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

Good morning, everyone, and thank you for waiting. Welcome to the webinar on the Board's proposal, the general meeting will be done on the 14th of July for 2023. If you need simultaneous translation, we have this tool on the platform. In order to do so, please like the interpretation button through the globe by the icon on the bottom part of your screen. Choose your language of preference, Portuguese or English. We'd like to let you know that this earnings call is being recorded and will be provided on the company's IR website, at ir.assai.com.br, where you can already find the material from the webinar available. [Operator Instructions] Now I'll pass the floor on to Daniela Sabbag, the CFO of the company.

Good morning, everyone. Welcome to the Assai webinar for the discussion of the new Board proposal. As mentioned, I am Daniela Sabbag, the CFO at Assai. And before we begin, I would like to also share with you a bit of the dynamic here for this meeting. We'll cover -- Belmiro will have an initial opening speech, presenting the new Board and the new committees, especially soon after the Board will share a bit of the context and assumptions of the work performed. And then we'll have the main modifications that were incorporated to the proposal. Soon after, we'll get into Q&A session. And during the entire meeting, we will approach exclusively the issues related to the proposal for compensation at the Board level. So if you do have any questions on any other topics, we will address this with the Investor Relations department, and we'll schedule another opportunity for these specific discussions. I'll pass the floor on to Belmiro for his initial remarks. Belmiro?

Thank you, Danny. I would like to thank you all for your presence in this webinar. I think it's very important because this topic, it's highly relevant and pending for the company. And we need to present the new Board after the general meeting that will be -- that was occurred in April. I want to thank the shareholders for electing the new Board. We have our HR department supported also by consultants, external third-party consultants, and we were able to have 6 independent new members; 5, I had never had contact with before, personally or professionally. We really wanted to have a selection process that could be really independent -- and of course, now I would also like to thank you for electing this new Board, that has been fundamental ever since the first days of work when we look at the challenge that the new board faced, and I want to thank all of the Board members for their support and the work done. We have 4 committees that are created in the company. From the Board members, we have Andiara Petterle, she's an independent member; Jose Guimarães Monforte, Chair VP at the board level, and he has a lot of expertise when it comes to governance. I won't go over each one's curriculum, but these are names that are very well known. professor Nelson Carvalho is also an independent member in the Audit Committee. He already came from another previous board composition, and he's been helping us a lot. And then me as a CEO and member of the Board in this transition period. Assai in 3 years tripled in size, and it was not -- no longer a subsidiary once it became listed. And then with Casino exiting, it became a real corporation. So the company went through this very intense change process. Then we have Leila, People, Culture and Compensation committee. She's leading this proposal. Then we have Oscar De Paula Bernardes Neto, he is our Board Chairman, and he's been having important interaction with the validation, guidance and support for the company. And then Julio Campos. We already had contact with him. We worked with him. He's some of that's very strong in the food sector in Brazil. He worked at Unilever for many years. He will bring us interesting insights, so he can support the Board. And then Leonardo Pereira, he comes from the financial market. He has a lot of know-how when it comes to governance, then Filippe Alarcon, member representing Casino still, and he had the 2 operations at Assai and still has a relevant stake in the company. So with this, we end this presentation of the new Board members and the committees and Leonardo is leading the Financial and Investments Committee. So along with this, we also discussed a bit of this with some third-party advisers and consultants. The Board was completely independent to analyze and study these compensation plans and create this proposal that's really well aligned between the new Board and management. [indiscernible] and she helped us with the preparation of this new proposal. So I think Oscar can really highlight this in greater details. But as the last point of contact had been with the company's management, the company is really on a path for evolution when it comes to governance and transformation. Having said that, I would like to pass the floor on to Oscar for his initial remarks.

Good morning. The proposal you received was developed with a clear leadership of the Board. And this is important to highlight because we had support from external advisers and consultants that were also chosen by the Board. Now with this new Board and with members with less than 60 days of experience as a new board, this work was an extraordinary opportunity to get to know Belmiro better and the company as a whole. We -- they were very skillful, very cooperative. And everything you're going to see is a result of the work done with the team as a whole, including the Board and management. Belmiro has already mentioned this before, but I would like to emphasize also that the transformation that took place at Assai in the last few years is extraordinary from going from an integral subsidiary than a controlled subsidiary and finally, a fragmented control company, is not an easy transition. And of course, this generates new challenges. But this transformation, not only from a shareholder perspective, was monitored by extraordinary growth. And I don't like using adjectives too much, but what happened with us, it really deserves an adjective, which is at least extraordinary. Brutal growth in the amount of stores, sales and this is really something that needs to be acknowledged and recognized. Now the nonapproval by the shareholders of the proposal submitted in the general -- in the previous general meetings forced us to have a profound analysis of all of the practices and policies for compensation of the company. And the conclusion we reached was that this new Assai requires something that is completely new and different from what was being practiced till now. But of course, this can be done in a short-term horizon as what we've seen. So we have been committed to you, ladies and gentlemen, to present a more solid proposal at the General Shareholders Meeting next year. So please understand that what you receive now is a proposal for the short term within what was possible. But what we try to do now in the next slide, please, is we try to correct distortions responding to your main concerns and implementing solutions in the short term. We do not want to generate any kind of potential labor liability. The involvement with [indiscernible] was essential to take a look at all of the obligations from a contractor perspective, all of the labor agreements, and we don't want to create any kind of labor liabilities. Then we had many restrictive factors about what we could or not do. And all of our statutory members are CLT, that means official labor registration. And we also had past commitments that could not be ignored that we had to honor as well as a profit-sharing process, which is an intense negotiation with all of the company's employees, which involves unions, and this, of course, creates restrictions and the lack of possibilities to modify parameters for 2023 because we're at the end of the first half of 2023. So we couldn't change targets or goals when you already have over half of the year gone. Then we had a permanent concern with engaging and retaining executives that, of course, generated the success story for Assai. So this was a big permanent concern, keeping them motivated. We wanted to guarantee the stability in the company. The last thing we would like is to increase instability. And of course, we would like to generate an alignment with the shareholders. So I think this first step already generates a lot of alignment, and you will see that in 2024, there's even greater alignment. And so from what we've expected as the -- for the approval for 2022 and '23, then we will immediately start working on the proposal for '24. And we are absolutely open to talking, hearing your ideas, suggestions, as you all know. It's always difficult to meet everyone's needs, but we would like to hear everyone that has contribution to this process. Thank you very much. Now I'll pass the floor to Leila as a coordinator of the committee for people, culture and compensation was an important spectacular coordinator in this project. Leila, please?

Thank you, Oscar. Good morning, everyone. And now we will summarize a bit of the main fields we operated in throughout the 35 days ever since we took over. And from the assumptions in context that Oscar just presented with a very big focus on recognizing valuing Assai's team with all of the success that the company is having as well as all of the legal aspects, what we did initially about the Board and then after, I'll talk about the directors and management. About the Board in 2022, what we had value that was very similar to what was proposed. And we had a negotiation with Casino so that they could reimburse an amount that we understood was correct or fair and they agreed to this. This is going to take place in 2023. But from an accounting perspective, it remains in 2022. But for 2023, we had another reduction related to what was proposed in the last general meeting, which is considering the short-term bonus related to Board members at Casino that left the Board. So this is also taken over by Casino. And therefore, well, there was a significant reduction in the Board's budget from 35% to 26.7%. And the new compensation of the new Board members is really due to the research and the specialized institutes and also we eliminated the short-term bonus plans for the Board and also those for the granting of shares. So the Board has a fixed compensation at this moment based on market research. But about the statutory board -- sorry, the management in 2022, we reviewed all of the contracts and is about -- helped us reading all the contracts, [indiscernible] their legal firm. And we wanted to preserve the team and the level of motivation. And we also wanted to guarantee that we are not creating any type of liability or problems. And so these contracts were all reviewed and there was -- as we can see, it was created, very well cared for in our proposal. Now we had the conversion plan that was still not in line or completed in the last board. And so since this was very successful, we also had participation that was greater than what we expected initially in the last board. So with this, we had a higher value. And what we did in this initial process for the alignment was that we transformed 80% where they had received the amount that was approved last year in company shares. And so the Board with the vesting of 3 years, and then when it comes to the CEO with a 5-year vesting. And this is a way for us to also address retention plans with this team of executives. So this is a solution we found in 2022, and we're going to talk about this a bit in 2023, where we had the chance for a greater reduction. So first, we wanted to simplify the structure of all of the short-term plans and incentives, and there were many plans created over time, considering GPA, Casino, each plan had targets and logic. But at this moment, we understand -- at that moment, we understood that we needed to simplify and concentrate in a short-term plan, which is our PPR, so our profit sharing program. And we also had the expansion plan that was eliminated for 2023. It's not that the expansion will be part of the objectives that each executive has. But of course, there's a relevant participation, but you don't have an incentive plan anymore and other plans that were also eliminated. So this is one of the main projects we had done for 2023 already. And it's important to mention that we do not review the targets for 2023. I think Oscar mentioned this quickly, where the retailer needs to be really focused on this moment, and this is -- and in the month of June and July, when we finished the general meeting, renegotiating with the executives is not something that would make that much sense for the company or whether that would add value to the company. So we kept the indicators, but I can say that if there's something below 10 indicators, maybe, but they're all related to the company's operation, results, cash generation and there is also a discretionary assessment in the total amount. And of course, this was very structured, right, and are already previously approved by the union and by commission with a lot of governance in this plan. So we've been respecting this as we've done in 2022. We've been respecting this process. The only thing we changed for 2023 already is the maximum limit for payment, which was 200% of the target, and now it will reach 120% only because last year was actually -- and it was a really good year, and that's why a lot of executives went over reaching the 200% at the maximum process. So we talked about 2022, which was a renegotiation to transform this in shares. Here, we had some negotiations for 2023 as well. We're not going to get into details, but we're going to -- if everything is approved, we'll have a single granting process of the shares with the transitional aspect with a 5-year vesting in line with the market. Mauro will talk about this later on, and he's going to explain the mechanism a bit more. But I just wanted to mention that the ILP was also associated to the ICP, and so from this new plan, it's going to be associated with value multiples that are also based on market research, and this has already been done before, actually. So we already had a market preferential that we're using for this granting process in 2023. And we also decided not to perform new stock option granting in '23. And once again, this will be a specific topic that Mauro will explain. But we understand that there were many questions about the actual price of the offering for executives. And we also wanted to do this for a longer period and align our long-term interest as well. And these were the main changes we had. With this, we were able to have significant reductions but we'll be explaining this and how these numbers are and how the distribution is in between long term and short term. In 2022 -- sorry, in 2022, we capped the compensation for the directors, but we modified by BRL 8.1 million, and these were transformed into long term with buying stock for 3 or 5 years when it comes to the CEO. So we reduced the ICP due to the simplification and reduction of the maximum limit of BRL 200 to BRL 120 million. And so in 2023, we had a reduction in the ICP and there was also a transformation of the -- an increase of the ILP. So of course, well, you can go -- you can pass that one. But when we take a look at the compensation of 2023, specifically for the Board, as I mentioned previously, it is -- of course, the Murphy's Law always takes place. Can you hear me?

Yes, we can hear you Leila.

Okay. All of a sudden, my image disappeared, but I'm continuing here.

We can see you and hear you.

Okay. Great. So as we had mentioned previously, the Board's compensation from May to December represents less than half of what will be in our proposal for 2023. Why is that? Because we are concentrating only on the fixed compensation. So there's not an ICP or ILP anymore in this proposal for 2023. So in the specific case, the directors' compensation, there was a reduction in the total amount. And once again, Mauro will explain this better with how this is going to be in the future when it comes to the stock granting, we reduce 72% to 49.4%. And we transformed long term into 36% because there's some grants that will take place in the next years. But we reduced this -- it was a reduction that was very significant. But of course, we do not change our proposal for fixed compensation. We kept the fixed compensation. So with this scenario, we demonstrate a bit of the work done by the team so that we can -- as well as with support from our consultants and advisers and participation from the Board that we're having at this moment. So I'll pass the floor to Mauro, so that he can continue to explain the other modifications.

Thank you, Leila. It's a great honor to participate in this project. It's so important as we build this corporation in Brazil and really witness the cooperative efforts between the Board and the management and really understanding the transformation in this new phase. Oscar and Leila summarized the depth of the transformation and simplification that's going on as a major fruit of the process to listen, which was done by the Board from the election of this proposal. So I'm going to focus on 2 items that are very important, ILP and the transparency. So one of the diagnosis here in the stock option plan that Assai had before, brought a bit of discomfort to shareholders and one is by the actual nature of the stock option plans that are nonlinear and they have a transparency in their final costs that are not necessarily very clear, but also specifically when it comes to Assai, the plans had a vesting period and prices for emissions and issuances that were defined in the plan that had been approved by the controlling shareholder previously. So it wasn't possible to change these parameters that were fundamental when it comes to the expectations created by the shareholders and the actual Board. So the Board wanted to increase the vesting period that's going on to 5 years. It's something that's still quite rare in Brazil. And it's important to increase the alignment in level of interest and also end the issue with the discounts in the price for the exercise of the stock options. So the alternative we chose, however, was considering and so that we can provide some kind of compensation that will have this long-term aspect. So these long-term incentives really intend to perform retention. One of the diagnosis was the importance of working with the deadline and materiality of this retention considering what had been done in the previous structure. And still, we decided to offer a performance metric that's really relevant for these components of the compensation. 70%, however, will be based on cash flow upon revenue and 30% in ESG metrics. And so all of these, of course, according to the strategic plans of the company. So the objective is that in 2024, the Board will submit this to the General Shareholders Meeting with new plans for long-term incentive compensation plans based on stocks that we'll be able to absorb the residual stock if -- of course, that are going to be issued if this proposal is approved by the General Shareholders Meeting. But with this -- when we consider this new plan, considering the urgency of the approval of these proposals in '22 and '23. Next slide. Besides the issues of the compensation system, you also noticed that the proposal stands out, considering it's transparency. So first of all, Assai offers, all of the full explanation of what happened, what changed and also some disclosure on the data according to the stock granted in the previous years, the value submitted to the General Shareholders Meeting based on IFRS provide some inheritance of all the decisions made in the past, such as the amortization of previous plans, et cetera. So it's very important that as we approve the proposal, shareholders understand which decisions are being made at this moment. And so besides doing what some companies already do in Brazil, which is segregating the impact in the current year of the granting in previous years, you'll see these processes here. But as it is really innovating with what we consider this vision, this vision of the compensation is being decided at this year. So basically, we have when we take a look at 2022 and compare the current proposal with the proposal that was rejected before, we consider the maintenance of the values proposed with changes in the mixes and when we look at the vision from the stock granting perspective, there is a reduction. The mixes are different. So we see the same thing in 2023. When we take a look at the compensation of the management, we see that there's a major reduction, BRL 72.9 million to BRL 49.4 million which could lead to a concern as there would be an adjustment that's too heavy upon the management or executives that the shareholders admire want to retain. But with this vision, we can see that that's not the case. There is a reduction. This reduction is strongly due to the programs that were eliminated, that had converged within this package of the new proposal, but it's a much smaller drop. And besides this, the percentage of the long term from this vision is greater than from the accounting perspective because the initiatives that are being proposed have a much longer vesting period. And so the impact to the results in 2023, that's relatively insignificant because when we compare the amount granted in 2023, we see that 46% of the compensation that is being decided this year has a long-term perspective. And that's even longer considering the 5-year vesting. So I think that Assai will be available to explain in greater detail if necessary. But the Board really believes that this vision is important so that the shareholders can understand what's being offered and the evolution of the decisions throughout the year. So thank you, Mauro, and all the speakers. Now we can get into the Q&A session.

Now we'll begin our Q&A session. [Operator Instructions] So our first question comes from Luiz Guanais, sellside analyst at BTG.

Good morning, everyone. One question here on my side. If you guys could give us a bit more details on the KPIs for the definition of the compensation for the executives. You did talk about the free cash flow and ESG and how this interacts with the expansion plan that you're looking at in the next years.

So I'm going to pass this question to Sandra. Sandra, please.

Good morning, everyone. Well, we have KPIs that are connected to indicators for financial performance and operational performance and ESG and so within these KPIs, we also have the growth of the same stores and cash generation and others that also reflect that not only the existing part but also the new units. So either through conversions or organics. So our KPIs also reflect the performance of the stores.

So the next question is from Marcelo Savo. He's a buy-side analyst, and he will open up his mic, so he can proceed.

Hi, guys. Good morning, everyone, and I wanted to know if you can give us more details about the independent work that was done that based compensation of the Board for 2023. If you could give us more details on who performed the research and the segments of these peers and size of peers .

Marcelo, I will pass this to Sandra Vicari, our Executive Director for people and management.

Marcelo, thanks for that. About the research that was used for the definition for all of the competition is a [ Korn Ferry ] research. And we use as a parameter companies that have similar revenue that are also listed in the stock exchange. And so this is a research from [ Korn Ferry ].

[Operator Instructions] Any other questions? If not, we will end this call. So we have time for any final questions. Don't be shy. Please submit your questions.

We would like to emphasize that the company and the Board and all of the Department for Investor Relations will be available and if you have any other questions or points you would like to discuss with us.

Well, Danny, just 1 more point maybe to reinforce that is maybe not as clear as I would like it to be in my presentation. When we talked about the Board in 2023, we like to remind you that there are 2 periods in January to April. The Board still had the ICP and ILP. And from May to December, we have the fixed compensation based on the [ Korn Ferry ] research, as Sandra mentioned. And so they asked me to reinforce if I haven't been completely clear on this point. So I just want to make sure this is very clear.

Yes. And that actually clarifies the point by Marcelo Savo about the research because we must consider these 2 moments, right? Leila?

Exactly. Perfect, Daniela. Okay. All right. On behalf of the Board, I would like to thank you all for your presence. And I'm emphasizing what Daniela mentioned, the Board is available to you through the IR department of the company to answer any additional questions you may have.

We have the webinar and the proposal for the Board about the General Shareholders' Meeting is officially ended. The Investor Relations department is available to answer any other questions and points. Thank you so much participants, and have an excellent day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]