Sendas Distribuidora S.A. (ASAI3) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for waiting. Welcome to the earnings call for -- the video conference for Assaí Atacadista to discuss the relevant factor about the transaction of some Extra Hiper store conversions. I would like to let you know that if you need simultaneous translation, we have this tool available on our platform. You can select the button for interpretation through the globe icon on the bottom part of the screen and select language you prefer, Portuguese or English. We would like to let you know that this video conference is being recorded, and it will be available in the IR website, ri.assai.com.br, where you already see the relevant facts and presentation. [Operator Instructions] Now I would like to pass on the word to the company's CEO, Belmiro Gomes, to begin this presentation. Please, Mr. Belmiro Gomes, you may begin.

Thank you very much. Good morning, everyone. Ladies and gentlemen, thank you for your participation. So can you hear me all right? We had some issues with the connection, but just let me know if you can hear me all right.

Yes, we can see you and hear you well.

Okay. Great. So the objective today is that we'll give you some details on the relevant fact about the transaction we announced yesterday. And during the presentation, we'll cover some important points. And after all, we will open up for Q&A with the main reasons for the transaction involving the main benefit that this brings to Assaí, why is this taking place at this moment and what was the strategic reasoning for us to consider this transaction as something that we consider to be historical to add extreme value to Assaí and its shareholders and places Assaí at a whole other level of positioning for the dispute of the market. Next slide. So the objective of the transaction is the conversion of 71 stores from the Extra Hiper, which will allow Assaí to go over the number of 300 stores in 2023 when we include the organic expansion. These points, the 71 commercial points are not the full hypermarket network. At this moment, this acquisition is restricted to the perimeter of what we call large surface stores. So these stores currently are going to bring Assaí about 420,000 square meters. So you should imagine that these are not completely comparable to the current Assaí model. Even with our organic expansion the past years, the challenges in the real estate market was the deployment of stores for big surfaces over 6,000 square meters until there is over 500, 600 vacancies for parking due to the restrictions in the real estate market, have made it a big challenge to include these stores, especially in the major cities or big capitals. So the perimeter of this transaction is limited to the 71 largest stores that are operated by Extra Hiper. These stores operate with the hypermarket brand about BRL 8.7 billion in sales. And due to the performance of the sales per square meter in Assaí on average of what we've already done in the other conversions of Hiper supermarkets, we are estimating a potential revenue of BRL 25 billion after they are converted upon maturity, which, in this case, in the converted stores, this maturity would be in a very short period of time. Around the second year of operation, they will already be completely mature, with most of the stores reaching the breakeven within the fourth month, which is different than an organic store where you are going to be creating a commercial point from scratch that are normally more distant from central regions where customers need to discover that new point. And these stores that are already operated by another format, they're already well known by customers. There's already good access. Most of the customers already buy in these stores. So in our vision, it's a transaction that is extremely important. This allows us to place ourselves once again in a leadership position in the market where we're estimating that the current store network at Assaí, the current store network that we're opening [indiscernible] plus all of the organic growth in the next years. And now with the inclusion of the 71 new stores, we should have a target revenue for 2024 of about BRL 100 billion. So Assaí has, in its history, the necessary expertise and know-how that have been proven for the success, both organic and through conversions. In the last years, we've opened up another 150 new units. Most of them have been organic, with the approval of projects and also 25 store conversions in the past 5 years. So all of these -- from all of these openings, we do not have any history of a year that we had some performance problem or issue, where the main assumptions the company has adopted within the BP for each of these units has maybe led to some kind of a significant variation, especially negative. Fortunately, we've been able to overcome the actual numbers and expectations that the market has had. And in this way, with the company's administration, we have a lot of trust in the capacity for the delivery and the team's execution, the commercial model and the value proposition that Assaí has presented today to operate with organic stores in the next years but also these 71 units. And they all bring at this moment about 50% of the sales area of what Assaí produces currently due to the performance on the -- due to the fact that there are more downtown or central regions that have been located with normally conversions are more assertive due to their presence in this region -- in these center regions. And this leads to those BRL 25 billion revenue. So why this and why this asset? Well, because of natural reasons. Since Assaí was a subsidiary from GPA, in the past years, our expansion avoided some organic stores very close to big capital markets. So conversions that were made in the past 4 or 5 years were not what we call the best Extra stores. They were not the best located stores in central regions. These are stores that had a bigger challenge in performance due to the hypermarket being a little more distant. And even in these stores, Assaí was able to triple the amount of sales and deliver an EBITDA margin in the organic stores of about 150 bps higher than the converted stores, 150 bps that are greater than what we have in the organic stores. The main motivator for this transaction, this transaction takes place while the commercial points are very strategic. Most of these stores are located in the capital cities in Brazil. We're going to provide some details on this and how these commercial points are very important and how they really are differential in regard to the average of organic expansions we have currently compared to large stores Assaí already operates. Now considering the low cannibalization of the Assaí stores and, first of all, due to the actual strategy of avoiding placing stores close to Extra Hiper and the actual real estate barrier as well, so we have some stores, like 63 stores are either in capital cities, within the 16 capital cities in Brazil or in the metropolitan region. These are regions that have a real state barrier that's huge. These stores were opened 20 years, 30 years ago where there was already availability to have some land like 50,000 or 60,000 square meters. If you could implement a store with like a 7,000 or 8,000 square meters of sales area and another 600 or 700 vacancies for parking, which is almost impossible now. If we were to look at the cash and carry format in Brazil, we're going to notice that most of the time, the stores are located in the outskirts of these major cities. So this makes the major regions lack this format, which, in our vision, with the incorporation of this, Assaí will be in locations that are very different. So these stores also accelerate our pace for organic expansion, especially enabling Assaí to enter region that is central and access higher social levels. And the issues we've had in other stores that are open and other conversions demonstrate a population with greater acquisition power and purchase power. And since it's in the central regions, there's a lot of small businesses from food service, for example, in the primary and secondary zones of these stores, which will have stores available for supplying their operations. And the bureaucratic ritual to approve an organic store from scratch and just converting an existing point of sale is a lot smaller. So there's no complexity and conversion to these issues. And it's a lot quicker than an organic deployment. So quick maturity of the points. And the potential of profitability and considering that this reflects on the trend that's going on in the Brazilian market, especially for about like 2 decades that was accelerated in the past decade, which is a strong migration of individual customers in the purchases and also into the cash and carry format. This movement has been accelerated in the pandemic in the first year post-pandemic. It is very strong, actually pretty much expanded compared to the previous year. Considering the inflation, the increase in food prices really had -- regardless of the social status, had really led the population to find lower prices than normally. This Hiper market operation, we sell products 15% cheaper than a hypermarket, which makes the value proposition of this format. And this is -- Assaí's reference in this format really makes you have a strong search for this in the population. So as the wholesale sector grows in Brazil, you have greater competition than regional players, especially in the outskirts of cities and also the inclusion of the stores in regional and central areas is very in line with this movement in the Brazilian market. And the commercial point in our vision will have a -- or present a book at this point. And due to the knowledge we have in this real estate market, these are commercial points that are very irreplicable. When you add them all up, they're present in 16 states in Brazil, 63 in major cities in metropolitan regions. Even though it's not the metropolitan region of a major capital, we have cities like Campinas with over 1 million inhabitants, Osasco, Santos, Sorocaba and stores that were opened 20, 30 years ago where there was not a real estate barrier but will place Assaí in a very unique position when compared to other players. 50% of the store network are within the state of São Paulo where Assaí is a reference and where we have the greatest market share. It's the richest state in the country and where we can operate with an average of margins that's higher than in the other federative units and states in the nation with greater fees for scalability. So we plan to convert them into 2 major stores. And this first wave will be -- it should open about 40, 45 points around July or August in 2022, and another batch would be 28 to 30 stores will begin construction work in the second semester of 2022 for opening in the first quarter of '23. So another important point about this transaction is that this transaction creates a potential for sales of about BRL 8.7 billion for those BRL 25 billion in revenue that we have upon maturity. So just to give you an idea about the significance of all of this, all this BRL 25 billion of those 450,000 square meters in sales area in the 71 stores should already generate sales that are equivalent to the third largest player in the food retail market in Brazil. For retail and wholesale, about BRL 25 billion in revenue, which will be even bigger than Grupo Mattel, the publicly held group. And that's why this transaction is very historical. We can move on. Well, obviously, we will not be able to present all of this point on today's presentation, but I'd like to invite you all if you're interested in this and choose some capital. And you can find the store location in the very unique points. These are stores that were implemented where you don't have normally in their primary zones in most of these areas and other operations with cash and carry. So most of these stores you look at has a radius of like 5 or 6 kilometers that anywhere you look, you have a population with about 600,000, 700,000 inhabitants and no other operations with cash and carry format. So there should be a protection for the real estate market. And this model does not depend on this protection from the real estate market, but they will naturally first have this real estate barrier because of the heat in the real estate market and the expense you would have and difficulties to place in another store. So as you all know, Assaí has been growing organically. There's a lot of knowledge from the team and management in the company as well as the prices of the commercial points, types of land, construction costs. And now considering the situation in the real estate market, historical average cannot be implemented. Well, first is the lack of large properties that are like 50,000 or 60,000 square meters in the central region. And the cost of these would maybe be making projects we've already tried unfeasible. So if you were to deploy a store at similar in regards -- between the land and the construction, it wouldn't be less than BRL 240 million, 250 million. So why I'm calling your attention to this is when you compare the organic sources from Assaí, it's important to really differentiate what it means to place an organic store, although it's successful. But if it's in regions of lower density, you have an offer of properties that it's more limited than if you have a store that's in a really good place and you see they grew a lot. Well, we can move on. Then the store conversion history before the split with GPA. We had already had some conversions. Over the past years, we had 25 stores converted. And in these stores, we're able to triple the revenue. The network of converted stores for Extra, even though they're not the best stores converted in our vision, they deliver an additional of 150 bps for EBITDA margin. And we see these stores with the dilution and expenses. The audience has higher income, and the level of businesses, especially in the food service, is a lot stronger. And so this would lead to a higher average ticket, leading to a dilution and expenses where you can deliver lower SG&A to these stores. The ramp-up for the maturity of a -- differently than an organic store where you're going to be able to take maybe 1 year, 1.5 years to reach breakeven. In the converted stores, normally, there's a big expectation. So when we -- and the operations in action, we're opening also options in Assaí. There's a big expectations from the small businesses and customers. And this has led to a breakeven in the stores after around the fourth month of operation. The first year, they already delivered about 2 net income percentage points at the end of the year. And there's also sales per square meter, considering the reasons I mentioned previously. Well, that's about 5% greater than the average of stores of Assaí. The history of the conversions was extremely satisfactory with very interesting success history. And we've always seen an interest on behalf of Assaí to increase the amount of store conversions from Extra stores. So we can move on to the next slide, please, [ Gavin ]. And another very important question. Why now? A lot of people are asking as they go, okay, but the company had conversions, these are split. Why didn't you do this before the split, avoiding additional payment because both the companies are related parties and they're part of the same controller? Well, to be very direct and clear, this movement had 2 important events this year that changed the geography of the market. The first one is that you have the acquisition of Grupo BIG by Atacadão. Atacadão, our main competitor and sector leader where they buy 30 stores from Makro. And then right after Carrefour, formed the acquisition of BIG, which incorporates the MAX brand and other big stores that would probably be converted. There was in our vision additional things where we need to search for a way to accelerate our expansion in a profitable way. As you've noticed in the experience with Assaí, we've been growing in a very profitable way. Even considering an organic expansion that's quite aggressive in the past years, the company is cash-generating, self cash-generating. And when we look at the expansion, we also considered M&A and the asset has been more vital at this moment that due to the reason that I'm going to present up ahead was really the network of stores of Extra Hiper market due to the low level of overlapping that there was because of the period where the companies were together where Assaí was the subsidiary GPA. And second, because since it's a transaction between the same controller, this does not need to be verified by the CADE verification process, the antitrust body. So we had small stores that were deployed about 10 years before. None of them came from organic expansion, and these stores are small. They're very close to Extra. Sometimes they don't provide good customer service in that region. So there are only 6 stores that are going to be closed down. The fact that there's not the need to have approval from the antitrust body really gives us a lot of speed in this operation. There's also like a decisive factor that made us expand our negotiations with GPA to bigger parameters of the store, which were some limitations we had due to the renters or landowners that did not give us the authorization to convert the stores into Assaí stores. Although both of the operations are operated in the food format, the conversion of a hypermarket demands structural changes in the property, significant reinforcement in the flooring, operation in the firefighting system of the store, switch in equipment that can go from a hypermarket to a cash and carry store. But since in the network of stores in the company and even how previously some renters were not really favorable to a conversion of a hypermarket store to a cash and carry store, even during the period of the 25 conversions, we did have some difficulties to convince them that the format that was going to be predominantly in Brazil is not going to be the hypermarket but this new cash and carry model, to really authorize the structural movement. While we had these 2 movements, we started considering the possibility, knowing about the risk and the market reality since we're under the same controller, having the split recently and other questions that could have come up, but the actual decisions for the transaction starts within Assaí. We contacted GPA team. We start talking about this. We don't have the full Extra Hiper network store now. And then we placed some pressure in this because I really wanted to operate these stores and start converting them by the beginning of 2022. So why did we start this movement? Well, we have been monitoring the inflation, pressuring the income of the Brazilian population. It's been pressuring the purchases overall. With -- food inflation is almost 30% in the past 2 years. And in our vision for next year, this movement should continue and generate even greater pressure, which would basically make whoever has been monitoring the process in our sector historically at the moment who took the largest difficulties, not only in Brazil, for example, but in the U.S. as well. If you noticed the real estate crisis in 2008, you probably saw that, that was the year -- the biggest year for growth at Costco. But that year, Costco was growing 18%. And after this, it continued growing. So in our vision, at the Assaí team's vision is that 2022 is going to be a difficult year with the election period, the post-pandemic turbulence, the uncertainties in the commodity supply chain, the current variation will all make the population, the end customers, regardless of the social levels or the actual small businesses, were going to be searching for better prices. And in our unique transaction, we start offering the Assaí model within regions that the brand was not present in, offering a level of price in services in regions where there is a very strong demand for the cash and carry model. So if you consider that the transaction in our vision was only for stores with larger regions, free of inventory, the operated inventory by the hypermarket, especially for home appliances and part of their product assortment, is not adhering to the cash and carry format. So the scope of the transaction involves the purchases of the commercial points and the delivery of them to Assaí in the beginning of 2022, without an inventory or any liabilities that makes it and without the employees. So this payment involves payment in installments. It's going to be starting to be paid in 2021, and it's going to finish in 2024. The amount of BRL 4 billion represents 46% of the Extra sale in the past 12 months and only 15% of the Assaí sales upon maturity. Even when we add up the CapEx necessary for the conversion of the hypermarket into the cash and carry store, this amount and this ratio of investments versus sales is still going to be at about 20%, 25%, even a little lower than what we have in organic expansion, which really accelerates this process a lot. So these commercial points are getting paid in installments. And so part of the 17 stores that were from GPA, they're going to have a sales equity operation within GPA to be allocated to Assaí where Assaí guarantees the operation and then becomes the renter for 20 years, which is the moment for the real estate market in Brazil that already have more approvals. So when we structured this movement, considering the recent changes in the Brazilian market due to the actual acquisition of another player by our main competitor or by the possibility of having and unleashing -- with the Peninsula Fund who are the main owners of these Extra stores, and then we would be able to really work on the store conversions that were already well known, desired and where there was already -- they're already idealized to have a cash and carry operation in the Assaí brand. Regardless of time, we just didn't do this because there was not an authorization for this or an agreement for this. But the format also in the hypermarket was coming up with a different level of performance. You saw when they had a positive movement, but we saw this year this market trend would really make this moment ideal. So since it's a transaction with related parties that a post-split, we understand that the transaction negotiations were done exclusive between myself and Faiçal, the Chairman of GPA. We submitted to the Board where they voted only the members of the independent Board members because the Casino members had a conflict of interest in this operation. This is approved at the Board by the independent members of both companies. We had a fairness opinion from a first-line bank and really continue the best governance principles. The scope approval really belongs to the Board, which should have now appear for due diligence forecasted for the next 45 days. But it's an operation that's a lot more simplified than if you just buy a company or the entire liability, labor, tax and culture and all these other system issues and other complexities. So within this project, Assaí always focused on growing the company, whether organically or inorganically. We also assessed M&A possibilities. And normally, the multiples requested are a lot higher than what we're looking at for this operation. In practical terms, if we were to consider that there are replicable points of a single player, there was no other company, a third-party company that could have commercial points at the same level of the Extra points. And even if they did exist, something like this will not be able to have a transaction of this cost, would be a lot more expensive. The forecast for the signature of the contract is definite in December 2021. And GPA is going to be working on delivering these stores now in 2022, so that Assaí can start the store conversions and work -- construction work. So this already places us in 2022 to have a revenue of about BRL 80 billion. The funding of the operation, we still don't have any plans from the administration or the controller to perform the follow-on of the company, the cash generation of Assaí as you've seen. The company is the more we sell, the more cash we generate. The supply financial is positive. Our working capital is positive. And especially the incorporation of stores in central regions that are not so distant, as you can see in states that are more and more distant in small city states, this improves our indicators, so we're a strong cash-generating company. We have a debt level that, for the first time, Assaí is working on the leverage for its own operation. In the past years, we have been growing organically with our own resources and cash generation. But in our vision, this is very strategic to justify this kind of leverage and debt or even with the increase in the interest rate, we can still have the company positioned at that peak next year of 2022, calculated by 2.5x net debt-to-EBITDA. But the company will be deleveraging very quickly as the stores are open and start generating cash and sales. So 2023 or 2024, especially, will have a significant drop. So if we were to consider that this year, we should be generating about BRL 3 billion in cash, making about half of what we're estimating to make in 2024, we can see how the company really has a potential for cash generation and also for value for shareholders within this plan we're [ executing ]. So this is the presentation we have. And we gave you a bit more time for Q&A that we will open up for now. So all of the management of the company is present within this call that we're working on and were available to answer any of your questions. Thank you very much.

So sorry, but we've already received a few questions here on the chat. But whoever who wants to speak directly in the microphone, they can just place their name here. We're going to prioritize the questions that came first. And then over time or call who would like to ask these questions directly. So I'm going to pass on the word -- I'm going to go -- I'm going to read the questions already received at the moment. So this is the question -- 2, actually, for the same topic. So why the company did not go through the minority shareholders? Why did this transaction not go through minority shareholders? I think we can address this point.

Well, according to the bylaws of the company, the Board of Directors should approve this kind of transaction, considering that even if it went to the minority shareholders, they would also have to go through the Board of Directors. And there was some pressure on our side, considering that we want the stores free by January next year. So maybe the biggest -- maybe a longer process could delay this operation. It could also imply in what we call -- what we estimate to be the conversion time. So considering that this is in the bylaws of the company, it could even have been made if you were to look at the transactions pretty good enough. But there's also a timing issue because you have to take advantage of the fiscal period now in 2021 to begin the construction work in 2022. And so we can already have the store openings by the beginning of the first semester next year.

Perfect. Now the next question is about the CapEx estimated for the conversion. And the leverage we've already answered.

So conversion, we already have a vision that's based on the history of other conversions made. So although we have 2 food formats through the CapEx, that's going to have an expense, a major expense to end this operation. But there's also like value of our own investments in this process. So it really depends on the flooring load and the high and other engineering components. But we are estimating CapEx at about BRL 30 million or BRL 45 million per store. It could vary a lot from one store to another. It depends on the level of resistance of the flooring. But the operation is modified, and the equipment is placed -- practically all exchanged, and it's placed in a pallet floor, and the forklifts are different. The level of the building is different. So we have to refurbish these stores, so they can be opened as new stores. So the levels of investments in maintenance CapEx are very low in real estate for the type of construction we use in cash and carry stores. They also have a lower level of equipment from the service sector, which makes the reinvestment pretty low. We're estimating about BRL 30 million to BRL 45 million max per store.

Okay. Great. Now we're going to whoever placed their name in the Q&A for the questions, okay, following the order. Our next question comes from Danniela Eiger. She's a sell-side analyst from XP.

So my question is more like thinking about [indiscernible] with M&A. You've already had a very focused discussion on organic growth, and I understand this was a very important opportunity. But when you look ahead, you can see that you should -- should we expect that it will be more focused maybe on organic growth? Or would you maybe [indiscernible] more international expansion considering [indiscernible] of related parties maybe [indiscernible] or considering thinking about whether [indiscernible] operating format, the cash and carry format [indiscernible] cash and carry and then 100% focused on organic growth at the moment? I think it will be good if we could have this kind of [ idea ] where your mindset is about M&A beyond this.

There is no intention, to be honest, of operating assets out of Brazil at the moment, whether from the group or from third parties. Our vision is that there's still a lot of room to cover in Brazil, relevant states, communities of Assaí, they only have 2 stores to incorporate. We have another ones to incorporate as well with this transaction. So there is no interest really from this management. This is not a hypothesis to operate with a different format out of Brazil, even in the cash and carry format. So we cannot just consider it. What we see is these multiples, if you consider this cash and cash days exist when you consider the market, they request 1 year of sales. So 100% of the sale. So we're talking about an operation that will cost at least and profitable operations almost double with all the liability lease fees. So it's not selling that's discarded, but it's really going to become more and more distant in the horizon of the states where we are present as well as the level of overlapping. If we consider that today, we have a big geographic footprint. We're going to be present in 23 states by the end of this year. It's going to be very difficult to have another player where you wouldn't have a store close. So normally, when you're going to assess the perimeter of this transaction and the amount of stores that are going to be closed on 1 side or the other, destroys a lot of value. So the only plan that we had in the market, we knew about the discomfort because it was a related party transaction. But if we were to do the same operation with 71 stores for our company that was not for the group or that do not participate in this location with a low level of overlap, it would probably be a very well-seen transaction because there was not another player where we could have this amount of points and [ sales ] with the level of the simplification. But of course, this becomes a little more difficult. So now with the acquisition of BIG by Atacadão, there's going to be a lot of overlapping with the 2 big companies that are operating in this format in Brazil.

Our next question comes from Luiz Guanais, a sell-side analyst from BTG.

We have 2 questions, actually. The first one is if you could maybe mention a bit of a difference in profile of the stores that you're going to be converting compared to the previous store conversions that you had in the cash and carry, hypermarket as well. And if you can maybe also talk about the EBITDA margin dynamic considering more of a long -- mid- to long term. So if you were to consider in 2023 or 2024, how we could think about this margin dynamic as well.

Thank you, Luiz, for that question. So we have a difference in profiles. If you were to achieve the same amount of sales areas in these 71 stores, we would have to open up 110 organic stores. And this will demand an investment of 110 organic stores with the timing issues as well. So it's a quicker transaction where what's going to determine the reopening is our capacity to deliver and reopen the stores. We already have an experience to the conversion and also with the organic store network to place stores in these central regions. So when we look at expansion year-over-year, we're looking at a store mix in regional -- central regions but also in the interior and distant regions within the 100,000, 150,000, 200,000 inhabitants. So we're talking about at least 63 stores in the metropolitan regions. And you're going to place these points, if you look at the location of the stores, you'll notice that they're very iconic stores. These are stores that were set up in a period where the land was very different, the properties were different. So when you look at the performance, it's a simple calculation. To generate the same volume of sales, we'll end up 108 to 110 organic stores or even more and a huge amount of time considering approval required for the project. There's another issue also that's important to highlight, which are irreplicable points. So even in these regions where you have the willpower, the availability and time to -- just to give you an idea, we've normally spent about 5 to 6 years to reopen them. And so in Rio de Janeiro, for example, you probably know about the Assaí store in [indiscernible] between Brazil and Vermelha, a comparable point. We took 7 years to approve that project. So these are commercial points. When you reach this point, they demand organic investment. And when we look at organic investments, there's like the average of big cities and small cities, right? But when you look at some specific stores, they normally cost for organic expansion, over BRL 100 million to be able to be built. So with all of the timing of an organic construction project, you have land work and other services approval to licenses. And in this case, we're not going to have to. So when we talk about these first stores, we consider there's 3 factors: the first is the commercial point; the second is the commercial point; and the third is the commercial point. It's the only thing you can't change after opening up a store. If we open up with the wrong color, we can paint it again. Then there's the wrong product consumer, we can switch them. Prices can be changed. But when you choose a commercial plan, you can never go back on it. So the two main stores for revenue generation was -- all came from buying commercial points, generally from a conversion from Extra store -- the company's previous store. And also, the second one is in Aricanduva, also sells a lot, and it comes from store conversion. So due to this expertise and in our vision the first stores that were converted were not the best. They had even more difficulties in the operation in the hypermarket. The best stores are the ones coming up now. So it's a real different expertise. And since of operations at about 150 or 200 bps more margin, so about 150 to have a conservative level. But actually, if you've been keeping up with our experience, you've seen that we've never -- do not [indiscernible] a guidance we present to the market, and this kind of credibility is something that we really value in the management. We want to leave -- we have to maintain this level of credibility and trust in the market. So obviously, we still have an effect in 2022 of dilution because we'll be opening a bigger amount of stores. And we are estimating this to maybe dilute the EBITDA margin. But -- although it is a big amount of stores, [indiscernible] from 2022 onwards, we're also big enough to support this. So when we look at the mix, this should help increment margins later on when you have the store opening period and about 0.5 percentage point in the overall margin coming from this network of stores. I hope that was clear.

Our next question comes from João Pedro Soares, a sell-side analyst at Citi.

Yes. I wanted to hear -- about the size of the store, it's been very interesting, actually a lot greater than the usual size of a traditional store nowadays. So I wanted to explore a bit of the strategic aspects of having a bigger store. So how could you -- when you look at the level of services and also some opportunity maybe to accelerate this distribution wholesale business. And I wanted to understand if there's any additional strategic value that we're maybe now looking at now?

Yes. Obviously, when you consider the wholesale operations, there's another value as well. So the logistical issue -- because with the big stores, we can receive these products directly in the store, avoiding the need to go through the distribution center. So while we can't do sometimes in smaller stores. But within this universe of stores at [indiscernible], we have about 37 stores that are below 3,000 square meters. We have another 60 or 70 with measurement of about 6,000 to 7,000 square meters. Part of their good performance comes from logistics because you have a bigger capacity to have inventory. You don't have to have big distribution centers and timing for inventories and stuff. And so in these stores, you can have an expansion of the assortment to open up an opportunity, considering the amount of vacancies in the parking area. So slowly, but surely, we have like, for example, people to help people park their cars in about 15 stores because there's a lack of vacancies for parking. So before, there was a correlation between businesses and consumers, that's very different. Now with the biggest increase of end customers, there's a problem with the parking area. So it doesn't make sense to offer another category or a place or different service element, customers spend more time in the store and maybe I can lose this vacancy. So the store network has -- the amount of parking areas is only doubled where you have the bigger [indiscernible] stores, although the sales there is about 30% greater than in the big-sized stores, the amount of vacancy is very significant. So it opens up some potential when you look at the inventory overall, and then maybe not in distribution and wholesale, but something a lot stronger than what we have now with the B2B channel, our telesales channel. We have some news as well that we're developing when it comes from a technological perspective, but really helps us service better our customers. And especially the food and service sector where we noted that location is showing vital. That's a phase we say where a restaurant that has a good park on the store, they want proximity with the stores. And this allows us -- for example, like the Central region, that's something that will affect the consumer more. So it's very important for customers, but there's also a relevant point for individuals. So about 3 or 4 years ago, when you were to look at the tools for the cash and carry operations, like cash and carry would be cheaper. But for about 2 years, now it's about having a cash and carry that's closer to your home. It's not the cheapest one, necessarily. So this has directed our organic expansion as we search for the best commercial points. And this explains our best performance, also the average sale per store. And this is reinforced now with the strategy as we have incorporated 71 stores. But there are some that really involve the inclusion of services and categories of products.

So that's great, Belmiro. And just a last little point here. As you mentioned, the commercial points seems to be very replicable. So when you think about the geographic overlap with a major concentration in São Paulo, I wanted to know if there's any possibility for cannibalization. But what I see is very low because of the specificity of these points.

Yes, that's correct. Your analysis is correct. These are points. For example, if you were to look at [indiscernible], even [indiscernible], it's practically impossible now -- impossible maybe is too much of a heavy word, but it's almost improbable how we've actually been dedicating ourselves the entry Central region. So there's just the land of a [indiscernible] 60,000 square meters. This value for the real estate market is huge to dispute with construction companies building and development companies. It's very difficult to get the approval of this project. But the level today, although, I'd say, it does have a strong presence in São Paulo that the regions were there's an emptiness of Assaí stores where we're not able to place stores yet. And a good amount of the cash and carry stores are in the outskirts still. And of course, there was -- when we're in the same group, we would also avoid placing stores that could generate a conflict. So that's where we all started these products for the start conversions because we did well. If we're going to place some of our [indiscernible] stores closed. So it's preferable to convert the experience you have in conversions inside São Paulo, which are very satisfactory. And that's why we have these BRL 150 million more in the EBITDA margin. So when we look at these, we can see that point-by-point, we have a level of awareness on these stores. And our secondary business actually is to expand. So we have to get to know the land available, the players and the stores that are close by. And so, I can guarantee that no, there are no risks with these stores.

Well, our next question comes from Philippe Casemiro. He is a sell-side analyst at HSBC.

Maybe this is more of a strategic question like in the long run when you consider over 5 years. When do you think the company is going to need a new store format in the future that's more like convenience space to complement the portfolio? I think it makes sense to expand and accelerate the expansion, even if inorganically considering [indiscernible], or do you believe that this model is really -- the food retail is really based on just cash and carry?

Philippe, for the next 5 years, I think we have a focus on this. Maybe some other initiatives in the online world and digital could take place due to the changes that we're seeing in the market and the overall trends by operating a different format at this moment, we don't believe would be the strategy. When you look at Brazil, for example, it's a country with continental dimensions. You have cities that have 3 or 4 million inhabitants that we -- that does not even include it in the scope of the transaction, like Manaus, for example, where there's not even stores there. And we still talk about entering new stores. So we're estimating a capacity of about 400 to 550 stores in the Brazilian market, which will consume this still because of the organic expansion. For example, we're going to kind of hold us a bit for the CapEx levels. We're going to maintain these stores. They're going to be done in the B2C to be able to value this, considering that these stores are going to be selling a lot more. They're going to reach the breakeven first, but we still have this organic expansion plan that's very strong. In our network, we have another 80 projects that are still -- they're not being interrupted. They're not being paused. We continue with the same movement because the leverage curve is very big for us, for the cash generation. So we're continuing to open up stores. At least for the next 5 years, we don't have this responsibility. So innovation in the formal services, financial services and other things related to digital and some other facilities, yes. But a whole other format is not in our strategic plans for the near future.

Our next question comes from Thiago Macruz. He's a sell side analyst from Itaú Corretora.

[Interpreted] [indiscernible].

[Interpreted] Well, just there's any race, sometimes it's kind of crazy. People are going to go past the arrival line, right, when Jim vote when he would run past the arrival lines. But what we have tried to do is avoid the entering this space of just opening up stores for to open them, right? So it's like 4 or 5 cash and carry stores for [indiscernible], a small city that would have the capacity for 2 more. So this difficulty in the real estate market is persistent in all the regions in Brazil. So what we've noticed is that there's a big amount of stores and commercial points that are fragile or not as good. It's easier to open. You have lower costs for the land and the property is easier to move/this project is easier to get approval from the municipal government, but they might not have performance. If we were to look at the average sales per store, Thiago, compared to us and other players, you'd probably noticed that this movement for crazy store openings is most likely a point that we are not entering. So these 71 stores in our vision actually play to some point where there is a higher level of acceptability and they avoid some kind of a crazy race for cash and carry openings, maybe have an exceeding amount of stores in the region. So besides this, even in difficult states, as you mentioned, in [indiscernible], we have 2 stores, and we have another 5 projects in Manaus that are organic. And we have 3 stores starting [indiscernible] and about [indiscernible]. So I invite you all to come and take a look at this. And well, when you mean, is this still this case, so when we look at the M&A, except for maybe the operation with cash and carry in Carrefour with macro and [indiscernible] with its operation now, we start really defining the best market prices. On average, any company like this, if you were to talk to them, normally consider revenue per year, which will not be selling or be able to pay. So if we're talking about a project that maybe costs 46% of what [indiscernible] is making, 50% of what we will be making is revenue. And in the cash and carry, you have a lower upside. And they request about 100% of the revenue per year, which is the average of the market has requested. That shouldn't happen, right? That's why I'm kind of skeptical with M&A because soon becoming even more difficult with what we're looking at, we're going to -- we're entering some specific points. The organic expansion is already more equivalent to what you're seeing now. But if you were to look at some store openings with some players, they just -- sometimes cities that have like 40,000, 50,000 inhabitants, opening up stores is not something difficult to do. Now opening up a store with good revenue and good margins is more difficult. So I'm a little skeptical about this still, unless there's a significant change in the prices that the sector operators have been requesting.

Our next question comes from Rodrigo, a sell side anaylst from [indiscernible].

My question is in this transaction, this is -- would you acquire also some databases from these points from Extra that can be used also by the company to bring in a bigger customer as well to the Assaí stores?

No. There's no database acquired. Here, we're just acquiring the POS without the inventory. The formats are very different and the levels of success they've had in store conversions or inorganic expansions. We actually have other mapping out metrics for customers that are targeted in this region that would be sensitive information that could actually make the value of the transaction become even more expensive and generate complex. So the negotiation average is the being restricted to the stores with big surfaces and the commercial points. The main focus here is the commercial point. We have nothing related to database that could be used.

Your next question comes from Bob Ford from Bank of America.

How does this change your plans for dynamic expansion? And from the improvements in the geographic footprint and locations, how would this impact your thoughts in regard to e-commerce, for example, for individuals?

Well, actually, I think one of the main changes will be the amount of organic growth, especially in the two first years, and we have to be converting stores in. So loads of reduction in quantities is not a shift. Actually, that's very significant in the actual projects we have currently because a good amount of the base of products we've set up were already points that would avoid complex with the actual Extra Hiper operations because they were prospected before the stay of both companies or because I was always considering the main target the possibility of this acquisition. So at some point, for example, we'd go point-by-point. We have a level now that's very high. So for example, believe it or not, this will not impact the organic network as much. The organic now gets being set up is in cities that are like 400,000 -- 300,000 inhabitants or 500,000 inhabitants. They're not special regions, but they have complex key points. And so we have been looking at the market. And then, I just want to add on what Thiago mentioned, which is the organic network we already have within our radar, which, depending on some points, as we look at a city, for example, as we look, sometimes it's a crazy way for cash and carry, maybe could have an excessive amount of points in that region. So in the city, maybe I'm going to enter the more central region. Even if I spend more time with the project, I have more work. Or we have the unpleasant situations of having to approve a store that takes maybe 1 or 2 years, a lot more difficult. So this has been done in the organic expansion. But when you look at the rationale for organic growth, it changes very little. But what this gives us, a possibility to enter Central regions more. And it's a huge effort to be able to have points that are equivalent to this. Sometimes, you have an approval in like 20 properties and 30 properties that are preapproved, and just one of them is in a Central region that you can transform into a store. So you're either going to have problems with the [indiscernible] office. So there's going to be environmental issues or licensing with the municipal government. And this will -- obviously, you're going to be concentrating in other cities where you start -- this should lead to some relief in organic expansion and should also allow us to place organic expansion in a cycle that's not so concentrated of openings in the end of the year. In the last years, you've seen that we basically exhausted our launches. And then you saw the next year, you saw the construction work, which also lets you have a more balanced calendar for organic expansion as well.

Belmiro, how will this change the way you think about electronic e-commerce for individuals?

This change doesn't exist, in fact, in e-commerce for individuals. So we understand the potential of this. We started off with corner shop recently and [indiscernible] to just part of the population. The fact that the store -- for example, we do not have the conditions to work on like a pick up from store because actually, the big dilemma is the parking area in the current network. So in a store like this now, we can say, okay, now I have the conditions for this. I can have a drive-through. I can have a pick up from store. Customers can go, have like 30 or 40 cars. And that [indiscernible] generic conflict with other customers if they want to get there with their car and [indiscernible] house. So what we -- from the stores. So what we've invested in is some digitalization efforts, which is basically phygital, right? The mix of the digital and physical world. So everyone knows about the position we have. And I say, we don't believe even in e-commerce. And if you were to take a look at what's -- why you have a [indiscernible] with the hypermarkets, actually it comes because of e-commerce. When e-commerce starts, it strongly impacts the physical stores, especially the hypermarket because they lose the sales of the e-commerce and lasting goods, increasing operational costs and generating a huge advantage for cash and carry. So this should accelerate the issue with the online sales through partners for the last mile besides corner shop. The company should be having some other players also operating. But of course, these stores in the regions we're in, they open up a scope of possibilities that are very different.

Our next question comes from Jan Miller, an analyst, a buy-side at [indiscernible].

Belmiro, do you want to give us some more details on the main processes you need to work on for the store conversions? What kinds of structures need to be changed? The ceiling of the stores, if there -- so maybe, the seeing high of the stores would influence how you operate. And when you talk about the full potential or when you consider this, do you think -- how would it be compared to the organic stores? So after the conversion, how would you compare this organic store from scratch, considering the cash and carry format?

Considering the average organic growth, it should be keeping about -- when it comes to results and margins, about 150 bps that we're mentioning, which is a very conservative estimate and based on the level of information we have. So the margin mix in [indiscernible] depends on the amount of small businesses and the amount of individuals. We operate with 2 different margins. So believe it or not, these 2 stores have the same prices on all of the items. But since you have 2 prices and Brazilians are smart customers, we have more businesses. Sometimes, there's a difference in like 2 percentage points in margins. But we're actually changing anything in the pricing. So there are stores in the region -- in the Central regions where the product sold has more added value. And this product with more added value naturally generates more sales and it dilutes the percentage of your expenses. So how maturity, the expectation would be that they would keep up these 150 bps that we're already presenting to the market. So now it's 200 bps, but we're being a little more conservative and mentioning maybe 150.

And the conversion process for stores, what are the main points? Well, why was this project also restricted to some of the big [indiscernible].

Well, we had the experience of converting from smaller stores where the volume -- the smaller the square meter, the higher the cost per square meter. So if there was, for example, actually saying, so you have to get the full network, the value of the transaction will not change that much, it could actually drop considering the investment cost. So the stores with major services, we're not -- we don't operate with store ceilings. So it's a big advantage.

So where do you allocate more of the cost?

On the flooring because the flooring for hypermarket is about 800 kilos to 1,000 kilos per square meter. We increased this load of the flooring with the reimbursement to about 3.5 tons or 4 tons. We also changed the refining system because this system and the cash and carry the volume of the inventory and the products compared to the hypermarket goes from like the C2 to J4. It's -- there's a shift in the water reservoirs and you have to review all the piping, the electrical systems and switch the equipment, especially for the pallet ports, which is a characteristic of our sector, the checkouts and also the store counters. And this is -- the rest is just depending on each project. But these are some of the standard procedures that may take place.

And what about the margins? Yes, that was clear. But what about the margins above 150 bps? You mentioned the mix between the individuals and businesses. But what else can you see as a difference compared to an organic store to have this higher margin?

Well, there's other factors. Obviously, that's more of a strategic manner. But of course, you're working with different prices according to the competition level that you have around you. You have to work with this because you can work with the same stores even in the same regions where the prices -- so the land territory tax, property tax, that cost may be BRL 10,000 per month. And there's other cases where you have BRL 150,000 per month on property tax. So especially in the much big metropolitan regions, you have a variation level on the expenses and costs.

Our next question comes from [indiscernible], a buy-side analyst from [indiscernible]. [Operator Instructions]

[Audio Gap].

The organic expansion is similar to the question Bob made previously. But yes, there is a diminish reduction in the amount of stores for 2022. We consider from the 30 store target, all the projects are kept. We don't have any organic product that are going to be canceled due to this movement with the acquisition because the organic network of stores would already avoid the Extra Hiper store because it was not possible to have land in these regions. This is a big motivating factor for this operation. So what we should do in the first year is that we'll reduce the amount of stores, maintaining the projects within our land bank of projects to be able to really value the stores that are going to be done, to be able to generate stronger cash, and this transaction is going to be done today. And the actual CapEx for the store conversion. So this target of the organic expansion continues with this reduction in 2022 and 2023. But all the projects are maintained, and Assaí continues to grow. Excess project includes a relevant amount of stores that was mentioned as middle -- beginning mid on and the organic expansion where the brand is not present. It will continue to happen in the same way. And so we would be entering this with the contribution of the opening of organic stores as well. So the rental contract is also our percentages of a big -- you have a real estate barrier, for example, right from the renter. So sometimes to understand this better, you can consider that the percentages of the contracts. The contract sales percentage are very different when it's a retail operation and a cash and carry operation. So normally, a contract for cash and carry has a percentage that is less than half of what a hypermarket contract would be. But in a hypermarket, if you're going to pay maybe like 2.5% of rent, it's going to drop to like 1.25% or 1% when you bring cash -- wholesale operation, continue the bigger volume sales, and this normally is pretty good for the renter and the landowner, and also considering the low cost of the business. So the rents we're estimating for this operation should be rents that should be at about 1.4%, 1.5% in sales, 1.3% in sales, which is really in line with the stores that we have been renting. So there is no expectation of having a problem with SG&A or margins, which is why we're actually mentioning 150 bps above the EBITDA margins. I hope that was clear.

[Audio Gap].

Well, the market -- maybe because it's a related party, they didn't understand why this was not done before. I know it's after the spin. Maybe one market, we're going to translate this and going to try to understand things later, but first to react. But the transaction is very beneficial for the company. It's a transaction that, in our vision, has a level of value and a ROIC that we would only have organically. But we'll never be able to reach this in this short period of time or into the specific regions. So the value is very fair to be able to receive the stores without any liabilities, right? So I think there's a big challenge in the market to understand how valuable the commercial points are because in a transaction usually, we've already reached other transactions. For example, for another company where we offered over BRL 100 million for one point, and it wasn't accepted. The commercial point is a determining factor. So I think this will become more clear in the next days, especially how this will add value to the company from the moment when they start opening up -- how much does result -- how much this adds to results, and I believe it's going to -- but our work now is to educate the market and explain why we believe this is the fair value for the transaction for the purchase of a point. And if it was for third-party, it will probably be even more expensive to receive this in a comparable format than what is being presented here today. And the normal acquisition would be taking on liabilities and other expenses, and we have to sometimes close a huge amount of stores. And when you take a look and analyze these points that were selected or pinpoint -- pin picked and we don't have any liabilities and it's very easy to perform the conversions, I think the overall perception of the market will be different.

Our next question comes from [ Daniela Nigar ], a sell-side analyst from [indiscernible]. Daniela?

[indiscernible].

The debt level for the decision-making process actually negotiated through installments, the payment of this point, you have BRL 500 million now in 2021, but a bit more during 2024, but also the CapEx. It's not something that you pay up some in cash, so the debt levels of the company, in our vision, is a level that's 2.5x and supported by the cash generation we have in our operation. If we -- even if we consider the scenario with [indiscernible] interest rate for the next year, some other options also, and adjustments were done so that we could accommodate this transaction already as a debt-to-EBITDA ratio that will go up in June, landing in the end of next year by 2.5x. But it's going to be deleveraged very quickly. So there's no liquidity event in this sense. And the company is confident that it will be able to manage this level of leverage coming from this operation and the cost to convert the store.

[Interpreted] 2024 as well?

In 2024, there is a -- the ramp-up is very quick. Then it's margin above the current level. So we may have a drop in the dilution of about 0.5% in the first year. But considering that the other stores will be opening in 2023, we can reach the ramp-up of the store volume in the second year. Between '24, you can be working on numbers that we have currently for the EBITDA margin and maybe the net income would be a little lower because of the leverage costs, but this is all significantly smaller than what you're seeing currently at the moment.

[Operator Instructions] The section for Q&A has ended. And I will pass the word to Belmiro for his final remarks.

Well, thank you. I would like to make the final comments. So just taking a look here, we have a question that appeared now before we ended About the schedules for payments to GPA. And I could quickly answer this, or if Daniela would like to answer this, maybe? Daniela? Do you want to talk about the schedule of payments because basically, you have a first installment, yes.

Yes, I can talk about this. So our schedule we have, as Belmiro mentioned, we have -- so the leaseback operations or our initial installment is going to be smaller. And we have about -- it's about BRL 500 million until -- if you were to add up the sales leaseback, this is about BRL 1.5 billion, it's close to BRL 500 million. So we have this first installment of BRL 500 million until the end of this year. And with the fund to be BRL 1.5 billion, I'm talking about our installments. And then we'd have additional installments, which would add up to about BRL 1.6 billion until the end of 2022. And in 2023, we would have another BRL 1.2 billion until the end of June of 2023, and an additional BRL 700 million until the beginning of 2024. That's basically it. Yes, that's basically it. And then in the case of GPA, you have to add on the -- what comes from the real estate fund, that's BRL 1.2 billion in the beginning of December 2021 and January of 2022. All right?

Yes, I think that's it.

So now, we've obviously ended of the Q&A session. And we'd like to pass on the word to the company for the final remarks of the company.

Well, I want to thank you all for participating. This transaction is very important as we should be noticing that it's a transaction that is extremely strategic and historical in the growth history of Assaí's transaction within the business plan that was set up, really adds value to the company, about BRL 10 billion net of the effect of the transaction positioning Assaí in locations that are extremely relevant. So it's a historical step that we're taking now, and that you'll be able to monitor this execution as we provide the next disclosures in the third quarter and up ahead. Thank you once again, and we're available at the IR department.

The video conference has ended. The IR department is available to clarify any additional questions or doubts. Thank you so much to all the participants, and have a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]