Sendas Distribuidora SA

BOVESPA:ASAI3

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, everyone, and thank you so much for waiting. Welcome to the earnings call for the fourth of 2022 for Assai Atacadista.

I would like to highlight that if you need simultaneous translation, we have this tool available on our platform. For this, just click on the interpretation button through the icon on globe at the bottom part of your screen and choose the language of preference, Portuguese or English.

This earnings call is being recorded and will be provided on the company's IR website, ir.assai.com.br, where you can also find the earnings release.

During the presentation, all of the participants will have their mics off. Soon after, we'll begin the session with Q&A. [Operator Instructions]

The information in this earnings call and possible statements that could be made during the call regarding business perspectives, forecasts and operational targets and financial targets at Assai represent assumptions and beliefs of the company's management as well as information that's currently available.

Future statements are not a guarantee of performance. They involve risks and uncertainties and assumptions because they refer to future events and thus rely on circumstances that could or not occur. Investors, should understand that market conditions and other operational factors could affect the future performance of Assai and lead to results that different materially as those listed in future statements.

Now, I'll pass on the floor to Gabrielle Helu, she's the Investor Relations Director, Assai.

[Gabrielle Helu, Investor Relations Director]

Hello. Good morning, ladies and gentlemen. Thank you for your participation in our earnings call for the fourth quarter of 2022.

We'd like to invite the management team to present themselves. So, we have Belmiro de Gomes; Daniela Sabbag, the CFO; Wlamir, VP for Logistics and Commercial VP; Anderson Castilho, Operational VP.

Before we begin the presentation, I'll pass the floor on to Belmiro for his initial remarks.

[Belmiro de Gomes, Chief Executive Officer]

Thank you, Gabi. Thank you, everyone, for your participation. I want to thank you all for your presence and especially thank all of the Assai team and our partners and suppliers. I want to thank the members of the Board. Due to the major efforts and work from our team and other people and other companies, suppliers, supporters, that led to the results that we have in the presentation and also the expectations we have across.

2022 was an extraordinary year, one of the best and most important in our growth track. So, we had 60 openings of new big stores. And we invested over BRL4 billion. With this, the company generated over 16,000 new job positions. We became the biggest private employer in Brazil. And it was the year where even with all of the challenges economically, inflation and stability, pressure on consumption, the company kept its growth track record and stability, predictability, whether we look at numbers generally, but also when we look at the different forecasts provided to the market in this project, especially with the purchases of the hypermarkets from Extra. With this, we reached 108 openings in the last three years. The company doubled in size in the past three years. And just as we're going to see in Anderson, Danny and Wlamir's presentations, many other indicators also doubling. So, the strategy we've been working on to manage a store network plus huge expansion process that we could spend hours here talking about with all the details and the levels of efforts, we believe that the numbers really demonstrate the characteristics and stability.

We also had this year some evolution and this is important in the model. We've been searching for this. As we mentioned, other opportunities to improve the purchase experience the customers have regardless of their social levels we've been working on major efforts to keep our main low costs, but also improve purchase experiences for customers, consumers regardless of their social levels, but also, with B2B customers. We had important progress in governance with the operation of a new related party and of interest policies as well, which is in line with the Board as well to keep an important evolution from a governance perspective.

I'll pass the floor on to Wlamir. He's our Commercial and Logistics VP. He'll give us a little more details on the performance and sales margins and then we'll get back to the expectations for 2023. Thank you very much.

[Wlamir dos Anjos, Logistics and Commercial VP]

Thanks, Belmiro. Good morning, ladies and gentlemen. I want to thank you all for your presence. Also, I want to thank Assai team and -- for some reason, I can't see the presentation on the screen, but I think it's there. Yes, it's shared on the screen. Okay, great.

So, let's talk about the sales in the fourth quarter and what happened in the year. As you can see, we ended the year with -- with the fourth quarter, sorry, with BRL16 billion in revenue and net sales. So, we doubled the amount of sales in three years when compared to 2019. This is then repeated when we take a look at the closed year, we ended with growth of 31%, BRL54.5 billion in revenue. The numbers are very strong, very solid and this demonstrates the resilience of Assai and stability in our business.

When we look at the numbers, I think a good part of this contribution came from the stores we opened last year, whether they are organic or also from the converted store network, which are within this ramp of what we planned for these stores. And it's really in this growing curve with what the company expected. So, we should also mention that in this part, the increase of flow, and this has really made us very satisfied and excited for 2023.

When we take a look at this, we still have an important inflation and trade down impact, but overall, I think we were able to reverse this with the inclusion of new categories, new services. We're going to provide in detail per head and also the fact that we were able to increase the customer flow.

When we look at sales, we see the Nielsen measurements. We can understand that our commercial strategy is very good and well -- very precise. We had in the fourth quarter over 2% market share gains nationally, and to get into more details here. When we look at the City of Sao Paulo, it was an operation where we invested a lot, with 27 stores in the State of Sao Paulo. We had an increase, 4% in the state. And just to give you an idea, just in Sao Paulo, we increased our share by 5 percentage points. So, even with the stores being in a parameter, that is really big especially when you look at the average sales area with the other stores. We were able to keep the growth. We went from BRL4,500 sales per square meter to BRL4,700, demonstrating that all -- with all the innovation and the evolution of our model, we continue to be very precise in our proposal.

So, we can move on to the next slide, please. Well, my connection is not that great right now, but anyways, this -- for some reason, I'm having some technical issues. But when we look at the gross profit, it's also doubling and we had about BRL2.7 billion of gross profit in this quarter and BRL9 billion in the year. I think regardless of the gross profit generated, I want to highlight the stability. So, if you take a look at this, we brought the gross margins in the last four years, and you'll see that in this quarter and the year the variations are very small regardless of the size of the efforts to open up the 60 stores with pre-op costs. And I think the strategy, everything that was done also allowed us to deliver a value proposition that's better for the customers, adjusting the assortment in each store and region for the surrounding public. So, I think we're very precise. And I think we're really focused on really being able to provide a good purchase experience for each region.

I wanted to take advantage of this moment to mention the investments in our logistics. To support the expansion of the 60 stores in this year, we had an increment. We opened three new DCs, one was substitution to smaller DCs and we increased our capacity for storage by about 40%. And then we had this new unit in [Belem] (ph), it's a small DC. And besides looking at all of this, we also have the back-office structuring this to support not only this investment in 2022 with logistics, but also thinking about the ongoing expansion where the next three years will be supported by a logistical structure. So, I think that was pretty much it.

But there's another point to mention, which is -- question that's going to come around, which is, you'll see that in the working capital, especially for supply, we had a significant increase. These were negotiations, increase in deadlines with a huge expansion. And so, we did negotiate some additional timing and terms, and so this will also provide some relief on the CapEx invested.

I think that's pretty much it on my side. I'll pass the floor on to Anderson, so he can give us more details on the operation. Thank you all so much.

[Anderson Castilho, Operational VP]

Well, thanks, Wlamir. Good morning, everyone. Thanks to all of our team and partners.

We're super thankful and happy with the work reinforcing this that Wlamir already mentioned is really an all-time high. We're talking about 60 stores with the project. We began with an initial guidance for 52. So, we challenge ourselves to make those 58 and we've reached the end of the year delivering 60. So, I think it's an all-time high for Assai, but also for the sector as a whole when it comes to cash and carry. And this demonstrates the strength and capacity of our team.

We had 13 organic stores and 46 hypermarkets transformed. Within this, in 17 different states, which reinforces the complexity and the strength of our regional offices commercially with marketing as well and operations to execute this project, which involves the entire company as a major challenge especially in the last quarter, we opened over 37 stores. And we reinforced that we have a project with 47 hypers that were transforming from hypermarkets to cash and carry stores. And we have an even bigger challenge that demanded a lot from our team for engineering and studies, especially when it comes to providing some structural reinforcement, we were talking about hypermarket with about 1,000 kilos per square meter and assistance for firefighting, cooling. And so, it's really a restructuring process to be able to service our business model.

And I think we have some examples that we've mentioned due to the size of the project. We're talking about 12,000 kilometers of electric cables, it's a lot. And 4,050 statue – [Christ] (ph) statues if we were to consider the amount of concrete. So, at the end of the day, what we always worked on is to always offer a nice store with good lighting, modern equipment -- structure and furniture -- an equipment with low cost perspectives and thinking about the future maintenance of these assets. So, we have -- customers have a real different experience compared to what they had before and what they are receiving now.

When we talk about low costs, Gabi, please, if you could go over the next slide. Here we talk about the timeline. And we can show clearly that the discipline from our team, when we talk about expenses, we have major focus on developing the project, mainly innovation, but always being careful to make sure we don't harm the essence of the business model, which is low expenses. So, we offer this new experience, customers that were hypermarket customers, really feel that there is a big difference in the model and the quality of the store we delivered. And we always have this perspective for the B2B and B2C customers and we adapt the assortment, improve the services and customers always search for lower prices and a bit of all of that.

So, when we take a look at the timeline, we have this project we've consolidated already and so we expanded this even more. We added this to our stores. Then, we have the important, which is basically, we kind of just change a bit of the service provision we already provide to customers and all of the Assai stores, especially when we look at the transformational market, the restaurant owners, pizza shops, the pastel, and other snack shops. And so, we standardized this considering the size of the hypermarkets, which account to concentrators this and bringing this to the customer with better services searching for better sales, of course. So, the numbers reinforce the discipline of our team with expenses, timeline and, of course, without changing the Assai work, right, without losing our characteristic of price and low cost, right.

So, we deliver, as Wlamir mentioned, the stores have really perspective -- a positive perspective. We have a customer flow that's super interesting also. We already had this as a reference in the stores we transformed in the previous years. This remains and this really makes us continue to work, continue to expand and we imagine we're really on the right path. So, I also want to take advantage of this moment to thank all of the operations team and the areas involved. I think we had some fantastic work done and that's basically what I had to share.

Thank you so much. Now, I will pass the floor to Dainela, our Financial Director.

[Daniela Sabbag, Chief Financial Officer]

Thanks, Anderson. Good morning, everyone.

As a consequence of everything that was already presented by Wlamir and Anderson, I want to talk about our EBITDA, and basically this EBITDA doubled in three years at a period where we opened 107 stores. We ended the fourth quarter with adjusted EBITDA of BRL1.3 billion. And what's important to highlight is that if we were to offset the effects of the pre-operational expenses regarding the expansion this year, we would have an EBITDA margin in the quarter of 7.7%.

In the year, the EBITDA reached BRL3.9 billion and a margin of about 7.2%. So, if we were to adjust the pre-operational expenses as well, we would see that we have an EBITDA margin of about 7.4%, which is pretty similar, if you were to consider what we delivered last year, then if we were to remove that and have the recurring stores, so eliminating the effects of this expansion, right. And when we take a look at this EBITDA, it's really relevant if we were to consider all of the expansion historically, we've already discussed, with 60 store openings and its profitability has been very consistent. It's a very resilient portfolio. And I just wanted to summarize a little bit of what we've already been discussing with you guys.

Now, the conversions have been presenting quick maturity as well as a rigorous control of some of the expenses that Anderson mentioned, so I think that reinforcing that there was an expectation from the market when we were talking about the store conversion project that our EBITDA margin would be around 7%. And so, at the end of the day, we delivered a number that was surprising, which is 7.2%, and we're super satisfied with that and these results. But from this slide, that's pretty much what I wanted to mention, right.

We could move on to the other slide with the financial results and cash generation maybe. We had a financial result that in the fourth quarter reached BRL445 million or 2.8% of the sales. And we always bring in this analysis by excluding the effects of the interest -- lease interest and from this perspective, the financial expenses were about 1.7% of sales. And this result, of course, in the year is about BRL1.5 billion, excluding the BRL1 billion liability effect and 1.8% of our sales.

So, of course, we have an important effect here with the increase of interest, and this year, we had to -- 12.4, and last year 4.4. So that was a significant impact. And also, the fundraising we had to be able to handle all of the investment plans and store conversions, so we had some fundraising we announced quarter-over-quarter. These are very important and sometimes even -- sometimes helping to lower this and these were -- our debt was about from BRL8 billion to BRL12.4 billion, which also explains this effect a bit.

So, moving on to cash generation -- just a second, about the debt, I think it's important to mention that our cost of debt is still CDI plus 1.5% and the average term of 3.5 years. So, we ended the year with about -- a EBITDA -- net debt to EBITDA ratio about 2.2x, 2.19x to be precise within our expectations and even a little bit lower than what I was mentioning to you guys. We were talking about 2.5x, but there was like some displacement of other payments that kind of explains part of this.

When we move on to cash generation, the cash generation in the past 12 months, we generated BRL4.2 billion. This is super important for our performance. And it's an increment of almost BRL2 billion and a really important part, which was coming from the operational improvements and also the strengthening of the company in central regions with high density, so that optimizes working capital. As Wlamir mentioned, this was an important contribution for this kind of cash generation.

Then here we also have an understanding of the investments of BRL3.6 billion with the extra payments and financial expenses, as I mentioned. Of course, this net debt for the first quarters due to the seasonality increases a bit, because we have all of the CapEx with the second wave of conversions which takes place now in the next quarters. And naturally this is a variation, but I think it's important to mention that it's really within what we planned for this project, and very coherent as well, and what we've been mentioning to the market as a whole.

So, on the next slide, for final remarks, when it comes to our results and then after I'll pass the floor to Belmiro. Here, we have an overview of the profits, in the quarter, was BRL406 million and a margin of 2.5%. And in the year, BRL1.2 billion and margins of 2.2%. So, it's a profit that we consider to be really strong and it becomes even more relevant in this context with high interest that we've noticed throughout the year and all of the investments. So -- and that, of course, reflects maturity of the stores and the success of the commercial strategy and discipline towards our expenses.

So, I think these are the main points when it comes to the results and earnings. And I'll pass the floor to Belmiro to talk about ESG, okay.

[Belmiro de Gomes, Chief Executive Officer]

Thanks, Danny.

Of course, when you look at all the numbers and the advances with customers, but also the amount of stores, were important advances, especially regarding ESG, the company is super aware of its social responsibility. And due to the size of the company, the amount of customer service, so we had many advances, some highlights, even with the inclusion of Assai in ISE Index for B3 in companies when it comes to sustainability, and the fact that we came in with a high level of suppliers. And within this GPTW Index as one of the 10 best companies to work in and also the creation in 2023 of the Assai Institute, which is going to be super important to support our work in social projects.

So, the company has many different initiatives in this sense and this really is in line with our values and culture. And there's major work also to be this reference when it comes to social advances and inclusion of people with disabilities and strong search for gender equality and other racial issues. So, the company isn't moving along with many advances when it came to this topic.

So, we can advance now; expectations for 2023. When you consider the amount of store openings that are made from 108, 107 openings, 60 different store openings, we are keeping the investments and the company remains having the strong expansion plan for 2023 where the objective, of course, is to complete the conclusion of the stores, the Extra conversions where we had 19 conversions we have to deliver this year still and the opening with 40 -- and the objective of having 40 openings -- so then, till the end of 2023.

There is an expectation of a better curve in the interest rate. This doesn't change investments in new stores. The projects we had are the same when it comes to the perspectives and expectations when we deliver this project, as well as with the organic stores. And so, even if there is still some pressure in this net debt to EBITDA indicator, due to this wave of payments and so we're going to follow this deleveraging curve, it's going to be really quick. So, we should end 2023 with a net debt to EBITDA at most 2 times. And in 2024, it'll drop to 1.5 times, even with a scenario that is a little more aggressive for the interest scenario.

And so -- but we have seen once again food -- mentioned some more inflationary indexes, there's some relief when it comes to pressure. And we've seen some analysis, maybe the drop in inflation could harm sales. But we have to remember that a big part of the population had important trade down in the past years. So, if you look at the historical curves in the food sector, but especially for the wholesale operations, normally same store sales in a period with high inflation grows less than the inflation, but it grows even more when you have lower inflation because the population is very anxious to resume and recover their normal purchase behavior.

So, one of the means that the population adopted in this high food inflation was to adjust the purchase mix. So, when you take a look at -- like a consumer, that's a typical wholesale consumer. He has a certain amount of money he can spend regardless of the inflation. So, even if the inflation is going to provide some relief, which will be very beneficial to the population, this should favor us because of the trade-down effect we noticed that was so strong in the last three years. So, what we've seen so far is the conversions we performed in the calendar of the fourth quarter, it was maybe not as we expected. So, we started opening a lot more in the end of 2022 January. We already have the first full month of this conversions and the market share gains, that Wlamir mentioned, were really accentuated in January and February.

So, Assai goes through a major gain of over 3 points of market share. And we're already at 5 percentage points. So, to give you an idea, especially the stores that were recently converted and this pressure you have on income and the search for prices with a combination of what we did to improve the purchase experience, expanding the assortment and being careful with the low operational costs really generated an important combination. We're noticing this in the flow. We're reaching many records and all-time highs. In January, we had more than 6 million tickets due to the strong contribution of the recently opened stores. So, of course, we've seen that these stores didn't have such a big impact in the margin.

The company continues to follow a strategy to keep up with the ramp up of the converted stores, balancing sales and margins with our eyes open on competitive advantages if we need to invest in these margins that will take place, but it's not what we're looking at, at this moment. So, we keep this expectation for 2023 with the EBITDA levels pretty much at the same levels 2023 and that's when the company is really going to search for growth. So, the growth so far were half of the first quarter. And it's going to be higher than the growth that we had in the same-store sales base and the total base, which gives us more conviction that the plan, as it was executed, and what we presented to the market, we've been able to achieve even a little above what we had mentioned to the market as a whole.

So, within 2023, we should have some evolution -- ongoing evolution from a governance perspective. We really have our eyes open. And we've been talking to our shareholder -- our controlling shareholder to perform the modifications from a governance perspective to guarantee the security of minority shareholders, reflecting on the new Board to keep the same shareholding stake and share, and also, when we look at some procedures to really set the track to become a true corporation.

So, this is what I had to say for 2023. And I'll pass the floor back to Gabi for the Q&A session. Thank you so much, ladies and gentlemen.

[Operator]

Thank you, Belmiro. We can start with the Q&A session. We're going to follow the queue of the questions that arrived. Now, we will start the Q&A session. [Operator Instructions]

We will start with our first question coming from Danniela Eiger, the sell side analyst from XP. We will enable your audio, so you may proceed, please.

[Danniela Eiger, XP]

Thank you. Good morning, and thanks for taking my question. I'll congratulate you on the results and earnings. We have two questions. I have more, but I'll focus on two. So, the first one is, when it comes to the growth dynamics that you mentioned, you mentioned that it's accelerating compared to what we saw in the fourth quarter. But we've seen a lot of investors being very concerned with an impact of possible slowdown in the food inflation and how this could maybe reflect in same store sales. We do want to understand how you're looking at this overall equation between price and volume over the year? And maybe a recovery in volumes could contribute to bring in a little more color on this acceleration, if this comes from this point? So, I think that's the first aspect.

And the second point, you've already covered a bit, which is about governance. So, we also think it would be good to have a little more visibility, you've already mentioned that a bit in the past, but what's the mindset with Assai more to the mid-term when it comes to governance? Is it like moving towards a corporation or really having this year a renewal of the Board as an important sign that this is the path you are going to be following in line with the main shareholder? It would be good to understand a bit more of these discussions, right, and what the path is for the company in the mid-term when it comes to governance?

[Belmiro de Gomes, Chief Executive Officer]

Okay, perfect, Danny. Thanks for your questions. Let's start with the first question -- the second question. So, governance, yes, this is the path. We've been providing some signs to this. Of course, we have many different alignments. We're really in line with our controlling shareholder and renewal of the Board will provide one more sign of this. Just as in the fourth quarter, the modification of the policy for related parties provided some comfort since we have 70% [Technical Difficulty].

We will do so to be able to make the investments quicker. And we won't work on such an aggressive approach to accelerate the ramp-up curve destroying margins very quickly. We had -- we reached almost 67,000 employees, and you can see this. But the biggest highlight and the level of costs we're able to engage more than 3,000 people for support with training, new hires and really being able to keep the stability. So, there was a concern, of course, the market always has concerns. But first, we were able to open what was the impact in the margins and expenses and the continuity of this. So, first, we're super optimistic now, especially with the numbers we've been looking at so far in the relative perspective compared to the market. I hope I answered your question.

[Danniela Eiger, XP]

So, just at this point, on the organic run rate, the maintenance of these 20 openings would make sense at all?

[Belmiro de Gomes, Chief Executive Officer]

Well, we can't mention that it's clear sign because, of course, there is indicators for the important on the return on invested capital. So, one of the point is that, Assai is really acknowledged for its growth track record, but also because of the delivery of major returns. So, these 20 projects were already underway even before the acquisition of the Extra stores, where we really focused on the conversions of the hypermarkets.

So, these are projects that we valued more with the best projects from an organic perspective, balancing out the licenses, maturity in the stores and margins. But there was a significant increase in the cost of construction, especially when it comes to cement, concrete, and steel, which is something that in the organic stores where you built all the infrastructure and the foundation, there could be a bigger impact, and this could lead to a revision in the project portfolio. So, at least 15 openings in the next years could be expected.

So, there is a focus also on deleveraging, and 2022 and '23 were pretty strong. We're expecting the curve to take place in the fourth quarter this year, and in 2024 especially, we plan to deleverage the company a lot, because then we've already gone over the big investment period. So, this is not only with the cost of conversion of new stores, but also the payments made to GPA which end in 2024, the smallest instalments in 2024. So, that's when we already have a net debt to EBITDA ratio that's smaller than 1.5x.

[Danniela Eiger, XP]

Perfect, thank you.

[Operator]

So, now our next question is from Maria Clara, the sell-side analysts from Itau. Maria, we will open up your audio, so you may proceed.

[Maria Clara, Itau]

Hi, guys, thanks for taking our question. Here on our side, we would like to explain a bit more of the issue with the improvement in the dynamics with your relationship with suppliers. So, as we think about more of a gross margin perspective, is it reasonable to consider that these more favorable terms could positively impact the profitability dynamics when we look ahead? And this is from a working capital perspective, does it make sense to think that we have a new working capital level in the operation? Thanks.

[Belmiro de Gomes, Chief Executive Officer]

Wlamir, do you want to answer this one?

[Wlamir dos Anjos, Logistics and Commercial VP]

Yes, sure, I'll answer. But thanks for this question, Maria Clara. Of course, we -- when we consider the negotiation with suppliers, this is something constant. And what we are estimating is that with this trend towards expansion, we sat down with the suppliers and we have this movement to increase the terms. Of course, as I mentioned, this is something that we're going to be working on extending now in 2023-2024. And we were able to achieve, not only this and the negotiation of terms, but also pricing. So, when we look at the stability and balance between the gross margins, but also in the levels of stock, this demonstrates the precision of our commercial policy and what we can deploy.

So, yes, we continue to negotiate termings to not have -- to be able to continue to expand and also negotiate our prices to be able to be competitive. So, when you add up the gross margin, working capital, expense control, makes us have this share gain. And if you looked at the other weeks, we had some share gains almost [28%] (ph). And so, this shows that this relationship with suppliers has contributed to the maintenance of those indicators and the expectations that we'll keep these games that we kept in 2022.

[Maria Clara, Itau]

So, thank you. Perfect.

[Operator]

So, the next question is from Marcella Recchia, the sell-side analysts from Credit Suisse. Marcella, we will open up your audio, so that you may proceed. Now, you may proceed, Marcella.

[Marcella Recchia, Credit Suisse]

Well, thanks guys for taking my question, but we have two questions here. The first one is about capitalized interest. We know this has been a major factor for discussions throughout 2022 looking to the amount of stores that were added to the base. We also know that this represented most of the profits in the company. So, we can see that the total was almost a little more than 60% of the profit in 2022. So, as the company is completing the conversion process and opening up these last Extra stores, what should we expect throughout the first semester until you're opening up the last conversions when it comes to capitalize interest that's still impacting the profit line? That's my first question.

And the second question is about the conversions. So, in our conference now in the beginning of the month, we had feedback that the conversions already have sales very close to the uplifts of 2 times, 2.5 times, and the profitability is above expected. So, this is especially due to the bigger mix of individuals within sales. And Belmiro, I want to know from you if this is something you're looking at something occasional just due to the macroeconomic scenario or if this certainly represents an opportunity for the gross margins to be better in the long run when you consider a mix that could also be better? Thanks, guys.

[Belmiro de Gomes, Chief Executive Officer]

Thanks. I'll answer about the conversions, and then Danny will talk about the capitalized interest, that's been significant and that's really -- what we are working on. So, Danny will highlight this more.

But when we look at the conversions, the pace is still kept. We're looking at two curves, the sales curve and the margin curve. So, at this moment, we mentioned that there's going to be some stability because we're always going to be prepared for an increasing competitive advantages. But, of course, the stores, due to the level they have and the region they are in part of, we do have expectations that we will reach a better level of margin, working capital, not only due to the current scenario, but also due to the fact that we already had the expertise and the other organic stores that were opened in downtown regions for other conversions, and that we really have been searching for another stance expanding the improvement in the purchase expense for customers and the assortment to reach other social level.

So, we've been searching to do what has been already going on in other countries where you see all of the population buying in operations that are very similar to ours. So, we do expect this. And, of course, it depends on the company's discipline to manage this. And so, we have a huge country, lot of diversity and lot of inequality, which places a bunch of different challenges when we look at different regions and there is an expectation for -- to capture more margins. That's why we're very confident about this project, plus we're very careful when we have other factors such as an increase in competition and more pressure from the market. And so -- and that's where being more careful.

Since the stores have performance now, we look at January and February, that's pretty much in line with what we plan. We still have some sales ramp up space that we want to search for. And it could be a little premature still. When we get into some regions where they are part of, I think there is some room for this. So, we were even criticized due to changes in our business model, but people are throwing sticks and stones. But we know that any model needs to evolve and there is evolution, modifications, and these models that were kind of left -- they're operated in our sector and they kind of kept the same model and the needs, the customers have also changed.

Customers want to have the best purchase experience. And if it's possible to do keeping low cost, we must do so. Sometimes, we can expand this. Some of the people that we never imagine would buy in a wholesale operation, they're going to be surprised level of experience in the product and service level that they find. So, of course, there are retail company that works with thousands of employees and millions of customers, besides this positioning commercially, there is also when you look at this. So, this has been a big concern in the company and the numbers have been proving with this consistently.

So, now I'll pass the floor to Danny to talk about capitalized interest.

[Daniela Sabbag, Chief Financial Officer]

Okay. Hi, Marcella. To answer your question here, a bit of what we've been discussing on this topic. So, the first highlight is that the capitalization, as Belmiro mentioned, follows the accounting guidelines and this is not a new practice in the company. We always have been disclosing our CapEx and we always take a look at the capitalized interest where -- when the companies -- when the store is under construction, you have the capitalization. But this is, of course, something that's more significant due to the volumes of stores this year, and we had a reduction in this line that was about 100 million, that's in the explanatory notes, so you can see.

So, of course, this follows the schedule for store openings. We concentrated a little more on the end of the period. So, we have a reasonable amount. But it should reduce a lot. As this takes place, it's not something a new practice for us. It's an accounting guideline we follow. So, it's within our best practices.

[Marcella Recchia, Credit Suisse]

So, if I can have a quick follow-up just about this -- the tax line. So, we've seen some volatility that's very significant in this line, and we received a bit of the -- we lost a bit of the reference of what this effective tax line would be after some of the ICMS exemptions you started to consider as a benefit. Is there some visibility on what we can take on or expect as something recurrent from this year onwards at a more-adjusted basis?

[Daniela Sabbag, Chief Financial Officer]

So, just to round it up a bit, we had about BRL70 million with an effective tax rate of about 8.6%. And in the previous quarter, we had published about BRL60 million. So, we can give you some more details to be able to help balance this out. But there's always going to be some kind of a variation with regards to this. And this is connected to the ICMS. So, it's really going to depend on the sales mix for the different states and exempt categories. And so, we always going to have to hold on to that, depending on the way in the region it's in and that makes you sell. But we can balance this out and think of a way to communicate this to give you some better guidance. And this variation -- this is always going to have some kind of a variation, not a fixed number. So, unfortunately, in Brazil, you have some tax changes and that's what most happen.

So anyways, when it comes to this effect, you're not at the effective income tax rate. But when you look at this, although there are some variations, there could be some other monetization, some other creditor, which is not necessarily taxable. But for projection effects, you could use the average in the last three or four quarters and it's going to be a pretty good average. So, if we don't think it's a good -- well, this is the average we've been working on internally. But, of course, you've seen that there have been some changes and decisions, one big decision that was disclosed does not really affect us because we had no losses in this regard. But when it comes from a tax perspective, this is going to be a year with major changes. There are many different changes from tax reform perspective, increase of the tax loads. And so, taxes and fiscal issues are always a challenge in Brazil.

[Marcella Recchia, Credit Suisse]

Okay, excellent, guys. Thanks so much for the answers.

[Operator]

Moving on the next question is from Vinicius Strano, the sell side analyst from UBS. Vinicius, we will open up your mic, so you may proceed. You may proceed please, Vinicius.

[Vinicius Strano, UBS]

Hi, good morning, everyone, and thank you for taking my question. Could you talk about how your performance was in the B2B channel and B2C channels when you think about volumes? And what you're looking at and expecting when it comes to the mix for these two segments in 2023?

And would you also be able to talk about the converted stores? So, are you looking at some change in the B2B mix or B2C mix? And do you imagine that may be -- well, could you give us an idea on the profile of the public you've noticed in the converted stores? Are these consumers with higher income?

And here is a little bit more of a specific question, could you talk about what you've seen when it comes to the evolution in occupation costs here? And even a bit more in line with the inflation, when it comes to the costs for construction, if you could have a quick discussion on the CapEx for openings and conversions and how this has evolved? Thanks.

[Belmiro de Gomes, Chief Executive Officer]

Thank you, Vinicius, for that question. There is a shift in the customer mix and that's already expected. And so that's not that related because it's a lot more, of course, related to the regions that they are in. This already happens when you have the organic store openings. And initially even when it's a curve where you have the necessary timing for new store openings which is -- which varies, but generally what we should see in this channel is a little more share from the final consumers. If you look at how these are moving along, you can see that this rate has been increasing. And within the B2B customers, it's pretty stable. While we see some changes -- and even the distribution with the actual industry.

And so, we would notice with the increases in logistical costs of the categories that these B2B customers are buying with and they've tried to supply in a cash and carry store. But even when we look at the level of density in these stores, we do expect that there'll be a bigger presence of end customers or B2C customers. Sometimes it's difficult to measure this number because you have in some cases some B2Bs that also have a high level of non-formality or non-identification. But in these stores, you normally have about 70%, 75% consumers and about 25% the B2B customers are public. But you could have an error margin about 5 percentage points considering that it's also very common for some small companies, which we sometimes call utilizers and sometimes they sell cloth, but they also come and buy like clean supplies or other items that they are use in their cloth store and they also buy for their own house. So, normally it's a big focus also on small companies, entrepreneurs regardless of their [commerce that's] (ph) super specific for sector.

So, when we increase the cost of construction, the inflation was quite perverse, not only in the food sector, but this has increased costs especially for the new stores. So now on organic store, you have a big variation depending on the region you're building in, the area of the store and level of the foundation, but an organic store could cost BRL80 million or even more than this depending on the level of the foundation you're going to use for the store. So, of course, there have been more investments in -- and some evolution in these stores, which also impacted our cost with conversions. And we had estimated initial costs at a comparable base from an organic store of about BRL45 million, and this number has gone over. And, of course, it depends on the construction work and even considering the size of these units that were converted.

So, we have stores that have over 10,000 square meters. And there was also a concern on our behalf with making the stores really reach new conditions, right, to avoid costs of maintenance so high and avoid renewals or renovations in a short period of time. Sometimes you save initially, but that's going to cause your OpEx and maintenance costs in the short period of time. So, if you had the opportunity to get to visit the stores, you'll see that they really have new conditions.

[Vinicius Strano, UBS]

Thank you, Belmiro. Perfect.

[Operator]

So, our next question is from Vinicius Pretto, sell-side analyst at Bank of America. Vinicius, we will enable your mic, so that you may proceed.

[Vinicius Pretto, Bank of America]

Good morning, everyone, thanks for taking the question, and congrats on the results. We wanted to know if you guys had seen any lessons learned with the different initiatives with services and assortment. And if it is adapted, led to any kind of changes with the new store conversions?

[Belmiro de Gomes, Chief Executive Officer]

Yes, there are some lessons learned. Of course, these are acquired not only in the stores, but also in the organic expansion plan we had. So, some of these services had some pilot projects that we worked on that did not continue, and many of them were continued expanding to the existing store park. So, in the last year, we opened over 100 factories. And there's, of course, depending on the region, you have a different level of need, but this is part of this evolution in the model to be able to penetrate other social levels, of course. And obviously there is store network with the different locations that gives us a base of knowledge and lessons and it's very significant. So, when we look at improvements and other points that we also think we have room for when you look at a consumer with higher income level, more availability as well to have a bit more expense in the sector as long as we can offer an adequate proposal, of course, keeping the confidentiality of each business model. But yes, a lots of lesson learned.

[Operator]

All right. So, the next question is from Ruben Couto, sell-side analyst from Santander. Ruben, we will enable your audio, so you may proceed.

[Ruben Couto, Santander]

Good morning, everyone. How's it going? Let me talk about the increment and productivity about BRL4,500 to BRL4,700 now and the end of the year with conversions. And I wanted to understand about this number? Is it exclusively in the state of Sao Paulo, in the metropolitan region of Sao Paulo? I thought this was really interesting considering the level of maturity of the recently opened stores and converted stores.

And also, there is a concern that some people had about cannibalization. When we look at this cannibalization topic, how has the level been in the converted stores that are close to those that already existed, where there was already some kind of installed store? Has there been any adjustment or is this in line with what was expected?

[Belmiro de Gomes, Chief Executive Officer]

Well, getting back to cannibalization, yes, that exists. There's no way out. We're in regions where we were already present and other players were already present, but we believe that around December -- and from the total base. So, it's natural that eventually what happens in the big cities like in Sao Paulo, we have some stores with a lot of operational pressures. And so, sometime we didn't have conditions to service the customers. There is a big queue on the outside, so the level of services as well that was provided. But sometimes you need to store in that region, and it's in line with what we expected. And so, the market maybe expect a little more of impact. So maybe it would be about 12.5 if we didn't have stores inside regions that were that close.

So, this -- what happens is that B2B is sometimes quicker than B2C because businesses have to go far. There, as you know, have a different category products. And so, if you open up a store that's 100 kilometers away, obviously they are going to start buying from there. But it's natural that when you have an expansion and especially when you have to move on to similar model with less overlaps and to avoid level of cannibalization and some stores that were relatively close. So, the sales per square meter, that Wlamir highlighted, considers all of Brazil.

And then, you have a variation that's very significant when it comes to the national territory. So then, when you look at the purchase power, sometimes it's not only because you have a smaller volume and the quantity or amount of products sold, but sometimes it's just the average price. So, it's normal that the population has more purchase power and sometimes it even engages a similar amount. But sometimes it's a product with lower added value, but this is an average for Brazil. And I hope that answers your question.

[Ruben Couto, Santander]

Yes. No, that's clear.

[Operator]

So, the next question is from [Nicolas Larrain] (ph), the sell-side analyst. Nicolas, we will enable your audio, so you may proceed. You may proceed, please.

[Unidentified Analyst]

Okay. Good morning, everyone. Thanks for taking my question. Belmiro, I just wanted to get back to the organic expansion you mentioned. And how many stores -- for the store openings have you already hired for 2023 and '24? And also, how are you looking at the scenario from an industry perspective? Do you think you have room to accelerate the M&As once the balance sheet is already little deleveraged? Thanks.

[Belmiro de Gomes, Chief Executive Officer]

Well, thanks, Nicolas. M&A is not what on our strategy today. Our strategy is to really look at the organic stores that were already in the land bank for the company. So, these are projects that are practically prior or prior to the acquisition of the Extra stores. And what happened was a bigger selectivity of these projects to adjust the cost of construction in this new reality without leading to impact in the -- and M&A is not our target. Our target is to finish the project and to deleverage in the company.

Of course, this does not mean that it's a completely closed-door. There will always be, as I mentioned, kind of on track. And as soon as we have the deleveraging or we can do this, it could be that it could happen. But it's not our main strategy at this moment. But I do believe that maybe for 2024 or '25, it could be possible for us to be a little more active in the sense, but this is really connected to the company's leverage as well.

[Unidentified Analyst]

Very clear. Thanks, Belmiro.

[Operator]

Moving on. The next question is from Irma, a sell side analyst at Goldman Sachs. Irma, we will enable your audio. You can proceed. Thanks.

[Irma Sgarz, Goldman Sachs]

Good morning, thanks for taking my question. I have two questions, very fast. The first is, if you could give us an overview on the level of CapEx for 2023? And in line with this, could you also remind us about the agenda for payments that you still have for the Extra stores throughout '23 especially in the beginning of '24? I think it ends almost in the end of 2023.

And the last question related to this is if you could help us understand a little more on the expectations for cash flow for '23? Because we -- I saw you've already reached a leverage of 2.2 versus the end of the year. And so, now you also highlighted the objective of reaching close to the 2 times and -- at most 2 times till the end of the year. So, it seems maybe a little timid initially. Obviously, I understand you maybe have some CapEx aspects for 2023 and payments that need to be done. You have higher interest. But I just wanted to understand a bit of your mindset when it comes to cash generation for this year. Thank you.

[Belmiro de Gomes, Chief Executive Officer]

All right. Danny will talk about the payments now from GPA, a bit of investment CapEx. We're finishing the numbers and we should be highlighting this in our annual report. We have an elevation in the CapEx as well due to the organic stores -- about 20 organic stores. And they have a higher level of CapEx. You also have some revitalization of the existing store network and the services and stores that were not implemented yet. And part of this since the openings in '22 happened really close to the end of the year, 12 in November, 9 in October, 12 in December. So, it's quite natural that you have a significant carryover in the CapEx from 2022 that's going to be paying out in '23.

So that's why you'll see the leverage curve will follow a peak now compared to what we saw in the fourth quarter, because fourth quarter is also benefited by the seasonality of the products in the end of the year. And naturally by with a term that's little higher, so you'll see in the first and second quarter that it goes up a bit and then in the third and fourth quarters, it drops. So, basically, we still have room to be in a lower debt level, but still having some carryover costs and uncertainties, may be possibilities and opportunities even have an additional expansion in the amount of stores. So that's why we're being a little more conservative to have this level of debt that we expect to land by the end of 2023 and, of course, having a cost of debt. There is a relevant part of the GPA that's going to be paid now in 2023.

[Daniela Sabbag, Chief Financial Officer]

Yes. So, Irma, so the thing is about the payments, we have basically in the first semester BRL1.2 billion, which was a significant part in March and another in June, which adds up to BRL1.2 billion. And then in the second semester, as Belmiro mentioned, we have the carryover from last year with the payments of some delays in certain stores. And then we're going to be paying this in the second semester. So, you can consider about BRL1.2 billion in the first semester and BRL1.2 billion in the second semester. So, this is pretty much the payments flow that we have up ahead, and this explains the leverage that Belmiro mentioned as well.

[Irma Sgarz, Goldman Sachs]

So, would be the payments just to GPA, the BRL1.2 billion -- well, the BRL1.2 billion in the first semester, BRL1.2 billion in the second semester and you still have a final payment in 2024?

[Daniela Sabbag, Chief Financial Officer]

Exactly. So, we have BRL700 million in 2024.

[Irma Sgarz, Goldman Sachs]

And besides this, you still have the CapEx for organics stores, right?

[Daniela Sabbag, Chief Financial Officer]

Yes, exactly.

[Operator]

So, now our next question is in English and it came from Andrew Ruben, the sell-side analyst from Morgan Stanley. Andrew, we will enable your audio, so that you can submit your question. You can proceed, Andrew.

[Andrew Ruben, Morgan Stanley]

All right. Thank you. I just have a quick follow-up. Thinking about the non-food categories within the converted stores, how the sales has been trending versus your expectations? And do you have any updated thoughts about perhaps adding the non-food assortment within some of the core stores? Thank you.

[Belmiro de Gomes, Chief Executive Officer]

Yes. The stores, not necessarily since the fact that there are converted stores where we have the location stores with higher income, then you have a bigger share of non-food items. It's still very timid in our sector. It's different than what happens in other countries where cash and carry already -- like in the US, for example, with Costco, right, where you have a real high share on these kind of categories of products, but it's also connected to our -- to the level of American income.

But the opportunities here really are performing the ramp up in some categories that we predominantly work with, although we had inclusion of some items that are non-food. And some of the biggest inclusions in assortment, we're more considering the broadness of the brands and categories. But we believe there is an opportunity throughout the year. But then this maturity strategy, it is possible that we will have some test and some trials with how to offer low prices with some non-food items as well, especially for higher income consumers, which is where we really believe there's opportunities in these stores. But it's a secondary focus of what we're going to be following now on this path.

[Andrew Ruben, Morgan Stanley]

Thank you.

[Operator]

The Q&A session is officially ended. And now we will pass the floor to the company to their final remarks.

[Belmiro de Gomes, Chief Executive Officer]

Well, thank you all so much once again for participating.

As I mentioned, Assai has been following this path for growth. And in 2022, we have an important step towards the amount of stores, the amount of people we're servicing in 2023. And we are still in this investment phase, right, growing and generating more jobs and our expectation for '23, of course, has challenges obviously just like every year, but I think our team, our political scenario, the strength of our brand and all of these factors give us a lot of reliance and confidence that the company will move towards delivering results consistently regardless of adversities that we sometimes have when it comes to the market. So, we're pretty used to handling this. And whoever has been keeping up with the track record of the company, you'll see the levels of stability in our numbers that we can adjust in our business model, and there is a pretty good expectations for 2023.

Once again, I just want to thank all of the members, Danny, Wlamir, Anderson, Gabi, for their participation in this earnings call. Once again, I want to thank our team for their work. And I want to highlight that for 2023, we hope you will be with us in this process for growth and guaranteeing these results. Thank you so much.

[Operator]

The earnings call for the fourth quarter of 2022 at Assai is officially ended. The Investor Relations department is available to answer any future questions you may have. Thank you so much to all participants and have an excellent day.