Atacadao SA

BOVESPA:CRFB3

Earnings Call Transcript 2019-Q2

[Operator]

Good day, ladies and gentlemen. Welcome to Grupo Carrefour Brasil's Second Quarter and First Half of 2019 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded and broadcast live on the Investor Relations website at www.grupocarrefourbrasil.com.br. A slide presentation is also available on this website. Slide selection will be controlled by you.

Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in any forward-looking comments because of macroeconomic conditions, market risks and other factors.

It is now my pleasure to turn the call over to Mr. Noël Prioux, Chief Executive Officer, to start the conference call. Please, Mr. Prioux, you may proceed.

[Noël Prioux, executive]

Good morning, and thank you for joining us on this call to present Grupo Carrefour Brasil's second quarter and first half 2019 results. I am joined on this call by Roberto Müssnich, CEO of Atacadão; Carlos Mauad, CEO of Banco Carrefour; and Sébastien Durchon, our Chief Financial Officer. Daniela Bretthauer, our Head of Investor Relations is also with us.

I will start with a brief overview of the key highlights of our performance in the period. Sébastien will detail our financial performance and Roberto, Carlos and I will present the key performance highlights of our different businesses. Paula Cardoso could not join us for today's call, so Sébastien will present our digital highlights. After my concluding remarks, we will then open the floor to your questions. Our presentation is available for download on our Investor Relations website.

The first half provided a demonstration of the strength of the ecosystem theme that we introduced at our Investor Day back in March. Even in a challenging consumption environment, Grupo Carrefour Brasil posted double-digit growth in both sales and profitability in both the second quarter and the first half of the year, thanks to a solid execution of our strategy.

I'd like to mention some of the key advances of the first half, as we continued the development of our omni-channel strategy with a focus on connecting the physical world and the digital one.

Click-and-collect is now available in all stores, of which 50 operate with their own inventory, with 2-hour pickup.

We now have Drive for online food order pickup available in 17 stores. And we also have 3 side stores in operation in São Paulo. Our marketplace continues its rapid ramp up, and we now have 2,600 sellers and 2.4 million SKUs in our platform at end June.

We introduced Carina, our artificial intelligence enabled virtual after-sales assistant, which we introduced to you at our Investor Day, and which I will comment on in greater detail later.

Our ecosystem concept goes hand-in-hand with partnerships to speed up our digital transformation and enhance our service offering, and we continued to make progress in the first half.

The last-mile delivery service Rappi is all available in 88 stores in 22 cities, nearly twice Q1 figures. We also launched at the end of June a pilot with Magazine Luiza for store-in-store sales of home appliances in 2 stores and a similar partnership with Swift for meat sales in 12 stores.

The goal of the ecosystem is to multiply touch points with customers and to offer them increasingly personalized offers. We now have 15 million registered users whose data we can leverage, and we also increased connections through new stores.

In the first half of the year, we opened 9 new Atacadão stores, in line with our target to open 20 this year. And we continue to develop the proximity segment with 2 new market stores and 1 new Express store, bringing our proximity network to more than 130 at end June.

Speaking of innovation, Banco Carrefour will launch Insurtech, an insurance marketplace, which Mauad will comment on.

Finally, we are advancing in the digital payments area with Scan & Go now available in 15 Express stores, payment via QR code through the app, and the soft launch of an NFC Digital Wallet.

As you know, the Carrefour Group has set itself the global ambition of being the leader in food transition for all, bringing healthy food to consumers at affordable prices. And on Slide 4, you see that we took new steps towards that goal in the first half of the year.

Healthy food aisles are now rolled out in 59 hypermarkets at the end of June, and the target is to complete the rollout by the year -- by the end of year. In the first half, we increased a healthy product assortment by 32% with 500 new SKUs.

The organic food segment is increasing even faster, with sales increasing 82% on the back of a 34% increase in assortment, with another 300 SKUs added. We are working closely with suppliers to increase our offer even further.

We are also advancing in our aim of increasing the share of private label products in our food offer. They now represent 13% of total food sales, a 2 percentage point gain over Q1, and we target 20% penetration by 2022. With 560 new products launched in the first half, our private label sales have increased 33% in the period.

And we have added new features to Cyber Cook, the food tech we acquired at the end of last year, including nutritional and price data and functionalities to search for recipes based on food restrictions or using leftover ingredients from previous recipes, thus contributing to avoiding food waste.

We recently hosted an Act for Food event in São Paulo and launched our new media campaign, which I hope you have all seen on TV or web to reinforce Carrefour's public commitment to healthy eating.

I will now hand over to Sébastien to comment on our own numbers in greater detail.

[Sébastien Durchon, executive]

Thank you, Noël, and good morning, everyone.

On Slide 6, you see how the strategy translates into our numbers both in the quarter and the half year. I will present to you the key numbers for the quarter and the half year. My comments are on numbers prior to the implementation of IFRS 16 for the sake of comparability.

Let's start with our Q2 performance. Our gross sales rose 12.9% to BRL 15.3 billion. Adjusted EBITDA grew in line with sales to nearly BRL 1.1 billion for a margin of 7.6%. Adjusted net income group share rose 11% to BRL 419 million, equivalent to a 3% margin, broadly stable year-on-year.

If we look at the half year performance, the pattern is very similar. Gross sales were up 10.9% to BRL 29.4 billion. Adjusted EBITDA was up 14.5% to BRL 2 billion, with margin up 26 basis points to 7.6%. Adjusted net income, group share at BRL 832 million was up 19%.

Our net debt was BRL 1.1 billion, excluding discounted receivables, a leverage of 0.3x.

Let me now focus on the context in which these results were achieved.

Slide 7 provides a backdrop to this performance. Indeed, the headline numbers that I just presented are all the more remarkable as they were achieved in a challenging consumption and macroeconomic environment.

As you know, the Brazilian economy has underperformed expectations due to delays in implementing key reforms. Despite some advances recently, this has led economists and the government to lower their growth projections for the Brazilian economy for the year, and unemployment remains persistently high.

At the same time, we have operated in a somewhat volatile inflation environment, with food inflation rising in Q1 and Q2, as shown on the first graph on the slide, and then gradually using most notably in June, suggesting more moderate inflation for the rest of the year. This combination of a weak economy and high food inflation has impacted retail sales.

As you see on the graph on the right of the slide, as per Cielo's broad retail Index, the ICVA, it shows a decrease in consumption that began at the end of the first quarter and continued in the second quarter, but with a gradual pick up again towards June as inflation eased. I wanted to highlight this as something important to have in mind as we comment on our performance in the period.

On the graphs on Slide 8, you can see consistent year-on-year growth in sales, both in Q2 and the first half. Our total gross sales in Q2 of BRL 15.3 billion were up 13.5%, which marks an acceleration over the 9.9% growth recorded in Q1. Beyond our solid performance, Q2 was also boosted by a positive calendar effect of 0.8%, as Easter was in Q2 this year. The graph on the left-hand side shows that we have added BRL 1.7 billion in gross sales in Q2 '19 versus Q1.

Atacadão's contribution to our gross sales has grown in the period, reflecting its steady pace of expansion. Similarly, in the first half actually, our gross sales reached BRL 29.4 billion, a growth of almost 11% or BRL 2.9 billion year-on-year.

On the right-hand side, we look at the breakdown of sales. You see that quarter after quarter, the base of like-for-like growth has increased and reached 7.7% in Q2, the best performance in the past 3 years. This was driven both by Carrefour Retail, whose like-for-like growth of 8% in the period constitutes its best quarterly performance in the last 5 years, and by Atacadão post like-for-like growth in Q2 accelerated over Q1 to 7.6%. The contribution of expansion has also risen quarter-after-quarter, largely thanks to Atacadão's sustained pace of store openings with a Q2 contribution of 5%.

This growth in the context I described earlier is clear evidence that our strategic choices are paying off and are producing sustainable results.

Let's now turn to look at our simplified P&L on Slide 9. Our net sales in Q2 posted a strong quarterly performance, up by 12.6% and by 10.6% in the first half. Gross profit was up in double digits, both in Q2 and first half, increasing by 12.4% and 12.5%, respectively, driven by growth in all of our business units.

Gross margin was up by 36 basis points in the first half and was broadly flat in Q2 at 21.7%. Margin improved at Carrefour Retail by a strong 31 basis points in Q2 but was down 24 basis points at Atacadão. Roberto and Noël will discuss this in greater detail shortly.

Selling, general and administrative expenses were up in Q2, in line with sales growth. However, as a percentage of sales, they were stable, reflecting productivity gains in our continued financial discipline.

Our EBITDA increased to 12.7% in Q2 '19 to BRL 1.1 billion and 14.5% in the first half to BRL 2 billion.

Pursuant to the material fact disclosed on May 12, we recorded in this quarter an ICMS provision for a stable basket items posted under other operating income and expenses. This extraordinary provision does not impact the calculation of adjusted net income or dividends. Excluding a one-off foreign exchange gain of BRL 45 million in Q2, financial result remains basically stable.

Our adjusted net income group share was up in double digits, both in Q2 and the first half of the year, up by 11% and 19%, respectively, which constitutes a very solid performance.

On Slide 10, I will conclude this quick financial overview with some information on the 2019 interest on equity payment schedules. This was approved yesterday by our Board. We remind you that our dividend payout policy is to pay 25% of adjusted net income. In 2018, we made a total payment of BRL 470 million with an advanced payment in December '18 of BRL 380 million and a complement of this payment in June '19 of BRL 90 million.

Similarly, we have decided this year to anticipate a total amount of BRL 470 million in dividends in the form of interest on equity. The payment will be in 2 equal installments of BRL 235 million. The first in September and the second in November. A potential complement may be paid out in 2020, depending on the final net income of -- final net income for 2019.

Let's now look at our performance by business unit. And for that, I hand over to Roberto to speak about Atacadão's performance.

[José Müssnich, executive]

Thank you, Sébastien, and good morning to all. For the fourth consecutive quarter, Atacadão recorded double-digit growth in its total sales, demonstrating the strength of its low price every day image and of its commercial strategy. This growth also reflects our decision to significantly accelerate our expansion with 12 new stores year-to-date, including 9 in the first half of the year.

Atacadão's gross sales grew 14.8% in Q2 to BRL 10.3 billion. Like-for-like sales accelerated over the previous quarter's already strong growth, rising by 7.6% in Q2 after a 6.8% increase in Q1. We saw growth both in the number of ticket and average ticket in the second quarter.

In a challenging consumption environment, as Sébastien mentioned, our gross margin was 15.2%, as a result of our strategy to maintain the concept of the cash and carry model.

So let's comment on what happened in the second quarter. A tough comparable base as Q2 '18 gross margin benefited from a positive exceptional impact during the May trucker strike. This was a nonrecurring event. Greater focus on the merchant B2B customers with a extremely positive impact on sales of the famous day in April and the ramp-up effect of new stores. Our park of new stores reflects 15% of the total park of stores.

Excluding expenses related to the expansion of the last 2 years, distribution costs as a percentage of sales would be 7.9%, 40 basis points lower year-on-year in Q2, reflecting our strong productivity gains and the strength of our model in our more mature stores. Despite all that, our EBITDA grew in double digits, both in Q2 and in the first half of the year.

On Slide 13 now, please. We take a more detailed look at our expansion strategy. With 9 openings in the first half and another 3 in July, this brings our total openings year-to-date to 12 new stores, in line with our goal of 20 new stores this year. We surpassed 200 locations throughout Brazil. As you know, and as we always stress, Atacadão is a wholesaler with a truly nationwide presence in Brazil. And our openings were well distributed in 8 different states in the first 6 months of the year, as you can see on the map on the left. Our model has proven once again to be resistant and resilient to market dynamics. We managed to maintain our value proposition and low price image while delivering higher and sustainable results in absolute terms.

With that, let me hand over to Noël to comment on Carrefour Retail. I remain available for questions later.

[Noël Prioux, executive]

Thank you, Roberto.

On Slide 14, you see the main performance indicators for Carrefour Retail. The strategy we have been executing over the past couple of months is clearly showing up in our results. Carrefour Retail turned in its best quarterly like-for-like sales performance in 5 years, posting an 8% growth in the second quarter, accelerating over 6.1% in the first quarter and marking a very sharp increase versus the 0.8% like-for-like growth recorded in the second quarter of 2018.

Gross sales in Q2 were up by 9%. The strong sales growth validates the strategic decisions we have taken over the past year, including the decision to reposition hypermarket prices to improve their competitiveness, ongoing food transition initiatives, an enhanced value proposition and our steady ramp-up in e-commerce sales.

Gross profit rose in both Q2 and first half of the year and accelerated in Q2. Gross margin was also higher. This improvement reflects a better margin at Carrefour as a result of commercial initiatives as well as better gross margin in our e-commerce. In the first half of the year, gross margin grew both in Carrefour Retail and e-commerce.

Our distribution costs at 20.5% of net sales were broadly stable year-on-year, reflecting our continuing efforts to maintain financial discipline to fund investments linked to the rollout of Carrefour Retail's omni-channel strategy. In Q2, adjusted EBITDA pre-IFRS 16 was up 14% to BRL 183 million, a sharp improvement over Q1.

Let me now hand back to Sébastien, who will present our e-commerce advances and then Carlos Mauad will comment on the bank's performance.

[Sébastien Durchon, executive]

As Noël mentioned at the start, in Paula's absence, today I will comment on our digital initiatives. I will do my best to speak with the same passion and energy as she always does, so that she won't be mad at me when she returns.

Reflecting our growing emphasis on building an omni-channel ecosystem, e-commerce was once again the fastest-growing segment within Carrefour Retail and GMV's share of total Carrefour Retail sales in the first half reached 11% versus 7% in the year-ago period. The percentage is even stronger in nonfood, which represents 32% of Carrefour's total sales.

Q2 saw another strong performance with GMV rising by 59%, more than 5x the market's growth rate of 11%, according to EBIT. Orders were up 56% and visits increased by 89%. Our average ticket rose 6%, which is a very strong performance considering that the market's average ticket was down 13%.

A key part of our e-commerce growth is the development of our marketplace, which continues to expand rapidly. We added another 400,000 SKUs in Q2, bringing the total to 2.4 million, nearly 3x more than 1 year ago. The number of sellers also grew to 2,600 from 2,000 in the previous quarter and 374 that we had in the second quarter of '18, a sevenfold increase in 1 year.

As a result, the marketplace now represents about 17% of our e-commerce GMV. On the following slide, I'd like to highlight 2 of our many recent omni-channel initiatives.

The first is our virtual after-sales services assistant, Carina, which we launched in April. Enabled by AI, Carina is Carrefour's one of the most advanced after-sales services in Brazil retail. Through WhatsApp messages, Carina can answer customer questions on a broad variety of topics, such as store locations and promotions.

You can also track e-commerce orders, provide invoices for Carrefour and Atacadão cards and a host of other services. By the end of June, we had approximately 300,000 interactions with Carina. And July is not ended yet, but we believe we will have the same amount of interactions in July. We are working on upgrading Carina further, so she can do the Q&A session in the next earnings call.

The second focus is on the development of food e-commerce. As you know, we have set ourselves the ambition to be the leader in food e-commerce in Brazil and have a very focused strategy that relies on developing this service infrastructure.

The Carrefour app already accounts for 1/3 of our online food orders, and we are quickly rolling out services to make delivery and pick up fast and simple.

The Rappi delivery service is growing rapidly with a presence now in 22 cities and in 88 stores. Drive is available in 17 stores and it has a net promoter score above 75%.

In addition, with 3 side stores, we are growing our capacity to make orders available in a short time frame, which is key in online groceries. These are just 2 quick examples of the strategy that is clearly gaining momentum.

Let me now hand over to Mauad to talk about Banco Carrefour.

[Carlos Mauad, executive]

Thank you, Sébastien. Once again, Banco Carrefour stands out with strong growth in its results. Carrefour card total billings or the Atacadão card total billings, still in expansion, rose by 54.4% on a year-on-year basis. The Carrefour card, despite being a much more mature operation, also grew by 20.8%, as a result of investments we have made together with Carrefour and Atacadão since January. Banco Carrefour's total billings reached BRL 7.8 billion.

In a growing trend, the loan portfolio grew 36%, totaling BRL 9.5 billion in the period. Despite a robust growth of the loan portfolio, credit indicators continue to improve on a comparable basis. Under the Central Bank methodology, credit provision totaled BRL 946 million, with a coverage ratio of 11.2%. Such performance stems from a credit management dynamics, which includes careful acquisition of new customers, database allocation and review of credit limit and an increasingly efficient digital collection and invoicing system that keeps costs under control.

Growth of adjusted EBITDA accelerated, reaching BRL 252 billion in Q2, up 19.4% in relation to the same period of the previous year, driven by growth in net interest margin and diligent cost management.

On the next slide, I would like to share with you our cultural transformation and work dynamics, taking the customer to the heart of the bank's business decisions. All projects are closely linked to each phase of our customers' journey, ensuring an increasingly solid experience by strengthening the customers' or the consumers' relationship with our ecosystem.

Investments in our promotional platforms or communication in the Usou, Zerou initiative have proven to be powerful tools for customer engagement with store credit cards.

Another important initiative is the decision to accept the Carrefour card in the Atacadão store network, which should bring additional revenue in 2019 of almost BRL 300 million.

Banco Carrefour is establishing a marketplace for the sale of insurance. The main insurance in the Brazilian market are integrated on this platform, and the acquisition process is totally digital with full customer empowerment. We will have products completely customized for our customers.

We started selling to our own employees. And after this soft launch, we will open the platform for all our ecosystem customers with special conditions for Banco Carrefour cardholders. I can assure you that the bank is now experiencing a true revolution. All areas are part of the journey and are responsible for our customers.

We transformed the structures, previously working in silos, to self-organized in multidisciplinary things responsible for improving our customer experience throughout their cycle. Currently, 62% of the structure of the bank are in the agile model, and we want to reach 100% by December '19.

Given this new reality, all our products are connected to the experience that we provide to our consumers, strengthening the culture of test and learn. Coupled with the transformation of work dynamics, Banco Carrefour has been building a strong pillar linked to data, data capture, architecture and application permeate the entire customer journey by constantly improving communication channels and content as well as improving the operations' credit risk management.

Finally, at the end of the second quarter, we developed the technology chassis that will transform all of our channels, PWA, Progressive Web Applications. The experience our customers will have in our app in self-services stores or on web platforms with mobile and traditional will be unique. We will have more flexibility, development cost efficiency and more performance. This new platform will enable Banco Carrefour to optimize both customer service and cross-sell products for its customers. So there's a lot more coming in the next month. The bank's agenda is full of new initiatives, and we will surely have a lot more news by the end of the year.

Let me now hand back to Noël for his closing remarks.

[Noël Prioux, executive]

Thank you, Mauad. To conclude, I think you could see through today's presentation that the Carrefour Brasil ecosystem is at work and advancing. Our growth, even in a challenging consumption environment, is the consequence of a well thought out and well-executed strategy. The multiplication of touch points is clear, with over 500,000 new Atacadão cards and 480,000 Carrefour cards issued in the last 6 months, more than 90 million visitors in our e-commerce, more healthy SKUs, more transactions and an increasingly omni-channel approach.

All of these are elements of the interconnected ecosystem that we are building to drive more sales and more profitability.

With that, I conclude today's presentation. Thank you very much for your attention, and we can now move on to the question-and-answer session.

[Operator]

[Operator Instructions] Our first question comes from Joseph Giordano with JP Morgan.

[Joseph Giordano, analyst]

I have 3 questions. The first goes to Roberto. I would like to understand the very positive dynamic that we see in Atacadão. I'd like to understand what you're thinking, Roberto, in terms of how do you see the competitive landscape. Competition is assertive. I want to try and understand whether the model being more mature in more regions of Brazil, if you're seeing a change in the maturation curve of the stores. So they're reaching maturity earlier.

And finally, I'd like to understand what you have in terms of contracted pipeline for the rest of the year and for next year. Have a guidance of 20 stores, I'd like to know what you have done so far. And how do you see the food inflation?

Now to Noël, talking about retail. I would like to understand more Rappi. And if this does bring to Carrefour customers who are not the traditional ones. How is this evolving over time? And regarding CRM and what Mauad mentioned about Big Data, how are you capturing card data and collecting data on retail checkout to improve in-store execution and value proposition?

[José Müssnich, executive]

I'm fighting not to have my head in the market, but what we see in the market is a growing competitive environment. This is normal. Although some of our competitors do not have the sustainable competitive advantages that Atacadão has, we saw inflation a little higher in some months of the first quarter, and that caused a somewhat higher internal food inflation at Atacadão. But that has eased in June.

And in July, inflation has shown to be relatively low, which leads us to think that we are going to have inflation at around 3.5% to 4% until the end of the year, in terms of expansion.

Well, in a way, the market is ready to receive our model. The Atacadão brand is extremely strong where we're going. We have a map of these 8 stores opened in the second quarter, and they were very assertive. Our pipeline expansion is extremely strong. We have started to build 10 stores to open next year. This normally happens until the month of June, August. But this year, we started working on 10 so that we're going to have a balanced set of openings.

In terms of the projects for next year, these remain as strong as -- and the strategy remains the same. In other words, getting to markets that are ready for our distribution, and we want to work with merchants B2B customers as strongly as working with end consumers. So we want to have a wide array of services in the cities where we operate.

So we continue with the same strategy. We are getting into new markets. We're tapping into new markets. We are strengthening our position in markets where we've been for a while with extremely strong stores that are quickly maturing. And the result is shown in extremely consistent like-for-like sales in line with our strategy. Although if you look at the mature park of stores, we only have 15% of this park with less than 3 years of existence. This means that 15% of the park is presenting a more positive ramp up than the rest. But 60% of our store park is mature and 60% of our park has been attacked constantly. And even being attacked consistently, the model remains very, very strong.

And this is very good, because it shows that we have to be better day after day. And we change our tactics and our tactical plan day after day, so that we can execute on our macro strategy. We remain alive. My head is not on the line. My head is still linked to my body, and it continues to think very, very well.

[Noël Prioux, executive]

Regarding the Rappi strategy, we have Rappi, we also have click-and-collect, Drive and many other possibilities that we offer to the client. But to answer about Rappi, we do have an impressive conversion. We have an organization that is dedicated that allows us to offer a spectacular level of service, I believe, the best in Brazil. And with that, we can offer good service. And we have an important base of new customers, new to Carrefour, because if you offer service with a good quality, we end up attracting new customers, and this is the case of Carrefour. So we are doing well, and we are going to accelerate.

Regarding CRM and the evolution of clients, Mauad?

[Carlos Mauad, executive]

Thank you for the question. Well, we have 2 converging agendas in our group regarding data. Of course, the bank environment is used in terms of data capturing, architecture and modeling applied to loans because this is part of the core business of a bank activity. And this is a business that is very well developed, gaining more and more quality, given the information that we capture from our own ecosystem. So today, the bank has 100% of the data of what we call in-house buffer ticket, which is nothing but the shopping cart of the client, whether they are identified or not. In many cities, we identified them by taxpayer number in checkout. This is a line in some cities in other cities, there are customer incentives for customers to provide their taxpayer number. We just want to identify customers when they check out. And this applies to Carrefour and Atacadão.

So regardless of consumer and customers having the card, this information is captured when they check out in our stores. And this information is used to improve our credit modeling activity so that we can have approval indices, which are more and more competitive at the point of sale.

Considering Carrefour structures, we have a data initiative which is picking up very fast and very much linked to consumption. How can we build an engine of recommendations, particularly considering Food E-commerce linked to the app? We have very little space for offerings. So we have to have a recommendations engine for customers so that their experience will be always fluid. And so that you can have a high conversion level in your funnel, given the power that the data give you. So when you look at the group from the structural standpoint and whatever is related to data, we are very advanced in terms of data capture. All of that information in our ecosystem is being adequately captured. We have been working strongly from the standpoint of modeling, so that we can turn data into customer engagement and turn data into communication with a high level of return in terms of content and so as to make this a big asset in our ecosystem.

So you see, these are 2 converging initiatives, i.e., how we can bring more and more customers to us and how we can improve the assortment of products for customers that are in our ecosystem.

[Operator]

Next question from Robert Ford with Bank of America.

[Robert Ford, analyst]

Congratulations on the results. There seems to be a lot happening in Carrefour Retail. It's not just the Easter effect. So could you speak about what drives the improvement in Carrefour Retail? Perhaps a streamlined cost structure? And how sustainable do you think this improvement is?

[Noël Prioux, executive]

Regarding retail, I think it's easy to understand. Firstly, we obsessed about sales. For the last 2 years, we wake up every day thinking about our stores to break away from traditions. We want to change the store, the categories, the products and this path is already bringing impressive results. And again, we have other initiatives that bring this spectacular growth. Again, it's this new dynamic that we started 2 years ago, about 2 years ago and that is now giving results. And we have e-commerce, which is a door to new customers, particularly click-and-collect customers. They prefer to pick up their products at the stores. And we -- this gives us an opportunity to show them a store that is totally changed considering the last 2 years. And also, the quality of products. We have a good image in terms of quality of fresh produce. The prices were lowered. And we lowered the prices again in the end of May, beginning of June because we want to offer our customers a spectacular level of quality with affordable prices. So we think about that every single day.

In addition, there are other things. Our private label products. We had 2 percentage points of growth in 1 quarter. I mean this is spectacular. And this shows us that number one, our products are good at affordable prices and the clients -- the customers like those private-label products. And the same for fast-moving consumer goods and perishables. So all of these trends, but we want to be leaders in food transition. We are not going to stop. Every month, we have new initiatives. And it's difficult for the competitors to keep up with us, this is what is interesting. Every week, I go to the stores. Every single week. And I speak with our customers. And every week, we take on new initiatives. This is what is giving us this accelerated rate of improvement and we believe we will sustain this.

This is indeed going to be a model to show that hypermarkets have a great potential, particularly in Brazil.

[Robert Ford, analyst]

Understood, Noël. Are you now making money with your proximity model? Is there a material acceleration in this model?

[Noël Prioux, executive]

Yes. Last time, we spoke about this. Until a year ago, I wasn't convinced about this model. But now, I'm totally convinced. After 1 year, we have a strong growth of more than 20% happening every month. We maintained the pace. So I don't think that it's insufficient. We're already working on a version, which would be, say, a little more aggressive. We have some ideas that will allow us to provide strong growth for next year as well. Based on this, I am convinced that we have a winning model and that we can do more now.

[Operator]

Next question from Thiago Macruz with Itaú.

[Thiago Macruz, analyst]

My first question goes to Roberto. In the end of last year, you had a favorable decision based on the ICMS resolution in states other than São Paulo. We had an expectation that this could flow through Atacadão's results in 2019. And it seems that did not happen in the second quarter. Is it reasonable to suppose that you had to invest part of this benefit in prices, given the competitive landscape that you mentioned? And just a question -- this is my first question. The second question to Sébastien. Could you give us an update of your strategy, in-house strategy to make these ICMS-ST benefits of cash benefits in other accounting benefit, any progress in that direction? And my final question. You said that you're gaining more online customers. I'd like to understand, when you say this, do you include users that buy from Carrefour through RappI? And if there is a migration from Rappi customers to the Carrefour app that you mentioned? These are my 3 questions.

[José Müssnich, executive]

Great, Thiago. It's always a pleasure to have you on board. Let's speak about investing in prices. It's funny when you speak about advantages based on ICMS-ST, as if we have this kind of visibility on our day-to-day. But we don't. What does this mean? It means that the market is alive. The market changes every day. And we have to adapt to these market realities. As we always insist. Atacadão is top line. We always work to perform in the same way. And we want to have a steady performance. Our track record actually shows a steady performance. Obviously, we have to use all of the possibilities we have at hand to gain more. But still, a price investment is a day-to-day decision, according to market into the conditions for our procurement and according to what the market requires, so that we can have the same model, every day low price. Once we have the price to and once we have the cost control discipline that we work strongly in-house on, to maintain low cost every day, simple and with a very lean model. Once we control those variables, we work day-to-day to maintain the flame alive. And we've been able to play this game well.

But price investment is not something that we do in the way that, "Oh, let's lower prices to do this or that." No. We work according to market -- to the market requirements. And this has been very efficient for our model. I hope I have answered your question.

[Thiago Macruz, analyst]

You have indeed.

[José Müssnich, executive]

Regarding your second question about ICMS-ST and how to monetize these credits. There's a very strong point here. ICMS, before the favorable decision we had from the Supreme Court, we already had ICMS credits and ICMS-ST credits and there's no consumption issue, too. We can consume every year these credits with the value of credit generated. What created a different decision or different situation was the Supreme Court decision regarding ICMS-ST credits based on presumed margin and the credit that all companies had when they regularize presumed margin from real margin. With that, we had access to more credits. And we waited this year to take the initiative and consume the credits. I cannot give you a lot of details because this is very technical. But we have made changes in our logistics routes to avoid generating more credits because there are changes from one state to the next. We have initiatives to sell part of these credits. And there are some changes in the legislation. Here in São Paulo, the technical rule, That CAT 17 is changing to another, to 42. And with this new norm, it will be a lot easier to use credits for direct to offset of sale -- of purchase, actually. But everything is unfolding well. And another topic in our radar will be the tax reform. We have heard a lot of positive things about a possible upcoming tax reform. And this will bring changes. We look at this with very good eyes, very positively. We believe that it will even end this kind of system. We will have to pay a tax initially. We won't have to pay a tax and have a refund in the form of credits. This will be avoided. You also asked about the customers. So we gain with Rappi and migration, a possible migration to the Carrefour app. As Noël mentioned, with Rappi, have a lot of new clients and a lot new consumers that we can identify with our CRM. These were customers that then used to buy from Carrefour and they are now buying. So we are gaining a very relevant number of new customers.

Migration to the Carrefour app, this is only getting started, so very few. But both are growing. We have new customers being [ expedited ] to Rappi and we have a growing number of customers using the Carrefour app. I don't know whether the game will play out exactly in this way. Customers use Rappi and then use Carrefour app. Of course, we have initiatives, we encourage that but still, we have growth. Regardless of Rappi, our e-commerce app and our website are posting relevant growth.

[Operator]

Next question from Richard Cathcart with Bradesco.

[Richard Cathcart, analyst]

I have 2 questions here. One about e-commerce. You mentioned in the release that you launched 3 side stores in this quarter. Could you tell us more about the experience you had? I know it's very little time but it would be interesting to understand whether you can improve the efficiency of Rappi and your own delivery system. And what is the impact on hypermarket sales? And the second question to Roberto. You also mentioned in the release about your focus on merchants. I just want to understand if you see any economic recovery in these clients, I'm thinking about food service clients.

[Unknown Executive]

About the side stores, we have 3. The goal is to have a spectacular level of service. The most important thing is, when a customer asks for 10 products, they need to get 10 products. We have a level of service of 96%. Considering the world market, this is one of the highest in terms of level of service considering Carrefour and some of the competitors. So this is due to the side store offering good level of service with dedicated inventory and with people dedicated to that. The first ones are -- have been operating for a couple of months only. It's very little, but they are already giving us an outlook for the future. But in view, we want to have 15 and we are working to see when we can get to 100% capacity of the side stores, so that we can open new ones. We already have connection with all of the players: Carrefour, Rappi, the side store and the dark store that we also use for Rappi. So it's a dedicated organization that allows us to offer a good level of service. But truly, we want to open these in other cities. Well, that's why we have the ambition to be leaders in food e-commerce in Brazil and I think that we are on the right track.

[José Müssnich, executive]

Regarding your question, Richard, about focus on consumers. Indeed, in -- our focus on B2B, on merchants is a focus to serve B2B clients, not only B2B clients, but the industry. They are our partner in where we have a great capillarity throughout in Brazil.

We can get to every single corner of Brazil, in the north and in the South, and that makes the industry -- gives us the chance to work to improve the efficiency of the model. In food service in general, what we see in food service is a certain stability. I don't envision a great expectation of growth in this sector, in particular. And what we hear from B2B clients in the industry is that they're waiting for the mood to change a little because we are all waiting for key political decisions that will bring more money to the market. Yesterday, we heard that the Workers' Compensation fund, a part of it can be released for workers and this could drive consumption. So our expectation is that this will change from stability to optimism. This is how we see this matter. I hope I have answered your question.

[Richard Cathcart, analyst]

You did.

[Operator]

Next question from Tobias Stingelin with Citibank.

[Tobias Stingelin, analyst]

I would like to know -- perhaps you could give us some color on how the e-commerce margin evolved, perhaps comparing gross margin of e-commerce with the second quarter of last year and the second quarter of this year? Just so we can have an idea of how this is evolving.

And do you still have a lot of SG&A expenses envisioned for this project? Because I don't know if you still have a lot of investments that you're expecting to make in this segment.

And my last question. Regarding the like-for-like sales growth in Carrefour Retail, of what you reported, removing e-commerce, this should be close to 5% same-store like-for-like sales. Could you break down how the segment really grew?

[Unknown Executive]

I'll start with the second question. Yes, yes. Your calculation was perfect. The like-for-like sales of 8%, excluding the contribution of e-commerce, you would get to 5% in our brick-and-mortar stores.

We don't break down this information in terms of food and non-food. We don't do this here. We don't do this in the group in France. What I can tell you is that we have a very positive trend in nonfood. The trend is also good in the food segment, but it is even greater in nonfood with all of the changes we implemented in the end of last year and beginning of 2019. We had 2 double-digit growth in nonfood.

And the other part of your question was about e-commerce margin. It is the same trend that we had before that we mentioned in the prior quarters. We've started our e-commerce operations 3 years ago with a gross margin that was low with very attractive prices.

Over time, the margin is gradually improving. There is not a significant change, but it is improving gradually for 2 reasons. One, we already have a relevant operation. Our e-commerce sold EUR 1.5 billion last year and will be a lot more of this year.

With that, we don't need to be as aggressive in terms of price. And that's the first reason. The second reason, the growth of our marketplace. That's why we say that, for us, it is very important to have a fast-growing marketplace because the cost structure and the revenue structure are totally different. And this helps the e-commerce operation.

So the margin is improving gradually with the e-commerce. And you probably noticed that in this quarter, looking at e-commerce and the brick-and-mortar stores, our gross margin increased 0.30 bps and this is also driven by e-commerce. So the margin at the stores increased more than 0.30 percentage point.

So it came to a point, and I think that we mentioned this in the past, it came to a point where we can perfectly pay for the investment that we made in e-commerce without having such a strong pressure on the gross margin of the whole operation.

So looking ahead there are more investments in e-commerce. The nonfood part is done. So now the name of the game is to grow, to breakeven and to be profitable. For food, we have just started. So it will entail similar investments.

In the second quarter, in terms of investments, it was not that different than the first quarter. So the whole margin increased. So we can develop food, e-commerce, even having in the short term, some investments to be made. We understand that it is necessary to do this now so that we can have sustainable growth of our results. This is what we aim to happen. This is what we've been delivering so far.

[Operator]

Next question from Gustavo Oliveira with UBS.

[Gustavo Oliveira, analyst]

Sébastien, my question also has to do with Retail. To continue what you were saying, the growth of food e-commerce, what kind of mix do you have in terms of channel? Because if you use Rappi accounting for 45% of your sales, perhaps a margin will be a little higher. But from what I understood in prior answers, there's a certain strategy to migrate to other delivery forms, to home and click-and-collect. Please correct me if I'm wrong, but I think that they have a somewhat lower margin than what you would have with Rappi.

[Sébastien Durchon, executive]

It's actually the other way around. It's the other way around because Rappi, for us, is very interesting. It's a good way to attract new consumers. But to us, it's an additional result because there's practically no cannibalization. These are additional customers. And we have to pay them a take rate with our app. We have our own logistic costs but our gross margin is a lot better.

So Rappi is not necessarily the most profitable method for us. It helps us develop the food e-commerce operation and it is exactly because of that we want to develop all delivery channels at a time, the side store. We are going to start using it with Rappi to facilitate their operation, but we are going to use the side stores for our own delivery system as well.

Our strategy is to open the food e-commerce market. We have to convince customers about the quality of service. And to that -- to do that, we have Rappi, we have our delivery to home service and drive, and we intend to develop everything at the same time. And the customer -- it's up to the customer to choose.

[Gustavo Oliveira, analyst]

It's very clear. But if we think that you could have a move similar to what we saw in nonfood retail, where your margins evolved, your gross margin is evolving in the retail operation. Can we then imagine that this level of margin that we currently have would be a lower level of margin, and that the margin looking forward, should be growing? Is this what you're your thinking in your business model?

[Sébastien Durchon, executive]

It's what we've been saying over and over. Last year, when the gross margin of Carrefour declined, a lot of people complained. And we already told you at that time, these are short-term investments but with all of the initiatives we can improve the gross margin, at the stores and online, e-commerce, and this is exactly what's happening now. Is there more room for the gross margin to grow? Yes. There's a little more room, yes.

[Gustavo Oliveira, analyst]

And I have one final question to Mauad. In the press release, you say that there is an increased frequency of Atacadão on card and there's an increased consumption out of the stores. Of course, in this quarter, you had -- I believe you had increased sales given the campaigns that you had, the campaign, Usou, Zerou. So how are you thinking an opportunity out of your store's network because you're going to see an increase of sales out of the Atacadão network? And that decision of accepting Carrefour cards had an impact. I want to know how this is influencing the frequency of card use.

[Carlos Mauad, executive]

Thank you for the question but let me make a quick correction. Usou, Zerou is an exclusive dynamic for Carrefour card. The Atacadão card still charges an annual fee as the card was conceived in 2016 and implemented in 2017. But let's speak about frequency.

So what's happening specifically with the Atacadão portfolio? It is a portfolio, it is a product. Well, customers are trying to understand their product more in depth as the life cycle of the product advances. When you sell the products such as Atacadão card at Atacadão stores. Sometimes, this is the first card that that consumer will ever get. We are doing financial education. The customer thinks that that payment form can be used exclusively in the Atacadão stores. But little by little when for consumers that that is a brand card. It can be used at any point-of-sale that has a POS terminal available.

So you will probably see something very similar to what we see with Carrefour card where the of-us share, everything that is spent outside the Carrefour/Atacadão ecosystem is gaining more share. In the half-year numbers for Atacadão card we have something around 50-50, 50% of customers' spending is at Atacadão stores; the other 50% is of-us. When you look at a mature portfolio such as Carrefour's, this number is around 25% in stores, 75% of-us. So it's about financial education and communication about the product to educate consumers, to know that they can use the credit cards outside our own stores.

Now this is the business, which is specifically important for the bank in terms of P&L because this transaction has a totally different economics than a transaction that happens in Carrefour and Atacadão stores and also because of the consumption profile. This is information that we are collecting about customers to understand their spending profile, what they consume, what they buy, and if there's any opportunity in terms of communication to attract, to build to customers, to consume a certain service or SKU in our ecosystem. So these are the 2 major advantages of having of-us spending, growing and gaining share in our portfolio.

[Gustavo Oliveira, analyst]

And this 50-50 ratio, do you think is stabilized?

[Carlos Mauad, executive]

No, it is not stabilized yet. The trend is that spending of-us will gain share. It does not cannibalize on our spending but it should gain more share.

Because we are reviewing the Atacadão portfolio, because every month that goes by, in this portfolio, we capture more data, more information, and we can expand the credit limit of these consumers. And naturally, they just say that they can use that all on of-us, so I believe that Atacadão cards will not get to what we see in the Carrefour card, 25%, 75%. But I believe that of-us will continue to increase its share.

[Operator]

Next question from Irma with Goldman Sachs.

[Irma Sgarz, analyst]

I have 2 questions -- 2 follow-up questions. In terms -- there was a lot of [indiscernible] about the truckers' strike last year, the World Cup, Easter, so it's kind of difficult to understand.

What is the underlying factor in like-for-like sales? So when we think about 5% or 8%, including e-commerce, how should we think this number for the second half of the year? Obviously, there will be other impacts, impacts from the economy in the expectations. In addition to inflation move -- the inflation rate that has eased a little. So what are your expectations looking forward?

And my second question is a follow-up question of one of the first questions asked about the data strategy. I just want to clarify. Do you have an integrated view of CPFs or taxpayer numbers -- individual taxpayer number, to basically understand consumers' journey -- the full consumers' journey of the omni-channel customers that sometimes buy online with the app, through the website or they go to brick-and-mortar stores, to different formats of stores or perhaps through Rappi? Do you have a unique customer view? That's how they call it.

[Unknown Executive]

Regarding like-for-like, you are right. Every quarter, we have many events. They make it hard to compare. But what I can tell you is that we can look at the trends. Every quarter, there are different events. Easter in one quarter; in the following year, Easter is in another quarter. But if we look at retail trend, there is a very clear trend since the first quarter of 2018. Initially okay. We had deflation. Inflation started growing again and we had a lot of inflation at a certain moment. This year, this didn't really happen. And there was an acceleration of retail this year. The fourth quarter of last year posted like-for-likes of 13.5%, 6.1% in the first quarter of this year, 8% in the quarter -- in the second quarter. And the underlying reason, are not events that are happening in a quarter. Because this quarter, unlike last year, we had a reduction in consumption. So a very difficult and challenging environment.

Despite that, retail accelerated. It is what Noël said, all of those initiatives made last year, a move that we mentioned last year of repositioning our prices in the hypermarkets. So what we did on assortment, healthy food aisles, a lot of efforts regarding our private label. Our private label has a 13% share in food sales. 2 years ago, this number was 7%. In 2 years, we almost doubled our private label product share. So it's a set of initiatives in our view that explained the current performance. And again, this good performance happened in a challenging environment. Had we not made these decisions last year, we would never have achieved the current positive performance. And with the assumption that economic environment will not change, we don't envision a very different performance in the future. Now as you said it yourself at the end of your question, there are initiatives: Release of the FGTS Workers' compensation fund and PIS/PASEP. If this happens, it will help.

Regarding your second question, regarding data strategy. We have an area in the Carrefour Group, an integrated data area. And this is exactly what we're doing. We are collecting all of the data that was spread in different business units. We are putting it all together and we are trying to use data with the omni-channel strategy. Mauad said Usou, Zerou is an omni-channel's initiative that was very interesting. This is a decision of the bank that helps the bank because it brings in new customers to the bank. But at the same time, it is one way of acknowledging customers' loyalty and giving them an incentive to buy more. The decision by the bank and by Atacadão of accepting the Carrefour card is the same reason. Why did we make this decision? Because we analyzed the data. So we have a lot of initiatives to drive and to build on this wealth of data that we have.

[Operator]

[Operator Instructions].

[Noël Prioux, executive]

If there are no more questions, I will end today's call. I hope it gave you a greater insight into how our Grupo Carrefour Brasil's omni-channel ecosystem strategy is developing. All these advances are the result of strategic decisions and investments in the past year to build an interconnected ecosystem and ensure continued, sustainable, profitable growth ahead. Thank you very much for your attention, and have a great day.

[Operator]

This concludes today's question-and-answer, this concludes Carrefour's conference call for today. Thank you very much for your participation. Have a good day.

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