Companhia Brasileira De Distribuicao. (OTCPK:CBDBY) Q2 2024 Earnings Conference Call August 7, 2024 8:00 AM ET
Company Participants
Marcelo Pimentel – CEO
Rafael Russowsky – CFO and Investor Relations Officer
Conference Call Participants
Clara Lustosa – Itau BBA
Irma Sgarz – Goldman Sachs
Iago Souza – Genial Investimentos
Felipe Reboredo – Citi
Andrew Ruben – Morgan Stanley
Gustavo Frattini – Bank of America
Guillermo Villela – JPMorgan
Operator
[Interpreted] Good morning everyone and thank you for waiting. Welcome to the video conference for GPA’s second quarter’s earnings. I would like to point out if you need simultaneous translation, we have this tool available in this platform.
Simply click on the interpretation button by using the globe icon at the bottom of the screen and choose your preferred language, Portuguese or English. Again, for those who don’t speak Portuguese, we have the English simultaneous translation that can be used by pressing the interpretation button represented by the globe icon on the bottom right of the core of, excuse me, on the bottom right corner of the screen, there’s also an option to mute the original audio. We would like to inform you that this video conference is being recorded and it will be made available on the company’s investor relations website where the complete earnings release material is available. You can also download the presentation by clicking on the chat icon.
During the company’s presentation, all participants will be in listen-only mode. Then we will begin the questions-and-answer session. [Operator instructions]. We would like to emphasize that the information contained in this presentation and any statements made during the video conference about the company’s business outlooks, projections and operational and financial targets are simply the company’s management’s beliefs and assumptions, based on the information that is currently available, statements about the future are not a guarantee of performance.
They involve risks, uncertainties and assumptions as they refer to future events, and therefore depend on circumstances that may or may not come to pass. Investors should understand that the general economic conditions, market conditions and other operating factors may affect the company’s future performance and lead to results that differ materially from those expressed in these statements about the future.
With us today we have the CEO, Marcelo Pimentel and the CFO and Investor Relations Director, Rafael Russowsky. I will now hand the floor to Marcelo Pimentel for his presentation.
Marcelo Pimentel
[Interpreted]. Thank you. Good morning ladies and gentlemen, and thank you for joining us on this call. I am very happy today to announce the results for the second quarter of 2024, which were marked by a significant acceleration and the conclusion of projects that make up the final year of the company’s turnaround cycle, which began in 2022.
We strengthened our vision of having continuous evolution by delivering this first three year strategy. On slide four. I would like to begin with this quarter’s highlights. We closed the period with another solid operational advance. We achieved the best gross margin since 2020, reaching 28.2%, an increase of 1.9 percentage points compared to the second quarter of 2023. Our adjusted EBITDA margin grew by 2.1 percentage points, reaching 8.8% this quarter, an increase of 34.8% in our adjusted EBITDA compared to the second quarter of 2023.
This operational delivery takes place along with improving the company’s capital structure with important events announced in recent months, ranging from the sale of non-core assets to the follow on process which culminated in a new corporate structure. We remind you of two of the most recent events in this process which were announced recently. The sale of the company’s administrative headquarters, a transaction that totaled R$ 218 million and now in June, the sale of the fuel station network worth R$ 200 million.
This latest operation marks the conclusion of our asset sale plan which began in 2023 and has been delivered stage by stage with great consistency and discipline. The total value of these sales was R$ 1.9. When added to the amount raised in our follow on capture, we reached a total of R$ 2.6 billion. This entire movement, along with an operational improvement, reduced our financial leveraging pre IFRS 16 from 10.6 times to 2.8 times over one year, which is extremely relevant and important for the company.
Our operational improvement is also represented by operating free cash flow generation after CapEx which was R$272 million in the last twelve months, an increase of R$498 million compared to the previous year. Following the presentation, I would also like to comment on the increase in gross revenue, 3.4% in same stores and 2.1% in total stores in the quarter, with an increase in market share in Sao Paulo and maintaining the national level. The proximity format should be highlighted here. A 6.9% increase in same stores and 22.5% increase in total stores, as you can see in the graph on the left.
It’s also worth mentioning the 15.6% growth in our e-commerce business this quarter. We are the leader in food sales through this channel in Brazil, both with our own channels as well as on the main partner platforms. On the next slide, looking at each strategic pillar, we have the top line advances. Total sales reached R$4.8 billion in the second quarter, up 2.1%. The highlight this period was the proximity format with a growth of 22.5% reflecting the rapid maturing of stores open from 2022 onwards which continued to increase their contribution to the business’s growth.
Its no coincidence that our biggest advance in market share was in Sao Paulo which is the focus of our premium business growth strategy. There we had a gain of 0.7 percentage points year-on-year. The proximity format, on the other hand, had an even more significant increase in market share gains when compared to the small supermarket market in greater Sao Paulo which grew by 2.8 percentage points year-on-year. These advances confirm our strategy of expanding and refurbishing stores in Sao Paulo.
This quarter, Pão de Açúcar also posted same store growth of 2.7% with an increase in volume and average ticket which shows an improvement in our growth rate in May and June. After a weaker month of April. Extra Mercado had a same store increase of 3.4% as a result of advances in initiatives focused on improving customer experience in our stores. We expect to accelerate this growth in the next quarters with the implementation of a yemenite category management project and assortment and price reviews.
Under the customers pillar, I’m delighted to say that we have reached a level of excellence with 83 NP’s points, a record number for the company that celebrates the journey that we have trailed reconnecting with our customers. This figure reflects many work-fronts that we have been carrying out since 2022. They include reinforcing store staff training, revitalizing Pão de Açúcar stores and improving the customer experience overall, reducing, excuse me, involving a reduction in out of stock items, price perception, queue time, availability of products on shelves and others.
This is also reflected in loyalty which increased and the share of wallet of our premium customers which are essential to maintaining our business strategy. We’ve seen an increase of three percentage points in this group over the last twelve months which adds to the growth of the premium and valuable customer base. Another important lever as part of our loyalty strategy is an increase in the share of own brand products which continues to grow and now accounts for 23% of total sales at Pão de Açúcar and 26.5% at extra Mercado.
In the first half of the year alone, we relaunched 347 products under the new Qualita brand, redefining their attributes and modernizing their packaging and we have launched 102 new products during this time. To conclude with this slide, I have some excellent news about our digital sales channel. Our e-commerce revenue grew by 15.6% this quarter, reaching 524 million with a 12.6% penetration rate in total sales. This represents an increase of 1.5 percentage points compared to last year.
Perishables, which are the greatest differentiator in this business, already account for 34% of the channels sales, up eight percentage points compared to 2023. With this result, we are maintaining our leadership position in food e-commerce in Brazil and reinforcing that not only are we the market leaders, but we also have a profitable business with a contribution margin that has a positive impact on the company’s results.
I have to mention that we also received once again the diamond seal in the Nielsen EBIT survey which assesses customer experience in e-commerce. This is the highest position in the ranking and it demonstrates the excellence of our work. The next slide shows a summary of the expansion project and how it has been advancing. It reflects the successful advancement of proximity stores.
As we’ve mentioned, we opened 51 stores in the last twelve months, ten of which took place in the second quarter with nine proximity stores and one Pão de Açúcar em Campinas. The new stores opened since 2022 have brought in R$ 657 million in incremental sales this quarter. It should be noted that our focus in expansion continues to be the premium proximity format with the Minuto Pão de Açúcar brand which is maturing fast and is highly profitable.
To conclude this slide, here are the highlights of the profitability pillar. Rafael will discuss more details about our financial performance and the advances and initiatives that led us to achieve this record gross margin of 28.2%, the best gross margin we have had since 2020 and an adjusted EBITDA margin of 8.8%, also the best margin in the last ten quarters. Continuing with my last slide, here is our social, environmental and cultural initiatives.
In the social impact pillar, we donated ten tons of food to the people affected by floods in Rio Grande do Sul through the GPA institute, which was added to another 64 tons collected in a donation campaign with customers, partners and employees. This was an initiative we took together with the Amigos do bank, NGO and nine other institutions regarding our commitment to transparency.
We published our annual Sustainability Report for 2023, a report with the main business initiatives integrated into our sustainability agenda and also the diversity and sustainability weeks which were attended by more than 5000 people. In the permanent agenda to combat climate change, we reduced scopes one and two emissions by an additional 7% compared to the second quarter of 2023.
This concludes my presentation and I’ll now hand over to Rafael for his comments on our financial performance. Thank you. Rafael over to you.
Rafael Russowsky
[Interpreted] Thank you Marcelo. Good morning to everyone joining us for this conference. Starting with slide nine, we reported GPAs total earnings which came to R$ 4.8 in the second quarter of 2024. This accounted for 2.1% growth versus Q2 2023. I’d like to highlight the proximity format which was the focus of our expansion and which grew by 22.5% during this period. The increase was due to an increment in same store sales, excluding the calendar effect by 3.4%, as well as the opening of 51 new stores in the last twelve months, ten of which took place in the second quarter of this year.
Overall growth also had the impact of contratual effects with the closing of seven stores during this quarter order five extra Mercado stores as well as the rebalancing of the Aliados format. Both these trends were focused on optimizing our operations and increasing profitability. We should also highlight that during this quarter we saw a major seasonal impact seeing as Easter took place in the first quarter of the year, which led to a downturn in food retail demand in the month of April. Conversely, in the months of May and June, as you may see in the monthly growth in same store sales on the chart, we’ve reversed the decrease recorded in April with remarkable increases by 6.7% and 5.8% respectively. We also noticed some markets promoting strong promotional sales, especially in April.
Against this backdrop, we continued with our discipline in executing the plan to continuously improve our customer experience as well as the profitability of our operations. Pão de Açúcar grew by 2.7% in same store sales, mirroring significant improvements in the growth rates for May and June after a weaker April. As we mentioned before, this increase was driven both by the volume in sales as well as the increase in the average price of brand mix as well as in store traffic. The proximity format showed growth in same store sales by 6.9% with strong recovery from the previous quarters.
Stores opened from 2022 on continue to increase their contribution to the business with same store’s sales growth by two digits, which shows the quality of our expansion projects in the last few years as well as our investment strategy. We should also mention the remarkable increase by 2.8 percentage points in our market share for this format compared with that of small grocery stores in the Sao Paulo area. An extra Mercado same store sales increased by 3.4% and just as with the Pão de Açúcar brand, we saw growth rates recover in the months of May and June. These were also positive highlights in the perishables categories as well as complementary groceries.
Lastly, once again we saw significant increase in e-commerce sales which came to 15.6% with earnings by 524 million realize in Q2 2024, this channel’s overall penetration in total sales was by 12.6%, up 1.5 percentage points versus the same period last year. One pillar of our differentiation in this channel is our focus in perishables, which led to the high quality of our products as well as the picking process, all of that leveraged by the confidence our customers show and our brands. That way, 34% of our e-commerce sales was in perishables, up eight percentage points versus one year ago.
In addition to the accelerated growth, we have also been able to increase our profits with the digital channel, which this quarter saw its contribution margin grow to two digits, helping to dilute the expenses in our stores. In a 100% ship from store operation on slide ten, we saw the profitability measured by gross profit and adjusted EBITDA. The second quarter of 2024 shows once again the efficacy and consistency of the initiatives we’ve introduced over the course of 2023 as well as the first results of our 2024 projects.
As you can see in the chart on the upper hand side, gross profit came to R$ 1.3 billion with a record breaking margin of 28.2%, up by a robust 1.9 percentage points versus Q2 2023 and one percentage point over Q1 2024. As we’ve been saying in previous releases, we are sticking to our strategic discipline, evolving our profitability by realizing the gains via the projects we’ve initiated in 2023. We’d also like to stress in this result the beginning of the promotional efficiency project which, starting from our active customer base, targets the most appropriate offers to each profile so as to optimize customer experience and profitability.
We should also mention the increase in our retail media revenue which positively contributes to the increase in profitability. Our adjusted EBITDA came to 396 million with an 8.8% margin, reflecting the strong 2.1 percentage point increase versus Q2 2023. I’d also like to stress the increase in adjusted EBITDA over the previous year — year by 34.8%. Just as an illustration, the annualized adjusted EBITDA for the first quarter of 2024, historically weaker six months of the year for the industry, was R$1.534 versus R$1.305 in 2023 as a whole.
Moving on to slide eleven, we come to our financial performance with the net profit. As you can see on the chart to the right, in Q2 2024, we saw a R$100 million impact, referring to the non activation of revenue, tax credits and CSL over our losses in the period which we adjusted. By comparison with the same period last year when a larger share of these credits was activated. Adjusting this effect, the net loss would go to 272 million rise in Q2 ‘23, or from R$272 million in Q2 ‘23 to R$173 million in Q2 2024, an improvement by R$95 million.
Lastly, in Q2 2024, the net loss of the discontinued activities was R$60 million, largely impacted by the labor contingencies with extra hyper that most of you already know. Moving on to slide twelve, we see the managerial cash flow for the last twelve months. In this period, we generated free operational cash flow of R$272 million R$498 million improvement versus the LTM that ended in the second quarter of 2023.
As you can see, the higher result stems largely from the larger adjusted EBITDA pre IFRS 16. Considering the payment of rents and the smaller CapEx, the cash flow after the sales of assets came to R$1.8 million in these twelve months, impacted largely by the sales of non-core assets and our follow on offering, we should mention that this result includes a non recurring cash outlet of R$133 million relating to the Accorda Paulista in Q2 ‘24. We should also reinforce the R$208 million improvement in the net financial cost, largely the result of the significantly smaller debt that we’ve reported.
On slide 13, we have more details about our reduced debt. As you can see on the chart, we reported a decrease by R$1.2 billion in our net debt between the second quarter of 2023 and the second quarter of 2024. This was a result of the positive effects that I mentioned in the last slide with the generation of R$272 million in operational free cash flow, as well as the strong execution of our non-core asset sales and the funds raised during our follow on offering. The reduced financial leverage was also very significant.
We went from leverage considering the adjusted EBITDA pre IFRS 16 times of 10.6 times in Q2 to 2.8 times in Q2 2024. This result keeps the result on track for healthier and healthier leverage. Seeing as we’ve substantially improved our capital structure by selling our assets and with our follow on offering and we continue to evolve our operational results, we should also remember that this quarter we’ve concluded the sale of our corporate headquarters and announced the sale of our gas stations operation, concluding the non core asset sales for the company.
Cash from the sale the sale of post of gas stations will also come in over the next few quarters, helping to further reduce our leverage and that includes the cost of CDI plus 160 basis points. This was a transaction that ended at the end of July and was reported as a consequential asset operation.
On that note, I conclude my presentation and open the floor for questions.
Question-and-Answer Session
Operator
[Interpreted] We will now begin our question-and-answer session. [Operator instructions]. Our first question comes from Clara Lustosa, cell site analyst with Itau. Clara, we will now open your microphone so you may ask your question, please you may proceed.
Clara Lustosa
[Interpreted] Good morning, everyone. Congratulations on your results, and thank you for taking our questions. We have two questions. First of all, I’d like to talk about the progress in your gross margin, more specifically, about the latest initiatives with retail media, as well as the promotional sales project. Could you add a little bit more color about how much these projects have contributed to the margins we’ve seen this quarter? And if you could also guide us through at what stage in the process you are. I know that you’re still in the early stages, but if you could also qualify that and also talk about the potential you see for these projects, that would be the first question.
And the second is a quicker one. The deductions as a percentage of gross sales, we see that they have come back to normal, but they are still below the levels we saw last year. How could we think about this line? Moving on is this a level that should be stabilized now? We know that there are fluctuations quarter by quarter, but we just wanted some help with our modeling here. Thank you.
Marcelo Pimentel
[Interpreted] Thank you, Claire. I will take your first question and then turn over to Rafael for the second. So, with regard to the gross margin, I think it’s important to stress, Clara, that this comes with a continued improvement. So what we would like to underscore is how important this continues, this continuous movement is. So we are building on a very solid foundation, so we’re not seeing very dramatic peaks or troughs. What we could talk specifically about retail media and promotional efficiency. These two are strategic projects for the business, and as you very well said, they are at very different stages of maturity.
So when you look at retail media, this is a project that’s further along with clear contributions to the business. And just to add some context, the contribution from retail media this quarter was already three times the equivalent to what we had in the same quarter last year. And what retail media brought to us during these first six months is already more than what we had in 2023 overall, and the process is still ongoing.
As you may remember, we’ve talked before about the purchase of the CDP tool. We are now in the process of leveraging this tool in a more clear way, meaning we are bringing more customization in our interactions with customers. So virtually 80% of the entire digital marketing push is now involving the CDP, which has allowed us to have some progress when it comes to exclusive campaigns.
So campaigns, first of all with Pound Jasuka, where brands will have their launches exclusively within Pão de Açúcar, and also the progress by over two, nearly three screens that we’ve already installed in our stores, as well as the personalization of push notifications according to the customer’s purchase behavior. So we’re speaking to the customer precisely about what’s relevant to them. This adds more assertiveness to the business, which is why we’re seeing this substantial increment in the participation of retail media.
And what we expect is for this project to continue growing and for this channel to continue growing when it comes to the contribution to gross profit and gross margin, not only the next few months, but we actually believe this is a project that will continue to progress in the next few years. As for promotional efficiency, this is a project that’s in earlier stages than that of retail media. We’re already seeing gains in the categories and stores where we’re running the pilot. And now, as of the second half of the year, we will roll them out to the rest of the chain. So it’s still a smaller impact, but we tend to notice it more clearly starting in Q3 and Q4, when this project will begin to be rolled out to other stores.
Rafael?
Rafael Russowsky
[Interpreted]. Thank you, Clara. So I’ll answer what I can right now, which is this. As you know, we had a higher impact from these credits in the first quarter with these two lines. In the second quarter, we see a reduced impact from them. What we believe is that from now on, we will probably get closer to our historical level. We will come to a more normal level, but the impact that we see this quarter is much closer to what we have done historically. So this is what I can tell you right now.
Operator
[Interpreted]. The next question will be asked by Irma Sgarz, a sell-side analyst from Goldman Sachs. Go ahead. We’ll now open up your microphone so that you can ask your question. Go ahead
Irma Sgarz
[Interpreted]. Thank you for taking our question. I would just like to confirm something. Considering the top line and your revenue growth, obviously, it always depends on some macroeconomic factors, but just like to understand how much you think can still be done to generate additional growth and how much CapEx you would require to refurbish stores? I’d also like to understand your take on this dynamic between CapEx maintenance and top line growth. And obviously this also impacts how much you can generate in margin increases through operational leverage.
So I would just like to confirm the — is it fair to believe that this cut in SG&A for efficiency has already taken place? Or, and will it now depend more on improving the top line? I don’t know if my question was clear, but that’s what I wanted to ask. Thank you.
Rafael Russowsky
[Interpreted]. Thank you, Irma. I’m going to try to answer your question, but let us know if I missed anything. So, about expansion specifically should share with you our vision for our future investments which impact our top line growth. We’re splitting this into three different points.
First, Pão de Açúcar store refurbishment. So our aim is to refurbish Pão de Açúcar stores, which are great sites in Sao Paulo. They would start as a priority, especially in stores that had become outdated and depreciated. So this is already a part of our invested CapEx and we will continue. We don’t expect to change our CapEx level for this year. So we’re going to continue refurbishing stores in order to have more productivity per square meter after the refurbishment.
This is what we have been seeing in all the stores we’ve already refurbished and we’ve done a couple of dozen stores. So it goes from the layout from the front and then reorganizing the layout, changing categories, focusing on perishables. And after these refurbishments, we see better margins and profitability. So our first focus is to invest in refurbishing Pão de Açúcar stores.
Secondly, what you’ve also seen to expand our penetration of e-commerce across all of our stores. So you have seen a higher penetration, reaching record levels this quarter. And we expect to continue having this penetration and increase it gradually. But once we can make this channel profitable, we are now very committed to expanding it. Not only through the supermarkets, which have been our main focus thus far, but also by expanding and opening digital points of sale through the Pão de Açúcar stores. So we also want to strengthen this growth in profitability through e-commerce.
Finally, our organic expansion strategy, it has been focused on proximity premium for Minuto Pão de Açúcar in Sao Paulo. This will continue to be our focus. We’ve mapped many remaining points in Sao Paulo that we believe match the best geo-location for Minuto Pão de Açúcar. We have a team working on this. You’ve seen this before.
We’ve communicated that in the last twelve months, we’ve opened 51 new stores, and we want to continue with this pace of expansion. So, increase in sales and increase in market has been achieved through these three channels, and we’ve seen a gain in market share in Sao Paulo of 0.6%. So this is a part of our strategy to regain relevance in Sao Paulo through the Pão de Açúcar brand, focusing on the premium banner.
On the other hand, as we’ve mentioned before, we’re continuing the effort that we started last year, that we started with the Pão de Açúcar brand for the extra banner. So now we’ve seen a 60% change in profitability with the extra banner, and we’re going to continue to develop it. So it’s going to add value to its contribution margins, whether it is gross margins or EBITDA margins.
So this will also be a great contribution regarding profitability growth. I spoke to someone yesterday, and this is exactly what we discussed. The beauty of what we’ve seen in GPA is that it was exactly during the non core asset sales project that changed our leverage drastically, that we also made a strong effort to restructure our commercial operations. So this reduction in leverage was not only because of this non core asset sale, but it came especially due to this maturity of our operation. And this will continue to happen in the future. It will continue to be very relevant, because the operation will start to be self sustainable, self sustaining.
And we are confident that this will put us in a very good position from now on to keep these same levels. We think that we have the opportunity to improve. We’re working hard on that. In expenses, we’ve had a reduction. As you know, our base zero budget was created in 2023, and it was replicated in 2024. So we are in line with it in the first half of 2024, and there’s still a lot to capture in the second half, were confident and were prepared to capture all of it.
So we hope to still show some improvements in this line. If I can add something to what Marcelo just mentioned, I want to say that our expansion is focused on proximity stores, especially premium stores. With regard to these stores, we have been systematically obtaining contribution margins above the contribution margins or the consolidated margin for the entire company.
So with each additional store, we have a marginal margin increase than what we have done in our consolidated figures. So that’s very relevant. Another important point, and I think Marcelo mentioned this, is that we are executing the base zero budget projects. They’ve been giving great results and they also impact our margin, not by reducing our SG&A per se, but by increasing our margin, especially with our retail media project, which is a business that has very high margins. So on one hand, our cost is set. We still have some initiatives to reduce it, but we have an incremental revenue increase with very big margins. So this should also push our margins up in the next quarters if everything goes according to Plantain.
Operator
[Interpreted]. Thank you. The next question will be asked by Denis, a cell site analyst from XP. Go ahead, sir.
Unidentified Analyst
[Interpreted] Good morning, everyone. Thank you for taking my question first on the growth dynamics. You mentioned the promotional April, but how did that happen? Did you have one off promotions? Did you follow specific formats? We just want to understand why this specific month was more impacted by this. I understand that there was also Easter as a comparison, but since you mentioned the competitive environment, I’d just like to understand why it improved so much and what we should expect for the next months? If you can give us an update on the competitive scenario, that would be great.
My second question is in terms of cash generation. In fact, you have been able to deliver on deleveraging the company, especially with your operational improvements. So congratulations on your profitability for this quarter. But I’d like to understand when your opponents or when negative factors will start to affect you, like labor disputes. Although we’ve seen a reduction in these contingencies, they still affect your profit and cash generation negatively. So what should we expect and how will it impact your net debt? Thank you.
Marcelo Pimentel
[Interpreted]. Thank you, Danny. So about this growth, I’ll be very clear. This was a one off. So maybe the easiest way to say this is that actually April was the exception and not the rule. We had the Easter offset by a month, and there was also a reduction, a cool down after Easter, especially in early April, and then two weeks that were higher. So since people invested a lot in purchases during Easter, and that was during the last weekend of March, this obviously caused an impact in the beginning of April. The fact is that this was felt by the entire market, and the market was very aggressive in promotional initiatives, especially focusing on the top line.
We, on the other hand, made a conscious decision of sticking to our value proposition, especially focusing on premium clients. So we didn’t get into this price competition that was created, especially in early April, but that also took place throughout the entire month and we chose not to get into it in order not to create confusion for the client’s value perception. And then in May and June, we went back to normal levels.
We saw that we had very healthy months, then across all banners, we didn’t see that effect. Another point I’d like to highlight is that Pão de Açúcar is protected by Sao Paulo in general. So we’ve seen that gain in market share of 0.7%, which has been delivered. So we believe that this is much more of a one off thing than a reoccurring factor.
Rafael, do you have anything to say about cash generation?
Rafael Russowsky
[Interpreted]. Yeah, I think there are a couple important points, Danny, that we should stress with regard to the work that we’ve been doing. One of them is our CapEx reduction project. We’ve been telling the market that we would like to deliver something around 3% of revenue within CapEx. And we have that table. In our release, we saw a significant reduction when we look at the last twelve months, from R$ 956 million to R$ 763 million. So R$ 213 million or R$ 203 million, that leaves us absolutely on track to deliver on our plan over the course of the second half of the year. So this is an important point when it comes to preserving our cash in terms of leaving the company’s finances in a more stable place.
As for non recurrent points, I think it’s important to stress the fact that we’re already starting to see, and also very substantial improvement in those offenders which are those not really connected to our business anymore. And by that I mean especially the labor disputes relative to extra hyper. Last year, as we’ve discussed at length, with the market at large, we had significant debt by nearly R$ 500 million on this line.
This year, we expect that figure to be much lower. But you can see that more clearly when we look at that table that we included in our release, showing our cash flow, we’ve consumed R$ 175 million of cash flow. But it’s important to remember that this quarter, because of the Accorda Paulista, which was the agreement we entered into to reduce our contingency expenses with the state of Sao Paulo, we purchased a pregatory letter to reduce our contingency, and with a down payment that had to be made in cash.
According to the law that governed this agreement, we spent R$ 133 million. This is obviously a non recurring and one off. So if you look at those R$ 175 million and deduct that R$ 133 million, which really was a one off relating to the specific event, we will be talking about a cash consumption of no longer R$170 million, but more closer, more closely, or closer to R$ 40 million. So we’re starting to see our generation cash consumption in the next few months be more normalized. I don’t want to speak more than that, so that I don’t give you any guidance, but I can tell you that we’re on the right track for the next few quarters.
Operator
[Interpreted]. Thank you. Our next question comes from Iago Souza, sell site analyst with Genial Investimentos. Iago, we will now activate your microphone so you may ask your questions. Please. You may proceed.
Iago Souza
[Interpreted]. Good morning, everyone. Thank you for taking my question. We have actually two questions. The first has to do with general and administrative expenses. I just wanted to understand a little bit better what led to the increase in that line? And should we consider this level a proxy for the next few months, or was it one off? And my second question, I actually wanted to explore something that we’re already seeing in food retail, which is installment payments. Are you using that strategy? How does that work within Pão de Açúcar? And if you don’t, would it make sense for Pão de Açúcar to monitor that? If food retail begins to adopt that strategy more commonly, would that make sense for you?
Marcelo Pimentel
[Interpreted]. Well, thank you, Iago. I will answer your second question and turn over to Rafael for your second one. But I can tell you that, no, it doesn’t make sense to us. We have a different, a different customer base, and it’s very different for us to offer that than it is for our competition. What it makes sense for us with our card, especially in Pão de Açúcar, is the type of customer that uses the card to have the special benefits offered by that card, especially in premium categories within our stores.
And I’m talking about wine, special cheese, and even our white label, where as a customer, you have several benefits and discounts by using the car rather than the need to pay their purchases and installments, which is why we do not feel the need to introduce installment payments in our operations.
Rafael?
Rafael Russowsky
[Interpreted]. Thank you, Marcelo. Well, Iago, I would underscore what Marcelo said, and I’d also like to say that it was cash and carry stores that started with the adoption of installment payments because it makes sense for their business. And remember that many customers of those, of that business are those guys that purchased for resale. But that’s not the case for our customers. So we do not, that inventory cycle and our business show no adherence to this type of sales leveraging device.
So we do not plan to adopt that strategy in our business or in our stores. As to the expenses that you saw increasing in the SG&A line that really is non recurring and has to do with specific it expenses, we are making several changes currently to our IT infrastructure, which was essentially a requirement that we had to fulfill to enter this new process with the many changes that we’re making. So, simply put, this was a cost that we had to bear to make a change in our system.
And we chose to include all of that at once in our bonus regime, especially because this was a quarter where we had an extremely positive result and we decided to really get out of the way, something that we knew eventually we would have to do. So this is largely connected to our IT operation, and we should not see this recurring in following quarters.
Operator
[Interpreted]. Thank you. The next question comes from Felipe Reboredo, sell site analyst with Citi. Felipe, we will now open your microphone so you may ask your question, please. You may proceed.
Felipe Reboredo
[Interpreted]. Good morning, Mr. Pimentel and Rafael. Thank you for taking your questions. We would like to understand the company’s vision about extra for the next few quarters. You had already said that the idea was to be a bit more competitive with Ikesh and Kerry stores. We wanted to understand whether you feel like your strategy has been accurate and should we expect any changes with the extra brand for the next few quarters?
And another point that would be interesting for us would be to understand your view with regard to the company’s leverage, especially thinking about ’24 and ’25. I don’t know if you have a long term strategy, and if you do, that would be interesting for us to understand that too? Thank you.
Marcelo Pimentel
[Interpreted]. Thank you, Felipe. With regard to extra, as we’ve mentioned a few times, especially now in the first half of the year, we have been talked about, have been talking about what we did with Pão de Açúcar in the past. So we reviewed the entire assortment, reduced the number of non productive items, meaning items with over two or 300 days on the shelves to really make more room for products whose demand is higher. And we’re starting to see, and this quarter was an example of that higher growth within this store brand.
Now, one thing that’s interesting to say, our prospectus for this to continue is, first of all, we’re already seeing a decrease in expenses for the entire brand, extra brand, which reflects in improved sales, which is what we’re already seeing. And second is that this assortment, when we compare with the competition, and I’m speaking specifically about cash and carry stores, an extra grocery store or extra supermarket will have on average, twice the assortment of a cash and carry store. So you have four to 5000 more SKUs in assortment than you will see in a cash and carry by nature.
Obviously, this offers a completely different purchase experience and a completely different assortment of products to these customers. Third, we continue to see progress in our customers purchase behavior, which is more connected to continued purchases, as opposed to heavy purchases, especially for customers who live in smaller real estate. So we have benefited from that with extra. Path that’s been extremely positive is the penetration of digital in Mercado Extra.
So if you think that last year that rate of penetration was close to two or 3%, it is now closer to 8%. These are new sales, profitable sales, which we want to continue growing. So that extra continues to have not only the same level of penetration that we see in the entire company, which is close to 12%, but we expect it to continue growing. So the beauty of the work that we’ve been doing is we are growing our sales and growing your profitability at the same time. So extra also has a margin, delta that’s different from what it had in the past. And we want to keep that.
When you talk about strategy for the future, as it’s been made clear to everyone, our strategy is to focus on our premium stores. This does not mean that we plan to move away from extra. That’s not the path. We believe that extra has a role to play in the portfolio of our stores that we have to offer, actually to focus on an audience where by increasing sales and increasing profitability, it makes perfect sense to keep those stores. So we do not expect any move in terms of changing this brand. We actually want to move forward in the accuracy of our strategy.
As for our operations, there are always store closures, and we’re always monitoring the store’s performance and profitability. And when it comes at a point where we believe those stores are no longer feasible, we make the decision to close and shut them down with no sense of attachment. So once we feel that that has to be done, we tend to do that as fast as possible.
And obviously we cannot give you any guidance, but we believe that our leverage will continue to decrease. This is something that we’ve worked on, both by selling our non-core assets, as we mentioned, but also by improving our company’s operational results, all of which continue to take us on a path that will translate into lower leverage. Of course, we cannot go into detail about how much per quarter that will be.
Operator
[Interpreted]. The next question comes from [indiscernible], cell site analyst with Safra. [indiscernible], we will now open your microphone so you can ask your question. You may please proceed.
Unidentified Analyst
[Interpreted]. Good morning, Rafael. Good morning, Mr Pimental. We have two questions. First, about the Aliados format and what do you expect for next year? Maybe in terms of growth. And we know that the focus will be on profitability. And we also like to understand a little bit about the sales performance in June. Was it closer to what we had, what you had in May and June? And maybe following up on the question about your cash flow and other expenses in the last twelve months, we have close to R$ 900 million in this line. And we understand that you can’t give too much color, but we know there was R$ 130 million in judicial deposits. But what would be a recurring level, or what should we expect moving forward from this line?
Marcelo Pimentel
[Interpreted]. Good morning, [indiscernible]. With regard to our allies, I think that we came to a point of stability on this channel, and the focus was largely on reviewing the mix of products so that we can have a better productivity mix. And that’s what we’ve been doing. And in the second quarter, it has come in line with what we had planned for the gross margin at large, contributing to the company’s gross margin overall.
So we’re happy to see that we’ve come to the right mix as to the future. We are working on that, looking especially to 2025. But I, it has not come time yet for us to give you any guidance in that sense. We do not believe, however, that we should see a sudden increase. We want to make sure that this will be structured growth and make sure that we do not exchange sales for profitability. So if we do not have a model where we can increase sales with productivity in the perfect way, we will keep it stable so as to not affect the company’s productivity.
July was, I would say, an average month. It was not like April, but it was also not like May and June, especially. PA has been hurting a little bit with the vacation period, but this is something we see every year. This is a month where our customers leave Sao Paulo, and we rely heavily on Sao Paulo. So this is a trend that’s expected largely by us that takes place every year. That being said, the last week was when most schools went back from vacation, and we’re already seeing traffic increase on stores since last Friday, which confirms our opinion that people had left for vacation and they’re now coming back and so we’re moving back to regular standards as well.
Would you like to talk about our cash? Rafael?
Rafael Russowsky
[Interpreted]. Okay, so, Taliz, let me give you some more color. This is known, this has been discussed with the market many times, that the biggest offender in this line has been labor contingencies related to extra. To give you an idea, out of the R$ 900 million, R$ 500 million or nearly R$ 600 million, a bit under R$ 600 million actually, is for labor contingencies. So this is really the main offender. Now, What’s the good side of this bad story? The good side is that we sold extras in early 2021, excuse me, early 2022, and it has now been two years. So no longer can new lawsuits come be made against the company. So of course, we’ve been keeping track of all of them.
There was a growth throughout the last two years. But again, the good side is that right now we’re starting to see a reduction. Actually, there are basically no new lawsuits, maybe just one or two, maybe because they were on leave then, and that gave them some additional months to file a suit against the company. So this number will no longer grow and will actually tail off. We know that if we look at the company’s history, that this will start to go down significantly from now on. Besides labor contingencies, we also have some tax deals.
So, for example, for the last twelve months, we have some that include the first quarter of this year. So again, as I mentioned, we had R$ 133 million related to the Paulista deal, which is a one off. It’s non-recurring, and we have about R$ 100 million related to project costs, sales, serious backs. And we’ve been speaking to bankers and attorneys. These are projects that have been executed which were extremely relevant for the company. But as we announced, this non core asset sale plan is now concluded. So this R$ 100 million in expenses related to projects will also be non recurring. It will not be repeated from now on. So our conviction is that this figure will go down across the next few quarters.
Operator
[Interpreted]. The next question will be asked by the Andrew, a sell-side analyst from Morgan Stanley. Go ahead, sir. Thanks for the question.
Andrew Ruben
[Interpreted]. I was hoping you could detail what you’re seeing in terms of consumer conditions overall. If you’ve evidenced any trade up or trade down within your stores, the acceptance of inflation and some of the more inflationary categories, and then just if there was any gross margin mix to consider? I know you mentioned proximity, but any other mix factors could be helpful. Thank you.
Marcelo Pimentel
[Interpreted]. Obregado, Andrew. So about the consumption market, of course, with the different banners that we have, our premium market is much more resilient when it comes to the mix. So we still see our customer base, and we’ve mentioned this in our report, that it gained three to four additional share of wallet points with premium clients quarter on quarter last year. So we see that these clients remain active.
They are consuming, and they are consuming premium categories like wine, special cheeses, coffee, olive oil, meat, and especially processed high end goods. So we continue to see this to be very active. And despite the current moment, we don’t see a trade down behavior in the premium banners, in lower end banners. Of course we see this happening, but regardless of that, according to our price policy, we have been able to offset it and still gain share and still advance, especially when it comes to food. We are keeping a close eye on the market.
I think the numbers, especially when we look at the overall market, are higher than the average. But we do need to pay attention so that any changes can be seen. We haven’t noticed any changes, but of course we have been paying attention.
Operator
[Interpreted]. The next question will be asked by Gustavo Frattini, a sell-side analyst from Bank of America. Go ahead.
Gustavo Frattini
[Interpreted]. Good morning. Thank you for taking my question. So maybe excluding April, which as you mentioned was an exception, how much have you been able to pass on food inflation to your customers? And what has been the difference between your top line in inflation and in share?
Rafael Russowsky
[Interpreted]. Hi Gustavo, I’m sorry, I can’t answer your question because inflation has been very different across the different categories. So there is inflation with some categories, but we also see at some times during the quarter a deflation in some categories. So, for example, Meat has been a category that has been reducing in price. So with regard to price, we’ve been focusing on our strategy. We’re focusing on the premium market. We’re monitoring prices on a weekly basis.
Our value proposition and cost benefit is compared to our direct competitors. We have a promotional efficiency project which has allowed us to allocate our pricing investments correctly. So we have some categories that have a little bit more flexibility than others, but especially when it comes to fruit and vegetables. Fruit especially has been significantly impacted by inflation. In this case, we pass it on to the customer, but we have to pay attention to it so it doesn’t become too distant. So it’s about keeping an eye on prices, the competition, but especially the customers.
We do this separately for Mercado extra, where you can look at product size, assortment, cost benefit for the client. And in Pão de Açúcar, it’s important to work with our suppliers, because here we cannot compromise on product quality. And this is measured especially with perishables. We need to perfect the supply process, ensuring that we have the right orders in the right stores. And this should not impact our performance. And this is more important than anything else when it comes to food categories, you have to fight inflation, especially in perishables, but you cannot downgrade the products that you’re selling.
We’re not going to do that in Pão de Açúcar and that’s why we’ve been keeping a close eye on it. But for some of them, or for most of them, we can pass on inflation. But this doesn’t always happen completely. An example is our margin gains and it shows how much we’ve gotten this process right.
Operator
[Interpreted]. Great. Thank you. The next question is going to be asked by Guillermo Villela, a sell-side analyst from JPMorgan. Go ahead, sir.
Guillermo Villela
[Interpreted]. Hi, everyone. Thank you for taking my question. I’d just like to ask a follow up question about your comments on your competitors. You mentioned that your market share grew in the city of Sao Paulo, but when we look at the press release nationally, your market share is flat, but it has been decreasing quarter by quarter. So how is this part of the market share performing this quarter?
Marcelo Pimentel
[Interpreted]. Thank you, Thank you. Guillermo. It is stable. It’s important to be transparent here. We have to refer back to our strategy looking forward. This is something that we will continue to do. If you look at the strength of Pão de Açúcar, the percentage in sales, and especially the results we see in Sao Paulo, it shows that we need to continue focusing and investing in Sao Paulo through organic growth with Minutu Pão de Açúcar, but also by refurbishing Pão de Açúcar stores and the last mile digital logistics.
It has been growing and of course, Sao Paulo is disproportionately higher. So we see that our presence is being consolidated in Sao Paulo. As a reminder, not only does it dilute costs, but it also has the highest levels of profitability. It’s by far the best city. So we want to anchor Pão de Açúcar in Sao Paulo. And the investments we need to make in refurbishments and new stores outside of Sao Paulo is still very small, if not zero.
So of course we are going to see Sao Paulo strengthening itself in comparison to other cities in Brazil. So this is what we expect to see over the next quarters.
Operator
[Interpreted]. Thank you. The question-and-answer session is now closed. We will now turn over to Marcelo Pimentel for, for the company’s final remarks.
Marcelo Pimentel
[Interpreted]. Thank you so much, everyone, for joining our earnings conference. I am thrilled with the figures that we reported at the end of this first half of the year. There have been a lot of operational progress, a result of the consistent work we’ve been doing since the beginning of 2022, and also a result of our in managing our profitability, which we’ve handled in a very consistent and responsible way to maintain a healthy business.
Alongside the accelerating performance, we are closing and delivering a very well structured plan to reduce our debt level, which has allowed us to move from a 10.6 times leverage to 2.8 times this quarter versus Q2 2023. This is exceptional, and I only have my team to thank for that. And we are now working from this time on to work so that we can deliver our turnaround project. We have a lot of work to do, but looking to the future, we want the company to be well prepared and well structured to move forward with the new things.
I’d like to take this opportunity to thank the entire team for their work, and wish everyone an excellent day. Thank you so much.
Operator
[Interpreted]. This conference is now closed. The company’s IR team is available to answer any outstanding. Thank you. so much for attending and have a great day.
