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CBD Cia Brasileira De Distr-pao De Acucar - ADR

Filed: 30 Apr 21, 5:01pm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

_______________________________________________________________________
FORM 20
-F

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
 OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

 

Commission File Number 1-14626

 

_______________________________________________________________________
COMPANHIA BRASILEIRA DE DISTRIBUIÇÃO

(Exact Name of Registrant as Specified in its Charter)

BRAZILIAN DISTRIBUTION COMPANY
(Translation of Registrant’s name into English)

THE FEDERATIVE REPUBLIC OF BRAZIL
(Jurisdiction of incorporation or organization)

_______________________________________________________________________


Guillaume Marie Didier Gras, Chief Financial Officer
Phone: +55 11 3886-0421
gpa.ri@gpabr.com
Avenida Brigadeiro Luiz Antonio, 3142
01402-901 São Paulo, SP, Brazil
(Address of principal executive offices)

 

_______________________________________________________________________
Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each classTrading SymbolName of each exchange on which registered
Common Shares, without par value-New York Stock Exchange*

 

American Depositary Shares (as evidenced by American Depositary Receipts), each representing one Common Share

 

CBD

 

New York Stock Exchange

 

 

_______________________________________________________________________
*Not for trading purposes, but only in connection with the listing on the New York Stock Exchange of American Depositary Shares representing those Common Shares.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

 
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Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the period covered by the annual report:

As of December 31, 2020, the registrant had outstanding 268,351,567 common shares, no par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act

Yes No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes No

Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer Accelerated Filer Non-accelerated Filer Emerging Growth Company

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP International Financial Reporting Standards as issued by the International Accounting Standards Board Other

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

Item 17 Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No

 
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TABLE OF CONTENTS

Page

PART I 8
ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS8
ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE8
ITEM 3.KEY INFORMATION8
3A.Selected Financial Data8
3B.Capitalization and Indebtedness12
3C.Reasons for the Offer and Use of Proceeds12
3D.Risk Factors12
ITEM 4.INFORMATION ON THE COMPANY27
4A.History and Development of the Company27
4B.Business Overview34
4C.Organizational Structure56
4D.Property, Plant and Equipment57
4E.Discontinued Operations58
ITEM 4A.UNRESOLVED STAFF COMMENTS59
ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS59
5A.Operating Results59
5B.Liquidity and Capital Resources74
5C.Research and Development, Patents and Licenses, Etc.77
5D.Trend Information77
5E.Off-Balance Sheet Arrangements78
5F.Tabular Disclosure of Contractual Obligations78
5G.Safe Harbor79
ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES79
6A.Directors and Senior Management79
6B.Compensation81
6C.Board Practices86
6D.Employees90
6E.Share Ownership91
ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS91
7A.Major Shareholders91
7B.Related Party Transactions92
7C.Interests of Experts and Counsel97
ITEM 8.FINANCIAL INFORMATION97
8A.Consolidated Statements and Other Financial Information97
8B.Significant Changes102
ITEM 9.THE OFFER AND LISTING103
9A.Offer and Listing Details103
9B.Plan of Distribution104
9C.Markets104
9DSelling Shareholders99
9E.Dilution106
9F.Expenses of the Issue106
ITEM 10.ADDITIONAL INFORMATION106
10A.Share Capital106
 
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10B.Memorandum and Articles of Association107
10C.Material Contracts116
10D.Exchange Controls117
10E.Taxation118
10F.Dividends and Paying Agents127
10G.Statement by Experts127
10H.Documents on Display127
10I.Subsidiary Information128
ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK128
ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES131
12A.Debt Securities131
12B.Warrants and Rights131
12C.Other Securities131
12D.American Depositary Shares131
   
PART II 132
ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES132
ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS133
ITEM 15.CONTROLS AND PROCEDURES133
ITEM 16.[RESERVED]134
16A.Audit Committee Financial Expert134
16B.Code of Ethics134
16C.Principal Accountant Fees and Services135
16D.Exemptions from the Listing Standards for Audit Committees135
16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers136
16F.Change in Registrant’s Certifying Accountant136
16G.Corporate Governance137
16H.Mine Safety Disclosure139
   
PART III 139
ITEM 17.FINANCIAL STATEMENTS139
ITEM 18.FINANCIAL STATEMENTS139
ITEM 19.EXHIBITS139

 

 
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INTRODUCTION

All references in this annual report to (i) “CBD,” “we,” “us,” “our,” “Company” and “Grupo Pão de Açúcar” are references to Companhia Brasileira de Distribuição and its consolidated subsidiaries, unless the context requires otherwise; (ii) the “Brazilian government” are references to the federal government of the Federative Republic of Brazil, or Brazil; (iii) “common shares” are references to our authorized and outstanding common shares (ações ordinárias), without par value; and (iv) “preferred shares” are to our formerly issued preferred shares, which were converted into common shares on February 28, 2020. For additional information on the conversion of our preferred shares into common shares, see “Item 9. The Offer and Listing—9A. Offer and Listing Details.” All references to “ADSs” are to American Depositary Shares, each representing one common share, without par value. The ADSs are evidenced by American Depositary Receipts, or ADRs, issued by J.P. Morgan Chase Bank N.A., the depositary bank for the ADSs. All references to “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “COP$” are to Colombian pesos, the official currency of Republic of Colombia, or Colombia. All references to “US$,” “dollars” or “U.S. dollars” are to United States dollars. All references to “€” or “euro” are to the currency introduced at the start of the third stage of the European economic and monetary union pursuant to the treaty establishing the European Community, as amended.

Presentation of Financial and Other Data

Financial Data

We have prepared our consolidated financial statements included in this annual report in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or the IASB.

Our consolidated financial statements are presented in Brazilian reais. We have translated some of the real amounts contained in this annual report into U.S. dollars and COP. The rate used to translate the U.S. dollars amounts as of December 31, 2020 was R$5.1967 to US$1.00, which was the commercial selling rate of U.S. dollars in effect as of December 31, 2020, as reported by the Central Bank of Brazil, or the Central Bank. Unless otherwise stated, the rate used to translate the Colombian pesos amounts as of December 31, 2020 was COP$0.0015 to R$1.00, which was the commercial selling rate of the Colombian pesos in effect as of December 31, 2020, as reported by the Central Bank. The U.S. dollar and Colombian pesos equivalent information presented in this annual report are solely for the convenience of investors and should not be construed as implying that the real amounts represent, or could have been or could be converted into, U.S. dollars and Colombian pesos at that rate or at any other rate.

Other Data

In this annual report:

·some of the financial data reflects the effect of rounding;
·the term “Casino” refers to Casino, Guichard-Perrachon S.A., a French corporation (société anonyme). Casino is our indirect controlling shareholder. It is ultimately controlled by Mr. Jean-Charles Naouri, the chairman of our board of directors. For additional information on our direct and indirect shareholders, see “Item 7A. Major Shareholders;”
·the term “Casino Group” refers to Casino and Casino’s subsidiaries, including Rallye S.A., or Rallye, and Euris S.A.S., or Euris, which are ultimately controlled by Mr. Jean-Charles Naouri;
·the term “Cnova” refers to CNova N.V., a Dutch corporation, and, where appropriate, its subsidiaries. Cnova was one of our consolidated subsidiaries until October 31, 2016 and, starting on November 1, 2016, we began recording our investment in Cnova according to the equity pick-up accounting method. For additional information on our investment in Cnova, see “Item 4A. History and Development of the Company—Historical Changes in Our Business;”
·the term “Cnova Brazil” refers to Cnova Comércio Eletrônico S.A., a Brazilian corporation (sociedade anônima), which until October 31, 2016 was a wholly owned subsidiary of Cnova and operated and owned the Brazilian non-food e-commerce businesses of CBD and Via Varejo. Following the completion of the Cnova corporate reorganization on October 31, 2016, Cnova Brazil became a wholly owned
 
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subsidiary of Via Varejo. For additional information on the Cnova reorganization, see “Item 4A. History and Development of the Company;”

·the term “Diniz Family” refers to members of the Diniz family who were former shareholders of Wilkes Participações S.A., a Brazilian corporation (sociedade anônima), which is one of our direct major shareholders. For additional information on our direct and indirect major shareholders, see “Item 7A. Major Shareholders;”
·“Éxito” are to Almacenes Éxito S.A., a Colombian corporation, one of our consolidated subsidiaries, which became part of the Pão de Açúcar Group in November 2019. For additional information on the acquisition of Éxito, see “Item 4A. History and Development of the Company—Changes in our Business—Latin America Corporate Reorganization—Éxito Group’s Acquisition;”
·“Éxito Group” are to Éxito and its consolidated subsidiaries;
·“FIC” are to Financeira Itaú CBD S.A. Crédito, Financiamento e Investimento, a Brazilian financial services company;
·the term “low-cost supermarkets” refers to a grocery store or supermarket retail format that sell products at prices that are in principle lower than the regular retail price;
·the term “home appliances” durable goods (i.e., electronics, furniture and other items for the home);
·the term “Brazilian retail segment” refers to our food and non-food retail operating segment in Brazil that operates under different formats through the banners Pão de Açúcar, Extra Hiper, Mercado Extra, Compre Bem, Mini Extra, Minuto Pão de Açúcar, Aliados Minimercado and Pão de Açúcar Adega;
·the term “international retail segment” refers to our food and non-food retail operating segment outside of Brazil, in Colombia, Uruguay and Argentina;
·the term “private label” refers to our own branded products, including Qualitá, Taeq, Casino, Club des Sommeliers, Fábrica 1959, Confraria, Finlandek, Arkitect, Bronzini, Cast, Bambini, Boomy Nous, Frescampo and Custer;
·the term “Via Varejo” refers to Via Varejo S.A., a Brazilian corporation (sociedade anônima) and, where appropriate, its subsidiaries. Via Varejo was one of our subsidiaries until June 2019 and it operated in the home appliances business under the banners Ponto Frio and Casas Bahia. Via Varejo’s operations were classified and furnished as discontinued operations in the periods from November 2016 through June 2019. On June 14, 2019, we consummated the sale of all equity interest we held in Via Varejo. For additional information on the sale of the discontinued operations of Via Varejo, see note 12.4 to our audited consolidated financial statements included elsewhere in this annual report and “Item 4. Information on the Company—4A. History and Development of the Company—Recent Changes in Our Business—Via Varejo Sale;”
·the term “Sendas” refers to Sendas Distribuidora S.A., a Brazilian corporation (sociedade anônima) and, where appropriate, its subsidiaries. Sendas was one of our subsidiaries until December 31, 2020 and it operated in the cash and carry business under the banner Assaí. The spin-off and separation of Sendas from CBD was completed on December 31, 2020. For additional information on the spin-off and separation of Sendas, see “Item 4. Information on the Company—Recent Changes in Our Business—Separation of the Cash and Carry Business.”
·“Sendas Separation” refers to our separation from Sendas. On December 14, 2020, we entered into a Separation Agreement with Sendas to provide a framework for our relationship with Sendas following the Separation and the Sendas Spin-Off. For more information on the Separation Agreement, see “Item 7B. Related Party Transactions—Agreements With Sendas”; and
·“Sendas Spin-Off” are to the distribution of substantially all of the issued and outstanding Sendas common shares to holders of CBD common shares, on a pro rata basis for no consideration. For more information on the Sendas Spin-Off, see “Item 4A. History and Development of the Company—Recent Changes in Our Business—Sendas Spin-Off.”
 
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None of the information available on our website or on websites referred to in this annual report is incorporated by reference into this annual report.

FORWARD-LOOKING STATEMENTS

This annual report includes forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, principally in “Item 3. Key Information—3D. Risk Factors,” “Item 4. Information on the Company—4B. Business Overview” and “Item 5. Operating and Financial Review and Prospects.” We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting our business. These forward-looking statements are subject to risks, uncertainties and assumptions including, among other things:

·the economic, financial, political and social effects of the COVID-19 pandemic (or other pandemics, epidemics and similar crises) particularly in Brazil and in other Latin American countries where we operate, and to the extent that they continue to cause serious negative macroeconomic effects, thus prompting and exacerbating the risks described under “Item 3. Key Information—3D. Risk Factors;”
·global economic conditions and their impact on consumer spending patterns, particularly in Brazil (including, but not limited to, unemployment rates, interest rates, monetary policies and inflation rates);
·the impacts of the COVID-19 pandemic on customer demand, as well as on our expected results of operations, financial condition and cash flows;
·our ability to sustain or improve our performance;
·competition in the retail industry of Brazil, Colombia, Uruguay and Argentina in the sectors in which we operate;
·Brazilian government regulation and tax matters;
·adverse legal or regulatory disputes or proceedings;
·our ability to implement our strategy, including our digital transformation initiatives;
·credit and other risks of lending and investment activities;
·our ability to expand our operations outside of our existing markets;
·hedge risks; and
·other risk factors as set forth under “Item 3. Key Information—3D. Risk Factors.”

The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar words are intended to identify forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements because of new information, future events or otherwise. In light of these risks and uncertainties, the forward-looking information, events and circumstances discussed in this annual report might not occur. Our actual results and performance could differ substantially from those anticipated in our forward-looking statements.

EXPLANATORY NOTE

Sendas Spin-Off

On December 14, 2020, we entered into the Separation Agreement to carry out the separation of the cash and carry business through a spin-off of our then wholly owned subsidiary Sendas, which operates under the banner Assaí.

On December 31, 2020, the shareholders of CBD and Sendas at extraordinary general shareholders’ meetings of both companies approved the Sendas Spin-Off.

 
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The Sendas Spin-Off refers to the distribution of substantially all of the issued and outstanding Sendas common shares to holders of CBD common shares, including the CBD ADSs, on a pro rata basis for no consideration.  

On the same date, CBD completed a corporate reorganization pursuant to which Sendas transferred all of its equity interest in Éxito, which included Éxito’s international retail businesses in Colombia, Uruguay and Argentina, to CBD. We collectively refer to the series of the corporate transactions that CBD completed as the “Sendas Corporate Reorganization.” For additional information on the Sendas Corporate Reorganization, see “Item 4. Information on the Company—4A. History and Development of the Company—Changes in Our Business—Sendas Spin-Off.”

In addition, on December 14, 2020, we entered into the Separation Agreement with Sendas, which provides a framework for our relationship with Sendas following the Sendas Separation and the Sendas Spin-Off. For further information on the Separation Agreement, see “Item 7B. Related Party Transactions—Agreements with Sendas.” Pursuant to the Separation Agreement, CBD will recognize certain assets and liabilities related to contingencies and their related judicial deposits for which the parties have agreed to be responsible following the Sendas Separation, in a net amount of R$111 million.

As a result of the Sendas Spin-Off and the Sendas Separation, we have classified Sendas as discontinued operations in our statements of operations for the years presented in this annual report.

For additional information on the Sendas Separation and Sendas Spin-Off and the classification of Sendas as discontinued operations in our statements of operations for the years presented in this annual report, see notes 1.1 and 34 to our audited consolidated financial statements included elsewhere in this annual report and “Item 4. Information on the Company—4A. History and Development of the Company—Changes in Our Business—Sendas Spin-Off.”

The financial information and operating data as well the disclosure related to our business and operations in this annual report do not include those of Sendas, unless stated otherwise.

PART I 

ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable.

ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.KEY INFORMATION

3A. Selected Financial Data

We present in this section summary financial and operating data derived from our audited consolidated financial statements as of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018 included elsewhere in this annual report and prepared in accordance with IFRS as issued by the IASB.

IFRS 16 – Leases, or IFRS 16, became effective on January 1, 2019 and supersedes (i) IAS 17 – Leases, (ii) IFRIC 4 – Determining whether an Arrangement contains a Lease, (iii) SIC-15 – Operating Leases-Incentives, and (iv) SIC-27 – Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets forth the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to recognize most leases on the balance sheet.

Lessor accounting under IFRS 16 is substantially unchanged when compared to IAS 17. Lessors will continue to classify leases as either operating or finance leases using principles that are similar to IAS 17. Accordingly, IFRS 16 does not have an adverse impact on the recognition of a lease by the lessor.

We adopted IFRS 16 using the full retrospective method of adoption on January 1, 2019. Accordingly, operating lease expenses are replaced by depreciation expenses related to the right-of-use and interest expenses in connection with lease liabilities. We have also applied the practical expedient that exempts us from the reassessment of contracts as to whether they contain a lease. Additionally, we elected not to recognize a right-of-use and lease liabilities for leases with a lease term of 12 months or less.

 
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As a result of the application of the full retrospective method of adoption of IFRS 16, we have recasted the comparative financial information as of and for the years ended December 31, 2018 and 2017 with the following impacts:

 

As of and for the Year Ended December 31,

 

2018

2017

 (millions of R$)
Right-of-use assets4,5454,108
Lease liabilities5,7875,267
Depreciation expense(481)(483)
Interest expense(587)(565)

 

For further details on our adoption of new accounting standards, including IFRS 16 and IFRIC 23, see note 4 to our audited consolidated financial statements included elsewhere in this annual report.

The following tables present certain of our summary historical consolidated financial and operating data for each of the periods indicated. Solely for the convenience of the reader, real amounts as of and for the year ended December 31, 2020, have been translated into U.S. dollars at a rate of R$5.1967 to US$1.00, which was the commercial selling rate of U.S. dollars in effect as of December 31, 2020, as reported by the Central Bank.

 

As of and for the Year Ended December 31,

 

2020(*)

2020(**)

2019(**)(1)(2)(3)

2018(**)(1)(2)

2017(**)(1)(2)

2016(**)(1)(2)

 (millions of US$, except per share/ADS data)(millions of R$, except per share/ADS data)
Statement of operations and comprehensive income      
Net operating revenue9,86351,25328,83826,490 26,195 31,568
Cost of sales

(7,217)

(37,504)

(21,225)

(19,046)

(18,092)

(23,331)

Gross profit

2,646

13,749

7,613

7,444

8,103

8,237

Selling, general and administrative expenses(1,798)(9,343)(5,698)(5,396)(5,433)(6,709)
Depreciation and amortization(347)(1,804)(1,028)(892) (935) (616)
Other operating expenses, net

(14)

(71)

(386)

(199)

(551)

(501)

Operating expenses(2,159)(11,218)(7,112)(6,487) (6,919)(7,826)
Profit from operations before net financial expenses and share of profit of associates4872,5315019571,184411
Financial income175909353193 144 207
Financial expenses

(315)

(1,637)

(1,224)

(1,095)

(1,391)

(1,039)

Finance expenses, net

(140)

(728)

(871)

(902)

(1,247)

(832)

Share of profit of associates1998228 (93) 21
Profit (loss) before income tax and social contribution

366

1,901

(368)

83

(155)

(400)

Income tax and social contribution

(127)

(662)

95

41

(28)

53

Net income (loss) for the year from continuing operations

238

1,239

(273)

124

(183)

(347)

Net income (loss) for the year from discontinued operations

209

1,087

1,109

1,160

1,012

(799)

Net income (loss) for the year

448

2,326

836

1,284

829

(1,146)

Attributed to controlling shareholders from continuing operations2101,092(287)124 (183) (347)
Attributed to controlling shareholders from discontinued operations2091,0871,0771,025 682 (187)
Total attributed to controlling shareholders

419

2,179

790

1,149

499

(533)

Attributed to non-controlling shareholders from continuing operations2814714- -    (0)
 
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As of and for the Year Ended December 31,

 

2020(*)

2020(**)

2019(**)(1)(2)(3)

2018(**)(1)(2)

2017(**)(1)(2)

2016(**)(1)(2)

 (millions of US$, except per share/ADS data)(millions of R$, except per share/ADS data)
Attributed to non-controlling shareholders from discontinued operations--32135 330 (612)
Total attributed to non-controlling shareholders

28

147

46

135

330

(612)

Other comprehensive income (loss) for the year, net of income tax4162,162218(9) (36) 198
Total comprehensive income (loss) for the year

864

4,488

1,054

1,275

821

(947)

Attributed to controlling shareholders7213,7489451,132 478 (459)
Attributed to non-controlling shareholders142740109143 343 (488)
Per share data(4)      
Basic earnings per common share (weighted average for the year):      
Common – Continuing operations0.784.08(1.07)0.471.34(0.27)
Common – Total1.568.132.964.311.91(1.82)
Diluted earnings per common share (weighted average for the year):      
Common – Continuing operations0.784.07(1.07)0.461.34(0.27)
Common – Total1.568.122.954.291.90(1.82)
Weighted average number of common shares outstanding (in thousands)267,926267,926267,068266,604266,071265,532
Dividends declared and interest on own capital per common share0.371.920.851.090.300.02
Balance sheet data      
Cash and cash equivalents1,6768,7117,9544,3693,7925,112
Property and equipment, net3,82719,88824,29014,05213,2929,182
Assets held for sale2110922328,68726,74620,153
Total assets10,25653,29558,47561,65755,86245,051
Current borrowings and financing4442,3093,4881,9811,2002,957
Non-current borrowings and financing1,3176,84210,7063,3923,1932,912
Liabilities related to assets held for sale---23,54521,94715,632
Shareholders’ equity3,23416,80713,54813,15912,15612,417
Share capital1,0465,4346,8576,8256,8226,811
Other financial information      
Net cash provided by (used in):      
Operating activities9134,7421,1354,2673,464(1,304)
Investing activities(826)(4,291)(3,266)(1,897)(1,592)(2,020)
Financing activities(54)(281)1,894(1,641)(3,663)1,475
Capital expenditures(5)(479)(2,490)(2,782)(2,364)(1,713)(1,544)

 

________________       

(*)Solely for the convenience of the reader, we have translated certain real amounts at a rate of R$5.1967 to US$1.00, the closing commercial U.S. dollar selling rate as of December 31, 2020, as published by the Central Bank.
(**)The statements of operations for the years presented in the table related to Sendas were classified in a single line as “discontinued operations.” For additional information on the Sendas Separation and Sendas Spin-Off, see notes 1.1 and 34 to our consolidated financial statements included elsewhere this annual report and “Item 4. Information on the Company—4A. History and Development of the Company—Changes in Our Business—Sendas Spin-Off.”
(1)The operations of Via Varejo were classified as discontinued operations in the periods from November 2016 through June 2019. For additional information on the sale of our discontinued operations of Via Varejo, see note 12.4 to our audited consolidated financial statements included elsewhere in this annual report and “Item 4. Information on the Company—4A. History and Development of the Company—Changes in Our Business—Via Varejo Sale.” Moreover, starting on November 1, 2016, we began recording our investment in Cnova according to IFRS
(2)IFRS 16 became effective on January 1, 2019. We opted for the full retrospective adoption method as if IFRS 16 had been adopted since the date the lease agreements have entered into effect to show the comparative effects for each past period. As a result, we have restated our audited consolidated financial statements, and financial information included in this annual report, as of and for the years ended December 31, 2018 and 2017. Our audited consolidated financial statements and financial information as of and for the year ended December 31, 2016 have not been retroactively restated and are not directly comparable.
(3)As a result of Éxito Group’s acquisition on November 27, 2019, this table includes Éxito Group’s financial information solely for the month of December 2019.
(4)

Until February 2020, each preferred share received a dividend 10% higher than the dividend paid to each common share. In 2019, we paid dividends in the amount of R$20.6 to our preferred shareholders. See “Item 8. Financial Information—8A. Consolidated Statements and Other Financial Information—Dividend Policy and Dividends.” As a result of our migration to the Novo Mercado listing segment of B3 on March 2, 2020, we converted all of our preferred shares into common shares and started trading our common shares in the Novo Mercado listing segment of B3. For additional information on our migration to the Novo Mercado listing segment of B3, see “Item 9. The Offer and Listing—9A. Offer and Listing Details.” According to IAS33, for purposes of the presentation of the basic earnings per share and diluted earnings per share we are solely considering our common shares, including for periods from 2016 to 2019. We calculate basic earnings per share and diluted earnings per share on a converted basis to accommodate the fact that we no longer have outstanding preferred shares.

(5)Capital expenditures are comprised of cash used in purchases of property, equipment and intangible assets, as reflected in the consolidated statement of cash flows.
 
 10

 

 

As of and for the Year Ended December 31,

 

2020(4)

2019(4)

2018

2017

2016

 (R$, except as indicated)
Operating data*     
Number of employees at period end(1)

95,616

92,648

61,130

64,731

68,351

Total square meters of selling area at period end

2,164,137

2,232,514

1,195,089

1,237,769

1,393,072

Number of stores at period end(2):     
Pão de Açúcar182185186186185
Extra Hiper103112112117134
Mini Extra and Minuto Pão de Açúcar236237235265284
Extra Supermercado(3)175181186188194
Éxito Group(4)

629

653

-

-

-

Total number of stores at period end

1,325

1,368

719

756

797

________________       

*The table does not include the operating data from Sendas.

(1)Based on the full-time equivalent number of employees, which is the product of the number of all retail employees (full- and part-time employees) and the ratio of the average monthly hours of all retail employees to the average monthly hours of full-time employees.
(2)Excludes gas stations and drugstores.
(3)Includes Extra Supermercado, Mercado Extra and Compre Bem banners.
(4)Includes Éxito Group’s operations in Colombia, Uruguay and Argentina.

 

 

As of and for the Year Ended December 31,

 

2020(*)

2020

2019(1)

2018

2017

2016

 (US$, except as indicated)(R$, except as indicated)
Net operating revenue per employee(2):      
Pão de Açúcar112,954586,990447,977442,129414,903407,463
Extra Hiper(3)161,345838,464622,068609,364570,601517,197
Mini Extra and Minuto Pão de Açúcar111,846581,231424,552348,985349,306296,698
Extra Supermercado(4)90,198468,733376,005390,024439,678421,094
Éxito Group(5)112,651585,415    
CBD average net operating revenue per employee104,688544,030311,259433,333404,657 
Net operating revenue by store format:      
Pão de Açúcar1,4687,6307,1567,1716,9326,979
Extra Hiper(3)2,82814,69413,61313,71913,65214,102
Mini Extra and Minuto Pão de Açúcar3231,6781,2731,1821,0851,131
Extra Supermercado(4)9945,1684,6114,4174,5254,755
Éxito Group(5)4,24022,0342,151---
Other(6)

9

49

34

-

-

-

Total net operating revenue

9,862

51,251

28,838

26,489

26,194

26,967

Average monthly net operating revenue per square meter(7):      
Pão de Açúcar5082,6382,4482,4512,3852,420
Extra Hiper(3)3291,7111,5151,5161,5361,376
Mini Extra and Minuto Pão de Açúcar4632,4071,8501,5241,3431,287
Extra Supermercado(4)3942,0461,7861,7041,2781,685
Éxito Group(5)3401,767    
CBD average monthly net operating revenue per square meter01.8921.7721.7401.6341.602
Average ticket amount:      
Pão de Açúcar179067645957
Extra Hiper(3)2211690868073
Mini Extra and Minuto Pão de Açúcar(3)73825222019
 
 11

 

 

As of and for the Year Ended December 31,

 

2020(*)

2020

2019(1)

2018

2017

2016

 (US$, except as indicated)(R$, except as indicated)
Extra Supermercado(4)94940383636
Éxito Group(5)1790    
CBD average ticket amount168563605653
Average number of tickets per month:      
Pão de Açúcar1,358,6587,060,5378,959,0419,393,4889,770,68710,187,388
Extra Hiper(3)2,031,89610,559,15512,669,86613,244,64714,284,20916,106,165
Mini Extra and Minuto Pão de Açúcar699,3433,634,2774,160,4614,435,3484,425,0784,929,778
Extra Supermercado(4)1,674,7328,703,0809,674,1309,710,08310,480,77911,060,911
Éxito Group(5)3,929,62720,421,095    
CBD average number of tickets per month9,694,25750,378,14435,463,49736,783,56538,960,75342,284,242

________________       

(*)Solely for the convenience of the reader, we have translated certain real amounts at a rate of R$5.1967 to US$1.00, the closing commercial U.S. dollar selling rate as of December 31, 2020, as published by the Central Bank.
(1)IFRS 16 became effective on January 1, 2019. We opted for the full retrospective adoption method as if IFRS 16 had been adopted since the date the lease agreements have entered into effect to show the comparative effects for each past period. As a result, we have restated our audited consolidated financial statements, and financial information included in this annual report, as of and for the years ended December 31, 2018 and 2017. Our audited consolidated financial statements and financial information as of and for the year ended December 31, 2016 have not been retroactively restated and are not directly comparable.
(2)Based on the full-time equivalent number of employees, which is the product of the number of all retail employees (full- and part-time employees) and the ratio of the average monthly hours of all retail employees to the average monthly hours of full-time employees.
(3)Includes revenues associated with rentals of commercial spaces. Revenues of gas stations, drugstores, food delivery and in-store pick-up are included in the respective banner.
(4)Includes Extra Supermercado, Mercado Extra and Compre Bem banners.
(5)As a result of Éxito Group’s acquisition on November 27, 2019, this table includes Éxito Group’s financial information solely for the month of December 2019.
(6)Includes the banners Cheftime, James and Stix Fidelidade. For information on Cheftime, James and Stix Fidelidade, see “Item 4. Information on the Company—4A. History and Development of the Company—Changes in Our Business—Digital Transformation.”
(7)Calculated using the average of square meters of selling area on the last day of each month in the period.

 

3B. Capitalization and Indebtedness

Not applicable.

3C. Reasons for the Offer and Use of Proceeds

Not applicable.

3D. Risk Factors

An investment in the ADSs or our common shares involves a high degree of risk. You should carefully consider the risks and uncertainties described below and the other information in this annual report before making an investment decision. The risks described below are those that we currently believe may materially affect us. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations. This annual report also contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements.” The trading price of the ADSs and our common shares could decline due to any of these risks or other factors, and you may lose all or part of your investment. Our actual results could differ materially and adversely from those anticipated in these forward-looking statements as a result of certain factors, including the risks facing our Company described below and elsewhere in this annual report.

 
 12

Risks Relating to Brazil and Colombia

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. Brazilian political and economic conditions may adversely affect us and the trading price of the ADSs and our common shares.

The Brazilian government has frequently intervened in the Brazilian economy and has occasionally made significant changes to monetary, credit, tariff, tax and other policies and regulations. The Brazilian government’s actions to control inflation have often involved, among other measures, increases and decreases in interest rates, changes in tax and social security policies, price controls, currency exchange and remittance controls, devaluations, capital controls and limits on imports. Our business, financial condition, results of operations and the trading price of our ADSs and common shares may be adversely affected by changes in Brazilian policy or regulations at the federal, state or municipal level involving or affecting various factors, such as:

·economic, political and social instability;
·increases in the unemployment rate;
·interest rates and monetary policies (such as restrictive consumption measures that could affect the income of the population and government measures that may affect the levels of investment and employment in Brazil);
·significant increases in inflation or strong deflation in prices;
·currency fluctuations;
·import and export controls;
·exchange controls and restrictions on remittances abroad (such as those that were imposed in 1989 and early 1990s);
·modifications to laws and regulations according to political, social and economic interests;
·efforts to reform labor, tax and social security policies and regulation (including the increase of taxes, both generally and on dividends);
·energy and water shortages and rationing;
·liquidity of domestic capital and lending markets;
·public health, including as a result of epidemics and pandemics, such as the COVID-19 pandemic; and
·other political, diplomatic, social and economic developments in or affecting Brazil.

Uncertainty over whether the Brazilian government will implement changes in policy or regulation affecting these or other factors in the future may contribute to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets and securities issued abroad by Brazilian companies. These uncertainties and other future developments in the Brazilian economy may adversely affect our business activities, and consequently our results of operations, and may also adversely affect the trading price of the ADSs and our common shares.

Political instability has adversely affected and may continue to adversely affect our business, results of operations and the trading price of the ADSs and our common shares.

The Brazilian economy has been and continues to be affected by political events in Brazil, which have also affected the confidence of investors and the public in general, adversely affecting the performance of the Brazilian economy and increasing the volatility of securities issued by Brazilian companies.

Brazilian markets have experienced heightened volatility due to uncertainties from ongoing investigations on money laundering and corruption conducted by the Brazilian Federal Police and the Office of the Brazilian Federal Prosecutor. We have no control over and cannot predict whether the ongoing investigations or allegations will result in further political and economic instability, or if new allegations against government officials and/or companies will arise in the future.

 
 13

In addition, any difficulty by the Brazilian government in obtaining a majority in the national congress could result in congressional deadlock, political unrest and demonstrations or strikes, which could adversely affect us. Uncertainties relating to the implementation by the government of changes related to monetary, fiscal and social security policies, as well as to related laws may contribute to economic instability. These uncertainties and additional measures may heighten the volatility of the Brazilian securities market, including in relation to our ADSs and our common shares.

Brazilian government efforts to combat inflation may hinder the growth of the Brazilian economy and could harm us and the trading price of the ADSs and our common shares.

Historically, Brazil has experienced high inflation rates. Inflation and certain actions taken by the Brazilian government to curb it, including the increase of the SELIC rate established by the Central Bank, together with the speculation about governmental measures to be adopted, have materially and adversely affected the Brazilian economy and contributed to economic uncertainty in Brazil, heightening volatility in the Brazilian capital markets and adversely affecting us. Brazil’s annual inflation, as measured by the general price index (Índice Geral de Preços – Mercado), or IGP-M index, was 23.1% in 2020, 7.31% in 2019 and 7.54% in 2018. Brazil’s Broad Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo), or the IPCA, recorded inflation of 3.8%, 4.3% and 4.5 in 2018, 2019 and 2020, respectively, according to IBGE.

Tight monetary policies with high interest rates have restricted and may restrict Brazil’s growth and the availability of credit. Conversely, more lenient government and Central Bank policies and interest rate decreases have triggered and may trigger increases in inflation, and, consequently, growth volatility and the need for sudden and significant interest rate increases, which could negatively affect our business and increase the payments on our indebtedness. In addition, we may not be able to adjust the prices we charge our customers to offset the effects of inflation on our cost structure.

Recently, the Monetary Policy Committee (Comitê de Política Monetária), or COPOM, has decreased official interest rates, which have reached historical record lows. We cannot assure that interest rates will remain at current low levels in the future. Any future measures adopted by the Brazilian government, including further reduction in interest rates, intervention in the exchange market and the implementation of mechanisms to adjust or determine the value of the Brazilian real may trigger inflation, adversely affecting the overall performance of the Brazilian economy.

Furthermore, interest rate decreases may affect our ability to maintain interest margins we charge on installment sales, which could have a negative effect on net operating revenue. Brazilian government measures to combat inflation that result in an increase in interest rates may have an adverse effect on us, as our indebtedness is indexed to the interbank deposit certificate (Certificados de Depósito Interbancário), or CDI, rate. Inflationary pressures may also hinder our ability to access foreign financial markets or lead to government policies to combat inflation that could harm us or adversely affect the trading price of the ADSs and our common shares.

Exchange rate volatility may adversely affect the Brazilian economy and us.

The real has historically experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies. In 2017, the real depreciated against the U.S. dollar, reaching R$3.308 per US$1.00 as of December 31, 2017. In 2018, the real further depreciated against the U.S. dollar in comparison to 2017, reaching R$3.875 per US$1.00 as of December 31, 2018. In 2019, the real further depreciated against the U.S. dollar in comparison to 2019, reaching R$4.0301 per US$1.00 as of December 31, 2019. In 2020, the real further depreciated against the U.S. dollar in comparison to 2019, reaching R$5.1967 per US$1.00 as of December 31, 2020. Depreciation of the real against the U.S. dollar could create inflationary pressures in Brazil and cause increases in interest rates, which negatively affects the growth of the Brazilian economy as a whole, curtails access to foreign financial markets and may prompt government intervention, including recessionary governmental policies. Depreciation of the real against the U.S. dollar has also, including in the context of an economic slowdown, led to decreased consumer spending, deflationary pressures and reduced growth of the economy as a whole. Depreciation would also reduce the U.S. dollar value of distributions and dividends and the U.S. dollar equivalent of the trading price of the ADSs and our common shares. As a result, we may be materially and adversely affected by real/U.S. dollar exchange rate variations.

 
 14

Economic and political conditions in Colombia may adversely affect our business, results of operations and the trading price of the ADSs and our common shares.

Economic and political conditions in Colombia may adversely affect our business, results of operations and the trading price of the ADSs and our common shares, as our operations in Colombia represented 33.3% of our total net operating revenue in 2020. Economic growth or contractions, inflation, changes in law, regulation, policy or future judicial rulings and interpretations of policies involving exchange controls and other matters such as (but not limited to) currency depreciation, inflation, interest rates, taxation, banking laws and regulations and other political or economic developments in or affecting Colombia may affect the overall business environment and may, in turn, adversely affect us.

President Iván Duque Márquez, who took office in August 2018, inherited high government spending levels, and measures to meet fiscal targets led to protests around the country in late 2019 and early 2020, paralyzing activities in the main cities in Colombia for days. We may be adversely affected by changes in government or fiscal policies, and other political, diplomatic, social and economic developments that may affect Colombia. We cannot predict what policies will be adopted by the Colombian government and whether those policies would adversely affect the Colombian economy and, consequently, us.

In March 2017, Fitch Ratings (“Fitch”) upgraded Colombia’s rating outlook from negative to stable due to the perceived reduction in macroeconomic imbalances as a result of the sharp reduction in the current account deficit, diminished uncertainties surrounding Colombia’s fiscal consolidation path due to the tax reform measures passed in December 2016 and the expectation that inflation would meet the Colombian Central Bank’s target. Fitch reaffirmed the “stable” outlook in May 2017. In December 2017, S&P downgraded Colombia’s long-term foreign currency sovereign credit ratings from “BBB” to “BBB-.” In February 2018, Moody’s Corporation (“Moody’s”) changed Colombia’s rating outlook from stable to negative. In April 2020, amid developments relating to the spread of COVID-19 and the collapse of oil prices, S&P changed the outlook of Colombia’s credit rating to negative and Fitch downgraded Colombia’s credit rating from “BBB” to “BBB-” with a negative outlook.

Any further downgrade of Colombia’s credit rating could adversely affect the Colombian economy and us. In 2017 and 2019, tax reforms were implemented, which included raising the VAT rate from 16% to 19%, increasing the withholding income tax rate for foreign providers from 15% to 20% and introducing further taxation in the context of the indirect transfer of shares of Colombian entities.

Developments and the perception of risk in other countries may adversely affect the price of Brazilian securities, including the ADSs and our common shares.

The market value of securities of Brazilian and Colombian issuers is affected to varying degrees by economic and market conditions in other countries, including developed countries such as the United States and certain European and emerging market countries. Investors’ reactions to developments in these countries may adversely affect the market value of securities of Brazilian and Colombian issuers, including the ADSs and our common shares. Trading prices on B3, for example, have been historically affected by fluctuation in interest rates applicable in the United States and variation in the main U.S. stock indices. Any increase in interest rates in other countries, especially the United States, may decrease global liquidity and the interest of investors in the Brazilian or Colombian capital markets, adversely affecting the ADSs and our common shares. Moreover, crises or significant developments in other countries and capital markets may diminish investors’ interest in securities of Brazilian issuers, including the ADSs and our common shares, and their trading price, limiting or preventing our access to capital markets and to funds to finance our future operations at acceptable terms.

The outbreak of communicable diseases around the world, including the COVID-19, may lead to higher volatility in the global capital markets and recessionary pressure on the Brazilian economy. Any outbreak in Brazil could directly affect our operations, each of which may materially and adversely affect our business, financial condition and results of operations.

The outbreak of communicable diseases on a global scale may affect investment sentiment and result in higher volatility in global capital markets and may have a recessionary effect on the Brazilian and Colombian economies. Since December 2019, a novel strain of coronavirus known as COVID-19 has spread in China and other countries. In 2020, the COVID-19 outbreak has compelled governments around the world, including in Brazil and Colombia, to adopt temporary measures to contain the spread of COVID-19 by means such as lockdowns of cities, restrictions on travel and public transportation, business and store closures, and emergency quarantines, among others, all of which have caused significant disruptions to the global economy and ordinary course of business operations across a growing list of sectors and countries. The measures adopted to combat the COVID-19 outbreak have adversely affected and will continue to adversely affect business confidence and consumer sentiment. They have been, and may continue to be, accompanied by significant volatility in financial and commodity markets as well as stock exchanges worldwide.

 
 15

In Brazil, the stock market experienced a few automatic suspensions known as “circuit breakers”, as a result of investors’ aversion to risk. The B3 dropped 36.9% from January 1, 2020, to March 31, 2020, following the downfall of international equity markets. The trading price of our common shares was also adversely affected.

The spread of COVID-19, especially if the measures to curb the spread of the virus lingers, may have broader macro-economic implications, including reduced levels of economic growth and possibly a global recession, the effects of which could be felt well beyond the time the spread of infection is contained. Many countries are implementing relief plans to reduce the effects of the COVID-19 in the local and world economy. Due to the uncertainties related to the length of this novel virus, we cannot estimate the additional impacts that the COVID-19 may cause on the price and performance of our common shares and ADSs. Any material change in the Brazilian, Colombian and international financial markets or the Brazilian and Colombian economies as a result of these events or any developments may materially and adversely affect our business, financial condition and results of operations.

Any further downgrading of Brazil’s credit rating may adversely affect the trading price of the ADSs and our common shares.

Credit ratings affect investors’ perceptions of risk and, as a result, the yields required on debt issuances in the financial markets. Rating agencies regularly evaluate Brazil and its sovereign ratings, taking into account a number of factors including macro-economic trends, fiscal and budgetary conditions, indebtedness and the prospect of change in these factors.

Standard & Poor’s initially downgraded Brazil’s sovereign debt credit rating from BBB-minus to BB-plus in September 2015 and subsequently downgraded it to BB in February 2016, maintaining its negative outlook, citing Brazil’s fiscal difficulties and economic contraction as signs of a worsening credit situation. On January 11, 2018, Standard & Poor’s further downgraded Brazil’s credit rating from BB to BB-minus. In February 2019, Standard & Poor’s affirmed Brazil’s sovereign credit rating at BB-minus with a stable outlook. In December 2019, Standard & Poor’s affirmed Brazil’s sovereign credit rating at BB-minus with a positive outlook, further maintaining the sovereign credit rating at BB-minus, but revising the outlook on this rating from positive to stable in April 2020.

Moody’s placed Brazil’s Baa3 sovereign debt credit rating under review in December 2015 and downgraded it to Ba2 with a negative outlook in February 2016, citing the prospect for further deterioration in Brazil’s debt indicators, taking into account the low growth environment and the challenging political scenario. In April 2018, Moody’s maintained Brazil’s sovereign debt credit rating at Ba2, but changed its prospect from negative to stable, maintaining it in September 2018, citing the expected new government spending cuts. In May 2019, Moody’s affirmed Brazil’s sovereign credit rating at Ba2 and changed the outlook to stable, which rating and outlook were further reaffirmed by Moody’s in May 2020.

Fitch initially downgraded Brazil’s sovereign credit rating to BB-plus with a negative outlook in December 2015, citing the country’s rapidly expanding budget deficit and worse-than-expected recession and subsequently downgraded it to BB with a negative outlook in May 2016. In February 2018, Fitch downgraded Brazil’s sovereign credit rating again to BB-minus, citing, among other reasons, fiscal deficits, the increasing burden of public debt and an inability to implement reforms that would structurally improve Brazil’s public finances. In November 2019, Fitch maintained Brazil’s sovereign credit rating at BB-minus, citing the risk of tax and economic reforms and political instability. In May 2020, Fitch reaffirmed Brazil’s sovereign credit rating at BB-minus and revised the outlook on this rating to negative as a result of the impact of the COVID-19 pandemic.

Any further downgrade of Brazil’s credit rating could heighten investors’ perception of risk and, as a result, increase the cost of debt issuances and adversely affect the trading price of our securities.

 
 16

Risks Relating to our Industry and Us

We face significant competition and pressure to adapt to changing consumer habits and preferences, which may adversely affect our market share and net income.

We operate mainly in the food retail industry in Brazil and Colombia, including the home appliances segment, which are highly competitive. We compete with other retailers based on price, product mix, store location and layout and services. Consumer habits are constantly changing, and we may not be able to anticipate and quickly respond to these changes. We face intense competition from other store formats and sub-segments within the food retail industry, especially the cash-and-carry sector, which has in recent years imposed significant competitive pressure on our hypermarket stores. We also face competition from small and regional retailers, mainly in the retail segment, and especially from those that operate in the informal segment of the Brazilian and Colombian economies. In addition, in our markets, particularly in the São Paulo and Rio de Janeiro metropolitan areas, we compete in the Brazilian retail sector with a number of large multinational retail food, general merchandise and cash and carry chains, as well as local supermarkets and independent grocery stores. In the home appliances sector, we also compete with large multinational chains and large or specialized Brazilian companies. Acquisitions or consolidations within the industry may also increase competition and adversely affect our market share and net income.

If we are unable to compete successfully in our target markets (including adapting our store format mix or layout, identifying locations and opening stores in preferred areas, and quickly adjusting our product mix or prices under each of our banners and segments) or otherwise adjust to changing consumer habits and preferences, such as shopping on mobile devices, we may lose market share, which would adversely affect our financial condition and results of operations.

Our traditional supermarkets and retail stores face increasing competition from internet sales, which may negatively affect sales of traditional channels, and our digital transformation strategy might not be an effective response to this emerging competition.

In recent years, retail sales of food, clothing and home appliances products over the internet have increased significantly in Brazil and in other Latin American countries where we have operations. We expect this trend to continue as more traditional retailers enter into the online retail field or expand their existing infrastructure related to internet sales. For example, Amazon recently announced that it would focus more resources on its Brazilian business. Growth in the internet retail business of our competitors would likely harm not only our retail operations but also our internet retail operations. Internet retailers are able to sell directly to consumers, reducing the importance of traditional distribution channels such as supermarkets and retail stores. Certain internet food retailers have significantly lower operating costs than traditional hypermarkets and supermarkets because they do not rely on an expensive network of retail points of sale or a large workforce. As a result, internet food retailers are able to offer their products at lower costs than we do and in certain cases are able to bypass retailing intermediaries and deliver particularly high-quality, fresh products to consumers. We believe that our customers are increasingly using the internet to shop electronically for food and other retail goods, and that this trend is likely to continue, especially as a result of the COVID-19 pandemic.

Additionally, technology employed in retail sales of food and home appliances evolves constantly as part of a modern digital culture. For example, one of our competitors announced a partnership with a startup company for the opening of an automated grocery store run by a smartphone application. We may not be able to adapt to these changes quickly enough to meet our customers’ demands and preferences, as well as standards of the industry in which we operate.

We have a digital transformation strategy, but we cannot provide any assurance that our strategy will be successful in meeting customer demands or maintaining our market share in light of our competitors’ internet retail businesses. For information on our digital transformation, see “Item 4. Information on the Company—4A. History and Development of the Company—Changes in Our Business—Digital Transformation.” If internet sales in Brazil continue to grow, consumers’ reliance on traditional distribution channels such as our supermarkets and retail stores could be materially diminished, which could have a material adverse effect on our financial condition and results of operations.

 
 17

The Brazilian and Colombian food retail industry is sensitive to decreases in consumer purchasing power and unfavorable economic cycles.

Historically, the Brazilian and Colombian food retail industry, which includes the cash and carry segment, has experienced periods of economic slowdown that led to declines in consumer expenditures. The success of operations in the food retail and home appliances sectors depends on various factors related to consumer expenditures and consumer income, including general business conditions, interest rates, inflation, consumer credit availability, taxation, consumer confidence in future economic conditions, employment and salary levels. Reductions in credit availability and more stringent credit policies adopted by us and credit card companies may negatively affect our sales, especially for home appliances. Unfavorable economic conditions in Brazil or in other Latin American countries where we operate, or unfavorable economic conditions worldwide reflected in the Brazilian economy and in those other countries where we operate, may significantly reduce consumer expenditure and available income, particularly for lower income classes, who have less access to credit than higher income classes, more limited debt refinancing conditions and more susceptibility to be affected by increases in the unemployment rate. These conditions may have a material adverse effect on our financial condition and results of operation.

These factors are compounded as Brazil emerges from a prolonged recession after a period of slow recovery, with only meager gross domestic product, or GDP, growth in 2019 and 2018. Brazil’s GDP growth rates were (4.0)% in 2020, 1.1% in 2019 and 1.1% in 2018. According to Colombia’s National Administrative Department of Statistics (Departamento Administrativo Nacional de Estadística), or DANE, as of the end of December 31, 2020, the Colombian GDP decreased by 6.8% when compared to the same period of 2019, while the Colombian retail and wholesale industry as a whole decreased by 2.8%, mainly as a result of the adverse effects of the COVID-19 pandemic, including restrictions on the circulation of people, lockdowns, closing of commercial spaces, as well as the increased unemployment rate and lower consumer confidence.

Our results of operations and financial condition have been, and will continue to be, affected by the weak GDP of the countries where we operate. Developments in the economy of the Latin American countries where we operate, principally Brazil and Colombia, may affect these countries’ growth rates and, consequently, the use of our products and services, which may adversely affect the trading price of our ADSs and common shares.

Because the retail industry is usually perceived as essentially growth-oriented, we are dependent on the growth rate of Brazil and Colombia’s urban population and different income levels. Any decrease or slowdown in these metrics in Brazil or Colombia, may adversely affect our sales and our results of operations.

Restrictions of credit availability to consumers in Brazil and Brazilian government rules and interventions affecting financial operations may adversely affect our sales volumes and operations, and we are exposed to risks related to customer financing and loans.

Sales in installments are an important component of the result of operations for Brazilian non-food retailers. The increase in the unemployment rate combined with relatively high interest rates have resulted in an increased restriction of credit availability to consumers in Brazil. The unemployment rate reached 13.9% in 2020, compared to 11.9% in 2019 and 12.3% in 2018. These circumstances have not been noticeably improved by gradual reductions in the basic interest rate in Brazil, the SELIC rate, which went from 2.0%, 4.5% and 6.5% in December 31, 2020, 2019 and 2018, respectively.

Our sales volumes, particularly for non-food products, and, consequently, our results of operations may be adversely affected if the credit availability to consumers is reduced, or if Brazilian government restricts the granting of credit to consumers.

Additionally, we are involved through FIC in extending credit to customers through our partnership with Itaú Unibanco Holding S.A., or Itaú Unibanco, one of the largest privately-owned financial institutions in Brazil. FIC exclusively offers credit cards, financial services and insurance coverage at our stores. For more information on FIC, see “Item 4. Information on the Company—4B. Business Overview—FIC.”

FIC is subject to the risks normally associated with providing financing services, including the risk of default on the payment of principal and interest and any mismatch of cost and maturity of our funding in relation to the cost and maturity of financing to customers, which could have a material adverse effect on us.

 
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Furthermore, FIC is a financial institution regulated by the Central Bank and is, therefore, subject to extensive regulation. The regulatory structure of the Brazilian financial system is continuously changing. Existing laws and regulations may be amended, and their application or interpretation may also change, and new laws and regulations may be adopted. FIC and, therefore, we, may be adversely affected by regulatory changes, including those related to:

·minimum capital requirements;
·requirements for investment in fixed capital;
·credit limits and other credit restrictions;
·accounting requirements;
·intervention, liquidation and/or temporary special management systems; and
·interest rates.

Brazilian government rules and intervention may adversely affect our operations and profitability more than those of a competitor without financial operations.

We are increasingly dependent on credit card sales. Any changes in the policies of merchant acquirers may adversely affect us.

We are increasingly dependent on credit card sales. Sales to customers using credit cards accounted for 46.5%, 46.4% and 46.1% of the consolidated net operating revenue in 2020, 2019 and 2018 for our Brazilian retail segment. In order to offer credit card sales to our customers, we depend on the policies of merchant acquirers, including fees charged by acquirers. Any change in the policies of acquirers, including, for example, their merchant discount rate, may adversely affect us.

A portion of our sales is paid in installments offered by acquirers. As a result, we depend on acquirers to be able to continue offering credit cards as a payment option to our customers. Any change in the policies of acquirers regarding installment payments and credit may adversely affect us.

Our business depends on strong brands. We may not be able to maintain and enhance our brands, or we may receive unfavorable customer complaints or negative publicity, which could adversely affect our brands.

We believe that our Pão de Açúcar, Extra, Compre Bem, Éxito, Carulla, Surtimax, Super Inter , Surtimayorista, Devoto, Disco, Geant and Libertad banners contribute significantly to the success of our business. We also believe that maintaining and enhancing those brands is critical to expanding our base of customers, which depends largely on our ability to continue to create the best customer experience, based on our competitive pricing and our large assortment of products.

Customer complaints or negative publicity about our product offerings or services could harm our reputation and diminish consumer confidence in us. A reduction in the strength of our brands and reputation could adversely affect our business, financial condition and operating results.

The recent global outbreak of novel coronavirus (COVID-19) disease has disrupted and could further disrupt our operations and could have an adverse impact on our business, financial condition, results of operations or prospects.

Since December 2019, a novel strain of coronavirus known as COVID-19 has spread in China and other countries. In response to the COVID-19 pandemic, government authorities around the world imposed measures that restricted the movement of persons, including: (i) quarantine and lockdown; (ii) restrictions on travel and public transportation; (iii) extended closings of offices and working places, which caused interruptions in supply chains; and (iv) closing of certain stores, mostly those deemed non-essential. In the countries where we operate, state and local governments followed the guidelines issued by the respective Ministry of Health to control the spread of COVID-19 and imposed restrictions on the movement of persons and social distancing requirements, resulting in the closing of restaurants, schools, daycare centers, hotels, shopping malls, and areas with intense foot traffic, including parks and other public spaces.

 
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Certain of our operations were not considered essential by government authorities, which led to the closure of a significant part of our commercial galleries and centers. Even after the re-opening of these commercial galleries and centers, we have experienced a reduced traffic of people at these venues. Consequently, revenue from these operations has decreased significantly, which has adversely affected and may continue to negatively affect us.

Moreover, our administrative office and other facilities were affected as we adopted a remote work policy on March 2020 for our administrative and back-office personnel in the countries we operate. We have been gradually returning our employees to the office, but we cannot guarantee that we will not have to implement this policy once again in the event of new restrictive measures imposed as a response to a new COVID-19 wave. The use of this policy, partially or in full, may affect our productivity, result in errors and delays in our operations and cause other business interruptions.

To meet the demand of our customers and protect our employees, we implemented emergency protective health measures at our stores, hired temporary employees to maintain them operational and invested in additional training, which caused a temporary increase in our operating costs. We cannot assure you that we will not have to implement these measures or adopt new protective measures, which may adversely affect us.

If a significant percentage of our employees is not able to work, due to illnesses, restrictions on travel or government restrictions related to the pandemic, we may be adversely affected. An extended period of remote work may also increase our operating risks, including cyber security and labor risks, among others, which may adversely affect us. We may also be affected as a result of a lower flow of people on the streets, and consequently in stores, in addition to changes in the consumption pattern of customers.

We may also face supply chain risks, including scrutiny or embargoing of goods produced in infected areas, in addition to failures of third parties, including our suppliers, contract manufacturers, contractors, commercial banks, joint venture partners and external business partners to meet their obligations, or significant disruptions to their ability to do so, which may adversely affect us.

The extent to which the coronavirus or other diseases affect us will depend on future developments, which are highly uncertain and cannot be predicted, including (i) the severity and duration of the pandemic, including whether there are new waves caused by additional periods of increases or spikes in the number of COVID-19 cases, future mutations or related strains of the virus in areas in which we operate; (ii) evolving macro-economic factors, including general economic uncertainty, unemployment rates, and recessionary pressures; (iii) unknown consequences on our business performance and initiatives stemming from the substantial investment of time and other resources to the pandemic response; (iv) the long-term impact of the pandemic on our business, including consumer behaviors. Accordingly, our business may be adversely impacted by the fear of exposure to uncertainties related to or actual effects of the COVID-19 or similar disease outbreak. 

In addition, the COVID-19 pandemic may negatively impact our business by causing or contributing to, among other things, the following, each of which could adversely affect our business, results of operations, financial condition and cash flows:

·We cannot assure you that the emergency health measures we have adopted will continue to be effective or that we will not have to adopt new protective measures, including work from home policies, which may divert our management’s attention and increase our operating costs;
·If individual states and municipalities continue to implement different COVID-19 preventative measures, we may be required to expend additional time to implement them, which may increase our operating costs. In addition, we cannot assure you that we will be able to fully comply with these measures, which may negatively impact the way we operate our stores;
·In case we face a worsening in the pandemic situation in the future, which will require some investments with additional temporary workers or new adaptations in our stores, which may increase our operating costs; and

If new restrictions are imposed that again impact the production capacity of some of our suppliers, we might face new shortages in the future, in which case we may have to seek alternate sources of supply which may be more expensive, may not be available or may result in delays in shipments to us and subsequently to our customers.

 
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Contingent obligations for the benefit of unrelated parties may cause a material adverse effect on our business and result of operations.

On June 14, 2019, we completed the sale of all of our equity interest in Via Varejo and Via Varejo ceased to be a consolidated subsidiary. Since then, we do not control Via Varejo nor have exercised influence over its management or operations, and, as a result, Via Varejo has no longer been our related party. However, certain transactions, previously existing between the Company and Via Varejo, when Via Varejo was part of the Pão de Açúcar Group, remained in effect, including the guarantees we have granted for obligations of Via Varejo. In the event of non-compliance by Via Varejo of these obligations, including as a result of non-payment, our business and results of operations may be adversely and materially affected. For additional information on these transactions, see “Item 7. Major Shareholders and Related Party Transactions—7B. Related Party Transactions—Via Varejo.”

We may not be able to protect our intellectual property rights.

Our future success depends significantly on our ability to protect our current and future brands and to defend our intellectual property rights, including trademarks, patents, domain names, trade secrets and know-how. We have been granted numerous trademark registrations covering our brands and products and have filed, and expect to continue to file, trademark and patent applications seeking to protect newly developed brands and products. We cannot assure that trademark and patent registrations will be issued with respect to any of our applications. There is also a risk that we could inadvertently fail to renew a trademark or patent on a timely basis or that our competitors will challenge, invalidate or circumvent any existing or future trademarks and patents issued to, or licensed by, us. Although we have put in place appropriate actions to protect our portfolio of intellectual property rights (including trademark registration and domain names), we cannot be certain that the steps we have taken will be sufficient or that third parties will not infringe upon or misappropriate our proprietary rights. Any failure in our ability to protect our proprietary rights against infringement or misappropriation could adversely affect our business, results of operations, cash flows or financial condition, and in particular, on our ability to develop our business.

Our sales depend on the effectiveness of our advertisement and marketing campaigns, which may adversely affect our revenues and profitability.

To promote increased traffic of customers and attract them to our stores, we dedicate substantial resources to our advertisement and marketing campaigns. Our revenues and profitability depend on our ability to, among other things, identify our target consumers and decide on the marketing message and communication method to reach them most effectively. If we do not conceive, plan or execute our advertisement and marketing activities in order to successfully and efficiently increase revenues and market share, our profitability and financial position may be adversely affected.

We may not be able to renew or maintain our stores’ lease agreements on acceptable terms, or at all, and we may be unable to obtain or renew the operational licenses of our stores or distribution centers in a timely manner.

Most of our stores are leased. The strategic location of our stores is key to the development of our business strategy and, as a result, we may be adversely affected in the event that a significant number of our lease agreements is terminated and we fail to renew these lease agreements on acceptable terms, or at all. In addition, in accordance with applicable law, landlords may increase rent periodically, usually every three years. A significant increase in the rent of our leased properties may adversely affect our financial position and results of operations. Furthermore, we are party to an arbitration proceeding related to the lease agreements of 61 stores entered into with Fundo de Investimento Imobiliário Península, or Península, which is beneficially owned by members of the Diniz Family. We cannot assure you that the outcome of this arbitration proceeding will not adversely affect our business and operations. For more information on this arbitration proceeding, see “Item 8 Financial Information—8A. Consolidated Statements and Other Financial Information—Legal Proceedings—Arbitration—Península.”

Our stores and distribution centers are also subject to certain operational licenses. Our inability to obtain or renew these operational licenses may result in the imposition of fines and, as the case may be, in the closing of stores or distribution centers. Given that smooth and uninterrupted operations in our stores and distribution centers are a critical factor for the success of our business strategy, we may be negatively affected in the case of their closing as a result of our inability to obtain or renew the necessary operational licenses.

 
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Our product distribution is dependent on a limited number of distribution centers and we depend on the Brazilian transportation systems and infrastructure to deliver our products, and any disruption at one of our distribution centers or delay related to transportation and infrastructure could adversely affect our supply needs and our ability to distribute products to our stores and customers.

In our Brazilian retail segment, approximately 75% of our products are distributed through our 15 distribution centers and warehouses located in the Southeastern, Midwestern and Northeastern regions of Brazil. The transportation system and infrastructure in Brazil are underdeveloped and need significant investment to work efficiently and to meet our business needs.

Any significant interruption or reduction in the use or operation of transportation infrastructure in the cities where our distribution centers are located or in operations at one of our distribution centers, as a result of natural disasters, fire, accidents, systemic failures, strikes (such as the May 2018 Brazilian truckers’ strike) or other unexpected causes, may delay or affect our ability to distribute products to our stores and may decrease our sales, which may have a material adverse effect on us.

Our growth strategy includes the opening of new stores which may require the opening of new distribution centers or the expansion of the existing ones to supply and meet the demand of additional stores. Our operations may be negatively affected if we are not able to open new distribution centers or expand our existing distribution centers in order to meet the supply needs of these new stores. For more information on our distribution and logistics operations, see “Item 4. Information on the Company—4B. Business Overview—Distribution and Logistics.”

Our systems are subject to cyberattacks and security and privacy breaches, which could cause a material adverse effect on our business and reputation.

We, like all business organizations in the digital world, have been subject to a broad range of cyber threats, including attacks, with varying levels of sophistication. These cyber threats are related to the confidentiality, availability and integrity of our systems and data, including our customers’ confidential, classified or personal information.

We maintain what we believe to be reasonable and adequate technical security controls, policy enforcement mechanisms, monitoring systems and management oversight to address these threats. While these measures are designed to prevent, detect and respond to unauthorized activity in our systems, certain types of attacks, including cyberattacks, may occur.

Furthermore, some of our suppliers and service providers have significant access to confidential and strategic data collected by our systems, including confidential information regarding our customers.

Any unauthorized access to, or release or violation of our systems and data or those of our customers, suppliers or service providers could disrupt our operations, particularly our digital retail operations, cause information losses and cause us to incur significant costs, including the cost of retrieving lost information, which could have a material adverse effect on our business and reputation.

Our information systems may suffer interruptions due to factors beyond our control, such as natural disasters, hacking, energy interruptions, failures in telecommunication and computer viruses, among other factors. Any of these types of interruption may adversely affect our operations, thereby impacting our cash generation and our financial condition.

Failure to protect our database, which contains the personal data of our clients and employees, and developments in data protection and privacy laws, could have an adverse effect on our business, financial condition or results of operations.

We maintain a database of information about our suppliers, employees and customers, which mainly includes, but is not limited to, data collected when customers sign up for our loyalty programs. If we experience a breach in our security procedures that affect the integrity of our database, including unauthorized access to any personal information of our customers, we may be subject to new legal proceedings that could result in damages, fines and harm to our reputation.

 
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The processing of personal data is regulated in the jurisdictions where we operate by a series of rules enacted in Brazil and Colombia, some of which have just been recently implemented by local authorities, such as is the case of the rules under the Brazilian General Data Protection Law that came into effect in September 2020. Failure to comply with provisions of these laws, especially related to (i) providing clear information on the data processing operations performed by us, (ii) respecting for the purpose of the original data collection; (iii) legal deadlines for the storage of user data, and (iv) the adoption of legally required security standards for the preservation and inviolability of the personal data processed, can give rise to penalties, such as fines and even temporary or permanent suspension of our personal data processing activities.

In the event of non-compliance with Brazilian law or any other applicable law related to personal data, or in the event of a personal data breach, we may be subject to legal proceedings, fines and damage to our reputation, which may materially and adversely affect us. We are subject to uncertainties as to how Brazilian courts will apply and interpret the Brazilian legislation, which may materially and adversely affect us.

Our controlling shareholder has the ability to direct our businesses and affairs.

According to Brazilian corporate law, our controlling shareholder, the Casino Group has the power to (i) appoint the majority of the members of our board of directors, who, in turn, appoint our executive officers; and (ii) determine the outcome of the vast majority of actions requiring shareholder approval. Our controlling shareholders’ interests and business decisions may prevail over our other shareholders or holders of ADSs.

Unfavorable decisions in legal or administrative proceedings could have a material adverse effect on us.

We are party to legal and administrative proceedings related to civil, regulatory, tax and labor matters. We cannot assure you that these legal proceedings will be decided in our favor. We have made provisions for proceedings in which the chance of loss has been classified as probable by our external legal advisors, management and our audit committee. Our provisions may not be sufficient to cover the total cost arising from unfavorable decisions in legal or administrative proceedings. If all or a significant number of these proceedings have an outcome unfavorable to us, our business, financial condition and results of operations may be materially and adversely affected. In addition to financial provisions and the cost of legal fees associated with the proceedings, we may be required to post bonds in connection with the proceedings, which may adversely affect our financial condition. See “Item 8. Financial Information—8A. Consolidated Statements and Other Financial Information—Legal Proceedings” and note 21 to our audited consolidated financial statements, included elsewhere in this annual report, for a description of our material litigation contingencies.

We may be unable to attract or retain key personnel.

In order to support and develop our operations, we must attract and retain personnel with specific skills and knowledge. We face various challenges inherent to the administration of a large number of employees over a wide geographical area. Key personnel may leave us for a variety of reasons and the impact of these departures is difficult to predict, which may hinder the implementation of our strategic plans and adversely affect our results of operations.

We could be materially adversely affected by violations of the Brazilian Anti-Corruption Law, U.S. Foreign Corrupt Practices Act, the Sapin II Law and similar anti-corruption laws.

Law No. 12,846, of August 1, 2013, or the Brazilian Anti-Corruption Law, introduced the concept of strict liability for legal entities involved in harmful acts against the public administration, subjecting the perpetrator to both administrative and civil penalties.  Similar to the Foreign Corrupt Practices Act of the United States, to which we are also subject, the Brazilian Anti-Corruption Law considers that an effective implementation of a compliance program may be used to mitigate the administrative penalties to be applied as a consequence of a harmful act against the public administration. 

In Colombia, we have a similar provision. Law No. 1,778 of 2016 created a new case of liability for companies in case any of their controlling shareholders, employees, contractors or administrators or of any of their subsidiaries, carry out foreign bribery offences. The sanctions include fines (up to 200,000x the current minimum monthly wage) and a prohibition to contract with the Colombian government, among others. Likewise, Colombian law contemplates among its criteria for limiting corporate liability the existence, execution and effectiveness of transparency and business ethics programs or anti-corruption mechanisms within the company.

 
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Additionally, French Law No. 1,691, of December 2016, or the Sapin II Law, relates to transparency, preventing corruption and the modernization of economic activity, and determines that companies must establish an anti-corruption program to identify and mitigate corruption risks. Under the Sapin II Law, among others, any legal entity or individual may be held criminally liable for offering a donation, gift or reward with the intent to induce a foreign public official to abuse their position or influence to obtain an undue advantage. The Sapin II Law is applicable to companies belonging to a group whose parent company is headquartered in France and whose workforce includes at least 500 employees worldwide. As such, the Sapin II Law applies to us. The key anti-corruption provisions of the Sapin II Law have been in force since June 1, 2017.

Failure to comply with anti-corruption laws in any of the countries where we have operations and to which we are subject or any investigations of misconduct, or enforcement actions could subject us to fines, loss of operating licenses, and reputational harm as well as other penalties, including individual arrests, which may materially and adversely affect us, our reputation, and the trading price of the ADSs and our common shares.

We cannot guarantee that our service providers or suppliers do not engage in irregular practices.

Given the decentralization and outsourcing of our service providers’ operations and our suppliers’ production chains, we cannot guarantee that they will not have issues regarding working conditions, sustainability, outsourcing the provision or production chain and improper safety conditions, or that they will not engage in these irregular practices to lower service or product costs. If a significant number of our service providers or suppliers engage in these practices, our reputation may be harmed and, as a consequence, our customers’ perception of our products may be adversely affected, causing a reduction in sales and results of operations as well as in the trading price of the ADSs and our common shares.

Some categories of products that we sell are principally acquired from a few suppliers and over-concentration could disrupt the availability of these products.

Some categories of products that we sell are principally acquired from a few suppliers. If any supplier is not able to supply the products in the quantity and at the frequency that we normally acquire them, and we are not able to replace the supplier on acceptable terms or at all, we may be unable to maintain our usual level of sales in the affected category of product, which may have a material adverse effect on our business and operations and, consequently, on our results of operations.

We may be held responsible for consumer incidents involving adverse reactions after consumption of products sold by us.

Products sold in our stores may cause consumers to suffer adverse reactions. Incidents involving these products may have a material adverse effect on our operations, financial condition, results of operations and reputation. Legal or administrative proceedings related to these incidents may be initiated against us, with allegations, among others, that our products were defective, damaged, adulterated, contaminated, do not contain the properties advertised or do not contain adequate information about possible side effects or interactions with other chemical substances. Any actual or possible health risk associated with these products, including negative publicity related to these risks, may lead to a loss of confidence among our customers regarding the safety, efficacy and quality of the products sold in our stores, especially our private label products. Any allegation of this nature made against our brands or products sold in our stores may have a material adverse effect on our operations, financial condition, results of operations and reputation.

We are subject to environmental laws and regulations and any non-compliance may adversely affect our reputation and financial position.

We are subject to a number of different federal, state and municipal laws and regulations relating to the preservation and protection of the environment, especially in relation to our gas stations. Among other obligations, these laws and regulations establish environmental licensing requirements and standards for the release of effluents, gaseous emissions, management of solid waste and protected areas. We incur expenses for the prevention, control, reduction or elimination of releases into the air, ground and water at our gas stations, as well as in the disposal and handling of wastes at our stores and distribution centers. Any failure to comply with those laws and regulations may subject us to administrative and criminal sanctions, in addition to the obligation to remediate or indemnify others for the damages caused. We cannot ensure that these laws and regulations will not become stricter. If they do, we may be required to increase, perhaps significantly, our capital expenditures and costs to comply with these environmental laws and regulations. Unforeseen environmental investments may reduce available funds for other investments and could materially and adversely affect us.

 
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The political and economic conditions of the countries in which we operate may adversely affect us.

The political and economic conditions of the countries in which we operate may adversely affect us.

As a result of Éxito Group’s acquisition on November 27, 2019, we started to operate in Colombia, Argentina and Uruguay.

We are vulnerable to international economic crises and declining per capita income in the countries in which we operate, especially Colombia. A decrease in consumption in these markets could adversely affect our sales.

We face risks related to the international markets in which we operate, primarily including:

·interference by local governments in economic policies;
·unstable exchange rates and devaluation of local currencies;
·deterioration of economic conditions;
·inflation and interest rates;
·foreign exchange controls and restrictions on remittances abroad, including remittance of dividends;
·fiscal policy and tax regime;
·foreign trade policy, including taxes and tariffs;
·liquidity in the financial, capital and credit markets; and
·other political, social, and economic risks that affect the markets in which we operate.

The occurrence of any of these factors, as well as any other factor affecting economic, political and social conditions in the markets in which we operate or intend to operate, may prevent us from fulfilling our strategic goals in these countries or in our international operations as a whole, and may adversely affect us.

Risks Relating to the ADSs and Our Common Shares

If you exchange the ADSs for common shares, as a result of Brazilian regulations you may risk losing the ability to remit foreign currency abroad.

As an ADS holder, you benefit from the electronic certificate of foreign capital registration obtained by Itaú Corretora de Valores S.A., or the Custodian, for our common shares underlying the ADSs in Brazil, which permits the Custodian to convert dividends and other distributions with respect to the common shares into non-Brazilian currency and remit the proceeds abroad. If you surrender your ADSs and withdraw common shares, you will be entitled to continue to rely on the Custodian’s electronic certificate of foreign capital registration for only five business days from the date of withdrawal. Thereafter, upon the disposition of or distributions relating to the common shares, you will not be able to remit abroad non-Brazilian currency unless you obtain your own electronic certificate of foreign capital registration or you qualify under Brazilian foreign investment regulations that entitle some foreign investors to buy and sell common shares on Brazilian stock exchanges without obtaining separate electronic certificates of foreign capital registration. If you do not qualify under the foreign investment regulations, you will generally be subject to less favorable tax treatment of dividends and distributions on, and the proceeds from any sale of, our common shares.

If you attempt to obtain your own electronic certificate of foreign capital registration, you may incur expenses or suffer delays in the application process, which could delay your ability to receive dividends or distributions relating to our common shares or the return of your capital in a timely manner. The depositary’s electronic certificate of foreign capital registration may also be adversely affected by future legislative changes. See “Item 10. Additional Information—10D. Exchange Controls.”

 
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You might be unable to exercise preemptive rights with respect to the common shares underlying the ADSs.

You will not be able to exercise the preemptive rights relating to the common shares underlying your ADSs unless a registration statement under the United States Securities Act of 1933, as amended, or the Securities Act, is effective with respect to those rights, or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement or to take any action to make preemptive rights available to holders of ADSs. Unless we file a registration statement or an exemption from registration applies, you may receive only the net proceeds from the sale of your preemptive rights by the depositary or, if the preemptive rights cannot be sold, they will lapse and you will not receive any value for them. In addition, we may issue a substantial number of common shares as consideration for future acquisitions or for any other fundraising needs, and we may choose not to extend preemptive rights to holders of ADSs.

The volatility and illiquidity of the Brazilian securities markets and of our common shares may substantially limit your ability to sell the common shares underlying the ADSs at the price and time you desire.

Investing in securities that are traded in emerging markets, including in Brazil, often involves greater risk and are generally considered to be more speculative in nature than investing in securities traded in the securities markets of more developed countries. These investments are subject to certain economic and political risks, including (i) changes in the regulatory, tax, economic and political environment that may affect the ability of investors to obtain a total or partial return on their investments; and (ii) restrictions on foreign investment and return of capital invested.

The Brazilian securities market is substantially smaller, less liquid, more volatile and more concentrated than major international securities markets, including the securities market of the United States. Furthermore, the regulations of B3 may differ from what foreign investors are accustomed to seeing in other international exchanges. The characteristics of the Brazilian securities market may substantially limit the ability of holders of the common shares underlying the ADSs to sell them at the time and price they desire and, consequently, may adversely affect the market price of our common shares. If a liquid and active trading market is not maintained, the trading price of our common shares may be negatively affected.

Holders of the ADSs and our common shares may not receive any dividends.

According to our bylaws, we must pay our shareholders at least 25% of our annual net income as dividends, as determined and adjusted under Brazilian corporate law. This adjusted income may be used to absorb losses or otherwise be appropriated as permitted by Brazilian corporate law and may not be available to be paid as dividends. We may not pay dividends to our shareholders in any particular fiscal year if our board of directors determines that such distributions would be inadvisable in view of our financial condition.

Our status as a foreign private issuer exempts us from certain of the corporate governance standards of the New York Stock Exchange, or the NYSE, limiting the protections afforded to investors.

We are a “foreign private issuer” within the meaning of the NYSE corporate governance standards. Under the NYSE listing rules, a foreign private issuer may elect to comply with the practice of its home country and not to comply with certain NYSE corporate governance requirements, including the requirements that (i) a majority of the board of directors consist of independent directors, (ii) a nominating and corporate governance committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, (iii) a compensation committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, and (iv) an annual performance evaluation of the nominating and corporate governance and compensation committees be undertaken. Therefore, ADS holders do not have the same protections afforded to shareholders of companies that are subject to all NYSE corporate governance requirements.

For example, as a foreign private issuer, we chose to rely on an exemption under Rule 10A-3(c)(3) of the Exchange Act of 1934, as amended, or the Exchange Act with respect to our audit committee. For a further discussion of our statutory audit committee and the audit committee exemption, see “Item 6. Directors, Senior Management and Employees—6C. Board Practices—Committees of the Board of Directors—Audit Committee.”

 
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U.S. securities laws do not require us to disclose as much information to investors as a U.S. issuer is required to disclose, and you may receive less information about us than you might otherwise receive from a comparable U.S. company.

The corporate disclosure requirements applicable to us may not be equivalent to the requirements applicable to a U.S. company and, as a result, you may receive less information about us than you might otherwise receive in connection with a comparable U.S. company. We are subject to the periodic reporting requirements of the Exchange Act that apply to “foreign private issuers.” The periodic disclosure required of foreign private issuers under the Exchange Act is more limited than the periodic disclosure required of U.S. issuers. For example, we are required only to file an annual report on Form 20-F, but we are not required to file any quarterly reports. A U.S. registrant must file an annual report on Form 10-K and three quarterly reports on Form 10-Q. In addition, we are required to file current reports on Form 6-K, but the information that we must disclose in those reports is governed primarily by Brazilian law disclosure requirements and may differ from Form 8-K’s current reporting requirements imposed on a U.S. issuer. Finally, we are not subject to the proxy requirements of Section 14 of the Exchange Act and our officers, directors and principal shareholders are not subject to the short swing insider trading reporting and recovery requirements under Section 16 of the Exchange Act.

ITEM 4.INFORMATION ON THE COMPANY

4A. History and Development of the Company

We were incorporated in Brazil under Brazilian law on November 10, 1981, as Companhia Brasileira de Distribuição. Our principal executive offices are located at Avenida Brigadeiro Luiz Antonio, 3142, São Paulo, SP, Brazil (telephone: +55-11-3886-0421). Our agent for service of process in the United States is CT Corporation, 28 Liberty Street, New York, New York, 10005.

We have been a pioneer in the Brazilian retail food industry, opening our first store, a pastry shop, in 1948 in the city of São Paulo under the name Pão de Açúcar. We established one of the first supermarket chains in Brazil, opening our first supermarket in 1959 and opening the first hypermarket in Brazil in 1971. Brazilian economic reforms implemented in 1994, including the introduction of the real as the Brazilian currency and the drastic reduction of inflation rates, resulted in an unprecedented growth in local consumer markets. This increase in available income and the resulting increase in consumer confidence broadened our potential customer base and provided us with growth opportunities.

We responded to these changes by strengthening our capital structure, increasing our logistics and technology investments and implementing an expansion strategy focused on the different consumer preferences of the Brazilian population. To support our expansion strategy, consisting of acquisitions and organic growth, we defined the format of our stores to tailor them to the expectations, consumption patterns and purchasing power of the different income levels in Brazil. Our stores have operated under different banners targeting the various income segments of the Brazilian population, with the aim to provide comprehensive and targeted coverage of the regions where we operate. For further information on our banners, see “—Item 4B. Business Overview—Our Company” and “—Item 4B. Business Overview—Our Company—Operations.” In order to implement this strategy and to increase our market share, between 1981 and 2003 we acquired important Brazilian supermarket chains which were later and gradually converted into our current banners. We summarize below major events from 2004 to the present related to our organic growth, divestitures, acquisitions and other significant developments in our business.

Historical Changes in Our Business

In 2004, we entered into a financial partnership called FIC with Itaú Unibanco. FIC exclusively offers credit cards, financial services and insurance coverage at our stores. For further information on FIC, see “—Item 4B. Business Overview—FIC.”

From 2007 to 2009, we acquired a 100% ownership interest in Sendas Distribuidora S.A., which operates the Assaí chain and was segregated from CBD on December 31, 2020. For additional information on the spin-off of our cash and carry business, see “—Changes in Our Business—Sendas Spin-off.”

In 2009, we acquired a 98.8% of ownership interest in Globex (which later changed its corporate name to Via Varejo), a company which operates in the home appliances sector under the brand name Ponto Frio.

 
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In 2010, through an association with members of the Klein family who represent the partners of Casa Bahia Comercial Ltda., or Casa Bahia Comercial, a Brazilian home appliances retailer which operates under the brand name Casas Bahia, we and the partners of Casa Bahia Comercial merged our respective businesses in the home appliances and e-commerce segments under Via Varejo. As a result, we then owned 52.4% of Via Varejo. On December 27, 2013, Via Varejo concluded its public offering in Brazil. After the offering, we reduced our equity interest in Via Varejo to 62.25% of the common shares and 43.35% of the total capital stock.

Cnova Brazil was a wholly owned subsidiary of Cnova, until October 31, 2016, owning our and Via Varejo’s Brazilian non-food e-commerce businesses. Following the completion of the Cnova Corporate Reorganization (as defined below) (i) on October 31, 2016, Cnova Brazil became a wholly owned subsidiary of Via Varejo, operating the websites Extra.com.br, Pontofrio.com and Casasbahia.com.br, and was no longer a shareholder of Cnova; (ii) Cnova has continued its e-commerce operations outside of Brazil, focusing entirely on Cdiscount; and (iii) we were no longer the majority shareholder of Cnova, remaining with a 34.2% equity interest in Cnova, which we started to recognize through the equity pick-up accounting method. The corporate reorganization of Cnova, or Cnova Corporate Reorganization, consisted of (i) a reorganization agreement entered into by and among Cnova, Cnova Brazil and Via Varejo, dated August 2016; and (ii) concurrent tender offers launched by Casino to purchase any and all Cnova ordinary shares in the United States and in France in December 2016.

In connection with the Cnova Reorganization, Casino and CBD entered into a commitment and support letters which are intended to govern the parties’ ongoing relationship in their capacity as shareholders of Cnova after the Cnova Reorganization. Casino submitted the commitment letter to CBD, pursuant to which it grants us certain governance and liquidity rights in relation to the interest held by CBD in Cnova, including, among others: (i) CBD’s right to designate at least one member to the board of directors of Cnova, taking into account the number of members proportional to CBD’s interest; (ii) CBD will have priority over Casino to sell its shares in a public offering for the distribution of shares with respect to 90% of the total shares to be offered in the secondary offering; (iii) CBD will have partial tag along rights in case Casino sells its Cnova shares and the sale does not constitute a change of control; in case of change of control, CBD will have the right to sell all of its shares; (iv) CBD will be treated pari passu in relation to Casino in any transfer of Cnova shares to any third party or in case of any reorganization or corporate transaction resulting in any exchange, redemption or another issuance of Cnova shares; and (v) in case of any reorganization or corporate transaction involving Cnova, Casino will use its reasonable measures to cause CBD to receive securities in exchange for Cnova shares that are as liquid as the Cnova shares currently held by CBD.

In line with our long-term strategy of focusing on the development of the food retail segment, on June 14, 2019, we sold all of our equity interest in Via Varejo, corresponding to 36.27% of Via Varejo’s capital stock, by means of a public auction on B3. For more information about our divestment of Via Varejo, see “—Changes in Our Business—Via Varejo Sale” and “—Item 4E. Discontinued Operations.”

Furthermore, as a result of the reorganization to simplify Casino’s activities and businesses in Latin America, (i) on November 27, 2019, Casino acquired all shares issued by us and indirectly held by Almacenes Éxito S.A., or Éxito Group, a publicly held company located in Colombia, and (ii) on November 27, 2019, Éxito Group became our indirect subsidiary. For additional information on our Latin America corporate reorganization, see “—Changes in Our Business—Latin America Corporate Reorganization.”

In addition, to advance our digital transformation and expand our investment in technology, we acquired James in 2018 and Cheftime in November 2019 and partnered with Raia Drogasil in 2019 to launch Stix Fidelidade, in order to better adapt to our customers’ demand for delivery and e-commerce services.

On February 14, 2020, B3 approved our migration from the Level 1 listing segment to the Novo Mercado listing segment of B3, the highest level of corporate governance of B3. For additional information on our enrollment in the Novo Mercado, see “—Changes in Our Business—Latin America Corporate Reorganization.”

On December 14, 2020, we entered into a Separation Agreement to carry out the separation of the cash and carry business through a spin-off of our then wholly owned subsidiary Sendas, which operates under the banner Assaí. For additional information on the Sendas Separation and Sendas Spin-Off, see “—Changes in Our Business—Sendas Spin-Off.”

 
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Changes in Our Business

Latin America Corporate Reorganization

Overview

On June 26, 2019, our board of directors approved the recommendation of our final controlling shareholder, Casino, to carry out a reorganization to simplify its activities and businesses in Latin America. The proposed transaction comprised (i) the launch of an all-cash tender offer by us to acquire up to all of the shares of Éxito Group; (ii) the acquisition by Casino of all controlling shares issued by us and held indirectly by Éxito Group for a fair price; and (iii) our enrollment at Novo Mercado listing segment of B3 and, consequently, the conversion of all of our preferred shares into common shares. Our board of directors approved the creation of a special committee with three independent members to analyze and consummate the proposed transaction; the special committee was subsequently dissolved when the reorganization was concluded.

Casino’s Acquisition of our Shares

On September 12, 2019, Casino entered into a purchase agreement with Éxito Group to acquire all shares issued by us and indirectly held by Éxito Group for R$113.00 per share, corresponding to a total amount, net of debt, of US$1,161 million. The shareholders agreement entered into by and among Éxito Group, Casino and their subsidiaries governing their relationship as our shareholders was terminated. As a result of the acquisition, our board members appointed by Éxito Group resigned; they were Manfred Heinrich Gartz, Carlos Mario Giraldo Moreno and José Gabriel Loaiza Herrera.

Éxito Group’s Acquisition

On September 13, 2019, Sendas, our then wholly owned subsidiary launched an all-cash tender offer for the price of COP$18,000 for each Éxito Group share. Concurrently with the tender offer, Casino and Sendas entered into a pre-arrangement providing for the terms of the all-cash tender offer and Casino’s commitment to sell, by means of the tender offer, its 55.3% equity interest in Éxito Group to Sendas. On November 27, 2019, shareholders representing 96.57% of Éxito Group’s equity interest accepted the all-cash tender offer, corresponding to a total amount of COP$7,780.6 billion. We have begun to consolidate Éxito Group’s results of operations in our financial statements since December 1, 2019. The Sendas spin-off included the transfer of the equity interest currently held by Sendas in the Exito Group to CBD.

On July 24, 2019, during the offering period relating to the acquisition of Éxito Group, our financial committee approved the realization of a cash flow hedge, via non-deliverable forward agreements, or NDF agreements, to mitigate our exposure to the Colombian pesos. These NDF agreements were terminated prior to December 31, 2019. The resulting effects of these NDF agreements were taken into account for purposes of the consideration paid in for the acquisition of the Éxito Group.

In 2020, Éxito Group’s gross revenue totaled R$24.7 billion and net income totaled R$228 million.

As a result of Éxito Group’s acquisition, we started to consolidate the operations in Colombia, Uruguay and Argentina, through the following banners: (i) Viva Malls, Éxito, Carulla, Surtimayorista, Surtimax and Super Inter in Colombia, (ii) Devoto, Disco and Géant in Uruguay, and (iii) Libertad, Mini Libertad and Paseo Libertad Malls in Argentina.

Novo Mercado

On November 28, 2019, our board of directors approved the proposal to be submitted to the shareholders’ general meeting regarding the migration of the Company’s shares to the Novo Mercado listing segment of B3, the highest level of corporate governance of B3, and, consequently, the conversion of all of our outstanding preferred shares into common shares.

At an extraordinary shareholders’ meeting held on December 30, 2019, our shareholders approved, among other things: (1) the conversion of all of our preferred shares into common shares, at a ratio of one common share for one preferred share, (2) the Company’s adherence to the Novo Mercado rules and the transfer of trading of the common shares issued by the Company to the Novo Mercado, and (3) amendments to our bylaws. At a special meeting of holders of our preferred shares, held on that same date, our preferred shareholders ratified the conversion of all of our preferred shares into common shares.

 
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On February 14, 2020, B3 approved our migration from the Level 1 listing segment to the Novo Mercado listing segment of B3, the highest level of corporate governance of B3. According to the Novo Mercado requirements, on February 28, 2020, all of our then outstanding preferred shares were converted into common shares. In order to join the Novo Mercado, we entered into a Novo Mercado Participation Agreement with B3, dated February 28, 2020. According to this agreement, we are required to adhere to heightened requirements relating to corporate governance and the disclosure of information to the market. Additionally, on March 2, 2020, the trading of our common shares began on the Novo Mercado listing segment of B3.

In the U.S., the preferred ADS positions were converted into common ADS positions on March 4, 2020, with a corresponding change of CUSIP. On March 5, 2020, the NYSE suspended the trading of the ADSs represented by preferred shares and trading of the ADSs represented by common shares began.

For additional information on our amended bylaws, see “Item 10. Additional Information—10B. Memorandum and Articles of Association—Shareholders’ Meetings.”

Via Varejo Sale

On November 23, 2016, our board of directors approved the plan to sell our equity interest in Via Varejo, in line with our long-term strategy of focusing on the development of the food retail segment. Since then, in accordance with IFRS 5, we have separately reported the results of Via Varejo as discontinued operations in one single line item in assets, liabilities and income statement.

On November 26, 2018, we held 43.23% of Via Varejo’s total capital stock. On December 21, 2018 and February 20, 2019, our board of directors approved total return swap transactions, involving the sale of common shares of Via Varejo, corresponding to 3.86% and 3.09% of Via Varejo’s total capital stock, respectively. These sales were carried out on the B3 at a price of R$4.90 per share, totaling R$2,300 million, on December 27, 2018 and February 25, 2019, respectively. The sale of Via Varejo resulted in the recognition of a gain on sale of R$398 million, net of the effect of income taxes of R$199 million and related costs. Such gain was presented in the results of discontinued operations. For more information on the impact of the Via Varejo sale on our financial results, see notes 12.4 and 34 to our audited financial statements.

On June 14, 2019, we sold by means of an auction procedure all of our equity interest in Via Varejo on B3 for the price of R$4.90 per share, totaling R$2,300.7 million. Since then, we ceased consolidating Via Varejo’s assets, liabilities and operating results that were classified as held for sale. As a result of the sale we recognized a gain on sale of investment of R$398 million, net of tax.

Since June 14, 2019, we no longer exercise influence over Via Varejo’s management.

After the consummation of the sale of all our equity interest in Via Varejo, certain transactions, previously existing between the Company and Via Varejo when Via Varejo was part of the Pão de Açúcar Group, remained in effect. We have been in discussions with Via Varejo’s management regarding the amicable termination or replacement of the outstanding transactions that we had entered into with Via Varejo while it was part of the Pão de Açúcar Group.

For additional information on these transactions, see “Item 7. Major Shareholders and Related Party Transactions—7B. Related Party Transactions—Via Varejo” and note 12.4 to our audited financial statements.

Digital Transformation

In 2019, we and Raia Drogasil S.A., or RD, created Stix Fidelidade S.A., or Stix Fidelidade, in which we hold 66.7% equity interest and RD holds 33.3%. Stix Fidelidade is responsible for the development of a loyalty program in which its users earn points called Stix Fidelidade on purchases made on affiliated retailers’ websites and stores, including us and Raia Drogasil, to be redeemable for products or services available at the Stix Fidelidade platform, in addition to discounts and other benefits that might be available from time to time. Stix Fidelidade also has as a strategic partner Banco Itaú providing for the terms under which Banco Itaú clients may transfer points accumulated on Banco Itaú credit cards to the Stix Fidelidade platform or acquire Banco Itaú credit cards that will grant them automatic Stix Fidelidade points upon certain circumstances. In February 2020 we announced the approval of Administrative Council of Economic Defense, or CADE, confirming that the closing of the transaction has occurred. The Stix program was launched in October 2020 as the first retail coalition in Brazil and its opt-in platform reached more than one million customers at the end of the year. From all the rewards distributed, 80% were activated and 30% of Stix customers have earned points through more than one brand that is part of the program (Pão de Açúcar, Extra, Raia or Drogasil).

 
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Repositioning our Private Label

In 2018, we started to focus on repositioning our private label portfolio, with a priority on improving quality and price competitiveness as an important process for building client loyalty in the markets in which we operate. As part of this initiative, we have started working more closely with suppliers, entering into long-term partnerships and ensuring higher production levels, which allow us to maintain our product launch rates and reach better margins. The portfolio underwent a renovation process and new products were launched, representing the entry in new categories. In 2020, the penetration of our private label in the food category sales reached 20%.

Sendas Spin-Off

On December 14, 2020, our board of directors approved a corporate reorganization to carry out the separation of the cash and carry business through a spin-off of our then wholly owned subsidiary Sendas, which operates under the banner Assaí.

On December 31, 2020, the shareholders of CBD and Sendas at extraordinary general shareholders’ meetings of both companies approved the Sendas Separation and Sendas Spin-off.

The Sendas Spin-Off refers to the distribution of substantially all of the issued and outstanding Sendas common shares to holders of CBD common shares, including the CBD ADSs, on a pro rata basis for no consideration.

On the same date, CBD completed a corporate reorganization pursuant to which Sendas transferred all of its equity interest in Éxito, which included Éxito’s international retail businesses in Colombia, Uruguay and Argentina, to CBD. We collectively refer to the series of the corporate transactions that CBD completed as the “Sendas Corporate Reorganization”:

 

 Sendas engaged in an exchange transaction with CBD (the “Exchange Transaction”) in which certain assets of CBD were transferred to Sendas in exchange for an equivalent value of the shares of Éxito held by Sendas (corresponding to 8.77% of the total outstanding shares of Éxito). The assets of CBD transferred to Sendas consisted of:

 

 Ø50% of the shares of Bellamar Empreendimentos e Participações Ltda., or Bellamar, a holding company that holds an investment in 35.76% of the shares of FIC, in the amount of R$769 million; and

 

 Øfive parcels of real estate (the “Real Estate Assets”), in the aggregate amount of R$146 million, which may be developed as sites for new stores in the future.

 

 Following and contemporaneously with the Exchange Transaction, Sendas distributed to CBD the remaining shares of Éxito held by Sendas (corresponding to 87.80% of the total outstanding shares of Éxito).

 

 Sendas distributed certain assets to CBD in the net amount of R$20 million.

 

 CBD conducted the following capital contributions:

 

 ØCBD transferred to Sendas the net assets of stores that may be developed by Sendas in the future, with a residual value of R$45 million;

 

 ØCBD contributed intercompany receivables to Sendas for an amount of R$140 million; and

 

 ØCBD contributed R$500 million in cash to Sendas.

 

 
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In addition, on December 14, 2020, we entered into a Separation Agreement with Sendas, which provides a framework for our relationship with Sendas following the Sendas Separation and the Sendas Spin-Off. For further information on the Separation Agreement, see “Item 7. Major Shareholders and Related Party Transactions—7B. Related Party Transactions—Agreements with Sendas.” Pursuant to the Separation Agreement, CBD will recognize certain assets and liabilities related to contingencies and their related judicial deposits for which the parties have agreed to be responsible following the Sendas Separation, in a net amount of R$111 million.

Set forth below are simplified structure charts showing CBD and its relevant subsidiaries, including Sendas and Éxito, and equity interests: (1) immediately prior to the Sendas Corporate Reorganization; and (2) immediately following the Sendas Corporate Reorganization.

 

Pre- Sendas Corporate Reorganization

 

 

 

 

Post-Sendas Corporate Reorganization

 

 

 

Set forth below is a structure chart showing CBD and Sendas and their relevant subsidiaries immediately following the Sendas Spin-Off:

 

 

 
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Post Sendas Spin-Off

 

 

 

On February 26, 2021, our shareholders received shares issued by Sendas, in proportion to their respective holdings in the capital stock of CBD, on a pro rata basis for no consideration. The distribution occurred after the listing of Sendas common shares on the Novo Mercado segment of B3 and after the approval of listing of ADRs representing Sendas common shares on the NYSE. Upon consummation of the Sendas Spin-Off, Sendas has become an independent and publicly traded company. The goal of the Sendas Spin-off was to unlock the full potential of the Company’s cash and carry and traditional retail businesses, allowing them to operate on a standalone basis, with separate management teams, and focusing on their respective business models and market opportunities. Additionally, the Sendas Spin-off is expected to provide each of the businesses with direct access to the capital markets and other sources of funding, hence allowing them to prioritize investments according to each company’s profile, thus creating more value for their respective shareholders.

Capital Expenditures and Investment Plan

As part of our capital expenditures and investment plan, we have invested R$7.6 billion in our consolidated operations in the three years ended December 31, 2020. While the Brazilian economy was still under a downturn as a result of the COVID-19 pandemic, we decreased our capital expenditures in our continuing operations by 10% from R$2.8 billion in 2019 to R$2.5 billion in 2020.

Our capital expenditures and investment plan in 2020 aimed to foster (i) the opening of new stores and store conversions; (ii) store renovations; (iii) improvements to information technology; and (iv) improvements to distribution facilities. We have historically financed our capital expenditures and investments mainly with cash flow generated from its operations and, to a lesser extent, funded by third parties. We plan to continue financing our capital expenditures and investments principally with cash flow from our operations.

Our investments in the last three years ended December 31, 2020 have included:

Opening of new stores and store conversions – In the Brazilian retail sector, we seek to rent real estate properties when there is an opportunity to open new stores under one of our banners or local supermarket chain acquisition opportunities that suit one of our formats. In 2020, 41 stores were converted from Extra Super to Mercado Extra and four stores were opened: one Mini Extra, one Minuto Pão de Açúcar and two gas stations. In addition, to adjust our portfolio of stores, we closed nine Extra Hiper, of which three closed, three were converted to Assaí stores and three are in the process of being converted into three Pão de Açúcar, six Extra Super, three Mini Extra stores and 20 drugstores. In the international retail segment, 19 stores were inaugurated among openings and conversions, with 17 stores in Colombia, of which two consist of Éxito WOW stores, one Carulla FreshMarket, four Surtimayorista, three Éxito Express and seven Super Inter stores) and two in Uruguay (one Disco and one FreshMarket store). Another 25 stores were closed, 24 in Colombia (seven Éxito, three Carulla, 13 Surtimax and one Super Inter store) and one in Uruguay (Devoto).

Renovation of existing stores – We usually remodel a number of our stores every year. Through our renovation program, we updated refrigeration equipment in our stores, created a more modern, customer-friendly and efficient environment and outfit our stores with advanced information technology systems.

 
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Improvements to information technology – We view technology as an important tool for efficiency and security in the flow of information among stores, distribution centers, suppliers and corporate headquarters. We have made significant investments in information technology, totaling R$419.0 million from 2018 through 2020. For more information on our information technology, see “—Item 4B. Business Overview—Information Technology.”

Improvements to distribution facilities and others – We own and lease distribution centers and warehouses. The improvement in storage space enables us to further centralize purchasing for our stores and, together with improvements to our information technology, improve the overall efficiency of our inventory flow. We have invested R$1.0 billion in our distribution facilities from 2018 through 2020.

The following table provides a summary description of our principal capital expenditures for the periods indicated:

 

Year Ended December 31,

 

2020

2019

2018

2018-2020

 (in millions of R$)
Opening of new stores and store conversions1,0541,2007452,999
Renovation of existing stores5336896501,872
Information technology17916674419
Distribution facilities and other

276

458

306

1,040

Non-cash effects:    
Financing assets110(27)(32)51
Brazilian retail(1)2,1522,4861,7436,381
Éxito Group

338

80

-

418

Total

2,490

2,782

2,364

7,636

________________       

(1) The total of capital expenditures presented in the table for the years ended December 31, 2020, 2019 and 2018 include capital expenditures that we made in Sendas during the period until the Sendas Spin-Off that occurred on December 31, 2020. The capital expenditures related to Sendas totaled R$948.0 million, R$1,329.0 million and R$1,305.0 million in 2018, 2019 and 2020, respectively. The table also includes total capital expenditures made in Via Varejo during the year ended December 31, 2018 and until June 2019 when we completed the sale of all our equity interest in Via Varejo, which totalled R$621 million and R$216 million in 2018 and 2019, respectively. For additional information on the Sendas Spin-Off and Via Varejo sale, see “—Changes in Our Business—Sendas Spin-Off,” and “—Changes in Our Business—Via Varejo Sale,” respectively.

 

We believe that existing resources and operating income will be sufficient for our capital expenditures and investment plan and to meet our liquidity requirements. However, our capital expenditures and investment plan is subject to a number of contingencies, many of which are beyond our control, including the continued growth and stability of the Brazilian economy, including the continuing effects of the COVID-19 pandemic on the Brazilian economy and our business and operations. We cannot assure you that we will successfully complete all or any portion of our capital expenditures and investment plan. In addition, we may participate in acquisitions or divest asset that are not budgeted in the capital expenditures and investment plan and we may modify the plans.

SEC Website With Disclosed Information

The SEC maintains a website (http://www.sec.gov) that contains all of our filed reports and information statements. We also maintain an investors’ relations website (http://www.gpari.com.br/en) that contains the latest updates and material developments of our business. This domain name is listed for informative purposes only and the information contained in this website is not incorporated by reference in this annual report.

4B. Business Overview

The Brazilian Retail Industry

According to the Brazilian Supermarket Association (Associação Brasileira de Supermercados), or ABRAS, the Brazilian retail food industry represented approximately 5.2% of Brazil’s GDP in 2019, and the food retail industry in Brazil had gross revenues of approximately R$378 billion in 2019, representing a 6.4% nominal increase compared to approximately R$356 billion in 2018.

The Brazilian retail food industry is highly fragmented. According to ABRAS, the five largest supermarket chains that disclosed their revenues to ABRAS represented approximately 38.9% of the retail food industry in 2019, as compared to 37.0% in 2018 and 39.7% in 2017.

 
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According to data published by IBGE, the volume of sales in the food retail sector slightly increased by 4.8% in 2020 compared to 2019.

According to the IBGE, the total population of Brazil was approximately 212 million in December 31, 2020, representing a 0.77% growth since 2019. Given that approximately 85% of the population lives in urban areas (where most of our operations are located) and the urban population has been increasing at a greater rate than the population as a whole, our business is particularly well positioned to benefit from Brazil’s urban growth and economies of scale related to urban growth. According to an IBGE survey, in 2020, the city of São Paulo had an estimated population of 12.3 million and the city of Rio de Janeiro had an estimated population of 6.7 million. These are the two largest cities in Brazil. The state of São Paulo has an estimated total population of 46.5 million, representing 21.9% of the Brazilian population and is our largest consumer market, with 637 stores as of December 31, 2020. The state of Rio de Janeiro is our second largest consumer market, with 113 stores as of December 31, 2020.

The country’s GDP decreased 4.1%, while household consumption expenditure decreased 5.5% in relation to 2019, mainly due to the worsening in the labor market and social distancing due to the COVID-19 pandemic in 2020.

The following table sets forth the different income class levels of Brazilian households, according to the classification system from the Consumption Potential Index (Índice de Potencial de Consumo), or IPC Maps 2020, presenting the figures of 2019 published by IPC Marketing Editora.

Class Level

Average Monthly Income

 (in R$)
A25,554
B111,279
B25,642
C13,086
C21,749
D/E720

 

According to a study by IPC Maps 2020, class A households account for only 2.1% of all urban households, classes B1 and B2 collectively represent 20.9% of all households, classes C1 and C2, the most representative in Brazil, collectively represent 48.7% and classes D and E collectively represent 28.3%. In recent years, the average purchasing power and number of class C, D and E urban households have increased.

For more information on the Brazilian economic environment, see “Item 5. Operating and Financial Review and Prospects—5A. Operating Results—Macro-Economic Environment and Factors Affecting Our Results of Operations.”

The Colombian Retail Industry

In 2020, the Colombian retail industry decreased by 7.8% compared to 5.2% in 2019, and retail sales excluding gas and vehicles decreased by 1.7% in 2020 compared to 8.1% in 2019. According to the marketing consulting company Raddar CKG, household consumption in Colombia reached COP$760,360 million in 2020, a growth of 4.47% when compared to 2019.

In 2020, the prices of consumer products in Colombia increased by 1.6% compared to 3.8% in 2019. According to Nielsen, the beverage industry and the confectionery sub-basket were the most affected sectors and fell by double-digits. Beers, soft drinks, waters, juices, snacks and clothes were the most impacted categories. Meanwhile, foods and categories such as cat food, face creams and kitchen towels were the best performing items in terms of consumption.

According to Nielsen, in 2020, the market share of neighborhood stores was 40.2% compared to 46.0% in 2019. This decrease was due to the increased market share that supermarket chains are gaining. In 2020, the market share of supermarket chains was 36.6% compared to 35.6% in 2019, and low-cost supermarkets was 15.2%, representing an increase of 4.2 percentage points in 2020, with an 8.0% participation of pharmacies and small owner-operated businesses (the so called “mom-and-pop stores”). According to the latest Nielsen classification as of 2020, the market share of main players in Colombia, excluding pharmacies (40.2%) is as follows: Éxito Group remains as the largest supermarket chain with a market share of 23.4%, followed by D1 and Justo & Bueno (which together add up to 22.0%), Olimpica 12.3%, Ara 7.3% and Cencosud 7.0%. Éxito Group also has operations in Argentina and Uruguay.

 
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Our Company

We are the largest traditional retailer in sales in the food segment in Brazil, according to Nielsen. Within the Brazilian retail food industry, we had a total market share based on same store sales of approximately 14.3% in 2019, according to information published by Nielsen. As of December 31, 2020, our total gross sales, taking into account the Brazilian business, totaled R$31.0 billion. On the same date, we operated 696 stores, 74 gas stations and 103 drugstores in 15 Brazilian states and the Federal District, in addition to a logistics infrastructure supported by 15 distribution centers and warehouses across Brazil. We operate in the retail segment of food, bazar, home appliances, clothing, and other products by means of our supermarkets, hypermarkets, proximity and specialized stores, especially under the banners Pão de Açúcar, Minuto Pão de Açúcar, Pão de Açúcar Adega, Mercado Extra, Compre Bem, Mini Extra, Extra Hiper and Aliados Minimercado.

We operate in the Brazilian retail industry, which consists of sales of food and non-food products to individual consumers at (i) supermarkets through the banners Pão de Açúcar, Mercado Extra and Compre Bem; (ii) hypermarkets through the banner Extra Hiper; (iii) proximity stores through the banners Mini Extra, Minuto Pão de Açúcar, Pão de Açúcar Adega and Aliados Minimercado; and (iv) gas stations, and drugstores through the Extra and Pão de Açúcar banners. The Brazilian retail segment also includes revenues related to rentals of commercial spaces in our stores and e-commerce sales.

Food products include non-perishables, beverages, fruits, vegetables, meat, bread, cold cuts, dairy products, cleaning products, disposable products and personal care products. In some cases, we sell these goods under our private label at our stores and on our website. We also sell home appliances and other non-food products, which include clothing items, baby items, shoes and accessories, household articles, books, magazines, CDs and DVDs, stationery, toys, sports and camping gear, furniture, mobile phones, mattresses, pet products, gardening equipment and tools and electronics products, such as personal computers, software, computer accessories and sound and image systems. We also offer some of the products listed above under our private label. In addition, we sell our products in the Brazilian retail segment through our websites www.paodeacucar.com and www.clubeextra.com.br.

We include in the Brazilian retail segment the non-food products we sell at our drugstores, such as medications and cosmetics, and the non-food products we sell and the services we provide at our gas stations. For additional information on our operating segments in Brazil, see note 31 to our audited consolidated financial statements included elsewhere in this annual report.

On November 27, 2019, we, through our then subsidiary Sendas, acquired 96.57% of Éxito Group’s shares by means of an all-cash tender offer. For additional information on Éxito Group’s acquisition, see “—4A. History and Development of the Company—Changes in Our Business—Latin America Corporate Reorganization.” As a result of Éxito Group’s acquisition, we started to carry out operations in Colombia, Uruguay and Argentina , through the following banners: (i) Éxito, Carulla, Surtimayorista, Surtimax, Super Inter and Viva Malls in Colombia, (ii) Devoto, Disco and Géant in Uruguay, and (iii) Libertad, Mini Libertad and Paseo Libertad Malls in Argentina.

Until June 14, 2019, we controlled Via Varejo, which was presented as a discontinued operation in our financial statements, and which is the sole shareholder of Cnova Brazil, that operated in the home appliances and e-commerce segments through stores under the banners Ponto Frio and Casas Bahia, in addition to the e-commerce platforms Casasbahia.com, Extra.com and Pontofrio.com. For more information about our divestment of Via Varejo, see “—4E. Discontinued Operations” and note 34 to our audited consolidated financial statements included elsewhere in this annual report. On June 14, 2019, we completed the sale of all of our equity interest in Via Varejo and, therefore, Via Varejo’s ceased being a consolidated subsidiary. For additional information on the sale of our equity interest in Via Varejo, see “—4A. History and Development of the Company—Changes in Our Business—Via Varejo Sale.”

On December 14, 2020, our board of directors approved a corporate reorganization in order to carry out the segregation of the cash and carry business through a spin-off of our then wholly owned subsidiary Sendas, which operates under the banner Assaí. For additional information on the spin-off of our cash and carry business, see “—4A. History and Development of the Company—Changes in Our Business—Sendas Spin-off.”

 
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Segment Revenue and Income Distribution

The table below shows the breakdown of our consolidated gross and net operating revenue by banner, in addition to the Éxito Group and other operations, for the year ended December 31, 2020:

 

Year Ended December 31, 2020

Banners and other operations

Gross Operating Revenue

Percentage of Total Gross Operating Revenue

Net Operating Revenue

Percentage of Total Net Operating Revenue

 (in millions of R$)(%)(in millions of R$)(%)
Extra/Compre Bem(1)18,59433.4%16,85632.9%
Pão de Açúcar7,95214.3%7,22114.1%
Proximity stores(2)1,7873.2%1,6783.3%
Drugstores, gas stations and Delivery(3)

2,671

4.8%

3,415

6.7%

Brazilian retail

31,004

55.6%

29,170

56.9%

Éxito12,83223.0%11,54022.5%
Carulla2,7444.9%2,5124.9%
Surtimax and Super Inter1,7533.1%1,6353.2%
B2B and Others

1,485

2.7%

1,375

2.7%

Colombia

18,813

33.8%

17,062

33.3%

Uruguay

4,424

7.9%

3,746

7.3%

Argentina

1,432

2.6%

1,226

2.4%

International retail(4)

24,669

44.3%

22,034

43.0%

Other(5)

59

0.1%

49

0.1%

Total

55,732

100%

51,253

100%

________________       

(1)Includes the banners Extra Hiper, Extra Supermercado, Mercado Extra and Compre Bem.
(2)Includes the banners Mini Extra, Minuto Pão de Açúcar, Pão de Açúcar Adega and Aliados Minimercado.
(3)Includes drugstores, gas stations, food delivery and real estate business units.
(4)Includes our operations in Colombia, Uruguay and Argentina since our acquisition of Éxito Group in November 2019. For information on the all-cash tender offer to acquire Éxito Group’s shares, see “—4A. History and Development of the Company—Changes in Our Business—Latin America Corporate Reorganization.” and note 13 to our audited consolidated financial statements included elsewhere in this annual report.
(5)Includes the banners Cheftime, James and Stix Fidelidade. For information on the three banners, see “—4A. History and Development of the Company—Changes in Our Business—Digital Transformation.”

 

The table below shows the breakdown of our consolidated net income (loss) by reportable segment, in addition to the Éxito Group, discontinued operations and other operations. We present results of the reportable segments in accordance with IFRS, the measure used by management in evaluating the performance of and strategy for the segments listed below.

 

Year Ended December 31, 2020

 

Net Income (Loss)
from the Segment

Percentage of
Total Net Income (Loss)

Reportable segment(in millions of R$)(%)
Brazilian retail(1)1,27454.8%
Éxito Group(2)2289.8%
Discontinued operations(3)1,00343.1%
Other(4)

(179)

(7.7)%

Total

2,326

100%

________________       

(1)Includes Extra and Pão de Açúcar banners and our real estate business units.
(2)Includes our operations in Colombia, Uruguay and Argentina since our acquisition of Éxito Group in November 2019.
(3)Includes Assaí banner.
(4)Includes the banners Cheftime, James, Cdiscount and Stix Fidelidade.

 

For more information on our net operating revenue and net income (loss) by reportable segment, see “Item 5. Operating and Financial Review and Prospects—5A. Operating Results—Results of Operations for 2020, 2019 and 2018.”

Number of Stores

The following table sets forth the total number of stores in Brazil at the end of the periods indicated per store format:

 
 37

 

 

Pão de Açúcar

Extra Hiper

Extra Super-mercado

Mercado Extra

Compre Bem

Mini Extra

Minuto Pão de Açúcar

Total

As of December 31, 2017 (1)

186

117

188

––

––

183

82

756

During 2018   ––––   
Opened––––––––––––––––
Closed––(2)(3)––––(27)(3)-35
Converted (from)/to

––

(3)

(35)

23

13

––

––

-2

         
As of December 31, 2018(1)

186

112

150

23

13

156

79

719

During 2019        
Opened––––––––––––88
Closed(1)––(5)––––(2)(4)-12
Converted (from)/to

––

(1)

(92)

77

15

(2)

2

--1

         
As of December 31, 2019(1)

185

112

53

100

28

152

85

715

During 2020        
Opened00000112
Closed-3-6-600-30-18
Converted (from)/to

0

-3

-41

41

0

0

0

-3

         
As of December 31, 2020(1)

182

103

6

141

28

150

86

696

________________       

(1)Excludes 74 gas stations and 103 drugstores.

 

As of December 31, 2020, (i) Éxito, Carulla, Surtimax and Super Inter banners had a total of 513 stores in Colombia, (ii) Libertad and Mini Libertad banners had a total of 25 stores in Argentina, and (iii) Devoto, Disco and Géant banners had a total of 91 stores in Uruguay. In June 2021, the shareholders’ agreement that Éxito entered into with other shareholders of Disco is expected to be terminated. Upon its termination, we expect that the results of operations of Disco will be recognized according to the equity pick-up method in Éxito’s financial statements.

Geographic Distribution of Stores

Brazil

We operate mainly in the Southeast region of Brazil, in the states of São Paulo, Rio de Janeiro and Minas Gerais. The Southeast region accounted for 80% of our consolidated net revenue for the year ended December 31, 2020, while the other Brazilian regions (North, Northeast, Midwest and South), in the aggregate, accounted for 20% of our consolidated net operating revenue for the year ended December 31, 2020. In addition, none of these regions represents individually more than 14 of the consolidated net operating revenue.

The following table sets forth the number of our stores by region as of December 31, 2020:

Region

Supermarket

Hypermarket

Proximity

Total

North0101
Midwest168024
Southeast30473229606
Northeast3619762
South

1

2

0

3

Total

357

103

236

696

 

Colombia, Uruguay and Argentina

As a result of Éxito Group’s acquisition, we started to operate in Colombia, Uruguay and Argentina. We have a total of 629 stores, of which 513 stores are in Colombia, 91 stores in Uruguay and 25 stores in Argentina, among supermarkets, hypermarkets, low cost and proximity stores. As of December 31, 2020, our international operations accounted for 44.26% of our consolidated gross revenue. We started to consolidate Éxito Group’s operation in our financial statements in December 2019. For information on the all-cash tender offer to acquire Éxito Group’s shares, see “—4A. History and Development of the Company—Changes in Our Business—Latin America Corporate Reorganization.”

 
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Operations

The following table sets forth the number of stores, the total selling area, the average selling area per store, total number of employees and the net operating revenue as a percentage of our total net operating revenue for each of our store formats as of December 31, 2020:

 

Store Format

Number of Stores

Total Selling Area

Average Selling Area Per Store

Total Number of Employees (1)

Percentage of Our Net Operating Revenue

   (in square meters)(in square meters)  
Pão de AçúcarSupermarket182233,8241,28512,99814.9%
Extra HiperHypermarket103638,1646,19617,52428.7%
Extra Supermercado, Mercado Extra and Compre BemSupermarket175198,4141,13411,02410.1%
Mini Extra and Minuto Pão de AçúcarProximity Store23657,6492442,8873.3%
Éxito GroupVarious6291,036,0851,64737,63843.0%
Other BusinessesVarious

0

0

0

586

0.1%

Total(2) 

1,325

2,164,137

1,633

82,658

100.0%

________________       

(1)Based on the full-time equivalent number of employees, which is the product of the number of Brazilian retail employees (full- and part-time) and the ratio of the average monthly hours of Brazilian retail employees to the average monthly hours of full-time employees.
(2)Excludes 74 gas stations and 103 drugstores.

 

For a description of net operating revenue for each of our store formats, see “Item 5. Operating and Financial Review and Prospects—5A. Operating Results—Results of Operations for 2020, 2019 and 2018.”

Store Formats and Banners

We present a multi-channel, multi-format and multi-region portfolio ensuring a strong position in offering products and services to our customers. Our Brazilian retail segment operates under different formats and banners.

Our main operations are in Brazil, and since the Éxito Group’s acquisition in November 2019, we also operate in Colombia, Uruguay and Argentina.

Brazil

Pão de Açúcar

Our Pão de Açúcar banner is the premium supermarket chain of our Company. This banner considered a reference for innovation in the retail industry, providing high quality services and assortment of products to our customers and promoting concepts of healthy living and sustainability.

Pão de Açúcar stores are supermarkets, which are predominantly located in large urban areas (with over one-third located in the greater São Paulo metropolitan area). We believe that the locations of our Pão de Açúcar stores are a competitive advantage since available sites in these urban areas are scarce. The Pão de Açúcar stores target the Brazilian class A and class B household consumers. The stores are characterized by a pleasant shopping environment, a broad mix of quality products, innovative service offerings and a high level of customer service. Many of these stores feature specialty areas such as perishables, baked goods, wine, ready-to-eat dishes, as well as meat, cheese and seafood departments and bakeries.

As of December 31, 2020, we had 182 Pão de Açúcar stores in 12 Brazilian states and the Federal District, with an average sales area per store of 1,200-1,300 square meters. Food products represented 97% of gross sales revenue attributable to Pão de Açúcar stores in 2020 and non-food products represented 3%. In 2020, 46 stores were fully renovated following a next-generation concept store, which present a multi-channel, multi-sensory and multi-solution space, focusing on the shopping experience and a differentiated value proposition; more personalized, special and healthy solutions; social hub with living and interaction areas; and a frictionless experience thanks to digital technology available to the customer. These 46 stores continue to deliver significant growth compared to non-renovated stores, representing 41% of Pão de Açúcar banner total sales considering a total of 182 stores. In 2021, we will seek to implement the most successful concepts of the model in other stores of the banner, with low investment per store. We have also analyzed the cities where we can potentially open new stores for the expansion plan for the next three years.

 
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The Pão de Açúcar banner recorded gross sales of R$ 7.9 billion in 2020, with ongoing initiatives, such as (i) the strong performance of our stores renovated to the last concept of store, which presented higher growth in sales compared to our non-renovated stores, (ii) operational improvements and (iii) the evolution of omnichannel initiatives and expansion of our express delivery model and (iv) the attractiveness of the Pão de Açúcar Mais app. Additionally, there was an increase in the reach of the loyalty program, representing approximately 85% of Pão de Açúcar sales.

Extra

Extra is our banner focused on meeting our clients’ demands related to different needs and occasions, with the formats of supermarkets, hypermarkets, drugstores and gas station. With a product assortment tailored to each format, the Extra banner offers food, home appliances, bazar, clothing and other products, as well as services such as bakery, rotisserie, butchery and fishery.

In 2020, the Extra banner maintained successful initiatives such as portfolio optimization adhering to the needs of our customers in each region, seasonal activations, reinforcement of the quality and assortment of perishables, monetization of store area, growth in the penetration of our private label and evolution of digital strategy with expansion of the express delivery model and activations aimed to Extra loyalty program, Clube Extra, and app. For more information on our same-store sales, see “Item 5. Operating and Financial Review and Prospects—5A. Operating Results—Results of Operations for 2020, 2019 and 2018.”

Extra Hiper Stores

We introduced the hypermarket format in Brazil with the opening of our first 7,000 square meter store in 1971. The Extra Hiper stores offer the widest assortment of products of any of our store formats and are organized in a department store style, with an average sales area per store of 6,200 square meters as of December 31, 2020. The Extra Hiper stores target the Brazilian classes B, C, D and E classes. As of December 31, 2020, we had 103 Extra Hiper stores. The sale of food products and non-food products represented 59% and 41% of Extra Hiper’s gross sales in 2020, respectively.

Gross sales of the Extra Hiper banner in 2020 reached R$13.3 billion with a 6.4% increase compared to R$12.5 billion in 2019, due to the attractiveness of the one-stop-shop concept and the robust performance of 23 stores, which present a new value proposition for the format based on three business pillars: i) more competitive prices in mass consumption categories that increase customer traffic at stores; ii) improved customer service in perishable goods; and iii) review of our nonfood portfolio with an increase in the home appliances category and reduction in the assortment of other categories. Due to the success of the results achieved with this model, these initiatives will be implemented in all the stores of the format during 2021.

Mercado Extra and Compre Bem Stores

As of December 31, 2020, we operated 141 Mercado Extra stores, 28 Compre Bem stores and six Extra Supermercado stores, which will be converted into Mercado Extra in the first semester of 2021, completing the project to convert the banner into Mercado Extra and Compre Bem. These banners are supermarket format, characterized by stores focused on middle-class customers, with an average sales area per store of 1,100 square meters, as of December 31, 2020, and a complete mix of food products, general merchandise and a complete portfolio of private label products which strengthen the price attractiveness and quality perception in the stores. The supermarket format offers quality products, where families can rapidly and economically stock up on items for their pantries and also acquire a wide range of household items in an easily accessible and pleasant environment. The sale of food products and non-food products represented 97% and 3%, respectively, of gross sales in 2020.

Gross sales of these banners in 2020, including Mercado Extra, Compre Bem and Extra Supermercado, reached R$5.3 billion, an increase of 14% compared to R$ 4.6 billion in 2019, mainly due to the successful project of conversion into Mercado Extra and Compre Bem, which represented 84% of the sales in 2020.

 
 40

Mercado Extra Stores

In 2020, we continued the process, initiated in 2018, of converting Extra Supermercado stores into the Mercado Extra banner. Our Mercado Extra stores aim to bring a pleasant shopping experience to customers, creating a comfortable environment and an adequate assortment to their needs. Mercado Extra stores aim to reinforce the quality of perishables, customer service and the penetration of our private label products. The Mercado Extra stores target the Brazilian class B and class C household consumers. These stores also offer fresh seafood three times a week.

In 2020, we converted 41 Extra Supermercado stores into Mercado Extra stores, totaling 141 Mercado Extra stores. As a result of these conversions, the number and volume of sales are higher in the Mercado Extra stores when compared to the previous format.

Compre Bem

In March 2018, SCB Distribuição e Comércio Varejista de Alimentos Ltda., or Compre Bem, was created, strengthening our strategy to diversify our store format and cover key growth markets. We currently hold 100% of the capital stock of Compre Bem.

As of December 31, 2020, we totaled 28 Compre Bem stores, 13 of which were converted in 2018 and 15 of which were converted in 2019. The former Extra Supermercado stores have been delivering strong growth since their conversion into Compre Bem stores. The conversions allow us to enter in a market segment currently controlled by regional supermarkets. The Compre Bem store model focuses on locality, adapted to the needs of the consumers in each of the regions where stores are located. The service and assortment of perishables are reinforced, while other product categories have a leaner assortment. Compre Bem is managed independently from the Extra Supermercado banner in order to streamline operational costs, especially logistics and IT. In 2020, the Compre Bem banner had positive performance in sales.

Proximity Stores (Mini Extra and Minuto Pão de Açúcar)

As of December 31, 2020, the Mini Extra and Minuto Pão de Açúcar stores had an average sales area per store of 244 square meters. The sale of food products and non-food products represented 99% and 1%, respectively, of gross sales in proximity stores in 2020. Resuming the format’s expansion through the Minuto Pão de Açúcar banner is one of our priorities for the next three years.

In 2016, we launched the “Aliados Compre Bem” project, which was renamed to “Aliados Minimercado” in 2018, a business model for neighborhood stores that consists of a partnership between us and independent retailers, in which we provide our operational expertise to meet and increase the sales potential of this market segment by supplying products to participating independent retailers. We were the first major Brazilian retailer to offer this type of service and in 2020 we supplied products to approximately 1,150 neighborhood stores.

Gross sales of the proximity stores in 2020 totaled R$1.8 billion, an increase of 32% compared to 2019, mainly due to the (i) effective value proposition in the neighborhood store formats Minuto Pão de Açúcar and Mini Extra and (ii) the expansion of Aliados Compre Bem project. The proximity format reached 236 stores as of December 31, 2020, of which 150 were Mini Extra and 86 were Minuto Pão de Açúcar. As of December 31, 2020, the majority of our proximity stores were located in the state of São Paulo.

Gas Stations

As of December 31, 2020, we operated 74 gas stations in Brazil, the vast majority of which are located within the parking area of certain of our stores, mainly in Extra Hiper stores. We also have gas stations that operate under our Pão de Açúcar, Mercado Extra and Compre Bem banners. In addition, we have partnerships with Ipiranga and Shell, two major gas station chains in Brazil, which we believe gives us a competitive advantage. Through these partnerships, we offer co-branded gas stations, such as Extra-Ipiranga and Pão de Açúcar-Ipiranga. The location of our gas stations allows our customers to both shop and refuel their cars while they are on our premises. Our strategy for gas stations is based on competitive prices and the reliability and quality of fuel, which we believe is assured by the brand.

 
 41

Drugstores

As of December 31, 2020, we operated 103 drugstores in 9 Brazilian states. Our strategy, in relation to our drugstores, is to provide greater convenience to our customers by providing additional products, mainly in our Extra Hiper stores. We also have drugstores that operate under our Pão de Açúcar and Extra banner.

Food Delivery and In-Store Pick-Up

We have consolidated our leadership in the food e-commerce segment through our food delivery platforms, including Pão de Açúcar Delivery, or PA Delivery, and Clube Extra Delivery, through which our customers can order their products online and receive them at home (within 24 hours for “conventional” delivery and four hours for “express” delivery). This service also allows us to expand and deepen our client base, reaching new clients through our app and website, while also furthering our omnichannel approach for existing clients.

We offer our “Click and Collect” service, a purchasing option through which our customers are able to order online and choose the best time to pick up their food order at selected Pão de Açúcar and Extra stores.

As of December 31, 2020, we offered the “express” and/or “click and collect” concepts at more than 289 stores under the Pão de Açúcar and Extra banners, in the Brazilian Southeast, South, Midwest and Northeast region of Brazil. In line with our digital transformation strategy, we plan to continue to increase the presence of Extra Delivery, including in our Extra Hiper and Extra Supermercado stores.

In December 2018, we launched Pão de Açúcar Adega, an online platform for the sale of special beers and wines with nationwide delivery and a brick-and-mortar store in the city of Sao Paulo, providing our customers with a truly omnichannel experience. Pão de Açúcar Adega offers our subscription service, Pão de Açúcar Viva Vinhos, through which customers can have our wines delivered directly to their homes. In 2020, this platform allowed deliveries to any city in Brazil and assisted wine sales for all Pão de Açúcar e-commerce platforms reached an 125% increase over the previous year

In 2018, as part of our digital transformation strategy, we acquired the delivery app James, which is a multiservice platform for ordering and delivering our products, connecting customers, deliverers and establishments. This acquisition complements the delivery methods that we make available to our customers at our brick-and-mortar stores. In addition, the deliveries through James complements our same day and next day deliveries and provides our customers with one-hour delivery option. In 2020, we expanded James operations to 32 cities in Brazil located in the states of São Paulo, Rio de Janeiro, Ceará, Paraná, Tocantins, Pernambuco, Piauí, Sergipe, Minas Gerais, Mato Grosso, Mato Grosso do Sul, Paraíba, Bahia and the Federal District (Distrito Federal).

Loyalty Programs

The My Discount program, launched in July 2017 in Brazil, consists of a mobile app that provides personalized discounts to customers who are members of the loyalty programs of the Pão de Açúcar and Extra banners. At the end of 2020, 65.7% of our total sales in the Brazilian retail segment occured in connection to our loyalty programs and were identified sales. This number is close to 57% of the Extra banner sales (Clube Extra) and 86% in Pão de Açúcar banner (Pão de Açúcar Mais). Our two phone apps, Pão de Açúcar Mais and Clube Extra, are important tools to increase our customers’ digitalization and create ultrapersonalization and long-term relationships. They had 14.9 million downloads by the end of 2020, a 32% increase if compared to 11.3 million downloads in 2019. One of the main features that increases loyalty and allows us to create ultrapersonalized experiences to our clients is the My Discount feature. As of December 31, 2020, approximately 32% of the members of the loyalty program of the Pão de Açúcar banner utilized the My Discount program. Also in 2020, our clients’ digitalization increased and the number of omnichannel clients increased by 99% if compared to 2019. We believe this causes a positive impact on our results of operations because an omnichannel customer spends 2.7x more than a regular customer.

In March 2018, we added the My Rewards program to our mobile app, providing personalized challenges to customers who are members of the loyalty programs of the Pão de Açúcar and Extra banners. These challenges can be completed monthly to receive prizes, such as coupons, in-store products and vouchers from our partner companies. In 2020, the number of clients that achieved the monthly target to gain a prize grew by 24%, in comparison to 2019.

 
 42

Stix Fidelidade

In 2019, we formed Stix Fidelidade e Inteligência S.A., or Stix Fidelidade, in partnership with RaiaDrogasil, which is the largest pharmacy retailer in Brazil according to a report released by the Brazilian Association of Pharmacy and Drugstore Networks (Associação Brasileira de Redes de Farmácias e Drogarias -Abrafarma) in 2018. Stix Fidelidade is a loyalty program in which its users earn points on purchases made on affiliated retailers’ websites and stores. The accumulated points are redeemable for products or services available at the Stix Fidelidade platform, in addition to discounts and other benefits. Together with RaiaDrogasil, we have more than 3,000 stores to promote our loyalty programs. Additionally, in November 2019, we entered into a partnership agreement with Itaú Unibanco Holding S.A., or Banco Itaú, pursuant to which Banco Itaú’s clients may transfer points accumulated on Banco Itaú credit cards to the Stix Fidelidade platform or acquire Banco Itaú credit cards that will grant them automatic Stix Fidelidade points upon certain circumstances. We expect to enter into partnership agreements with other retailers to turn Stix Fidelidade into a loyalty program coalition comprising several retailers nationwide in Brazil. Launched in October 2020, the program was adopted by 1 million customers in the first seven weeks of operations.

Cheftime

In November 2019, we acquired 79.57% of the equity interest in Cheftime, a company that prepares and offers read-to-eat meal-kits, semi-cooked meal-kits, and cook-it-yourself meal-kits, enabling anyone to prepare their own food and inspiring our consumers to take up cooking as a hobby. In 2019, we started to sell Cheftime products solely in the format of ready-to-cook meal-kits, assembled with pre-portioned ingredients paired with the recipes. In 2019, we developed our portfolio of Cheftime products to deliver new recipes to our customers and to launch the ready-to-eat meal-kits. In 2020 Cheftime expanded the production center reaching 300 stores with the presence of the brand. In 2019, we launched Cheftime by Pão de Açúcar gastronomy school, where consumers can exchange their points accrued in loyalty programs for cooking classes. We have also maintained Cheftime’s e-commerce, which offers different options including a subscription plan. Cheftime became one of our private label brands, focusing on our consumer’s experience.

Private Label Products

Our main private labels are Taeq, focusing on the healthy food segment, and Qualitá, offering quality food products at reasonable prices to our clients. We also have Casino, Club des Sommeliers, Fábrica 1959, Confraria, Finlandek, Arkitect, Bronzini, Cast, Bambini, Boomy, Nous, Frescampo and Custer, among others, in our private label portfolio.

We launched the Taeq products in 2006. Its portfolio comprises healthy food products, including cereals, cereal bars, yogurts, teas, pasta, meats, soups, isotonic, juices, organic and natural products, among others. Taeq products are offered at our Pão de Açúcar and Extra stores (supermarkets, hypermarkets and proximity) and at our websites. We offer our Taeq products in our stores in Colombia.

We launched the Qualitá banner in 2008. Its portfolio comprises a variety of products, including frozen food, cleaning supplies, dairy products, among others. In order to achieve the goal of keeping quality at reasonable prices, Qualitá products undergo a strict standard of supply selection, logistics control and consumer testing before being offered to our clients. Qualitá products are offered at our Pão de Açúcar and Extra stores (supermarkets, hypermarkets and proximity) and at our websites.

Casino is a French brand that offers imported products selected and approved by French chefs. Club des Sommeliers is a wine brand that offers more than 90 wine labels from 11 nationalities. Fábrica 1959 is our exclusive craft beer brand, launched in 2018. Finlandek is a brand that offers kitchenware, dinnerware, bed, bath and decoration products. Bambini and Boomy are children clothing brands. Arkitect, Bronzini, Custer and Cast are clothing brands. Nous is a brand launched in 2020 that offers hair and personal hygiene products at reasonable prices.

Frescampo is a Colombian low-cost brand that offers quality food products at reasonable prices. Frescampo products are offered at our stores in Colombia.

In 2020, our private label brands reached a 20% market share in food sales in Brazil and 17% in Colombia.

 
 43

Colombia, Uruguay and Argentina

On November 27, 2019, we completed the acquisition of Éxito Group’s equity interest through an all-cash tender offer. For additional information on the all-cash tender offer, see “—4A. History and Development of the Company—Changes in Our Business—Latin America Corporate Reorganization.” Éxito Group operates in Colombia, Uruguay and Argentina and its portfolio of international retail businesses, is comprised of the following banners: (i) Éxito (hypermarkets, supermarkets and proximity), Carulla (supermarkets and proximity), Surtimax and Super Inter (low-cost supermarkets) and Surtimayorista (cash and carry) in Colombia, (ii) Devoto (supermarkets and proximity), Disco (supermarkets) and Géant (hypermarkets) in Uruguay, and (iii) Libertad (hypermarkets) and Mini Libertad (proximity) in Argentina.

As of December 31, 2020, (i) Éxito, Carulla, Surtimax, Super Inter and Surtimayorista banners had a total of 513 stores in Colombia, (ii) Libertad and Mini Libertad banners had a total of 25 stores in Argentina, and (iii) Devoto, Disco and Géant banners had a total of 91 stores in Uruguay.

Éxito Group’s operations in Colombia, Argentina and Uruguay corresponds to 76%, 6% and 18%, respectively, of Éxito Group’s total gross revenue in 2020.

Éxito

Éxito comprises hypermarkets, supermarkets and express stores which are predominantly located in large Colombian urban areas, such as Bogotá, Medellín, the Atlantic Coast, the Coffee Region and Cali. Éxito stores offer a large assortment of products, including food and non-food categories, and are organized in a department store style, with an average sales area per store of 2,572 square meters as of December 31, 2020. Éxito stores target the Colombian middle and middle-high classes. As of December 31, 2020, we had 241 Éxito stores. The sale of food products and non-food products represented 58% and 42% of Éxito banner’s net sales in 2020, respectively. Our focus is to develop a new generation of Éxito hypermarkets to link the best of the physical and virtual worlds in one place: a shopping experience connected to the digital world, superior customer service and improved focus on fresh products.

Net sales of the Éxito banner in 2020, considering the full year, reached COP$8 billion (equivalent to R$11 million), a 5.4% increase compared to 2019 and represented approximately 70% of the sales mix in Colombia. Éxito banner continued as the best performing player in the hypermarkets, supermarkets, and express stores segment in 2020, growing in almost all regions mainly from accurate commercial activities and the solid performance from Éxito Wow stores. Éxito Wow stores are digitally connected hypermarkets that integrates the digital channels and physical services offered by the Éxito banner to other services, including banking services, co-working area, gourmet food-court, omnichannel zone, among others. The Éxito Wow model totaled 11 stores in 2020 and is present in Bogotá, Medellin, Cali, Santander, Boyacá, and Atlantic Coast. Éxito Wow stores posted 13.9 % net sales growth in 2020 and represented a 20.7 % share of the banner’s total sales.

Carulla

Carulla comprises supermarkets and express stores which are predominantly located in main cities, such as Bogotá, Medellín, Cali, Barranquilla, Bucaramanga, among others. Carulla stores focus mainly on offering imported and premium products, a highly quality assortment of fresh products and are nationwide recognized for having the best bakery in the country. Carulla has an average sales area per store of 896 square meters as of December 31, 2020. Carulla stores target the Colombian high-end classes and as of December 31, 2020, we had 95 Carulla stores. The sale of food products and non-food products represented 98% and 2% of Carulla’s net sales in 2020, respectively.

Net sales of the Carulla banner in 2020, considering the full year, reached COP$1.8 billion (equivalent to R$2.5 million), a 13.6 % increase compared to 2019, mainly due to the implementation of the fresh market model. This innovative model aims at transforming the fresh food category, renovate stores and improve layouts. The model includes digital activities, such as apps, improved customer service experience, strengthening the offer of key items, such as wine, pasta, cheese, coffee, and opera events related to the premium banner. As of 2020, the model was implemented at 14 Carulla fresh market stores located in the cities of Bogotá, Medellin, Santa Marta, Cali and Cartagena. These fresh market stores represented approximately 26.5% of the sales share of the Carulla’s stores and posted low double-digit sales growth after implementation.

 
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Super Inter and Surtimax

Super Inter and Surtimax are considered low-cost supermarkets characterized by offering low prices for a complete basic basket of products, good quality meat, fresh fruits and vegetables and a large assortment of bulk grains. These stores have a regional focus, offering products according to the local consumer needs. Super Inter stores operate in approximately 22 cities in the coffee and Pacific regions of Colombia. Surtimax stores are located in residential areas and offer a wide portfolio of own branded products.

Super Inter’s sales of food products and non-food products represented 99% and 1%, respectively, of its stores net sales in 2020. We had 69 Super Inter and 74 Surtimax stores, respectively, and average sales area per store is 698 square meters as of December 31, 2020.

Surtimax’s sales of food products and non-food products represented 98% and 2% respectively of its stores net sales in 2020.

Net sales of the low-cost segment in 2020, considering the full year, reached COP$1.2 billion (equivalent to R$1.7 million), a 1.4% decrease compared to 2019 as a result of the implementation of stores’ refurbishing process and base optimization, conversion of stores into cash and carry stores, comprised of Super Inter and Surtimax banners, strong commercial actions, implementation of productivity plans, and focus on private label to offset the effect of the challenging competitive environment in this market.

Surtimayorista Stores

Surtimayorista stores have been operating in the cash and carry segment in Colombia for over three years and is focused on the commercialization of products for retail and institutional consumers, such as food retailers (including restaurants, pizzerias and snack bars), conventional retailers (such as grocery stores and neighborhood supermarkets) and end users (including schools, small businesses, churches and hospitals). It offers more than 2,100 items of grocery, food, perishable, beverage, wrapping, hygiene and cleaning products, among others.

In 2020, 4 stores were converted to the Surtimayorista banner, totalling 34, which represented 3.8% of Colombia´s sales share, as of December 31, 2020.

Other Businesses and Services

Other revenue included income from (i) services, (ii) complementary businesses, such as the real estate, credit card, travel, insurance, mobile and money transfer, and (iii) royalties, financial services, marketing among others. Net revenue from other businesses and services decreased by 24.7% in 2020, considering the full year, totaling COP$594,595 million (equivalent to R$825 mi), mainly revenues from the Viva Envigado and Viva Tunja shopping centers.

Puntos Colombia

Puntos Colombia is a 50/50 joint venture between Éxito Group and Bancolombia in Colombia. Puntos Colombia operates a loyalty program pursuant to which its users earn points on purchases made on partners’ websites and at stores. These points are redeemable for products or services available at Puntos Colombia platform, in addition to discounts and other benefits. As of December 31, 2020, Puntos Colombia had 105 affiliated businesses, including Celio, Pilates, CineColombia, and processed COP$ 174,001 billion to exchange points earned through the program into prizes.

Tuya

Tuya is a 50/50 joint venture between Éxito Group and Bancolombia. Tuya is a financial company focusing on issuing credit cards for low income segments and promoting access to financial services to segments that the traditional banking system does not approach. By the end of 2020, Tuya had a financial inclusion ratio of 52%, which represents the percentage of private label credit cards granted to people who had formal credit lines denied or non-approved by the traditional banking system. As of December 31, 2020, Tuya had 2.6 million customers and issued 2.7 million credit cards, representing 16% of the credit card market share in Colombia.

 
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Real Estate Business Units

GPA Malls, Viva Malls and Paseo Libertad Malls are our real estate business units, which are responsible for the creation and management of commercial spaces in Brazil, Colombia and Argentina, respectively. Paseo Libertad Malls and Viva Malls became part of our portfolio through the acquisition of Éxito Group.

As of December 31, 2020, GPA Malls was present in 16 Brazilian states and the Federal District and managed around 251 commercial galleries in Brazil and two neighborhood commercial centers. As of December 31, 2020, GPA Malls had more than 292,000 square meters of gross leasable area.

As of December 31, 2020, Viva Malls was present in 11 Colombian cities and managed around six commercial galleries and 12 neighborhood commercial centers. As of December 31, 2020, Viva Malls had 569,202 square meters of gross leasable area.

As of December 31, 2020, Paseo Libertad Malls was present in 11 Argentinian cities and managed around five commercial galleries and ten neighborhood commercial centers. As of December 31, 2020, Paseo Libertad Malls had near to 170,000 square meters of gross leasable area.

Seasonality

We have historically experienced seasonality in our results of operations, principally due to traditionally stronger sales in the fourth quarter holiday season and “Black Friday” promotions, which are relatively new in Brazil and help to boost fourth quarter sales in mainly non-food categories. In recent years, our average sales revenues during the fourth quarter have typically been approximately 14% above average sales revenues during the other quarters of the year.

We also experience strong seasonality in our results for the months of March or April as a result of the Easter holiday, when we offer specialized products for the occasion, as well as in FIFA World Cup years, when some of our event-focused products show an increase in sales.

Seasonality relating to the availability of some of our products (such as fruits and vegetables) generally does not affect our results due to the large and diverse selection of products we offer to our customers.

Our Products

Our products in the Brazilian retail sector are mostly ready-for-sale products that we purchase and resell to our end-user customers. Only a portion of our products are produced at our stores, by our technical team for the development of perishables. In certain circumstances, we have entered into partnerships with suppliers who deliver semi-finished products that are finished at our stores.

The products manufactured or handled at our stores include: (i) fruits and vegetables, which are cut or packaged at our stores; (ii) meat (beef, pork, chicken and fish) as well as cold cuts and cheeses, which are cut, weighed and packaged at our stores; (iii) ready-to-eat meals sold at our deli counters; and (iv) bread, cakes and sweets made at the bakeries located within our stores.

We do not manufacture the products sold under our private label. These products are manufactured by suppliers who are carefully selected by us, after we have thoroughly evaluated the quality of their services and their capacity to meet our demand. The development of products carrying our private label is guided by a detailed process, involving various areas of our Company, aimed at standardizing our products and ensuring the products’ manufacturing and launch within the commercial and strategic targets of our brands and compliance with our quality standards.

Suppliers

In Brazil, the purchasing of food products for all of our Brazilian retail banners is centralized and we purchase substantially on the spot or on a short-term basis from a large number of unrelated suppliers. As a result, we are not dependent on any single supplier. The prices of our food products may vary depending on inflation.

The purchasing of products sold under our private label is mostly centralized and products are purchased from a large number of local and international suppliers. The purchasing of 95% of the goods sold under our private label is centralized through our logistics platform. The purchasing of the remaining 5% of products sold under our private label, which consists mainly of bakery and frozen products, is decentralized due to the number of different purchasers throughout Brazil. 85% of our private label portfolio is purchased from local producers. Food prices depend on levels of inflation.

 
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In Colombia, the purchasing process is centralized to a large number of local and international suppliers. 75% of the merchandise is centralized through our logistics platform, of which 50% is managed via cross docking, which is a process that involves delivery directly from the suppliers and does not require storage in warehouse. The non-centralized goods are mainly beverage, bakery, snacks and some frozen products. In 2020, 90% of our fruits and vegetables were locally purchased, 82% of them, directly from 651 national farmers.

In Uruguay, the purchasing of food products for all our banners is mostly decentralized with 61% of products being purchased from different suppliers. We purchase substantially on a short-term basis from a large number of unrelated suppliers, thus avoiding being dependent on few suppliers. Prices of our food products vary depending on inflation. Non-food products, excluding home appliances, are mostly imported due to the lack of a national industry.

In Argentina, the purchasing of food products for all our banners is centralized and purchase is done directly or on a short-term basis from a large number of unrelated suppliers. As a result, we are not dependent on any single supplier. The prices of food products depend on inflation levels.

Distribution and Logistics

In Brazil, in order to efficiently distribute perishable food products, grocery items and general merchandise, we operate 15 distribution centers and warehouses strategically located across the country, with a total storage capacity of approximately 555,396 square meters. The locations of our distribution centers enable us to make frequent shipments to stores, which reduces the need of in-store inventory space and limits non-productive store inventories.

In Brazil, our distribution centers are significantly supported by pd@net, a business-to-business technology platform, which links our computer automated ordering system to our distribution centers and suppliers in order to automatically replenish our inventory.

In Colombia we operate ten distribution centers and three nodes located in Bogotá, Medellín, Cali, Santander and the Atlantic Coast with total storage capacity of 256,452 square meters.

In Uruguay, we operate four distribution centers and warehouses strategically located across Montevideo, with a total storage capacity of approximately 40,000 square meters.

In Argentina, our distribution center is located in the center of the country, in the city of Cordoba, with an average distance of 620 km to our stores.

We organize our logistics and distribution processes in accordance with the products and services sold under our banners. Accordingly, we guide our distribution processes by the procedures described below.

Stores, Supermarkets and Hypermarkets

Brazil

As of December 31, 2020, the logistics process to supply our stores, supermarkets and hypermarkets, excluding drugstores and gas stations, included 15 distribution centers located in the states of São Paulo (including a distribution center specifically focused on our proximity stores), Rio de Janeiro, Ceará, Pernambuco and the Federal District, corresponding to a 555,396 square meter area including both our own and outsourced distribution centers. Our distribution process is performed by an outsourced fleet. As of December 31, 2020, our centralization rate (the percentage of revenue from the products supplied at our stores that comes directly from our distribution centers) was approximately 75%.

Orders made for our non-centralized products are made directly by the stores and delivered by the suppliers following the supply model known as “Direct Delivery.” As of December 31, 2020, approximately 20% of our stores sales corresponded to “Direct Delivery” products, especially ornamental plants, cigarettes, ice cream, yogurt and magazines.

 
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Colombia, Uruguay and Argentina

As of December 31, 2020, the logistics process to supply our stores, supermarkets and hypermarkets, excluding our cash and carry operation in Colombia, included 18 distribution centers located in Colombia, Argentina and Uruguay, corresponding to a 330,000 square meter area including both our own and outsourced distribution centers. Our distribution process is performed by an outsourced fleet.

E-commerce Food Delivery

In Brazil, since 2016, we have operated a dedicated distribution center in the city of São Paulo focused on our online and proximity operations. This distribution center is responsible for regular online delivery requests. Additionally, certain of our stores offer express delivery (within four hours) services.

In Colombia, we operate one of the largest e-commerce operations in the country through our direct online and marketplace sales, and the new channels, including delivery applications. In order to operate these channels, we have a network of dedicated (i) distribution centers in Bogota serving mainly non-food demands, (ii) storages in Medellin serving food e-commerce demands, and (iii) deliveries from stores used mainly to serve delivery applications.

Drugstores

The main Brazilian pharmaceutical distributors and regional distributors supply our drugstores across the country, with whom we have entered into supply agreements, with medications and other products, such as cosmetics. The logistics system varies between centralized deliveries through our distribution centers and decentralized deliveries.

Gas Stations

Our gas stations are supplied by exclusive suppliers in Brazil. In 2020, we used two suppliers. Supply orders are made individually by each station, and fuel is requested through purchase orders or pre-agreed daily supply orders, pursuant to the service agreements entered into by each gas station. Fuel transportation is carried out exclusively by our suppliers while unloading operations are closely followed by our employees for safety and quality control reasons.

The supply process for compressed natural gas (gás natural veicular), or GNV, involves direct delivery by regional suppliers to the gas stations using pipelines connected to the entrance boxes located at the gas stations and holding fuel meters installed and controlled by the dealers themselves. This equipment regularly measures the GNV volumes supplied. GNV is then sold to customers through dispensers attached to these entrance boxes, using specific pipelines.

Marketing

Our marketing policy aims to attract and retain our customers. To this end, we carry out integrated marketing campaigns that are specific to each store banner in which we operate and are structured and directed at the target customer market for each store banner. Our marketing teams are media experts dedicated to developing quality marketing campaigns to emphasize our strengths in terms of products assortment, service and competitive prices. We recognize marketing campaign expenses in our financial statements as sales expenses as they are incurred.

In 2019, we started to have a better control of our marketing expenses by means of the use of digital tools and platforms. As an example, we reduced the use of printed advertising and started to use our app more often to promote our clearance items.

In 2020, 2019 and 2018, we spent R$663 million, R$542 million and R$490 million, respectively, in advertising, representing 1.29%, 1.88% and 1.85%, respectively, of total net operating revenue in each year.

 
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Innovation

In 2020, we have defined milestones for innovation within the Company. We have expanded our relations with the startup ecosystem though the innovation hub Cubo pursuant to which we have helped 20 startup projects, and through a partnership with startup accelerator Liga Ventures we were linked to and accelerated six retail techs. Within our stores, we were able to bring in 14 foodtechs to sell their disruptive products, and five services to improve customer experience. We have disseminated an innovative culture consisting of a network program with innovation ambassadors, which included 27 participants.

FIC

FIC operates financial services kiosks in our stores in Brazil with exclusive rights to offer credit cards, financial services and insurance policies, except for extended warranties. FIC has been operating for more than ten years and as of December 31, 2020 had a portfolio of 3.2 million credit card accounts from customers, including the portfolio of Cartão Extra, Cartão Pão de Açúcar, Cartão Passaí and Cartão Ponto Frio. We and Sendas each hold 50% of Bellamar, a holding company the only asset of which is an investment in 35.76% of the shares of FIC. Itaú Unibanco and Via Varejo hold 50% and 14.24%, respectively, of the shares of FIC. Itaú Unibanco determines the financial and operational policies of FIC and appoints the majority of its officers.

 In 2020 and 2019, FIC’s net profit was R$328.8 million and R$263.1 million, respectively. We maintain our strategy to increase the share of FIC’s credit cards and financial services at our stores in Brazil as an important loyalty tool and mechanism to increase sales and additional profitability. FIC’s credit cards offer payment options for the cardholders at our stores, aiming to provide them with benefits and convenience.

The table below sets forth the breakdown of FIC’s customers in 2020, 2019 and 2018:

 

Total number of clients

2020

2019

2018

 (in thousands)
Brazilian retail1,8732,0852,112
Sendas732717501
Via Varejo (1)

631

776

961

Credit cards

3,236

3,578

3,574

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(1)After consummation of the Sendas Separation on December 31, 2020, Sendas remained as one of the members of FIC with an equity interest of 17.88%.
(2)The sale of all of our equity interest in Via Varejo, consummated on June 14, 2019, did not have any impact on FIC’s clients relating to the Ponto Frio banner. Via Varejo remains as one of the members of FIC with an equity interest of 14.24%.

 

Credit Sales

In 2020, 56.2% of our net operating revenue from the Brazilian retail segment was represented by credit sales, principally in the form of credit card sales, installment sales and food vouchers, as compared to 54.8% in 2019, as described below:

Credit card sales. All of our store formats and our e-commerce operations accept payment for purchases with major credit cards, such as MasterCard, Visa, Diners Club, American Express and co-branded credit cards issued by FIC. Our stores also accept virtual credit cards through methods such as Apple Pay. Sales to customers using credit cards accounted for 46.5%, 46.4%% and 46.1% of the consolidated net operating revenue from the Brazilian retail segment in 2020, 2019 and 2018 for our Brazilian retail segment. Of this total, sales through our FIC co-branded credit cards accounted for 7.3% of our net operating revenue in 2020. An allowance for doubtful accounts is not required as credit risks are assumed by the relevant credit card companies or issuing banks.

Installment sales. Our Extra hypermarkets offer financing to our customers to purchase home appliances on an installment basis through our FIC co-branded and private label credit cards, as well as third-party credit cards. Sales to customers using credit cards on an installment basis accounted for 12.7%, 11.1% and 10.6% of our total credit card sales in the Brazilian retail segment in 2020, 2019 and 2018, respectively. An allowance for doubtful accounts is not required as credit risks for all installments are assumed by the relevant credit card companies or issuing banks.

Food Vouchers. At our food stores, we accept food vouchers as payment. Food Vouchers are issued by third-party agents to participating companies that provide food vouchers to their employees as a fringe benefit. Food vouchers accounted for 9.8%, 8.0% and 8.3% of the consolidated net operating revenue in 2020, 2019 and 2018 for our Brazilian retail segment, respectively. The voucher-issuing companies assume the credit risk associated with these sales.

 
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Information Technology

We invested R$179 million, R$166 million and R$74 million in information technology in 2020, 2019 and 2018, respectively. We are identifying opportunities and mapping efficiency gains by integrating services and functions across our various operating segments, improving our tax systems, our ERP, focusing on governance and our customers. Our information technology department negotiates the reduction of costs on projects and contracts with service and software suppliers, based on sharing services between us and our subsidiaries, thus creating economies of scale.

In 2019, we implemented an information technology project aiming to enhance our information technology system and to develop our digital services. We have invested in tax hardware, development of new digital products and implementation of new systems, among other things.

In 2020, we improved our digital platform, including navigation and search features, customer service, in addition to updating the versions of our app: Pão de Açúcar Mais and Clube Extra and update of our internal systems, among other improvements.

Intellectual Property

Brazil

We consider our brands to be one of our most valuable assets and we have worked extensively to define the characteristics of each of our banners (Extra Hiper, Supermercado Extra, Mercado Extra, Mini Extra, Pão de Açúcar, Minuto Pão de Açúcar, Compre Bem, Éxito, Carulla, Super Inter, Surtimax, Surtimayorista, Libertad, Disco, Devoto and Viva) with respect to the expectations, consumption patterns and purchasing power of the different types of customers and income levels in Brazil. We believe that Brazilian customers associate each of our banners with a specific combination of products, services and price levels.

In Brazil, it is necessary to officially register a trademark with the National Industrial Property Institute (Instituto Nacional de Propriedade Industrial), or INPI, in order to acquire trademark rights. This registration gives the owner the exclusive right to use the trademark throughout Brazil for a specific period of time, which may be renewable.

As of December 31, 2020, our most important trademarks (Pão de Açúcar, Extra, Qualitá, Taeq and Compre Bem, among others) were duly registered with INPI and we had approximately 2,164 trademarks registered or in the process of being registered in Brazil and abroad, of which 1,993 trademarks are in Brazil. We did not have any registered patents as of December 31, 2020.

Our business relies on intellectual property that includes the content of our websites, our registered domain names and our registered and unregistered trademarks. We believe that the Pão de Açúcar, Extra and other domain names we use in our e-commerce business are valuable assets and essential to the identity of our business.

We own the following domain names, among others: www.extra.com.br, www.gpabr.com, www.paodeacucar.com.br, www.paodeacucar.com and www.deliveryextra.com.br. These domain names are listed for informative purposes only and the information contained in these websites is not incorporated by reference in this annual report.

Colombia

In Colombia, it is necessary to officially register a trademark with Colombia’s Superintendence of Industry and Commerce (Superintendencia de Industria y Comercia), or SIC, in order to acquire trademark rights. This registration gives the owner the exclusive right to use the trademark throughout Colombia for a specific period of time, which may be renewable.

Éxito Group owns a portfolio of more than 1,495 duly registered trademarks, including every trademark classes, among 32 countries, of which more than 1,000 are in Colombia, including, among others, the brands Éxito, Carulla, Surtimax, Superinter, Surtimayorista associated to the retail business and Arkitect y Bronzini, associated to the fashion and textile industry. As of December 31, 2020, Éxito Group did not have any registered patents. Additionally, Éxito Group owns the following domain names, among others: www.grupoexito.com.co, www.exito.com, www.carulla.com, www.surtimax.co and www.arkitect.com.co.  These domain names are listed for informative purposes only and the information contained in these websites is not incorporated by reference in this annual report.

 
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Competition

Brazil

According to ABRAS, the three leading retail food companies in Brazil are controlled by companies headquartered abroad. Foreign presence in the Brazilian retail food industry started with the French retail food chain, Carrefour. In 1995, the U.S. chain Walmart (currently known as Grupo BIG) also entered the Brazilian market, mostly through the acquisition of domestic retail food chains, increasing competition in the industry. Thus, the Brazilian retail food industry is highly competitive. For more information about risks related to competition, see “Item 3. Key Information—3D. Risk Factors—Risks Relating to our Industry and Us—We face significant competition and pressure to adapt to changing consumer habits and preferences, which may adversely affect our market share and net income.” Nonetheless, supermarket penetration levels in Brazil, in terms of the number of supermarkets in proportion to the country’s population and area, is estimated to be lower than the levels recorded in the United States, several Western European countries and some other South American countries.

Recently, leading retail food companies, including our Company, have pursued the following strategies:

·expansion of our omnichannel operation;
·partnership with delivery (last milers) and marketplace players;
·migration of large stores to smaller store formats, such as neighborhood or proximity stores;
·expansion of small store formats;
·investment in store renovations and in general asset quality;
·investment in multi-channel strategy to reach more customers;
·focus on loyalty programs for deeper understanding of consumer habits;
·development and strength of private label products; and
·increased promotional activities for hypermarkets and supermarkets, which have been most affected by customer migration.

Our competitors vary depending on the regional location of the stores. Our main competitors in the Brazilian retail in the state of São Paulo are Carrefour, Futurama, Mambo, Pastorinho, Sonda, Dia and Grupo BIG. In the city of Brasília, our principal competitors are Big Box, Carrefour, Super Cei and Super Maia. In the state of Rio de Janeiro, our principal competitors are Guanabara, Mundial, Prezunic and Zona Sul supermarkets. In the states of Paraíba, Pernambuco, Ceará and Piauí, our principal competitors are the local supermarkets, in addition to Bompreço and GBarbosa.

The principal competitor of our Extra hypermarkets is Carrefour, which operates stores in the Southeastern and Southern regions of Brazil, and Grupo Big, which operates through various banners in the Southeastern, Northeastern and Southern regions of Brazil.

In our other regional markets, we compete not only with the organized Brazilian retail sector, but also with various small and medium-sized chains, family owned companies and Brazilian retail businesses.

We are market leaders in food e-commerce, through the Pão de Açúcar and Extra banners. Our main competitors in this segment are Carrefour, Saint Marché, Mambo, Sonda and Zona Sul.

 
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Colombia

In Colombia, the retail industry has undergone a profound transformation in the last ten years, characterized by the entry of foreign companies into the national market, the trend towards greater concentration, the implementation of new technologies and the search for greater efficiency.

Éxito Group is the market leader in the Colombian retail market. Our main competitors are Supertiendas Olímpica (and its subsidiary Supertiendas Cañaveral), Grupo Cencosud (Jumbo and Metro) and Supermercados la 14. Other competitors are discounters, which have been strongly gaining market share, such as Koba Colombia S.A. (Tiendas D1), Mercadería Justo & Bueno Discount Store and Supermercados Jerónimo Martins (ARA).

Regulatory Matters

Brazil

We are subject to a wide range of governmental regulation and supervision generally applicable to companies engaged in business in Brazil, including federal, state and municipal regulation, such as labor laws, public health and environmental laws. In order to open and operate our stores, we need a business permit, site approval and an inspection certificate from the local fire department, as well as health and safety permits. Our stores are subject to inspection by city authorities. We believe that we are in compliance, in all material respects, with all applicable statutory and administrative regulations with respect to our business. In addition, we have internal policies that in some instances go beyond what is required by law, particularly with respect to environmental and sustainability requirements and social and community matters.

Our business is primarily affected by a set of consumer protection rules regulating matters such as advertising, labeling and consumer credit. We believe we are in compliance in all material respects with these consumer protection regulations.

Data Protection Law

On August 14, 2018, Law No. 13,709, the General Data Protection Act (Lei Geral de Proteção de Dados), or GDPA, was enacted, and came into effect on September 18, 2020. However, the GDPA administrative sanctions can only be applied by the Brazilian National Data Protection Authority (Autoridade Nacional de Proteção de Dados), or ANPD, starting in August 2021. The GDPA establishes a new legal framework to be observed in the processing of personal data, including that of our customers, suppliers and employees. The GDPA establishes, among other things, the rights of personal data owners, the legal basis applicable to the protection of personal data, requirements for obtaining consent, obligations and requirements relating to security incidents, data leaks and data transfers, as well as the creation of the National Data Protection Authority. In the event of non-compliance with the GDPA, we may be subject to the following penalties: (i) disclosure of the infraction after it has been duly investigated and confirmed, (ii) blockage of the personal data to which the infraction relates, (iii) elimination of personal data to which the infraction relates, and (iv) a fine, per infraction, of up to 2% (subject to a limit of R$50,000,000) of our billings in Brazil during the last fiscal year, excluding taxes. ANPD may revise data protection standards and proceedings based on the GDPA in the future.

In the event of non-compliance with the GDPA or any other applicable law related to personal data, or in the event of a personal data breach, we may be subject to legal proceedings, fines and damage to our reputation, which may materially and adversely affect us. We are subject to uncertainties as to how Brazilian courts will apply and interpret the GDPA, which may materially and adversely affect us.

Additionally, the processing of personal data in Colombia is currently regulated by the Political Constitution of 1991, the Statutory Law No. 1581 of 2012, the Decree No. 1377 of 2013 and its complementary and specific regulations, which establish and develop the rules for the processing of personal data. The conditions for keeping personal data include obtaining consent, implementing safety procedures and complying with the duties of data controllers and data processors. Colombian law established the Industry and Commerce Superintendence as the Colombian data protection authority. The sanctions for non-compliance with its regulations include (i) fines (up to 2,000x the current minimum monthly wage) which can be successive for as long as the non-compliance persists, (ii) the suspension of the operations related to the processing of the involved personal data for up to six months and (iii) the adoption of corrective measures. If such corrective measures are not adopted, the sanctions may include the temporary closure of the operations related to the processing of personal data or even the immediate and definitive closure of the processing of sensitive personal data.

 
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Colombia

Éxito Group is subject to governmental regulation relating to commercial establishments and supervision by competent authorities, generally applicable to environmental, health and commercial matters. In order to open and operate our stores, we must register all our stores in the commercial register, obtain the land use permit and the sanitary certification that certifies compliance with matters relating to the safety of the facilities and the level of sanitation of the establishments. Éxito Group’s stores must also have a security certificate issued by the respective fire department, which indicates that the establishment has the security mechanisms and tools to attend to an emergency at any time. In respect of environmental matters, we comply with waste management, dumping and noise regulations. We believe that Éxito Group complies in all material respects with all applicable regulations and controls with respect to our business.

Éxito Group’s Colombian subsidiaries develop their businesses in different industries, including logistics and transportation, travel, mobile telephone, industrial production (food and apparel), and electronic commerce. We believe Éxito Group is complying within all material regulations of these industries.

Éxito Group is a registered company in the Colombian stock market, and, accordingly, is also subject to regulations issued by the Financial Superintendence, which includes, but is not limited to the disclosure of relevant information, the adoption of corporate governance practices and financial reporting. We believe that Éxito Group is complying in all material respects with these regulations.

Environmental and Social Matters

In 2020, we continued to implement our sustainability strategy, aiming to be a mobilizing agent in the construction of a new social, environmental and governance agenda for a more inclusive and sustainable society, and maintained the following six operating pillars for all of our business units:

·Valuing our people: To be a business benchmark in promoting diversity, ethics and sustainability through our employees and brands;
·Managing environmental impact: Fight against Climate Change, innovating and improving the environmental management of our businesses;
·Conscious consumption: to expand the offering and support the consumer in choosing healthy and sustainable products;
·Transforming the value chain: Co-build value chains committed to the environment, people and animal welfare;
·Engagement with society: To be a mobilizing agent for the promotion of more inclusive and fair opportunities for all; and
·Integrated management and transparency: Consolidate social, environmental and governance practices in our business model and strengthen ethics and transparency in the relationship with our stakeholders.

Below is a summary of other relevant environmental and social matters from our operations in 2020.

Diversity and Inclusion

In 2020, we have strengthened our focus on diversity and inclusion, with a strategic agenda on fighting violence and discrimination. In this respect, we highlight the following initiatives:

·Diversity, Inclusion and Human Rights Policy: In 2020, we launched the Diversity, Inclusion and Human Rights Policy, which provides (general and specific) guidelines connected to the topics of diversity, inclusion and human rights. Its purpose is to provide transparency to our goal of fostering a discrimination-free environment that promotes equal opportunities and values mutual respect;
·In 2020, the Diversity area started conducting a series of online trainings involving all 41 GPA regional offices, assisted by regional managers, store managers and even some of our brand ambassadors, addressing issues of diversity and inclusion values, human rights promotion, compliance policies and publicizing our whistleblowing channel;
 
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·In September 2020, at the Retail University (Universidade do Varejo), we launched the training series “Diversity, Inclusion and Unconscious Bias”, divided into 10 chapters on unconscious bias, empathy, and other priority themes. Open to all associates of head offices and stores, it was ranked as mandatory for managers, store leaders and associates in the areas of loss prevention and property security. In total, 92% of the invited public completed the training;
·Women’s Leadership Development Program: In 2020 we continued the Female Leadership Development Program, addressing topics such as inclusive leadership, self-knowledge, personal strengths and values, gender stereotypes, leadership and strategic influence. The program was mandatory for 214 store managers in the corporation;
·4th Diversity Week: In 2020 GPA held the 4th Diversity Week, which was fully virtual and took place over two weeks, having impacted more than 6,400 store and headquarters associates and service providers. In an unprecedented way, instead of giving specific lectures divided by priority themes, we prioritized the intersectional approach of the themes, discussing, for example, specific challenges for black women and self-esteem of women with disabilities. Over such week, in continuation of non-violence and non-discrimination agenda that we started in 2019, we held workshops focused on our service and security providers, and another workshop for the area of loss prevention and property security, with special emphasis to our anti-racist agenda;
·Affinity groups: We continued to encourage and support our two affinity groups and the gender equality committee in promoting racial equality and LGBTQ+ rights;
·Diversity ambassadors: In each of our stores, two employees volunteered to uphold the theme of diversity. During the 4th Diversity Week we started a series of online training in live format with Diversity Ambassadors. So far, 4 specific lectures have been given to this audience addressing the question of the Ambassador’s role in promoting gender and racial equality; and
·An annual action agenda was carried out, with the purpose of generating understanding and engagement on the subject, while also raising empathetic attitudes and respect for differences. The planning includes actions such as internal communication, posts on social media and a lecture with experts. Dates covered in 2020: Mother's Day, Day against Homo, Trans and Lesbophobia, Gay Pride Day; Day against Lesbophobia; August Lilac (against domestic violence); National Day of People with Disabilities; Day of Deaf People; Day of the Elderly; International Day of Mankind; International Day of People with Disabilities; and Human Rights Day.

In addition, we received an important award on this topic:

·GPA was one of the winners of the Business Excellence Award at the Out & Equal Forum LGBTQI+ Brazil 2020, held on December 2 and 3, 2020. Out & Equal is an organization that works exclusively with LGBTQI+ equality in the workplace and through its Awards of Excellence recognizes organizations, individuals, and affinity groups that have made significant progress over the previous year in the defense of diversity and inclusion of LGBTQI+ people in the workplace. Among the latest advances that we were recognized for were: the performance of our LGBTQIA+ Pride affinity group and the Ambassadors for Diversity program in stores; the publication of the Diversity, Inclusion and Human Rights Policy; working together with the Ombudsman to ensure respect and non-discrimination in the workplace; and the training schedule for all associates

All of these initiatives resulted in an increase in the percentage of leadership positions (managers and above) held by women to 36.12% and the percentage of employees with disabilities to 3.91%, an increase of 0.14 and 0.74 percentage points compared to 2019, respectively.

Management of environmental impact and conscientious consumption and supply

In 2020, we published a new version of our Environmental Management Policy, that presents the principles, commitments and guidelines which lead the performance of the company in sustainability and environmental management in four themes: reducing greenhouse gas emissions, ensuring the sustainable use of natural resources, reducing waste generation and protecting natural ecosystems and biodiversity.

 
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We link the variable remuneration of our executives to the goal of reducing carbon dioxide emissions for 2021. This is in line with the commitment of our controller, the Casino Group, to reduce emissions. Besides, we published a commitment to reduce 30% of our greenhouse gas emissions by 2025.

Since 2013, we have joined the Carbon Disclosure Project (CDP), a mechanism in the financial sector to encourage transparency about emissions. Over the past three years, we have continued to consistently improve our CDP score, which reflects the progress in climate management, in line with our commitment to reduce emissions. Our score went from D in 2018 to B in 2020.

We continue to occasionally invest in projects that improve the energy efficiency of our stores, which allowed us to further reduce our energy consumption per square meter by 9.5% between 2015 and 2020. In 2019, we made a public commitment to replace all fruit and vegetable styrofoam packages for biodegradable trays in private label products (i.e. Qualitá and Taeq) by May 2020. Because of the pandemic, this initiative was postponed to October 2020. Most of our suppliers have been using cardboard trays. We continue to further this initiative and to structure a packaging policy for our exclusive brands.

We are constantly seeking to minimize and prevent waste generation in our operations. In 2020, we achieved a recovery rate (amount of recyclable waste per total amount of waste) of 27%, an increase of 2% compared to our result in 2019.

Moreover, in 2020 we increased the volume of perishable food donated (fruits and vegetables unsuitable for sale, but suitable for consumption) to 24%, reaching 3,600 tons, in comparison with 2019, thereby reducing food waste.

Transformation of the Value Chain

After prioritizing specific supply chains and product categories, we defined an action plan, which included the following actions in 2020:

·Animal Welfare: we published our commitment to animal welfare and worked together with organizations to better align animal welfare standards and share good practices with the productive sector. For eggs, we expanded the commitment undertaken in 2017, committing ourselves to sell 100% of the eggs in the Pão de Açúcar and Extra stores, in the entire Brazilian territory, from cage-free hens until 2028. The share of our private label cage-free egg sales increased by 6%, when compared to 2019.
·For cattle, by 2025 all Pão de Açúcar suppliers must be publicly committed to the policy regarding animal welfare. We have already made 100% of Exclusive Brand products available with social and environmental monitoring and end-to-end traceability.
·Working conditions at international factories: GPA, through Casino, is a member of the ICS Initiative. The ICS is a private-led initiative, with 20+ active retailer members committed to ensure social compliance in their supply chains. The social audit is requested by us in order to verify the respect and application of our Ethics Code based on the ICS Code of Conduct in factories.
·Combating Deforestation: we hold sustainability as a strategic value and commitment of its business model. The socio-environmental transformation of the supply chain is one of our pillars of action, with the fight against deforestation as one of its central themes. Thus, since 2016, the Group has had a Social and Environmental Policy for the purchasing of beef meat, with procedures and criteria for the approval of all national suppliers in all of the company's businesses, in order to identify the direct origin and guarantee the fulfillment of six socio-environmental criteria, which are:
oFree of deforestation and conversion of native vegetation;
oFree of labor conditions similar to slave or child labor;
oFree of environmental embargoes due to deforestation;
oFree from invasions of indigenous lands;
oFree from invasions in areas of environmental conservation;
 
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oWith proper environmental license and registration.

 

Engaging Society

GPA Institute, our social investment arm, is responsible for determining and implementing our strategy for social investments. Throughout the year, several actions of the GPA Institute had a major impact on society, highlighting:

·Solidarity agenda. In 2020, in the face of the challenging Covid-19 scenario, we focused the efforts of the solidarity campaigns on donations for philanthropic institutions to support the confrontation of the pandemic. We promoted the donation of 5,900 tons of food and hygiene and cleaning products to support families from all over Brazil in vulnerable situations to overcome the challenges of the pandemic. In total, more than 643 thousand families were benefited by these actions;
·Through the Instituto GPA, we joined the “Você Não Está Sozinha” Program, an initiative of the Avon Institute, in tackling violence against women and we made available on the Pão de Açúcar Mais, Clube Extra and Assaí apps and on the Compre Bem website a banner that directs women who are experiencing violence to an online page where they can get in touch with a virtual assistant via WhatsApp, who will help them understand if they are experiencing violence, inform them about the public services available on the safety net and indicate what resources they can access;
·Empreendedoras Periféricas (Female Entrepreneurs from Suburbs): In 2020 we support this project that promotes technical and financial support for 17 micro and small-sized black female entrepreneurs from various cities in Brazil, with support for business sustainability during the COVID-19 pandemic period and for strengthening the female network;
·Casa Pretahub: Casa Pretahub is a space dedicated to black entrepreneurs, with shared infrastructure to develop micro and small businesses in digital platforms. With partners such as Extra, through Instituto GPA, Facebook, Tide Setubal Foundation and Mercado Livre, it has six rooms, two studios, kitchen for content production and pop-up kitchen, maker space, space for visual artists exhibition, shared store and library of books and vinyl;
·NATA Project: vocational education school that trains young people in bakery and dairy. This course lasts for three years, with a workload of more than 3,000 hours. It is an integrated model of general and vocational education, always seeking to supplement the teaching process, combining activities of experiences and internships at GPA stores; and
·Prosperar (Thrive) Program: contributing to the academic training of 43 young people with high development potential but with limited financial conditions. It offers scholarships for low-income students to enroll in undergraduate courses in Business Administration or Public Administration at a top university known as Fundação Getúlio Vargas (FGV).

4C. Organizational Structure

Organizational Structure

The chart below sets forth a summary of our organizational structure based on total capital stock as of the date of this annual report:

 
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________________       

*This chart reflects the Sendas Separation and Sendas Spin-Off. For additional information on the corporate reorganization, see notes 1.1 and 34 to our consolidated financial statements included elsewhere this annual report and “—4A. History and Development of the Company—Changes in Our Business—Sendas Spin-Off.”

 

For further information on our subsidiaries, see note 12 to our audited consolidated financial statements included elsewhere in this annual report.

4D. Property, Plant and Equipment

In Brazil, as of December 31, 2020, we owned 57 stores, one warehouse and a portion of the real estate where our headquarters are located. As of the same date, we leased the remaining 639 stores and 14 distribution centers and warehouses we operated in Brazil and the remaining portion of the real estate where our headquarters is located. Leases are usually for a term of five to twenty-five years and provide for monthly rent payments based on a percentage of sales above an agreed minimum value. We have one lease agreement that expired in the end of 2020 in Brazil. Based on our prior experience and Brazilian law and leasing practices, we do not anticipate any material change in the general terms of our leases or any material difficulty in renewing them. Based on our management’s experience and knowledge of the Brazilian market, our management believes that our leases follow market standards.

On March 5, 2020, we and Sendas entered into a sale and leaseback agreement with investments funds administered by BRL Trust Distribuidora de Títulos e Valores Mobiliários S.A., and managed by TRX Gestora de Recursos Ltda., or the Sale and Leaseback Agreement, providing for the sale and leaseback of 43 real estate properties located in the Brazilian states of São Paulo, Rio de Janeiro, Mato Grosso do Sul, Goiás, Bahia, Sergipe, Pernambuco, Piauí and Paraíba and in the Distrito Federal for the total aggregate amount of R$1,245.9 million. The parties will enter into lease agreements relating to each of the real estate properties pursuant to the terms established in the Sale and Leaseback Agreement. We concluded the sale of 39 real estate properties by August 2020.

The Sale and Leaseback Agreement is in line with our strategy of monetizing mature assets, contributing to (i) the decrease of our net indebtedness and (ii) the strengthening of our capital structure and increase of our return on capital expenditures. We are constantly looking for opportunities to sell our real estate properties in order to accomplish this strategy.

 
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The following table sets forth the number and total selling area of our owned and leased retail stores by store format, the number and total storage area of our owned and leased distribution centers and the total office area of our headquarters that we owned and leased as of December 31, 2020:

 

Owned

Leased

Total(1)

 

Number

Area

Number

Area

Number

Area

  (in square meters) (in square meters) (in square meters)
Pão de Açúcar1316,183169217,641182233,824
Extra Hiper19120,09184518,073103638,164
Extra Supermercado(2)2433,990151169,791175203,781
Proximity stores(3)111723557.53223657,649
Total Stores57170,381639963,0386961,133,149
Warehouses113,19814579,49315592,691
Total58183,5796531,542,5317111,726,110

________________       

*The operating data in this table does not include the operating results from Assaí.

(1)Excludes gas stations and drugstores.
(2)Includes Extra Supermercado, Mercado Extra and Compre Bem banners.
(3)Includes Mini Extra, Minuto Pão de Açúcar, Pão de Açúcar Adega and Aliados Minimercado.

 

As of December 31, 2020, GPA Malls was present in 16 Brazilian states and the Federal District and managed around 244 commercial galleries in Brazil and two neighborhood commercial centers. As of December 31, 2020, GPA Malls had more than 292,759 square meters of gross leasable area.

As of December 31, 2020, in Colombia, Argentina and Uruguay we owned 192, 16 and 16 stores, respectively, and one warehouse in each country. In Colombia we also lease 395 stores and 12 distribution centers and warehouses, and we also have 26 mixed stores (stores that are partially owned and partially leased by us). In Argentina we lease nine stores, and in Uruguay we lease 74 stores and three distribution centers. The term of our lease agreements in these countries varies from three to 15 years, and payment conditions include a fixed fee and a variable fee, which is calculated according to the percentage of sales.

For further information on capital expenditures, see “—Item 4A. History and Development of the Company—Capital Expenditures and Investment Plan.”

4E. Discontinued Operations

Via Varejo Sale

On November 23, 2016, our board of directors approved the disposal of our equity interest in Via Varejo, in line with our long-term strategy of focusing on the development of the Brazilian retail segment. Starting on November 1, 2016, we began recording our investment in Via Varejo according to IFRS 5. We concluded the sale of our equity interest in Via Varejo on June 14, 2019 by means of a public auction on B3.

Until May 31, 2019, we carried out our discontinued operations through Via Varejo, which operates in the home appliances, such as consumer electronics and furniture, and e-commerce segments through stores under the banners Ponto Frio and Casas Bahia, in addition to the e-commerce platforms Casasbahia.com, Pontofrio.com, Extra.com.br and Barateiro.com, which were operated by Cnova Brazil.

As disclosed in note 34 to our audited consolidated financial statements included elsewhere in this annual report, net income for the year ended December 31, 2018, and the results (up to May 31, 2019) related to Via Varejo were classified in a single line item as “discontinued operations” in our statement of operations and comprehensive income and the assets and liabilities for Via Varejo (including Cnova Brazil) are classified as held for sale in our balance sheet as of December 31, 2018 and 2017. The sale of Via Varejo resulted in the recognition of a gain on sale of R$398, net of the effect of income taxes of R$199 and related costs. The net effects on discontinued operations were a gain of R$348 million in 2019 compared to R$128 million in 2018. For additional information, see notes 12.4 and 34 to our audited consolidated financial statements included elsewhere in this annual report.

Noncurrent assets held for sale were R$26,137 million as of May 31, 2019 compared to R$29,144 million as of December 31, 2018. Noncurrent liabilities held for sale were R$20,859 million as of May 31, 2019 compared to R$23,933 million as of December 31, 2018.

 
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For additional information on the sale of our equity interest in Via Varejo, see “—4A. History and Development of the Company—Changes in Our Business—Via Varejo Sale.”

Spin-Off of the Cash and Carry Business

On December 14, 2020, our board of directors approved a corporate reorganization in order to carry out the segregation of the cash and carry business through a spin-off of our then wholly owned subsidiary Sendas, which operates under the banner Assaí. On December 31, 2020, the corporate reorganization proposal was submitted to and approved by the shareholders of CBD and Sendas at extraordinary shareholders’ meetings of both companies. Our shareholders also approved the delivery of the common shares issued by Sendas that were owned by CBD directly to CBD shareholders, at a ratio of one common share of Sendas for each common share issued by CBD. The spin-off included the transfer of the equity interest currently held by Sendas in Almacenes Éxito S.A. to the Company.

On February 26, 2021, our shareholders received shares issued by Sendas, in proportion to their respective holdings in the capital stock of CBD. The distribution occurred after the listing of Sendas’ common shares on the Novo Mercado segment of B3 and after the approval of listing of ADRs representing Sendas’ shares on the NYSE. We expect Sendas to follow substantially similar corporate governance standards as those currently adopted by the Company.

As disclosed in note 34 to our audited consolidated financial statements included elsewhere in this annual report, net income for the years ended December 31, 2020, 2019 and 2018 and the results related to Sendas were classified in a single line item as “discontinued operations” in our statement of operations and comprehensive income.

For additional information on the spin-off of our cash and carry business, see “—4A. History and Development of the Company—Changes in Our Business—Sendas Spin-off.”

ITEM 4A.UNRESOLVED STAFF COMMENTS

None.

ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read this discussion in conjunction with our audited consolidated financial statements prepared in accordance with IFRS and the related notes and the other financial information included elsewhere in this annual report.

5A. Operating Results

Macro-Economic Environment and Factors Affecting Our Results of Operations

Since most of our operations are in Brazil, our results of operations are affected by macroeconomic conditions in Brazil, including inflation rates, interest rates, Brazilian GDP growth, employment rates, wage levels, consumer confidence and credit availability. As a result of Éxito Group’s acquisition on November 27, 2019, we started to operate in Colombia, Uruguay and Argentina.

Although the Brazilian economy presented signs of recovery in 2019, the year of 2020 presented challenges and impacts due to the Covid-19 pandemic. Inflation increased in Brazil in the twelve months ended December 31, 2020 and reached an annual rate of 23.1%, according to the General Market Price Index (Índice Geral de Preços - Mercado), or IGP-M, compared to 7.32% and 7.55% in 2019 and 2018, respectively. The IPCA inflation rate also increased, reaching 4.52% in the same period, compared to 4.31% and 3.75% in 2019 and 2018. Inflation has a direct effect on the final prices we charge our customers when they acquire our products.

Brazilian macroeconomic conditions remain unstable. From January 1 to December 31, 2020, the real depreciated by 28.9% in relation to the U.S. dollar. As of December 31, 2020, the real/U.S. dollar exchange rate was R$5.197 per US$1.00. The depreciation of the real against the U.S. dollar may create inflationary pressures in Brazil, including in the category of food inflation, with possible effects on the cost practiced by the suppliers.

We use derivatives, such as swaps, aiming to hedge the exchange exposure risk to U.S. dollar, converting the cost of debt into domestic currency and interest rates. We have a treasury policy to manage foreign exchange risk relating to U.S. dollar, principally by entering into swaps in reais for 100% of our U.S. dollar-denominated liabilities, which represented 2.96% of our total debt as of December 31, 2020. We engage in cross-currency interest rate swaps under which we enter into an agreement with the same counter-party that provides the original U.S. dollar-denominated financing. We sign a separate financial instrument at the time the loan agreement is consummated, pursuant to which we are then effectively liable for amounts in reais and interest at a percentage of the CDI rate. The reference amounts and maturity periods of these swaps generally correspond to the original U.S. dollar-denominated loan. This policy protects us against losses resulting from currency devaluations.

 
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The interest rates set by the COPOM declined in 2020, reaching an all-time low of 2.0% as of December 31, 2020. The interest rates were 4.5% at year-end 2019, 6.50% at year-end 2018 and 7.00% at year-end 2017.

Foreign exchange reserves held by the Brazilian government slightly decreased from US$356,884 million as of December 2019 to US$355,62 million as of December 2020.

Brazilian GDP decreased by 4.1% in the twelve months ended December 31, 2020, compared to an increase of 1.4% in 2019 and 1.8% in 2018. The unemployment rate in Brazil reached 13.9% in 2020, 11.0% in 2019 and 11.6% in 2018. These two indicators directly affect the purchasing power of the Brazilian workforce.

An economic recession and an increasing unemployment rate, including as a result of COVID-19, could lead to a decline in household consumption that could adversely affect our results of operations and financial condition. In order to mitigate this risk, we are currently adapting our stores’ portfolio with conversion to our low-cost format.

On the other hand, a continuation of the recent trend of decreasing interest rates could have a positive effect on our results of operations and financial condition, as many of our rental contracts are partially indexed to Brazil’s national inflation index and the majority of our financial revenues and financial expenses have variable interest rates.

The following table sets forth data on real GDP growth, inflation and interest rates, and the U.S. dollar exchange rate for the indicated periods:

 

December 31,

 

2020

2019

2018

2017

2016

GDP Growth(1)(4.1)1.41.81.3(3.3)
Inflation (IGP-M) (%)(2)23.47.37.5(0.5)7.1
Inflation (IPCA) (%)(3)4.524.33.72.96.3
CDI (%)(4)2.755.96.49.914.0
TJLP (%)(5)4.555.67.07.07.5
SELIC rate (%)(6)1.94.46.47.013.8
Appreciation (depreciation) of real to U.S. dollars (%)(28.9)4.418.51.517.0
Exchange rate (closing) R$ per U.S. dollars 1.00(7)5.1974.0313.8753.3083.259
Average exchange rate R$ per U.S. dollars 1.00(8)5.15783.9463.6563.1933.484

 

(1)Source: IBGE.
(2)The General Market Price Index (Índice Geral de Preços-Mercado), or IGP-M, is measured by FGV.
(3)Extended National Consumer Price Index (Indice de Preços ao Consumidor Amplo), or IPCA, is a broad consumer price index measured by IBGE.
(4)The CDI is the accumulated rate of interbank deposits in Brazil during each year.
(5)The official long-term interest rate (taxa de juros de longo prazo), or TJLP, is charged by Brazil’s National Development Bank (Banco Nacional de Desenvolvimento Econômico e Social), or BNDES, on long-term financing (end of the period data).
(6)Annual average interest rate. Source: Central Bank.
(7)Exchange rate (for sale) of the last day of the period. Source: Central Bank.
(8)Average of exchange rates (for sale) of the period. Source: Central Bank.

 

In Colombia, as a result of the expected contraction of revenues, due to the recession caused by COVID-19 pandemic and the necessary counter-cyclical policy, the fiscal deficit target was revised up at 8.9% of GDP for 2020 and at 7.6% of GDP for 2021. Also, Colombia’s Central Bank intervened in several occasions on the discount rate, decreasing the discount rate from 3.8% on March 2020 to 1.75% on September 28, 2020. Since then, the discount rate has been maintained unaltered. During 2020, due to the COVID-19 crisis, the peso experienced significant volatility which resulted in a depreciation of 12.6% when considering the period between February 29, 2020 and April 30, 2020, as the exchange rate at the end of that period increased from COP3,589.86 to COP3,983.29 per U.S.$1.00, respectively. However, as of April 6, 2021, the exchange rate was COP3,645.79 per U.S.$1.00. Furthermore, the current Colombian government term, led by President Iván Duque, will conclude on August 7, 2022. Gustavo Petro, a leftist candidate, a former rebel, and runner-up of the 2018 general elections leads the vote intention. However, the next presidential election is scheduled for May 2022, and the scenario remains unclear. Moreover, the Colombian government, through the Ministry of Finance and Public Credit, is planning to submit to the Colombian Congress a new tax reform law. The changes in tax-related laws and regulations, and interpretations thereof, can affect tax burdens by increasing tax rates and fees, creating new taxes, limiting tax deductions, and eliminating tax-based incentives and non-taxed income. The legislative changes may have an adverse impact on our business and financial condition. We may be adversely affected by changes in government or fiscal policies, and other political, diplomatic, social and economic developments that may affect Colombia.

 
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Current Conditions and Trends in our Industry

The following discussion is based largely upon our current expectations about future events, and trends affecting our business. Actual results for our industry and performance could differ substantially. For further information related to our forward-looking statements, see “Forward-Looking Statements” and for a description of certain factors that could affect our industry in the future and our own future performance, see “Item 3. Key Information—3D. Risk Factors.”

COVID-19

Since December 2019, a new strain of coronavirus known as COVID-19 has spread in China and other countries. In 2020, the COVID-19 outbreak has compelled governments around the world, including in Brazil and other Latin American countries where we operate, to adopt temporary measures to contain the spread of COVID-19 by means such as lockdowns of cities, restrictions on travel and public transportation, business and store closures, and emergency quarantines, among others, all of which have caused significant disruptions to the global economy and normal business operations across a growing list of sectors and countries. The measures adopted to combat the COVID-19 outbreak have adversely affected and will continue to adversely affect business confidence and consumer sentiment, and have been, and may continue to be, accompanied by significant volatility in financial and commodity markets as well as stock exchanges worldwide.

In Brazil, reflecting the scale of investor’s risk aversion, the stock market triggered several automatic suspensions, known as circuit breaker, and the benchmark Ibovespa index fell 36.9% from January 1, 2020 to March 31, 2020, following the trend of international stock markets. Accordingly, the price of our common shares and ADSs were adversely affected.

The COVID-19 pandemic resulted in greater adherence to online sales channels as an option of convenience to the consumer in all countries where we operate. We have also experienced a decrease in foot traffic in all of our stores as a result of the restrictions on movement of people as part of the efforts towards showing down the effects of the pandemic.

As grocery shopping is considered an essential activity, our business operations in Brazil were not adversely affected by the restrictive measures imposed by federal and state governments of those countries. As a result of the COVID-19 pandemic, we experienced a temporary increase in sales in our stores since people were initially stocking food, in addition to the change in consumption pattern of individuals from restaurants to home meal preparations. Since March 2020, there has been an increase in household consumption, even though the frequency of store visits has decreased due to social distancing guidelines.

On the other hand, our Colombian operations were adversely affected by the restrictive measures imposed by regional and state governments as a result of the COVID-19 pandemic, as well as the increased unemployment rate and lower consumer confidence. The restrictions on popular mobility imposed in Colombia were more stringent than in Brazil and included, among other things, reduced business hours at stores, establishment of purchasing limits, closure of stores, dry law enforcement during certain weekends and curfew in the main Colombian cities.

According to DANE, as of the end of December 31, 2020, the Colombian GDP decreased by 6.8% when compared to the same period of 2019, while the Colombian retail and wholesale industry as a whole decreased by 2.8%, mainly as a result of the adverse effects of the COVID-19 pandemic.

 
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Additionally, certain of our operations were not considered essential by government authorities, which led to the closure of a significant part of our commercial galleries and centers, and therefore revenue from these operations has decreased significantly.

We have been monitoring the progress of the pandemic of COVID-19 and its impacts on our operations. We have adopted several measures as a result of the COVID-19 pandemic, including the creation of a crisis committee formed by senior management. Our crisis committee is acting in line with the recommendations of health and local authorities and professional associations aiming at effectively responding to the negative impacts of the COVID-19 pandemic.

As of December 31, 2020, we have assessed the impacts of the COVID-19 to our business and concluded that we do not expect to have material adverse changes to our revenues and other lines of our income statement, and we did not need to record any COVID-19 related provisions. As of the date of this annual report, we incurred in operating expenses related to the COVID-19 protective measures in the amount of R$134 million.

To meet the demand of our customers, we implemented emergency protective health measures at our stores, hired temporary employees to maintain our stores operational and invested in additional training, which caused a temporary increase in our operating costs. As of March 2020, we implemented home office policy for employees with administrative and back-office responsibilities in the countries where we operate, and these employees have been gradually returning to our offices.

If a significant percentage of our employees is not able to work, due to illnesses, restrictions on travel or government restrictions related to the pandemic, we may be adversely affected. An extended period of remote work may also increase our operating risks, including cyber security and labor risks, among others. We may also be affected as a result of a lower flow of people on the streets, and consequently in stores, in addition to changes in the consumption pattern of customers.

We may also face supply chain risks, such as scrutiny or embargoing of goods produced in infected areas, in addition to failures of third parties, including our suppliers, contract manufacturers, contractors, commercial banks, joint venture partners and external business partners to meet their obligations, or significant disruptions to their ability to do so. As of the date of this annual report, we have not experienced problems in our supply chain, and our suppliers are delivering products on a regular basis to our distribution centers and stores.

The extent to which the coronavirus and/or other diseases affect us will depend on future developments, which are highly uncertain and cannot be predicted. The spread of COVID-19, especially if the measures to curb the spread of the virus lingers, may have broader macro-economic implications, including reduced levels of economic growth and possibly a global recession, the effects of which could be felt well beyond the time the spread of infection is contained.

New waves of COVID-19 have already started to occur in certain regions in which we operate and may continue to spread, including novel and variant strains in Brazil. In March 2021, new governmental regulations were imposed in various cities throughout Brazil mandating social distancing measures and other closures as the number of COVID-19 cases and COVID-19 related deaths continued to increase, with accompanying stresses on the hospital systems throughout Brazil. At the same time, a relatively low proportion of the Brazilian population has received vaccines due to supply shortages and delays on Brazilian regulatory approval of certain vaccines.We cannot assure you that we will be able to take the measures required to prevent a negative impact on our business. No recent comparable events exist that may provide us with guidance regarding the effects of a severe global pandemic. As a result, the final impact of the COVID-19 outbreak is uncertain and subject to changes that we cannot predict.

For risks relating to COVID-19, see “Item 3. Key Information—3D. Risk Factors—Risks Relating to Brazil and Colombia—The outbreak of communicable diseases around the world, including the COVID-19, may lead to higher volatility in the global capital markets and recessionary pressure on the Brazilian economy. Any outbreak in Brazil could directly affect our operations, each of which may materially and adversely affect our business, financial condition and results of operations,” and “—Risks Relating to our Industry and Us— The recent global outbreak of novel coronavirus (COVID-19) disease has disrupted and could further disrupt our operations and could have an adverse impact on our business, financial condition, results of operations or prospects.”

 
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Financial Presentation and Accounting Policies

Presentation of Financial Statements

The preparation of our consolidated financial statements, in accordance with IFRS as issued by the IASB, requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures, as well as the disclosure of contingent liabilities, at the end of the reporting period. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.

Critical Accounting Policies and Estimates

We discuss below key assumptions and judgments concerning the future and other key sources of uncertain estimates at the reporting date that have a significant risk of causing a material impact to the carrying amounts of assets or liabilities within the next financial year.

For further details on critical accounting policies and our adoption of new accounting standards, such as IFRS 16, see notes 3 and 4 of our consolidated financial statements included elsewhere in this annual report.

Annual impairment test of goodwill and intangibles

We test annually whether goodwill is impaired, in accordance with the accounting policy stated in note 16 to our audited consolidated financial statements included elsewhere in this annual report and international accounting standards, or IAS, IAS 36 – Impairment of Assets. Other intangible assets, the useful lives of which are indefinite, such as brands and commercial rights, are submitted to impairment tests on the same basis as goodwill.

As of December 31, 2020, we calculated the recoverable amount of goodwill arising from past acquisitions, for the purpose of evaluating its recoverability and potential impairment resulting from events or changes in economic, operating and technological conditions that might indicate impairment.

For impairment testing purposes, intangible assets with indefinite useful lives are not amortized, but tested for impairment at the end of each reporting period or whenever there are indications that their carrying amount may be impaired either individually or at the level of the cash-generating unit. The assessment is reviewed annually to determine whether the indefinite life assumption remains valid. Otherwise, the useful life is changed prospectively from indefinite to definite.

The recoverable amount allocated to each segment was defined by means of a calculation based on the value in use of the assets based on cash flow projections arising from financial budgets approved by senior management for the next three years. The discount rate applied to cash flow projections was 7.9% each year and cash flows exceeding three years are extrapolated by the expected long-term growth rate of 4.6% for our Brazilian retail segment. Based on this analysis, no impairment loss was identified. The Éxito Group discount rate applied to cash flow projections is 6.5% (and cash flows exceeding the three-year period are extrapolated using a growth rate of 3%).  Based on this analysis, no impairment charges were recorded.

Commercial rights are intangible assets which are amounts paid to former owners of commercial locations. To test for impairment of these assets, we allocated the amounts of identifiable commercial rights by store and we test them together with the fixed assets of the store as described in notes 15.1 and 16 to our audited consolidated financial statements included elsewhere in this annual report.

Income taxes

Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. Given the nature and complexity of our business, differences arising between the actual results and the assumptions made, or future changes to those assumptions, could require future adjustments to tax income and expenses already recorded. We recognize provisions, based on reasonable estimates, for consequences of audits by the tax authorities of the respective jurisdictions in which we operate. The amount of these provisions is based on various factors, such as our experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. Differences of interpretation may arise on a wide variety of issues depending on the conditions prevailing in the respective entity’s jurisdiction.

 
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Deferred income tax and social contribution assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits together with future tax-planning strategies.

We have recognized deferred tax assets related to tax loss carry forwards amounting to R$514 million as of December 31, 2020, R$453 million as of December 31, 2019 and R$198 million as of December 31, 2018. These losses do not expire and relate to subsidiaries that have tax-planning opportunities available to support these balances. The use of tax loss carry forwards is limited by law to 30% of taxable income in a single fiscal-year.

Fair value of derivatives and other financial instruments

When the fair value of financial assets and liabilities recorded in the financial statements cannot be observed in active markets, it is determined according to the hierarchy set forth by IFRS 13, which sets certain valuation techniques including the discounted cash-flow model. The inputs to these models are taken from observable markets where possible or from information on comparable operations and transactions in the market. The judgments include analyses of data, such as liquidity risk, credit risk and volatility. Changes in assumptions regarding these factors may affect the reported fair value of financial instruments.

The fair value of financial instruments that are actively traded on organized markets is determined based on market quotes, at the end of the reporting period. For financial instruments that are not actively traded, the fair value is based on valuation techniques defined by us and compatible with usual market practices. These techniques include the use of recent market arm’s length transactions, benchmarking of the fair value of similar financial instruments, analyses of discounted cash flows or other valuation models.

Share-based payments

The cost of transactions with employees eligible for share-based compensation is measured based on the fair value of the equity instruments on the grant date. Estimating the fair value of share-based payment transactions requires determining the most appropriate valuation model, which depends on the terms and conditions of the specific grant. This estimate also requires determining the most appropriate inputs for the valuation model, including the expected useful life of the stock options, volatility and dividend yield, as well as making assumptions about them. The assumptions and models used to estimate the fair value of share-based payment transactions are disclosed in note 25(d) to our audited consolidated financial statements included elsewhere in this annual report.

Provision for contingencies

We are a party to several proceedings at the judicial and administrative levels in the ordinary course of its business. Provisions for legal claims are recognized for all cases representing reasonably estimated probable losses. The assessment of the likelihood of loss takes into account available evidence, the hierarchy of laws, former court decisions and their legal significance, as well as legal counsel’s opinion. For details on legal proceedings, see note 22 to our audited consolidated financial statements included elsewhere in this annual report.

Impairment of financial asset

In January 1, 2018, we started to adopt IFRS 9. IFRS 9 replaces the incurred loss model of IAS 39 with an expected credit losses model. The new impairment loss model applies to financial assets measured at amortized cost, contractual assets and debt instruments measured at fair value through other comprehensive income, but does not apply to investments in equity instruments (shares) or financial assets measured at fair value through profit or loss.

We measure provisions for losses from accounts receivable and other receivables and contractual assets at an amount that equals the credit loss expected for the full lifetime of the same receivable or contractual asset. We use the same measurement for trade accounts receivable, whose portfolio of receivables is fragmented, rents receivable and wholesale accounts receivable. The practical expedient was applied through the adoption of a matrix of losses for each maturity range.

 
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When determining whether the credit risk of a financial asset increased significantly since its initial recognition and while estimating the expected credit losses, we take into account reasonable and sustainable information that is relevant and available free of cost or excessive effort. This includes quantitative and qualitative information and analysis, based on our historical experience, during credit appraisal and considering information about projections. We consider that the credit risk of a financial asset increased significantly if the asset is overdue for more than 90 days. For additional information, see note 3 to our audited consolidated financial statements included elsewhere in this annual report.

Recoverable taxes

We pay tax on services and sales, known as ICMS, which is a state level value-added tax levied on the sale of goods and the provision of services at each phase of production and sales. In the Brazilian states where we operate, and for most of the products in our sales mix, the ICMS tax substitution regime applies. Under the tax substitution regime, the responsibility for paying upfront taxes due on the entire production and sales chain for certain products is primarily that of the manufacturers and, in some cases (depending on the tax system applicable in each state and for each product) can be our responsibility. In the tax substitution regime, the tax is collected on the sale of the products and transferred to the government. We record the taxes paid upfront under the tax substitution regime in accordance with the accrual basis in our cost of goods resold.

We also have recoverable tax credits related to social security contribution (Contribuição para o Financiamento da Seguridade Social), or COFINS, and social integration (Programa de Integração Social), or PIS, taxes.

The estimate of future recoverability of these tax credits is made based on growth projections, operational matters, the consumption of the credits by the Grupo Pão de Açúcar companies and the special tax regime. For details of credits and compensation, see note 10 to our audited consolidated financial statements included elsewhere in this annual report.

Inventories

Inventories are carried at the lower of cost or net realizable value. The cost of inventories purchased is recorded at average cost, plus warehouse and handling costs related to bringing each product to its present location and condition, less rebates received from suppliers.

Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs to sell.

The value of inventory is reduced by an allowance for losses and breakage, which is periodically reviewed and evaluated as to its adequacy.

Business Combination and goodwill

According to IFRS 3, business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the sum of the consideration transferred, measured at fair value on the acquisition date, and the remaining amount of non-controlling interest in the acquired company. For each business combination, the acquirer measures the non-controlling interest in the acquiree at fair value or by the proportionate share in the acquiree’s identifiable net assets, according to our accounting policy. The acquisition costs incurred are treated as an expense and included in administrative expenses.

Goodwill is initially measured at cost and is the excess between the consideration transferred and the fair value of assets acquired and assumed liabilities, including any non-controlling interests. If the consideration transferred is lower than the fair value of the acquirer’s net assets, we recognized a gain on bargain purchase in profit or loss.

Lease

According to IFRS 16, we assess the agreements we enter into to evaluate whether it is or contain a lease provision. We understand that an agreement is, or contains, a lease when it transfers the right to control the use of a given asset for a specified period in exchange for consideration.

 
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We lease equipment and commercial spaces, including stores and distribution centers, under cancellable and non-cancellable lease agreements. The terms of the lease agreements to support these transactions varies between five and 25 years.

As a result of the application of the full retrospective method of adoption of IFRS 16, we have recasted the comparative financial information as of and for the years ended December 31, 2018 and 2017 with the following impacts:

 

As of and for the Year Ended December 31,

 

2018

2017

 (millions of R$)
Right-of-use assets4,5454,108
Lease liabilities5,7875,267
Depreciation expense(481)(483)
Interest expense(587)(565)

 

For additional information on the assessment of our lease agreements and the adoption of IFRS 16, see note 4 to our audited consolidated financial statements included elsewhere in this annual report.

Lessee

When we act as lessees in the lease agreements we entered into, we assess our lease agreements in order to identify the term of the lease agreement according to the term the lessee has the control of the use of a given asset, considering extension and termination options. According to IFRS 16, we do not consider in our assessment agreements with a term lower than twelve months and with an individual asset value below US$5,000.

The agreements are recorded as of the date they were entered into and when the related asset is ready to be used, through the recognition of a lease liability and a corresponding right of use asset. The lease liability is calculated at the present value of the minimum lease payments, using the incremental borrowing rate for similar assets.

Payments made are segregated between financial charges and reduction of the lease liability, in order to obtain a constant interest rate on the liability balance. Financial charges are recognized as financial expenses for a given period.

The right-of-use assets are amortized over the lease agreement term. Capitalizations for improvements, improvements and renovations carried out in stores are amortized over their estimated useful life or the expected term of use of the asset, which might be limited if there is evidence that the lease will not be extended.

Variable rents are recognized as expenses in the years in which they are incurred.

Lessor

When we act as lessors in the lease agreements we entered into, we assess the transfer of risks and benefits to the lessees. Leases in which we do not substantially transfer all the risks and benefits of the ownership of the asset are classified as operating leases. The initial direct costs of negotiating operating leases are added to the book value of the leased asset and recognized over the term of the agreement, on the same basis as rental income.

Variable rents are recognized as income in the years in which they are earned.

Discontinued Operations of Sendas

Sendas was one of our subsidiaries and its operations were classified as discontinued operations in the periods from December 31, 2018 through December 31, 2020. On December 31, 2020, our shareholders approved the corporate reorganization proposal and it ceased to be a consolidated subsidiary. For additional information on the sale of our equity interest in Sendas, see “Item 4. Information on the Company—Changes in Our Business—Sendas Spin-off.”

 
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Discontinued Operations of Via Varejo

Via Varejo was one of our subsidiaries and its operations were classified as discontinued operations in the periods from 2016 to 2019 (until May 31, 2019). For more information about our discontinued operations, see “Item 4. Information on the Company—4E. Discontinued Operations” and note 34 to our audited consolidated financial statements included elsewhere in this annual report. On June 14, 2019, we completed the sale of all of our equity interest in Via Varejo and it ceased to be a consolidated subsidiary. For additional information on the sale of our equity interest in Via Varejo, see “Item 4. Information on the Company—4A. History and Development of the Company—Changes in Our Business—Via Varejo Sale.”

Éxito Group’s Acquisition

On November 27, 2019, Sendas acquired 96.57% of Éxito Group’s shares by means of an all-cash tender offer. As a result of Éxito Group’s acquisition, we started to carry out operations in Colombia, Argentina and Uruguay. For additional information on Éxito Group’s acquisition, see “Item 4. Information on the Company—4A. History and Development of the Company—Changes in Our Business—Latin America Corporate Reorganization.”

We started to consolidate Éxito Group’s after we assumed its corporate control on November 27, 2019.

Overview of the Fiscal Year Ended December 31, 2020

With the divestment of all of our equity interest in Via Varejo, concluded in June 2019, we focused our operations in the Brazilian retail segment and took an important step to simplify our Latin America structure. With the acquisition of 96.57% of the equity interest in Éxito Group, which is now part of our portfolio, expanded our operations to Colombia, Uruguay and Argentina. Accordingly, after the acquisition of Éxito Group, we are one of the largest food retail companies in South America according to the Bloomberg data and the retail market leader in Colombia and Uruguay. Additionally, aiming at strengthening the level of our corporate governance, as of March 2, 2020, our common shares began trading on the Novo Mercado listing segment of B3, the trading segment of B3 with the highest corporate governance standards.

Despite a challenging economic scenario in which consumption was sharply affected by high unemployment rates, our gross sales in Brazil increased 8.0% in 2020 from 2019, totaling R$ 31.1 billion. Our consolidated gross sales totaled R$ 55.7 billion in 2020.

We improved our portfolio of store formats in the Brazilian retail segment to better meet our clients’ needs by renovating our store and conversions of stores, which reinforced consumers’ power of choice and ensured a better presentation of products and services. In 2020, 68 stores in Brazil were renovated, converted, inaugurated or repositioned in the year.

Extra Hiper stores presented 11% of growth in sales due to the attractiveness of the one-stop-shop concept and the robust performance of 23 stores, which are based on three business pillars: (i) more competitive prices in mass consumption categories that increase customer traffic at stores; (ii) improved customer service in perishable goods; and (iii) review of our nonfood portfolio with an increase in the home appliances category.

Our focus on improving our clients’ shopping experience was materialized with the 46 Pão de Açúcar stores renovated following a next-generation concept store, focused on perishables, services and improvement of portfolio, presenting a multi-channel, or sales in different channels, including brick and mortar stores, e-commerce, James delivery, among others; multi-sensory and multi-solution space, offering different shopping experience in terms of store layout, variety of products, service quality, social hubs, among others. By the end of 2020, renovated stores accounted for 41% of the Pão de Açúcar banner’s revenue, delivering outstanding performance in terms of sales.

In 2020, we continued to convert our Extra supermarket stores into Mercado Extra stores, with additional conversion of 41 stores. Only six stores remained Extra Super stores. In 2020, Mercado Extra and Compre Bem stores comprised 84% of Extra supermarket’s sales. In 2020, these stores presented significant growth in sales and better performance compared to non-converted stores.

 
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The proximity store business continues to soar, mainly due to its effective value proposition in the neighbourhood format and the expansion of the Aliados Compre Bem program, as evidenced by the continuous increase in sales – ten consecutive quarters of growth – and profitability gains throughout the year.

In 2020, we also improved the portfolio of our private label brands, an important part of the loyalty building and profitability of our business, launching more than 190 products in Brazil, and increasing the categories of products we offer under our private label brands. This improvement was responsible for the increase in sales of the products under our private label brand and contributed to a more integrated strategy for our businesses.

We also invested in our digital transformation strategy by means of the continuous integration of our e-commerce and brick-and-mortar stores, reaffirming our leadership in the food e-commerce segment. Our digital retail operation presented a threefold growth from the previous year and reached R$1.1 billion in sales in Brazil, mainly due to (i) the expansion of the Express and Click & Collect models to 289 stores as of December 31, 2020 (compared to 120 stores as of December 31, 2019), (ii) the opening of four new mini distribution centers to support a pervasive delivery system and (iii) the expansion of the last mile solution (James Delivery) to 355 stores in 32 cities (compared to 55 stores in 18 cities as of December 31, 2019).

In 2021, the Sendas Separation and Sendas Spin-Off was completed, and we focused our business on the retail sector, with our income statement reflecting the higher level of service and value added products.

Results of Operations for 2020, 2019 and 2018

We measure the results of our operating segments in accordance with IFRS using, among other measures, each segment’s operating results. References to “same-store” sales are determined by the sales made in stores open for at least 12 consecutive months and that did not close or remain closed for a period of seven or more consecutive days.

The following table presents the consolidated results of operations in accordance with IFRS for the periods indicated, as included in our audited consolidated financial statements included elsewhere in this annual report.

 
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Year Ended December 31, (1)(2)

 

2020(3)

% of Net Operating Revenue

2019

% of Net Operating Revenue

2018

% of Net Operating Revenue

Results of Operations(in millions of R$, unless otherwise noted)
Net operating revenue51,253100.028,838100.026,490100.0
Cost of sales

(37,504)

(73.2)

(21,225)

(73.6)

(19,046)

(71.9)

Gross profit

13,749

26.8

7,613

26.4

7,444

28.1

Selling, general and administrative expenses(9,343)(18.2)(5,698)(19.8)(5,396)(20.4)
Depreciation and amortization(1,804)(3.5)(1,028)(3.6)(892)(3.4)
Other operating expenses, net

(71)

(0.1)

(386)

(1.3)

(199)

(0.8)

Operating expenses(11,218)(21.9)(7,112)(24.7)(6,487)(24.5)
Profit from operations before financial expenses and share of profit of associates2,5314.95011.79573.6
Financial income9091.83531.21930.7
Financial expenses

(1,637)

(3.2)

(1,224)

(4.2)

(1,095)

(4.1)

Financial expenses, net

(728)

(1.4)

(871)

(3.0)

(902)

(3.4)

Share of profit of associates

98

0.2

2

-

28

0.1

Profit before income tax and social contribution

1,901

3.7

(368)

(1.3)

83

0.3

Income tax and social
contribution

(662)

(1.3)

95

0.3

41

0.2

Net income from continuing operations

1,239

2.4

(273)

(0.9)

124

0.5

Net income from discontinued operations

1,087

2.1

1,109

3.8

1,160

4.4

Net income for the year

2,326

4.5

836

2.9

1,284

4.8

Attributed to controlling shareholders from continued operations1,0922.1(287)(1.0)1240.5
Attributed to controlling shareholders from discontinued operations

1,087

2.1

1,077

3.7

1,025

3.9

Total attributed to controlling shareholders

2,179

4.3

790

2.7

1,149

4.3

Attributed to non-controlling shareholders from continued operations1470.3140.0--
Attributed to non-controlling shareholders from discontinued operations

-

-

32

0.1

135

0.5

Total attributed to non-controlling shareholders

147

0.3

46

0.2

135

0.5

________________       

(1)As disclosed in note 33 to our audited consolidated financial statements included elsewhere in this annual report, Via Varejo operations were classified as discontinued operations in the periods from 2016 to 2019 (until May 31, 2019). Starting on November 1, 2016, we began recording our investment in Cnova according to IFRS 5. On June 14, 2019, we consummated the sale of all equity interest we held in Via Varejo. Accordingly, our financial statements as of and for the year ended December 31, 2019 include the five months that Via Varejo’s results of operations were considered in the line item relating to discontinued operations. For additional information on the sale on our discontinued operations, see note 12.3 to our audited consolidated financial statements included elsewhere in this annual report. The sale of Via Varejo resulted in the recognition of a gain on sale of R$398 million, net of the effect of income taxes of R$199 million and related costs. The net effects on discontinued operations were a gain of R$348 million in 2019. For additional information, see notes 12.4 and 34 to our audited consolidated financial statements included elsewhere in this annual report.
(2)The statement of operations for the years ended December 31, 2020, 2019 and 2018 related to Sendas was classified as “discontinued operations.” As discussed in footnote 1.1 to our consolidated financial statement included elsewhere in this annual report, the Sendas spin-off was approved by the general meeting on December 31, 2020, resulting in the deconsolidation of Sendas from GPA on the same date.
(3)IFRS 16 became effective on January 1, 2019. We opted for the full retrospective adoption method as if IFRS 16 had been adopted since the date the lease agreements became effective to show the comparative effects for each past period. As a result, we have restated our audited consolidated financial statements, and financial information included in this annual report, as of and for the years ended December 31, 2018 and 2017.

 

In addition, we present the results of our operating segments in the same manner management evaluates the performance of and strategy for the segments listed below. For further information on the segments, see note 31 to our audited consolidated financial statements included elsewhere in this annual report.

 
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Information for our segments is included in the following tables:

 

Year Ended December 31, 2020

Statement of operations

Brazilian retail

Éxito Group

Other businesses(1)

Discontined operations(2)

Total

Segments(in millions of R$)
Net operating revenue29,17022,03449-51,253
Gross profit8,2195,50822-13,749
Depreciation and amortization(1,069)(729)(6)-(1,804)
Other operating expenses, net240(306)(5) (71)
Profit from operations before financial income (expenses) and share of profit of associates2,016652(137)-2,531
Financial expenses, net(386)(340)(2)-(728)
Share of profit of associates

118

27

(47)

-

98

Profit (loss) before income tax and social contribution1,748339(186)-1,901
Income tax and social contribution

(559)

(110)

7

-

(662)

Net income (loss) – continuing operations

1,189

229

(179)

-

1,239

Net income (loss) – discontinued operations

85

(1)

-

1,003

1,087

Net income (loss) for the year

1,274

228

(179)

1,003

2,326

 

Statement of operations

Year Ended December 31, 2019(2)

Segments

Brazilian retail

Éxito Group

Other businesses(1)

Discontinued operations(2)

Total

 (in millions of R$)
Net operating revenue26,6542,15133-28,838
Gross profit7,005609(1)-7,613
Depreciation and amortization(967)(60)(1)-(1,028)
Other operating expenses, net(248)(138)  (386)
Profit from operations before financial income (expenses) and share of profit of associates46790(56)-501
Financial expenses, net(815)(57)1-(871)
Share of profit of associates

107

(6)

(99)

-

2

Profit (loss) before income tax and social contribution(241)27(154)-(368)
Income tax and social contribution

121

(28)

2

-

95

Net loss – continuing operations

(120)

(1)

(152)

-

(273)

Net income (loss) – discontinued operations

312

-

-

797

1,109

Net income (loss) for the year

192

(1)

(152)

797

836

 

Statement of operations

Year Ended December 31, 2018

Segments

Brazilian retail

Other businesses(1)

Discontinued operations(2)

Total

 (in millions of R$)
Net operating revenue26,490--26,490
Gross profit7,444--7,444
Depreciation and amortization(892)--(892)
Other operating expenses, net(199)  (199)
Profit from operations before financial income (expenses) and share of profit of associates957--957
Financial expenses, net(902)--(902)
Share of profit of associates

79

(51)

-

28

Profit (loss) before income tax and social contribution134(51)-83
Income tax and social contribution

41

-

-

41

Net income (loss) – continuing operations

175

(51)

-

124

Net (loss) income– discontinued operations

(73)

-

1,233

1,160

Net income (loss) for the year

102

(51)

1,233

1,284

________________       

(1)Includes equity pickup of the Company in Cnova. It also includes the banners Cheftime, James and Stix Fidelidade.
(2)The statement of operations for the years ended December 31, 2020, 2019 and 2018 related to Sendas were classified as “discontinued operations.” As disclosed in note 33 to our audited consolidated financial statements included elsewhere in this annual report, operations of Via Varejo were classified as discontinued operations in the periods from 2016 to 2019 (until June 2019). On June 14, 2019, we consummated the sale of all equity interest we held in Via Varejo. Accordingly, our financial statements as of and for the year ended December 31, 2019 include the five months that Via Varejo’s results of operations were considered in the line item relating to discontinued operations. For additional information on the sale on our discontinued operations, see note 12.3 to our audited consolidated financial statements included elsewhere in this annual report. Moreover, starting on November 1, 2016, we began recording our investment in Cnova according to IFRS 5.
 
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Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Consolidated

Net operating revenue. Net operating revenue increased by 77.7%, or R$22,415 million, from R$28,838 million in 2019 to R$51,253 million in 2020, of which R$19,883 million relates to net operating revenue of Éxito Group in 2020 which we started to consolidate at the end of 2019. To a lesser extent, the increase was also related to the growth of renovated and remodeled stores in the last two years, as well as digital transformation initiatives, underlining the adoption of our omnichannel strategy. In addition, the restrictions in mobility related to the COVID-19 pandemic had a positive impact on sales.

Gross profit. Gross profit increased by 80.6%, or R$6,136 million, from R$7,613 million in 2019 to R$13,749 million in 2020, mainly due to (i) the acquisition of Éxito Group at the end of 2019; and (ii) the continuity of our commercial strategy segmented by customer profile. Gross margin had an increase with the consolidation of Éxito of 0.4%, from 26.4% in 2019 to 26.8% in 2020.

Selling, general and administrative expenses. Selling, general and administrative expenses increased by 64.0%, or R$3,645 million, from R$5,698 million in 2019 to R$9,343 million in 2020, mainly due to the increase of R$3,498 million generated by the acquisition of Éxito Group. Selling, general and administrative expenses represented 19.8% of our net operating revenue in 2019 and 18.2% in 2020. The increase related to the consolidation of Éxito’s results was partially offset by a decrease in the selling, general and administrative expenses of the Brazilian retail segment, mainly due to our initiatives to control expenses.

Depreciation and amortization. Depreciation and amortization increased by 75.5%, or R$776 million, from R$1,028 million in 2019 to R$1,804 million in 2020, mainly due to the depreciation and amortization resulting from the acquisition of Éxito Group of R$669 million and, to a lesser extent, the increase was also related to renovation and maintenance of stores, renewal of lease agreements and IT projects.

Other operating expenses, net. Other operating expenses, net, decreased by R$315 million, from R$386 million in 2019 to R$71 million in 2020, mainly as a result of (i) gains related to revaluation of Bellamar, net of costs, of R$513 million, (ii) gain of disposal of assets of R$378million. The decrease was partially offset by (i) increase on restructuring costs of R$187 million, (ii) expenses incurred as a result of the COVID-19 pandemic of R$134 million and (iii) increase on tax contingencies of R$216 million.

Financial expenses, net. Financial expenses, net, decreased by 16.4%, or R$143 million, from R$871 million in 2019 to R$728 million in 2020, mainly as a result of i) R$413 million of increase in expenses mainly related to monetary restatement and lease liabilities and ii) tax credit of ICMS on the calculation basis of PIS/COFINS of R$622 millions that have offset the increase.

Share of profit of associates. Share of profit of associates increased by R$96 million, from a gain of R$2 million in 2019 to R$98 million in 2020, mainly as a result of (i) a decrease in losses in the amount of R$52 million from our share of profit in Cnova, due to a better performance of this investee; (ii) a gain of R$18 million in the share of profit in Tuya and Puntos Colombia as a result of the acquisition of Éxito Group at the end of 2019; and (iii) an increase in our share of profit in FIC due to higher profits.

Income tax and social contribution. Income tax and social contribution increased by R$757 million, from an income from an income tax and social contribution of R$95 million in 2019 to an expense of R$662 million in 2020, mainly as a result of the increase in our taxable profits in 2020.

Net income (loss) from continuing operations. As a result of the foregoing, net income from continuing operations increased by 553.8%, or R$1,512 million, from a loss of R$273 million in 2019 to a profit of R$1,239 million in 2020.

Net income (loss) from discontinued operations. Net income from discontinued operations decreased by R$22 million, from R$1,109 million in 2019 to R$1,087 million in 2020, mainly due to the gain on the sale of Via Varejo in the amount of R$398 million in 2019, partially offset by an increase in the net income of Sendas in 2020.

 
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Segment Information

Brazilian Retail Segment

Our Brazilian retail segment consisted of sales of food and non-food products to individual consumers at (i) supermarkets through the banners Pão de Açúcar, Extra Supermercado, Mercado Extra and Compre Bem; (ii) hypermarkets through the banner Extra Hiper; (iii) proximity stores through the banners Mini Extra, Minuto Pão de Açúcar, Pão de Açúcar Adega and Aliados Minimercado; and (iv) gas stations, and drugstores through the Extra and Pão de Açúcar banners. The Brazilian retail segment also includes the revenues related to rentals of commercial spaces and e-commerce sales. We do not consider Éxito Group as part of our Brazilian retail segment and consider it as a separate segment since its acquisition at the end of 2019.

Net operating revenue. Net operating revenue increased by 9.4%, or R$2,516 million, from R$26,654 million in 2019 to R$29,170 million in 2020, mainly as a result of the strengthening of stores renovated and remodeled in the last two years, as well as by our digital transformation initiatives, underlining the traction of our omnichannel strategy. In the same period, our gross margin, calculated by dividing gross profit by net operating revenue, increased from 26.3% in 2019 to 28.18% in 2020. Also, the restrictions related to the COVID-19 pandemic had a positive impact on sales.

Depreciation and amortization. Depreciation and amortization increased by 10.5%, or R$102 million, from R$967 million in 2019 to R$1,069 million in 2020, mainly as a result of the renovation and maintenance of our stores and the renewal of lease agreements and IT projects.

Profit/loss from operations before financial income (expenses). As a result of the foregoing, profit from operations before financial income (expenses) increased by 331.7%, or R$1,549 million, from R$467 million in 2019 to R$2,016 million in 2020.

Financial expenses, net. Financial expenses, net, decreased by 52.6%, or R$429 million, from R$815 million in 2019 to R$386 million in 2020, mainly as a result of mainly as a result of i) an increase in expenses principally related to monetary restatement and lease liabilities and ii) tax credit of ICMS on the calculation basis of PIS/COFINS.

Profit/loss before income tax and social contribution. As a result of the foregoing, profit before income tax and social contribution increased by R$1,989 million, from a loss of R$241 million in 2019 to a profit of R$1,748 million in 2020.

Éxito Group

As a result of Éxito Group’s acquisition at the end of 2019, we started to consolidate the operations in Colombia, Uruguay and Argentina, through the following banners: (i) Viva Malls, Éxito, Carulla, Surtimayorista, Surtimax and Super Inter in Colombia, (ii) Devoto, Disco and Géant in Uruguay, and (iii) Libertad, Mini Libertad and Paseo Libertad Malls in Argentina. For additional information on Éxito Group’s acquisition, see “Item 4. Information on the Company—4A. History and Development of the Company—Changes in Our Business—Latin America Corporate Reorganization.”

Net operating revenue. Net operating revenue increased by R$19,883 million, from R$2,151 million in 2019 to R$22,034 million in 2020, mainly as a result of the solid progress made in our omnichannel strategy in all countries, the strong performance by the Colombia retail operation and a solid contribution from innovative formats (Wow and FreshMarket). In the same period, our gross margin, calculated by dividing gross profit by net revenue, decreased from 28.3% in 2019 to 25.0% in 2020. This decrease was mainly related to lower revenues of complementary businesses due to the pandemic, especially the lower distribution of royalties in Tuya, despite the improvement in its retail operation performance. In the consolidated financial statements of GPA, Éxito was consolidated in the statements of operations for 12 months in 2020, compared to only one month in 2019.

Depreciation and amortization. Depreciation and amortization increased by R$669 million, from R$60 million in 2019 to R$729 million in 2020, mainly as a result of the acquisition Éxito Group at the end of 2019.

 
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Profit/loss from operations before financial income (expenses). As a result of the foregoing, profit from operations before financial income (expenses) increased by R$562 million, from R$90 million in 2019 to R$652 million in 2020.

Financial expenses, net. Financial expenses, net, increased by R$283 million, from R$57 million in 2019 to R$340 million in 2020, mainly as a result of the acquisition of Éxito Group at the end of 2019.

Profit/loss before income tax and social contribution. As a result of the foregoing, profit before income tax and social contribution increased by R$312 million, from a gain of R$27 million in 2019 to a higher gain of R$339 million in 2020.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Consolidated

Net operating revenue. Net operating revenue increased by 8.9%, or R$2.348 million, from R$26,490 million in 2018 to R$28,838 million in 2019, mainly due to our acquisition of Éxito Group. The Brazilian retail segment remained stable in 2019 compared to 2018 in same-stores sales.

Gross profit. Gross profit increased by 2.3%, or R$169 million, from R$7,444 million in 2018 to R$7,613 million in 2019, mainly due to our acquisition of Éxito Group.

Selling, general and administrative expenses. Selling, general and administrative expenses increased by 5.6%, or R$302 million, from R$5,396 million in 2018 to R$5,698 million in 2019, mainly due to our acquisition of Éxito Group. Selling, general and administrative expenses represented 20.4% of our net operating revenue in 2018, and 19.8% in 2019.

Depreciation and amortization. Depreciation and amortization increased by 15.2%, or R$136 million, from R$892 million in 2018 to R$1,028 million in 2019, mainly due to the depreciation resulting from our acquisition of Éxito Group, renewal of lease agreements and capital expenditures related to conversion of stores from Extra to Mercado Extra and Compre Bem.

Other operating expenses, net. Other operating expenses, net, increased by R$187 million, from R$199 million in 2018 to R$386 million in 2019, mainly as a result of (i) expenses relating to the acquisition of Éxito Group; (ii) store closures and costs associated thereto; and (iii) increased provision for tax contingencies due to change in the assessment of likelihood of loss of certain legal proceedings.

Financial expenses, net. Financial expenses, net, decreased by 3.4%, or R$31 million, from R$902 million in 2018 to R$871 million in 2019, mainly as a result of increased income from financial investments and the interest income derived from tax credits recognized in 2019 as a consequence of the favorable ruling of the Brazilian Supreme Court that determined that ICMS tax should be excluded from the calculation base of PIS and COFINS taxes.

Share of profit of associates. Share of profit of associates decreased by R$26 million, from R$28 million in 2018 to R$2 million in 2019, mainly as a result of (i) increased losses in the amount of R$49 million from our share of profit in Cnova, and (ii) losses in the amount of R$17 million in the share of profit in Tuya and Puntos Colombia recognized in the results of Éxito Group. This increase in losses was partially offset by an increase in our share of profits in FIC due to FIC’s better results of operation as a result of offering expansion of financial products and services.

Profit/loss before income tax and social contribution. As result of the foregoing, profit before income tax and social contribution decreased by R$451 million, from a gain of R$83 million in 2018 to a loss of R$368 million in 2019.

Income tax and social contribution. Income tax and social contribution increased by R$54 million, from R$41 million in 2018 to R$95 million in 2019, mainly as a result of interest on shareholders’ equity in 2018.

Net income (loss) from continuing operations. As a result of the foregoing, net income from continuing operations decreased by R$397 million, from a profit of R$124 million in 2018 to a loss of R$273 million in 2019.

 
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Net income (loss) from discontinued operations. Net income from discontinued operations decreased by 4.4%, or R$51 million, from R$1,160 million in 2018 to R$1,109 million in 2019, mainly due to (i) the gain on the sale of Via Varejo in the amount of R$398 million, net of income tax; and (ii) a decrease in the net income of Sendas.

Segment Information

Brazilian retail Segment

Our Brazilian retail segment consisted of sales of food and non-food products to individual consumers at (i) supermarkets through the banners Pão de Açúcar, Extra Supermercado, Mercado Extra and Compre Bem; (ii) hypermarkets through the banner Extra Hiper; (iii) proximity stores through the banners Mini Extra, Minuto Pão de Açúcar, Pão de Açúcar Adega and Aliados Minimercado; and (iv) gas stations, and drugstores through the Extra and Pão de Açúcar banners. The Brazilian retail segment also includes the revenues related to rentals of commercial spaces and e-commerce sales. We do not consider Éxito Group’s sales as part of our Brazilian retail segment.

Net operating revenue. Net operating revenue increased by 0.6%, or R$164 million, from R$26,490 million in 2018 to R$26,654 million in 2019, mainly as a result of the (i) slow pace of the economic recovery in 2019, and (ii) increase in investments for the renovation of our portfolio of stores to adapt them in order to increase the attractiveness of our stores. These investments comprised the renovation of stores. In the same period, our gross margin, calculated by dividing gross profit from net revenue, decreased from 28.1% in 2018 to 26.3% in 2019. This 1.8 percentage point decrease was mainly related to the clearance sales we performed to balance inventories and renovate our portfolio of stores.

Depreciation and amortization. Depreciation and amortization increased by 8.4%, or R$75 million, from R$892 million in 2018 to R$967 million in 2019, mainly as a result of the depreciation resulting from capital expenditures relating to the conversion of stores from Extra to Mercado Extra and Compre Bem, store renovation and maintenance of stores and renewal of lease agreements.

Profit/loss from operations before financial income (expenses). As a result of the foregoing, profit from operations before financial income (expenses) decreased by 51.2%, or R$490 million, from R$957 million in 2018 to R$467 million in 2019.

Financial expenses, net. Financial expenses, net, decreased by 9.6%, or R$87 million, from R$902 million in 2018 to R$815 million in 2019, mainly as a result of the (i) income from short-term investments, and (ii) increased income from financial investments and the interest income derived from tax credits recognized in 2019 as a consequence of the favorable ruling of the Brazilian Supreme Court that determined that ICMS tax should be excluded from the calculation base of PIS and COFINS taxes..

Profit/loss before income tax and social contribution. As a result of the foregoing, profit before income tax and social contribution decreased by R$375 million, from a gain of R$134 million in 2018 to a loss of R$241 million in 2019.

 

5B. Liquidity and Capital Resources

The following table sets forth information related to our cash flows as of and for the periods presented:

 

As of and for the Year Ended December 31,

 

2020(*)

2020(**)

2019(**)(1)(2)(3)

2018(**)(1)(2)

2017(**)(1)(2)(4)

2016(**)(1)(2)(4)

 (millions of US$)(millions of R$)
Other financial information      
Net cash provided by (used in):      
Operating activities9134,7421,1354,2673,464(1,304)
Investing activities(826)(4,291)(3,266)(1,897)(1,592)(2,020)
Financing activities(54)(281)1,894(1,641)(3,663)1,475
Capital expenditures(6)(479)(2,490)(2,782)(2,364)(1,713)(1,544)

 

 
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We have funded our operations and capital expenditures mainly from our operating cash flow and sale of receivables at a discount to financial institutions (banks and credit card merchant acquirers). Additionally, we have issued debentures in the local markets and entered into loans and financing agreements with financial institutions.

In 2020, we continued selling our receivables to financial institutions and credit card merchant acquirers at a discount, without a right to recourse or any related obligation. For further information on the discount on receivables, see note 7.1 to our audited consolidated financial statements included elsewhere in this annual report.

Our primary sources of liquidity have historically been cash flows from our operating activities.  Net cash provided from operating activities, including continuing and discontinued operations, was R$4,742 million, R$1,135 million and R$4,267 million in 2020, 2019 and 2018, respectively. From 2019 to 2020, the increase in net cash provided from operating activities was due to an increase of R$3,607.0, of which R$1,490.0 was net income, R$1,941.0 in trade payables, R$1,005.0 in depreciation and amortization, R$541.0 in provision for contingencies, R$(961) in inventories and R$(523) in taxes credits. From 2018 to 2019, the decrease in net cash provided from operating activities was primarily due to a decrease of R$3,364.0 in trade payables.

Net cash used in investment activities was R$4,291 million, R$3,266 million and R$1,897 million for the years ended December 31, 2020, 2019 and 2018, respectively. In 2020, 2019 and 2018 our net cash used in investment activities mainly related to the purchases of property and equipment and intangible assets, in 2020, and in 2019 to the acquisition of Éxito Group. In addition, in 2020, 2019 and 2018, we used net cash provided by operating activities primarily for investments in the capital expenditures program, totaling R$2,490.0 million, R$2,782.0 million and R$2,364.0 million, respectively. Proceeds from sales of property and equipment generated a cash flow of R$1,262.0 mainly due to sale leaseback transactions in 2020.

Net cash provided by (used in) financing activities, was net cash used of R$281 million, net cash provided of R$1,894 million and net cash used of R$1,641 million for the years ended December 31, 2020, 2019 and 2018, respectively. From 2019 to 2020, the decrease was mainly due to a de-consolidation of results from Sendas. Our year-end current and noncurrent borrowings and financing decreased by 35.2%, or R$4,968 million, from R$14,108 million as of December 31, 2019 to R$9,140 million as of December 31, 2020, and consisted of:

·R$7,285 million in real-denominated loans;
·R$282 million in U.S. dollar-denominated debt, swapped to real-denominated loans; and
·R$1,573 million related to Éxito Group’s loans and financing agreements. 

From 2018 to 2019, the increase was mainly due to our borrowings and financing operations. Our year-end current and noncurrent borrowings and financing increased by 167%, or R$8,822 million, from R$5,286 million as of December 31, 2018 to R$14,108 million as of December 31, 2019, and consisted of:

·R$12,963 million in real-denominated loans;
·R$831 million in U.S. dollar-denominated debt, swapped to real-denominated loans; and
·R$314 million related to Éxito Group’s loans and financing agreements.

Our interest expense was R$387 million in 2020, R$337 million in 2019 and R$327 million in 2018, excluding our discontinued operations.

Our year-end total cash position increased by 9.5%, or R$757.0 million, from R$7,954.0 million as of December 31, 2019 to R$8,711.0 million as of December 31, 2020, of which R$476.0 million were related to the conversion of cash and cash equivalents of foreign subsidiaries.

Derivatives

We use derivatives, such as swaps, aiming to hedge the exchange exposure risk to U.S. dollar, converting the cost of debt into domestic currency and interest rates. See “—5A. Operating Results—Macro-Economic Environment and Factors Affecting Our Results of Operations.”

 
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On July 24, 2019, in respect of the acquisition of Éxito Group, our financial committee recommended that we enter into a cash flow hedge contract, via NDF Agreements, to mitigate our exposure to the Colombian pesos. The NDF Agreements were terminated prior to December 31, 2019. We considered the effects of the NDF Agreements as part of the consideration paid for the acquisition of Éxito Group. We have also entered into NDF Agreements in the first quarter of 2020 to hedge against foreign exchange variations relating to the dividends we received from Éxito Group in Colombian pesos. These NDF Agreements were terminated in the second quarter of 2020.

In addition, Éxito Group uses derivatives to hedge against foreign exchange (U.S. dollars and euros) variations on imports.

FINAME Financings

We have credit lines outstanding with financial institutions that are associated with BNDES by means of the Equipment and Machinery Financing (Financiamento de Máquinas e Equipamentos), or FINAME, program, which are used in the ordinary course of our business for the purchase of machinery and equipment financing. We make payments of principal amounts in monthly installments after a grace period. BNDES has historically been one of our sources of financing for new stores and the acquisition of supermarket chains as well as machinery and equipment acquisitions. For further information on our lines of credit with BNDES, see note 18 to our audited consolidated financial statements included elsewhere in this annual report.

Promissory Notes

In December 2018, we issued commercial promissory notes in the total principal amount of R$800 million, maturing on January 9, 2022, and accruing interest at 163.13% of the average CDI rate, payable on the maturity date. As of December 31, 2020, the total outstanding amount under this issuance was R$891 million.

Non-Convertible Debentures.

In April, 2017, we issued non-convertible debentures in Brazil in the total principal amount of R$1,080 million, accruing interest at 96% of the average CDI rate. Principal and interest were paid in full on the maturity date, April 13, 2020.

In January, 2018, we issued non-convertible debentures in Brazil in the total principal amount of R$800 million, maturing on January 15, 2021 and accruing interest at 150.00% of the average CDI rate. Principal and interest were paid in full on the maturity date, January 15, 2021.

In September, 2018, we issued non-convertible debentures in two series in Brazil in the total principal amount of R$1,200 million, of which (i) R$700 million refers to the first series, which accrues interest at 162.71% of the average CDI rate and matures on September 10, 2021, and (ii) R$500 million refers to the second series, which accrues interest at 163.56% of the average CDI rate and matures on September 10, 2022. As of December 31, 2020, the total outstanding amount under this issuance was R$1,232 million.

In December 2019, we issued non-convertible debentures in Brazil in the total principal amount of R$2,000 million, maturing on January 6, 2023 and accruing interest at 1.45% per year plus the average CDI rate.

We are required to comply with certain covenants under our debt instruments. The financial ratios are calculated based on our consolidated financial statements prepared in accordance with accounting practices adopted in Brazil. The ratios are (i) net debt (defined as debt minus cash and cash equivalents and trade accounts receivable) not greater than equity; and (ii) consolidated net debt/EBITDA ratio lower than or equal to 3.25. As of the date of this annual report, we are in compliance with the covenants under our debt instruments.

For further information on our non-convertible debentures, see note 18.4 to our audited consolidated financial statements included elsewhere in this annual report.

Borrowings in Foreign Currencies

As of December 31, 2020, we had borrowings in U.S. dollars and Colombian pesos to strengthen our working capital, maintain our cash strategy, extend our debt profile and make investments. As of December 31, 2020, the total outstanding amount (corresponding to principal and interest) under these agreements was R$1,855 million.

 
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On November 25, 2019, we entered into a financing agreement with Banco Bradesco S.A. in the aggregate amount of US$160 million (or approximately R$923 million), accruing interest at CDI plus 0.89% per year. Principal and interest were paid in full on the maturity date, November 19, 2020.

On September 29, 2017, we entered into a financing agreement with Bank of Nova Scotia, or Scotiabank, in the aggregate amount of US$50 million (or approximately R$289 million), accruing interest at 106% of CDI per year. Principal and interest were paid in full on the maturity date, September 29, 2020.

On October 13, 2020, we entered into a financing agreement with Bank of Nova Scotia, or Scotiabank, in the aggregate amount of US$50 million, accruing interest at USD plus 2.27% per year (R$271 million as of December 31, 2020).

Éxito Group has borrowings in Colombian pesos. As of December 31, 2020, the total outstanding amount (corresponding to principal and interest) under these agreements was R$1,534 million, accruing interest at IBR 3M plus 3.8% per year.

For additional information on our borrowings in foreign currency, see note 18.1 to our audited consolidated financial statements included elsewhere in this annual report.

Foreign Currency Transactions

Foreign currency transactions are initially recognized at the respective currencies exchange rates on the date the transaction qualifies for recognition.

Monetary assets and liabilities denominated in foreign currencies are converted into reais according to the exchange rates of the respective currencies at the balance sheet date. Any difference arising from the payment or translation of monetary items is recognized in our financial results.

For additional information on the conversion of foreign currencies, see note 3.2 to our audited consolidated financial statements included elsewhere in this annual report.

5C. Research and Development, Patents and Licenses, Etc.

We do not have any significant research and development activities.

5D. Trend Information

Consumer confidence, as measured by FGV, decreased in Brazil from 91.6 point in 2019 to 78.5 points in 2020, as a result of the uncertainty brought by the COVID-19 pandemic about the economic recovery in Brazil. Since 2014, Brazil has experienced economic slowdown triggered by a deep recession and was slowly recovering from it prior to the COVID-19 pandemic. During the last economic crisis, households modified their consumption habits by seeking stores with cheaper prices, choosing heavily discounted items and building up stock at home by buying bulk. Consumers became more careful, choosing products with an attractive cost-benefit trade off and avoiding superfluous items.

In addition, upper income classes sought for more complete and varied assortment solutions, quality service and a better shopping experience. The 2020 pandemic accelerated the growth of online food sales and the use of delivery services (last mile), consequently changing customers’ consumption habits.

Despite the current scenario, we believe that the Company is well prepared to face the challenges of 2021. The commercial strategies of our hypermarkets and supermarkets segments have been constantly monitored throughout 2019 and 2020 and led the Company to be competitive. The value proposition of our banners is being redefined to address new consumption habits while enhancing profitability. In 2018, 2019 and 2020, we converted a number of our stores to adapt them to new consumer trends.

We have also implemented a strong digital transformation plan, including the use of physical assets for logistical support, launching our own online operation and the launch of the marketplace GPA, which helped us support the sharp increase in e-commerce demand, develop a closer relationship with suppliers, while improving our customers’ shopping experience and providing innovative solutions to our customers. We will continue to promote the values that we believe make us competitive among our competitors, combining respect for the local culture and corporate. For more information on our digital transformation, see “Item 4. Information on the Company—4A. History and Development of the Company—Changes in Our Business—Digital Transformation.”

 
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We believe that these actions, combined with a responsible management, will ensure sustainable growth while meeting our customer’s needs and creating value for our stakeholders.

New waves of COVID-19 have already started to occur in certain regions in which we operate and may continue to spread, including novel and variant strains in Brazil. In March 2021, new governmental regulations were imposed in various cities throughout Brazil mandating social distancing measures and other closures as the number of COVID-19 cases and COVID-19 related deaths continued to increase, with accompanying stresses on the hospital systems throughout Brazil. At the same time, a relatively low proportion of the Brazilian population has received vaccines due to supply shortages and delays on Brazilian regulatory approval of certain vaccines.We cannot assure you that we will be able to take the measures required to prevent a negative impact on our business. No recent comparable events exist that may provide us with guidance regarding the effects of a severe global pandemic. As a result, the final impact of the COVID-19 outbreak is uncertain and subject to changes that we cannot predict.

As a result of the COVID-19 pandemic, we experienced a temporary increase in sales in our stores in Brazil since people were initially stocking food, in addition to the change in consumption pattern of individuals from restaurants to home meal preparations. Since March 2020, there has been an increase in household consumption, even though the frequency of store visits has decreased due to social distancing guidelines.

On the other hand, our Colombian operations were adversely affected by the restrictive measures imposed by regional and state governments as a result of the COVID-19 pandemic, as well as the increased unemployment rate and lower consumer confidence. The restrictions on the movement of people imposed in Colombia were more stringent than in Brazil, and included, among other things, reduced business hours at stores, establishment of purchasing limits, closure of stores, dry law enforcement during certain weekends and curfew in the main Colombian cities. For additional information on the effects of the COVID-19 to our business, see “—5A. Operating Results—Current Conditions and Trends in our Industry—COVID-19.”

5E. Off-Balance Sheet Arrangements

Except as disclosed in “Item 7. Major Shareholders and Related Party Transactions—7B. Related Party Transactions—Via Varejo—Guarantees,” we do not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

5F. Tabular Disclosure of Contractual Obligations

The following table summarizes significant contractual obligations and commitments as of December 31, 2020:

 

Payment Due by Period

Contractual Obligations(1)

Total

Less than one year

One to three years

Three to five years

After five
years

 (in millions of R$)
Long-term debt:     
Principal4,5021,0492,795463195
Accrued interest as of 12/31/204040---
Unaccrued interest(2)

595

63

478

68

(14)

Total long-term debt

5,137

1,259

3,273

531

181

Debentures:     
Principal4,4851,1813,304--
Accrued interest as of 12/31/191133875--
Unaccrued interest(2)

212

40

172

-

-

Total debentures

4,810

1,259

3,551

-

-

Taxes payable, other than on income taxes(3)3951471603751
Lease liabilities (IFRS 16)

8,374

947

1,702

1,351

4,374

Total contractual obligations

18,716

3,505

8,686

1,919

4,606

____       

(1)For additional information, see notes 18 and 19 to our audited consolidated financial statements included elsewhere in this annual report.
(2)Future interest includes estimated interest to be incurred from December 31, 2020, through the respective contractual maturity dates, based on outstanding principal amounts as of December 31, 2020, and projected market interest rates (especially the Brazilian CDI rate) for our variable rate debt obligations, net of the impacts of derivative instruments classified as fair value hedges and swap transactions.
(3)Refers to Federal Tax Installment Payment Program (Programa de Recuperação Fiscal), or REFIS, credits. As of December 31, 2020, the balance of the consolidated installments was R$395 million.
 
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5G. Safe Harbor

See “Forward-Looking Statements” on page 7 of this annual report.

ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

6A. Directors and Senior Management

Board of Directors

The following table sets forth the name and year of election of each of our board members as of the date of this annual report. A brief biographical description of each of our board members follows the table:

Name

Position

Since

Date of Birth

Jean-Charles Henri NaouriChairman2005(1)March 8, 1949
Arnaud Daniel Charles Walter Joachim StrasserCo-Vice Chairman2010(2)July 6, 1969
Ronaldo Iabrudi dos Santos PereiraCo-Vice Chairman2016(3)May 14, 1955
Hervé DaudinDirector2019May 12, 1967
Christophe José HidalgoDirector2020October 25, 1967
Rafael Sirotsky RussowskyDirector2020December 10, 1977
Luiz Augusto de Castro NevesDirector (Independent)2012October 29, 1943
Eleazar de Carvalho FilhoDirector (Independent)2012July 26, 1957
Renan BergmannDirector (Independent)2020February 16, 1954
    

________________       

(1)Mr. Jean-Charles Henri Naouri has been a member of the board since 2005 and the chairman since 2013.
(2)Mr. Arnaud Daniel Charles Walter Joachim Strasser has been a member of the board since 2010 and co-vice chairman since 2018.
(3)Ronaldo Iabrudi dos Santos Pereira has been a member of the board since 2016 and co-vice chairman since 2018.

 

Mr. Jean-Charles Henri Naouri has been the chairman of our board of directors since 2013. He has also been a member of our board of directors, the chairman and chief executive officer of the Casino Group and president of the Casino Group’s parent company, Euris S.A.S., or Euris, since 2002. He also serves as chairman of the board of directors of Rallye S.A., or Rallye, chairman of the Euris Foundation, vice-chairman of the Casino Group Corporate Foundation and member of the board of directors of F. Marc de Lacharrière (Fimalac) S.A. He had served as chairman and chief executive officer of Casino Finance until 2017, chairman of the board of directors of CNova until 2015, chairman of the board of directors of Wilkes Participações until 2015, member of the supervisory board of Monoprix S.A. until 2014, chief executive officer of Rallye until 2013, and as chairman, chief executive officer, and chairman of the supervisory board of Monoprix S.A. until 2013. In 2013, Mr. Naouri was appointed by France’s Ministry of Foreign Affairs to be a special representative for economic relations with Brazil. From 1982 to 1986, Mr. Naouri served as chief of staff for the Minister of Social Affairs and National Solidarity of France and the Minister of Economy, Finance and Budget of France. Mr. Naouri is an Inspecteur des Finances (Finance Inspector) for the French government. Mr. Naouri holds degrees from École Normale Supérieure and École Nationale d’Administration, a Ph.D. in mathematics, and has studied at Harvard University.

Mr. Arnaud Daniel Charles Walter Joachim Strasser has been co-vice chairman of our board of directors since 2018 and a member of our board of directors since 2010. Prior to serving as co-vice chairman, he was the vice-chairman of our board of directors from 2012 to 2018. He has also been a member of the board of directors of Cnova since 2014. Mr. Strasser also served as a member of the board of directors of the Big C Supercenter plc. He has worked for the Casino Group since 2007, where he currently serves as corporate development and holdings officer. Until 2009, he was an advisor to the chairman for international development of the Casino Group. Mr. Strasser also worked as mission head in the Cabinet of the Prime Minister of France in 2005 and as special advisor in the Cabinet of the French Minister of Companies and Trade, from 2005 to 2007. Mr. Strasser holds a bachelor’s degree from École Nationale d’Administration and master’s degrees from École des Hautes Études Commerciales and Institut d’Études Politiques de Paris.

 
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Mr. Ronaldo Iabrudi has been the co-vice chairman of our board of directors since April 2018 and has been a member of our board of directors since 2016. He is also vice chairman of the board of directors of CNova. From January 2014 to April 2018, Mr. Iabrudi served as our chief executive officer. Previously, he was the chairman of the boards of directors of Lupatech, Contax and Telemar, and a member of the board of directors of Estácio, Magnesita Refratários S.A., or Magnesita, Cemar, Oi/Telemar, RM Engenharia and Ispamar. He was also chief executive officer of Magnesita from 2007 to 2011 and from 1999 to 2006 he worked for Grupo Telemar, where he held several positions, including chief executive officer of Oi/Telemar and Contax. From 1997 to 1999, Mr. Iabrudi was chief executive officer of FCA (Ferrovia Centro-Atlântica) and from 1984 to 1997, he was chief financial and administrative officer and chief human resources officer at the Gerdau group. Mr. Iabrudi earned a degree in psychology from Pontifícia Universidade Católica de Minas Gerais, a master’s degree in organizational development from Université Panthéon Sorbonne and a master’s degree in change management from Université Paris Dauphine.

Mr. Hervé Daudin is currently a member of the executive committee and executive director of merchandise, from the Agribusiness Division and from the Supply Chain, Logistics and IT of Casino Group. He is a member of the board of directors of Almacenes Éxito (Colombia), CDiscount (France), Distribution Casino France, European Marketing Distribution, Achats Marchandise Casino and Big C (Thailand). He was a member of the board of directors of Via Varejo (Brazil). After holding the position of Director in Euris Group (parent company of Casino Group), he joined the Casino Group in 2003, where he held various executive positions in the areas of strategy, logistics and technology. He began his career as an economist and he was, for 7 years, a high ranking official in the Ministry of Economy in France. Mr. Daudin holds a bachelor’s degree in Physical Sciences and a PhD in Economics from the École Normale Supérieure of Paris and an Engineer degree from the École Nationale des Ponts et Chaussées.

Mr. Christophe José Hidalgo has served as our chief financial officer from 2012 to 2021, and as our chief financial officer and investor relations officer from 2020 to 2021. He has also been our corporate services officer since 2012. He joined the Casino Group in 2000, where he has held several positions in finance and accounting, including chief financial officer of Éxito Group from 2010 to 2012. From 1996 to 2000, Mr. Hidalgo served as the chief financial officer of Castorama. Mr. Hidalgo holds a bachelor’s degree in law and a master’s degree in finance and accounting from the Université de Bordeaux.

Mr. Rafael Sirotsky Russowsky has been director of corporate development and participations for the Casino Group since 2012. Previously, he was an investment banker specializing in M&A and equity capital markets transactions at Credit Suisse, Morgan Stanley and Oppenheimer & Co. In addition, he worked at HSBC and Safra Banco, focusing on credit operations. Mr. Russowsky holds a bachelor’s degree in business administration from the Pontifical Catholic University of Rio Grande do Sul and holds an MBA from Columbia Business School in New York.

Mr. Luiz Augusto de Castro Neves has been an independent member of our board of directors since 2012. Mr. Castro Neves was a career diplomat having joined the Brazilian diplomatic service in 1967 and served as a Brazilian ambassador to Japan, from 2008 to 2010, China, Mongolia and the Democratic People’s Republic of Korea between 2004 and 2008, and Paraguay, from 2000 to 2004. He has also served as chairman of Itaipu Binacional and Interim Minister of State and Head of the Secretariat of Strategic Affairs of the Presidency of Brazil. He is a founding partner of CN Estudo e Projetos Ltda., emeritus vice president of the Brazilian Center of Foreign Affairs, president of the China-Brazil Business Council, and member of the Technical Council of the National Confederation of Commerce. Mr. Castro Neves holds bachelor’s degrees in economics from the Universidade Federal do Rio de Janeiro and diplomacy from the Brazilian Ministry of Foreign Affairs Instituto Rio-Branco and a master’s degree in economics from the University of London.

Mr. Eleazar de Carvalho Filho has been an independent member of our board of directors since 2012 and a member of the board of directors of Cnova since 2014. He is a founding partner at Virtus BR Partners, an independent advisory firm, and at Sinfonia Capital, and currently serves as a member of the boards of directors of TechnipFMC, plc and of Brookfield Renewable Corporation. Since 2018, he serves on the board of directors of Oi S.A. and in September of that year was elected Chairman. He served as chief executive officer of Unibanco Banco de Investimentos do Brasil S.A., president of BNDES and managing director of Banco UBS – Brasil Banco de Investimento S.A. He served as the chairman of the board of directors of BHP Billiton Brazil and as a member of the board of directors of Petrobras, Centrais Elétricas Brasileiras S.A., Vale, Tele Norte Leste Participações, Alpargatas, and others. He is also president of the board of trustees of the Brazilian Symphony Orchestra Foundation. He holds a bachelor’s degree in economics from New York University and a master’s degree in international relations from Johns Hopkins University.

 
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Mr. Renan Bergmann holds a bachelor’s degree in chemical engineering from the Federal University of Rio Grande do Sul and a master’s degree in nuclear chemical engineering from the Federal University of Rio de Janeiro (COPPE). He completed the Executive Program at the John E. Anderson Graduate School of Management and the Executive Program “Making Corporate Boards More Effective” at Harvard Business School. He is a member of the board of directors of Fogo de Chão since 2018 and is a senior advisor to the Rhone Group. He was a member of the board of directors of Rampak of Columbus, Ohio, USA, SLC Participações, FCC Campo Bom - RS, CCRR, Terphane Holdings LLC of Delaware, Almatis B.V. and UTEX of Houston TX. He was an also an advisor to New Globe.

Executive Officers

The following table sets forth the name, position and year of election of each of our executive officers as of the date of this annual report. A brief biographical description of each of our executive officers follows the table:

Name

Position

First Year Elected

Date of Birth

Jorge FaiçalChief Executive Officer2021December 3, 1974
Guillaume Marie Didier GrasChief Financial Officer2021August 22, 1978
Isabela Maria Cadenassi BatistaDirector of Investors Relations2019August 22, 1981

 

6B. Compensation

For the year ended December 31, 2020, the aggregate compensation expense for the directors, executive officers and members of the committees of CBD was R$131.1 million, of which R$108.0 million was paid in cash. The executive officers receive a package of benefits in line with market practices, including health and dental insurance, biannual medical check-ups, pension plan, life insurance, meal vouchers and purchase discounts. According to the CVM, listed companies are required to publicly disclose the lowest, highest and average individual compensation paid to directors, executive officers and members of the fiscal council.

In July 2007, the Company established a supplementary private pension plan of defined contribution to its employees, and engaged the financial institution Brasilprev Seguros e Previdência S.A. for management purposes. The Company provides monthly contributions on behalf of its employees based on services rendered to the Company. Contributions made by the Company in the year ended December 31, 2020, amounted to R$0.7 million and employees’ contributions amounted to R$0.7 million with two participants.

We have established a profit-sharing plan for our management, including our executive officers. The plan and its rules have been approved by our board of directors, but is not applicable to them. Under the terms of the plan, each member of our management (including executive officers) who is a beneficiary of the plan is assigned annually a base amount for computation of payments under the profit-sharing plan. The individual amount of the profit-sharing payment is based on (i) the consolidated results of the Company, (ii) the results of the business segment or the department, as the case may be and to which the individual belongs, and (iii) the individual’s performance. The final amount is determined by multiplying the individual amount by an index applicable to all participants. This index depends on our operating performance.

Compensation of the Board of Directors, Executive Officers and Fiscal Council of CBD for 2019, 2020 and 2021 (expected)

The table below indicates the compensation for members of the board of directors and members of the committees of the board of directors, executive officers and fiscal council for 2019:

 
 81

 

 

Board of directors and members of the committees of the board of directors

Executive officers

Fiscal council

Total

 (In R$, when applicable)
Number of members12.504.670.0017.17
Number of compensated members11.504.670.0016.17
Fixed annual compensation33,904,69730,259,546-64,164,243
Benefits2,393,6981,460,882-3,854,580
Variable compensation    
Profit sharing-12,942,572-12,942,572
Participation in meetings----
Others (invitees’ compensation, contributions and taxes)1,908,2261,652,413-3,560,639
Post-employment benefit----
Benefits on ceasing to exercise the position----
Share-based compensation

2,366,277

15,595,555

-

17,961,832

Total compensation

40,572,897

61,910,968

0.00

102,483,865

 

The table below indicates the compensation of the members of our board of directors and members of the committees of the board of directors, executive officers and fiscal council for 2020:

 

Board of directors and members of the committees of the board of directors

Executive officers

Fiscal council

Total

 (In R$, when applicable)
Number of members12.504.582.0019.08
Number of compensated members11.504.582.0018.08
Fixed annual compensation62,670,83133,921,016276,00096,867,847
Benefits3,063,0271,211,912-4,274,939
Variable compensation    
Profit sharing-11,175,170-11,175,170
Participation in meetings----
Others (invitees’ compensation, contributions and taxes)1,981,7941,735,55755,2003,772,552
Post-employment benefit----
Benefits on ceasing to exercise the position----
Share-based compensation

4,056,475

10,905,968

-

14,962,443

Total compensation

71,772,126

58,949,624

331,200

131,052,950

 

The table below indicates the expected compensation for members of the board of directors and members of the committees of the board of directors, executive officers and fiscal council for 2021:

 

Board of directors and members of the committees of the board of directors

Executive officers

Fiscal council

Total

 (In R$, when applicable)
Number of members13.003.003.0019.00
Number of compensated members12.003.003.0018.00
Fixed annual compensation25,402,61511,903,960432,000,0037,738,574
Benefits3,639,5543,295,259-6,934,814
Variable compensation    
Profit sharing-5,490,863-5,490,863
Participation in meetings    
Others (invitees’ compensation, contributions and taxes)    
Post-employment benefit    
Benefits on ceasing to exercise the position    
Share-based compensation

12,992,035

4,341,502

-

17,333,538

Total compensation

42,034,204

25,031,585

432,000,00

67,497,789

 

 
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Variable Compensation for 2019, 2020 and 2021 (expected)

Below we present the variable compensation of our executive officers paid in 2019, 2020 and 2021 (expected):

2019

Executive officers

 (In R$, when applicable)
Number of members5.67
Number of compensated members5.67
Profit sharing 
Minimum expected amount0
Maximum expected amount28,981,131
Expected amount – goals achieved14,490,566
Amount actually recognized12,942,572

 

2020

Executive officers

 (In R$, when applicable)
Number of members4.58
Number of compensated members4.58
Profit sharing 
Minimum expected amount0
Maximum expected amount28,981,131
Expected amount – goals achieved14,490,566
Amount actually recognized11,175,170

 

2021 (expected)

Executive officers

 (In R$, when applicable)
Number of members3.00
Number of compensated members3.00
Profit sharing 
Minimum expected amount0
Maximum expected amount10,981,726
Expected amount – goals achieved5,490,863

 

Employee Stock Option Plans

At an extraordinary general shareholders’ meeting held on May 9, 2014, our shareholders voted to (i) approve the creation of a new stock option plan, or our New Stock Option Plan, and (ii) create a compensation plan for employees based on stock options, or our Compensation Plan. Our New Stock Option Plan and our Compensation Plan originally granted options to purchase preferred shares (which were recently converted into common shares), including to members of our board of directors. The New Stock Option Plan and the Compensation Plan were further amended as a result of the resolutions approved at the annual and special shareholders’ meeting held on April 24, 2015, April 25, 2019 and December 31, 2019. The December 31, 2019 amendment reflected the changes relating to the conversion of our preferred shares into common shares, as a result of our migration to the Novo Mercado listing segment of B3, as approved by our shareholders on December 31, 2019. Accordingly, as of December 31, 2020, our New Stock Option Plan and the Compensation Plan grant the option to purchase common shares to our employees, including to members of our board of directors.

General Terms and Conditions

New Stock Option Plan

Our New Stock Option Plan is administered by the human resources and compensation committee of our board of directors, which defines the plan’s eligibility criteria and selects recipients based on their functions, responsibilities and performance. Each grant cycle under our New Stock Option Plan is designated with a serial number beginning with the letter “C.” As of December 31, 2020, the outstanding series of stock options under our New Stock Option Plan were C5 and C6

Our employees and executive managers, as well as the employees and executive managers of our subsidiaries, who are considered “key executives,” are eligible to participate in our New Stock Option Plan, subject to the approval of the human resources and compensation committee. Participation in our New Stock Option Plan is independent of other forms of compensation, such as wages and benefits.

 
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Compensation Plan

Our Compensation Plan is also administered by the human resources and compensation committee of our board of directors, which defines the plan’s eligibility criteria and selects recipients based on their functions, responsibilities and performance. Each grant cycle under our Compensation Plan is designated with a serial number beginning with the letter “B.” As of December 31, 2020, the outstanding series of stock options under our Compensation Plan were Series B5 and B6.

Our employees and executive managers, as well as the employees and executive managers of our subsidiaries, who are considered “key executives,” are eligible to participate in our Compensation Plan, subject to the approval of the human resources and compensation committee. Participation in our Compensation Plan is independent of other forms of compensation, such as wages and benefits.

Main Objectives of the Stock Option Plans

The aim of our Stock Option Plans is to (i) attract and retain highly qualified executive officers and professionals; (ii) enable our managers and employees to participate in our capital and in the equity increases arising from the results these managers and employees have contributed; and (iii) align the interests of our managers and employees with those of our shareholders, encouraging these professionals to improve performance while ensuring continuity in the management of our Company and our subsidiaries.

Maximum Number of Shares and Options

The total aggregate number of options that may be granted under each of our New Stock Option Plan and our Compensation Plan, must not exceed 2% of the total number of common shares issued by our Company, subject to adjustments resulting from stock splits, reverse stock splits and bonuses.

Exercise Price

The exercise price per common share granted under the Compensation Plan will correspond to R$0.01.

For each series of options granted under the New Stock Option Plan, the exercise price of each stock option will correspond to 80% of the average of the closing price of the common shares issued by the Company, in the prior 20 trading sessions of the B3 prior to the date of the meeting of the human resources and compensation committee, in which the options are granted.

Vesting

In general, the stock options granted under the New Stock Option Plan will vest beginning in the 37th month, following the granting of the stock options.

The options granted under the Stock Option Plans may be exercised in whole or in part.

Restrictions on Transferring Shares

Under the New Stock Option Plan, for a period of 180 days from the date of payment by the participant, the participant will be prohibited from, directly or indirectly, selling, assigning, exchanging, disposing, transferring, granting an option or entering into any instrument or agreement that results or may result in the direct or indirect, onerous or gratuitous, disposition of any or all of the shares. There is no such transfer restriction for the Compensation Plan.

Outstanding Stock Options

The charts below detail the outstanding stock options for the members of our senior management, as of December 31, 2020.

 
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Number of members that benefit from the stock option plan:

 

 

As of December 31, 2020

 

Number of options (in thousands)

In relation to each option grant:
 
 

Series B5

Series C5

Series B6

Series C6

Grant date  05/31/201805/31/201805/31/201905/31/2019
Number of options granted (in number of shares)  163.483258.361232.409129.305
Deadline for the options to become exercisable  05/31/202105/31/202105/31/202205/31/2022
Deadline for the exercise of the options  11/30/202111/30/202111/30/202211/30/2022
Period of restriction to the transfer of the shares  n.a.180 daysn.a.180 days
       

Average weighted exercise price of each of the following groups of shares:

Outstanding in the beginning of the year (in R$ per share)  0.0162.610.0170.62
Lost during the year
(R$ per share)
  n.a.n.a.n.a.n.a.
Exercised during the year (R$ per share)  0.0162.610.0170.62
Expired during the year
(R$ per share)
  n.a.n.a.n.a.n.a.
Fair value of the options on the grant date
(in R$ per share)
  78.5235.6682.3931.50
Potential dilution in case of exercise of the options  0.06%0.10%0.09%0.05%

 

Stock Options Exercised and Shares Delivered

In 2020, 86,604 stock options were exercised by certain members of our senior management and 74,696 shares were delivered to certain members of our senior management.

We recognized share-based payment expenses of R$14,962 million, R$17,962 million and R$29,267 million in our consolidated financial statements in 2020, 2019 and 2018, respectively. These amounts included the amounts related to accelerated vesting of certain stock options.

Maximum, Minimum and Average Compensation of the Board of Directors, Statutory Board of Executive Officers and Fiscal Council

Highest, Lowest and Average Individual Compensation for the Year Ended December 31, 2018

 

Board of Directors

Statutory Board of Executive Officers

Fiscal Council

 (in thousands of R$, when applicable)
Number of members13.335.421.00
Number of compensated members12.335.421.00
Highest compensation (R$)(1)6,380,14429,525,90576,000
Lowest compensation (R$)(2)92,4001,587,72376,000
Average compensation893,28215,112,012228,000

________________       

(1)The highest annual individual compensation for each of the board of directors, statutory board of executive officers and fiscal council was received by members who provided services to our Company for 12 months.
(2)The calculation of the lowest annual individual compensation for each of the board of directors, statutory board of executive officers and fiscal council excludes members who provided services to our Company for less than 12 months.

 

Highest, Lowest and Average Individual Compensation for the Year Ended December 31, 2019

 

Board of Directors

Statutory Board of Executive Officers

Fiscal Council(3)

 (in thousands of R$, when applicable)
Number of members12.504.670.00
Number of compensated members11.504.670.00
Highest compensation (R$)(1)33,222,85919,668,197-
Lowest compensation (R$)(2)176,40010,512,518-
Average compensation3,120,99210,138,507-

________________       

(1)The highest annual individual compensation for each of the board of directors, statutory board of executive officers and fiscal council was received by members who provided services to our Company for 12 months.
(2)The calculation of the lowest annual individual compensation for each of the board of directors, statutory board of executive officers and fiscal council excludes members who provided services to our Company for less than 12 months.
(3)In 2019, we did not install the fiscal council.
 
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Highest, Lowest and Average Individual Compensation for the Year Ended December 31, 2020

 

Board of Directors

Statutory Board of Executive Officers

Fiscal Council

 (in thousands of R$, when applicable)
Number of members12.504.582.00
Number of compensated members11.504.592.00
Highest compensation (R$)(1)65.944.59314.329.313n/a
Lowest compensation (R$)(2)216.000819.045n/a
Average compensation5.520.93211.682.74497.877,78

________________       

(1)The highest annual individual compensation for each of the board of directors, statutory board of executive officers and fiscal council was received by members who provided services to our Company for 12 months.
(2)The calculation of the lowest annual individual compensation for each of the board of directors, statutory board of executive officers and fiscal council excludes members who provided services to our Company for less than 12 months in the year.

 

Insurance

We maintain officers’ and directors’ liability insurance with a certain limit, covering all of our administrators against damages attributed to them in the good faith exercise of their functions. The policy is automatically extended to the management of our subsidiaries.

6C. Board Practices

According to our bylaws and the internal regulation of the board of directors, the board shall consist of seven to nine members, elected and removable by the annual shareholders’ meeting. The term of office of the members of the board of directors shall be up to two years, with re-election permitted. The board of directors shall have a Chairman and up to two Vice-Chairman, all appointed by the annual shareholders’ meeting. The board of directors shall ordinarily meet at least six times a year, to review the financial and other results of the Company and to review and follow-up of the annual operating plan and strategic plan, and shall extraordinarily meet whenever necessary.

Our board of directors is comprised of nine members elected by our shareholders, with three of those being independent directors. The term of office of all of our directors will expire in the 2022 annual shareholder´s meeting which will approve the financial statements of the fiscal year of 2021. We are managed by our board of directors and by our board of executive officers. None of our directors and officers is party to an employment agreement providing for benefits upon termination of employment, except for those benefits provided by Brazilian labor law.

The board of executive officers shall consist of two to 14 members, shareholders or not, resident in Brazil, appointed and removed by the board of directors, being necessarily appointed one Chief Executive Officer, one Investor Relations Executive Officer and the others Vice Executive Officers and Officers. As of December 31, 2020, our board of executive officers was composed of three members.

The responsibilities of our executive officers include adopting plans related to our management and operations, reporting to shareholders each fiscal year on the status of our business activities, presenting the year-end balance sheets and other legally required financial statements and submitting investment programs and budgets to our board of directors.

Our executive officers are elected by our board of directors for two-year terms, although any executive officer may be removed by our board of directors before the expiration of his or her term. On March 19, 2021, our directors elected our executive officers. The term of all executive officers expires on the date of the first board of directors meeting after the 2022 annual shareholders’ meeting.

Committees of the Board of Directors

As of the date of this annual report, we have the following five advisory committees: (i) audit committee; (ii) human resources and compensation committee; (iii) financial committee; (iv) corporate governance and sustainability committee; and (v) innovation and digital transformation committee. The responsibilities of our committees are set by their respective internal regulations. The members of each committee are appointed by our board of directors and the board of directors also designates the coordinator of each advisory committee. The committees may include one member who is external and independent, except for the audit committee, which has specific rules described below. Each special committee is composed of at least three and up to five members for a term of office of two years, reelection being permitted. In addition to these committees, the board of directors may create other committees with special roles.

 
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Audit Committee

Brazilian publicly held companies may, pursuant to CVM Rule 308, as amended from time to time, adopt a statutory audit committee (comitê de auditoria estatutário). According to CVM Rule 308, the statutory audit committee is an advisory body of the board of directors and must have at least three members who shall be appointed by the board of directors, including at least one member who is also a member of the board of directors and not a member of management. A majority of the members must be independent, according to the independence requirements of the CVM. Additionally, a company listed on the Novo Mercado listing segment of the B3 like us must install an audit committee.

The statutory audit committee holds meetings at least once every three months and its main duties, according to its internal rules, are: to analyze and monitor the quality and integrity of our quarterly information, financial statements and management report, to evaluate the effectiveness and sufficiency of our internal control structure and internal and independent audit processes, to evaluate and monitor, jointly with our management and internal audit systems, the adequacy of the related party transactions entered into by us, to evaluate and monitor our exposure to risk, to propose the appointment of independent auditors as well as their replacement, and to prepare the annual report, to be presented jointly with the financial statements, including, at least, the following information: (i) activities carried out in the period, the results and conclusions reached; (ii) evaluation of the effectiveness of the internal control and risk management systems; (iii) description of the recommendations presented to our management and evidence of their implementation; (iv) evaluation of the effectiveness of the independent and internal audits; (v) evaluation of the quality of the financial, internal control and risk management reports; and (vi) any situations in which there is any significant divergence between our management, the independent auditors and the committee in relation to our financial statements.

Our statutory audit committee is composed of at least three and up to five members, of whom at least two must be external and independent and one must be a member of our board of directors and not an executive officer of the Company. Additionally, at least one of the members of the audit committee must have recognized experience in corporate accounting. Members of our statutory audit committee are appointed by our board of directors for a two-year term, re-election being permitted, subject to a maximum of ten years, and must meet certain requirements set forth by our bylaws, the audit committee’s internal regulation and the CVM rules.

Our statutory audit committee is not equivalent to or comparable with a U.S. audit committee. Pursuant to Exchange Act Rule 10A-3(c)(3), which provides for an exemption under the rules of the SEC regarding the audit committees of listed companies, a foreign private issuer, such as us, is not required to have an audit committee equivalent to or comparable with a U.S. audit committee, if the foreign private issuer has a body established and selected pursuant to home country legal or listing provisions expressly requiring or permitting such a body, and if the body meets the requirements that (i) it be separate from the full board; (ii) its members not be elected by management; (iii) no executive officer be a member of the body; and (iv) home country legal or listing provisions set forth standards for the independence of the members of the body.

As a foreign private issuer, we chose to rely on this exemption under Exchange Act Rule 10A-3(c)(3) and we believe that our statutory audit committee complies with the aforementioned exemption requirements.

Because Brazilian corporate law does not permit the board of directors to delegate responsibility for the appointment, retention and compensation of the external independent auditors and does not provide the board of directors with the authority to resolve disagreements between management and the external auditors regarding financial reporting, our statutory audit committee cannot fulfill these functions. Therefore, our statutory audit committee may only make recommendations to the board of directors with respect to these matters.

The following members were appointed by our board of directors to our statutory audit committee:

 
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Name

Position

First Year Elected

Date of Birth

Eleazar de Carvalho Filho(1)Coordinator and Member(2)2014July 26, 1957
Gisélia da SilvaMember2018December 30, 1961
Renan BergmannMember2018February 16, 1954
Fernando Dal-Ri MúrciaMember2020July 16, 1977
Christophe Hidalgo(3)Member2020October 25, 1967

________________       

(1)Independent member of board of directors
(2)The role of the coordinator of the statutory audit committee is provided for in CVM Instruction No. 509, of November 16, 2011. His responsibilities are to chair the meetings, represent the committee to our administrative bodies and enforce the provisions of the internal regulation.
(3)Mr. Hidalgo joined the statutory audit committee only after leaving his previous position as chief financial officer, given that both positions are incompatible under our bylaws.

 

Mr. Eleazar de Carvalho Filho. Please see “—6A. Directors Senior Management—Board of Directors” for Mr. Carvalho’s biography.

Mr. Christophe Hidalgo. Please see “—6A. Directors Senior Management—Board of Directors” for Mr. Hidalgo’s biography.

Ms. Gisélia da Silva is the founding partner of GIS DS, a consulting firm specialized in integrity culture and corporate governance models. She is a lawyer, who specialized in corporate law and capital markets. She holds a law degree from the Pontíficia Universidade Católica in the state of Rio Grande do Sul (PUC-RS), an MBA in marketing from Escola Superior de Propaganda e Marketing in the state of São Paulo (ESPM-SP), an L.L.M. degree in corporate law from Insper/SP and a Post-MBA in Advanced Boardroom Program for Women from Saint Paul Business School/SP and the Columbia University of New York. She worked for more than 18 years for the CPFL Energia group, having held the positions of Institutional Relations Advisor, Corporate Law Manager and Advisor of Corporate Governance. She is a member of the Governance Secretariat Committee of the Br5azilian Institute of Corpo4ate Governance (IBGC), as well as an independent member of the Management Committee of the Integra Rating of Governance in Sports. She is also an independent member of the Board of Directors of Eletronorte and Amazonas Geração e Transmissão (Eletrobras Group), as well as a deputy member of the Fiscal Council of SABESP.

Mr. Renan Bergmann. Please see “—6A. Directors Senior Management—Board of Directors” for Mr. Bergmann’s biography.

Human Resources and Corporate Governance Committee

The human resources and corporate governance committee holds meetings at least once every three months and has the following duties: a) suggesting amendments to the committee’s internal regulation, submitting them to the board of directors’ consideration; b) discussing and recommending an organizational structure model for the Company, to be submitted to the board of directors’ consideration; c) evaluating and recommending to the board of directors policies on management and development of people, as well as guidelines for attracting and retaining talents; d) identifying, both in the Company and in its subsidiaries, potential future leaders and follow up the development of their corresponding careers e) reviewing and discussing the recruitment and hiring methods adopted by us, by taking those used by similar Brazilian companies as a parameter; f) examining the candidates to be elected to the board of directors and to the committees, including external members, based on professional experience, technical qualifications, as well as economic, social and cultural representativeness; g) examining and recommending to the board of directors the selected candidates for the position of Chief Executive Officer of the Company, as well as the candidates selected by the CEO to hold a position in the Board of Executive Officers; h) reviewing and discussing the compensation policy applicable to our management, recommending to the Board of directors the criteria of compensation, benefits and other programs, including the stock option program; i) reporting periodically to the board of directors its assessment of the applicability and effectiveness of compensation policies adopted by us, in order to assess the effectiveness of these policies in rewarding performance and discriminate against non-satisfactory performance, according to metrics aligned to our strategic goals, as well as to attract and retain talent; j) discussing and suggesting criteria to annually evaluate the performance of our Executive Officers, by taking those used by similar Brazilian companies as a parameter, as well as support the board of directors in the evaluation process, expressing manifesting its recommendations to the individual assessments of our board of directors; k) recommending and monitoring the adoption of the best corporate governance practices, as well as coordinating the process of implementing and maintaining such practices in the Company, as well as the effectiveness of the corporate governance processes, proposing changes, updates and improvements when necessary; l) draft and periodically submit to the Board of Directors a review of the Company’s hiring policy with its related parties, as well as all other policies necessary for the adoption, by the Company, of the best management and corporate governance practices; among others.

 
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We have a Related Party Transactions Policy which requires that such transactions be conducted at arm’s length and in the interest of the Company. This policy also establishes the corporate body responsible for approving related party transactions. Our human resources and corporate governance committee is responsible for, among other things, reviewing whether the procedures set forth in the Related Party Transactions Policy are followed.

Our human resources and corporate governance committee is composed of Arnaud Daniel Charles Walter Joachim Strasser, Luiz Augusto de Castro Neves, Rafael Sirotsky Russowsky and Ronaldo Iabrudi dos Santos Pereira.

Financial Committee

The financial committee holds meetings at least once every three months and has the following duties: a) suggesting amendments to the committee’s internal regulation, submitting them to the board of directors’ consideration; b) recommending and following up the adoption of the best economic and financial standards and the process of implementation and maintenance of such standards in the Company, suggesting to the board of directors changes, updates and improvements thereto; c) analyzing and reviewing our budget, as well as following up and monitoring the implementation and enforcement thereof; d) analyzing and reviewing the economic and financial feasibility of our investment plans and programs, as well as following up and monitoring the implementation thereof; e) analyzing, reviewing, and recommending measures and actions for the negotiations of any intra-company loans, merger and acquisition, or any other similar transaction involving the Company or any of its controlled companies; f) following up any of the operations and negotiations mentioned in item (e) above; g) analyzing and reviewing the economic and financial indicators, our cash flow and debt policy, for the purpose of suggesting changes and adjustments whenever it may deem necessary; h) following up and monitoring our average capital structure cost and suggest modifications thereto, whenever it may deem it necessary, as well as evaluating and discussing new funding alternatives for the Company; i) reviewing and recommending opportunities connected to financing transactions that may improve our capital structure, as well as for analyzing and discussing the working capital needs and its impact on our capital structure; j) assisting both the board of directors and the Board of Executive Officers in analyzing the Brazilian and world economic situations and their potential effects on our financial position, as well as the development of scenarios and trends, evaluating opportunities and risks and defining strategies to be adopted by us as regards its financial policy; k) monitoring the trading patterns of our securities in both the Brazilian and American markets, as well as the opinions of top investment analysts, recommending measures able to contribute in maintaining a healthy and liquid secondary market; and l) performing other duties as may be specified by the board of directors. Our financial committee is currently composed of Eleazar de Carvalho Filho, Arnaud Daniel Charles Walter Joachim Strasser, Christophe Hidalgo, Hervé Daudin and Renan Bergmann.

Sustainability and Diversity Committee

The corporate governance and sustainability committee, created on April 27, 2018, is a result of the unification of the former sustainable development committee and corporate governance committee with the intent to provide a systemic management focus on the perpetuity of good corporate governance and sustainability practices. This committee is responsible for guiding and ensuring the adoption of the best corporate governance practices by the Company, monitoring compliance with the requirements of Brazilian corporate law, capital markets law and securities market oversight bodies to which the Company is subject, guiding our strategy and business in terms of sustainability issues, and promoting discussions on sustainable development policies and initiatives at the level of leadership and of the board of directors. In addition, this committee monitors macro-economic indicators in order to promote sustainable development by evaluating critical policies and high impact and sustainable practices, based on economic, environmental and social factors. Our corporate governance and sustainability committee is currently composed of Luiz Augusto Castro Neves, Arnaud Daniel Charles Walter Joachim Strasser, Rafael Sirotsky Russowsky, Helio Mattar and Ronaldo Iabrudi dos Santos Pereira.

 
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The Innovation and Digital Transformation Committee

The Innovation and Digital Transformation Committee, aside from ensuring our interests, in the scope of its functions, has the following attributions: (i) suggest changes in its regulation, submitting it to the board of directors for resolution; (ii) recommend and monitor the adoption of best practices of innovation, as well as coordinating the implementation process and maintenance of such practices, as well as the effectiveness of innovation processes, proposing changes, updates and improvements when necessary; (iii) prepare or review periodically, as the case may be, any documents related to innovation of our business, elaborating recommendations for changes, criticisms and suggestions that it deems to be necessary to the board of directors, in order to keep them constantly updated with respect to our innovation practices; (iv) assist the board of directors in the analysis of technological trends and innovations, as well as evaluate our projects, initiatives and investment proposals from the perspective of innovation; (v) opine on any other matters submitted by the board of directors to it, as well as on those that it considers relevant. Our Innovation and Digital Transformation Committee is currently composed of Ronaldo Iabrudi dos Santos Pereira, Christophe Hidalgo, Jorge Faiçal, Paul Sangeet Choudary and Rafael Sirotsky Russowsky.

Fiscal Council

According to Brazilian corporate law, the adoption of a fiscal council is voluntary, and it may be on a permanent or temporary basis. On October 18, 2012, our shareholders approved an amendment to our bylaws to grant temporary status to our fiscal council. Under Brazilian corporate law, the fiscal council is an independent body from management and the board of directors, elected by shareholders annually to supervise the activities of board of directors, management and independent auditors. The responsibilities of the fiscal council are set by Brazilian corporate law and encompass the oversight of management’s compliance with the laws and bylaws, the issuance of a report included in the annual and quarterly financial reports and certain matters submitted for shareholders’ approval and the calling of shareholders’ meetings and the reporting of specific adverse matters arising at those meetings.

Under Brazilian corporate law, the fiscal council may not contain individuals who are members of the board of directors or management, or who are our employees or employees of a controlled company or of a company within our corporate group, or a spouse or relative of any member of our management. In addition, Brazilian corporate law requires that fiscal council members receive compensation of at least 10% of the average amount paid to each executive officer, not including profit sharing and other benefits. Brazilian corporate law requires a fiscal council to be composed of at least three and up to five members and their respective alternates, being one of the members elected by our minority shareholders. According to Brazilian corporate law, the majority of the members of the fiscal council shall be elected by our controlling shareholder.

On April 23, 2020, we installed a fiscal council for the 2020 fiscal year at our shareholders’ meeting held on the same date to serve a term of office that lasted until the 2021 annual shareholders’ meeting, which took place on April 28, 2021. Our shareholders elected three members and their respective alternate members. One of the members and his alternate member were elected by our minority shareholders.

The following table sets forth the name and date of birth of each of the members of our fiscal council as of the date of this annual report, who were elected on our 2021 annual shareholders’ meeting:

Name

Position

Date of Birth

Eric Aversari MartinsEffective memberOctober 19, 1973
Antonio Sergio Salvador dos SantosAlternateJune 13, 1967
Líbano Miranda BarrosoEffective memberJuly 06, 1969
Jerônimo AntunesAlternateNovember 18, 1955
Doris Beatriz França WilhelmEffective memberDecember 17, 1954
Michelle SqueffAlternateNovember 27, 1978

 

On April 28, 2021, a general shareholders’ meeting took place and approved the continued installation of the fiscal council. Our shareholders reelected all previous members of the fiscal council for the fiscal year of 2021, with the exception of Rafael de Souza Morsch, who was replaced by Doris Beatriz França Wilhelm as an effective member, and Debora de Souza Morsch, who was replaced by Michelle Squeff as an alternate member.

6D. Employees

As of December 31, 2020, we had 53.073 employees (calculated on a full-time employee equivalent basis) located in Brazil and 42.548 full-time employees located in Colombia, Uruguay and Argentina. In Brazil, in 2020, over 30% of leadership positions were occupied by women and we experienced a 21% increase in the percentage of persons with disabilities, when compared to 2019. Virtually all of our employees, including Éxito Group’s employees, are covered by union agreements. The agreements are renegotiated annually as part of industry-wide negotiations between a management group representing the major participants in the retail food industry, including our management, and unions representing employees in the retail food industry. We believe we compensate our employees on a competitive basis, and we have developed incentive programs to motivate our employees and reduce employee turnover, including a retention program for key management. See, “Item 3. Key Information—3D. Risk Factors—Risks Relating to our Industry and Us—We may be unable to attract or retain key personnel.” Our management believes that our relations with our employees and their unions are good.

 
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The following table sets forth the number of our employees as of December 31, 2020, 2019 and 2018:

 

As of December 31,(1)

 

2020

2019(2)

2018

Operational82,66392,64853,446
Administrative

5,471

8,427

2,322

Total

88,134

101,075

55,768

________________       

(1)Based on the average of the full-time equivalent number of employees, which is the product of the number of Brazilian retail employees (full- and part-time) and the ratio of the average monthly hours of all retail employees to the average monthly hours of all full-time employees. The numbers in the table are related to our continuing operations in 2020, 2019 and 2018.
(2)The increase in 2019 was a result of Éxito Group’s acquisition. For additional information on Éxito Group’s acquisition, see “Item 4. Information on the Company—4A. History and Development of the Company—Changes in Our Business—Latin America Corporate Reorganization.”

 

6E. Share Ownership 

As of December 31, 2020, members of our board of executive officers directly owned an aggregate amount of 253,805 common shares while the members of our board of directors directly held an aggregate amount of 563,805 common shares. As of the same date, none of our executive officers nor directors held, individually, more than 1% of our outstanding common shares. For further information on direct share ownership of our board members, see “Item 7. Major Shareholders and Related Party Transactions—7A. Major Shareholders.” As of December 31, 2020, our management and some of our employees also owned options to purchase an aggregate amount of 1,051,912 common shares at a per-share weighted average purchase price of R$ 33.29. See “—6B. Compensation” for a description of the stock option plans available to the Company’s and our subsidiaries’ senior management and employees.

On February 14, 2020, B3 approved our migration from the Level 1 listing segment to the Novo Mercado listing segment of B3, the highest level of corporate governance practices of B3. According to the Novo Mercado requirements, on February 28, 2020, all of our then outstanding preferred shares were converted into common shares. For additional information on our migration to the Novo Mercado listing segment, see “Item 4. Information on the Company—4A. History and Development of the Company—Changes in Our Business—Latin America Corporate Reorganization—Novo Mercado.”

ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

7A. Major Shareholders

The following table sets forth information relating to the beneficial ownership of our capital stock as of December 31, 2020, by each person known by us to beneficially own 5% or more of our common shares and our directors and officers as a group.

Shareholder

Common Shares

Total Shares

 

Number

%

Number

%

Wilkes Participações S.A.(1)94,019,17835.0494,019,17835.04
Segisor S.A.S.(1)5,600,0502.095,600,0502.09
Casino(1)20.0020.00
King LLC(1)852,0000.32852,0000.32
Geant International B.V.(1)9,423,7423.519,423,7423.51
Helicco Participações Ltda.(1)581,6000.22581,6000.22
Nuveen13,495,8925.0313,495,8925.03
Jean-Charles Naouri10.0010.00
Directors and Officers(2)707,3030.26707,3030.26
Treasury shares239,0600.09239,0600.09
Others

143,432,739

53.45

143,432,739

53.45

Total

268,351,567

100

268,351,567

100

____       

(1)Wilkes Participações S.A., Segisor S.A.S., Casino, King LLC, Geant International B.V. and Helicco Participações Ltda. are part of the Casino Group.
(2)Refers to common shares that our board of director, board of executive officers and fiscal council own directly.
 
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As of December 31, 2020, we had 23,817 record holders in Brazil. On December 31, 2020, 39,941,859 of our common shares were held in the form of ADSs, representing 14.9% of the total of our common shares.

In 2015, our controlling shareholder, the Casino Group, carried out a reorganization of its activities and businesses in Latin America to consolidate its platform in the region and capture synergies. Pursuant to the reorganization, the Casino Group transferred 50% of the shares of our common shares to Éxito Group, corresponding to approximately 18.8% of our total capital stock. Éxito Group was also controlled by the Casino Group and, therefore, after consummation of the transaction, the Casino Group remained as our controlling shareholder.

In connection with this reorganization, Segisor S.A.S. shareholders’ agreement, the Holding Company shareholders’ agreement and CBD shareholders’ agreement were executed on August 20, 2015 with the purpose of setting forth the rules pursuant to which the Casino Group and Éxito Group would exercise control of CBD. As a result of the Holding Company shareholders’ agreement and the CBD shareholders’ agreement, representatives of the Casino Group and Éxito Group on our board of directors used to vote in the same manner and our board had nine members, of whom three were representatives of the Casino Group and three were representatives of Éxito Group.

On June 26, 2019, our board of directors approved the acquisition of Éxito Group. The proposed transaction comprised (i) the launch of an all-cash tender offer by us to acquire up to all of the shares of Éxito; (ii) the acquisition by Casino of all controlling shares issued by us and held indirectly by Éxito Group for a fair price; and (iii) our migration from Level 1 to the Novo Mercado listing segment of B3 and, consequently, the conversion of all of our preferred shares into common shares. For additional information on the corporate reorganization, see “Item 4. Information on the Company—Item 4A. History and Development of the Company—Changes in Our Business—Latin America Corporate Reorganization.”

On September 12, 2019, Casino entered into a purchase agreement with Éxito Group to acquire all shares issued by us and indirectly held by Éxito Group for R$113.00 for each share, corresponding to a total amount, net of debt, of US$1,161 million. The shareholders agreement entered into by and among Éxito Group, Casino and their subsidiaries governing their relationship as our shareholders was terminated and our board members appointed by Éxito Group, Manfred Heinrich Gartz, Carlos Mario Giraldo Moreno and José Gabriel Loaiza Herrera, resigned.

As of December 31, 2020, the Casino Group is the beneficial owner of 35.03% of the total capital stock of CBD.

7B. Related Party Transactions

From time to time we and our affiliates have entered into transactions with the Casino Group and other related parties in the ordinary course of business on an arm’s length basis, including, but not limited to, loans, consulting agreements, intellectual property license agreements, services agreements for the intermediation and negotiation of third party services and agency agreements.

We have a Related Party Transactions Policy which requires that related party transactions be at arm’s length, according to the usual trading conditions of the market, and in the best interest of the Company. This policy also establishes the corporate body responsible for approving related party transactions. Until February 14, 2020, our statutory audit committee was responsible for, among other things, reviewing whether the procedures set forth in the Related Party Transactions Policy are followed. As a result of our migration to the Novo Mercado listing segment, the governance and human resource committee assumed the responsibility of reviewing all of our related party transactions.

In addition, we have also entered into commercial contracts to set the rules for promotion and sale of financing services provided by FIC at the Company stores for implementation the financing partnership between the Company and Itaú Unibanco S.A. established in the association agreement between the parties: (i) bank correspondent; (ii) indemnification agreement that FIC is committed to keep the Company free of losses in performing FIC’s services, and that FIC and Company are committed, with each other, to compensate for contingences; and (iii) agreement for sharing information and allow access to the systems for offering services.

 
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Agreements with Casino Group

Cost Sharing Agreement

On August 1, 2014, as amended on October 30, 2014 and October 28, 2020, we entered into a cost sharing agreement with Casino, Euris, Helicco Participações Ltda. Wilkes Participações S.A. and Sendas Group (all companies controlled by the Casino Group), pursuant to which we agreed to reimburse them (Casino Group) for expenses incurred by their employees in connection with activities involving the transfer of “know-how” to CBD to support its development. The activities involve administrative, financial, advertising, strategic, planning and budgeting aspects, among others. On August 1, 2016, we also entered into a joinder agreement (substantially in the form of the schedule attached to the cost sharing agreement) with Casino Services SAS (a company controlled by the Casino Group), pursuant to which Casino Services SAS adhered to the cost sharing agreement. For the year ended December 31, 2020, we paid R$91.9 million under the cost sharing agreement.

Agency Agreements

On December 20, 2004, we entered into an agency agreement, amended on February 23, 2017, with Sendas Distribuidora S.A. and Casino International S.A., an affiliate of the Casino Group, to regulate the terms pursuant to which Casino International S.A. renders international retail and trade services to us (i.e., negotiation of commercial services with international suppliers).

On July 25, 2016, as amended on January 24, 2017, we, Sendas Distribuidora S.A. and Groupe Casino Limited, an affiliate of the Casino Group, entered into an agency agreement to regulate the terms under which Groupe Casino Limited renders global sourcing services to us (i.e., procurement of global suppliers and mediation in purchases). We also entered into an agreement with the original counterparties of the agency agreement, pursuant to which Groupe Casino Limited reimbursed us for an amount necessary to provide for margin equalization due the reduction of gains as a result of promotions carried out by us in our stores during 2018.

Cost Reimbursement Agreement

On July 25, 2016, as amended on January 23, 2018 and September 5, 2019, we and Casino entered into an agreement to regulate reimbursement by the Company of expenses incurred by the Company’s French employees related to French social contributions and other benefits granted in the expatriation program which are paid by Casino in France.

Agreements with Éxito Group

Commercial Agreement and Copyright License Agreement

On July 27, 2016, we and Éxito Group entered into an agreement for the implementation of synergy processes for the operations of CBD and Éxito Group. The agreement matures in 2022. The agreement also provides for the granting of trademark and copyright licenses by Distribuidora de Textiles y Confecciones S.A., a company of the Éxito Group, to us. On July 13, 2017, we and Distribuidora de Textiles y Confecciones S.A. entered into a copyright license agreement, which sets forth the royalty payments to be made to Distribuidora de Textiles y Confecciones S.A.

Cost Reimbursement Agreement

On October 22, 2019, we, Éxito Group and Sendas entered into a reimbursement agreement to regulate reimbursement of expenses related to the relocation of employees among Éxito Group, CBD and Assaí to foster the sharing of know-how and experience on certain areas of operation within the companies of the Pão de Açúcar Group. On November 4, 2020, Sendas became a party to this agreement. This agreement has an indefinite period of duration.

As of the date of this annual report, we are in the final stages of entering into a cost sharing agreement with Éxito Grupo providing for the reimbursement of expenses relating to the inclusion of Éxito Group as an user to DocuSign, which is an electronic signature software.

 
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Agreements with GY

Energy Efficiency Framework Agreement

On May 8, 2015, as amended in April 06, 2016, December 07, 2018 and December 31, 2019, we entered into an agreement with GreenYellow do Brasil Energia e Serviços Ltda., or GY, a Brazilian company controlled by Casino, pursuant to which GY provided for the installation of equipment and rendering of energy efficient solutions services at our Extra and Pão de Açúcar stores.  The equipment and the services provided by GY were aimed at reducing the amount of energy used by our stores.  We pay as consideration for the equipment an annual amount according to a payment method that is similar to a lease.  For the rendering of services, GY is remunerated according to a formula based on the energy savings generated at each store.  For the year ended December 31, 2020, we paid R$165.2 million under the energy efficiency framework agreement.  The duration of the individual agreements entered into under the framework agreement vary from 2 to 13 years.

Photovoltaic Equipment Lease and Maintenance Agreements

From May 2017 through April 2019, we entered into various agreements with GY, pursuant to which GY provided for the installation and maintenance of photovoltaic equipment at eight of our Assaí stores. These agreements usually have a term of 25 years. For the lease and rendering of services, GY is remunerated according to a formula that is based on the energy savings generated at each store.

Service Agreement

On November 12, 2020, we entered into a service agreement with GY pursuant to which GY will provide oversight and monitoring services to us relating to energy efficiency. This agreement has a term of 120 months for each store where the services are rendered.

Service Agreement for Retrofit and Food Refrigeration Solution

On December 9, 2020, we entered into an agreement for the supply and maintenance of chillers and similar products related to food refrigeration, to increase the energy efficiency of our facilities and to reduce our environmental impact on the planet’s greenhouse effect. This agreement has a term of 15 years.

Agreement with EMC

On June 6, 2019, we entered into a purchase agreement with Assaí and E.M.C. Distribution Limited, or EMC, a company indirectly controlled by Casino, pursuant to which EMC will perform the import of non-food and food products (except perishables and wine), on a non-exclusive basis. The agreement has a term of five years, automatically renewable for equal periods of time.

Agreements with Sendas

Separation Agreement

On December 14, 2020, we entered into a Separation Agreement with Sendas. The Separation Agreement sets forth our arrangements with Sendas regarding the principal actions to be taken in connection with the separation of the cash and carry business, and matters regarding the operation of the CBD and Sendas businesses after the Sendas Spin-Off. The following are the principal terms of the Separation Agreement:

Transfer of Assets and Assumption of Liabilities.

The Separation Agreement identifies the assets to be transferred, liabilities to be assumed and contracts to be assigned, terminated and/or duplicated to each of Sendas and us as part of the internal transactions to be effected prior, during and after the spin-off, the purpose of which is to ensure that, as at the time of the spin-off, each of CBD and Sendas holds the assets which it requires to fully operate.

Common Agreements.

All agreements, arrangements, commitments and understandings with third-parties that contemplate both Sendas and us as parties, beneficiaries, guarantors and/or in any way create an obligation to both Sendas and us, will terminate as soon as practically feasible after the completion of the spin-off, except where such termination could create losses for Sendas and us, and therefore will be addressed by the Transition Committee (as defined therein).

 
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Intercompany Arrangements.

All agreements, arrangements, commitments and understandings, including most intercompany accounts payable or accounts receivable, between us, on the one hand, and Sendas, on the other hand, will be terminated effective as of completion of the Spin-Off, except for specified agreements and arrangements that are intended to survive completion of the separation that are either transaction in nature, at arm’s length or depend of a transitional period due to its complexity.

Representations and Warranties.

We and Sendas each provide customary warranties as to our respective capacity to enter into the Separation Agreement. Except as expressly set forth in the Separation Agreement or any ancillary agreement, neither we nor Sendas will make any representation or warranty as to the assets, business or liabilities transferred or assumed as part of the separation, or as to the legal sufficiency of any assignment, document or instrument delivered to convey title to any asset or thing of value to be transferred in connection with the spin-off.

Indemnification.

We and Sendas each agree to indemnify the other and each of the other’s directors, officers, managers, members, agents and employees against certain liabilities incurred in connection with the spin-off and our and Sendas’ respective businesses. The Separation Agreement provides for indemnification in relation to breaches of the agreement, violation or incorrectness of representation and warranties and in relation to certain other assets and liabilities that are specified for in the Separation Agreement.

Other Matters.

Other matters governed by the Separation Agreement include, without limitation, insurance arrangements, confidentiality, data protection, mutual assistance and information exchange after completion of the spin-off, treatment and replacement of cross-guarantees, conduct of litigation and tax matters after the spin-off, and transfer of and post-Separation access to certain books and records.

 Data Protection Agreement

On December 17, 2020, we entered into a Data Protection Agreement with Sendas. The Data Protection Agreement sets forth our arrangements with Sendas regarding the fulfillment of data protection rules by both parties, the sharing of data between Sendas and us and indemnification rules relating to any penalties, damages and/or losses that might result from the non-compliance of data protection rules by any party.

Employee Matters Agreement

On December 17, 2020, we entered into an Employee Matters Agreement with Sendas. The Employee Matters Agreement sets forth our arrangements with Sendas, as part of the operational separation in connection with the Spin-Off, regarding the transfer of employees to each of Sendas and us, the amendment to Sendas’ stock options plan and the creation of new stock options plans for our officers and employees, as well as the arrangements concerning agreements, understandings and/or representations with unions.

Via Varejo

On June 14, 2019, we completed the sale of all of our equity interest in Via Varejo by means of a block trade over the B3. For additional information on the sale of our equity interest in Via Varejo, see “Item 4. Information on the Company—4A. History and Development of the Company—Changes in Our Business—Via Varejo Sale.”

Since then, we do not control Via Varejo nor have exercised influence over its management or operations, and, as a result, Via Varejo has no longer been a related party of the Company. After the consummation of the sale of all our equity interest in Via Varejo, certain transactions, previously existing between the Company and Via Varejo when Via Varejo was part of the Pão de Açúcar Group, remained in effect.

 
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We have been in discussions with Via Varejo’s management regarding the amicable termination or replacement of the outstanding transactions that we had entered into with Via Varejo while it was still part of the Pão de Açúcar Group.

For information on transactions with Via Varejo, see note 12.4 to our audited consolidated financial statements.

Guarantees

From 2016 through 2018, we entered into guarantee agreements with Via Varejo and its subsidiaries, collectively referred to as the Guarantee Framework Agreements. The agreements provided for a fee based on market terms to be paid by Via Varejo and/or its subsidiaries, as the case may be, to us for having granted the guarantee. We provided guarantees for obligations of Cnova Brazil under financial agreements, lease agreements and commercial agreements. We also provided guarantees for obligations of Via Varejo under lease agreements, commercial agreements, insurance policies and agreements with financial institutions pursuant to which the financial institutions granted a surety to Via Varejo and its subsidiaries.

In addition, the guarantees would remain in effect until all debts were repaid by the relevant obligors (i.e., Via Varejo and/or its subsidiaries, as the case may be) or until the release of the guarantees. If CBD requested the termination of any of the Guarantee Framework Agreements and any of the relevant obligors was unable to replace the guarantees within a 90-day period, (i) the relevant agreement would remain in effect until the guarantee was replaced and (ii) if fees were due to CBD, they would have to be paid to CBD without discounts. Additionally, the agreements indicated in items (i) and (ii) above would be terminated in the event of a change of control of the relevant obligors.

We also granted guarantees for obligations of Via Varejo under operational agreements with maturities and performance terms to be complied by Via Varejo. Management has already taken the necessary legal steps, according to the previous agreements, to extinguish all the guarantees as a result of the change of control.

We have reached an agreement with Via Varejo for the replacement of the most significant guarantees, which are no longer in effect as of the date of this annual report.

Indemnity with the Klein Family

On December 4, 2009, we entered into an association agreement with Via Varejo, the Klein Family and Casa Bahia Comercial, which was later amended on July 1, 2010. Under the association agreement, (i) Via Varejo had indemnity rights against us and Casa Bahia Comercial for certain claims existing as of July 1, 2010 and (ii) the parties undertook to ascertain the balance of indemnity rights to be paid by one party to another, among other related expenses on November 8, 2016 (i.e., six years after the closing of the transaction).

On July 4, 2017, we entered into an agreement with the original counterparties to the association agreement to (i) ascertain the liabilities for losses and damages incurred by Via Varejo and the Klein Family until July 1, 2010; (ii) consolidate the procedures for indemnification of potential losses and damages of Via Varejo and the Klein Family before and after July 1, 2010; and (iii) adjust the guarantees provided by GPA on the lease agreements entered into between Via Varejo and the Klein Family. Pursuant to the terms of that agreement, it was established that (i) Casa Bahia Comercial would pay R$70.2 million to Via Varejo in installments during 2017, adjusted for the SELIC rate, as indemnifying losses incurred until November 8, 2016. This amount was paid in full in 2017; and (ii) Via Varejo would pay a fee to us on an arm’s length basis in connection with corporate guarantees provided by us in respect of the lease agreements entered into by Via Varejo and Casa Bahia Comercial. The parties also agreed on the proceedings to be followed to determinate the liability of each party regarding claims occurred on and after November 8, 2016. On October 24, 2018, we entered into an amendment to the agreement to improve the criteria for determination of the outstanding amount of indemnifiable losses, among other items.

The reimbursement obligations of CBD related to contingencies arising from facts that occurred prior to the acquisition of Globex in 2010 will remain in effect for as long as the legal proceeding that are subject to the reimbursement obligations have not terminated.

For further information, see note 22.4 to our financial statements included elsewhere in this annual report.

 
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Operating Agreement

In August 2016, Via Varejo and Cnova entered into the Cnova Reorganization Agreement related to the reorganization of Cnova Brazil within Via Varejo. After the Cnova Corporate Reorganization in October 2016, Via Varejo became the sole shareholder of Cnova Brazil, which operates Extra.com.br, Pontofrio.com and Casasbahia.com.br websites, and ceased to be a shareholder of Cnova. For further information on the Cnova Corporate Reorganization, see “Item 4. Information on the Company—4A. History and Development of the Company––Historical Changes in Our Business.”

On August 8, 2016, CBD and Via Varejo entered into an operating agreement, pursuant to which both parties agreed to integrate the e-commerce and physical stores of the Extra banner. We have the obligation to pay Via Varejo a fixed fee for items that we purchase from suppliers in conjunction with Via Varejo. Via Varejo has the obligation to pay to CBD a fixed fee for the withdrawal of products from our physical stores that were purchased through the websites of the Extra, Ponto Frio and Casas Bahia banners. The use of the Extra banner by Via Varejo was free of charge.

After the consummation of the sale of all of our equity interest in Via Varejo, the only section of the Operating Agreement that remained effective is Via Varejo’s exclusive right to operate the e-commerce of electronic products. The Operating Agreement will expire on October 21, 2021.

Cost Sharing Agreement

On December 15, 2016, we entered into an agreement, which was subsequently amended on December 10, 2018, with Via Varejo, Cnova Brazil and Sendas Distribuidora S.A., pursuant to which the parties agreed to reimburse each other for the use of administrative activities which are shared among the parties. The agreement was terminated with Via Varejo and remains in effect with respect to Sendas.

Éxito Group

Almacenes Éxito S.A. enters into transactions with its investments in joint ventures in the ordinary course of business.

Tuya

Éxito Group entered into agreements with Tuya, a joint venture between Éxito Group and Grupo Bancolombia, relating to partnership agreements and to the reimbursement of expenses, among other matters. As of December 31, 2020, Tuya recorded revenues of R$24 million.

Puntos Colombia

Éxito Group entered into an agreement with Puntos Colombia, a joint venture between Éxito Group and Banco Colombia, providing for the terms and conditions for the redemption of points collected under their loyalty program, among other services. As of December 31, 2020, Puntos Colombia recorded an expense of R$12.5 million.

For further information regarding our related party transactions, see note 11 to our audited consolidated financial statements included elsewhere in this annual report.

7C. Interests of Experts and Counsel

Not applicable.

ITEM 8.FINANCIAL INFORMATION

8A. Consolidated Statements and Other Financial Information

The information included in Item 18 of this annual report is referred to and incorporated by reference into this Item 8A.

 
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Legal Proceedings

We are party to administrative proceedings and lawsuits that are incidental to the normal course of our business. These include general civil, tax and labor litigation and administrative proceedings. We believe that our provisions for legal proceedings are sufficient to meet probable and reasonably estimated losses in the event of unfavorable court decisions to us and to ensure that the outcomes of these legal proceedings have no material effect on our financial condition or results of operations. We cannot estimate the amount of all potential costs that we may incur or penalties that may be imposed on us other than those amounts for which we have made provisions. For further information on our legal proceedings, see note 22 to our audited consolidated financial statements included elsewhere in this annual report.

Based on the advice of our external legal counsel, we have identified and made provisions for the following probable losses that may result from legal proceedings to which we are a party:

 

2020

2019

2018

 (in millions of R$)
Tax claims(1)937841828
Labor claims303319291
Civil and other claims

145

145

116

Total accrued liabilities for legal proceedings

1,385

1,305

1,235

________________       

(1)Includes tax claims related PIS and COFINS.

 

Tax-Related Claims

Tax-related claims are indexed to the SELIC rate, which in annual terms was 6.50% on December 31, 2018, 4.50% on December 31, 2019, and 2.00% on December 31, 2020, and are also subject, in certain cases, to fines. We have made provisions for interest charges and fines, when applicable.

In addition, tax claims are subject to monthly indexing, which involves adjusting the amount of provisions for litigation in accordance with the indexing rates used by each tax jurisdiction. The indexing is required by law for all tax amounts, including the provision for judicial deposits.

Taxes and Other

We pay PIS and COFINS taxes, at the rates of 1.65% and 7.60% on gross sales revenue, respectively. We adopt the non-cumulative system whereby these tax liabilities can be partially or completely offset by credits we accrue from taxes previously paid on products we purchase and other expenses. As a result of our application of the non-cumulative system, we and our subsidiaries have requested the right to exclude state value added tax (Imposto Sobre Circulação de Mercadorias e Serviços), or ICMS, from the calculation basis of these two contributions.

We have tax claims that were deemed probable losses by our legal counsel, including: (i) a 2011 disagreement regarding the non-application of Accident Prevention Factor (Fator Acidentário de Prevenção), or FAP; (ii) a disagreement with the Finance Department of the Brazilian federal government regarding the ICMS tax rate calculated on electricity bills; (iii) undue credit; (iv) no social charges on benefits granted to its employees, due to an unfavorable decision in the Court; (v) IPI requirement on resale of imported products; (vi) other less relevant issues. The amount we provisioned for these matters as of December 31, 2020, was R$470 million (R$345 million as of December 31, 2019).

On October 16, 2014, the STF decided that the taxpayers whose trade products were included in the “basic consumer products basket” have no right to fully use their ICMS credits. We, with the aid of our legal advisors, evaluated and recorded a provision for this matter amounting to R$27 million as of December 31, 2020 (R$50 million as of December 31, 2019), since this claim is considered a probable loss. On May 9, 2019, the STF upheld their previous understanding and ruled against us. This court decision did not have an adverse effect on our financial information, since we had a provision recorded in the full amount.

Additionally, we are party to some proceedings before the São Paulo state tax authorities which discuss accessory state tax obligations in the context of the refund of ICMS due to tax substitution. Considering recent court decisions, we recorded a provision for this matter amounting to R$292 million as of December 31, 2020 (R$268 million as of December 31, 2019) representing the estimate of probable loss evaluated by management on these proceedings.

 
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We discussed in court our eligibility to not pay Government Severance Indemnity Fund for Employees (Fundo de Garantia do Tempo de Serviço), or FGTS, contributions, as provided by Supplementary Law 110/01. As of December 31, 2020, the accrued amount was R$60 million (R$96 million as of December 31, 2019).Éxito Group and its subsidiaries are parties to legal proceedings relating to value added tax, property tax and industry. As of December 31, 2020, the amount under discussion totaled R$88 million.

Sendas Compensation Liability

The Company is responsible for Sendas legal proceedings prior to Assai activity. As of December 31, 2020, the amount involved in tax proceedings is R$115 (R$104 as of December 31, 2019).

For further information on our tax-related claims, see note 22 to our audited consolidated financial statements included elsewhere in this annual report.

Exclusion of ICMS from the Calculation Basis of PIS and COFINS.

Under the non-cumulative regime for the calculation of PIS and COFINS, we requested the exclusion of ICMS from the calculation basis of PIS and COFINS. On March 15, 2017, the Supreme Court ruled that ICMS must be excluded from the calculation basis of PIS and COFINS, in line with our request.

We and our legal counsel expect that the decision in regard to this appeal will not limit our claim; however, the proceeding is still pending judgment and we are unable to recognize the asset related to the credits to be obtained since we filed this lawsuit in 2003. In 2019, our subsidiaries recorded credits in the amount of R$382 million, of which R$198 million was recorded in financial result, in accordance with the final and unappealable decisions rendered in their proceedings.

On October 29, 2020, we obtained a favorable decision in a lawsuit, resulting in the recording of a tax credit in the amount of R$1,609 million, of which R$613 million was recorded in financial result, net of provisions for installments that may be considered non-realizable. We made calculations based on the opinion of our legal counsel. The offsetting of this tax credit is subject to certain administrative proceedings filed with the Brazilian tax authorities and we expect to realize it within five years.

Similarly, Via Varejo obtained a favorable decision in May 2020, which includes an amount to which we are entitled to be reimbursed for, according to the terms of the association agreement signed between us and the Klein family in the transaction that created Via Varejo. The periods for which we are entitled to be reimbursed relate to the subsidiary Globex (that was merged in the formation of Via Varejo) for the years between 2003 and 2010. We have already recognized in fiscal year 2020, R$231.0 million of receivables from Via Varejo. The related gain is recognized in the net result of discontinued operations. In addition, we believe we are entitled to an outstanding amount of R$277.0 million, which is subject to be confirmed by documents to be provided by Via Varejo.

Labor Claims

We are party to numerous lawsuits involving disputes with our employees, primarily arising from layoffs in the ordinary course of business. As of December 31, 2020, we recorded a provision of R$303 million (R$319 million as of December 31, 2019) referring to lawsuits whose risk of loss was considered probable. Management, assisted by legal counsel, evaluates these claims recording provisions for losses when reasonably estimable, taking into account previous experience in relation to the amounts claimed.

Civil, Regulatory and Other Claims

We are defendants in civil lawsuits. Among these lawsuits, we highlight the following:

·

We file and respond to various lawsuits requesting the review of lease amounts. In these lawsuits, the judge determines a provisional lease amount, which is then paid by the stores until the final lease amount is defined. The Company recognizes a provision for the difference between the original amount paid by the stores and the amounts requested by the opposing party (owner of the property) in the lawsuit, when internal and external legal advisors agree on the likelihood of a change to the lease paid by the entity. As of December 31, 2020, the provision for these lawsuits was R$34 million (R$68 million as of December 31, 2019) to which there are no judicial deposits.

 
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·We are party to lawsuits relating to penalties applied by municipal, state and federal regulatory agencies, including the Consumer Protection Agency (Procuradoria de Proteção e Defesa do Consumidor) and National Institute of Metrology, Standardization and Industrial Quality (INMETRO), as well as discussions relating to the termination of agreements with our suppliers. As of December 31, 2020, we had provisions for these lawsuits in the amount R$40 million (R$24 million as of December 31, 2019).
·Éxito Group is a party to civil lawsuits relating to challenges to lease agreements, among others. As of December 31, 2020, the amount under discussion was R$35 million (R$17 million as of December 31, 2019).
·The amount provisioned for the remaining civil jurisdiction matters as of December 31, 2020, was R$36 million (R$36 million as of December 31, 2019).

As of December 31, 2020, including the lawsuits mentioned above, we had provisions for civil claims in the amount of R$145 million (R$145 million as of December 31, 2019).

Other Contingent Liabilities for Which There Are No Provisions

As of December 31, 2020, we were party to certain legal proceedings for which the probability of loss was deemed possible and, therefore, we have not recorded provisions for these proceedings. See note 22.4 to our audited consolidated financial statements included elsewhere in this annual report for detailed information on these proceedings.

We are party to several tax-related legal proceedings with various governmental agencies related to social security taxes (Instituto Nacional de Seguridade Social), or INSS, IRPJ, withholding tax (Imposto de Renda Retido na Fonte), or IRRF, social contribution on net profits (Contribuição Social Sobre o Lucro Líquido), or CSLL, COFINS, PIS, credits related to taxes on industrialized products (Imposto Sobre Produtos Industrializados), or IPI, contribution tax on financial transactions, (Contribuição Provisória sobre Movimentação ou Transmissão de Valores e de Créditos e Direitos de Natureza Financeira), or CPMF, ICMS, municipal service tax (Imposto Sobre Serviços), or ISS, municipal property tax (Imposto Predial e Territorial Urbano), or IPTU. As of December 31, 2020, the aggregate amount of the possible loss regarding these tax-related legal proceedings was R$10,081 million (R$10,829 million as of December 31, 2019).Globex (which later changed its corporate name to Via Varejo) is a defendant in tax legal proceeding relating to ICMS, PIS and COFINS discussions, among others. As per the terms of the public auction to acquire Globex’s shares in 2009, we are liable for the losses relating to the legal proceedings of Globex prior to its acquisition by Via Varejo. In June 14, 2019, we sold all of our equity interest in Via Varejo, however, we remain liable for these legal proceedings. For additional information on the transactions with Via Varejo that remained in effect, see “Item 7. Major Shareholders and Related Party Transactions—7B. Related Party Transactions—Via Varejo.” As of December 31, 2020, the amount under discussion in this tax proceeding was R$456 million (R$484 million as of December 31, 2019).

Globex (which later changed its corporate name to Via Varejo) was a plaintiff in a writ of mandamus filed against the Brazilian Federal Revenue Service to discuss the recognition of tax credits resulting from the exclusion of ICMS from the PIS and COFINS calculation basis. On May 19, 2020, Via Varejo obtained a final favorable decision under this writ of mandamus. According to an agreement we have in place with Via Varejo, among others, we are entitled to receive from Via Varejo part of the credits they will receive as a result of this favorable decision. In 2020, we recognized a credit in the amount of R$231 million, of which the related gain was recognized as net result of discontinued operations. We believe we are entitled to an outstanding amount of R$277 million, which is subject to be confirmed by documents to be provided by Via Varejo.

We are also party to other tax legal proceedings, including claims relating to the improper deduction of goodwill amortization. Pursuant to agreements we entered into with certain of our former and current shareholders, we believe we are entitled to receive an indemnification, which, as of December 31, 2020, we estimated to be in the amount of R$1,432 million.

On August 21, 2020, the STF ruled that the payment of IPI is constitutional when the products to be sold in the local market are imported. Additionally, on August 28, 2020, the STF also ruled that of the payment of Christmas bonus (décimo terceiro salário) to employees is subject to social security contributions. We have been following the development of these rulings, and based on the opinion of our legal advisors, we concluded that we do not need to record a provision.

 
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The Company is responsible for the legal proceedings of Sendas that were filed prior to Assaí’s activity. As of December 31, 2020, such proceedings involved an amount of R$1,420.0 million, of which R$1,378.0 million are tax and R$42.0 million civil and others..

We engage external counsels to represent it in the tax assessments, whose fees are contingent upon a percentage to be applied to the amount of success in the final outcome of these lawsuits. This percentage may vary according to qualitative and quantitative factors of each claim, and, as of December 31, 2020, the estimated amount that will be paid in all lawsuits is approximately R$174.0 million (R$205 million as of December 31, 2019).

Arbitration

Península

On September 12, 2017, we announced that we received a notice from the Brazil Canada Chamber of Commerce regarding a request for arbitration filed by Banco Ourinvest S.A., a financial institution, in its capacity as fund manager and acting in the exclusive interest of the quotaholders of Península.

The arbitration proceeding aims to discuss the calculation of rental fees and other operational matters related to lease agreements and contracts which we entered into with Península, during 2005, regarding stores owned by Península. These agreements entitled us to the commercial use of the referred real estate for a period of 20 years, which may be extended for an additional 20-year term, at our exclusive criteria.

The proceeding refers to matters related to the application of these agreements and does not affect the continuity of the leases, which are contractually established. Our management has determined, based on the opinion of external legal counsel, that the chance of loss is possible. However, the amount of any potential loss cannot be determined with reasonable certainty at this time based on the current stage of the arbitration process.

For further information on the arbitration proceeding related to Península, see note 22.8 to our audited consolidated financial statements included elsewhere in this annual report.

Dividend Policy and Dividends

General

Pursuant to Brazilian corporate law, Brazilian corporations are required to hold an annual shareholders’ meeting in the first four months of each fiscal year to resolve the allocation of the results of operations in any year and the distribution of an annual dividend. Under Brazilian corporate law, shareholders of a Brazilian corporation have the right to receive, as a mandatory dividend for each fiscal year, (i) a part of the corporation’s net profits as established under its bylaws, subject to a minimum mandatory dividend of at least 25% of the net profits adjusted pursuant to Brazilian corporate law, or (ii) if not provided under such bylaws, an amount equal to 50% of the company’s adjusted net profits calculated according to Brazilian corporate law. Pursuant to Brazilian corporate law, in addition to the mandatory dividend, the board of directors may recommend the payment of interim dividends and payment of dividends from other legally available funds to shareholders. Also pursuant to Brazilian corporate law, a Brazilian company is allowed to suspend the distribution of mandatory dividends in any year in which its management reports at its shareholders’ general meeting that the distribution would be incompatible with the company’s financial condition.

Pursuant to our dividend policy, created by our board of directors on August 3, 2009, we may prepay our dividend distribution on a quarterly basis, subject to approval by our board of directors, at meetings usually held during the first quarter of each fiscal year. At the end of each fiscal year, we pay our shareholders the minimum mandatory dividend, calculated in accordance with Brazilian corporate law, less the dividend payments paid in advance during the year.

In 2018, 2019 and 2020, our board of directors approved payments of interest on equity to our shareholders. The approved payments were charged to the minimum mandatory dividend related to the respective fiscal years. On June 15, 2020, we paid dividends in the amount of R$155,8 million in order to meet the minimum mandatory dividend for 2019, as required by Brazilian corporate law. According to Brazilian corporate law and our bylaws, we must pay declared dividends within 60 days after the approval of the distribution of dividends in the shareholders’ meeting. For further information, see “Item 10. Additional Information—10B. Memorandum and Articles of Association—Appropriation of Net Profits and Distribution of Dividends—Distribution of Dividends” and “—Interest on Shareholders’ Equity.”

 
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Dividend Policy and History of Dividend Payments

On April 28, 2021, a general shareholders’ meeting took place and approved the distribution of dividends in the amount of R$0.475788964 per common share and interest on shareholders’ equity in the amount of R$1.701093954 per common share. The following table sets forth the distributions paid or to be paid to holders of our common shares and preferred shares at the time:

Period

Description

First payment date

R$ per preferred share

R$ per common share

Total amount in dividends on shareholders’ equity shares

     (in R$ millions)
2018Interest on equityJune 12, 20180.29108933090.264626664475(1)
2018Interest on equityNovember 27, 20180.4465936300.405994209115(1)
2018Interest on equityDecember 13, 20180.2774046480.25218604471(1)
2018Interest on equityMay 22, 20190.7471461550.679223778192(1)
2019Interest on equityAugust 16, 20190.1425124510.12955677436(1)
2019Interest on equityJune 15, 2020N/A0.582024107156(1)
2020Interest on equityJune 15, 2021N/A1.701093954456(1)
2020DividendsJune 15, 2021N/A0.475788964127

________________       

(1)Such amounts represent the estimated gross amount of interest on equity, as certain shareholders are exempt from IRRF.

 

Shareholders who are not residents of Brazil must generally register with the Central Bank to have dividends and/or interest on shareholders’ equity, sales proceeds or other amounts with respect to their shares eligible to be remitted in foreign currency outside of Brazil. For additional information, see “Item 10. Additional Information—10D. Exchange Controls.” The common shares underlying the ADSs are held in Brazil by the Custodian, as agent for the depositary, the registered owner on the records of the Custodian for the common shares underlying the ADSs. As of the date of this annual report, the Custodian of our ADSs is Banco Itaú Corretora de Valores S.A.

Payments of cash dividends and distributions, if any, will be made in Brazilian reais to the Custodian on behalf of the depositary, which will then convert the payments from Brazilian reais into U.S. dollars and thereafter will cause the U.S. dollars to be delivered to the depositary for distribution to holders of ADSs as described above. In the event that the Custodian is unable to immediately convert the Brazilian reais received as dividends and/or interest on shareholders’ equity into U.S. dollars, the amount of U.S. dollars payable to holders of ADSs may be adversely affected by any devaluation of the Brazilian real that occurs before the distributions are converted and remitted. For additional information, see “Item 3. Key Information—3D. Risk Factors—Risks Relating to Brazil and Colombia—Exchange rate volatility may adversely affect the Brazilian economy and us.” Dividends and interest on shareholders’ equity in respect to the shares paid to shareholders, including holders of ADSs, are subject to the tax treatment outlined in “Item 10. Additional Information—10E. Taxation—Brazilian Tax Considerations.”

8B. Significant Changes

COVID-19

Since December 2019, a novel strain of coronavirus known as COVID-19 has spread in China and other countries. In 2020, the COVID-19 outbreak has compelled governments around the world, including in Brazil and other Latin American countries where we operate, to adopt temporary measures to contain the spread of COVID-19 by means such as lockdowns of cities, restrictions on travel and public transportation, business and store closures, and emergency quarantines, among others, all of which have caused significant disruptions to the global economy and normal business operations across a growing list of sectors and countries. The measures adopted to combat the COVID-19 outbreak have adversely affected and will continue to adversely affect business confidence and consumer sentiment, and have been, and may continue to be, accompanied by significant volatility in financial and commodity markets as well as stock exchanges worldwide.

 
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There was an increase in the number of COVID-19 cases in February and March of this year in Brazil. Some state governments have adopted more restrictive measures. The government of the state of São Paulo, where we have the largest number of our stores, published on March 11, 2021, new restrictive measures until March 30, 2021, in order to contain the spread of the virus, including restrictions on the circulation of people between 8:00pm and 5:00am. As grocery stores, our activity is considered essential and our business operations in Brazil were not adversely affected by the restrictive measures imposed by federal and state governments.

As a result of the COVID-19 pandemic, we experienced a temporary increase in sales in our stores in Brazil since people were initially stocking food, in addition to the change in consumption pattern of individuals from restaurants to home meal preparations. Since March 2020, there has been an increase in household consumption, even though the frequency of store visits has decreased due to social distancing guidelines.

On the other hand, our Colombian operations were adversely affected by the restrictive measures imposed by regional and state governments as a result of the COVID-19 pandemic, as well as the increased unemployment rate and lower consumer confidence. The restrictions on the movement of people imposed in Colombia were more stringent than in Brazil, and included, among other things, reduced business hours at stores, establishment of purchasing limits, closure of stores, dry law enforcement during certain weekends and curfew in the main Colombian cities. According to DANE, as of the end December 31, 2020, the Colombia GDP decreased by 6.8% when compared to the same period of 2019, while the Colombian retail and wholesale industry as a whole decreased by 2.8%, mainly as a result of the adverse effects of the COVID-19 pandemic.

The extent to which the coronavirus and/or other diseases affect us will depend on future developments, which are highly uncertain and cannot be predicted. The spread of COVID-19, especially if the measures to curb the spread of the virus lingers, may have broader macro-economic implications, including reduced levels of economic growth and possibly a global recession, the effects of which could be felt well beyond the time the spread of infection is contained.

For risks relating to COVID-19, see “Item 3. Key Information—3D. Risk Factors—Risks Relating to Brazil and Colombia—The outbreak of communicable diseases around the world, including the COVID-19, may lead to higher volatility in the global capital markets and recessionary pressure on the Brazilian economy. Any outbreak in Brazil could directly affect our operations, each of which may materially and adversely affect our business, financial condition and results of operations,” and “—Risks Relating to our Industry and Us— The recent global outbreak of novel coronavirus (COVID-19) disease has disrupted and could further disrupt our operations and could have an adverse impact on our business, financial condition, results of operations or prospects.” For additional information on the COVID-19 effects to our business, see “Item 5. Operating Results—5A. Operating Results—Current Conditions and Trends in our Industry—COVID-19.”

 

ITEM 9.THE OFFER AND LISTING

9A. Offer and Listing Details 

On February 14, 2020, B3 approved our migration from the Level 1 listing segment to the Novo Mercado listing segment of B3. According to the Novo Mercado requirements, on February 28, 2020, all of our then outstanding preferred shares were converted into common shares and, on March 2, 2020, the trading of our common shares began in the Novo Mercado listing segment of the B3. For additional information on the conversion of our preferred shares, see “Item 4. Information on the Company—4A. History and Development of the Company—Changes in our Business—Latin America Corporate Reorganization—Novo Mercado.” As of March 2, 2020, the trading of our common shares began in the Novo Mercado listing segment of B3.

Our preferred shares were traded on B3 under the trading symbol PCAR4 until their conversion into common shares on March 2, 2020. Since then, the trading of our common shares, which were already listed on B3 under the trading symbol PCAR3, began trading in the Novo Mercado listing segment of the B3.

Our common shares in the form of ADSs are traded on the NYSE under the trading symbol “CBD.” Our ADSs commenced trading on the NYSE in May 1997. As a result of our migration to the Novo Mercado listing segment of B3 and the conversion of our preferred shares into common shares, since March 5, 2020, each ADS has represented one common share, without par value. The ADSs are evidenced by ADRs issued by JP Morgan Chase Bank, N.A.

 
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9B. Plan of Distribution

Not applicable.

9C. Markets

Trading on the B3

The B3, formerly BM&FBOVESPA, is a Brazilian publicly held company formed in 2008 through the merger of the São Paulo Stock Exchange (Bolsa de Valores de São Paulo) and the Brazilian Mercantile and Futures Exchange (Bolsa de Mercadorias & Futuros). The B3 is one of the largest exchanges in the world in terms of market capitalization, the second in the American continent and the leader in Latin America.

Trading on the exchange is conducted by authorized members. Trading sessions take place every business day, with order cancellation from 09:30 am to 09:45 am, pre-opening from 09:45 am to 10:00 am, trading from 10:00 am to 05:55 pm and closing call from 05:55 pm to 06:00 pm. Depending on daylight savings time in Brazil or United States the trading sessions can take place in different periods, with order cancellation from 09:30am to 09:45am, pre-opening from 09:45am to 10:00am, trading from 10:00am to 04:55pm and closing call from 04:55pm to 05:00pm.

To better control the excess of volatility in market conditions, B3 has adopted a “circuit breaker” pursuant to which trading sessions may be suspended for a period of 30 minutes or one hour whenever the stock exchange broad based index falls below the limits of 10% and 15%, respectively, compared to the close of trading of the previous trading day. In the event the stock exchange index falls below the limit of 20% in comparison to the previous trading day, B3 may determine the suspension of the trading session for a certain period to be defined at its sole discretion. The exchange has also adopted single stock trading halts to deal with certain high volatility situations.

Trading on B3 by non-residents of Brazil is subject to certain limitations under Brazilian foreign investment and tax legislation.

Regulation of the Brazilian Securities Markets

The Brazilian securities market is regulated and supervised by the CVM (which has general authority over the stock exchanges and securities markets) as provided for by Law 6,385, dated December 7, 1976, or the Brazilian Securities Exchange Act, and Brazilian corporate law. The National Monetary Council (Conselho Monetário Nacional), or the CMN, is responsible for supervising the CVM’s activities, granting licenses to brokerage firms to govern their incorporation and operation, and regulating foreign investment and exchange transactions, as provided for by the Brazilian Securities Exchange Act and Law No. 4,595 of December 31, 1964. These laws and regulations provide for, among other things, disclosure requirements to issuers of securities listed on stock exchanges, criminal sanctions for insider trading and price manipulation, protection of minority shareholders, the procedures for licensing and supervising brokerage firms and the governance of Brazilian stock exchanges.

Under Brazilian corporate law, a company is either public (companhia aberta), like us, or private (companhia fechada). All public companies are registered with the CVM, and are subject to periodic reporting requirements and the public disclosure of material facts. A company registered with the CVM may have its securities traded either on B3 or on the Brazilian over-the-counter market. The shares of a company listed on B3 may also be traded privately, subject to certain limitations. To be listed on B3, a company must apply for registration with the CVM and with B3. Trading of securities of a public company on B3 may be suspended at the request of such company in anticipation of a material announcement. Trading may also be suspended upon the initiative of B3 or the CVM, based on or due to, among other reasons, a belief that a company has provided inadequate information regarding a material event or has provided inadequate responses to inquiries made by the CVM or B3.

The Brazilian Securities Exchange Act, Brazilian corporate law and the laws and regulations issued by the CVM, the CMN, and the Central Bank provide for, among other matters, disclosure requirements applicable to issuers of traded securities, restrictions on insider trading and price manipulation, protection of minority shareholders, licensing procedures, supervision of brokerage firms, and the governance of the Brazilian stock exchanges.

 
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Corporate Governance Practices

In 2000, the BM&FBOVESPA, currently known as B3, introduced three special listing segments, known as Level 1 (Nível 1) and Level 2 (Nível 2) of differentiated Corporate Governance Practices and the New Market (Novo Mercado), aiming at fostering a secondary market for securities issued by Brazilian companies with securities listed on the BM&FBOVESPA, by prompting such companies to follow good corporate governance practices. The listing segments were designed for the trading of shares issued by companies voluntarily undertaking to abide by corporate governance practices and disclosure requirements in addition to those already imposed by applicable Brazilian law. These rules generally increase shareholders’ rights and enhance the quality of information provided to shareholders.

On May 10, 2011, the differentiated Corporate Governance Practices of the Level 1 and 2 and the Novo Mercado rules were amended. The new provisions include, among others, new pecuniary sanctions for companies that do not comply with rules. In addition, according to the amended rules, a company’s chief executive officer or major executive officer cannot hold the position of chairman of the board of directors. Board members shall be elected for continuous terms of a maximum of two years, with reelection permitted.

We were listed in the Level 1 listing segment of B3 from March 31, 2003 to February 14, 2020, when we received the formal approval by B3 to migrate to Novo Mercado, the highest level of corporate governance of B3. According to the Novo Mercado requirements, on February 28, 2020, all of our then outstanding preferred shares were converted into common shares and, on March 2, 2020, the trading of our common shares began in the Novo Mercado listing segment of B3. In the U.S. the preferred ADS positions were converted into common ADS positions on March 4, 2020, with a consequently change of CUSIP. On March 5, 2020, NYSE suspended trading of the old CUSIP and trading under new CUSIP began. For additional information on our enrollment in the Novo Mercado, see “Item 4. Information on the Company—Item 4A. History and Development of the Company—Changes in Our Business—Latin America Corporate Reorganization—Novo Mercado.”

To be listed on the Novo Mercado segment, in addition to the obligations imposed by current Brazilian law, a company must agree to (i) issue only common shares; (ii) grant tag-along rights to all shareholders in the event of a change in shareholder control. The shareholder acquiring control must hold a public tender offer for the shares of other shareholders, offering the same price per share paid to the controllers; (iii) maintain free float of at least 25% of the company’s total capital stock; (iv) adopt offering procedures that favor a broad shareholder base; (v) comply with minimum quarterly disclosure standards; (vi) follow stricter disclosure policies with respect to securities transactions made by the issuer’s controlling shareholders, board members and officers; (vii) submit any existing shareholders’ agreements and stock option plans to B3; (viii) disclose a schedule of corporate events to shareholders; (ix) prepare annual financial statements including cash flow statements in English and in accordance with international accounting standards, such as U.S. GAAP or the International Financing Report Accounting Standards (IFRS); (x) adopt exclusively the arbitration rules of B3, in which B3, the Company, the controlling shareholder, administrators and members of the Fiscal Council, if instated, commit to resolve any dispute or controversy related the listing rules through arbitration; (xi) hold public meetings with financial analysts and any other interested parties at least once a year to present information regarding its financial and economic position, projects and prospects; and (xii) if a decision to delist from the Novo Mercado is made, the issuer’s controlling shareholder must hold a public tender offer for the acquisition of all outstanding shares at a minimum price to be established based on an independent appraisal.

Disclosure Requirements

According to Brazilian corporate law and CVM regulations, a public company must submit certain periodic information to the CVM and B3, including financial statements, quarterly information, management discussion and analysis and independent audit reports. This legislation also requires us to file our shareholders’ agreements, notices of shareholders’ meetings and copies of the related minutes and communications regarding material acts or facts with the CVM and B3.

The CVM rules also provide for requirements regarding the disclosure and use of information related to material acts or events, including the disclosure of information in the trading and acquisition of securities issued by publicly held companies.

Such requirements include provisions that:

 
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·establish the concept of a material act or events that gives rise to reporting requirements. Material acts or events include decisions made by the controlling shareholders, resolutions of the general shareholders’ meeting or of the company’s management, or any other political, administrative, technical, financial or economic acts or facts related to the company’s business (whether occurring within the company or otherwise somehow related thereto) that may influence the price of its publicly traded securities, or the decision of investors to trade or maintain such securities or to exercise any of such securities’ underlying rights;
·specify examples of acts or facts that are considered to be material, which include, among others, the execution of agreements providing for the transfer of control of a public company, the entry or withdrawal of shareholders that maintain any managing, financial, technological or administrative function with or contribution to the company, and any corporate restructuring undertaken among related companies;
·oblige the public company to disclose material acts or facts to the CVM, to B3 and through the publication of such acts in the newspapers or websites usually utilized by such company;
·require the acquirer of a controlling stake in a public company to publish a material event, including its intentions as to whether or not to de-list the corporation’s shares within one year;
·require management, members of the fiscal council, if active, or of any technical or advising body of a public company, to disclose to the company, to the CVM and to B3 the number, type and form of trading of securities issued by the company, its subsidiaries and controlling public companies that are held by them or by persons closely related to them, and any changes in their respective ownership positions;
·require that, if any direct or indirect controlling shareholder or any shareholder electing members of the board of directors of a public company increases or decreases participation in such company by more than 5.0%, such person or entity must disclose information regarding such acquisition or disposition; and
·forbid trading on the basis of insider information.

Under the terms of CVM Instruction No. 358, dated January 3, 2002, as amended, we may, under exceptional circumstances, submit a request for confidential treatment to the CVM concerning a material act or fact when our controlling shareholders or managers consider that such disclosure will pose a risk to the company’s legitimate interest.

9D Selling Shareholders

Not applicable.

9E. Dilution

Not applicable.

9F. Expenses of the Issue

Not applicable.

ITEM 10.ADDITIONAL INFORMATION

10A. Share Capital

As of December 31, 2020, our subscribed and paid-up capital was represented by 268,351,567 common shares, with no par value.

As a result of our migration to the Novo Mercado listing segment of B3, on February 28, 2020, we converted all of our preferred shares into common shares. As of December 31, 2020, our subscribed and paid-up capital is represented by 268,351,567 common shares. For additional information on the conversion of our preferred shares into common shares, see “Item 9. The Offer and Listing—9A. Offer and Listing Details.”

 
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The Company is authorized to increase its capital stock up to the limit of 400,000 thousand shares, regardless of any amendment to the Company’s Bylaws, upon resolution of the board of directors, which will establish the terms and conditions.

10B. Memorandum and Articles of Association

Below is a brief summary of certain significant provisions of our bylaws and Brazilian corporate law. This description does not purport to be complete and is qualified by reference to our bylaws (an English translation of which has been filed with the SEC) and to Brazilian corporate law.

Corporation Objects and Purposes

We are a publicly held corporation with our principal place of business and jurisdiction in the city of São Paulo, Brazil, governed by Brazilian laws (including Brazilian corporate law), CVM and SEC regulations and our bylaws.

Our main business purpose is to sell manufactured, semi-manufactured and natural products of both Brazilian and foreign origin, of any and all kinds and description, nature or quality, provided that they are not forbidden by law. Furthermore, we may also engage in a wide range of activities as set forth in article 2 of our bylaws.

Common Shares

On February 14, 2020, B3 approved our migration from the Level 1 to the Novo Mercado listing segment of B3, the highest level of corporate governance of B3. According to the Novo Mercado requirements, on February 28, 2020, all of our then outstanding preferred shares were converted into common shares. Additionally, on March 2, 2020, the trading of our common shares began in the Novo Mercado listing segment of B3.

Pursuant to our bylaws and our B3 listing agreement in connection with the listing of our common shares on the Novo Mercado, we cannot issue shares without voting rights or with restricted voting rights. In addition, our bylaws and the Brazilian corporate law provide that holders of our common shares are entitled to dividends or other distributions made in respect of our common shares ratably in accordance with their respective participation in the total amount of our issued and outstanding common shares. See “—10B. Memorandum and Articles of Association—Appropriation of Net Profits and Distribution of Dividends—Interest on Shareholders’ Equity” for a more complete description of payment of dividends and other distributions on our common shares. In addition, upon our liquidation, holders of our common shares are entitled to share our remaining assets, after payment of all of our liabilities, ratably in accordance with their respective participation in the total amount of our issued and outstanding common shares. Holders of our common shares are not obligated to subscribe to future capital increases and are generally entitled to preemptive rights to subscribe for new shares as provided by the Brazilian corporate law. See “—10B. Memorandum and Articles of Association—Preemptive Rights on Increases in Share Capital.”

Appropriation of Net Profits and Distribution of Dividends

Appropriation of Net Profits

At each annual shareholders’ meeting, our board of executive officers and our board of directors is required to recommend how to appropriate net profit, if any, from the preceding fiscal year. This appropriation is subject to deliberation by our shareholders.

The Brazilian corporate law defines “net profit” for any fiscal year as the net profit of the relevant fiscal year after income and social contribution taxes for that fiscal year, net of any accumulated losses from prior fiscal years and any amounts allocated to employees’ and management’s participation in our net profit in that fiscal year pursuant to our profit-sharing plans. Our bylaws allow us to implement a profit-sharing plan for employees and managers and a stock option plan. The amount to be paid in connection with both plans is determined by our board of directors and must not exceed an amount equal to 15% of our net profit. Under the Brazilian corporate law, this profit sharing may only be paid to managers with respect to a fiscal year in which the mandatory dividend has been declared.

 
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Our calculation of “net profits” and appropriations to reserves for any fiscal year are determined on the basis of our financial statements. Our management’s and our shareholders’ discretion to determine the allocation of our net profit is limited by certain rules that determine whether such net profit should be distributed as dividends or appropriated to certain profit reserves or carried forward to future fiscal years, as follows:

Mandatory Minimum Dividend. Under the Brazilian corporate law and our bylaws, we must distribute a specified percentage of our net income as a mandatory minimum dividend to be paid with respect to all shares of our capital stock. Our bylaws establish the minimum percentage at 25% of our adjusted net profit. The mandatory dividend may be made in the form of dividends or interest attributable to shareholders’ equity, which may be deducted by us in calculating our income and social contribution obligations. Adjusted net profit is net profit following the addition or subtraction of:

·amounts appropriated to a legal reserve account; and
·amounts appropriated to a contingency reserve account and the return of any amounts in any contingency reserve accounts deposited in previous years.

The payment of our mandatory dividends may be limited to the profits actually realized in the fiscal year, if the portion of the unrealized profits is appropriated to the unrealized income reserve account (as described below). The balance of the reserve accounts, except for the contingency reserve account and unrealized profit reserve account, may not exceed our share capital. If this occurs, a shareholders’ meeting must resolve whether the excess will be applied to pay in the subscribed and unpaid capital, to increase and pay in the subscribed share capital or to distribute dividends.

Under the Brazilian corporate law, however, we are allowed to suspend the distribution of the mandatory dividends for any year in which our management reports at our shareholders’ general meeting that the distribution would be incompatible with our financial condition. The fiscal council, if in place, must issue its opinion in relation to the suspension. In addition, our management must file a justification for such suspension with the CVM within five days from the date of the relevant general shareholders’ meeting. If the mandatory dividend is not paid, the unpaid amount must be attributed to a special reserve account and, if not absorbed by subsequent losses, those funds must be paid out as dividends as soon as our financial condition permits.

Legal reserve account. Under the Brazilian corporate law and our bylaws, we are required to maintain a legal reserve to which we must appropriate 5% of our net profit for each fiscal year until the aggregate amount of our legal reserve equals 20% of our share capital. Our legal reserve may only be used to increase our share capital or to offset accumulated losses, if any. We are not required to make any appropriations to our legal reserve for any fiscal year in which such reserve, when added to our capital reserves, exceeds 30% of our share capital. The legal reserve account is not available for the payment of dividends.

Contingency reserve account. A portion of our net profit may also be allocated to a contingency reserve for an anticipated loss that is deemed probable in future years. Any amount so appropriated in a prior year must either be reversed in the fiscal year for which the loss was anticipated if the loss does not occur or be charged off if the anticipated loss occurs.

Tax incentives reserve account. Our shareholders’ meeting, upon a justified proposal of our board of directors or board of executive officers or according the rules of the benefit granted, may decide to appropriate a percentage of our net profit resulting from government donations or subventions for investment purposes to a tax incentives reserve account.

Statutory Reserve. Under the Brazilian corporate law, our bylaws may create reserves provided that the purpose of the reserve is determined along with the appropriation criteria and the maximum amount to be maintained in it. Currently, our bylaws provide for an expansion reserve (Reserva de Expansão) which will be made of up to 100% of the remaining adjusted net profit after the establishment of the legal reserve account, contingency reserve account and the payment of the mandatory dividend. The total amount of this reserve may not exceed an amount to our share capital. Our shareholders may amend our bylaws in order to establish other discretionary reserves. The appropriation of our net profit to discretionary reserve accounts may not be made if it prevents the distribution of our mandatory dividends.

Unrealized profit reserve account. The portion of the mandatory dividends that exceeds the net profit actually realized in any year may be appropriated to the unrealized profit reserve account. Unrealized profit is profit resulting from investments measured by the equity method and/or the profits of earnings of any transaction, the financial satisfaction of which takes place in the subsequent fiscal year. The unrealized profit reserve account, when realized, must be used first to offset accumulated losses, if any, and the remaining portion must be used for the payment of mandatory dividends.

 
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Retained profit reserve. Our shareholders can decide to retain a portion of the net profit provided that such portion has been contemplated in the capital budget previously approved by the shareholders.

Distribution of Dividends

Under the Brazilian corporate law and our bylaws, we may pay dividends only from:

·our “net profit” earned in a given fiscal year, which is our results from the relevant fiscal year, reduced by accumulated losses of prior fiscal years; provisions for income tax and social contribution for such fiscal year; and amounts allocated to employees’ and managers’ participation in the results in such fiscal year pursuant to our profit-sharing plans. Our bylaws allow us to implement a profit-sharing plan for employees and managers and a stock option plan. The amount to be paid in connection with both plans is determined by our board of directors and must not exceed an amount equal to 15% of our net profit. Under the Brazilian corporate law, this profit sharing may only be paid to managers with respect to a fiscal year in which the mandatory dividend has been declared;
·our net profits accrued in previous fiscal years or in any six-month and/or quarterly interim period of a fiscal year; or
·our profit reserves set aside in previous fiscal years or in the first six months of a fiscal year. For these purposes, “profit reserves” means any discretionary reserve account, contingency reserve account, amounts allocated to our capital expenditure budget approved by our shareholders’ resolution or unrealized profit reserve account, not including the legal reserve account.

Dividends are generally to be declared at general shareholders’ meetings in accordance with the board of directors’ recommendation. Our board of directors may declare interim dividends to be deducted from the accrued profit recorded in our annual or semiannual financial statements. In addition, our board of directors may pay dividends from the net profit based on our unaudited quarterly financial statements. The interim dividends may be declared and debited to the profit reserve amount registered at the most recent annual or semiannual financial statement. These semiannual or quarterly interim dividends may not exceed the amounts accounted for in our capital reserve accounts. Any payment of interim dividends may be set off against the amount of mandatory dividends relating to the net profit earned in the year the interim dividends were paid.

Under the Brazilian corporate law and our bylaws, dividends must be available to the shareholders within 60 days after the date the dividends were declared. The amount is subject to monetary restatement, if so, determined by our board of directors.

A shareholder has a three-year period following the dividend payment date to claim a dividend with respect to its shares. After the expiration of that period, we are no longer liable for the payment of such dividend.

Interest on Shareholders’ Equity

We are allowed to pay interest on shareholders’ equity as an alternative form of payment to shareholders. We may treat these payments as deductible expenses for income tax and social contribution purposes. Payments of interest on shareholders’ equity may be made at the discretion of our board of directors, subject to the approval of our shareholders in a shareholders’ meeting. The amount distributed to our shareholders as interest on shareholders’ equity, net of any withholding tax, may be included as part of the mandatory distribution. This rate applied in calculating interest attributable to shareholders’ equity cannot exceed the daily pro rata variation of the Long-Term Interest Rate (Taxa de Juros de Longo Prazo), or TJLP, a long-term interest rate, as determined by the Central Bank of Brazil (Banco Central do Brasil), or the Central Bank, from time to time, and cannot exceed, for tax purposes, the greater of (1) 50% of net profit (after deduction of social contribution on net profits, but before taking into account the provision for corporate income tax and the amount of the interest on shareholders’ equity) for the year with respect to which the payment is made; or (2) 50% of the sum of retained profit and profit reserves in the beginning of the period with respect to which the payment is made.

 
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Any payment of interest on common shares to shareholders, whether Brazilian residents or not, including holders of the American Depositary Receipts, each representing one common share, is subject to Brazilian withholding tax at the rate of 15% or at the rate of 25% if the beneficiary is resident or domiciled in a Low or Nil Taxation Jurisdiction (generally a country or location that does not impose income tax or where the maximum income tax rate is lower than 20%, or 17% if certain requirements are met or where the local legislation imposes restrictions on disclosing the shareholding composition or the ownership of the investment). See “—10E. Taxation—Brazilian Tax Considerations—Distribution of Interest on Shareholders’ Equity.” The amount distributed to shareholders as interest on shareholders’ equity, net of any withholding tax, may be included as part of the minimum mandatory dividend. In accordance with applicable law, we are required to pay to shareholders an amount sufficient to ensure that the net amount they receive in respect of interest attributable to shareholders’ equity, after payment of any applicable withholding tax, plus the amount of declared dividends is at least equivalent to the mandatory dividend amount.

Board of Directors

According to Brazilian corporate law, our directors are prohibited from voting on, or acting in, matters in which their interests conflict with ours.

Our bylaws provide that the shareholders are responsible for determining the global remuneration of the members of our administration and fiscal bodies. There are no specific provisions regarding the directors’ power to vote on their compensation in the absence of an independent quorum.

The board of directors has the power to authorize the borrowing of funds in amounts in excess of the equivalent to half of our EBITDA.

In case of acts that entail any kind of acquisition, sale, disposal or creation of any lien on any of our assets, including any real estate, as well as, for the granting of powers-of-attorney for the practice of such acts, we are required to be represented either: (i) jointly by two executive officers; (ii) by two attorneys-in-fact; (iii) by one Executive Officer and one attorney-in-fact of whom one must always be the chief executive officer; and the attorney-in-fact duly appointed by two (2) executive officers of whom one must be the chief executive officer.

There is no requirement under Brazilian corporate law or our bylaws that directors retire upon reaching a certain age. In addition, our bylaws do not provide for the re-election of directors at staggered intervals.

For a discussion of our board of directors, see “Item 6. Directors, Senior Management and Employees—6A. Directors and Senior Management—Board of Directors” and “Item 6. Directors, Senior Management and Employees—6C. Board Practices.”

Voting Rights

At our shareholders’ meetings, each common share entitles the holder thereof to one vote. Pursuant to our bylaws and our B3 listing agreement in connection with the listing of our common shares on the Novo Mercado, we cannot issue shares without voting rights or with restricted voting rights. In addition, our bylaws and the Brazilian corporate law provide that holders of our common shares are entitled to dividends or other distributions made in respect of our common shares ratably in accordance with their respective participation in the total amount of our issued and outstanding common shares. See “—Appropriation of Net Profits and Distribution of Dividends—Interest on Shareholders’ Equity” for a more complete description of payment of dividends and other distributions on our common shares. In addition, upon our liquidation, holders of our common shares are entitled to share our remaining assets, after payment of all of our liabilities, ratably in accordance with their respective participation in the total amount of our issued and outstanding common shares. Holders of our common shares are not obligated to subscribe to future capital increases and are generally entitled to preemptive rights to subscribe for new shares as provided by the Brazilian corporate law. See “—Preemptive Rights on Increases in Share Capital.”

According to the Brazilian corporate law, holders of our common shares that are not controlling shareholders and represent at least 10% of our total voting stock will have the right to elect one member of our board of directors. Only shareholders that can prove that they have held the common shares for at least three continuous months immediately prior to the respective general shareholders’ meeting may exercise such right.

 
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The Brazilian corporate law permits the adoption of cumulative voting upon a request by shareholders representing at least 10% of our voting capital. CVM Instruction No. 282, of June 26, 1998, allows the minimum voting capital percentage required for the adoption of the cumulative vote in publicly held companies to be reduced from 10% to as low as 5% depending on the value of the company’s capital stock. Taking into consideration our current capital stock, shareholders representing 5% of the voting capital may request the adoption of cumulative voting to elect the members of our board of directors.

According to the Brazilian corporate law, neither our bylaws nor actions taken at a shareholders’ meeting may deprive a shareholder of the following rights:

·the right to participate in the distribution of profits;
·the right to participate equally and ratably in any remaining residual assets in the event of liquidation of the Company;
·preemptive rights in the event of the issuance of shares, convertible debentures or warrants, except in certain specific circumstances under Brazilian law described under “—Preemptive Rights on Increases in Share Capital;”
·the right to supervise our management in accordance with the provisions of the Brazilian corporate law; and
·the right to withdraw from the Company in the cases specified in the Brazilian corporate law, which are described under “— Redemption and Withdrawal Rights.”

Indemnity Provision

On April 28, 2021, a general shareholders’ meeting took place and approved an amendment to our bylaws that included an indemnity provision in favor of members of our board of directors, our officers, members of our statutory committee, members of our fiscal council and employees that exercise any function in our management. As a result, an indeminification will be available under our bylaws if the insurance coverage of any civil liability provided by us is insufficient to cover the losses of a member of our management. Any action shall not be indeminified if (i) in disagreement with any applicable legislation or regulation; (ii) against our bylaws, policies and codes; (iii) not performed in the normal course of business; (iv) performed in bad faith, fraud or serious guilt, in self-interest or in the interests of third parties; or (v) to the detriment of the social interest.

Shareholders’ Meetings

Pursuant to the Brazilian corporate law, our shareholders are generally empowered at our shareholders’ meetings to take any action relating to our corporate purposes and to pass resolutions that they deem necessary to our interests and development at duly called and convened general meetings. Shareholders at our annual shareholders’ meeting, which is required to be held during the first four months following the end of our fiscal year, have the exclusive right to approve our audited financial statements and to determine the allocation of our net profits and the distribution of dividends with respect to the fiscal year ended immediately prior to the relevant shareholders’ meeting and to elect the members of our board of directors and fiscal council, as the case may be.

An extraordinary shareholders’ meeting may be held concurrently with the annual shareholders’ meeting and at other times during the year whenever necessary. Pursuant to our bylaws and the Brazilian corporate law, the following actions, among others, may be taken only at a shareholders’ meeting:

·the amendment of our bylaws;
·the appointment or removal of members of our board of directors;
·the appointment or removal of the Chairman or the Co-Vice Chairmen of our board of directors;
·the approval of annual management’s accounts and our annual financial statements;
·the approval of any issuance of shares, bonuses, debentures convertible into our shares or securities or other rights or interests which are convertible or exchangeable into or exercisable for our shares, without limiting the authorization granted to our board of directors to approve such issuances within the limit of our authorized capital (400,000,000 common shares);
 
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·the approval of any appraisals of assets offered by a shareholder in consideration for the subscription of shares of our capital stock;
·the approval of any proposal to change our corporate, amalgamate, merge the Company with or into another company, spin-off or split the Company, or any other form of restructuring of the Company;
·the approval of any proposal for the dissolution or liquidation of the Company, or for the appointment or replacement of the liquidator;
·the approval of the accounts of the liquidator; and
·the establishment of the global annual compensation of the members of our board of directors and board of executive officers.

Our annual and extraordinary shareholders’ meeting took place on April 28, 2021. The agenda for the meeting included: (i) review of the management’s accounts, as well as examination, discussion and voting of the Company’s management report and financial statements for the fiscal year ended December 31, 2020; (ii) resolve on the proposal for allocation of profit for the fiscal year ended December 31, 2020; (iii) determination of the annual global compensation of the members of our (a) management and (b) fiscal council, in case the shareholders request its continued installation; (iv) resolve on the proposal to increase our share capital due to the excess of profit reserves in relation to the share capital, without the issuance of new shares; (v) resolve on the proposal to amend our bylaws to provide for the granting of indemnity agreements; and (vi) resolve on the proposal to approve the consolidation of our bylaws to incorporate the aforementioned amendment, in case it is approved.

Call of Shareholders’ Meeting

The Chairman of our board of directors may call shareholders’ meetings. In his absence, the meeting may be called by any of the Co-Vice Chairmen of our board of directors or, in their absence, by an Officer appointed by the Chairman of our board of directors. Pursuant to the Brazilian corporate law, shareholders’ meetings also may be called by:

·any shareholder, if our management fails to call a shareholders’ meeting within 60 days after the date which it is required to do so under applicable law and our bylaws;
·shareholders holding at least five percent of our shares, if our management fails to call a meeting within eight days after receipt of a justified request to call the meeting by those shareholders indicating the proposed agenda;
·shareholders holding at least five percent of our shares if our management fails to call a meeting within eight days after receipt of a request to call the meeting for the creation of the fiscal council; and
·our fiscal council, if one is created, if our management fails to call an annual shareholders’ meeting within one month after the date it is required to do so under applicable law and our bylaws. The fiscal council may also call an extraordinary general shareholders’ meeting if it believes that there are important or urgent matters to be addressed.

Notice of our Shareholders’ Meetings

Under the Brazilian corporate law, notice of our shareholders’ meetings must be published at least three times in the Diário Oficial do Estado de São Paulo, the official newspaper of the state of Sao Paulo, and in another widely circulated newspaper in the same state, which is currently Folha de São Paulo. Such notice must contain the agenda for the meeting and, in the case of an amendment to our bylaws, a summary of the proposed amendment. The first notice must be published no later than 15 days before the date of the meeting on the first call, and no later than eight days before the date of the meeting on the second call. However, in certain circumstances, the CVM may require that the first notice be published no later than 30 days before the date of the meeting. In addition, upon request of any shareholder, the CVM may suspend for up to 15 days the required prior notice of an extraordinary shareholders’ meeting so that the CVM may become familiar with and analyze the proposals to be voted upon at the meeting and, as the case may be, inform our company at the end of this period the reasons that any proposal submitted to the shareholder violates applicable legislation.

 
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Conditions of Admission to Shareholders’ Meeting

Shareholders attending a shareholders’ meeting must produce proof of their status as shareholders and proof that they hold the common shares that they intend to vote. A shareholder may be represented at a shareholders’ meeting by a proxy appointed less than a year before, which must be a shareholder, a corporate officer, a lawyer or a financial institution. An investment fund must be represented by its investment fund officer or a proxy.

Quorum and Voting at Shareholders’ Meeting

Generally, the Brazilian corporate law provides that the quorum for our shareholders’ meetings consists of shareholders representing at least 25% of our issued and outstanding common shares on the first call and, if that quorum is not reached, any percentage on the second call. If a shareholders’ meeting is called to amend our bylaws, a quorum at that shareholders’ meeting consists of shareholders representing at least two-thirds of our issued and outstanding common shares on the first call and any percentage on the second call.

As a general rule, the affirmative vote of shareholders representing at least the majority of our issued and outstanding common shares present in person, virtually (whenever the shareholders’ meeting is held under a partial or 100% digital format), by means of distance voting forms (boletim de voto à distância) or represented by proxy at a shareholders’ meeting is required in order to ratify any proposed action, and abstentions are not taken into account. However, the affirmative vote of shareholders representing more than one-half of our issued and outstanding common shares is required in order to, among other things:

·reduce the percentage of mandatory dividends;
·change our corporate purpose;
·consolidate with or merge the Company with or into another company;
·spin off a portion of our assets or liabilities;
·approve our participation in a group of companies (as defined in the Brazilian corporate law);
·apply for cancellation of any voluntary liquidation;
·merge all of our shares into another Brazilian company, so that we become a wholly owned subsidiary of such company; and
·approve our dissolution.

Preemptive Rights on Increases in Share Capital

Under Brazilian corporate law, each shareholder has a general preemptive right to subscribe for shares in any capital increase, in proportion to its shareholding, except in the event of the grant and exercise of any option to acquire shares of our capital stock under our stock option plans. A shareholder has a general preemptive right to subscribe for debentures convertible into our shares and subscription warrants that we may issue. A minimum period of 30 days following the publication of the notice of a capital increase must be respected to exercise this right, except if otherwise determined by the bylaws or a shareholders’ meeting. This right is negotiable.

Our board of directors is authorized to eliminate preemptive rights with respect to the issuance of shares, debentures convertible into shares and subscription warrants, provided that the distribution of such shares is effected (i) through a stock exchange or in a public offering; or (ii) through an exchange of shares in a public offering, the purpose of which is to acquire control of another company.

In the event of a capital increase, which maintains or increases the proportion of capital, holders of ADSs may, under the circumstances described above, exercise preemptive rights to subscribe for newly issued shares. In the event of a capital increase which would reduce the proportion of capital, holders of ADSs may, under the circumstances described above, have preemptive rights to subscribe for shares in proportion to their shareholdings. For risks associated with preemptive rights, see “Item 3. Key Information—3D. Risk Factors—Risks Relating to the ADSs and Our Common Shares—You might be unable to exercise preemptive rights with respect to the common shares underlying the ADSs.”

 
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For risks associated with preemptive rights, see “Item 3. Key Information—3D. Risk Factors—Risks Relating to the ADSs and Our Preferred Shares—You might be unable to exercise preemptive rights with respect to the common shares underlying the ADSs.”

Redemption and Withdrawal Rights

Our common shares are not redeemable. Any of our shareholders who dissent from certain actions taken by our shareholders in a shareholders’ meeting have the right to withdraw from the Company and to receive the value of their common shares. According to the Brazilian corporate law, the withdrawal rights of a dissenting shareholder may be exercised in the event that the shareholders’ meeting approves the following matters:

·a reduction in the percentage of mandatory dividends;
·a change in our corporate purposes;
·the merger of all of our shares into another Brazilian company, so that we become a wholly owned subsidiary of such company or vice versa;
·our merger into or with another company, including if we are merged into one of our controlling companies, or are consolidated with another company;
·our participation in a group of companies as defined under the Brazilian corporate law and subject to the conditions set forth therein;
·the conversion of the Company to another corporate form; and
·a spin-off of the Company if it entails (1) a change in our corporate purpose, (2) a reduction in mandatory dividends, or (3) our participation in a group of companies as defined under the Brazilian corporate law.

Withdrawal rights may not be exercised in the event of:

·the merger of all of our shares into another Brazilian company, so that we become a wholly owned subsidiary of such company or vice versa;
·our merger into or with another company, including if we are merged into one of our controlling companies, or are consolidated with another company; and
·our participation in a group of companies as defined under the Brazilian corporate law and subject to the conditions set forth therein,

if our shares (1) are “liquid,” which means that they are part of the Ibovespa Index or another traded stock exchange index, as defined by the CVM, and (2) are widely held, such that our controlling shareholders and their affiliates hold less than 50% of the type or class of shares that are being withdrawn.

Dissenting shareholders also have a right of withdrawal in the event that the entity resulting from (1) a merger of all of our shares into another company so that we become a wholly owned subsidiary of such company; (2) a spin-off; or (3) a merger or a consolidation of a Brazilian publicly listed company, fails to become a Brazilian publicly listed company within 120 days of the general shareholders’ meeting in which such decision was taken.

The right to withdraw lapses 30 days after publication of the minutes of the relevant shareholders’ meeting. We are entitled to reconsider any action giving rise to withdrawal rights within 10 days following the expiration of this period if we determine that the withdrawal of shares of dissenting shareholders would jeopardize our financial stability.

Any shareholder that exercises withdrawal rights is entitled to receive book value for its shares, based on our most recent audited balance sheet approved by our shareholders. However, if the resolution giving rise to the withdrawal rights is adopted more than 60 days after the date of our most recent audited approved balance sheet, a shareholder may request that its shares be valued on the basis of a special balance sheet dated no more than 60 days prior to the date of the adoption of the resolution. In such case, we are obligated to immediately pay 80% of the book value of the shares according to our most recent audited approved balance sheet, and the balance must be paid within 120 days after the date of the resolution of the shareholders’ meeting that gave rise to withdrawal rights.

 
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Form and Transfer of Shares

Our shares are in book-entry form, and the transfer of such shares is made by the registrar in our books, by debiting the share account of the transferor and crediting the share account of the transferee. We maintain book-entry form services with the Custodian, which performs all of the services of safekeeping and transfer of our shares and related services.

Transfer of shares by a foreign investor is made in the same way and is requested by the investor’s local agent on the investor’s behalf. If the original investment is registered with the Central Bank pursuant to CMN Resolution 373, the foreign investor should also seek amendment of the electronic registration to reflect the new ownership through its local agent, if necessary.

The B3 operates a clearinghouse through CBLC. CBLC is also responsible for settlement and custody of the shares. The payment of dividends, bonuses and other corporate events is managed by the Central Depositary (Central Depositária), which is a department of the B3.

Other Dispositions

In addition to the provisions already described in this annual report, Brazilian corporate law, our bylaws, and current regulations set forth, among others, that:

i.upon a sale of control, the acquirer is required to launch a tender offer to purchase all minority voting shares at a price equal to at least 80% of the control price;
ii.if provided for in the bylaws, as it is our case, disputes among shareholders will be subject to arbitration;
iii.upon the occurrence of a tender offer aiming at delisting our Company or through which our controlling shareholders acquire more than one-third of the float shares, the purchase price will be equal to the fair value of the shares taking into account the total number of outstanding shares;
iv.members of our board of directors elected by the non-controlling shareholders will have the right to veto the choice of the independent accountant of the controlling shareholders;
v.the chairman of any shareholders’ or board of directors’ meeting may disregard any vote that is rendered against provisions of any shareholders’ agreement if that shareholders’ agreement has been duly filed with us.

Sale of Control of Our Company

In the event of a sale of our direct or indirect corporate control, through a single or successive transactions, the acquirer must conduct a public tender offer to buy all of the shares held by the remaining shareholders in order to assure equal treatment of all shareholders (tag-along right). The tender offer will be subject to the terms and conditions terms set forth under applicable laws and the rules of the Novo Mercado.

Acquisition of a Significant Equity Interest in our Company

Our bylaws contain provisions that have the effect of avoiding concentration of our shares in the hands of a small group of investors, in order to promote more widespread ownership of our shares. These provisions require any person, shareholder or Group of Shareholders (as defined in Article 36 of our bylaws) that acquires, whether through a single transaction or through a series of transactions:

·direct or indirect ownership more than 25% of our equity interest (excluding treasury shares); or
·any other shareholders’ rights, including usufructuary enjoyment or establishment of a trust, concerning more than 25% of our equity interest (excluding treasury shares) (each, a Significant Equity Interest);
 
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to, within 30 days from the date of such acquisition, commence a public tender offer to purchase any and all of our outstanding shares in accordance with the regulations of the CVM and B3 and our bylaws. The purchase price offered in the tender offer must be not less than the greater of:

·the economic value of our company, determined pursuant to Article 36 of our bylaws;
·the highest price paid by the acquiring person, shareholder or Group of Shareholders during the 12 months prior to the acquisition of the Significant Equity Interest; and
·125% of the weighted average unit price of the common shares during the period of 120 trading sessions prior to the commencement of the tender offer.

The obligation to commence a tender offer will not apply to a person, shareholder or Group of Shareholders that acquires a Significant Equity Interest:

·as a result of a merger of our company with another company or a merger of shares of another company into our company;
·if our company purchases another company through a private increase in corporate capital or subscription of shares by primary offering by any person who has pre-emption rights;
·if our company purchases another company through a private increase in corporate capital or subscription of shares by primary offering due to the lack of full payment by any person who has pre-emption rights or did not have enough interested parties in the respective offer; or
·in the event of a public offering (including a public offering with restricted selling efforts).

Involuntary increases of equity interest resulting from cancellation of treasury shares, repurchases of shares by our company or capital reductions with cancellation of shares will not be considered in the calculation of a Significant Equity Interest.

The commencement of a public tender offer by the holder of a Significant Equity Interest does not prevent any other person from commencing a competing public tender offer in accordance with applicable regulations.

The obligation of the holder of a Significant Equity Interest to commence a public tender offer may be waived in a general shareholders’ meeting by the affirmative vote of a majority of our outstanding shares present in such meeting, excluding shares held by the holder of a Significant Equity Interest. The quorum requirement for a general shareholders’ meeting called to deliberate on such a waiver is a minimum of 2/3 of our outstanding shares, excluding shares held by the holder of a Significant Equity Interest, on first call, and any number of our outstanding shares on a subsequent call.

Arbitration

In accordance with our bylaws, we, our shareholders, directors, officers and members of our fiscal council, effective or alternates, if any, agree to resolve through arbitration before the Market Arbitration Chamber of B3 any disputes or controversies that may arise between us relating to or arising from our status as issuer, shareholders, directors, officers or members of the fiscal council, especially arising from the provisions established in the Law 6,385, of December 7, 1976, in the Brazilian corporate law, in our bylaws, in the regulation issued by the CMN, by the Central Bank of Brazil and by the Brazilian Securities Commission, as well as in any regulation applicable to the operation of capital markets in general, in addition to those contained in the Novo Mercado Regulation, other regulations of B3, and the Participation Agreement of the Novo Mercado.

10C. Material Contracts

Cost Sharing Agreement with Casino Group

For information regarding our cost sharing agreement with the Casino Group, see “Item 7. Major Shareholders and Related Party Transactions—7B. Related Party Transactions––Agreements with Casino Group—Cost Sharing Agreement.”

 
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10D. Exchange Controls

The ownership of common shares by individuals or legal entities domiciled outside Brazil is subject to certain conditions established under Brazilian law.

The right to convert dividend payments and proceeds from the sale of common shares into foreign currency and to remit those amounts outside Brazil is subject to exchange control restrictions and foreign investment legislation which generally requires, among other things, obtaining an electronic registration with the Central Bank.

CMN Resolution No. 1,927 provided for the issuance of depositary receipts in foreign markets with respect to shares of Brazilian issuers. Based on CMN Resolution No. 1,927, we filed an application to have the ADSs approved under the Annex V Regulations by the Central Bank and the CVM, and we received final approval before the offering of the preferred shares underlying the ADSs in May 1997. Since March 30, 2015, CMN Resolution No. 4,373, which replaced CMN Resolution No. 1,927, provides for the issuance of depositary receipts in foreign markets with respect to shares of Brazilian issuers.

An electronic registration, which replaced the amended certificate of registration, was issued in the name of the depositary with respect to the ADSs and is maintained by the custodian on behalf of the depositary.

This electronic registration was carried out through the Central Bank’s system (Sistema do Banco Central), or SISBACEN, a database of information provided by financial institutions to the Central Bank. Pursuant to the electronic registration, the Custodian is able to convert dividends and other distributions, with respect to the common shares represented by the ADSs, into foreign currency and remit the proceeds outside Brazil. In the event that a holder of ADSs exchanges those ADSs for common shares, that holder will be entitled to continue to rely on the depositary’s electronic registration for only five business days after that exchange, after which time that holder must seek to obtain its own electronic registration. Thereafter, unless the common shares are held pursuant to CMN Resolution No. 4,373, dated as of September 29, 2014, a holder of common shares who applies for and obtains a new electronic registration may not be able to obtain and remit abroad U.S. dollars or other foreign currencies upon disposal of the common shares, or distributions with respect thereto, and generally will be subject to less favorable tax treatment on the proceeds arising from any sale of common shares. In addition, if the foreign investor is domiciled in a Low or Nil Taxation Jurisdiction (as defined under “—10E. Taxation—Brazilian Tax Considerations”), the investor will also be subject to less favorable tax treatment, even if its registry before the Central Bank is in accordance with the provisions of CMN Resolution No. 4,373. See “—10E. Taxation—Brazilian Tax Considerations.”

Under CMN Resolution No. 4,373, foreign investors may invest in almost all financial assets and engage in almost all transactions available in the Brazilian financial and capital markets, provided that the requirements described below are fulfilled. In accordance with CMN Resolution 4,373, the definition of foreign investor includes individuals, legal entities, mutual funds and other collective investment entities domiciled or headquartered outside Brazil.

Pursuant to CMN Resolution No. 4,373, foreign investors must fulfill the following requirements before engaging in financial transactions:

i.appoint at least one representative in Brazil with powers to perform actions relating to the foreign investment;
ii.appoint an authorized custodian in Brazil for the investments, which must be a financial institution duly authorized by the Central Bank and the CVM;
iii.complete the appropriate foreign investor registration form;
iv.register as a foreign investor with the CVM; and
v.register the foreign investment with the Central Bank.

Securities and other financial assets held by foreign investors pursuant to CMN Resolution No. 4,373 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or the CVM. In addition, securities trading is restricted to transactions carried out on stock exchanges or through organized over-the-counter markets licensed by the CVM, except for subscription, bonification, conversion of debentures into common shares, securities indexes, purchase and sale of investment funds quotas and, if permitted by the CVM, going private transactions, canceling or suspension of trading, public offerings of securities, etc., as detailed by CVM Rule No. 560. Moreover, the offshore transfer or assignment of the securities or other financial assets held by foreign investors pursuant to CMN Resolution No. 4,373 is prohibited, except for transfers resulting from a corporate reorganization, or occurring upon the death of an investor by operation of law or will.

 
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Investors under CMN Resolution No. 4,373 who are not resident in a Low or Nil Taxation Jurisdiction (i.e., a country that does not impose income tax or where the maximum income tax rate is lower than 20%) are entitled to favorable tax treatment. See “—10E. Taxation—Brazilian Tax Considerations.”

10E. Taxation

This summary contains a description of the main Brazilian and U.S. federal income tax consequences applicable to the purchase, ownership and disposal of common shares or ADSs, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to these matters based upon the particular circumstances of a holder.

This summary is based upon federal tax laws of Brazil and the federal income tax laws of the United States in effect as of the date hereof, which are subject to change and differing interpretations possibly with retroactive effect. This summary is also based upon the representations of the depositary and on the assumption that each obligation in the Amended and Restated Deposit Agreement, dated as of May 28, 1997, last amended on March 4, 2020, as amended from time to time, or the Deposit Agreement, among us, JP Morgan Chase Bank, N.A., as the depositary and the owners from time to time of ADRs, and any related documents, will be performed in accordance with its terms.

Although there is presently no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty. No assurance can be given, however, as to whether or when a tax treaty will enter into force or how such a treaty would affect a U.S. holder of common shares or ADSs.

Prospective investors are urged to consult their own tax advisors regarding the Brazilian and U.S. federal, state and local tax consequences of the purchase, ownership and disposal of our common shares and ADSs.

Brazilian Tax Considerations

In General

The following discussion describes the material Brazilian tax consequences relating to the purchase, ownership and disposal of our common shares and our ADSs by Non-Resident Holders.

It does not purport to be a comprehensive discussion of all the tax consequences that may be relevant to these matters, and it is not applicable to all categories of investors, some of which may be subject to special tax rules not specifically addressed herein. It is based upon the tax laws of Brazil in effect as of the date of this registration statement, which are subject to change and to differing interpretations. Any change in the applicable Brazilian laws and regulations may impact the consequences described below.

The tax consequences described below do not take into account tax treaties entered into by Brazil and other countries. The discussion also does not address any tax consequences under the tax laws of any state or locality of Brazil, except if otherwise stated herein.

Although there is presently no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty. No assurance can be given, however, as to whether or when a tax treaty will enter into force or how such a treaty would affect a U.S. holder of our common shares or ADSs.

You are advised to consult your own tax advisor with respect to an investment in our common shares or ADSs in light of your particular investment circumstances.

 
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Material Brazilian Tax Consequences for Non-Resident Holders of Our Common Shares and ADSs

The following discussion summarizes the main Brazilian tax consequences applicable to the purchase, ownership and disposal of our common shares or ADSs by a Non-Resident Holder.

Taxation of Dividends

Dividends paid by a Brazilian corporation, such as us, to a Non-Brazilian Holder of common shares or ADSs are currently not subject to withholding income tax, or WHT, in Brazil to the extent that such amounts are related to profits generated on or after January 1, 1996. Dividends paid from profits generated before January 1, 1996 may be subject to WHT at variable rates, according to the tax legislation applicable to each corresponding year.

Law No. 11,638, dated December 28, 2007, or Law No. 11,638, significantly changed the Brazilian corporate caw in order to align Brazilian generally accepted accounting principles with IFRS. Nonetheless, Law No. 11,941, dated May 27, 2009, introduced the Transitory Tax Regime, or RTT, in order to render neutral, from a tax perspective, all the changes provided by Law No. 11,638. Under the RTT, for tax purposes, legal entities should observe the accounting methods and criteria that were effective on December 31, 2007.

Profits determined pursuant to Law No. 11,638, or IFRS Profits, may differ from the profits calculated pursuant to the accounting methods and criteria as effective on December 31, 2007, or 2007 Profits.

While it was general market practice to distribute exempted dividends with reference to the IFRS Profits, Rule No. 1,397, issued by the Brazilian tax authorities on September 16, 2013, established that legal entities should observe the 2007 Profits in order to determine the amount of profits that could be distributed as exempted income to their beneficiaries.

Any profits paid in excess of said 2007 Profits, Excess Dividends, should, in the tax authorities’ view and in the specific case of Non-Resident Holders, be subject to the following rules of taxation: (1) 15.0% WHT, in case of beneficiaries domiciled abroad, but not in a Low or Nil Tax Jurisdiction, and (2) 25.0% WHT, in the case of beneficiaries domiciled in a Low or Nil Tax Jurisdiction.

In order to mitigate potential disputes on the subject, Law No. 12,973, dated May 13, 2014, or Law No. 12, 973, in addition to revoking the RTT, introduced a new set of tax rules, or the New Brazilian Tax Regime, including new provisions with respect to Excess Dividends. Under these new provisions: (1) Excess Dividends related to profits assessed from 2008 to 2013 are exempt; (2) potential disputes remain concerning the Excess Dividends related to 2014 profits, since Law No. 12,973 has not expressly excluded those amounts from taxation and Rule No. 1,492, issued by the Brazilian tax authorities on September 17, 2014, established that they are subject to taxation when distributed by companies which have not elected to apply the New Brazilian Tax Regime in 2014; and (3) as of 2015, as the New Brazilian Tax Regime is mandatory and has completely replaced the RTT, dividends calculated based on IFRS Profits should be considered fully exempt.

Finally, there is currently legislation pending before the Brazilian Congress discussing the taxation of dividends. It is not possible to predict if the taxation of dividends will be effectively approved by the Brazilian Congress and how such taxation would be implemented.

Distribution of Interest on Shareholders’ Equity

Law No. 9,249, dated December 26, 1995, as amended, allows a Brazilian corporation, such as us, to make payments to shareholders of interest on shareholders’ equity as an alternative to carrying out dividend distributions and treat those payments as a deductible expense for the purposes of calculating Brazilian corporate income tax and social contribution on net income.

For tax purposes, this interest is limited to the daily variation of the pro rata variation of the long term interest rate as determined by the Central Bank from time to time applied to certain equity accounts, and the amount of the distribution may not exceed the greater of:

·50.0% of net income (after the deduction of the social contribution on net income and before taking into account the provision for corporate income tax and the amounts attributable to shareholders as interest on shareholders’ equity) for the period in respect of which the payment is made; or
 
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·50.0% of the sum of retained profits and profits reserves for the year prior to the year in respect of which the payment is made.

Payments of interest on shareholders’ equity to a Non-Resident Holder are subject to WHT at the rate of 15.0%, or 25.0% if the Non-Resident Holder is domiciled in a Low or Nil Tax Jurisdiction.

These payments may be included, at their net value, as part of any mandatory dividend. To the extent that such payments are accounted for as part of the mandatory dividend, under current Brazilian law, we are required to distribute to shareholders an additional amount sufficient to ensure that the net amount received by the shareholders, after payment by us of applicable WHT, plus the amount of declared dividends, is at least equal to the mandatory dividend. The distribution of interest on shareholders’ equity must be proposed by our board of directors and is subject to subsequent ratification by the shareholders at the shareholders’ meeting.

Capital Gains

Sale of Our ADSs

According to Law No. 10,833, dated December 29, 2003, or Law No. 10,833, capital gains earned on the disposal of assets located in Brazil by a Non-Resident Holder, whether to another Non-Resident Holder or to a Brazilian Resident Holder are subject to taxation in Brazil.

Our understanding is that ADSs do not qualify as assets located in Brazil for the purposes of Law No. 10,833 because they represent securities issued and renegotiated in an offshore exchange market and, therefore, should not be subject to the Brazilian WHT. However, considering the lack of any judicial court ruling in respect thereto, we cannot assure you of how tax authorities and Brazilian courts would interpret the definition of assets located in Brazil in connection with the taxation of gains realized by a Non-Resident Holder on the disposal of ADSs to another Non-Resident Holder. If the ADSs are deemed to be assets located in Brazil, gains recognized by a Non-Resident Holder from the sale or other disposition to either a non-resident or a resident in Brazil may be subject to income tax in Brazil as further described below.

Conversion of Our ADS into Our Common Shares

Although there is no clear regulatory guidance, the cancellation of our ADSs and receipt of the underlying common shares should not subject a Non-Resident Holder to Brazilian income tax. Non-Resident Holders may cancel their ADSs, receive the underlying common shares, sell such common shares on a Brazilian stock exchange and remit abroad the proceeds of the sale, according to the regulations of the Central Bank.

Upon receipt of the underlying common shares upon the cancellation of ADSs, a Non-Resident Holder may also elect to register with the Central Bank the U.S. dollar value of such common shares as a foreign portfolio investment under Resolution No. 4,373, which will entitle them to the tax treatment described below.

Alternatively, a Non-Resident Holder is also entitled to register with the Central Bank the U.S. dollar value of such common shares as a foreign direct investment under Law No. 4,131/62, in which case the respective sale would be subject to the tax treatment applicable to transactions carried out of by a Non-Resident Holder that is not registered before Brazil’s Central Bank and CVM in accordance with the Central Bank Resolution No. 4,373, as described below.

Sale of Common Shares

Capital gains assessed on a Non-Resident Holder on the disposition of common shares carried out on a Brazilian stock exchange are:

·exempt from income tax when realized by a Non-Resident Holder that: (1) has registered its investment in Brazil with the Central Bank under the rules of CMN Resolution No. 4,373, or a 4,373 Holder; and (2) is not resident or domiciled in a Low or Nil Tax Jurisdiction;
·subject to income tax at a rate of 15.0% in the case of gains realized by a Non-Resident Holder that: (1) is a 4,373 Holder; and (2) is resident or domiciled in a Low or Nil Tax Jurisdiction. In this case, a withholding income tax of 0.005% of the sale value shall be applicable and withheld by the intermediary
 
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institution (i.e., a broker) that receives the order directly from the Non-Resident Holder, which can be later offset against any income tax due on the capital gain earned by the Non-Resident Holder; or

·subject to income tax at a rate of up to 25.0% in the case of gains realized by a Non-Resident Holder that: (1) is not a 4,373 holder; and (2) is resident or domiciled in a Low or Nil Tax Jurisdiction. In this case, a withholding income tax of 0.005% of the sale value shall be applicable and withheld by the intermediary institution (i.e., a broker) that receives the order directly from the Non-Resident Holder, which can be later offset against any income tax due on the capital gain earned by the Non-Resident Holder.

Any other gains assessed on a sale or disposition of common shares that is not carried out on a Brazilian stock exchange are subject to: (1) income tax at a rate ranging from 15.0% up to 22.5% when realized by a Non-Resident Holder that (A) has registered its investment as a foreign direct investment under Law No. 4,131/62 (a 4,131 Holder; and (B) is not resident or domiciled in a Low Tax Jurisdiction; and (2) income tax at a rate of 25.0% when realized by a 4,131 Holder that is domiciled or resident in a Low Tax Jurisdiction. If these gains are related to transactions conducted on the Brazilian non-organized over-the-counter market with intermediation, a WHT of 0.005% on the sale value will also apply and can be used to offset the income tax due on the capital gain.

Under Brazilian legislation, there are legal grounds to support that the disposition of shares of a Brazilian entity by a 4,373 Holder outside the Brazilian stock exchange should be subject to a rate of 15.0%. This is mainly because Section 81 of Law No. 8,981, dated January 20, 1995, as extended by Section 16 Provisional Measure 2,189-49/01, provides for a Special Tax Regime to 4,373 Holders by means of which: (1) capital gains earned by 4,373 Holders are exempt, to the extent capital gains are considered to be the positive results obtained from transactions carried out on the stock exchange; and (2) in all other cases applies the taxation at the 15.0% WHT rate. Notwithstanding, Brazilian custodian agents usually do not accept this view and require the tax treatment applicable to 4,131 Holders (i.e., progressive WHT rates ranging from 15.0% up to 22.5%) on disposition of Brazilian assets carried out outside the stock exchange. There is a Ruling surrounding the matter, but it still leaves room for interpretation. Administrative and judicial precedents are inexistent.

Any exercise of preemptive rights relating to common shares or ADSs will not be subject to Brazilian withholding income tax. Any gain on the sale or assignment of preemptive rights relating to common shares by the Depositary on behalf of holders of ADSs will be subject to Brazilian income taxation according to the same rules applicable to the sale or disposal of common shares.

In the case of a redemption of common shares or a capital reduction by a Brazilian corporation, such as us, the positive difference between the amount received by a Non-Resident Holder and the acquisition cost of the common shares redeemed, including common shares underlying ADSs, is treated as a capital gain derived from the sale or exchange of shares not carried out on a Brazilian stock exchange market, and is therefore subject to income tax at the specific rates detailed above, depending on the nature of the investment and the location of the investor.

As a general rule, the gains realized as a result of the disposal of common shares, including these underlying common ADSs, is the positive difference between the amount realized on the sale or exchange of the common shares and their acquisition cost. There is a controversy regarding the currency that should be considered for purposes of determining the capital gain realized by a Non-Resident Holder on a sale or disposition of shares in Brazil, more specifically, if such capital gain is to be determined in foreign or in local currency.

There is no assurance that the current preferential treatment for a Non-Resident Holder of ADSs and a 4,373 Holder of common shares will continue or that it will not change in the future.

Conversion of Common Shares into ADSs

The deposit of common shares into the ADS program and issuance of ADSs may subject a Non-Resident Holder to Brazilian income tax on capital gains if the amount previously registered with the Central Bank as a foreign investment in common shares or, in the case of other market investors under Resolution No. 4,373, the acquisition cost of the common shares, as the case may be, is lower than:

·the average price per common share on the B3 on the day of deposit; or
 
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·if no common shares were sold on that day, the average price on the B3 during the 15 preceding trading sessions.

The difference between the amount previously registered, or the acquisition cost, as the case may be, and the average price of the common shares, calculated as set forth above, is considered a capital gain.

Discussion on Low or Nil Taxation Jurisdictions

On June 4, 2010, the Brazilian tax authorities enacted Normative Ruling No. 1,037 listing: (1) the countries and jurisdictions considered as Low or Nil Taxation Jurisdictions or where the local legislation does not allow access to information related to the shareholding composition of legal entities, to their ownership or to the identity of the effective beneficiary of the income attributed to non-residents; and (2) the privileged tax regimes, which definition is provided by Law No. 11,727, of June 23, 2008, or Law No. 11,727.

A Low or Nil Taxation Jurisdiction is a country or location that: (1) does not impose taxation on income; (2) imposes income tax at a maximum rate lower than 20.0%; or (3) imposes restrictions on the disclosure of shareholding composition or the ownership of the investment. A regulation issued by the Brazilian tax authorities on November 28, 2014 (Ordinance No. 488, of 2014) decreased, from 20.0% to 17.0%, the minimum threshold for certain specific cases. The reduced 17.0% threshold applies only to countries and regimes aligned with international standards of fiscal transparency in accordance with rules to be established by the Brazilian tax authorities. Although Ordinance No. 488 has lowered the threshold rate, Normative Ruling No. 1,037, which identifies the countries considered to be Low or Nil Tax Jurisdictions and the locations considered as privileged tax regimes, has not been amended yet to reflect such threshold modification.

Law No. 11,727 created the concept of “privileged tax regimes,” which encompasses the countries and jurisdictions that: (1) do not tax income or tax it at a maximum rate lower than 20.0%; (2) grant tax advantages to a non-resident entity or individual (a) without the need to carry out a substantial economic activity in the country or jurisdiction, or (b) conditioned to the non-exercise of a substantial economic activity in the country or jurisdiction; (3) do not tax or tax proceeds generated abroad at a maximum rate lower than 20.0%; or (4) restrict the ownership disclosure of assets and ownership right or restrict disclosure about economic transactions carried out. Although we believe that the best interpretation of the current tax legislation is that the above mentioned “privileged tax regime” concept should apply solely for purposes of Brazilian transfer pricing and thin capitalization rules, among other rules that make express reference to the concepts, we can provide no assurance that tax authorities will not interpret the rules as applicable also to a Non-Resident Holder on payments of interest on shareholders’ equity.

Currently, the understanding of the Brazilian tax authorities is that the rate of 15.0% of WHT applies to payments made to beneficiaries resident in privileged tax regimes (Answer to Advance Tax Ruling Request COSIT No. 575, of December 20, 2017). In any case, if Brazilian tax authorities determine that payments made to a Non-Resident Holder under a privileged tax regime are subject to the same rules applicable to payments made to Non-Resident Holders located in a Low or Nil Tax Jurisdictions, the withholding income tax applicable to such payments could be assessed at a rate up to 25.0%.

We recommend investors to consult their own tax advisors from time to time to verify any possible tax consequence arising from Normative Ruling No. 1,037 and Law No. 11,727. If the Brazilian tax authorities determine that payments made to a Non-Resident Holder are considered to be made under a “privileged tax regime,” the WHT applicable to such payments could be assessed at a rate of up to 25.0%.

Other Brazilian Taxes

There are no Brazilian federal inheritance, gift or succession taxes applicable to the ownership, transfer or disposal of common shares or ADSs by a Non-Resident Holder. Gift and inheritance taxes, however, may be levied by some states on gifts made to or inheritances bestowed by the Non-Resident Holder on individuals or entities resident or domiciled within such states in Brazil. There is no Brazilian stamp, issue, registration or similar taxes or duties payable by a Non-Resident Holder of common shares or ADSs.

 
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Taxation of Foreign Exchange Transactions (IOF/Exchange)

Pursuant to Decree No. 6,306/07, the conversion into foreign currency or the conversion into Brazilian currency of the proceeds received or remitted by a Brazilian entity from a foreign investment in the Brazilian securities market, including those in connection with the investment by a Non-Resident Holder in common shares and common ADSs, may be subject to the Tax on Foreign Exchange Transactions, or IOF/Exchange. Currently, the applicable rate for almost all foreign currency exchange transactions is 0.38%. Currently, foreign currency exchange transactions carried out for the inflow of funds in Brazil for investment in the Brazilian financial and capital market made by a foreign investor (including a Non-Resident Holder, as applicable) are subject to IOF/Exchange at a 0% rate. The IOF/Exchange rate will also be 0% for the outflow of resources from Brazil related to these types of investments, including payments of dividends and interest on shareholders’ equity and the repatriation of funds invested in the Brazilian market. Furthermore, the IOF/Exchange is currently levied at a 0% rate for the conversion of ADSs into common shares held by foreign investors under the 4,373 Holders regime. In any case, the Brazilian government is permitted to increase the rate to a maximum of 25.0% at any time, with respect to future transactions. Any increase in the rate would not apply retroactively.

Tax on Bonds and Securities Transactions (IOF/Bonds)

Pursuant to Decree 6,306/07, the Tax on Bonds and Securities Transactions, or IOF/Bonds, may be imposed on any transaction involving bonds and securities even if the transactions are performed on a Brazilian stock exchange. The rate of this tax for transactions involving common shares is currently 0%, but the Brazilian government may increase such rate up to 1.5% per day, with respect to future transactions. Currently, the issuance of depositary receipts traded outside of Brazil which underlying common shares are issued by a Brazilian company and listed on a Brazilian stock exchange are also subject to IOF/Bonds at the 0% rate. Any increase in the rate would not apply retroactively.

U.S. Federal Income Tax Considerations

The following discussion summarizes certain U.S. federal income tax considerations relating to the acquisition, ownership and disposition of common shares or ADSs by a U.S. holder (as defined below) holding such common shares or ADSs as “capital assets” for U.S. federal income tax purposes (generally, property held for investment) within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended, or (the “Code”). This summary is based upon the Code, its legislative history, Treasury regulations, administrative pronouncements of the U.S. Internal Revenue Service, or (the “IRS”), and judicial decisions, all as in effect on the date hereof, and all of which are subject to change (possibly with retroactive effect) and to differing interpretations. This summary does not describe any implications under state, local or non-U.S. tax law, or any aspect of U.S. federal tax law (such as the estate tax, gift tax or the Medicare tax on net investment income) other than U.S. federal income taxation.

This summary does not purport to address all of the material U.S. federal income tax consequences that may be relevant to the holders of the common shares or ADSs, and does not take into account the specific circumstances of any particular investors, some of which (such as tax-exempt entities, banks or other financial institutions, insurance companies, dealers in securities or currencies, traders in securities that elect to use a mark-to-market method of accounting for their securities holdings, regulated investment companies, real estate investment trusts, investors liable for the alternative minimum tax, partnerships and other pass-through entities or arrangements, U.S. expatriates, investors that own, have owned or are treated as owning, directly, indirectly or constructively 10% or more of the voting power or value of our stock, investors that hold the common shares or ADSs as part of a straddle, hedge, conversion or constructive sale transaction or other integrated transaction, “controlled foreign corporations,” certain U.S. holders who file applicable financial statements required to recognize income when the associated revenue is reflected on such financial statements and U.S. holders whose functional currency is not the U.S. dollar) may be subject to special tax rules.

As used below, a “U.S. holder” is a beneficial owner of common shares or ADSs that is, for U.S. federal income tax purposes:

i.an individual citizen or resident of the United States;
ii.a corporation (or an entity taxable as a corporation) created or organized in or under the laws of the United States, any state thereof, or the District of Columbia;
iii.an estate, the income of which is subject to U.S. federal income tax regardless of its source; or
iv.a trust if (a) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust; or (b) the trust has a valid election in effect under applicable U.S. Treasury regulations to be treated as a United States person.
 
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If a partnership or other entity or arrangement taxable as a partnership for U.S. federal income tax purposes holds common shares or ADSs, the U.S. federal tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partners of partnerships holding common shares or ADSs should consult their tax advisors.

In general, for U.S. federal income tax purposes, holders of American Depositary Receipts evidencing ADSs will be treated as the beneficial owners of the common shares represented by those ADSs.

Taxation of Distributions

Subject to the passive foreign investment company, or (“PFIC”), rules discussed below, the gross amount of any dividends (including amounts withheld in respect of Brazilian taxes) paid with respect to the common shares or ADSs generally will be subject to U.S. federal income taxation as ordinary income. In general, distributions with respect to the common shares or ADSs (which includes (i) distributions of interest on shareholders’ equity under Brazilian law and (ii) amounts withheld in respect of Brazilian taxes and (iii) any additional amounts payable in respect of such withholding taxes, as described above under “—Brazilian Tax Considerations—Distribution of Interest on Shareholders’ Equity”), to the extent made from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles, will constitute dividends for U.S. federal income tax purposes. If a distribution exceeds the amount of our current and accumulated earnings and profits, as so determined under U.S. federal income tax principles, the excess will be treated first as a non-taxable return of capital to the extent of the U.S. holder’s tax basis in the common shares or ADSs, and thereafter as capital gain, which will be either long-term or short-term capital gain depending on whether the U.S. holder held the common shares or ADSs for more than one year. We do not intend to maintain calculations of our earnings and profits under U.S. federal income tax principles and, unless and until such calculations are made, U.S. holders should assume that all distributions are made out of earnings and profits and constitute dividend income. As used below, the term “dividend” means a distribution that constitutes a dividend for U.S. federal income tax purposes.

Distributions paid in Brazilian currency will be included in the gross income of a U.S. holder in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date the dividends are actually or constructively received by the U.S. holder, or in the case of dividends received in respect of ADSs, on the date the dividends are actually or constructively received by the depositary or its agent, whether or not converted into U.S. dollars. A U.S. holder will have a tax basis in any distributed Brazilian currency equal to its U.S. dollar amount on the date of receipt by the U.S. holder or disposition, as the case may be, and any gain or loss recognized upon a subsequent disposition of such Brazilian currency generally will be foreign currency gain or loss that is treated as U.S. source ordinary income or loss. If distributions paid in Brazilian currency are converted into U.S. dollars on the day they are received by the U.S. holder, the depositary or its agent, as the case may be, U.S. holders generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. U.S. holders should consult their own tax advisors regarding the treatment of any foreign currency gain or loss, if any, Brazilian currency received by the U.S. holder or the depositary or its agent is not converted into U.S. dollars on the date of receipt.

Under current law, the U.S. dollar amount of dividends received by an individual with respect to the ADSs will be subject to taxation at a reduced rate if the dividends represent “qualified dividend income.” Dividends paid on the ADSs will be treated as qualified dividend income if (i) the ADSs are readily tradable on an established securities market in the United States; (ii) the U.S. holder meets the holding period requirement for the ADSs (generally more than 60 days during the 121-day period that begins 60 days before the ex-dividend date; and (iii) we were not in the year prior to the year in which the dividend was paid, and are not in the year in which the dividend is paid, a PFIC. The