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Edited Transcript of LAME4.SA earnings conference call or presentation 9-Aug-19 5:30pm GMT

Q2 2019 Lojas Americanas SA Earnings Call

Saúde - Rio de Janeiro - RJ Sep 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Lojas Americanas SA earnings conference call or presentation Friday, August 9, 2019 at 5:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carlos Eduardo Rosalba Padilha

Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board

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Conference Call Participants

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* Andres Estevez

Brasil Plural Corretora de Cambio, Titulose Valores Mobiliários S.A., Research Division - Analyst

* Gabriel Disseli

Santander Investment Securities Inc., Research Division - Research Analyst

* Gustavo Piras Oliveira

UBS Investment Bank, Research Division - Head of LatAm Research & Latin America Consumer Analyst

* Joseph Giordano

JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst

* Thiago A. Bortoluci

Goldman Sachs Group Inc., Research Division - Research Analyst

* Tobias Stingelin

Citigroup Inc, Research Division - Director

* Vinicius Figueiredo

Itaú Corretora de Valores S.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to Lojas Americanas conference call to discuss the results relative to the first half of 2019. Here with us today, I have Mr. Carlos Padilha, CFO and IRO for Lojas Americanas; and Mr. Fabio Abrate, CFO and IRO for B2W Digital. (Operator Instructions) It's also important to have in mind that today's event is accompanied by a slide deck, which may be accessed at ri.lasa.com.br.

Before moving on, it's important to have in mind that forward-looking statements made during this call concerning the company's business outlook and also financial and operating projections are based on the company's beliefs and assumptions and also on information currently available. Forward-looking statements are no guarantee of performance as they involve risks, uncertainties and assumptions as they refer to future events, and therefore, depend on circumstances that may or may not materialize.

Investors should have in mind that general economic conditions, industry conditions and other operating factors might affect the future performance of Lojas Americanas, and thus lead to results that will differ considerably from those expressed in these forward-looking statements. The company states that accounting information that will base the comments being presented in accordance to international standards for accounting reports, IFRS, and also with the norms set by the CVM in Brazil and also they are expressed in BRLs.

Now I'd like to turn the conference over to Mr. Padilha, who will start the presentation, talking about financial and operating highlights for Lojas Americanas. Please, Mr. Padilha, you have the floor.

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Carlos Eduardo Rosalba Padilha, Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board [2]

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Good afternoon, everyone. It is a pleasure to be with you this afternoon for this conference call to discuss the results relative to the first half of 2019 for Lojas Americanas.

On Slide #2, we have the highlights of the first 6 months of the year. Lojas Americanas opened 41 stores and now operates in 617 cities in a total of 1,518 stores across Brazil. The Ame reached over $3.2 million downloads in a little less than a year of operation. The B2W Digital presented a positive cash generation in Q2 2019. LET'S launched the crowdshipping platform called VOE and the O2O services, Online to Offline, for the Marketplace sellers. Using the concept of Everything, every time, anywhere, OO2 (sic) [O2O] initiatives for Lojas Americanas and B2W have serviced over 2 million customers in the last 12 months.

On Slide #3, we'll see the consolidated numbers. Due to a calendar mismatch for Easter, which in 2019 was on April 21 and 2018, April 1, we'll present results for the first half to preserve the comparison basis. 2018 figures have been adjusted according to the IFRS 16.

In the first half of 2019, the GMV -- consolidated GMV presented a growth of 13.5% when compared to first half of 2018. This is likely a growth of B2W of 18.6% and a gross revenue for Lojas Americanas of 7.2%. The GMV growth for B2W was driven by a strong growth of the Marketplace option at 51.8%. The 1.4 percentage points gain in gross margins for the first 6 months is linked to the growth of the Marketplace operation at B2W and a better management of several different categories for Lojas Americanas. The EBITDA margin performance is due to operational leverage for both companies, which allowed for a growth in EBITDA above the revenue growth, leading to an expansion of 1 point -- percentage point of the EBITDA margin. Lastly, 104.8% growth in net income was driven by the increase in EBITDA.

On Slide #4, we can see the results from the parent company, the controlling shareholder. The growth of 7.2% in gross revenues was driven by the good performance by the main events in the first 6 months, which helped exceed a strong comparison basis provided by the World Cup in 2018. That performance reflected a growth in the concept of same-store at 5.2%, up 1.8 percentage points from the inflation as measured by IPCA. Besides, in the first half of this year, the company maintained a flat gross margin even though we didn't have the World Cup, again, and we had the -- we saw the end of the Law of Good. Still in this semester, the company presented operating leverage, which allowed for an expansion of 0.1 percentage points in EBITDA margin due to a better expenses control.

On Slide #4 -- 5, you see the main strategic initiatives by Lojas Americanas in the first half of the year. In the first 6 months, convenience stores, called Local, improved the assortment, tested new food categories and made new services available such as the Pegue na Loja, Pegue na Loja Hoje and LASA Entrega, Grab and Go and [Click and Pick] and so on. It's in the first half that +AQUI brand offered services to over 6.5 million people at the stores where the operation is present, representing a growth of 60% vis-à-vis the first half of last year. Additionally, the +AQUI started a partnership with the Ame in which sales promoters helped customers download the app, inform about new promotions and present the services which are available, thus contributing to increase the number of users and also to improve user experience.

On Slide #6, we'll be addressing the self-service stores, another initiative by IF, Innovation and Future. In this first 6 months of the year, we started several tests with models of self-service stores which use artificial intelligence, vision computer, cameras and sensors. The Ame Go, which uses the Grab and Go model, the customer can use the app of Ame to walk into the store, pick the products and as they leave the store, purchases are automatically charged without having to stand in queue or to go through a checkout.

The Smart Fridge is a freezer or a refrigerator, which also follows the Grab and Go model. In this model, the customer opens up the app, opens the fridge's door, takes the drink and after the door is closed, the charge is automatically made to his or her account. Ame Box is a model of store-in-store with a limited space, limited by glass walls and an automatic door, which is opened by the app. As the customer walks into the space, the area, they can choose the product, is charged as they leave the space directly on the app.

On Slide #7, we'll be talking about the 85 years in 5 - We are More -- this is Somos Mais Brasil, and which aims to open another 800 new stores between 2015 and 2019. The first half of this year, we continued with our expansion plan for the company and opened 41 new stores as compared to 27 in the first half of last year, 8 of which are traditional, 27 are express stores and 6 are convenient stores, adding 22 new cities to our store base.

On Slide #8, we highlight the company's penetration across the country. At the end of the first half of this year, the company had 1,518 stores, 868 of which traditional ones, 606 express outlets and 44 convenience stores, operating in 617 cities across all Brazilian states.

On Slide #9 now, we highlight the continuous growth of Ame. In over a year of operation, the app already has had 3.2 million downloads and has imposed strong traction to all brands. At the end of June 2019, the app was accepted at 774 Lojas Americanas outlets. The app has exclusive functionalities for the physical world. By the end of the year, the Ame will be present in all Lojas Americanas outlets.

On Slide #10, we'll be talking about products and services available through the Ame app. As for the new things launched in the second quarter of 2019, we have connection with private transportation apps, geomarketing and in the better version, private transportation, Marketplace for services, e-gift and cash-outs Lojas Americanas. Throughout the second half, as part of its business plan, the Ame will have several new features, making an important contribution for the future of Lojas Americanas and B2W.

On Slide 11, we have results for B2W Digital in the second quarter in figures. Total GMV reached BRL 3.9 billion, up 21.8% when compared to the 10.8% figure posted in the market according to the EBIT, leads to a gain in market share of 2.7 percentage points, which moved from 27% in 2018, the second quarter, to 29.7% in the second quarter of 2019. Marketplace continues to grow rapidly with a GMV that reached BRL 2.3 billion, up 51.4%. In the second quarter of 2019, the participation of 3P in the total GMV came at 58.7%, an increase of 11.5 percentage points. Throughout the second quarter of 2019, 5,500 new sellers were connected to the Marketplace, and 5,900 new sellers were connected to the B2W Entrega.

On Slide #12, we'll be talking about the new features for LET'S, our management -- shared management platform for logistic assets for both Lojas Americanas and B2W. In the first half of 2019, LET'S launched the O2O program for sellers of the B2W Marketplace, turning sellers and stores into flexible fulfillment centers. This way, initiatives of Pegue na Loja, Pegue na Loja Hoje and LASA Entrega can now be expanded to more than 15,000 physical stores for sellers under B2W.

In July, it launched a platform for crowdshipping with VOE, or VOE, aiming at accelerating O2O initiatives, connecting independent couriers to the logistics platform at last. This way, it allows for the delivery of products to clients in up to 2 hours for both Lojas Americanas and the physical stores for sellers under the B2W Marketplace platform.

On Slide 13, we'll highlight new features for the second half for O2O. Following the concept of Everything, anytime, anywhere (sic) [Everything, every time and anywhere], O2O initiatives for Americanas and B2W seek to allow customers to buy what they want, when they want, where they want and how they want. For the last 12 months, more than 2 million customers made purchases through that possibility. Until the second quarter of this year, Lojas Americanas and B2W Marketplace initiatives had already registered orders for more than 3,800 different cities across Brazil. And this period with Pegue na Loja was already available at 1,315 stores as compared to 580 stores in the same period of last year.

In addition, it is also available at 102 physical stores belonging to sellers and the B2W Marketplace. Through the second quarter, the operation Pegue na Loja was already available across all 1,518 Lojas Americanas stores. Additionally, the LASA Entrega which allows customers to buy online products from the closest or nearest Lojas Americanas and then receive those purchases in up to 2 hours was made available in 12 cities, totaling 82 stores participating in the program.

Well, these were the main comments we had concerning the performance of Lojas Americanas in the first half of 2019.

Now I'd like to start the Q&A session so that we can address possible questions that you may have. Thank you very much for your attention so far.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question, Joseph Giordano, Banco JPMorgan.

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Joseph Giordano, JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst [2]

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The first question is about growth. There was some deceleration in the same stores in the first 4 months of the year. And I wanted to understand what was the trajectory and the behavior of this sale in May, June. May was weak. June was strong. And in this context, what are the categories that you think are getting -- gaining more traction this year? The market is not strong. We have a relatively good result in the current context. But I would like to understand what are the categories that are growing to understand how the average stake is behaving. And how is the issue of traffic over the course of the year? And lastly, I would like to talk about Ame. How much of this is spent in the Lojas Americanas? And I would like to understand about the funding strategy and the cash back scenario. How would be the dynamics with B2W and Lojas Americanas and potential sellers that may enter the platform?

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Carlos Eduardo Rosalba Padilha, Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board [3]

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Thank you. Thank you for your question. As regards to your first question, we had sales in the parent company about 7.2%. Reminding that last year, we had the World Cup in the first half of the year. And January this year, the Law of Good program was excluded, so it was terminated. So this [happened] for us. And telephone and computer sales and we also had an impact of taxes. And these 2 impacts together, they have represented an important challenge for us that we had to achieve growth from bases that had the impact of the World Cup. And also we had to account for the end of the Law of Good. So this 7.2% in sales that we had and it was -- represented 1.8 points above the inflation, it's something we are proud of.

We think this growth is in line with what we expect for the second half of the year. But as regards to your question, the departments or categories that are gaining more traction, we have a wide array of departments -- or [faulty] departments. And just to show that there is no great difference in average ticket, I would say that we had [AHBA in food], just to give you an idea and give you a more direct sort of answer.

In regards to Ame, the funding strategy will be in line with the participation of each company Lojas Americanas and B2W in this business. Ame is part of Lojas Americanas and B2W and will become a [lead operation] and through the end of this month. And the fund will be provided by Lojas Americanas and B2W according to their respective participation.

Cash back, which is the next question, well, nothing will change. In this scenario, we will have the commercial strategies of each company that are associated with cash back. And Lojas Americanas and B2W will [benefit] according to the strategic -- [solidifying strategy]. Thank you.

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Operator [4]

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The next question is by Thiago Macruz from Itaú.

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Vinicius Figueiredo, Itaú Corretora de Valores S.A., Research Division - Research Analyst [5]

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This is Vinicius speaking. In the release you had mentioned -- you've commented about progression of O2O initiatives in physical stores and the Pegue na Loja, Pegue na Loja Hoje, which is the Click&Collect and Click&Collect Now. And I would like to know how this can contribute to increased sales. Do you see an increased flow in stores coming from these consumers that are more on the channel. And do you have a PPI of this conversion of incremental sales of these customers with online orders in the store? If you can tell me how many SKUs you are offering in these programs, Click&Collect, I would love it.

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Carlos Eduardo Rosalba Padilha, Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board [6]

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Thank you for your participation. This is an important pathway of growth for us between Lojas Americanas and B2W. And just to remind you, we have from O2O, so which is a Lojas Americanas seller in Marketplace with B2W and Click&Collect, or Pegue na Loja. And B2W's stock has grown for having 1P and 3P in physical stores, and more than 580 in the second half of 2018 with more and more traction. So we had 1 or 2 physical stores that we didn't have before, and we had been working to increase traction in these activities.

Click&Collect Now, which is the technology today, is available in 18 stores. Customers can purchase online and collect in the store right away. And then we also have LASA Entrega Ship from Store or the customers using the Americanas app can choose -- if the product should be sent to their home or their work address. And according to the stock in the physical stores, end products will be delivered in up to 2 hours. So Ship from Store is available in 102 stores in several cities. And before anything else, this represents a great satisfaction, which is our duty to captivate our clients and customers and the usability, it's very good to customers. The customers can have agility when they purchase in Lojas Americanas.

As regards how much this contributes to sales in Lojas Americanas, I think -- I could say that merchandise -- actually getting Lojas Americanas and B2W is not great -- the differences are not great there. The average ticket is similar. So Click&Collect, when customers collect the merchandise in the stores, they also buy from the physical store. So this is an additional gain. And the same thing happens with the Click&Collect Now. Customers using the app, when they finally go to the physical store to collect what they have purchased, they also buy other things. So this is a complementary sort of sale. And Ship from Store also is good for customers. Customers that don't have time or going away on vacations, we can -- they order the merchandise at home or at work, whatever the client decides. So this is all additional things that's included in our sales. I would say that's Everything, anywhere, anytime (sic) [Everything, every time and anywhere]. And we want to service our customers in the best way possible.

So just to give you some more information, I could tell you that overall in O2O, 50% of customers that go to the stores to collect their product, they also buy. And this creates additional sales. And I think this is something to bear in mind. And we have seen a growth in this area. And if we have more information about those, we will be sharing that with you. Thank you. Thank you very much.

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Operator [7]

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The next question is from Gabriel Disseli from Santander.

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Gabriel Disseli, Santander Investment Securities Inc., Research Division - Research Analyst [8]

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Congratulations for your results. There is just one question. And in the last 6 months, you have been expanding the local format of stores in a more organic manner. Can you give us some update about the possibility of having expansion of this format?

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Carlos Eduardo Rosalba Padilha, Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board [9]

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Gabriel, thank you for your question. You know how our business models work in traditional stores, convenience stores. These have a fixed format and a specific assortment. And I think this is all complementary for us to foresee the small purchases. And I think it's our duty to check all possibilities and in all sort of business that we understand that will make sense for our profile and our business model, but always with the view of serving customers better. In M&A, there is no restriction regarding this topic. And as alluded to last year, we had a distributor as a potential partner and other possibilities have risen, and they are all going to be analyzed in the same manner.

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Operator [10]

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Next question is from Tobias Stingelin from Citibank.

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Tobias Stingelin, Citigroup Inc, Research Division - Director [11]

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I just wanted to go back to that issue of same-store sales because it wasn't clear for me. Sequentially, if we look at what happened over the quarter, I think there was a deceleration at the end of the second quarter. Could you tell us how this happened? And where this happened? And how you see this now? We wanted to have an overview about the trend. So it began in one manner and it ended in another manner. And what is the current trend? This is the first question. And also I wanted to know something about growth, expansion from 2020 because the strategic plan is -- a product is about to end. So I would like to know what we should expect for next year. And you have mentioned that you're also analyzing BR. How do you see this? What sort of changes do you expect?

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Carlos Eduardo Rosalba Padilha, Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board [12]

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Thank you, Tobias, for your participation. As regards to the sales expectation, I think we have the best expectation as possible because if you think about what has been said, sales are growing and are growing in a very significant manner. And I think we see no impact that we had comparing 2018 and 2019. The impact on sales because we had last year the World Cup and the Law of Good, and we longer have this, this year. So even though we had these differences, we are able to overcome. We have 7.2% in sales, which is good. And about the trend that we saw over the last few months, you can see that the sales are growing. And our sales are expected to grow. They grow -- they're already growing. And I think this is a very productive trend for us.

The second question regarding expansion. We had been working with an expansion of 7% to 9% square meters of stores. We're going to open 224 stores to complete our second large expansion cycle that started in 2015 and is expected to last 5 years, so to end in 2019. 224 stores will be opened, 30 -- about 30 to 40 convenience stores and remaining stores will be traditional stores and [red] stores. And to facilitate the math, we expect to have a growth of 7% to 9% square meters, including this 20 -- 224 stores. I think this is a figure that we can bear in mind.

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Tobias Stingelin, Citigroup Inc, Research Division - Director [13]

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7% to 9% this year. But how about 2020, 2021? What sort of figure should you have in mind?

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Carlos Eduardo Rosalba Padilha, Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board [14]

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2020, we are still evaluating. We prefer -- well, some people they talk about the future, but without talking about the past. And we have been talking about our expansion plan. We are delivering our expansion plan. And we are confident that we will be able to deliver what we expect to deliver. And to deliver this plan is something I have to do before we come up with the next plan and discuss this next plan with you.

As regards to convenience stores. Convenience stores are a great opportunity for us because the Brazilian market lacks in convenience stores. We have these stores in gas stations and some other establishments. And we respect our competitors that we consider in Brazil, this market has a lot of room for this sort of services. There's room for everyone. And this is not -- this is nothing negative for our expansion intentions within this business plan. And I think that in the near future, I will have more information about this.

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Operator [15]

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The next question from Gustavo Oliveira from UBS.

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Gustavo Piras Oliveira, UBS Investment Bank, Research Division - Head of LatAm Research & Latin America Consumer Analyst [16]

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I would like to understand a bit better when we think strategically about your assets and your created IF to think about innovation. Ame was the first digital company that is launched as an [initial -- structured in LET'S], which is the logistics company. You are developing a lot of those. You started the crowdshipping platform. And I believe next year includes further developments. And LET'S seems to be the next company you will be creating as an autonomous company. Is that true? Or -- am I right? How are you envisaging this development in this platform? And just moving one step back, why have you been thinking along these lines? We can see some competitors in Brazil and other places going in the opposite direction. So they are integrating all platforms in a single company. And I would like to understand a bit better how you see this?

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Carlos Eduardo Rosalba Padilha, Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board [17]

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Thank you for your question. So you're talking about IF, Innovation and Future. This is -- provides us with technological innovations within Lojas Americanas and B2W. And then this should include business practices, national and international, to our Lojas Americanas and B2W's environment. Ame has been discussed fairly in this call and other initiatives. [We're conceived] in IF as other technological innovations that we have been implementing. The strategy is, as I said, was the creation of IF. Ame was the first big step, the first strategy, the development -- for development of a platform associated with future innovation. And Ame was part as -- of a [lead operation] Lojas Americanas and B2W. And the idea when opening Ame as a lead operation, this was to have an independent company. And we have a lot of work to do, a lot of innovations should be implemented and launched. So I think Ame is growing and is working as proposed as a long-term strategy. And from this first strategy, we expect to work along the same lines within IF.

This is our management platform. We had a lot of growth within the structures of both companies. We are very happy with this business. And so far, there is nothing new to share with you apart from the creation of Ame. And when we did this, we communicated this officially. And the idea, the goal regardless of the name, Gustavo, Ame or LET'S or whatever, Lojas Americanas, B2W, the major goal is to provide better services for our customers and to be the best channel of purchase and distribution in the physical, online environment. And this is our major goal. And we conduct all our businesses according to available resources and strategies, but this is our initial focus. So I think over the next 12 months, we may say that nothing -- no big changes in structure will be happening in the company. We believe nothing will change when it comes to logistics in the company.

Gustavo, we don't have anything about this at this moment. I have nothing really to say about it right now.

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Operator [18]

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Next question from Thiago Bortoluci from Goldman Sachs.

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Thiago A. Bortoluci, Goldman Sachs Group Inc., Research Division - Research Analyst [19]

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My question has to do with G&A. To reach the covenant that you presented, you had to open 183 stores, which would be 14 extra stores when compared to last year. Given this year-on-year growth, what kind of G&A would -- should we expect for the second half? That's the question. G&A for the fourth quarter -- for the second half, third and fourth quarters?

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Carlos Eduardo Rosalba Padilha, Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board [20]

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Thank you for your questions. We'll show -- we'll open 224 stores. Last year, we opened 196 stores. The year before, 125. But the number of stores will be close to 200, decreases the impact of G&A on the final numbers. The stores we opened 2 years ago are now maturing and have been showing good results under the P&L. So we do not expect to have G&A adjustments because of the expansion plan as stores that we have opened for the past 2 years, which are relatively fewer, but in general, something close to 200. The number makes sense to the current number, 224. So again, no impact is expected on G&A on our P&L because the stores we have opened are now maturing.

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Operator [21]

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Next question comes from Andres Estevez from Brasil Plural.

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Andres Estevez, Brasil Plural Corretora de Cambio, Titulose Valores Mobiliários S.A., Research Division - Analyst [22]

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Still going back to the G&A and perspectives around margins. You had a very challenging first and second quarters. What can we expect looking forward? I would imagine we would be expecting to be maintaining margins for this year and then some gain in 2020. Am I correct in assessing the evaluation of the margins?

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Carlos Eduardo Rosalba Padilha, Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board [23]

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Thank you, Andres, for your question. We are working with a flat margin as is. We've had several initiatives for improving margins, initiatives in the financial front, with Ame, pricing assortments. In other words, several activities, as I mentioned, towards improving margins. But as I said, we expect to have a relatively flat margin going forward. This will be reflected in sales, all of those gains will be flat within the sales. This is the answer to your query.

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Andres Estevez, Brasil Plural Corretora de Cambio, Titulose Valores Mobiliários S.A., Research Division - Analyst [24]

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But looking forward, Padilha, 2020, 2021 and so on, do you expect any major gain in margins? Or you expect something flat like now?

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Carlos Eduardo Rosalba Padilha, Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board [25]

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I think that looking forward, looking ahead to 2020 onwards, we do expect to make some gain in gross margins. We expect more leverage. This year, we were really expecting leverage. We were expecting higher margins, and it would be in line and also financial leveraging for 2019 and for 2020 as we mature all those projects. We expect to have some margin gains. And we expect some marginal gains, as I said. And we expect leverage to become more relevant as we move forward.

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Operator [26]

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We will now close the Q&A session. I'd like to turn the conference over to Mr. Padilha for his final remarks.

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Carlos Eduardo Rosalba Padilha, Lojas Americanas S.A. - Financial & IR Director and Member of the Executive Board [27]

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Thank you for participating in our earnings call relative to the first half of 2019. I'd like to also congratulate all fathers on Father's Day, which will be next Sunday. We also like to invite you all for -- starting next Monday, to please check out our offers celebrating the 90th anniversary of Lojas Americanas and the 20th anniversary of Americanas.com at the website and across the stores in Brazil. Lastly, our IR team remains available to clarify questions or comments that you may have through the e-mail, investidores@lasa.com.br.

Thank you once again and have a nice day, everyone.

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Operator [28]

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Lojas Americanas' conference call is now over. Thank you all for participating. Have a nice day, everyone. Thank you.

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