Companhia Brasileira de Distribuicao SA (CBD) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to CBD’s conference call to discuss the Q3 2003 results. Please be advised that information relative to CBD’s Q3 2003 results is available on CBD’s website www.cbd-ri.com.br/eng

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from those anticipated in any forward-looking comments as a result of macro-economic conditions, market risks, and other factors.

With us today in Sao Paulo this morning are Mr. Augusto Cruz, the company’s CEO, Mr. Aimar Geglio, (ph) Treasurer, and Mr. Fernando Tracanella, Investor Relations Director. First, Mr. Tracanella will comment on the company’s performance during Q3 2003. Afterwards the executive will be available for a Q&A session.

It is now my pleasure to turn the call over to management. Mr. Tracanella, you may now begin.

Good morning, everyone, and thank you for standing by. It is a pleasure to be with you again to discuss CBD’s Q3 2003 performance.

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

In Q3 2003, CBD presented gross sales of R$3bn, and net sales of R$2.5bn, showing a growth of 9.7% and 9.3% respectively, compared to the same period in 2002.

The quarter was marked by a weak performance of non-food product sales, which were most affected by the current high interest rate environment, and reduced purchasing power of the population.

Another figure that also illustrates this trend is the participation of food products in the company’s total sales, which increased to 79% to 83%. Net same-store sales of food products grew 6.5% in the quarter, while non-food products retracted 0.8%.

On a same-store basis, net sales of the company presented a 5.1% growth in the quarter. Sales in the quarter were also characterized by an increase in the consumption of second line products, and private brand products, which reduced the average ticket in the period.

This impact was minimized by the increase in client flow on a same-store basis, reflecting the degree of the company’s strong price competitiveness, as well as progress made in category management, store operation, and communication with our customers.

In the first nine months of 2003, the company’s gross sales grew 19.3%, reaching R$9.2. Net sales in the period reached R$7.8bn, a 19.1% increase. Same-store sales registered an 8% growth, with a double-digit growth for the Extra and Comprebem business units.

CBD expects to reach a same-store sales growth in the year in the range of 8-10% in nominal terms in 2003.

Despite touch price competitiveness in the Brazilian retail market, CBD registered a gross margin of 28.8%, practically the same margin posted in Q3 2002, which was 29%, and above the 28.6% posted in the previous period.

I would like to note that our main factor that contributed to the maintenance of the high levels of gross margin was the strong negotiation effort with our suppliers. Moreover, other factors that contributed to Q3’s gross margin were the changes in the sales mix with a greater portion of food product sales reducing the percentage of non-food, especially electronics, and the growth in the participation of second line products and private brand products.

In the first nine months of 2003, gross margin was 28.5%, practically flat in relation to the same period in 2002.

Even in a scenario of retraction in sales and, therefore, lower expenses dilution, the company maintained SG&A expenses in a similar level to that of the same quarter 2002, respectively 20.6% and 20.7%. The strong control verified in the period reached, mainly, personnel expenses and advertising expenses, confirming the company’s commitment to ongoing control of its operational expenses structure.

EBITDA in the quarter was R$206.1m, an increase of 7.6% compared to the previous year. In the nine months of 2003, EBITDA grew 17.8%, totaling R$637m, compared to R$540.7m registered in the same period 2002. Q3’s EBITDA margin reached 8.2%, flat YoY. The company expects the EBITDA margin to remain at the same 8.2% level registered in the period January-September 2003.

In Q3, the net financial result was, again, analyzed by low volume of credit income and high funding costs. The financial income and financial expenses reached R$140.3m and R$185.7 respectively, generating a net financial expense of R$45.4m, showing an improvement in comparison to the previous quarter, where the company reported a net financial expense of R$57.9m.

The net income of the quarter was R$52.1m, 44% higher than the R$36.2m registered in Q3 2002. In the first nine months, CBD’s net income reached R$149.4m, a 4.8% increase in comparison to the R$142.6m registered in the same period 2002.

Inventory turnover was 39 days in the quarter, very close to the 38 days in the same period of the previous year, and an improvement over Q1 and Q2 2003, 46 and 40 days respectively.

Average payment terms with suppliers were 40 days, similar to that in Q3 2002.

Capital expenditure in the quarter reached R$148m, of which 40% referred to renovation and conversion of stores; another 40% to the construction of new stores; and 20% related to technology and distribution.

In the first nine months of 2003, investments reached $340.6m, against $442.3m in the nine months of 2002.

To conclude, I would like to say that the perspectives to the rest of the year are positive. It is expected that the recent decreasing trends in interest rates will be maintained, which should enhance the economic activity level in Brazil. This, combined with expected salary readjustments, and a gradual recovery in consumers’ confidence, should lead to a much better environment for consumption in the country.

This scenario, coupled with a strong pent up demand for a lot of products in Brazil, and also coupled with the verified increased flow of customers in our stores, make us feel more domestic regarding sales in the coming months.

Those were the main comments I wanted to make on CBD’s Q3. Now we are available to answer any questions you may have. Thank you very much for your attention.

Thank you. The floor is now open for your questions. If you have a question please press 1 then 4 on your touch-tone telephone at this time. Once again, the floor is open for questions. If you do have a question, please press 1 followed by 4 on your touch-tone telephone at this time. Please hold while we poll for questions.

Our first question comes from Bob Ford.

Hi, Bob Ford, over at Merrill, the first question is with respect to wage adjustments for your own employees, I was not sure what your expectations were at year end for wage adjustments.

Our expectation is to have something slightly below inflation of the period.

Which particular index would you be looking at in terms of inflation?

IPC, Bob.

When it comes to the actual market as a whole, do you think that is what we can expect for wage adjustments in the entire labor market? I would expect the informal market, probably, to not put through much of a wage increase at all. What do you expect the overall salary mass to increase by?

Excluding informal sectors, we believe that most of the other sectors will establish a salary increase also very close to inflation in the period. We can see what happened in the banking sector, for example, and the expectation in salary increases for the other sectors until the end of the year. We do not expect something very different, and we expect all sectors to give something very similar to inflation.

With respect to pending ICMS and labor reform, I know it’s a little early for ICMS, but I understand that some products are going to see a net price increase, and I wondered if you have an idea of what the average impact of moving towards five bands nationally might have on your average absorbance in terms of gross prices to your consumer. With respect to labor reform, I know you were actively involved in, and possibly lobbying for, specific changes. I was wondering what the outlook for labor reform was, and what kind of impact you might expect to have in the timing of that.

The position of the company is that we will not have any significant improvement coming from the initial tax reform in Brazil. What we can have is some improvement in terms of tax collection, but nothing significant that would expect CBD’s performance.

With respect to that, do you think some of the changes would eliminate some of the loopholes that smaller operators have, that allow them to perhaps price a little more aggressively, and would reduce the degree of evasion or maybe will there not even be any proof?

Our position is a little bit more conservative. We do not believe that this reform will be very effective in terms of tax evasion. We believe that this will continue to be a problem in the Brazilian retail sector, so no significant positive effect in CBD’s performance.

With respect to the labor reforms?

You know that roughly 50% of total SG&A of the company comes from personnel expenses. In this case, if we have something (inaudible) the effect will be significant. It is something that would significantly reduce the current flexibility of the informal layers, so we are optimistic. We do not know exactly when, but we believe the Government is also interested in creating jobs. In this case, it can have a significant impact on our numbers, and it is something that can significantly reduce the competitiveness of the informal players today.

I have not heard much about it in the news. You perceive it as high priority, but it’s not something you perceive as imminent. Is that fair to say, or do you think we could see something over the next 12 months?

We do not have any good guidance to give you. It is something that could take longer, but also something that CBD is very optimistic about.

With respect to credit card receivables, you are still growing at a pretty healthy rate. I think you are almost at 11% quarter on quarter. Is there anything you can do to share the burden of the working capital expense more evenly with the credit card issuers?

Bob, its Aimar speaking. We need to remember that the indirect rates are falling. Our capacity to pay all these costs for credit card operations will be higher now than our capacity was in 2003. We are advancing our tiers (ph) with suppliers, and when we put the two things together, we can reduce our working capital needs along the coming months.

How much more room do you think you have to extend terms with suppliers?

Three days – at least in these next two quarters.

So you can add another three days, but if you look at some other regions, you have 60-65 days payables in other Latin American countries. Do you think those are reasonable objectives over the longer term as interest rates come down, and you can really extend your supplier payables to that extent, or is there something different about Brazil that will limit you definitely?

We cannot give you a precise timing, but we believe that it is achievable, as long as we have a more favorable situation in the Brazilian economy, considering the size of the company CBD in Brazil. We know that in other countries retailers have 60-70 days to pay suppliers, so the good news is that we have room to expand our terms with suppliers, and we believe that is achievable, especially considering the current scale of the company, the drop in interest rates, and the improvement in the economy.

Great. Thank you very much.

Our next question comes from Mr. Cassis (ph) of CDC Securities.

Good afternoon, ladies and gentlemen. What could be your net debt at the end of 2003? Evidently, the importance is of no acquisitions in the current portfolio. Secondly, when can we expect an announcement date regarding the Bompreco negotiations with Ahold?

Regarding Bompreco, unfortunately the timing for the precision chain, is not in our hands currently, and it is taken longer than we had initially expected. We have a confidentiality agreement that does not allow us to give you much information.

The important message I would like to leave you with here is that CBD is aware of the fair price of the chain. We will keep the strategy of pursuing any possible acquisition opportunity, but also having in mind the fair value of the chain, and something that can be creative to shareholders.

And for the net debt?

Our next question comes from Tina Barosso from UBS.

I think the question before me was not answered. He asked about the net debt target.

I am sorry. Net debt excluding receivables, we anticipate and including 27% of net debt to equity, it will be 27%. If we include the receivables it will be something like 40%. To date in Q3 we have 49%.

First, on the average ticket, in particular in the Pao de Acucar format, I understand, since the target is higher on consumers, the average ticket should be going down as much as in the other formats. Can we assume there was a traffic loss there, and if so, do you think you lost traffic to other formats – maybe your own, Extra and Barateiro, or to other supermarkets? Secondly, could you give us a breakdown of private label and first price today, versus last year, and what is your long-term target as a weight of total sales?

In the case of Pao de Acucar, we see a down trading, not only of brands, but also in terms of format, because of the current economic situation. We have the most difficult performance with our Pao de Acucar performance in the quarter.

And for the second part of your question, first price products, or lower price products, used to represent in the beginning of 2002 just 1% of our sales. Now we have something around 6%. In terms of private brands, it used to be 5% last year, and now we have something around 8%. In some categories we have a market share in participation of private brands above 10%. It has increased, and this is a consequence of the tough environment we have in Brazil.

Do you have a long-term target for these products?

In terms of product brands, we have 15% share in the categories where we have products.

How long do you take it will get for you to get there?

Two years.

In the case of Pao de Acucar, are you doing anything to recover traffic, or do you think it is just the market situation and will naturally solve itself as the macro improves to recover traffic at the Pao de Acucar format?

We are increasing the format in the perishables categories, and we believe that this is something that can increase client traffic.

My second question is regarding the Bompreco deal as well. In the case that Wal-Mart was to buy Bompreco, what kind of changes do you think you could do to your strategy in terms of geographic expansion? I understand that the north-east was the main focus of the company. In terms of pricing strategy, do you think you would be even more aggressive? I understand you have been pretty aggressive, at least in this past year. Would you be pushing a format more than the others, considering Wal-Mart’s main formats? Would you be opening more hypermarkets versus supermarkets going forward, or something like that?

We do believe that Brazil is extremely under-stored, so there is room to build a lot of stores in the country, in all formats and in all regions. We can accelerate that kind of growth in many states in Brazil.

We also do believe that Brazil is still very fragmented. Even if CBD does not acquire Bompreco, we will continue with many other opportunities in Brazil – medium sized and small chains, and also some large chains. The status of the company will not change. We will continue growing, with a balance between hypermarkets and supermarkets, through organic growth and through acquisitions. The north-east of Brazil can be one area where the company will focus in terms of organic growth.

On the hard discount format, do you still think this is a format that will never work in Brazil? Carrefour has continued aggressively opening stores in that format.

Our opinion has not changed. We still believe that it is a very important format in other countries, but it would be very difficult to make it profitable in Brazil. We still believe that the best way to sell to low-income in Brazil is through a format similar to what we have in Barateiro, which is a much more popular supermarket, rather than a traditional high discounter.

OK, great. Thank you very much.

Our next question comes from Robert Wertheimer of Morgan Stanley.

My question is a follow-up on what Tina was talking about, basically, on the food business. Do you expect the lower market interest rates and consumer confidence to have a significant effect on food, or if not, do you have plans to encourage customers to start up-trading again after having down-traded to lower formats and private label goods?

We believe that two trends will take place very soon in Brazil. We believe we are going to have a very good environment for electronics with low interest rates and higher confidence levels. There is a huge pent up demand in Brazil for those products. Brazilians have not brought electronics since 2001 (inaudible) rationing. Now CBD is in a much better position to take advantage of this recovery, as long as we have a much higher number of hypermarkets. Hypermarkets are a much more important channel for selling electronics in Brazil. We are optimistic, and we believe we can have up-trading in the food categories. Private brands will continue to be very important, as well as the second line products, but we believe that we will see up-trading and people will buy the leader brands – the more premium brands.

Have you seen that happen in the past, or do you have any specific plan to encourage people to do so, in the food business?

In our experience, this is usual. Brazilians respond very quickly to any improvement in the economy. We have to remember that with the salary adjustments that we are going to have in Q4, and as long as we expect lower inflation in 2004, we can finally see some improvements in the purchasing power of consumers. Considering this, and our past experience in periods such as this, we are optimistic about this up-trading, and also about an increase in the sales of durable goods.

Thank you.

Once again, the floor is open for your questions. If you do have a question, please press 1 followed by 4 on your touch-tone telephone at this time. Once again, if there are any further questions, please press 1 followed by 4 on your telephone at this time.

Our next question comes from Jose Galvan from BBVA.

First, considering the trend in the gross margin, what could we expect in Q4, and can we expect you to squeeze the gross margin in order to improve traffic at the store level? Secondly, could you give me an update regarding the opening, remodeling and conversion that is scheduled for Q4?

Our expectation for Q4 is a gross margin of 28%, a little lower than the nine months. This is because Q4 is seasonally weaker, seasonally stronger in terms of promotions, I’m sorry, and we also have the anniversary of our hypermarkets division taking place in November. The company intends to be very competitive in terms of prices, and aggressive in promotions, especially in November. You can expect a very good gross margin, but maybe not at the same level as we had in Q3. However, it is above YoY, and above the 27% we had in 2002. We are expecting something around 28%.

Regarding investment in new stores, we are planning to open three hypermarkets by the end of the year, five Barateiro stores, and one Pao de Acucar store. In terms of conversions, we just have four Se stores being converted, but the quarter will be more focused on openings of new stores.

Thank you, Fernando.

Our next question comes from Juliana Rosenbaum from ITAU.

I would like to know if you think that Grupo Martins’ initiative to join many stores in the unified format in Smart brand, and if it will have any impact on the competitive environment here in Sao Paulo?

We would like to clarify that we are talking about existing stores, and not new stores. Existing stores that will join this association with Martins group especially, towards purchasing activities. We are talking about very, very small stores, so we do not believe that will represent new competition, because they are existing stores, and will not represent direct competition to our new formats. It is a very different way to operate stores, so we do not expect any major impact.

Yes, of course they are existing in stores, but the point is they are now going to be making acquisitions together with Grupo Martins, so they get more leverage with suppliers. Do you think that could impact specifically Barateiro stores?

One important point is that every time we have a group of stores being formalized, it is positive for a retailer like CBD. This is something that may decrease the level of informality in the sector, and according to pictures that we have seen of the stores, we are talking about very different things. We cannot compare them to our stores.

OK. Thank you.

Our next question comes from Daniel Parker of Bear Stearns.

First, with respect to your selling expense, you seem to be able to improve it, or reduce the selling expense ahead of the drop of revenues this quarter. Could you talk about where the reductions came from? You had lower head count in total than you did a year ago, but you also have fewer stores, so the number of employees per store was pretty much constant. How were you able to make improvements in selling expenses? That’s my first question.

In terms of selling expenses, there are two important points. First, personnel expenses, with an increase in terms of productivity at store level. That took place especially in the Pao de Acucar division, and will be reflected even more in future quarters. Secondly, more control in terms of advertising expenses. This is an important line in our SG&A, an important line of our selling expenses, and we know that we have to be more efficient. We have a target of 1.5% in the long term. We could have, in Q3, something below 2%, so we believe we are in the right direction. The two main reasons for this decrease in selling in expenses were personnel and advertising.

You said in Q3 it was below 2%?

Yes. It was below 2%.

Can you talk more about the fact you said you were able to increase productivity of personnel in the stores? What does that mean? It seems the amount of personnel per store has remained unchanged, so what is it that you have been able to do to improve it? Is it better employee retention, more training?

Training, with more productivity in the check-outs, for example. More productivity in the replacement of products from the back to the shelves. A lot of details in the store operation, and the two most important ones were checkout operation, and replacement of products from back of store to the shelves.

With respect to the short term debt that you have coming through this year, can you talk about how you are either going to pay part of it down, or give us an update on the ability to roll over the short term debt that comes due in 2003?

Hi, its Aimar speaking. If we want to roll over our short term debt, we will have all the conditions to do it. However, we are in fact decreasing this level. The short term debt was reduced from Q2 to Q3, and it will be reduced too more from Q3 to Q4. The intention continues to be to extend the term of the company’s remaining debt. We can have a net debt lower than today by the end of the year, with a term longer than today.

I think the conditions in the market are improving, in order for us to be successful in these initiatives. The receivable fund is an important initiative that will take place in Q4 already. It is a long term fund of R$400m, and resources are coming from BNDS, from an investment plan, but part of these resources were already paid by the company, and our capacity to reduce our short term debt will be increased. We will see part of this effect in Q4.

The overall situation on our debt is in the right direction, and we intend to maintain a level of net debt between 35%-40% of equity.

Broadly, how much of the cash that you are going to receive from the accounts receivables securitization and the BNDS loan do you think you will use to pay down debt?

The biggest part of this cash will reduce the debt – R$700m.

You will use R$700m to pay down debt.

Yes, in the next quarter. It is not entirely in Q3.

OK, that’s pretty substantial. With interests coming down in Brazil, with respect to your credit business, you could maintain the current level of lending and effectively have a higher level of profitability because of a higher spread between what you lend in and what you borrow, or you could increase the amount of lending and offer a lower spread. Do you have a preference between the two? Would you rather keep the credit business at its current size, with a higher profitability as the net interest margin increases, or would you rather expand that business as rates come down?

I think the credit business will be extended in 2004. If we are going to maintain our strategies in terms of partnerships with financial institutions, and exploring this business in terms of credit inside the stores, eventually we can have a strategic partner concentrating these efforts, but we understand there is a lot of room to grow with these initiatives in 2004.

The decrease in interest rates enables us to be more aggressive in promotions in the term of credit sales. The environment is positive for the improvement of these operations.

So far have you reduced the interest rates that you charge on your proprietary credit?

Yes, we reduced the interest rates that we charge, and more than just charging, we are more aggressive in promotions. When interest go down you have more capacity and power to have good promotions and improve conditions for clients.

Remind me what the interest rates are versus where they were since you have been lowering it, just to get a sense of the magnitude.

We have promotions around 1.99% and 1.5%, but the average interest rate being charged is around 3% per month. It was roughly 5% 60-90 days ago.

Thank you very much.

Our final question comes from Bob Ford of Merrill Lynch.

On Extra, you are up against a tough comparison. It is one of the more difficult comparisons of the year. You were up 11.7% last year. It was a big event during last year. During Q4 your gross margin declined a lot more than it had previous years. Quarter on quarter I think it was done about 213 bits. I know Carrefour had a flop on their anniversary promotion. I am curious to know what is different. You have been working on this for quite a while now, and you have quite a bit planned that you kick off tomorrow. How do you beat the comparison with last year, and how do you avoid some of the mistakes that Carrefour made during their big annual anniversary promotion?

The main difference, and the reason why we are expecting to beat 2002’s anniversary, is that we currently have better conditions with our suppliers, and one of the reasons for this is the different macro-environment that we have today. We are expecting even higher price competitiveness without the same margin deterioration that we had last year. We are not expecting to have the same thing we had in 2002, when we were very aggressive but had problems in terms of gross margin.

The situation is going to be very different as long as we have greater price competitiveness without margin deterioration. We are expecting at least 28% gross margin in Q4. This is the difference – greater price competitiveness coming from better negotiations with our suppliers. We also see a very high uncertainty of suppliers to sell, so the environment for negotiation is very good for retailers like CBD.

Great. Thank you very much.

There appear to be no further questions at this time. I would now like to turn the call back over to Fernando for any closing remarks.

Thank you, everyone, for your interest and for attending this conference. Please feel free to call us at the Investor Relations Department if you have any other doubts about our numbers. Thank you very much, and have a nice day.

Thank you. This concludes this morning’s presentation. Please disconnect your lines, and have a great day.