Companhia Brasileira de Distribuicao SA

BOVESPA:PCAR3

Q2-2025 Earnings Call

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to GPA's Second Quarter of 2025 Earnings Release. [Operator Instructions] Please note that this video conference is being recorded and will be available on the company's Investor Relations website, where you can also find a complete material, it's also possible to download the presentation from the chat icon. [Operator Instructions]

We highlight that the information within this presentation and statements that may be made during the video conference regarding GPA's business outlook, operational and financial projections and goals and our beliefs and assumptions of the company's management as well as information currently available. Forward-looking statements are no 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 occur. Investors should understand that general economic conditions, market conditions and other operating factors may affect the GPA's future performance and lead to results that differ materially from those expressed in such forward-looking statements.

Joining us today are GPA's CEO, Marcelo Pimentel; and CFO and Investor Relations Officer, Rafael Russowsky. Now Marcelo Pimentel will begin the presentation.

[Marcelo Pimentel, executive]

Thank you. Good morning, everyone. Thank you for being here and for your interest in joining our presentation of the results of Q2 of 2025. I'd like to start by noting that this period was marked by a more constraint consumer environment due to high interest rate and the impact of food inflation, especially in May and June, reflecting the market slowdown. Even so, I highlight that our ability to respond swiftly and accurately implementing operational adjustments and acting strongly in cost control. The results that we are presenting here reflect the efficiency gains and the resilience of our value proposition with significant progress in a number of KPIs that underpinned our growth.

On the first slide, I highlight our sales performance in Q2 of 2025, GPA posted total sales of BRL 5.1 billion with a growth of 5.8% vis-a-vis Q2 of 2024. This result was partially impacted by calendar seasonal effects, especially the shift of the Easter holiday to the second quarter. Even excluding the seasonal effect, our same-store sales grew 5.1%, reflecting the resilience and consistency of premium business model. The Pão de Açúcar banner, which accounts for [ 50.2% ] of total sales continues on a solid growth path in same-store sale up 6.5%, underscoring customer loyalty and the effectiveness of the business's value proposition. During this quarter, we also consolidated the premium [indiscernible] project with the renovation of 11 stores, offering a more exclusive experience with improved services, assortment and infrastructure.

Extra Mercado also grew 4.8%, mainly reflecting an increase in average price and stable volumes. The result already includes the positive effects of the assortment review and category management project launched last year, as well as success of promotional actions, which are key to maintain brand appeal in this competitive environment. Since Q4 of 2024, we have revamped 83 extra stores, focusing on strategic categories, such as butchery and bakery. The proximity for maintained a positive trajectory with 16.8 growth in total sales, and market share gains with stability in same-store sales. This result was driven by opening -- by the opening of 59 new stores in the past 12 months, 8 of them in this quarter alone. These results are directly linked to the progress in our customer pillar, which also deserves mentioning.

We achieved a significant market share gains, both in the premium segment of 1.1 percentage points and proximity format of 0.8 percentage points vis-a-vis last year, reflecting strengthening -- strengthening of the value proposition of our main banners Pão de Açúcar and Minuto Pão de Açúcar. These results are the outcome of ongoing actions such as reinforcing team training, store refurbishments and assortment improvements which rate our NPS from 52 points in Q2 of 2022 to 82 points in Q2 2025 with progress across all banners and real gains in price perception, checkout waiting time and product availability.

Customer loyalty has also made progress -- the share of wallet of premium customers grew 1.8 percentage points vis-a-vis the same period last year, driven by the Pão de Açúcar Mais loyalty program, which posted a 10% increase in the number of Black tier customers, the program's highest category.

Private label products also play a strategic role within this context as a competitive differentiation for loyalty, the market share of 25.3% in total sales in this segment in Brazil. These products are present in 8 out of every 10 shopping baskets. Private label customers shop well 2.4x more often than those who do not purchase them. In Q2 of 2025, private label penetration and GPA sales reached 22.6%, growth of 0.2 percentage points from Q2 of 2024. We remain committed to our digital strategic pillar. During Q2 of 2025, the channel continued on a strong growth trajectory, reaching total sales of BRL 609.5 million, up 16.3% year-over-year and accounting for 13% of total sales. This is a 1.1 percentage point gain compared to the previous year. This performance came with high pre-IFRS 16 EBITDA margin of 9.9%, reflecting efficiency gains initiated in Q4 of 2022 and reinforcing the channel's profitability and scale potential. I highlight the significant progress of the proximity format in digital with a 1.5 percentage points increase in penetration, underscoring its growth potential in this model.

Multichannel customers have 3x the shopping frequency and 4x the average ticket compared to single channel customers, demonstrating the strategic value of channel integration. Even with the fast expansion pace, we maintained operational excellence in delivering perishables, a competitive differentiator and an important foundation for loyalty, which accounts for [ 35%. 7% ] of the channels own sales in the quarter. We're going to talk about expansion, our fourth strategic pillar between 2022 and the first half of 2025. We focused our expansion efforts on the premium proximity format under the Minuto Pão de Açúcar banner. During this period, we opened 230 new stores out of the 300 planned, including 177 proximity units 13 supermarkets and 23 conversions from hypermarkets to supermarkets, following a strategy focused on more affluent neighborhoods in the city of São Paulo. We have made progress in this channel.

Now stores opened since 2022 not only exceed the margins of the previous unit, but also present average profitability higher than the company's consolidated results, reinforcing the soundness of our growth plan and the consistency of the business model.

From the second half of 2025, store openings will slow down. Considering the significant progress already achieved in the first phase of the expansion and a more challenging macroeconomic scenario marked by recent interest rate hikes. Still in profitability, we highlight consistent quarterly progress reflected in the solid gross margin level of 27.4%. This result of continuous efficiency gains across all banners and significant SG&A efficiency gains with a 1 point percentage point dilution year-over-year, contributing to the growth of the adjusted EBITDA margin reaching 9% in the quarter. And this is growth of 0.2 percentage points from Q2 of 2024.

Next half, I will go into more details, and we'll talk about profitability. In this final slide, I present the highlights of our ESG agenda. On the environmental front, through preventive and corrective maintenance actions, we reduced Scope 1 and 2 greenhouse gas emissions by 2.3% equivalent to over 3,000 tons of CO2 avoided, strengthening our commitment to the target to reduce by 60%. And by 2030, in diversity and inclusion, we were recognized for the third year as one of the best companies and diversity action, highlighting the first place in engagement with the value chain awarded by the business initiative for racial equality. We've hired over 400 refugees and immigrants. We advanced programs for black employees with more than 100 participants and awarded 600 English course scholarships. We also released our annual sustainability report, consolidating our initiatives on the topic. And finally, we celebrated the recognition from Merco ESG responsibility, which ranked us among the 100 most responsible companies in Brazil.

This concludes my remarks, and now I turn it to Rafael for financial comments.

[Rafael Russowsky, executive]

Good morning. Thank you very much, and welcome, everyone. On Slide 8, we highlight the progression of our profitability through the growth of gross profit and adjusted EBITDA. We've been working consistently on projects to increase the company's efficiency, optimizing costs and expenses, always focused on getting adapted to market changes without losing focus on the progress of margins. The results of the second of 2025 shows that we are on the right track. Even with a market that showed some signs of cooling down in the months of May and June, we were able to be competitive and at the same time, maintain the positive trajectory of obtaining operating gains in EBITDA margin. As shown on the chart above, gross profit reached BRL 1.3 billion in the second quarter of '25, with margin of 27.4%, keeping the high level obtained after several initiatives, which were implemented in recent quarters.

Compared to the second quarter of '24, there was a reduction of 0.8 percentage points, reflecting higher comparative base. I would like to emphasize that we are convicted that our gross margin is fully aligned with our plan, confirming the fact that we are on the right track. We still have a robust pipeline of strategic initiatives, including reducing breakdowns, improving commercial margin, expanding retail media and optimizing the store network, which reinforce our commitment to continuous evolution of profitability, focused on sustainable and long-term results.

The chart below shows that adjusted EBITDA totaled BRL 420 million in the second quarter of '25, which means growth of 6.1% over the previous year, margin of 9%, gain of 0.2 basis points compared to the second quarter of '24. This performance was all possible, thanks to the strong work we have done in managing the company's expenses. Since the second half of 2022, we have focused our efforts on several initiatives to gain efficiency in SG&A such as zero-based budgeting cycles, renegotiation of contracts to suppliers and leases in addition to most recent redesign in our administrative structure. All these measures focused on adapting the company to its new sites, have more agile decisions and simplify the process such as intensive use of technology.

In the context of stores, we continue to have sales expenses under strict control, but always maintaining our value proposition of our brands. As a result, we present dilution of 1 percentage point in SG&A compared to net revenues over the second quarter of '24. Most of efficiencies were captured from administrative expenses. Now moving on to Slide 9. We can see the financial performance of net income. As shown on the chart, in the second quarter of 2025, we recorded net loss from continuing operations of BRL 176 million, a significant reduction of 35.5% over the loss of BRL 272 million reported in the same period of 2024.

This improvement shows the positive evolution of operating results as highlighted in the previous slide. And at the same time, reduction of impact of other operating expenses, which resulted from lower impact of tax provisions. Finally, in the second quarter of 2025, net loss from discontinued activities was $41 million, showing significant reduction of 32.2% compared to the second quarter of 2024. This performance reinforces the consistent progress in the process of reducing negative impact related primarily to discontinued operations of hypermarkets.

Now moving on to Slide 10. We present to you the managerial cash flow for the past 12 months, a period in which we generated operating cash flow of BRL 1.1 billion. This result was driven by significant improvement in pre-IFRS 16 adjusted EBITDA, which reached BRL 856 million, meaning -- or translated in significant growth BRL 222 million or 37.3% over 2024. In addition, we had efficient cash -- working capital for goods contributing a generation of BRL 235 million in the period, supported by [indiscernible] improvement in the working capital cycle compared to the second quarter of 2024.

Now moving on, CapEx totaled BRL 711 million, a slight increase of 1.9% over the same period. Despite this growth, we already see reduction in investments, in expansions, renovations and IT, which is a result of the maturation of our strategy. This is a trend that should be intensified in upcoming quarters.

As Marcelo highlighted, we will have fewer new stores being opened in 2025 and 2026. This decision shows our cash flow position in view of recent interest rate variations and the advances already achieved with the openings held between 2022 and the first half of '25. Now moving on to other operating expenses. We totaled BRL 687 million, maintaining the downward trend that I've been referring to in recent quarters. This result has been impacted by nonrecurring effects observed in the last 12 months. Compared to the previous period, there was a drop of BRL 201 million. It's worth mentioning that these last 12 months still reflect extraordinary facts, which totaled BRL 512 million, mainly related to tax agreements and tax lawsuits of Extra Hiper.

Finally, net financial cost totaled BRL 701 million in the last 12 months, increase of 8.5% over the same period. This growth reflects the increase in interest rates due to current selling rate over our debt. On Slide 11, we present in details the evolution of our financial leverage. As shown on the chart, net debt increased by BRL 835 million in the last 12 months, impacted mainly by extraordinary effects already mentioned in other operating expenses. It's important to highlight that a relevant part of these effects is associated with tax agreements. Even though they represent one-off disbursement, they have brought significant reduction in company's contingencies. Thanks to the discounts obtaining interest and fines. .

To close, pre-IFRS 16 financial leverage reached 3x in the quarter compared to 2.7x in the same period last year. We have been working not only operationally, but also on additional initiatives to accelerate deleveraging. As I mentioned, we are confident in the reduction of extraordinary expenses that affect our cash especially those related to discontinued activities. In addition, we continue to monitor and evaluate opportunities with nonstrategic assets that may contribute to this deleveraging process.

With that, we wrap up our presentation of results, and I would like to open for the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Larissa with XP.

[Unknown Analyst]

We have 2 questions on our side. Number 1, in the demand slow down during the quarter. What's your attention? And what have you seen from this trend onward. If we continue throughout July and the beginning of August, you can see some type of normalization. Now gross margins, we do believe that when we compare to 2Q of 2024, it was strong that although growing in pricing mix, the gross margin leverage, the gross margin still has been affected. So if you could give us color regarding what you've seen in the quarter's trend and what can we expect from here on?

[Rafael Russowsky, executive]

Thank you, Larisa. Now regarding the trend. What we've observed throughout Q2 was a strong April. We had a very successful Easter with market chain gains. In May and June, there was a certain slowdown in purchase mainly, as you saw in figures in the most popular banners that would be Extra and Mini Mercado Extra. A positive signal is that we've seen an improvement as of July and the beginning of August. It's too early to say anything. We are observing this very closely, but on the other side, and this is the full glass of the equation.

Our strategy of focusing on premium because the resiliency of this consumption remained aligned. Therefore, Pao de Acucar, Minuto Pao de Acucar banner mainly due to the expansion since 2022 has a performance aligned with the past showing the resiliency of this channel. Now regarding the gross margin, 2 points that I would like to highlight that impacted this comparison. #1 would be migration of Easter toward April this year. As a consequence, we've seen promotional action bigger than the average, because Easter seasonality is one of the main points of our calender. It brings a cash margin -- but the margin competitiveness is higher. And with the migration of the calendar, we saw an impact in the margin percentage.

Number two, precisely the slowdown in consumption in the most popular banners, Therefore, we had to be more competitive. For us, it's extremely important to offer to this customer base, a good cost benefit that maintains us in -- and a share gain and a customer gain scenario. There was a very slight reduction, but it was extremely strategic to continue doing what we're doing. Just another comment regarding the last point. We are always submitted to trade dynamics, as Marcelo explained, but with the drop mainly in SG&A. With this, we have flexibility and ability to be more reactive in more challenging moments. I would like to highlight the fact that although we saw a drop in gross margin during this quarter because of what Marcelo mentioned, as a benefit, there was a significant improvement mainly from SG&A. And therefore, we were able to deliver an operational and an EBITDA margin growing and robust for the sector.

[Operator]

Our next question is from Vinicius Strano from UBS.

[Vinicius Strano, analyst]

Now the inflation effect, if you could comment on how you see slowdown in food inflation. When we see sales, if you can give us color regarding categories where would you see more sensitive points? If you could talk -- you talked about investing in competitiveness in the most popular banners. Could you talk about price elasticity in this current scenario? How do you see this investment in price and volume? So what do you see from here on? And a more specific question when we see the growth revenue that was close to 6%, and net revenue, 4%. I would like to know if there is something that explains this effect? How do you see the situation from here on?

[Marcelo Pimentel, executive]

Now regarding inflation. A reality of this sector is -- well, this is a sector or an industry that has a macro assortment that you see inflation and the inflation in the middle of the way we've seen -- how we -- how coffee and other categories are communicated, beef or meat that are important for us, and we're suffering. And now we are seeing a slowdown -- a slowdown on the inflationary impact on these categories. On the other side, we've seen the deflation. This has helped us in terms of volumes, and there is a challenge regarding cash.

But the balance that we see for this second semester and now especially Q3, we see price stability with no major ups and downs. We also have a greater beef supply in the market that for us is extremely important because this is an extremely relevant category in our mix, and this has an important share of wallet in our customers' basket. So price stability, especially in premium cuts in our premium banners. Well, this is good news when we analyze the situation from here on when we see competitiveness. I believe that our current macroeconomical scenario where we have constant news. Well, now customers are sensitive regarding investments, especially when we see the mainstream customer base.

When we talk about Extra Mercado, Mini Mercado Extra. Within this context, we have focused on the strength of these channels. And we want to continue this way, be it with the butchery, bakery and that these are appealing categories in the store, and you complete the rest of the basket with good value propositions. Here, we have basic groceries, hygiene, cleaning, everything that the public needs. Now the advantage here is that Mercado Extra -- well, it has to be competitive spending per unit. Now the customer that is sensitive to expenses and budget, what we have seen in terms of behavior is a greater frequency in the stores with the average ticket and volume, which is lower. They come more to the store and they buy gradually. It is different than the past where they would buy in bulk in great quality and Mercado Extra offers this opportunity. Rafael, do you want to talk about the sales delta?

[Rafael Russowsky, executive]

This is simple. We had higher credits in the net revenue last year, and this proportionately dropped the revenue of this year. This is the difference that you observed. And this is what explains the figure that you identified.

[Operator]

Now Bob Ford from Bank of America.

[Robert Ford, analyst]

Congratulations for your results. And thank you for taking my question. Pimentel, what is your importance regarding changes in the auditing committee? What is your opinion and the opinion of the Board.

[Marcelo Pimentel, executive]

Bob, what a pleasure to talk to you. Always good speaking to you. Now regarding [indiscernible] pill, what I can say are facts. And the facts are that. This matter has not been part of the agenda, in the Board meeting, okay? This was not part of the Board meeting's agenda. This emerged through the media. Well currently, the Board has not discussed this matter. I do not want to convey my personal opinion, because this is something that pertains to the board and the shareholders, and they will approach it as soon as it's necessary. Regarding yesterday's events, I would like to outline a number of important points for everyone.

Number one is that the exit of the 2 board members from the Auditing Committee does not impact what the committee is doing. Number two, there is no need to replace them -- there is no need to replace them -- We are above the legal request and this is what our SEC requires regarding what is legal and regarding the amount of people that you need for a board, you need minimum 3 members and majority should be independent and one accounting experts. In our case, we've maintained 4 members, 3 are independent. And most of the independent members have accounting expertise.

And I would like to highlight to the group, the quality of our Board members and our auditing board members. We have [indiscernible] over 35 years of experience in the financial market. He graduated in [ UMG ] in economics, he's an executive and finance -- then he has Master's degree MBA through [indiscernible]. Now this is -- now also as he has diploma FG [indiscernible] is a member of our auditing Board. She is the -- she specialized in capital markets. She graduated in full MBI marketing, shareholders right and -- she also has a diploma and Board members.

She worked 18 years in the CTF. She is also an instructor for future boards and she's a coordinator. She was a coordinator of the government's office for 2 years. And the last with Mr. Bruno [indiscernible] Head of the Accounting Department of the University of São Paulo. He has a Master's degree. He has PhD. And he is a faculty staff in there. He also has a diploma in actuary science. He is a member professor and head of the accounting and accounting department from [indiscernible] from and he is also part of the committee from the CPC and accounting member of the working group made out by the CPC for the [indiscernible].

He's also a member of the fiscal board. And to everyone that is here, I would like to highlight the commitment of the company with transparency and how diligent we are regarding all of our processes. All our figures are audited by Big -- by independent Big 4s and we will continue doing this. I do understand, and it is a personal decision of certain members that the company will continue working with high corporate governance standards and committed to the accounting rule.

[Operator]

The next question comes from Victor with Itau.

[Unknown Analyst]

I just have a follow-up about food inflation. Have you seen any differences in terms of the industry at margin.

[Marcelo Pimentel, executive]

Yes indeed, especially in some specific categories. And now we have observed an increased flow of availability in the Brazilian market. This is going to be translated into lower prices for the end consumer. Competitiveness always benefits end consumers. What is happening as a macro perspective of economy, can end up leading to an overflow of products to Brazil and oversupply, which means that prices to our consumers. I don't want to go specifically into any categories because this is a sensitive topic of internal competitiveness, but we've already started observing some of our suppliers adjusting what they have according to what the inflation has been pointing to.

[Operator]

The next question comes from Ruben with Santander.

[Ruben Couto, analyst]

I'd like to know more about SG&A management and there were some comments in the release. But I'd like to understand more. Do you think there is still room to show more gain? You still have lots of projects for restructuring, internal restructuring base 0 budget. A number of factors that you've been alluding to for a while. In this quarter, this is something that -- so I would like to know what to expect for the year. I would like to ask for an update on the line of other expenses, contingency agreements. What is the volume? Or what's the number we would expect?

[Rafael Russowsky, executive]

Thank you, Ruben. Dilution of SG&A, we have had some impact over for G&A. As we showed in the previous quarter, we have restructured internally with significant reduction of headcount. That was done in the end of last year, which was done to reach efficiencies throughout the year of '25. And this is something which is becoming clearer as you could see. We have also had significant reduction of expenses related with IT, which was also very significant when compared over the second half last year.

This quarter, you can see the results of the reduction in headcount, something that we started at the end of last year, and now we are obtaining the gains from it. And we've had a reduction in our IT accounts. Concerning other initiatives or other activities that we have focused on improvement, you've mentioned some of them. We've been very strict on our base 0 budget. This is the third wave of base 0 budget. It has brought extraordinary gains to us, and it has been sold since 2022. And we've come across a number of additional possibilities and potential efficiencies.

The more we analyze the more we find, especially in the administrative area. Another important point is the fact that we've made a change administratively. I cannot give you many details here, but we've changed the procurement tool. It has implemented in the beginning of the this year. It has provided initial tasks with opening auctions and specific bidding processes for supplies we use in our stores, and also service for facilities. We've had a very positive result. It reached gains over 50% in some of those procurement auctions. Of course, it makes us very happy and also seems like good prospects for the future because we have indirect purchased BRL 4 billion of indirect purchase every year.

Any reductions can really impact significantly over this large amount of indirect procurement. We are paying close attention to that, and we are doing our best and using different initiatives to get more and more efficiency.

Concerning the line of others, I think you are making reference to the line of other operating expenses of our P&L. Let me show you what happened in this quarter. There was the activation of some indemnity concerning the amortization of over price. We had some issues concerning that in the past. All these actions are covered by the previous controllers of the company, Peninsula and [indiscernible].

We had settled BRL100 million last half, paid with tax credit with 1 of the specific suits. And we have the right to be compensated, because of these actions by peninsula and [indiscernible] had the initial investments in Pao de Acucar, BRL 100 million of these indemnification.

Concerning all the topics that were used for the BRL 100 million, we are talking about closing down stores, especially write-offs BRL 40 million related with that, BRL 30 million related with regulatory and tax contingency, which includes lawyers' fees for some of these contingencies and also miscellaneous cost of restructuring, including the one that I've mentioned of reduction of headcount.

Looking ahead, we expect at least in upcoming quarters to have something like BRL 40 million to BRL 60 million negative, because of all the restructurings that have to be made, closing down stores, for example, and some additional contingencies that we have had regularly, which impact this line you may reference to.

[Operator]

The next question comes from [indiscernible] with Morgan Stanley.

[Unknown Analyst]

Most of my concerns have been answered. But I would like to emphasize something that Rafael pointed out in his presentation about some of the initiatives to reduce the leveraging of the company. And you've talked about selling of noncore assets. If you could tell us a little bit more about how much you have in terms of amounts and other initiatives that you might have in mind to reduce leveraging.

[Rafael Russowsky, executive]

Thank you, Alexandre. Good morning. Yes, our main goal in the period that we currently are in as to reduce leverage. You know the work that we've been doing so far, but we are also focusing on other opportunities, other things that seem to be solid and would help us go into the deleveraging process or speeding it up even -- at the same time that we have improvement in our operating activities.

Unfortunately, I cannot go into specific details, but there are 2 to 3 significant transactions ongoing, and if we succeed, they would bring some hundreds millions to the company. And if so our commitment -- the commitment of the Board is that 100% of any revenues generated from non-core asset sales would be focused on debt reduction. We wouldn't use for anything, but reducing leverage of the company. In additional I would like to emphasize that when you look at our managerial cash flow which we presented in our release, there are 2 important lines there.

We still need cash one CapEx, of course, and we've been making investments primarily to take our stores at a good level, which is compatible with our value proposition. And at the same time, we have the other expenses and revenues. Concerning CapEx, it's important to point out that most of the minimum investments required to improve our stores to be compatible with our value proposition at -- most of them have already been completed. Another important point concerning CapEx is the fact that as Marcelo pointed out, we have had over 200 new stores in the past 3 years. Most of them are Minuto Pão de Açúcar, Proximity stores is our main driver of organic growth. But I believe that we've come to a time that concerning to the macroeconomic landscape, interest rate and high capital costs, we've decided to slow down our plan of expansion, and you've seen a material fact that was published yesterday.

We expect to have significant reduction of CapEx used throughout the second half of 2025 and also significant reduction in upcoming years. Concerning the line of others, as I pointed out, is still very significant. We've presented cash consumption of BRL 600 million in the past 12 months. But you can see that there is clear drop in this number year-over-year, over BRL 200 million drop. If we consider the 12 months, second half of '24 over third -- second half of '25. It means that we will keep on reducing it.

There are a number of expenses or cash use that we have had in the past 12 months, which are extraordinary. Most of them are related with tax agreements which were very important. In addition, we have had some stores closing down and it has required BRL 70 million. And as you are used to getting from us, we still have labor contingencies, which are related with the close down of our hypermarket stores, they reached the peak in 2023, BRL 550 million at that time. In 2024, it was BRL 300 million. In the past 12 months, BRL 300 million approximately. And we are looking forward to having a reduction of these numbers. Most of the period for filing a lawsuit related to the closure of a closedown of is coming to an end. So probably there's going to be a backlog reduced throughout time. As such, the numbers of other expenses from now on will be significantly reduced. I expect that this year and certainly next year as well.

[Operator]

Our next question from Gabriela from Goldman.

[Unknown Analyst]

I would like you to elaborate the growth dynamics, especially in Proximity, you said that there was a slow impact. Could you give us more color regarding calendar effect in the performance or if there was something else that affected the performance during the quarter.

[Marcelo Pimentel, executive]

No, it was this unfortunately or fortunately for us, the strategy is focused on the city of São Paulo in the most affluent neighborhoods where people can walk to the stores. This is the base, Minuto Pao de Acucar strategy and when you have an extended holiday, we've seen during the first semester, especially during Easter, Proximity is directly impacted, because these customers leave the city. Now it's important to say that we've been very assertive regarding Proximity. As it was mentioned, we opened over 170 stores and the level of assertiveness in these stores has grown a lot. When we compare all of this, it has been growing, 9% by 9%, 16% of growth. This is growth above the combined enterprise.

So on the other side, we can see a second semester with less extended holidays. Therefore, we will see the benefit, because these customers will remain within their households. But we are extremely reassured. And another point that I would like to highlight regarding Proximity is the introduction of the digital channel for Proximity. We started this project when we went from store in digital, we started with Pão de Açúcar banner, then we continued with Mercado Extra. And now we are embarking in Proximity.

It's important to mention the growth of digital within Proximity was 61%. So you can see the incremental delta that we will see. And as a consequence, we still had a market share gain of 0.8% when we compare ourselves to the market. Although with comparison of a flow against ourselves, we continue gaining market share in the market, once again, we're not only highly optimistic regarding this channel, but mainly now we're investing in bringing additional sales to the channel, implementing the digital channel in our Proximity stores.

[Operator]

Our next question from Felipe from Citibank.

[Felipe Reboredo, analyst]

I have just one question. I was analyzing the EBITDA margin, IFRS improving, but when we see financial expenses and the EBITDA are you making organic efforts. This is a question for Rafael. How do you see the coverage the index via organic efforts. And what about your expectation and divestment, how much can you improve this equation, it would be important to see this.

[Rafael Russowsky, executive]

We focus a lot on this matter by way. There are a number of initiatives underway, and we have mentioned a couple of them. Deleveraging will be observed by the cash improvement, the operational part of the company's EBITDA, as you pointed out, has shown to be extremely resilient. We do have clients that support our operation. Nonetheless, it's important to mention that we will continue making an additional effort to reduce our CapEx, as I mentioned.

We had significant investments to bring our stores, was equal to our value proposition. Our investments are basically all done. I believe that from here on, we will see a reduction -- a significant reduction in our CapEx. I just also mentioned an important point that is not connected to the EBITDA, but will affect the cash flow that also affects our debt precisely.

The cash consumption from other expenses. And here, I refer to matters that are connected to labor contingencies, connected to Extras and Hipers. Just to remind you all during this occasion when we closed the transaction in 2022, we have to lay off 16,000 employees and 12,000 employees, sold the company. Now we have reduced the labor contingencies, so we must continue facing these different lawsuits. But as I mentioned, the good news as the prescription period has ended.

This transaction took place in the beginning of 2022. Now period of new lawsuit was the beginning of 2022. So we have known new lawsuits. We had BRL 600,000 that were dedicated to these contingencies. This was in 2023 and in 2024. This figure dropped half and we believe that during -- now we will have half of the half.

Starting from 2023 will be BRL 150 million, BRL 180 million for this year. Now regarding these labor contingencies, these elements will improve our cash generation, and we are convinced that with this, we will be able to reduce our leverage. Marcelo also stated the fact that there are a number of initiatives connected to the sales of assets. There are operational assets nonetheless. They are not core assets for the company. And these are agreements that may and from them, significant cash for the company may stem from this. If these negotiations are successful, we're talking about hundreds of millions of rials here.

And to the fact that, that we believe and this is a consensus in the market, and this was confirmed that we have reached a tipping point in interest rates and Selic in Brazil. So we believe that from here on, we will see a drop in the interest rate. And as a consequence, this will impact the negative impact in the cost of our debt in the company. All of this together with the company's operational improvement, I believe that we will see an improvement in these indexes from here on.

[Felipe Reboredo, analyst]

And there is a follow-up question to this. If we were to clusterize these stores when we think about the pre-IFRS margin that is 4 or something, in level of grandeur how many stores are operating at this level, how many stores are operating below? Do you have a breakdown?

[Marcelo Pimentel, executive]

We do have the breakdown I cannot disclose this information and details. But I can say that this has been our strategy since 2022. All the investment in growth concentration has been -- has taken place in São Paulo, we're the brand, undoubtfully have the best point, it's strongly established, and we are within the most affluent neighborhoods, which gives us better results in sales and in profit.

So the business prioritization is concentrated in São Paulo within the premium banners. We're talking about over 70% of sales, over 80% of results of the company coming the state of São Paulo. We are a regional company and national brand, and we will continue investing in the state of São Paulo. We have not forgotten the other states, but in terms of history, the share in sales and profit will come from the state of São Paulo.

[Operator]

The next question from Nicolas from JPM.

[Nicolas Larrain, analyst]

Most of my questions have been answered, but could you break down what is your CapEx expectation for this year and next year? Because with a lower interest rate and lower Selic rate.

[Rafael Russowsky, executive]

Excellent question, unfortunately, we cannot disclose you this guidance. What I can say is that when we received the past 12 months, the expectation of ending the year of 2025 is improvement when we compare it to 2024. And we are already focusing for the strategic planning for 2026. And undoubtfully, there will be a significant drop in the CapEx investment of the company.

Just something that Marcelo also mentioned. This is not a guidance, okay? This is data that is subjective and known by everyone. We're talking about an expansion drop. And you must remember that we have expanded around 50, 60 stores a year. We have expanded mainly, I would say, significantly in Proximity stores. And these Proximity stores cost around BRL 2.5 million to BRL 3 million stores for each store opening. So if we see the figures in expansion for the recent years. Here, we have something around BRL 140 million, BRL 150 million without transforming this in guidance because we are not talking about future expansions just for you to see what the total amount is.

Now of course, we are working with other points pursuing more efficiency, pursuing improvement in our capital allocation, but this accounts for BRL 140 million, BRL 150 million. I know that you're aware of these figures, but I wanted to underscore it because it's extremely important and timely.

[Operator]

The next question comes from [indiscernible].

[Unknown Analyst]

I have 2 questions concerning CapEx. What adjustments have you made in the distribution center? And when do you expect the payback of the investments. Concerning closedown of Mini Extra, 1 unit under conversion, I understand it's expected to have closed down, and the amount is not significant, it's only 4%. But if the correction of the expansion that you've been doing for the past 2 years? And if yes, what didn't work out fine? About the conversion of this unit, I would like to understand why would go from Mini to Minuto, is there a difference in terms of profitability between the 2 formats? What could you tell us.

[Marcelo Pimentel, executive]

CapEx of the distribution center. Two investments were made. One, expected normal turnover of the distribution center, we had to replace it in our distribution center 1 in [indiscernible] Highway. We had to change the pallet holders, which are part of the structure. It is something that happens every 5 to 7 years. And this was the year that we expected it to be done. We've done that from our distribution center 1 and in some of the other distribution centers. One-off investment, even though it's long term, the payback of the investment is kind of quick.

But much more than thinking about the payback, this is required procedure for maintaining good operations of our distribution center. Concerning the closedown of Mini Extra, there is nothing new. It's a natural process something that we are used to doing. We review opening of stores, and we also review the performance of some of our current stores, and some of them have to be closed down. We closed on 6 Proximity stores in the last quarter. The reason for it is the location change of competitiveness, landscape around the store. We're always trying to recover a store before we close it, of course. But when we realize that we've done whatever it took and still the store is not reacting as expected, we don't keep them open. I would say that these close downs result from extensions that we did in the past. Before 2022, we had 200 stores in this format.

And with the change in our strategy, we've been closing down those old proximity stores. We use the same rationale for transformational conversion, especially what we've been observing in the city of São Paulo. Since the construction of master plan was approved in the city of São Paulo, the city is getting transformed. And we have high-income buildings being developed in regions, which didn't use to be focused on these kind of high-income population. And now we've realized the importance of bringing Minuto to these customers.

We are talking about 5 percentage points better than the Mini market, because we offer different assortment, the presence of perishables, which has expanded, and service offer, which is better. And something that is going to happen this year with the introduction digital in these stores as well. I would say nothing is different, nothing has attracting our attention or cause alarm. It is a normal review of our stores, and we are very diligent in analyzing that. If we realize that a store is not performing, and it has been for a while, and we've tried our best efforts, we have no problems, but to close the store and improve the profitability of the channel.

The conversion that you alluded to, you probably know the story. It was a sort of Mini and who are those [indiscernible] a region that has gone through a major transformation. It was an older store of Mini Extra. It's closed [indiscernible]. It is a store that since its conversion, it has performed much better than the previous store. Because of the new model -- the new model of Minuto, especially in this region that has transformed so much in recent period.

[Operator]

Our Q&A session is finished. Now I would like now to hand it over to Mr. Marcelo Pimentel for his closing remarks.

[Marcelo Pimentel, executive]

Thank you all very much for your participation, considering our macroeconomic scenario, which is still very challenging. We've been working with focus and discipline. And with that, we've had major achievements. We produced our margins, reduced expenses and gain more participation in the premium segment, which seems to be more resilient during adverse conditions. We end the cycle, absolutely sure that we will remain firm on the right path, and we remain paying attention and committed to our goals. I would like to give my special thanks to our team, people who are dedicated and which is essential for us to move on in this journey. Thank you all very much. Have a great day.

[Operator]

With that, we close our earnings release call. The Investor Relations department is available for any further questions. Thank you all very much for your participation. Have a great day.

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