come to the right mix. As to the future, we are working on that, looking especially to 2025, but it has not come time yet for us to give you any guidance in that sense. We do not believe, however, that we should see a sudden increase. We want to make sure that this will be structured growth and make sure that we do not exchange sales for profitability. So if we did not have a model where we can increase sales with productivity in a perfect way, we will keep it stable, so as to not affect the company's productivity. July was, I would say, an average month. It was not like April, but it was also not like May and June. Especially Pao de Acucar has been hurting a little bit with the vacation period. But this is something we see every year. This is a month where our customers leave Sao Paulo and we rely heavily on Sao Paulo. So this is a trend that's expected largely by us that takes place every year. That being said, the last week was when most schools went back from vacation and we're already seeing traffic increase on stores since last Friday, which confirms our opinion that people had left for vacation and they're now coming back. And so we're moving back to regular sales as well. Would you like to talk about our cash, Rafael?

[Interpreted] Okay. So Tales, let me give you some more color. This is known. This has been discussed with the market many times that the biggest offender in this line has been labor contingencies related to Extra. To give you an idea, out of the BRL 900 million, BRL 500 million or nearly BRL 600 million, a bit under EUR 600 million actually, is for labor contingencies. So this is really the main offender. Now what's the good side of this bad story? The good side is that we sold Extras in early 2022 and it has now been 2 years. So no longer can new lawsuits come -- be made against the company. So of course, we've been keeping track of all of them. There was a growth throughout the last 2 years. But again, the good side is that right now we're starting to see a reduction. Actually, there are basically no new lawsuits, maybe just 1 or 2, maybe because they were on leave then and that gave them some additional months to file a suit against the company. So this number will no longer grow and will actually tail off. We know that if we look at the company's history that this will start to go down significantly from now on. Besides labor contingencies, we also have some tax deals. So for example, for the last 12 months, we have some that include the first quarter of this year. So again, as I mentioned, we had BRL 133 million related to the Paulista deal, which is a one-off. It's nonrecurring. And we have about BRL 100 million related to project costs, sales, series backs. And we've been speaking to bankers and attorneys. These are projects that have been executed, which were extremely relevant for the company. But as we announced, the noncore asset sale plan is now concluded. So this BRL 100 million in expenses related to projects will also be nonrecurring. It will not be repeated from now on. So our conviction is that this figure will go down across the next few quarters.

[Interpreted] The next question will be asked by Andrew, a sell-side analyst from Morgan Stanley.

I was hoping you could detail what you're seeing in terms of consumer conditions overall. If you've evidenced any trade-up or trade-down within your stores, the acceptance of inflation and some of the more inflationary categories? And then just if there was any gross margin mix to consider? I know you mentioned Proximity, but any other mix factors could be helpful.

[Interpreted] Thank you, Andrew. So about the consumption market, of course, with the different banners that we have, our premium market is much more resilient when it comes to the mix. So we still see our customer base and we've mentioned this in our report that it gained 3 to 4 additional share of wallet points with premium clients quarter-on-quarter last year. So we see that these clients remain active, they are consuming and they are consuming premium categories like wine, special cheeses, coffee, olive oil, meat and especially processed, high-end goods. So we continue to see this to be very active. And despite the current moment, we don't see a trade-down behavior in the premium banners. In lower-end banners, of course, we see this happening. But regardless of that, according to our price policy, we have been able to offset it and still gain share and still advance. So especially when it comes to food, we are keeping a close eye on the market. I think the numbers, especially when we look at the overall market, are higher than the average, but we do need to pay attention so that any changes can be seen. We haven't noticed any changes, but of course, we have been paying attention.

[Interpreted] The next question will be asked by Gustavo Fratini, a sell-side analyst from Bank of America.

[Interpreted] So maybe excluding April, which, as you mentioned was an exception, how much have you been able to pass on food inflation to your customers? And what has been the difference between your top line and inflation and in share?

[Interpreted] I'm sorry, I can't answer your question because inflation has been very different across the different categories. So there is inflation with some categories, but we also see at some times during the quarter, a deflation in some categories. So for example, meat has been a category that has been reducing in price. So with regard to price, we've been focusing on our strategy. We're focusing on the premium market. We're monitoring prices on a weekly basis. Our value proposition and cost benefit is compared to our direct competitors. We have a promotional efficiency project, which has allowed us to allocate our pricing investments correctly. So we have some categories that have a little bit more flexibility than others, but especially when it comes to fruit and vegetables, fruit especially has been significantly impacted by inflation. In this case, we pass it on to the customer, but we have to pay attention to it so it doesn't become too distant. So it's about keeping an eye on prices, the competition, but especially the customers. We do this separately for Mercado Extra, where you can look at product size, assortment, cost benefit for the client. And in Pao de Acucar, it's important to work with our suppliers because here, we cannot compromise on product quality and this is measured especially with perishables. So we need to perfect the supply process, ensuring that we have the right orders in the right stores. And this should not impact our performance and this is more important than anything else. When it comes to food categories, you have to fight inflation, especially in perishables, but you cannot downgrade the products that you're selling. We're not going to do that in Pao de Acucar. That's why we've been keeping a close eye on it, but for some of them or for most of them, we can pass on inflation, but this doesn't always happen completely. An example is our margin gains and it shows how much we've gotten this process right.

[Interpreted] The next question is going to be asked by Guilherme Vilela, a sell-side analyst from JPMorgan.

[Interpreted] I'd just like to ask a follow-up question about your comments on your competitors. You mentioned that your market share grew in the city of Sao Paulo. But when we look at the press release, nationally your market share is flat, but it has been decreasing quarter-by-quarter. So how is this part of the market share performing this quarter?

[Interpreted] It is stable. It's important to be transparent here. We have to refer back to our strategy. Looking forward, this is something that we will continue to do. If you look at the strength of Pao de Acucar, the percentage in sales and especially the results we see in Sao Paulo, it shows that we need to continue focusing and investing in Sao Paulo through organic growth with Minuto Pao de Acucar, but also by refurbishing Pao de Acucar stores and the last-mile digital logistics. It has been growing. And of course, Sao Paulo is disproportionately higher. So we see that our presence is being consolidated in Sao Paulo. As a reminder, Sao Paulo not only does it dilute costs, but it also has the high levels of -- highest levels of profitability. It's by far the best city. So we want to anchor Pao de Acucar in Sao Paulo. And the investments we need to make in refurbishments and new stores outside of Sao Paulo is still very small, if not 0. So of course, we're going to see Sao Paulo strengthening itself in comparison to other cities in Brazil. So this is what we expect to see over the next quarters.

[Interpreted] The question-and-answer session is now closed. We will now turn it over to Marcelo Pimentel for the company's final remarks.

[Interpreted] Thank you so much, everyone, for joining our earnings conference. I am thrilled with the figures that we reported at the end of this first half of the year. There've been a lot of operational progress, a result of the consistent work we've been doing since the beginning of 2022 and also a result of our discipline in managing our profitability, which we've handled in a very consistent and responsible way to maintain a healthy business. Alongside the accelerating performance, we are closing and delivering a very well-structured plan to reduce our debt level, which has allowed us to move from a 10.6x leverage to 2.8x this quarter versus Q2 2023. This is exceptional and I only have my team to thank for that. And we are now working from this time on to work so that we can deliver our turnaround project. We have a lot of work to do, but looking to the future, we want the company to be well-prepared and well-structured to move forward with the new gains. I'd like to take this opportunity to thank our entire team for their work and wish everyone an excellent day. Thank you so much.

[Interpreted] This conference is now closed. The company's Investor Relations department is available to answer any outstanding question. Thank you so much for attending and have a great day. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]