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BOVESPA:ASAI3

Earnings Call Analysis

Revenue Growth, Margin Improvement, and Strong Cash Generation

In Q2 2024, Assai saw revenue grow by 11% year-over-year and 34% over two years, achieving a milestone of 79 million customers. EBITDA increased by 18% YoY to BRL 965 million, with a 0.6 percentage point margin expansion. The company generated BRL 7.6 billion in cash over two years, funding 88% of its investments through operational cash, reducing leverage to 4.25x. Plans to open 10 new stores in H2 2024 are on track, contributing to significant growth and sustained profitability.

Strong Customer Growth and Store Performance

In the second quarter of 2024, Assai Atacadista reported a remarkable increase in customer engagement, welcoming approximately 79 million customers, up by 7 million compared to the same period last year. This translates to nearly 3 million additional visitors per month. The company also maintained robust Same-Store Sales growth, achieving an increase of 11% compared to the previous year. This growth reflects success from both customer retention and increased average tickets during the quarter.

Impressive Financial Metrics and Cash Generation

Assai reported a significant jump in Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA), climbing from BRL 815 million in the previous quarter to BRL 965 million, marking an 18% quarter-over-quarter growth. Over the six months, EBITDA grew by 27% year-over-year. Correspondingly, net income also showed growth, reaching BRL 258 million in this period, driven by efficient expense management, which reduced operational costs from 3% to 2.6% of gross sales.

Strategic Focus on Store Maturity and Expansion

The company continues to expand its store network, aiming to open 15 new stores in 2024 and an additional 20 in 2025. In the last two years, Assai has converted 64 stores and opened 20 organic stores. The management emphasized that the converted stores are still maturing, and the new locations are expected to perform at least 25% above the average sales of existing stores. This ongoing expansion showcases Assai's commitment to increasing its market footprint while enhancing store offerings.

Maintaining Solid Operational Cash Flow

Operational cash generation remained robust, with the company generating BRL 7.6 billion in cash over the recent cycle, with 88% of this amount funding its expansion projects. This cash generation has been crucial in supporting the company's growth initiatives without incurring excessive debt. Additionally, the company has implemented strict control over expenses, allowing for continued profitability amidst rising interest rates.

Improving Financial Leverage

Assai's focus on reducing leverage has yielded positive results, with a reduction in the net debt-to-EBITDA ratio from 4.25x to approximately 3.2x expected by year-end. This decline signifies effective debt management strategies amidst a challenging economic environment characterized by rising interest rates. The gradual improvement of financial leverage is expected to continue, reinforcing the company's financial strength moving into 2025.

Guidance on Future Growth and Margins

Looking ahead, Assai provided an optimistic outlook for its EBITDA margin, projecting an increase of 1 percentage point by June 2024 through various operational efficiencies and store expansions. The company aims to see revenue growth of 5% in the first semester of the upcoming fiscal year and continues to explore new service offerings, such as butchery and bakery, to enhance customer experience and drive sales per ticket.

Navigating Economic Challenges

Despite challenges such as inflation and reduced purchasing power among consumers, Assai's management expressed confidence in its business model, emphasizing sustained customer loyalty and market adaptability. By focusing on strategic store conversions and expanding service offerings, the company aims to outpace competitors and stabilize margins.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to our earnings call for the second quarter of '24 at Assai Atacadista. [Operator Instructions] We'd like to let you know that this earnings call is being recorded and will be provided on the IR website of the company at ri.assai.com.br, where you can already find our release as well.

[Operator Instructions] The information presented in this presentation and possible statements that could be made during the earnings call related to business perspectives, forecasts, and operational targets and financial targets at Assai represent beliefs and assumptions of the company's management, as well as information that, is currently available.

Future statements are not a guarantee of performance. They involve risks, uncertainties, and assumptions as they refer to future events and thus rely on circumstances that could or not occur. Investors must comprehend that overall general market conditions and economic conditions and other operational factors can affect the future performance at Assai and lead to results that differ materially from those listed in such statements.

Now, we'll pass the floor on to Gabrielle Helu, the Investor Relations Director.

[Gabrielle Castelo Helu, executive]

Hello, good morning, everyone. Once again, I want to thank you all for participating in our earnings call for the second quarter of '24. And I want to present the main executives present here; our CEO, Belmiro Gomes; our VP of IR and Finances, Anderson Castilho, the Operations VP and Sandra Vicari, Sustainability and HR VP.

So in this presentation, before we start the presentation, I'm going to show you a quick video. It's like less than 2 minutes, because we're experiencing a very special moment, which is our 50th anniversary at Assai. This video that's narrated by Belmiro, tells a bit of our story, strengthens our partnerships and also talks about how the company has evolved and the impact in the lives of Brazilian.

So let's move on to the movie. This video has subtitles, so we will not be translating.

[Video Presentation]

[Belmiro de Gomes, executive]

Thank you all so much, and good morning, everyone. First of all, I want to thank you for your presence. And welcome you all to our earnings call for the second quarter of '24. This is a quarter where we had opportunities to welcome over 2,000 new employees, which we hired now in the second quarter, and especially another 2 million new monthly customers with an increase in the tickets.

As you've seen in our presentation and the release, Assai was able to reach a milestone of 79 million customers, an increase of 7 million compared to what we achieved last year in the second quarter. So 7 million plus, represents over 2 million customers, almost 3 million people visiting our stores, whether the new stores or the existing stores in the company.

The 50th anniversary campaign we showed a video about, and we plan to provide more details about, because Assai traditionally has spectacular campaigns, not only when it comes to awards and activation, but also to keep loyalty active. And we're the company that's most present in Brazilian households. We're the company that has physical stores with the biggest amount of traffic and people visiting year-over-year. We have been overcoming expectations, so the company can continue to innovate and be a reference in the market.

Before we move on to the numbers, I want to talk about the environment in the market. We still feel consumers and the overall B2B customers quite pressured by debt, interest rates, some changes also in consumer habits that make us have a environment with the level of debt and purchasing power that's below expectations for this moment in the year. The inflation in our perspective is in line with what's expected by us, and the government with a variation level up or down, which is not maybe that relevant. Not such a big change from an inflation and deflation perspective

We also see a significant reduction in trade down that we had in the first 2 years of the pandemic. But also we've been seeing that what's impacting the market as a whole is a movement with a reduction of the sizes of the packaging in certain categories of products. Since we came from an inflation period that was really high, where income didn't keep up and a lot of the movements that industries and suppliers had to keep their volumes of sales, were really related to changing the size of packages.

So within the strategy for the second quarter, was really above all to preserve our cash position, keep up with our level of competitiveness and keep focus on store maturity, promoting a sequential increase of our gross profits and keeping up coherence and consistency, especially in our results. And we'll see this when I show you the slides.

The evolution of the gross profit throughout the 3 years and keeping up coherence and keeping up the deadline periods as well. And so, this could, of course, lead to something that maybe is not that healthy for the companies. So of course, discipline and expense controls, maintaining the level of services in stores. The company continues to expand with over 10 stores. Now, we had already mentioned previously.

[Technical Difficulty] And the team has already talked about the expansion traditionally, which is the focus in Assai when it comes to growth, the team has been, ever since April. Anderson, of course, can give you some more info. We had 80 new services deployed in the existing stores, which includes new services, butchery, bakery and cold-cuts. And this makes the 2 million new customers come from other formats in the food sector also attracted by not only the location and execution in the stores, but also the new services.

So I think that's the main highlight when we look at the second quarter. And same stores was close to 3%, with the balance in the growth of the same stores and also the growth of the expansion. So we had a growth of 11% compared to last year, 34% in 2 years, which represents in the last 2 years, 24 months, we've been anchoring this since Vitor will talk about the cash generation as well in these 24 months. But we had over BRL 5 billion in additional amount.

So the company is still working on its investments, growing and expansion. And we have important store openings in the second semester, Guaruja, which is something we could highlight. The new unit in Guarulhos; Sao Jose do Rio Preto we're trying to open this year, beginning of next year and some markets and regions where Assai is not present with major opportunities. And we should also go over the milestone of 300 stores this year, probably by the end of the campaign -- when we are at the end of our anniversary campaign.

So the EBITDA and the pre-IFRS vision, as we all know. We have this trend with the purchase of the Extra stores, which increased the levels of rent in these locations. And we're really highlighting this.

And the best way to view this pre-EBITDA is BRL 965 million and a growth of 18% compared to the previous year, higher than the sales. And that highlights that Assai has 100% of the EBITDA, which is cash. And in the pre-IFRS vision, we have a margin that's 7.2% and LAIR evolution of profits before income tax. And we also had the impact from the subvention that we had last year, we don't have this year.

And then you see this ratio between the profits and the net income. But you can see the sufficiency operation in the company. And we have a financial expense that is due to a level of leverage that's pretty high due to the interest rates, but the company has been very focused on deleveraging.

I'm not going to get into too much of the details here, because Vitor will cover this later on. But we really know the power of the cash generation in this business. So our leverage continues to be reduced. And we have an EBITDA that is more robust when you split this by the 12 months. And our focus is really this leverage projection. And so it's important to highlight that this level does not consider possible discounts on receivables, which are -- whether they're discounted or not and the company has its projection for our net debt to EBITDA of 3.2x till the end of the year.

But anyways, on the second slide, you can see how things have been evolving in stores and with the Extra conversions that we already have sales of over 25% of the average in the company. And from the 10 main stores, when it comes to customer flows, 9 are conversions, the stores that are very well located. We're talking about the project. And you can see the evolution of the EBITDA, especially.

Of course, these stores are not mature. So you can have an idea that maybe the first store, which like 2 years ever since the opening. So most of the stores are going to continue with the second year full of work and then after, we'll be completing the 24-month cycle.

And we've been working on some initiatives to balance our sales and EBITDA margin maturity. So the sales should reach BRL 26 million and the EBITDA margin pre-IFRS without the impact of the leases. Of course, you have the property tax impact, but it's about 5.4%, which means an EBITDA margin evolution of 1 percentage point, if you already look at this from December onwards, so 6 months December '23 to the end of June '24.

The company has been really focused on improving the store network and the maturity ramp-up when it comes to sales and margins, trying to balance out both of these points. And with this we advanced about 140 bps in margin compared to last year and a growth in our revenue in the first semester when we compare with December, which, as we all know is a very typical month with a growth of revenue of about 5%.

We can move on to the next slide now. As the process of conversions, as we all know, as they went through a very intense project for the expansion of the conversions. And in this slide, we brought in an evolution of the gross profit. So when you look at the amount of tickets, you can see the company more than doubled or tripled during this year and the last periods, actually. And the gross profit keeps up with the same proportion.

So if we take a look at this from our perspective, the positive results is that even when you go through such a big process with the conversion of the hypermarket and the closings. And during this period, we really evolved in this store format. We had 2 things that took place.

Concurrently, we had the conversion and opening of a hypermarket plus also the inclusion of the new services with butchery and other projects. So the first butchery we opened was in the end of 2019 in Sinop, Mato Grosso. So these are different occurrences. But when you look at this due to our commercial dynamic and even with this evolution, we had a gross profit that was very stable, 16.7% to 16.5% now in the second quarter of 24%.

So 2021, we didn't start the conversions yet. But you can see gradually that the levels of gross profit get back to normality, even with all of these changes as we enter new centers and include new services. We can advance.

When we look at the expense perspective, the changes in the dynamics, there was always some skepticism in the market about the shift in formats. And this intends to provide better services to the population with higher income and also provide some possibilities to adapt for B2B and B2C customers with better locations that were very far off, and I would be very difficult to be open in Cash & Carry operations.

So the changes in the assortment and the changes in certain units in other stores. When we look at the level of expenses, you can notice that the expense in the post-IFRS vision where you don't consider the lease is completely stable. So 9.7% we had seen as an SG&A percentage is prior to any conversion projects for Extra and prior to the inclusion of any services as well. So it's pretty stable, 9.7% to 9.5%.

But when we look at the lease and include the lease in perspective, of course, these stores, as we mentioned in the beginning, they have a characteristic with the level of a property that's very different. But the increase in the margins and sales when we look at those 25% more than offset this.

And in April, especially in our vision, there's a whole another possibility for growth in the company, because when you consider the profile of regions where the cash & carries to operate, you kind of have the situation where you can maybe not have a higher level of saturation or the capacity to penetrate in central regions.

So I'd say it was a big innovation, which allowed for major movements even among competition to follow along behind us in the paths we pioneered. And as we wrap up here, I'm going to pass the floor to Vitor as he talks about the EBITDA and presents here. We still have some time for Q&A as well. But he's going to discuss the operational aspects -- the leverage aspects and after we'll get into the operational aspects.

[Vitor Faga de Almeida, executive]

Great, Belmiro, thank you. Good morning, everyone, for me to describe a bit of the gross profit dynamic and the SG&A. Now, we're going to show you here through these 2 metrics, look at the EBITDA and see an important evolution of the EBITDA.

When it comes to the quarterly basis, we've seen evolution of BRL 815 million to BRL 965 million in the comparison quarter-over-quarter. And the growth of 18% that comes from an increase in sales, but also the margin expansions.

And when you look at the evolution in the 6 months, you see that there's pretty much the same format, 27% growth and an increase in the margins of 0.6 percentage points. And so once again, as a basis for the success in the maturity of our stores so far, as they've been converted, but also the deployment of services, as Belmiro explained. And no doubt, the control of our expenses, which allows us to grow, having an increase in our profitability when we look at the EBITDA line.

So moving ahead and looking at a bit of the financial results. We also see positive evolution. In the comparison with the same period last year, where we have stability when it comes to the representation or importance of this financial result compared to the revenue and the percentage of the ratio.

But when you look at this and you compare the first quarter of this year with this quarter. You see a reduction -- a nominal reduction of the expense, BRL 510 million to BRL 468 million, but especially a dilution of these expenses. So as a percentage of sales, it goes from 3% of the sales to 2.6% of gross sales. So the evolution of gross profit and expense control generated an increase in EBITDA margin associated with the maintenance if you look at the annual basis and the reduction.

When you look at this in a sequential manner, we see a profit before income tax that had a very important growth rate. What they call the LAIR on this slide in Portuguese. And when we look at this, in the semester, this profit before income tax more than doubled from BRL 135 million to BRL 347 million. So this was an increase of 157%, which demonstrates we are on the right path when it comes to the strategies that the company has been adopting.

What's also important to mention is when we look at the net income. It was impacted in the comparison with last year due to the significant reduction and the positive effects of the subvention and investments. But then when we look at the semester view, we have a growth of the net profit. So we move on to BRL 258 million in this period.

Then moving on, here, we have a comparison. Belmiro quickly showed this in the presentation. We have a comparison and a number that we think we should share with you, which is, the operational cash generation we brought in this 2-year cycle, which really sets the beginning of the deliveries from the stores that were converted for the hypermarkets.

And here, we presented this comparison and analysis to show you clearly have the operational cash generation was so strong. The company generated BRL 7.6 billion in cash in this period coming from the EBITDA generation, BRL 6.8 billion in EBITDA generated, but also a positive evolution in our working capital. So it was a major evolution in the number of stores and 64 of them were conversions and 20 were organics.

And this cash generation, if you look at the investments that were required for this expansion and these investments were very significant when it comes to the acquisition of hypermarkets, the conversion of hypermarkets, or even the opening of these 20 organic stores. But also when it comes to the refurbishing and implementation of the services, the company was able to generate the necessary cash to handle basically all of the investments.

To be more precise, 88% of this investment was funded with operational cash generation in this period. And I want to remind you all that these stores are still maturing. So basically, this is an analysis we consider to be very important to share with you, because it demonstrates the strength of the company and how solid it is and that we're really on the right path to continue to grow our results.

But of course, we also have the payment of the interest rates in this period, about BRL 3.4 billion. And that's a direct consequence of our debt levels, as Belmiro mentioned. And the interest rates in this period that also reached levels that were a lot higher.

So moving on, it's also worth mentioning that a bit of the evolution of our leverage. This is an indicator we've been accompanying closely. This is one of our focuses in the company as Belmiro has mentioned. And we see ongoing improvements and reduction in leverage.

If you look at the leverage by the end of the second quarter, which was at the level of 4.25x, we can see a reduction of 0.6x, and that's if you compare with the end of the second quarter this year. And this was an evolution of 0.10x for the last quarter to now. So this is an indicator we monitor closely and it's one of the company's focuses.

Clearly, we've been looking at this. And we've been seeing the evolution of the EBITDA. The reduction of the leverage is happening and it will happen throughout '24 mainly due to evolution of EBITDA. For '25, we expect to have even greater contributions coming from the reduction of the net debt.

Moving on to the next slide; you can see that there's some additional information that we're presenting, which is a total availability. So we've been working on a new interpretation on this breakdown. And we brought in what's considered cash, equivalents and also the receivables that are not discounted.

So the first point that I think is worth mentioning is that we had an issuance of debentures that was really well -- very successful, which led to a higher cash position in the end of the quarter. And that made us discount less receivable in this period. So that's why we see this significant growth in availability. That's a total BRL 6.9 billion, a sequential growth of 33% through 34%.

But when we look at the breakdown with the non-discounted receivables, which is substantially greater, and that's a fruit of this expansion, which is mainly -- it's another step we're taking to improve the profile of our debt. So first, we discussed. We had the issuance considering CDI+ 1.25%, which is substantially lower, which was CDI+ 1.49%. And the extension of our average term of debt, which was 28 months, but now with this issuance, it becomes 32 months as an average term.

And so Assai will continue to search for new opportunities. And so also, we want to consider the average cash in the period. So it went over just BRL 600 million. And it was BRL 640 million in the first quarter of '24 million. And then, in the last quarter, it was over BRL 800 million.

And then here our practice is that we'll gradually increase this cash position, providing more liquidity and increasing the financial solidness in this period. That's what we wanted to share with you guys about the financial indicators.

Now, I will pass the floor over to Sandra, as she talks about sustainability as a strategic pillar for the company. Sandra, the floor is yours.

[Sandra Vicari, executive]

Thank you, Vitor. Good morning, everyone. So within our sustainability strategy, which intends to really lever prosperity for everyone, all of our initiatives are based on 3 pillars, which are efficient operations, developing people and communities and the ethical and transparent operations.

And so here, we're really focused on reestablishing reusing waste and that these would be intended to landfill. And this is all related to our Destino Certo program, benefiting many organizations. And we continue to develop these initiatives. So that we can create a more diverse work environment based on valuing differences and [ spec ] differences and also 40% of black leaders in the company. And in this context, we were recognized among the companies are Ibovespa, the Brazilian Stock Exchange, is one of the companies with the highest rates of black leadership.

And we also received some indications as the best companies for LGBTQ communities to work in partnering with Instituto Mais Diversidade. And through Instituto Assai, we are promoting the donation of food and beds and different other materials to Rio Grande do Sul, and -- so that we can also send this throughout all of Brazil.

And I would also like to mention that we are highlighting some awards and recognition that we received in this quarter because it really values our performance and the relationship with our customers, which is really essential. So for the fourth time, Assai was recognized in the first place in the Retail category for Modern Consumers. And we were elected as the -- for the ninth time as the best Cash & Carry operations city in Sao Paulo, which is based on the perception from people that live in Sao Paulo.

And we're third place among the best companies in the Investor Day. And we're the only ones in the food retail on the podium. And Assai was considered the Brazilian brand that's most valuable in the food retail sector. So these are acknowledgments that really make us happy and confident that we can continue to work to achieve a company which is more sustainable, more solid and with greater prosperity for all of our stakeholders.

So thank you all. That's it and I'll pass the floor on to Belmiro.

[Belmiro de Gomes, executive]

Well, thanks, Sandra. Thanks, Vitor, for the presentation. We brought in a bit more of the campaign details for the 50th anniversary at Assai. And Assai with the amount of 77 million tickets in the quarter really represents a huge flow of people. It's about 38 million and people passing by our stores. And it's a company that's most present in Brazilian households with the biggest flow of customers in retail stores in Brazil. And the company operates in a continent really in the national territory.

So traditionally, every year, we have very strong campaigns. And this is one of the decisive initiatives for this kind of expansion to make the brand really well-known and famous in the national territory and generate loyalty among customers. So the 2 million customers per month we conquered in the second quarter partially come from the promotion and mouth-to-mouth referrals, but also services based on the quality of our culture.

And so this year, we have a campaign that's probably the strongest campaign in Brazilian retail. The strongest one we've ever had. And in all years, we decided to hire a full ship from MSC Cruises. And it's going to be in the Brazilian coast. And our customers will be able to win 1,500 trips that -- it's going to be [indiscernible].

So as customers buy, the more they buy, they can expand the chances of winning and being awarded. And also the more they buy from the participating brands, we had over 50 suppliers that are the sponsors of the campaign. And besides being highlighted because of the customers buy their products they can expand their chances to achieve this. And they have a bunch of benefits with the expansion of the product.

So it's a campaign that really will affect our customers a lot and also will allow us to continue to move towards conquering new customers. And first award is BRL 5 million. And then you have over 50,000 awards that they can use instantly of about BRL 100. So we'll have -- its going to last 4 months, and we're going to have strong promotion in different media sources and outlets.

We also shifted our registration process so that we can capture as much data as possible, enriching the basis of our CRM in our digital strategy. And Assai has been working with future projects as well that we have and especially want to keep our customer loyalty and conquer new customers.

So an interesting data as the company is made up of people. Above all, the main differential is -- in a company's culture, right? So within this, we're going to be sharing this with all of the employees that have over 20 years of experience. They're all going to go regardless of the position they occupy the company.

So in this way, we'll also demonstrate to who is in the operation working with the 30 million people that being at Assai will lead to special awards and they will be recognized. So well, I'm getting too excited here. So I don't want to go over too much. But I want to thank everyone working on the campaign. It was fantastic. It was a joint effort, not only in the marketing, but also the commercial and operations area.

We have a challenging period up ahead. But we have a beautiful campaign. And we believe it's going to be really good acceptance. So to anchor this, we brought 5 personalities. Each of these represents a different region in Brazil. They're very popular. We have Xande de Pilares, Michel Telo, Gaby Amarantos and all of them represent a specific region in our country, just the diversity. They are very popular singers and artists. And we brought them on board for this campaign.

Now, we're going to show you the campaign video. It's very quick and then, we'll get into Q&A.

[Video Presentation]

[Operator]

[Operator Instructions] So Joao will open up your audio, so you may proceed.

[Joao Pedro Soares, analyst]

I wanted to explore 2 points here. First of all, I wanted to discuss the competitive environment, Belmiro. I think we're going through this new discussion with the SKUs. And so now we're discussing this. And it would be good to get a perspective on your opinion about payments and sales with installments. Some regions don't have demand for this kind of purchase, and payment in installments. But I want to get your perspective on this.

And also your vision about the growth dynamic. So we have a relatively constructive perspective when it comes to food inflation at the bank here. But I wanted to get your feel. Do you see there's going to be a short-term acceleration? And what's your mindset? Have you seen something change compared to the messages in the last quarter?

And finally, the capital structure bit, an expansion for next year and how comfortable you guys are for this expansion plan?

[Belmiro de Gomes, executive]

Joao, well, let's put this up. So yes, there's a shift in the market. And of course, there's always a possibility for changes in the competitive environment. We've been one of the protagonists when we placed services in stores. And in our perspective, services were just to evolve in this model. And you can see there are so many differences in levels of income. And so the model that's adequate for one region is not always adequate for all of them.

The solution in the model for the regions is, we requested that the inclusion of these services is necessary, and this inclusion demonstrates that it was a very assertive process. And in the second quarter now, we saw a change in the pricing -- in the payment term conditions.

So we've been watching this very carefully. You can search for sales with 2 things: margin and terms. So margin, which is what you was going to work towards recovering, but what we saw in the dynamic and so it's a lot more related to the actual wholesale operations because when you expand the terms, the customers that have working capital that's really pressured and financial conditions when you stretch out and double the terms for the B2B customers or even offer 3 installments, you have an increase in sales. That should impact the market as a whole.

But in our perspective, it's a strategy we don't expect because as buying with installments -- so even with private -- we would have a private label to incentivize the use of Assai card. But at this moment, we're not going to shift in the sense in our policy because this did not actually reflect that much in the stores, but maybe it's more impactful for the distribution and wholesale operation that our competitor has.

So if you look at the total in the market when it comes to growth in the second quarter, we're really in line with what the overall market has been seeing in the second semester. Besides the campaign, we have many adjustments we've been working on in the commercial dynamic, negotiation with suppliers, product mixes.

Of course, the second quarter was slightly below expectations, but the expectation for the second semester is that it should be a more positive period. So the company and all of its efforts to -- that are necessary to change to have a more positive second semester we're working on. But of course, this environment we were expecting or projecting at the end of last year for this year is not at the same level of purchases we expected.

The expansion plan is pretty much kept. We haven't, at this moment, had any signs. It's always a process that we have to be reviewing because the expansion we have up ahead will be for organic stores. And with this differently than when we bought the Extras we had to open up as quick as possible since we are already having the lease expenses.

But with organic expansions, it's really a matter of decision. And we can decide the level of expansion versus debt and we always monitor things like that. But at this moment, we have the 15 stores expected for '24 and the 20 stores for 2025. So a lot of the projects have already been expanding quite a bit. And that this could be something we're really expecting. But what we see at this moment, but I do hope to have answered your question.

[Operator]

So our next question is from Clara Lustosa, sell-side at Itau BBA.

[Clara Lustosa, analyst]

So more of a follow-up on the previous question. But I wanted to explore a bit of the same-store sales and how that took place in the quarter, the evolution throughout the month.

And also may be taking advantage of the payment term and payment conditions topic. You mentioned that maybe this is more attractive for the wholesale distribution business. But what was the performance throughout the quarter and the beginning of the third quarter when you think about B2B? Do you think that they're being more attracted by other payment conditions provided by competitors? How you guys been working on this? I think that's the first question. More of a follow-up.

And the second question is really quick. It's like a working capital one. I think you made this very clear in the release at the level of suppliers in the second quarter last year had a one-off effect. But if you could just go over a bit of how we should be looking at this level? Maybe closer to 60 to 65 days. Eventually, so of course, offsetting some of these effects of the fourth quarter.

[Belmiro de Gomes, executive]

So Vitor will talk about the dynamics of the working capital that we can see in the second quarter of last year.

So about the timing dynamic, we can see the consumers always have a different dynamic as soon as you provide a bit higher payment term, your increases purchases. But right now, the cost of cash, if you increase the level of limits, you could have higher delinquency rates. So that's something we have to be careful about and monitor and see if there's any like major modification.

I want to remind you that we don't have the distribution wholesale channel. We only have the sales for Cash & Carry in the stores. So of course, these 2 channels, they do have an overlap. 98% of the customers that buy for distribution also buy in the Cash & Carry stores. So they normally have like a product mix. So if you increase the terms, you also have an increase in sales initially. But if you don't increase it slightly, what happens is you'll perform the sales initiative, but then you're going to go over, which could lead to delinquency up ahead besides the cost today of cash.

So basically, I think we have to always analyze and see how this policy will be. But according to our current policy, monitoring, how we've been working in the second quarter, even if this could lead to an impact on the sales for B2B. So of course, you have part of the B2Bs, which are the transformation public, those customers that as work in food service, et cetera. But the resellers actually just want to know about payment terms and conditions and pricing, but it's hard to keep loyalty among this kind of customer, the resellers.

[Vitor Faga de Almeida, executive]

Clara, so thanks for your question. Just about the working capital now. Yes, we did have a variation upon the working capital in the same period last year, which is a lot more marked or impacted by the difference. And the fact that the working capital in the second quarter last year having performed in a very typical manner with an account for suppliers that was relatively high. And when you look at the history label, we described this, I think, in greater detail on Page 7 on our release.

But if you look at this from here forward, you see the working capital behavior is going to be very similar to what we've seen in the first quarter this year. And what we're seeing in the second quarter, the cash cycle is about 5 days, basically. So that is what we've seen. And of course, there could be some change like 1 to 2 days up or down in suppliers' stock, et cetera. But when you look at the cycle, the cash cycle, we see this cash cycle that's a lot more similar to what the first and second quarters were.

There's, of course, a seasonality effect in the last quarter of the year, and you have a shift in this parameter, considering the high volumes of sales, but this is something that we know about in the industry, and we won't behave very differently.

[Operator]

Our next question is from Danniela Eiger, sell-side at XP.

[Danniela Eiger, analyst]

My question is very quick. I think most of the topics were covered already, but it's just a follow-up on the food inflation dynamic point. So Belmiro, you mentioned there is like a major changes in the trends, but we've seen and even today, we saw the data on the inflation surprising downwards. And that was really levered by categories that are really relevant like protein and dairy products. So how do you see this dynamic? I know you see -- you said you won't see too much of a change. But do you think this could be updated or changed considering the data today?

And also, what are the types of levers you have for possibly working on better profitability and cash generation in a scenario where you maybe have a food inflation that's still not helping that much when it comes to the same-store sales dynamic?

[Belmiro de Gomes, executive]

Thank you, Danni, and thank you for the question. When I talked about the variation here in this year, from a comparative perspective, looking at the turbines we had after the pandemic. From an inflation and deflation perspective, there were more sudden movements, but this year it's a lot more stable. So yes, there are variations in the month-to-month comparison, but we have one component we should keep an eye open for which is the dollar, currency issue because even the proteins and other commodities are impacted by the dollar.

So if you have the American currency higher, which is not the level we had expected or seen with the change in the consumer environment in the U.S. And so I think we all were kind of wondering if there could be an effect on the food inflation just as construction materials that are also impacted right with the new stores. Especially when we're talking about steel. So there's also a reduction of the inflation, but that's a [ re-deflation ] as they call in Brazil, where we have a reduction of the size of packaging, where you want to have industry keep the same pricing and at the same levels, but you have some occasional trends.

So it's difficult to say because sometimes in the production reductions, considering climate conditions, we see the droughts and everything. And so it could be that in the second half, we'll have a different reality because of this. So we do expect some variations until we reach a higher stability point from a consumer perspective. And even some of the protein and commodities had some variations, but we don't see like major variations for the full year. I think that's the main point. I'm not sure if that's clear.

[Operator]

Our next question comes from Eric Huang, sell-side at Santander.

[Eric Huang, analyst]

On our side, we have a quick follow-up from Danni's previous question. And Dannie talked about the dynamic of the inflation. And just if you could talk about how you've been looking at the beginning of the third quarter. And as we think about the same-store sales, do you guys see this as an acceleration or not just so we can have a better feel on how this has been advancing.

And then getting back to installments just to understand more where your partnerships are? Today, you have this partnership with FIC, and also if you would like to maybe look into something where you guys can have more control. And even having some kind of possible support for market changes if or should there be a prevailing situation with these payment conditions with installments?

[Belmiro de Gomes, executive]

So I think we were missing part of the answer. And basically, we have, in retail as a whole been, below expectation. But there are different initiatives in the company to try to offset these effects. And besides what I highlighted, we included another 80 new services, which was ever since April that we were here, which will contribute in the same stores. And other pilot tests also in product categories, depending on each region and store that also help.

So we're not just, of course, stopped watching the market. We constantly look into finding more resources and taking advantage of this as and we're look into the customer flows we have today. I think our greatest heritage is customer loyalty. And of course, we're always searching for ways to work on this as long as this, of course, it doesn't change the business model.

In the third quarter, as you've seen, we're really in line with the second quarter. We don't expect significant variations. And then the payments and installments, as I mentioned, I think we need to separate this discussion, right? And so I don't know if you could maybe add on to this next point here, but what we noticed in this volume of sales in 3 installments is not coming so much from consumers, right?

So keeping up this would not make too much of a difference, and we have to look at this that the risk of delinquency could maybe be higher. So we're kind of following in the same direction. We're not going to be changing anything severely in the policies or restructuring a financial company or something. That will not really affect much of the dynamic now in my opinion.

[Vitor Faga de Almeida, executive]

That it's Belmiro. So, Eric, our partnership with FIC, our financial services company provides all of the insurance we need to work with our customers. The Assai card allows us to perform -- to offer purchases in 3 installments, but it also in certain items allows the customer to buy a smaller amount of products with a wholesale price and not a retail price.

So we also have in our stores, just to remind you, the same products have 2 prices, the retail and the wholesale prices, depending on the volumes, the customer buys with this item. So the FIC partnership would allow us to advance as we would like with this issue. And so the issue with the installments, as Belmiro mentioned is more of a commercial decision to not keep up this way.

[Belmiro de Gomes, executive]

Well, and I think just to add on here with the payments and installments. When we look at the numbers in the market, as we've seen in the competitive environment, the consolidated between the distribution, wholesale and delivery, wholesale operations as we don't have disclosure or a breakdown of all this, it could give us an impression that you could have a trend change, which is probably more of the wholesale in the sales volume. But by what we've been observing in the market and even the share measurements when we look at the comparable, which would be Cash & Carry, there is not pretty much any kind of effect there. So I don't know if that was clear. But as I saw, this topic had 3 different questions. I think it's worth mentioning.

[Eric Huang, analyst]

Yes, that was very clear.

[Operator]

So keeping up with our next question here from Luiz Guanais, the sell-side at BTG Pactual.

[Luiz Guanais, analyst]

Getting into a bit of the discussion on the productivity of the converted stores, I wanted to understand what the dispersion is like in the stores in different regions, you converted throughout the last 2.5, 3 years. And if you could also talk about the cannibalization effects in these stores upon the legacy stores at Assai?

[Belmiro de Gomes, executive]

Thank you, Luiz. Yes. Obviously, you have this dispersion, which is very much connected to the performance of what Extra had. So we already had this expectation that this would happen throughout the project. This was very close. Of course, there are some variations, right? Because in certain regions during this period, the closings and reopening, you had some competitors that open up in some stores, the Extra stores that were very strong, continuous strong, Assai stores and the ones that are weaker, continue weaker. But it's more about the population potential, income levels and surrounding areas and then the actual store it's off. There's not much very relevant impact in this.

Of course, you have cannibalization, the lower the overlapping in Extra and Assai, many company really, we have presence in 25 states in Brazil. Any operation you have will have a cannibalization level on, and also because the offering in the environment of these stores is a lot more robust, but part of the stores that did have cannibalization in the stores, when you look at the sales per square meter that we see an average of in the Assai performance, which is the best in the sector, about BRL 4,400 per square meter. We had organic stores had BRL 7,000, BRL 8,000. So it's already like a bad service for customers. And we mentioned this cannibalization will be about 2 percentage points. In our project, you'll probably remember, it's about 3% to 4%.

But on the other hand, we preferred to migrate or maybe lose in Assai customer and an older stores with the new Assai store than losing them to competitors. So we're opening up in regions where we already had stores, so some level of cannibalization would exist. Of course, the B2B public is willing to drive further off consumers due to the practicality of the stores or parking or the level of offerings adjust because a lot of the stores, we look at the lowest indicator -- the best indicator is looking at the sales per square meter. You'll see our stores had a really high level of saturation. So it was slightly above what we expected in the beginning of the project, but it's not a variation that's going to change the fundamentals for the decision towards the project.

And when you look at the fundamentals, of course, we're looking at same-store sales, but it cannot be seen as an absolute indicator in the sector like ours, where you keep up with this major expansion. And naturally, you have this self-cannibalization effect. If you look at the same stores, it would be like an absolute perspective if we hadn't had any expansion. But if you look at from 56 million tickets in the second quarter of '22 to 77 million tickets. Now within the second quarter of '24, and you can see there's an increase of almost 20 million tickets, 7 million per month. So that means almost 13 million or 12 million people.

That's a huge increase in such a big amount like this, just compare with the population in certain countries. So of course, you migrate customers from competition and you might get like to an older Assai to a new store and I think you need to look at the total growth basis as well. So to the same stores. Of course, we know the indicator and the importance it has, but in an expansion process, it can be the only indicator.

[Operator]

Our next question comes from Felipe Rached, sell-side at Goldman Sachs.

[Felipe Rached, analyst]

I wanted to talk about the gross margin topic. And then, of course, the competition, we talked about competition a lot, of course, regarding the sales, but maybe more towards the gross margins.

The converted stores have a margin that's a little higher. So they probably have a positive effect in the mix. But I want to know what the dynamic was like if you exclude the mix effect. So how did the gross margin behave if you consider the same-store criteria?

And then adding on to this, in similar markets, did you feel competition was more aggressive or if the difference is really just in the sales level that was mainly considering the 3 installments and the discretion of B2B as well?

[Belmiro de Gomes, executive]

Okay. So when you look at the gross margin and you exclude Extra, although the Extra stores, not all of them have the gross margin, gross profit that's higher than the companies, right? But we're really focused on the EBITDA margin, balancing this out in the stores and we have organic stores as well that have gross margins as well. So obviously, we have the clusterization of the prices and the stores don't follow the same prices for each region and need to have differences. But when you look at the same stores, even the same assortment, the margin was very stable.

And I think part of the scale gains we had with this increase, as I had in the last 2 years, we're also reinvesting in pricing. So the company is really keeping an eye open towards investments and competitive advantages. And we're looking at the numbers and you're seeing the total numbers. And customers themselves, we saw this even with the card because sometimes they are afraid of taking on debt and paying in 3 installments, especially when it comes to food. And so of course, the market is competitive, and we're following -- it's keeping up with a really strong level. So we have to continue to innovate and bring new products, new assortments and searching for the best pricing. So we don't have this -- so we're not left behind.

But when you look at the gross profit, I think you can see the stability the company has, right? When you see the 3-year light, you can see what happened, right? Ever since Extra came into the base and the beginning of the inflation, deflation and the margin was still quite stable at this time. So at the end of the day, what guides our price policy is our role as a complementary distributor between customers and especially B2Bs. So we search for ways to be the lowest cost channel for industry. So this makes the margin be an important result to pay the operational costs and be more competitive when it comes from the distribution wholesale and industry itself.

[Operator]

Well, moving on, our next question comes from Vinicius Strano, the sell-side at UBS.

[Vinicius Strano, analyst]

Belmiro, what's your perception in regards to the price elasticity for consumers? If you look, this is a topic that people covered already a little bit before, but do you think it makes sense to be a little more aggressive with the price investments and try to win more on the volumes? And what have you noticed as well about the stock levels in B2B customers? And what's your growth perspectives between B2B and consumers up ahead?

[Belmiro de Gomes, executive]

Thanks for the question. But when it comes to pricing, of course, the consumers motivated by price, but that's not the only thing you consider it. If you look at any survey by Nielsen, or other services and even our internal service demonstrate that more and more the store location, level of service and service level in the stores or store environment and store is all part of the decision-making process, right, and especially good execution in the stores.

So when we do one-on-ones with the investors, you invite them to visit a store and a competitor store, especially downtown regions so that they can see the level of service. So the company is still competitive.

And by what we've observed at this moment, consumers are looking for products that have maybe smaller size and if there's a trade down period, they're also working on consumption. So reducing margin would have to be a very destructive trend that could be bad for the overall market. But also like a big margin movement would maybe not lead to the expected result because you also have from the consumers a reality where they look at this, the wholesale -- the cash and carry is already a lower price channel.

So normally, the price difference is like 12%. We're already a search for low price. If it's 12%, we go to 13% or 14%, we don't know how much of a sales differential is sort of bring you. If we are too aggressive, we could lose margin, and we're going to sell pretty much the same amount that we would have been selling with the margins we currently have.

So if you look at B2B, we're still very careful while you have this scenario with high interest rates and currency and this perception that we have where the economies generate a little more jobs and some other indicators, but the overall perception still is that people are very cautious still with the expenses, especially with the last currency increases, the uncertainty about the interest rates of these customers, if they're really quick to adjust, we don't see like a major stock up trends. So if we had such like a cataclysm in the market, that could maybe lead to higher increases they could invest. But the cost of investing in stock today versus an expectation regains, we look at how we see that hasn't really happened in practical terms.

[Operator]

Well, moving on, our next question comes from Bob Ford, sell-side at Bank of America.

[Robert Ford, analyst]

Belmiro, how are you looking at the differentiation and competitive advantage. And besides greater segmentation and regionalization, are there opportunities from a seasonal perspective for more of a treasure hunt in the stores?

[Belmiro de Gomes, executive]

I don't know if I bought this question. But about differentiation, more and more, the company has been when you see -- like when we showed you the campaign, it demonstrates how we're really trying to adapt to each region in Brazil. It's a continent. We have huge differences from one region to another, and that happens in the micro regions. So if you look at Sao Paulo or Campinas or the Santos region, you can see dynamics that are very different.

So Brazil is almost like one coffee brand per city. So our big bet on standing out is really at the level of services that mix of products, and there are many other dynamics as well when it comes to activation at the stores and special festivities and campaigns and even the types of ads we put in the store to be able to stand out compared to other competitors. So I think another differential Assai has, we've presented in many areas that among all cash and carriers, we have the highest diversity in the store formats and network. So we have store of 2,000 square meters, all the way to 10,000.

So in order to do this, you shift all of the logistical patterns and supply. And so this makes the company very resistant and sorry, very consistent with the numbers when -- despite the financial issues and the interest rates, you look at the SG&A and the gross profit, then you see that consistency and continuity is pretty much the biggest milestone besides the cash EBITDA transformation. I hope I have answered.

[Robert Ford, analyst]

And just to ask you, how you've been thinking about like a treasure hunt approach or more like a seasonal approach to 2-year mix?

[Belmiro de Gomes, executive]

Bob, once we know if we have more opportunities for like treasure items, which are the in and out items, right, where you don't have like frequent fee in stock, right, is like a one-off opportunity. So yes, there's many opportunities, we have different projects we're working on. And we have some news to share soon with some great opportunities. We're trying to attract and bring in more resources and having a greater share on their pocket.

And of course, we can't make a huge change from a strategic perspective so quickly because we have to preserve cash and also the maturity of the Extra stores and really doing things well done is the biggest focus. But of course, we have different projects. And as soon as this is a little more mature, we'll be sharing this with you guys. But it's just putting yourself in our place and seeing a company that's going to start off with 300 stores with 38 million people visiting in a month, and you see so many opportunities.

So ever since advances in the galleries now in the second quarter all the way to other projects with -- of course, we have a limit of sales and space in the stores. So now with more solid data soon, we'll be able to bring more information. We don't want to create any false expectations. But of course, there are opportunities for the in and out.

[Operator]

Our next question comes from [ Tanis Cranell ], sell-side at Safra.

[Unknown Analyst]

I have a quick question here about leverage. I think when we think about '25, what has the company been seeing as leverage for the end of next year? And what are the levels of leverage that would make the company pay interest on equity or private capital to be able to have the fiscal tax benefits?

[Vitor Faga de Almeida, executive]

[ Thali ], on leverage. The company has been focusing on reducing the level of leverage and we are looking for in the midterm level of leverage that would be about 2x net debt-to-EBITDA. But what's most important, this, of course, relies on the interest rate. So we have to have a financial expense that can maybe compromise 15% or 20% of our EBITDA, but a lot more than that. So that's what we've been discussing. And the company is still really focused on deleveraging.

So if we talk about a leverage level for the end of next year, it's still too early because of everything we're seeing in the market and the fact that we still have so much to evolve in from now the way there. But what we can be more precise about is our leverage by the end of this year, which should be below 3.2x and our commitment to continue to deleverage the company throughout '25.

And especially about JCP, it's still a little too early to talk about that. Our focus is deleveraging and it doesn't make sense to evolve into a discussion on JCP considering that we're really focused on deleveraging, so. But then for next year onwards, then this discussion can be made in a more effective manner, okay?

[Operator]

Our next question comes from Nicolas Larrain, sell-side at JPMorgan.

[Nicolas Larrain, analyst]

Actually, most of the topics were already addressed, but I just wanted to maybe ask you something quickly here, look at the quarter. What was the progression of the same-store sales throughout the quarter? Just to understand how you guys are looking at this now for the third quarter?

[Belmiro de Gomes, executive]

Thank you, Nicolas. Actually, the quarter don't necessarily repeat because in the second quarter, you had this displacement due to the Easter period, and we had April and May stronger, but in the end of the quarter was a little weaker. But the line already demonstrates a different sign. Our estimates for the quarter are -- that are really in line with the second quarter. And even in our sector, the big changes in the quarter are not so relevant because, of course, that depends on the dynamics each company adopts. When you look at this, you see at these levels that are very similar when you consider progression throughout the quarter.

[Operator]

Now we're going to head to our last question today. This is a English question from Andrew Ruben, sell-side at Morgan Stanley.

[Andrew Ruben, analyst]

A bit more on mature stores, if I may. Where are we in terms of the planned cannibalization impacts you mentioned? Are they mostly in the past? Or should there be some go-forward effects as the converted stores keep maturing? And then when we think about the normalized mature store growth, should it be at inflation, above inflation when considering the services and other improvements or maybe below inflation as the sales further spread out with the new store base?

[Belmiro de Gomes, executive]

Okay. Thank you, Ruben. Of course, we want to be above inflation always. The dynamics we have and the inclusion of new services. And the cannibalization this is -- and so we're buying an older Assai and we are buying an new Assai, so when you look at this, these 2 million customers and as we have greater maturity in the stores, I hope I have answered.

[Operator]

Now the Q&A session is officially ended, and we would like to pass on the word to the company for the final remarks for the company.

[Belmiro de Gomes, executive]

I want to thank you all for your participation. I hope to see you on our ship in February '25, where you can shop at our stores and really have this incentive. So we're going to be heading towards the third and fourth quarters, which are the most important periods in the year. Thank you so much for your participation.

[Operator]

The earnings call for the second quarter of '24 at Assai is officially ended. The Investor Relations department is available to answer any possible statements and questions. Thank you all, participants, and have a great day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]