Atacadao SA
BOVESPA:CRFB3
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Atacadao SA
Earnings Call Analysis
Q3-2023 Analysis
Atacadao SA
In Q3 2023, the company encountered a challenging economic environment marked by food deflation, as evidenced by a 3% decrease in food inflation. Despite these conditions, the company strategically expanded its Cash & Carry operations by inaugurating 3 new Atacadao stores, wrapping up the year's expansion with a total of 15 new stores.
The retail segment faced a demanding like-for-like (LFL) performance landscape due to macroeconomic pressures and a stark comparison to the previous year's 15% growth in the same quarter. However, the white label brand's contribution surged beyond 20% of sales, and Carrefour Bank's portfolio experienced a robust 26% growth. Gross margins expanded due to synergies from the BIG Group integration and gainful supplier negotiations, combined with a disciplined approach to cost management. This helped achieve profitability across legacy businesses and slash net debt by BRL 1.4 billion over the year, leading to a net debt over EBITDA leverage ratio of 2.27x.
The company made notable strides on the ESG front by embracing measures across three strategic areas: combating hunger and inequality, fostering diversity and inclusion, and championing planet protection and biodiversity. Efforts included food donations equivalent to nearly 10 million meals, participation in the zero-racism movement, and a commitment to slash Scope 1 and 2 carbon emissions by 50% and 70% respectively by the designated goal years. By August, carbon emissions had already been cut by 34%.
Q3 saw gross sales hit BRL 28 billion, a 3.9% dip from the previous year, primarily due to food deflation. Gross margin, though, improved by 22 basis points, largely driven by the Cash & Carry segment. There was a measured increase in SG&A expenses, which nonetheless remained below inflation levels. Consolidated EBITDA totaled BRL 1.5 billion, and an adjusted net profit of BRL 212 million was achieved despite the pressures of increased leverage and taxes.
Notwithstanding the macroeconomic adversity, the Cash & Carry business celebrated the completion of its expansion plan and demonstrated robust performance, particularly in stores converted from the BIG Group with 22.2% LFL growth. Gross margin appreciated by 94 basis points, reflecting the proactive supplier renegotiation efforts and mastery of shifting market dynamics. Adjusted EBITDA for the segment stood at BRL 1.2 billion with a margin of 6.7%, marking a testament to the company's resilience in a demanding economic environment.
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[Interpreted] We'd like to inform you that this conference is being recorded and will be available at the company's IR website alongside the prospective slide deck. [Operator Instructions]Note that the information contained in this presentation and any statement made during this conference relative to Carrefour Brazil Group's prospects, projections, operating and financial targets are based on the company's management's beliefs and assumptions as well as currently available information. Forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions seeing as they relate to future events and therefore rely on circumstances that may or may not materialize.Investors must understand that general economic conditions, the state of the market and other operational factors may affect the Carrefour Brazil Group's future performance leading to results which are materially different than those expressed in said forward-looking statements.Now I'd like to turn it over to the company's CEO, Stephane Maquaire to begin the presentation. Mr. Maquaire, please, you may proceed.
[Interpreted] Good morning, everyone. And thank you once again for joining us as we disclose our Q3 2023 results. The third quarter was characterized by a food deflation scenario which was persistent affecting the industry's revenues according to the Brazilian, the Geography and Statistics Institute. Food inflation came to minus 3% during this quarter and minus 0.8% in the last 12 months. At the same time, the interest rate in Brazil has been decreasing more slowly than initially predicted. Brazilian consumers are still clearly very much leveraged and its discretionary income still under pressure.Along our -- in this macroeconomic and everyday consumption context, we focused on the excellence of our execution. We've revisited our cost structure across our business units and accelerated in realizing our synergies and moving forward with our expansion plan.In Q3, we've opened 3 new Atacadao stores, concluding our Cash & Carry store openings this year with 15 new stores being added to our network, in addition to those we've converted from the BIG Group. This year, we still plan to open 4 new Sam's Club stores in combo formats, which are very promising and which we expect will deliver cost and construction synergies as well as in operation and customer traffic.Our e-commerce showed stellar performance this quarter, as our GMV grew by 50% year-over-year far outpacing the market. The highlight was the 117% growth in food [ 1P ] e-commerce which has been the main focus of our growth plans. GMV came to BRL 2.5 billion this quarter with a 9.2% penetration in sales, a record for the Carrefour Brazil Group. As for our activities performance, LFL has been impacted by our food deflation scenario and our sales remain steady year-over-year.In Cash & Carry, LFL was minus 2.7% accelerating versus the second quarter. Here, we benefitted from the performance of the old BIG Group stores, which have been converted into Atacadao. Those have prevented solid LFL growth of 22% year-over-year.The retail segment showed a more challenging LFL performance impacted by the macro scenario as well as a very strong comparison basis seeing as the Q3 of last year had shown growth by 15%.Our white label brand which offers products of high quality and fair prices and are an important instrument of building customer loyalty have continued to grow its share, reaching penetration of over 20% of sales in this quarter. Sam's Club was once again a positive LFL sales highlight, as revenue grew by 2% in same-store basis, which shows the resilience of our model with a very distinguished assortment and significant share of groups from our own members marked brand as well as imported products, which focus on the share of the public -- of consumers with higher purchasing power.Carrefour Bank also performed strongly in this quarter as its portfolio grew 26% over last year. And we captured new customers in our converted stores, which we have been doing since the beginning of the year. We also saw an improving trend in delinquency rates which remained steady since Q3 of last year and are now showing signs of a decrease.Once again, we saw our gross margins expand in Q3, a result of the synergies we realized as we integrated the BIG Group as well as our expertise in navigating different macroeconomic scenarios and negotiating better terms with our suppliers. In addition to that our discipline in managing costs and realizing synergies made it possible for us to remain profitable across our legacy businesses. We also reduced our net debt by BRL 1.4 billion versus last year, ending the quarter with a leverage ratio net debt over EBITDA of 2.27x.On the ESG front, we also make progress in implementing initiatives across all 3 strategic pillars. On our fight -- hunger and inequality fight front, we've donated 102 tons of food to help the victims of the cyclone that hit the state of Rio Grande do Sul. So far this year, we've donated over 2,400 tons of food, which is the equivalent of nearly 10 million meals. In addition to that we've launched or we've opened a new class of our retail social school, with 300 new openings to prepare young people for the labor market.On the diversity and inclusion front, we've joined the zero-racism movement in partnership with the [indiscernible] University. We were also awarded at the [ Link ] festival for our accessibility initiatives at the Carrefour Bank.Lastly, on the planet protection and biodiversity front, we've made progress in implementing our decarbonization strategy, the purpose of which is to reduce Scope 1 emissions by 50% before 2030 and Scope 2 emissions by 70% before 2040. In August, our carbon emissions had decreased by 34%. We've tracked 100% of the meat the Carrefour Group has purchased with over 7.9 million hectares and over 6,300 farms being monitored. The Carrefour Group's commitment to ESG initiatives is a priority for us in Brazil and around the globe.With that, I'd like to turn it over to Eric who will detail our financial results. Eric?
Thank you, Stephane. Hello, everyone. It's a pleasure to be here joining you all once again. On Slide 3, we look at the company's consolidated results. Our gross sales in Q3 2023 came to BRL 28 billion, down 3.9% versus the same period of last year, largely affected by the deflation scenario that Stephane has just mentioned as well as the sales of Remedy stores and the closure of selected stores. We saw a 22 base point expansion in our gross margin, largely driven by our Cash & Carry operations because of the synergies we've realized and the effective management of our supply chain.Our SG&A went up 3.3% year-over-year, below cost inflation. In addition, our SG&A cost decreased 2.8%. This is a result of our efforts in lowering the costs by new efficiency initiatives, which we announced in the last quarter and also the synergies we've realized.As a percentage of sales, our SG&A has increased by 92 basis points year-over-year as expected, impacted by the ramp-up in converted stores and the stores that were opened over the last year. This percentage tends to decrease from its current level as these stores mature and also as we continue to introduce the cost reduction initiatives.Consolidated EBITDA was BRL 1.5 billion, reflecting the pressured cost inflation, ramp-up in converted stores and the investment in acquiring new clients for our bank to accelerate the new clients brought into our converted stores. Excluding the effects of BIG, our business margins from our legacy business remain in keeping with those we saw over time. Lastly, we ended the quarter with a positive bottom line. Our adjusted net profit was BRL 212 million over the quarter, still carrying the weight of increased leverage and tax expenses.I would now turn to the highlights by business unit. On to Slide 5, we talk specifically about the Cash & Carry business. We've opened 3 new stores to the Atacadao network in the quarter, adding 15 new stores to our Cash & Carry network in 2023, in addition to those converted from BIG, which concludes our expansion plan for the year. Our network came to 361 stores at the end of September.Gross sales in the business came to BRL 19.7 billion in Q3 '23, in keeping with the results we had last year. Considering same-store sales fell by 2.7%, improving their performance compared to the past quarter, but still pressured by deflation in important food groups. Converted stores from the BIG Group and Atacadao performed very strongly this quarter with LFL growth by 22.2%.Legacy stores showed similar LFL performance than what we had last quarter. B2B customers still presented slightly lower purchasing volumes than expected, but have improved over the quarter, which is a positive sign.The gross margin increased by 94 basis points versus last year because of new negotiations with suppliers as we integrated the BIG Group stores as well as because of our expertise in navigating different market conditions.Our SG&A was 9.1% of net sales, increasing by 92 basis points over the year and mirroring the ramp-up of our recently opened and converted stores. As a result, our adjusted EBITDA came to BRL 1.2 billion with a 6.7% margin. Lastly, looking at the chart on the right-hand side of the page, we show our EBITDA margins for the industry.Two important takeaways -- takeaway messages that you should think about looking at this chart are: one, the margin for our mature stores are still in keeping with historic levels despite the pressures from the top line. This shows how disciplined we've been in managing our costs and capturing synergies as well as how resilient our business model is.The newer stores are delivering higher profitability this year, including the stores we've converted from the old BIG Group. These stores specifically have ended the quarter with an EBITDA margin of 1.5% at the store level reaching a rate or breakeven before we expected.Now moving on to Slide 7, we'll talk about the highlights from retail. Here, we see that gross sales came to BRL 7 billion in Q3 '23, down 15%, which is explained largely by the reduced sales area. Just as a reminder, in the last 12 months, we converted 27 BIG hypermarkets, 2 Todo Dia stores, and 3 Carrefour hypermarkets into Atacadao stores. LFL sales came down 7.7% affected by deflation and discretionary incomes, which are still very pressured.Once again, our white label brands, which account for or which represent an alternative high-quality and low-cost product for consumers is an important tool in building loyalty and increased their share accounting for over 21% of our sales, a new record for Carrefour Brazil.Gross margin was 192 basis points smaller this year with the increased promotional activities in some periods in the end of our partnership with Hipercard in Q2 or Q4 2022. It's important to remember that last year, gross margins for retail and BIG segment included the Hipercard results.SG&A as a percentage of sales increased by only 28 basis points year-over-year, despite the reduced sales area and several hypermarkets being converted still in ramp-up stage. This result was only possible thanks to our cost contention efforts and realized synergies. As a result, the adjusted EBITDA came to BRL 108 million, 1.7% margin. The EBITDA margin, excluding the impacts relating to BIG was 3.7%, 185 basis points lower than last year, especially because of the decreased or narrower gross margin and operating deleverage.A final comment is -- final note is important here in Q3. There was the additional challenge of -- in our retail operations with the migration of our systems in the Todo Dia Nacional and Bompreco networks. That migration caused specific disruptions to the business, which ultimately impacted the margins for the segment. The additional impact this quarter came from the networks compared to last year was approximately BRL 15 million negative. Also, important to note, these issues were specific and have been addressed. So we're back to business as usual.Now on Slide 9, Sam's Club showed gross sales of BRL 1.5 billion in the quarter, 9.3% larger than last -- the same period of last year, up 2% in same-store sales and with growth in our network with 5 new stores in the last 12 months.Before we begin to compare profitability results, I'd like to clarify that in 2022, the results we showed are the equivalent to the result on the store level because they do not capture the distribution center costs that's -- and also the fair share of corporate costs and contingency in line with the methodology of accounting allocation that we adopted for the Carrefour Group.To make the analysis of our figures easier and provide a clear overview of how the business is progressing, we show the figures in Q3 of the year pro forma to make them comparable to those of Q3 2023.Our gross profit came to BRL 264 million with a gross margin of 19.8% during this quarter. We're focused on gradually improving our margins, driven largely by increased penetration of our white label members marked brand, one of the pillars of our strategy and growing our profitability.SG&A came to BRL 213 million in this quarter. And looking quarter-over-quarter, it grew BRL 22 million versus last quarter, increasing because of the new stores we opened in June and which are now maturing. Our EBITDA -- adjusted EBITDA margin in the quarter was 3.9%, 22 basis points larger than the pro forma margin in Q3 2023.Moving on to Slide 11. Our digital channel showed stellar growth this quarter, largely driven by food 1P, our main focus. The nonfood segment continued its positive growth trend with our GMV growing 26% year-over-year this quarter with positive contributions in both 1P and 3P. Total GMV grew 50% year-over-year, very much outpacing the market and our e-commerce accounted for 9.2% of our sales, a record penetration for the Carrefour Brazil Group.On Slide 13, we show the Carrefour Bank's performance. We're still investing to attract new clients to our converted stores, which reflected a 26% growth in our credit portfolio. Earnings in the quarter went up 13% and revenue for the quarter was BRL 1.2 billion. This new -- this move of new clients coming in naturally creates a short-term pressure, both in terms of risk load and SG&A. But we already see this effect being partially offset by the financial margin of these new clients earlier in the year, which has made the impact of this investment to become gradually smaller over the year.And just to remind you, our new customers are generating a positive net credit margin starting in month 6, which will continually increase our profits. The EBITDA in our quarter was BRL 233 million or BRL 270 million, excluding the investment to attract new customers with growth of 42% versus last year.Now still on Bank Carrefour, Slide 14. Let's talk a little bit about delinquency. And the first chart on this page will show you the over 90 and over 30 charts. In both of them, we see improvement quarter-over-quarter as well as year-over-year. Since Q3 of last year, we have been seeing delinquency levels at a steady rate, which is a better performance than what we saw in the market at large as the chart in the middle of the page shows.The new accounts showed a very healthy profile as the chart on the right shows, which refers to customers in arrears by over 30 days after 3 months of receiving credit, which shows the trend tends to turn positive in the future. As we can see in the chart on the right-hand side, we went from levels of about 12% to 5% to 6% below the normalized appetite for credit extensions, which should have a positive impact on our delinquency moving forward.On Slide 16, the adjusted net profit was brought back to BRL 212 million in the quarter. The cash result after taxes and depreciation of our operations came to BRL 990 million. Financial expenses came to BRL 590 million, helped by the reversal in expenses with monetary corrections because of the provisions that we either decreased or reverted by BRL 163 million. Our tax expenses was BRL 125 million, with a still higher-than-expected rate impacted by the legal entity of VIG that still hasn't been absorbed for means of calculation of the taxes.On Slide 17, our operating cash flow is still strong, coming to BRL 5.1 billion in the last 12 months. We're still working on managing our working capital this quarter. We saw a quarter-over-quarter increase in the number of days in inventory, which is seasonal. But we were able to offset that increase with the improved management of our payments to suppliers, which ensured repayment term of 11 days -- that's 11 days longer compared to last year. We're still executing our expansion plan and this last year was very demanding from the investment standpoint, seeing as in addition to converting 129 stores from the BIG Group that we purchased, we continued to open new stores.We invested BRL 2.7 billion in the last 12 months, BRL 1.8 billion of which was to convert -- on the converted stores. The difference was for opening 21 new Atacadao stores, especially. Free cash flow for stakeholders came to BRL 844 million, showing Group Carrefour Brazil's ability to finance a bold expansion strategy.On Slide 18, we'll talk about our leverage. We ended the quarter with net debt, including receivables of BRL 13.1 billion, BRL 1.4 billion lower year-over-year. Our leverage rate remained steady at 2.27x net debt to EBITDA. And our leverage position, especially liquidity is very comfortable seeing as half of our financial gross debt is an intercompany loan with our headquarters in France. Our 4131 rates, which are below the CDI at plus 1% a year, reflect the confidence that the holding has in Brazil, making our credit one of the most attractive in the Brazilian retail.With that, I conclude my financial highlights and turn the conference back to Stephane. Thank you.
[Interpreted] Q3 was characterized by a quite challenging macro scenario, as we said before, for Brazilian retail with food deflation being very stubborn and affecting our sales. We focused our efforts on business elements that are under control, so we could protect our bottom line. We've lowered costs, optimized structures, realized synergies, especially on the cost side, all of which allowed us to protect our earnings. The maturity of both our open and -- newly opened and converted stores, especially in the Cash & Carry segment is doing really well, with positive results coming in before the expected.With our bank, we saw the investments that we made in capturing new clients beginning to bear fruit with strong or significant expansion of our portfolio and delinquency under control, a result of our very accurate decision in Q2 of last year to adopt a more cautious approach when it came to lending from the bank. We will carry the cost discipline and the search for efficiency that's pervaded all our businesses into the future to be even more prepared to seize the benefits that will come as the Brazilian consumers purchasing power picks up again.Thank you again, and we would like to have you joining us on November 28, with a great opportunity that I think is very interesting for us to discuss some of the main business topics and to present our vision for the future. Thank you so much for joining us. And let's now move on to our question-and-answer session.
[Interpreted] [Operator Instructions] Our first question comes from Felipe Cassimiro, sell-side analyst with Bradesco BBI.
[Interpreted] I will stick to 2 questions. First of all, I'd like to understand a little bit better the sustainability of your profitability with Atacadao, especially considering the more positive payment days for suppliers. So if you could, I'd like to understand what we could expect for the future with this positive trend in suppliers?And the second question maybe in a more strategic sense as to Stephane. I'd like to understand a bit more about the hiring of the new COO at a delicate time for the company when you're streamlining and accelerating the synergies. So if I could, I'd like to understand a little bit more from you if this was really something that was missing, to have someone on that -- in that position for the company? Is this something that you already expected? I just wanted to understand strategically a little bit more about that move.
[Interpreted] I'll start with the first one. The gross margin for Atacadao, as we saw in the last few quarters is something that shows the excellence of our procurement and cost management work. And this model in Cash & Carry, we are able to face all of these scenarios, high or low inflation, B2B or B2C, with great work with our suppliers and we took the opportunity that we were integrating BIG stores.Look at that and this doesn't change -- it doesn't completely change the game and we believe that we should keep those margins at similar levels in the next few quarters. So the ability to manage that gross margin in Cash & Carry and also with the stores that we've converted to Atacadao are following a very positive trend and we expect them to reach those levels. So it seems that we will continue to sustain those levels with Atacadao.Now as to your second question, with bringing in Pablo, our new COO, what we wanted was to give more versatility and agility to Carrefour Brazil. This is someone I've worked with before, especially in Argentina. He knows the group very well and all the models and formats we work with in the country. So I think this is the right time to do that. We had been thinking that we would need a COO, given the size that we've acquired. I mean, the game has changed last year as we enter the stage of adoption of new systems and opening new stores and converting stores.So we entered a new stage where we want to strengthen our ecosystem and work more closely together across all the models we operate, whether they are retail, Cash & Carry, the member clubs. I think [ Momo's ] one very good example of that strengthening of the system. And Pablo will bring this ability of working in a cross-sectional way and working more closely together and bring more agility in everything that we do, making the most of the new size that we now have.Because of the sheer size of our company, I wouldn't be able to do everything on my own. We have over 5,000 associates today. So we are giant with many issues to address. And I think that the arrival of Pablo is really a touch-down for us for the next quarters and years. So thank you. I don't know if Eric has anything else to add.
[Interpreted] You manage -- you touched the working capital because there's the increase in the gross margin and we were able to manage to keep that despite the deflation scenario. And there's also the working capital side. You mentioned the 10 days account and that's correct.Now the point here is it's about structure. It's not that we are delaying anything. This had been in place since we acquired BIG, we were going to adopt the same format that was being adopted by BIG and Carrefour and it structurally improved these gains that we expect to see in the future.Bear in mind that the working capital trend in Q3 is -- Q4 is very different. We have 51 days of inventory and that has to fall to under 50 by the end of the year. We have 62 days of accounts payable. We ended the year with 81. So we did great structural work, but there are still many opportunities to seize yet.
[Interpreted] Our next question comes from Andrew, a sell-side analyst with Morgan Stanley.
With regards to food pricing, we understand a lot of categories are moving in the same direction at once. But I'm curious if you have any commentary around the outlook for deflation, food pricing and if there's any areas of the basket where you have some visibility that pricing might be turning more positive? Any color would be much appreciated.
[Interpreted]I will answer in Portuguese to ensure that I keep the focus on Portuguese.[Interpreted] Yes, this is a very -- a moment of very strong deflation. We had seen that in Q3 with limited inflation at 3 points, IPCA 15 in October has shown yet another food deflation in the month with minus 5% in food and home prices as well as a slowdown in the pace of deflation month by month. We are seeing minus 1 -- month-over-month, I think the final figure was minus 0.5% in the IPCA 15 in September.So we are seeing gradual improvement now in this moment of deflation, which should last till the end of the year. But that will depend on several factors.Now starting next year, we should have -- should not have deflation, but more than earlier this year. So the basis will be more positive, especially on the commodity side. This year, we saw, first of all, a sharp decrease in commodity prices and deflation in commodities.And later, this deflation in commodities came to affect the more processed foods and that's what we see more clearly today. So commodities should pick up first until that reaches industrialized products. So it will be a gradual movement in the next few months. We should see a figure in October that's lower than what we've seen in the last few months.
[Interpreted] Our next question comes from [ Carla Lestauces ], sell-side analyst with Itau BBI.
[Interpreted] Actually, I just wanted to talk a little bit more about Cash & Carry. In the release, you mentioned that you already see an improvement in same-store sales quarter-over-quarter. This is something you had already seen in the first 2 quarters. And I just wanted to understand if that trend should continue moving forward. You talked about the improvement in food inflation, but we already see the forecasts from the macroeconomic department showing positive inflation month-over-month. But the trend in volumes could improve also in month-over-month. So I wanted to hear from you, what we can expect for the next quarter?And you've already talked about your margins, but I understand that negotiation with suppliers should continue to progress. But thinking about the competitive environment, we know that competition is fiercer in a few regions. How can we expect the development in gross margins also thinking about that? Can we expect more promotional sales to improve volumes? Or is that something that's not in your minds at this point? I wanted to hear a little bit more about that.
[Interpreted] Thank you, [ Clara ], I will take your first question, and I think that Eric really wants to take your second question, so I will turn it over to him. Well, as you mentioned, in Q3, we had a slightly better scenario month-over-month, better in Q3 than we saw in Q2 in like-for-like sales for Atacadao.This is a very interesting point when we think about volume. We also expect that for October. Now as for Q4, we obviously can't give you any figures. But what's important about Q4 is that these months of November and December, we saw a lot more strength than in October historically. November, we have Black Friday and December, we have Christmas. And we prepare very thoroughly to make the most of this very strong period across all our store formats. And so we should see that reflect in the trend for Q4.Now as for food inflation, it should go back up and we should see a slight or small inflation, which should also have an impact on Q4. Eric?
[Interpreted] Thank you, Stephane. Now I think that one important point here was Atacadao's merit to even slightly widen its margins in an inflationary scenario. In the retail market, whenever there is inflation, it's easier to widen your margins because you buy in advance and increase your inventory and then you sell products at a higher price than you purchased them. Now during times of deflation, that equation is a lot more -- a lot trickier. It was one that Atacadao was able to overcome.So the way we look at it is if we were able to see this performance at this challenging time, now that we're looking at potential increase in prices in the future, this tends to not deteriorate or even improve. We will obviously work with promotional sales, but that's just a fine tuning that retailers have done for years to ensure whenever they can to either sell more in volume or sell at a higher price. Now the advantage that we have is that even in these times, we have been disciplined enough to keep our margins showing how resilient we've been and the outlook for the future is a lot more positive than what we see right now.
[Interpreted] Our next question comes from [ Nicolas Nahan ], sell-side analyst with JPMorgan.
[Interpreted] Well, first of all, to Carla's question about Atacadao, we realized that the deduction from gross sales to net sales was slightly smaller than it historically is for Atacadao. I don't know if you have any interpretation of why that was?And the second question is about retail. How do you see the margins for the converted stores, because I understand that the problem with the DTI system has already been resolved in Q2 or Q3. But what is your plan to improve your margins a little bit more in those stores, those Legacy stores?
[Interpreted] Well, I'll turn over to Eric to answer your first question.
[Interpreted] This is a very natural variation, fluctuation between Q1 and Q2. There was nothing structural to explain the change in that value. You can expect those levels to come back to historical standards. Sometimes it's about what's being sold and not sold from our inventory, but it's really not a trend, to really not be interpreted as one.
[Interpreted] Now to your second question, the issue is to strengthen sales in these converted stores. As we said before, we need to convert the Hipercard clients to our own clients and that takes time. So we need to strengthen our sales so that we can improve our margins in our converted stores to the same levels that we had before. And we always said this, the maturity of converted stores will be in 3 years. So we will be talking about this until 2025.Naturally, with the more challenging consumer scenario here in Brazil, we're seeing a slower ramp-up, especially in these stores that were converted to retail more so than in other formats. So it's taking a little bit longer to strengthen sales there. But step by step and little by little, they're improving with this conversion of clients focusing on our execution and offering and proposing the right products in every city where we open these stores.This is also a new work for us, but we've reached new states carrying the Carrefour brand where this was a brand that was not that well-known. So we have to continue to offer the right services and right products to these customers in areas that we didn't know as well. All of that takes time and we are moving forward on all of these fronts. Thank you.
[Interpreted] Our next question comes from Danniela Eiger, sell-side analyst with XP.
[Interpreted] The first one might even be a follow-up on your outlook. It wasn't that clear to me how your margins will perform in the last quarter of the year. I understand that November and December are critical. But if the -- I'd like to understand if the quarter-over-quarter development that we saw in Q3 will continue into December. So if you could add a little more color on that.And also on the profitability side, you made it very clear that for Atacadao, the margins will remain on the same levels, but I wanted to understand more about retail. Eric mentioned that the disruption in your systems has progressed. But I wanted to understand how we're thinking about that moving forward. I understand that the gross margin will remain pressured by the competition and inflation scenario, but how can we think about that development in the near term?And now my second question is about the integration of the BIG Group. I have 2 points that I'd like you to help me understand. First of all, about these expenses that you have been facing over the course of the first half of the year, about BRL 50 million this quarter including indemnity payments and the layoffs, how much can we still see downsides in this sense?And how should we -- when should we expect to see the realization of synergies affect the consolidated results? You mentioned -- you already mentioned essentially 75% of the 2P when you mentioned the synergy guidance. But when we look at the cash generation and full results, there is still some pollution on a few aspects. So I just wanted to understand how we should be thinking about that trend?
[Interpreted]. Thank you, Danniela. Well, I counted 3 questions, I counted 4. Well, so we have 4 questions. I will take the first one and then I'll turn it over to Eric. And maybe I'll come back later to add more comments.First of all, about the month of October. We're looking at October more as the average of Q3 that will depend business unit by business unit or converted stores into retails and Sam's Club, we are now seeing a movement upwards. So we are moving and doing better and better when compared to the previous month. But overall, we see October more as an average of Q3.Eric, you may take the other questions.
[Interpreted] So talking about profitability for the company at large and also the profitability of our retail operations as well. So globally speaking, we went from 19.9% to 20%, so there has been an increase in gross margin. And the increase -- that increase was because of Cash & Carry. Now there is a question relating to retail. Retail has decreased by -- from 25.5% to 23.6% in gross margin. And this is an item where we have to work.Retail has had more promotional operations, which not necessarily reflected on a large like-for-like sales rate. So between retail, where there was a decrease and wholesale where there was a decrease, the result was structurally positive because we believe that in Cash & Carry, where you expect things to continue and in retail, we have a plan to work on that.You may see that in retail, we cut the SG&A to be able to offset the decrease in sales by over 15%. And this is very much in line with what you said in terms of realizing synergies. Part of that gross margin increase came from the synergies. Part of the lower cost in retail also came from those synergies from the 65%. So they have gone through P&L and in retail, we are not being able to make a BIG's retail operation to be profitable.We still have about 55 negative -- BRL 55 million negative. And we also have BRL 25 million from the Legacy operation. So this is a point where we have to work. As we said, we have good news from Atacadao, which are already positive at the store level. So we see that that realization is taking place and it tends to improve even more when we can work better on the maturity of those converted stores and the Legacy in retail and wholesale.There was also an issue about the expenses. And admittedly, the expenses on Cash & Carry are virtually down to 0. What you will see are the expenses in restructuring, whether on Legacy stores are, on BIG stores, we're still restructuring and these are much lower costs than what we had before, but they still exist. And lastly, they are the issues relative to some one-off small expenses with BIG, but these are really low. So we should see a significant decrease over the next quarters.
[Interpreted] Our next questions come from Vinicius Strano, sell-side analyst with UBS.
[Interpreted] I'd like to go a little bit deeper into the new store openings. If you could talk a little bit about what you expect in terms of openings within the Atacadao brand, what do you see, is there more room for conversion of hypermarkets? If you could also share a little bit what you've been seeing in terms of CapEx per store, that would also be great?Now on a second topic, if we could go back a little bit to pricing in Cash & Carry, I just wanted to understand whether in the current scenario, considering that you've had more significant gains in Cash & Carry, does it make sense to be more price-aggressive and accelerate your volumes?
[Interpreted] Thank you, Vinicius. Now about Atacadao, we see a pristine potential for Atacadao, so to speak. We plan to have more than 400 Atacadao stores in the long term. So that remains untouched and our overview is being adjusted in terms of where we can open new stores. But it's still early to share with you a vision for 2024.We will take the opportunity to finalize our plans for 2024 and 2025 in the last quarter. Considering the opportunities to have more stores of Atacadao, obviously, there are opportunities to convert even more stores into Atacadao. I've spoken about this several times. We're absolutely open about this. And this year, we've converted 3 Carrefour hypermarket Legacy stores into Atacadao and that's been working really well.And year after year, we've been working and looking into our store network, store-by-store, location-by-location to understand what makes more sense to our customers, whether it's Carrefour hypermarket or Atacadao and now Sam's Club as well. So converting -- either fully converting sales or partially as we mentioned in the beginning of this presentation, we have the opportunity also to reduce the hypermarket -- the size of a hypermarket to add a Sam's Club store as well and strengthen that point of sale.So opening 2 stores where we previously had only one. So when it comes to possibilities of opening new Atacadao stores, you're absolutely right. Now as to how many stores those will be, we're still looking into that for 2024. And conversions of stores from hypermarket into Atacadao and Sam's Club, obviously, always a possibility. Eric?
[Interpreted] Thank you. Now the pricing equation when it comes to volume is something that our team is working on every day. So it will really depend on what location we're talking about or what's the time for the country and for consumers.At this time, there is no guideline from management in terms of changing our work model to expand volumes. Now our philosophy, which is something that we keep in mind when looking at pricing is to, first of all, especially in Cash & Carry, ensure that we have the best end price to our customers, which is what makes Atacadao what it is and also, in some way, keep our margin disciplines to make sure that our business is still efficient. These are our principles, so you can expect those to never change.
[Interpreted] Our next question comes from [ Tallis Vernelo ], sell-side analyst with [ Safra Bank ].
[Interpreted] My first question is about whether you see this decreasing over the next quarters, thinking about the increase in gross margins, your levers during this quarter when it comes to gross margin in retail, can we expect this gap to be bridged in 2024? Or is it something that should come only in 2025?
[Interpreted] This is Eric speaking. If you know us, you know that we won't give any guidance about our margins for next year. But what we can tell you to help compile your figures and forecasts is, first of all, we have been time-over-time reducing the gaps in margins for BIG. So that has decreased by 20 basis points since the beginning of the year. So we are expecting some of our stores to mature next year and the maturity of some of our results as a consequence.Now because we have been able to control our gross margins, we are working very strongly on SG&A. This should be our way out in terms of reducing our costs. I think that if you look at it, the secret is in our SG&A, which is why we are now obsessed working to achieve this efficiency across the company. And that's what we will be working on. Now one proxy you may have in terms of store improvements is what we showed last year for Cash & Carry in a bit longer for the retail operation, okay?
[Interpreted] Our next question comes from Irma Sgarz, sell-side analyst with Goldman Sachs.
I wanted to hear a little bit from the migration of BIG customers to the Carrefour card. If you could please add a little more color over how much of the old base has already migrated? And how many more do you expect to migrate in the next few months? And I know this is still early, but from what you hear right now, what should be the potential profitability when compared to the Legacy base of customers from Carrefour? That's my first question.And my second question is about the supermarket format stores. I think you've gone over a few issues, but I just wanted to hear a little bit more about that. What locations do you expect -- I know there's specific demand for markets, but specifically for supermarkets, now that you had the migration in your CTI system, how long do you believe it will take for maturity? And what are the KPIs you're looking at the most? Is it more about productivity or SG&A control? If you can maybe even help us to understand whether some of those locations will be shut down or take a little bit longer to become profitable?
[Interpreted] Thank you for your questions, Irma. For the Carrefour Bank, we began the work to integrate the Hipercard customers or Hipercard clients. We had a few months to prepare for that. So far, we've converted just over 500,000 clients from Hipercard and Sam's Club members as well. So in the BIG world, we have converted already 500,000 clients to our bank.This is already a very significant client base and just over 50% of everything that we believe will be able to convert. So we've made very good progress. But as Eric has said, we should see a more significant impact in the gross margin only some time from now.Now as to your second question, for the supermarket stores, we are, first of all, looking at the customer traffic, how many people are going to purchase in our stores per day, per week, per month. In addition to that, it's more about the financial and profitability per store and the feasibility that they present.So we have already shut down a few stores in Q2 of this year and it is a continued process looking into sales volume and profitability for every point of sale and assessing whether it makes sense to keep those stores open or not. It's not really the time to do that.As Eric said, we've had several systemic changes that we're -- bothering our clients, so to speak and affecting our sales on these locations. So this is an issue that has been addressed. And whenever there's an integration of this size, this is something that we see. In our case, it was for supermarkets.Now the first point here is we need to sell again and see our customers happy again. And once that's the case, we will look at the profitability in those points of sale to understand whether maybe some of them should be shut down or not. Anything to add, Eric?
[Interpreted] No, that was perfect.
[Interpreted] Our next question comes from Joao Soares, sell-side analyst with Citi.
[Interpreted] I have 2 very quick questions. The first of them, we are seeing comments from you about focusing on your leverage next year. And from what I could gather, from your answer to your previous question about expansion, Stephane again reiterated the 4 Atacadao store guidance. But for next year, I just wanted to understand whether the pace should be a bit slower to adjust your capital costs and understand how we can reconcile those plans. What do you see in terms of leverage for next year?And the second question about Sam's Club. We see that within this methodology, a slightly narrower margin than we had in mind. We're looking at maybe 3% to 4% and we feel that you're very excited about this format. So I just wanted to hear a little bit about what the opportunities are. Do you see a lot of room for growth, also margin improvements? Anyway, I wanted to hear what your prospects are for Sam's Club?
[Interpreted] Well, maybe I could start taking the second or third question that you asked, Joao, and then I'll turn it to Eric. Thank you for your question.In Sam's Club, obviously, we are very excited. The success of those initiatives that we've had in terms of strengthening sales, every quarter, Sam's Club exceeds our expectations. We're also looking into expanding stores or converting stores to Sam's Club from the former BIG Group stores, whether they're Maxi or a BIG hypermarket.Those have all also been a success so far. We learned from these first store conversions, we did not know the model before we purchased the BIG Group and we are very happy about what we're seeing so far. We are in the process of strengthening the purchasing cell, digitalizing a lot of the operation and making the most of our bank offerings with the Sam's Club card as well, which is also doing really well.Digitalizing the purchase experience for our members and focusing on the active member base every month and we're seeing very exciting ramp-up. We saw an increase of the number of active members in Q3 by 5 point something. And I think we came to something like 10 point something in Q3. So we are accelerating in Sam's Club.We've also opened the first combo in the month October, Atacadao Sam's Club combo in the Barra da Tijuca neighborhood in Rio. So we're very excited. We are seeing some very clear champions since June of last year when we started with this format.I will now turn it over to Eric to address your other questions. Thank you.
[Interpreted] Well, about deleverage. This is how the balance we're looking at works. Like Stephane said, the 470 stores we see as potential are still there. This is a medium to long-term plan. We will implement according to that potential. Now as for the future, we need to look at what the greater potential for the company is and we'll begin to work on that at this point. And once we are comfortable with the figures, we will be sharing them with you.Now the important thing right now is to share what's the philosophy that's guiding us. We are now comfortable with a 2.27x leverage rate, but we will work to reduce that leverage rate. We believe we need to generate cash considering the nature of our business and that cash generation obviously should reduce the company's leverage.Now what rate we want to get to, that will depend on how much we want to expand on or invest in expanding next year. And if you think about it, what grows our leverage is the expansion CapEx. So it's very difficult to give you a guidance right now. But our purpose is to lower our leverage via cash results and that will depend on how much we want to grow next year, which is still open for a discussion.
[Interpreted] Our next question comes from Eric Huang, sell-side analyst with Santander.
[Interpreted] Still on the leverage issue, I think Eric mentioned at the beginning of the call, a real estate project. So if you could update us on that, that would be interesting. And also looking at your banking operations, I think that your results have followed an upward trend with positive results.And within this context, I just wanted to understand whether that changes your appetite for risk in any sense? Maybe if you would like to accelerate your portfolio? Or if you're still focused on bringing mostly the client base from BIG as opposed to accelerating your own client base otherwise?
[Interpreted] Thank you, Eric. Eric will take your question.
[Interpreted] Well, the real estate projects is an important one. From last quarter to this one, what we did mostly was operational work because there are a number of things when it comes to transferring land deeds and creating real estate-specific legal entities. And this was what we were working on in the last 3 months.From a negotiating standpoint, there was no progress even because we are laying the groundwork in terms of structure for this project. We are talking about hundreds of land plots. So there's a lot of complexity. And we have to make sure that once we start the project, that is light and well-structured. So that's number one.Now about the bank, I think your vision is very much in line with ours. We saw this decrease from -- to 16.3% in delinquency. And if you look at the market, the market goes down a little bit on 1 month and up then later on the following month. So we made a decision to continue to use the same credit policies for our new clients moving forward.And if that becomes more solid, we can discuss at the Board whether it makes sense to open the door a little bit more. One chart that we showed that's very significant, which is that for new clients, after 3 months, how many of them are in arrears by 30 days or more. And if you look at the chart, it goes down to 5% or 6%, which shows that we have been keeping the same policy in a very rigorous way until we have greater visibility about what's going to occur with delinquency, not just on the bank, but for the country at large, right?
[Interpreted] Our next question is from Luiz Guanais, sell-side analyst with BTG.
[Interpreted] Well, going back to the Atacadao and store conversions discussion, if you could talk a little bit more about how the productivity in these stores has moved forward, broken down into B2C and B2B? And also looking ahead, even considering how inflation has behaved here in Brazil, we are now seeing some early signs of acceleration, albeit fading signs. How can we expect those converted stores to perform moving forward?
[Interpreted] Thank you for your question, Luiz. Yes, we are seeing an improvement in these stores converted to Atacadao with a very good and solid performance month after month, with better sales levels and improved accounting figures.We now have this full package of 76 converted stores in positive territory and also in operating results as well, which have been positive for those stores that were converted to Atacadao. And even if you look at the history, those stores that we converted from Maxi, which were already Cash & Carry to Atacadao, those stores are in positive territory and those BIG Hypermarket stores that were converted to the Cash & Carry Atacadao store also are on positive territory.So doing very strongly and growing month after month in terms of profitability, all of them in positive territory. So with regard to the challenges between B2B and B2C, they are very different in those converted stores. Maxi already enjoyed a very interesting B2B customer base. We are now strengthening these stores. In the stores we converted from BIG Hypermarket to Atacadao, that's where we have to build a significant base of B2B customers. And in this case, we need a little bit more time, but they are growing as well.Naturally, with the current scenario, as you mentioned, with faded signs of acceleration, we will make the most of that. And as always, what will be our priority will be B2B. So we will make the most of this B2B work in those converted stores to see better performance in terms of sales.
[Interpreted] With no further questions, we will now conclude the question-and-answer session. We now turn over to the company's final remarks.
[Interpreted] Well, thank you for such interesting questions. I think that we will move forward looking at 3 very important elements for us in this current context. First of all, discipline, cost discipline and efficiency, which is what we've already been working in the last few quarters and 6 months periods. We've seen in our results the ability to work that way across our business units. Excellence is another very important topic that we will continue to underscore.And another important part is the unique ecosystem that we enjoy. We've been talking about that issue very persistently and will continue to do so. We will make the most of such a strong banking operation and also the ability to convert our stores from one format to another.And the digital operation is showing all of that, growing by 50% against this backdrop as we saw on our e-commerce over this quarter, that was a very positive sign and shows that our unique ecosystem allows us great opportunities for growth going into the future. This is my final message.Once again, I'd like to thank you for your questions. And we are available if you have any follow-up on those questions. Thank you so much.
[Interpreted] The Grupo Carrefour Brazil's Q3 2023 earnings conference is now closed. The company's IR department is available to answer any questions you may have. Thank you so much for joining us and have a great day.[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]