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

Good morning. Welcome to the video conference to announce GPA results of the second quarter of 2026. If you need translation, just click on the Interpretation button in the globe icon at the bottom of your screen and choose your preferred language. The information contained in this presentation and any statements that may be made during this video conference regarding GPA's business prospects, projections and operational and financial goals are beliefs and assumptions of the company's management and are based on information currently available. Forward-looking statements are not guarantee of performance because they involve risks, uncertainties and assumptions as they refer to future events and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, market conditions and other operating factors could affect GPA's future performance and lead to results that could be materially different from those forward-looking statements. Today with us, we have GPA's CEO, Alexandre Santoro; and GPA's CFO and Investor Relations Officer, Pedro Albuquerque. Now, I'm going to give the floor to Mr. Santoro to start the present.

Thank you, Rodrigo. Good morning, everyone, and thank you for being once again with us here in announcing the results of the second quarter of GPA. This is a second quarter that starts to show the first effects of the changes that we started just over 6 months ago. We have advanced in profitability, reducing costs and expenditures and strengthened our financial discipline. But obviously, we still have a lot of work ahead of us, but the initial results start to show and indicate that we are going down the right path. When we arrived in GPA, we found a business of brands with strong assets, very loyal customers, with a huge potential to generate value. But over time, the company has become very complex. And as the business has reduced in size and changed its profile, it has not simplified in the same speed. We started to carry structure, processes and systems, which are no longer compatible to the new reality of GPA. This complexity has increased costs, reduced agility and made the execution at the edge more difficult. This is why our first decision was to return the focus to the company, a focus on customers, a focus on the operation, a focus on executing the strategies and discipline and strictness in using our resources. The big challenge here is to concentrate energy on what is truly the point and to make the basic things very well done. And it's with this vision that we've defined the 3 main priorities for GPA to increase our customers' experience, to increase operational and commercial efficiency and to strengthen financial discipline. Talking about the first part, which is client centricity. Since the onset, we have strengthened that it has to be at the center of all company decisions and improving the experience at the edge continues to be our main priority. The behavior of consumers has changed. Today, they mix different channels, formats based on each occasion and purchase journey. The same customer can have a purchase to supply in a supermarket as Extra uses Pao de Acucar for buying perishables and high added value products and uses Minuto or Mini Extra for purchases during the week. And they always have the option of using the convenience of e-commerce depending on the moment and their needs. And our responsibility and challenge is to guarantee that each one of these flags has a clear value proposition, which is relevant and well executed. We also believe that, a company with the presence of GPA needs to deeply know the characteristics of each market we are in. A more regionalized management allows us to offer a better supply, increase frequency of customers and to strengthen as a consequence the relationship with them. The second priority we decided is obviously the operational and commercial excellence, the heart of our business. The efficiency doesn't mean only to reduce expenditures. It means to reduce complexity, revisit processes, adequate structures, increase productivity and enhance the quality of our operation. This is something which is ongoing and involves the entire organization, our systems, logistics, stores, and even the way in which decisions are made. And the same logic guides our investments. We will not grow just to grow. We will use capital and direct it to where we have higher return, proving our stores with stores that already exist to strengthen and enhance our logistics and to increase the productivity of assets and at the end of the day, enhance our customers' experience. The third pillar is financial discipline. This means that we have to make choices to allocate capital with discipline, controlled expenditures and increase cash generation. And it is with this mentality that we have structured our efficiency program. We have already advanced in reducing costs from the organizational structure to the general expenditures, identifying a series of additional opportunities, which need to be captured with speed and urgency by our team. This agenda also requires a change in culture. We need to have a more simple organization with clear priorities, quicker decision-making and greater responsibility on costs, productivity and results. And for this to happen, we need to have a strong team aligned and engaged. Today, we are over 35,000 associates placing the strategy in practice everyday store-by-store, distribution centers and here at our service center to the stores, which is the way we call our headquarters in Sao Paulo. This only exists for one purpose, which is to make the lives of those who are out in the field easier. A strategy alone, we know does not transform a company. Execution transforms it, and it is our capacity to make this company more simple to change the way we work and to execute with efficiency, which will determine how quickly GPA is able to recover. Going now to the second slide. This is one of the most important steps to highlight this part in my presentation. But in order to make this agenda feasible, one of the important steps for us to execute it was to reorganize the financial structure of the company. When we arrived, we found a company with an indebtedness, which was incompatible with the business reality and especially with the debt expiring in a very short term. Only in '26, we had approximately BRL 2.3 billion in the debt expiring. And this concentration of obligations and passive in the short-term used cash, limiting our flexibility and restricting our capacity to execute any strategy. And it also would take an important amount of the time of the company's leadership. And that is why amongst the options we had, we decided to have our extra judicial recovery process. We understood it was the best manner to enhance the company's financial situation, continuing with what we continue to believe is unnegotiable: the operation, our customers, our associates, our suppliers and our stores. In May, we protocoled our plan with the support of creditors, which represented over 57% of the credits for this. And then after that, approximately 95% of the creditors opted for one of the participation with a very low number of questions, which shows that this is a balanced plan. At this moment, we are waiting for the judicial approval, which we hope to conclude during the third quarter. The impacts are very significant for the company. The debt at the end will reduce from more than 50%. The average term will go from approximately 2 to 6.4 years. The cost of CDI plus 1.8% to 0.5%. And the consequence of all of these factors is that the payments from '26 to '28, which were foreseen of approximately BRL 5.2 billion between the principal and interest rates will be reduced to BRL 400 million. But above all, more important than these numbers is what GPA will make possible. Our recovery process was an instrument to strengthen the company and not an objective in itself. Our objective has always been to create the conditions for GPA to concentrate its energy in what really adds value, customers operation and executing our strategy. The approval of this process represents an important step in this direction. It gives us back financial flexibility and creates the conditions to accelerate the operational transformation of our company. And that is what we continue to be focused on day in, day out because at the end of the day, credibility is built through execution. So now continuing with our presentation, going to Slide 3 to talk a little about our quarter performance, and then Pedro will go into more detail. The results presented start to reflect the changes which we started throughout the last few months. We are still aware that we are just at the onset of this journey, but we already have a relevant evolution in indicators we consider to be crucial for the recovery of GPA, which is profitability, operational efficiency and financial discipline. At the same time, we are aware that we still have relevant challenges ahead of us, especially to have a growth of sales and to strengthen cash generation. The second quarter had factors which were timely, which impacted our revenues and at the same time where we follow decision-making, which is important to have a more simple, efficient and better prepared company to grow in a consistent manner. The total sales reached BRL 4.7 billion, which is a reduction of 7% compared to the same period of last year. This performance was influenced above all by 3 factors. The first was the temporary impact of our recovery process on the supply of stores. The announcement of this process brought greater care by some of our suppliers temporarily increasing our levels of stock-outs. We were very close to our commercial partners in order to minimize this impact. I would also like to make a recognition of the majority of our vendors, which were big partners during this entire process and continue to be so. The most challenging moment, as you can see in the graph, took place between April and May right at the beginning of this process. And in June, we already are able to see an improvement not only of supply, but allowing the growth of sales in this graph, which is comparable in the same moment. The second factor, which led to the drop in revenue, we made some decisions to improve the quality of the business. We prioritized operations and channels with a greater capacity to generate cash, discontinuing the format of Aliados allies and rebalancing and many initiatives in e-commerce and a more regionalized management of our product supply. And our objective continues to be to grow, but to grow maintaining profitability, generating cash and return on invested capital. And the third factor, which obviously impacts the revenues is the macroeconomic landscape. The Food Retail as a whole operates in a very competitive and challenging scenario despite indicators such as employment and income continue to be resilient, consumers have growing pressure on their budget, high interest rates, greater indebtedness, increase of default and a higher fight for this available income. In this context, this changes the behavior during the purchase process, and we permanently need to adapt this sector. Despite this environment, we continue to advance in executing our strategy. So in an environment where we reduced our revenues, we are able to grow our EBITDA in 7.3% compared to the same period of the last year. We were able to obtain more than half of the efficiency foreseen for the year. We've reduced costs and expenditures in a relevant manner and strengthened the profitability of our operation. These results do not mean that the transformation has reached an end, far from that, but they show that the strategy is starting to bring concrete results. Now, we need to speed up this process. We still have a lot to do regarding adequating our costs and contracts. For example, we shall continue to simplify the company bringing new efficiency opportunities, strengthening cash generation and creating the conditions to continue to grow in a consistent manner. And that is what will determine the speed in which GPA will recover. I will stop now, and I will give the floor to Pedro, my partner and CFO, to detail the financial performance of our quarter.

Thank you, Santoro. Thank you, everybody, who is with us. Now I continue on Slide 8. I would like to highlight the evolution of gross profit and adjusted EBITDA. In the quarter, the gross margin reached 30.5%, an expansion of 3.1 percentage points compared to the same period of the previous year. This evolution was explained mainly by 3 factors. The first was profitability, the prioritization strategy, the rebalancing of e-commerce sales mix and other profitability actions. The second was the change in certain products of the ICMS-ST regime to ordinary ICMS. Finally, we had incremental and non-recurring cognition of credits. These factors had an impact in the contribution of both gross margin expansion. So we move forward with a rigor and discipline. We want to implement continuing improvement and a very judicious use of resources to improve the experience of our customers. In the quarter, SG&A had a sales reduction of BRL 23 million or 2.6% year-on-year in real terms, considering accumulated inflation of 4.6% in the period, a reduction of 6.9%. As for CapEx, we invested BRL 162 million in the first half of the year, down 55% compared to the same period of the previous year. This reduction mainly reflects the greater selectivity investments in technology and logistics and discontinuation of the plan to open new stores. We expect to end the year with investments between BRL 300 million and BRL 350 million. At the same time, we continue to prioritize essential investments for storage -- for stores, sorry, maintenance. In costs and expenses, we captured BRL 244 million in gains. These results reflect mainly the adaptation of the workforce, the review of relevant contract gains in operational efficiency and freight implementation of new spending policies. As a result of the set of initiatives, the adjusted EBITDA margin reached 10.6%, up 1.7 percentage points compared to the previous year. Moving to Slide 9. Net loss of continuing operations was BRL 204 million in the quarter compared to Q2 '25, adjusted for the positive non-recurring effects associated with tax proceeding, the loss was reduced to 28.5%, reflecting the operational and financial advances mentioned before. On Slide 10, you can see the evolution of cash flow, which was influenced by 2 important factors. The first was a more cautious posture of suppliers and then we're very diligent in managing the commercial relationships, seeking to preserve supply and limit levels of disruption. Even so, we had a reduction of 12 days in the average term of suppliers with a negative impact of BRL 677 million in the annual comparison. We have already observed a recovery of the time after the conclusion or the completion of the definitive agreement. Another relevant effect for cash flow was the sale of Stix, which resulted in a deconsolidation of BRL 185 million. Excluding this accounting impact, we generated BRL 663 million in operating cash flow after CapEx. The generation was supported mainly by 3 factors: first, the evolution of the adjusted EBITDA; second, improvement in the line of other non-operating assets and liabilities; and third, a reduction of BRL 287 million in CapEx in line with initiatives in the efficiency plan. Also considering the improvement of BRL 236 million in line with operating revenues of expenses, free cash flow increased by BRL 267 million compared to the previous year in the 12-month period. The quarter's results already reflect part of the benefits of the initiatives implemented by the company. At the same time, this has been a difficult quarter. We remain focused on executing our strategy with the aim of resuming sustainable sales growth, improving profitability, increasing cash generation and maintaining a disciplined capital allocation. Now, I'd like to give the floor back to Santoro for his closing remarks.

Thank you, Pedro. And before opening for Q&A, I'd like to leave a last message. In the last few months, we have taken some very important steps to build the basis of our GPA plan to strengthen the company's financial conditions. We've started to simplify our structure. We've reduced costs and obviously, with a focus of increasing the efficiency of our business. The quarter's results start to show the first effects of this work and job, but we are very much aware that this journey is only at the beginning. We have important opportunities. We still have important opportunities to capture here, both in the operation and reducing costs in productivity and as a consequence in cash generation. Our focus will continue to be exactly the same to place the customer at the center of decisions, simplify the company, execute our strategy with discipline and to build an operation which is more and more efficient and competitive. The results of the quarter points clearly that we are in the right direction, and it is now up to us to be able to speed up this transformation with focus and discipline and execution capacity. And that is how we will build a more simple, agile and better prepared company to generate value for consistency with clients, associates, vendors and shareholders. Thank you very much, and let us continue now to Q&A.

[Operator Instructions] So let's start with the first question from Wellington Santana, Bank of America.

Congratulations for your restructuring plan. I have 2 questions from my side. I think the first question, and I think you very well touched the situation of the negotiation with vendors, but you had some stockouts during your recovery process. But I'd like to understand -- I know that, this is close to being normalized, but I'd like to know if there has been any change in terms of payments of obtaining funding, et cetera, with your vendors after this situation has become more normal after the month of May to understand if you are now working with a different approach in terms of cash availability, and we want to know how the situation with vendors is currently. And my second question, you're currently making a very significant advancements, especially in G&A. But I'd like to understand what you highlight as the main internal changes? How do you see what are the main leverages which still are available? And how are you balancing this reduction of cost and customers' experience in the store? What do you see that you're going to be able to handle very well this cost reduction and to maintain customers' experience in stores? I think, those are my 2 questions, please.

Wellington, thank you very much for your question. As you very well mentioned, I'm going to go a little bit into the dynamic with our vendors and cash flow. Obviously, when we go into this process, when we do this out-of-court restructuring process, this is something which allows us to define the perimeter vendors, clients, rents, et cetera. This is never part of the big dealings, right? All of our vendors, all our operational vendors were all protected, and we continued without any delay, with any default in no way whatsoever. But obviously, this is something which generates some noise and concern. Therefore, we've had to adjust some specific aspects in negotiations and the amount of limits we had, and that's [Foreign Language]

And there were some processes, business processes what was going on. But as we started the reorganization and once we normalize and there is the final agreement and we somehow recover and then we move on and continue with the objective of finalizing the approval to go back to more normal levels in terms of working capital. This is what we've been seeing, but we didn't change anything more structurally in the way we operated. So I don't think there have been any major changes, much to the opposite. I think that the process has been very intense and strong throughout the process. Now following on your second question, Wellington, and thank you once again for the opportunity, but going into more detail. So sort of discriminating what's been done and what we still have to do. So we have reorganized first the structure in terms of staffing and personnel. We have clearly an opportunity of streamlining not just the administrative headquarters of the company, but also some operations in some regions. And we did this with a lot of discipline. And part of your question is how can you isolate the things with customers. So what is clear is that we have and we want to have the right staffing per store. And this is the last thing we are going to do something about. If there are any changes, it needs to be done. We have a very clear understanding of the reality of the store in order to avoid negative effects because we were losing sales just because we didn't have the appropriate structure. So we're very surgical, very accurate, precise in some stores that -- or some of our units that could have some adjustments, but this was more in administrative, but with no impact on the day-to-day operation of our units. But the other area with relevant gains, we still have opportunities. We have centralized direct purchase. But everything that is indirect for the company. This was very much decentralized. It's a lot of things. Our company has lots of departments, lots of people, lots of contracts all spread through the company. So there was an area we reinforced in redesigning the company, and there have been significant gains and various new negotiations, sometimes it's service provision, cleaning, brand, labor, third parties, or temporary labor. So many things the company as big as complex as us has great benefits once you centralize these kinds of negotiations. And in parallel, we also have an expense committee for all expenses, maybe it may sound too much. So about BRL 40,000, it's not BRL 40 million, it's BRL 40,000 needs to have an approval. And then we want to leave some ideas that might be good, but we are no longer doing. So one thing is to renegotiate to buy better, so to speak, to find new partners, new suppliers for these indirect services. But there have been decisions of no longer doing things that were not priority at this time of the company. So this sets the backdrop for many things and things that we have already captured. So there is a capture of gain in terms of cost reduction. So when we had streamlined, so we have associated costs in terms of terminations, so the benefit is yet to come more than we saw in the first quarter. There have been a number of initiatives that were implemented, and I'm going to give you more details further ahead. There are some specific adjustments to be made, which is natural in terms of structure. But there are 2 major initiatives where there is a lot to be done, and it's not going to be done in 1 month. They're going to be done over the next few months. And I would point out logistics and technology. Well, logistics, clearly, I can give you example. We have a logistics system that has been designed for a reality that is no longer true. So we have distribution centers with idle capacity. And this is because we had hypermarkets, different structure, big units, but now we have some idleness in our business. You know very well the margins with which we operate. It's impossible to have any idleness. So -- but these are contracts that are not easy to solve. They are not simple problems to solve, but they're being addressed with focus and discipline. I think logistics, both in terms of redesigning distribution centers that we have already started doing and we have recently announced an action and then freighting contracts, distribution partners on the last mile of our business. So logistics is an important aspect considering the size of the company and our complexity. So technology is important. These are changes that are kind of complex, and we do things with lots of responsibility considering a company as big as ours. And just to give you an example, we have mainframe. We operate with mainframe. So aside from banks, I don't know of any other companies working with mainframes. And this is a heritage, a legacy system. So today, we don't have much flexibility because of the mainframe, lots of many different systems that do not interact with each other as they should. And this is cost. It's cost, not just in terms of structure, but also in terms of expenses with suppliers, different systems, which do not -- which is not reflected into productivity. So if I could summarize, a lot has happened. There's a lot going on right now. There is relevant -- there are relevant things going on right now, but we are being very responsible when we talk about our units and how we define them. And we have a specific department where we can define the size per sector, and we are being very accurate in doing that. And there is a significant set of stores. We have more staffing. We have increased the headcount instead of reducing, because we wanted to have the appropriate headcount. But well, in some other places, it was the opposite. But we've been doing it with a lot of discipline and a very close follow-up.

The next question is from Nicolas Larrain, JPMorgan.

I have a few questions here. The first is, I would just like to confirm something which you mentioned in your initial comments regarding the margin, the gross margin. If I understand well, the gross margin was split more or less between those 3 different channels and also the credits. I just wanted to confirm that item. And my second question is related to FIC. We're still waiting for the Central Bank to confirm to approve the operation. I want to know, if you have advanced in obtaining a new plan for the stores and if you're able to share how much this could mean in terms of money available for the company? And my third question is related to your tax partners. I'd like to understand if you have any update on that process? And anything you can tell us would be very welcome.