Companhia Brasileira de Distribuicao SA (CBD) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to CBD's second quarter 2003 earnings conference call.

Today with us, we have Mr. Augusto Cruz, CEO; Mr. Lenardo Rocha (ph), CFO; and Mr. Fernando Tracanella, Investor Relations Director of the company.

Also we have a simultaneous Web cast on the internet that can be accessed at the site www.cbdri.com.br. There will be a replay facility for this call in the Web site.

We inform that all participants will only be able to listen to the conference during the company's presentation. After the company's remarks are over, there will be a question and answer section. At this time, further instructions will be given.

Should any participant need assistance during this conference, please press star-zero for an operator.

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of CBD management, and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of CBD, and could cause results to differ materially from those expressed in such forward-looking statements.

Now I'll turn the conference over to Mr. Fernando Tracanella, who will present the CBD's operating and financial highlights of the quarter. Mr. Fernando, you may begin your conference.

Good morning, everyone, and thank you for standing by. It's a pleasure to be with you again to discuss CBD's second quarter 2003 performance.

Also with us today are Mr. Augusto Cruz, the company's CEO, and Mr. Lenardo Rocha (ph), CFO of the company.

As on previous occasions, I'm going to make a brief presentation on the main highlights of CBD's performance during the quarter. And then I will make ourselves available for any questions you may have.

In the second quarter of 2003, CBD presented gross sales of 3.1 billion and net sales of 2.7 billion, showing growth of 26.3% compared to the same period 2003 - 2002.

Same-store net sales of food products were 16% higher, while there was an 8.3 decrease in the non-food product sales which are most affected by the current high interest rate environment and reduced purchase power of the population.

Total same-store sales increased by 10.7% with double-digit growth both in our hypermarkets as well as in our supermarkets.

It's important to stress that this posted (ph) performance was tainted not only by a nominal increase in the average ticket, but also due to the increase in the traffic (ph) of customers in our stores which indicates that the company is well-positioned to take advantage from a consumption (ph) recovery in Brazil.

This reflects the gains we had in the category (ph) management, the effectiveness of our marketing and customer loyalty initiatives, how much the store remodeling is adding value to our operation, and mainly that the strategy of reverting the gains achieved in operational efficiency and scale into aggregated (ph) value to our customers has been accurate.

Despite greater price competitiveness in the Brazil retail market, CBD achieved a gross margin of 28.6% -- 10 basis points higher than in the same period of last year. This was possible due to efficient price management combined with better negotiation with our suppliers.

Company's EBITDA in the quarter reflects this positive (ph) operating performance. As operating expenses as a percentage of net sales remain unchanged at from the second quarter 2002 in 20.3%, the gross margin increased led to an increase of EBITDA as well.

Earnings before interest, taxes, depreciation and amortization reached 221.4 million - a growth of 28.6% over the same quarter 2002.

In the same period, EBITDA margin increased from 8.2% to 8.3%.

Net financial results continued to be strongly impacted by the high funding costs and the reduced credit income. We posted financial income of BRL143.3 million and financial expenses of 201.2million, generating a negative net financial result of BRL57.9 million.

This net financial expense is higher than the one registered in the same quarter of last year, when we reached 5.1 (ph) million (ph). But our net (ph) shows an improvement against quarter, when net financial expenses were BRL65.3 million.

It's worth mentioning that our financial result is expected to greatly (ph) improve in the upcoming quarters as the CitiGrade (ph), the Brazilian basis interest rate, is expected to keep reducing in the coming months.

Approximately 80% of CBD's total debt (ph) is linked to CitiGrade (ph).

Net income was 56.7 million - 12.1% higher than the 50.6 million in the second quarter 2002. This result reflects the good operating performance with improvement in the gross and EBITDA margins which reduced the impact of higher net financial expenses.

An income tax credit of 8.1 million that came from tax losses carried forward from purchased store chains also contributed to the result of the period.

Our inventories were reduced by BRL180 million, which led to a turnover decrease from 46 to 40 days.

The average payment terms with suppliers was 42 days -- similar to that of the second quarter of 2002 when we had 41 days and shorter than the 57 days over the first quarter of this year.

However, we must consider that Easter this year was in April and has affected the base of comparison against the first quarter in terms of inventories and average payment terms with suppliers. The purchases of Easter were made in the first quarter. But the sales took place only in the second quarter. Therefore, inventories in the first quarter carried all Easter products and the average payment terms with suppliers reflected the purchase of these products.

The objective for the second half of this year is to maintain an inventory turnover of around 35 days and an average payment term with suppliers of approximately 45 days.

During the quarter capital expenditures reached 96.7 million - being 65% invested in remodeling and conversion of stores; 20% in construction, the construction of new stores and gas stations; 15% in information technology, distribution, strategic (ph) acquisitions (ph) and other investments.

The main investment highlights were the conversion of nine (ph) stores to the company's format. Four have been converted to the CompreBem Barateiro format and five to the Pão de Açúcar format.

The beginning of construction of four new hypermarkets to be inaugurated during the fourth quarter of this year.

Renovation of 20 CompreBem Barateiro stores, five Extra hypermarkets, eight Pão de Açúcar stores, and six Extra Eletro stores.

The opening of three new gas stations and the beginning of the construction of (inaudible) new ones in a hypermarket in the state Sao Paolo.

Acquisition of five pieces of land in strategic locations.

The planning for the second half of the year is to open the four new hypermarkets that we are building, two new Pão de Açúcar stores in addition to the one opened in the first half of the year, five new CompreBem Barateiro stores, resulting in a total CAPEX for 2003 of something around BRL400 million.

To conclude, I would like to say that the perspective for the rest of the year is positive. It's expected that the recent decreasing trend of interest rate to be maintained. That should enhance the economy - economic activity level in Brazil with a direct impact over retail sales and our performance.

In case of a gradual recovery in Brazil's consumption level, we expect our results should be even better in the second half of the year, considering the positioning achieved by our performance (ph), our present price-competitiveness (ph), our information technology and distribution infrastructures, and the high operating efficiency level achieved over the last (ph) quarters.

Those were the main comments I wanted to make on our second quarter 2003 performance. And I'd like now to answer any questions you may have.

Thank you very much for your attention.

At this time I would like to remind everyone in order to ask a question, please press the number one on your telephone keypad at this time. If you would like to withdraw your question please press the pound key.

Once again the floor is open for questions. If you do have a question or a comment, please press the numbers one followed by four on your touch-tone phone at this time. If you would like to withdraw your question please press the pound key.

Please hold while we poll for questions.

Thank you. Our first question is coming from Tina Barosa (ph) of UBS

Yes. Hello again. I have a question about the number of remodelings for the second half. I noticed there were 47 remodelings during the first half which is basically the same number you had in -- during 2002, if I'm not mistaken.

So are these done? Or are you still - expect to do more in the second half? And how many?

On a similar question, the 16 (ph) conversions (ph) of stores (ph) to be completed during the third quarter. Was most of the costs already booked (ph) during the second quarter, since these conversions already started? Or we'll see some of this cost during the third quarter as well?:

I understand the average cost of remodeling - not remodeling, for store (ph) conversions was BRL400,000 per store. That's the figure I think you gave us last year. I'm not sure if this is still valid this year.

And my last question is about June same-store sales. I understand (ph) it's similar to - I'm sorry - July is similar to June. In June we had mid-single digits. Is this really the case? Or I misunderstood later (ph) - the information I got before?

Thank you.

Tina (ph), for the second half the investments will be concentrated in the opening of stores. However, we have scheduled some store remodelings - a lower number compared to what we had in the first half. But we have, for example, four - five new - five hypermarkets being remodeled and some stores that we haven't converted from Cert (ph) to our format.

The bulk of the investments in terms of conversions are already took place in the second half.

OK. Regarding same-store sales, yes. You understood right. July was similar to June. But we are expecting something a little bit better in August. We has a great weekend (ph) - a good beginning. So it's very early to say something more precise, but we are more optimistic about August.

You (ph) have to consider a very important factor. A lot of people came back from vacation. So eventually we can have something a little bit better.

OK. Great. Thanks.

Once again the floor is open for questions. If you do have a question or a comment, please press the numbers one followed by four on your touch-tone telephones at this time.

And if at any point you would like to remove yourself from asking a question, please press the pound sign.

Thank you. Our next question is coming from Robert Ford (ph) of Merrill Lynch.

Hey. Good morning, guys. In the opening statements, I think Fernando mentioned that one of the reasons why your gross margin is doing a little bit better than I think most anticipated was the - was efficient price management.

And I was - I was hoping to get a better idea of what exactly that term really referred to and get a better sense of how you're proceeding in your category management practices. What opportunities do you see there? How you've changed the way you're using your promotions this year versus last year? And how they may or may not be driving bigger average basket purchases, or more foot traffic, or what-have-you?

Bob (ph), the basic equation that I have is a sum (ph) price of (ph) competitiveness together with good negotiations with suppliers. But not only this. We have had also progress (ph) in terms of capital management. The company has developed a lot of what we call first-price products, second-line (ph) products. And we have seen a strong improvement in our private label product.

So we believe that now we have a more efficient mix of products. The company has been very fast to respond to any need of customers. And this is basically what we have done.

Fernando, do you have an idea of how much your private label and perhaps your first-line pricing assortment have grown in terms of the proportion they represent year-on-year?

Bob (ph), just to give an example, one year ago we had almost zero in terms of first-price products -- OK? -- almost nothing. And nowadays it's something between five and 10%, OK? And together with out product brands (ph) products we have something very close to 15%.

Wow. And then with respect to the competitiveness of the marketplace, can you give us a sense of where your price gaps are versus Socaro Four (ph), and even some of these very aggressively priced wholesales that seem to be exploiting some tax opportunities in the marketplace?

I'm just curious. Where were they, you know, a year ago, possibly? And where are they today?

Because there was a period of time in the not-too-distant past where the price leadership, I think, was being questioned a little bit in the marketplace - particularly with those fourth quarter results.

Bob (ph), we continue being very competitive in terms of prices. If you see (ph) that the market was (ph) 100 - it depends on the category - but CBD has been always on the range of 95 - between 90 or 95 in all the categories. This is in the case (ph) of Baratiero and Extra. Pão de Açúcar - in Pão de Açúcar, we have a different target customer. And we are closer to the average of the market.

But you're right when you say that the source (ph) of competition continues being from informal players. This is where we have more difficult because of this tax flexibility that they have.

But anyway, we feel much more comfortable with our price competitiveness today than one year ago. And this is a result of significant improvement that we have had in our commercial area. We made a deep (ph) restructure in our commercial department in 2001. Probably you will remember that since then the focus of our commercial department has been 100% in purchasing. And this has brought for the company a lower cost of good sold and improvement, also, in working capital in average payment terms.

But we have a lot to do yet. But we believe that we have achieved significant improvements in one year.

Great. Thank you. Fernando. And then just lastly, you know, why did general and administrative expenses lead the top line growth in the quarter? And what kind of expense opportunities do you see going forward?

I understand that Leonardo (ph) in particular is involved in a pretty comprehensive review of the cost structure. And I'm curious as to what has been identified so far? And what kind of opportunities you see going forward on the expense side as - given the very difficult visibility that we have going forward in terms of top-line growth?

Bob (ph), what happened in the G&A line is that we have a negative impact from public services and third-party services that increased more than our sales evolution (ph), and also the impact of the salary (ph) increase that happened at the end of 2002. So that's why we have something around 30% higher year-on-year in the G&A line.

But we have several opportunities not only in terms of G&A, but also in terms of earnings (ph) expenses. Some of them are - for example, the revision of some leasing agreements that we have. We've been trying to reduce the renting (ph) expenses of our business, reduction of advertisement expenses, reduction in some public services like telecom, electricity.

So there are a lot of opportunities. We are aware that we have to improve in terms of expenses. But the good news is that we have room to present better numbers on the operating line.

Fair enough. Thank you very much. And congratulations on a very solid operating quarter;

Thank you. Our next question is coming from Pablo Zuanec (ph) of JP Morgan.

Good morning, everyone. I just want to go back a bit to the issue about gross margins. How comfortable are you being able to maintain gross margins above 28.5 for the rest of the year?

And then of you can just go back to that fourth quarter number of 26.9. At the time, the way I understood it the number was explained because of a more aggressive pricing stance. Now you have explained why that's been improved. But is there any particular reason that might have distorted the fourth quarter number? Or what could happen again that could make you see a number like that - of 26.9 - in the fourth quarter?

If you can explain that first, please?

Pablo (ph), what happened in the fourth (ph) quarter is that was a very promotional period. We had the anniversary of Extra division in November. And we put prices really down. The company was real aggressive in terms of prices.

So at that time we said that the 26.9 was something (ph) unusual despite the fact that we really want to invest (ph) even more in price competitiveness.

We -- so far in 2003 we have achieved a performance in terms of gross margin even above our initial expectations. And we believe that this is sustainable. We are expecting a gross margin around 28% for the rest f the year. So a good performance as a result, again, of good price - an efficient price policy combined with good negotiations with suppliers.

So, yes. We believe that 28% is something sustainable for the rest of the year.

Fine. And regarding (ph) tax carry forwards. Is that already fully used after the second quarter? Or do you still have some left for the second half?

What should we assume in terms of effective tax rates for the second half?

Pablo (ph), there is still some tax losses to be used. And I would work with something around zero for the second half.

OK. And just one more question if I may?

In terms of looking at your spreads on the credit business, in an environment when interest rates are coming down, should I assume that those spreads are going to remain stable? Or should they increase or decrease?

And a related question to that - when interest rates are coming down, does that mean that you will extend terms? That people will be able to pay, you know, in more installments? Or the opposite?

If you can just expand on that, please?

Pablo (ph), it's still not clear for us how the market will behave in the second half. So we prefer to wait a little bit more to give you a more precise answer. Anyway, we believe that if we feel comfortable to extend the terms that we have with our clients, we will do so. And also this is also true for the interest rate that we charge customers.

But we don't - we don't expect any significant change in the spread that we have. We believe that rates will go down following a decrease in the basic interest rates of the country, keeping the spread reasonably stable.

OK. But that's my point, Fernando. I mean if interest rates are coming down and you are not necessarily bringing down your own interest rates to customers, your spread should actually increase then, in that environment. Or am I wrong about that?

Yes. No, no. You are completely - you are 100% right. But the fact is we intend to decrease interest rates if we se conditions for this. So we intend to be more - we intend to keep our competitiveness in the credit business. So if we see conditions, and these conditions are lower interest rates in the economy -- the full rates under control -- then we will decrease the interest rate that we charge customers, keeping the spread stable.

OK. And if I may? In terms of the whole (ph) electronics business, if I think of the expansion of Casas Baella (ph) and other chains in the recent past, what would you think that your market share in the whole electronics and appliances business compares with, say, two years ago? Would it be fair to say that it's decreased because other people have expanded more aggressively? Or are you still pretty much in the same level?

Not at all, Pablo (ph). We believe that our market share has increased - but mainly because of an increase in the number of hypermarkets.

Today our electronics operation is larger in our hypermarkets than in natural (ph) Extra stores. So - and we believe that hypermarkets will be probably the most important - one of the most important channels to sell electronics in Brazil. So that's why we believe that we have gained in market share, and not loosed in market share in that business.

But it continues to be very difficult. But we believe that again there is a huge pent-up demand for electronics in Brazil. And we believe (ph) we're (ph) well positioned to take advantage of a turning point in this segment.

OK. And just a very last question. And this is more regarding Monpreso (ph). Correct me if I misinterpret what's been said before, but the way I understood it was that in the event that you wanted to do a rights (ph) issue and you wanted to issue ON (ph) shares, that you would not issue ON (ph) below 45 dollars. Is that correct? Or am I wrong in saying that?

That's right, Pablo (ph). That's our view.

OK. Thank you very much.

Thank you. Once again the floor is open for final questions or comments. If you do have a question or a comment please press the numbers one followed by four on your touch-tone phone at this time.

There are not further questions at this time. Mr. Fernando, please proceed with your final remarks.

Thank you very much for your attendance. We are glad to see your interest in CBD. Please feel free to call us in the investor relations department if you have any further doubts (ph).

Have a nice day. Thank you.

Ladies and gentlemen, the CBD second quarter 2003 conference call is over. You may disconnect now.

Thank you.

END