Companhia Brasileira de Distribuicao SA (CBD) 2003 Q4 法說會逐字稿

Good morning ladies and gentlemen. At this time, we would like to welcome everyone to CBD's Fourth Quarter Year-End of 2003 Conference Call.

Today with us we have Mr. Leonardo Rocha, CFO and Mr. Fernando Tracanella, Investor Relations, Director of the Company.

Also, we have a simultaneous Web cast on the Internet that could be accessed at the same time at the site: www.cbd-ri.com.br/eng . There will be a replay facility for this call on 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 session.

[Operator Instructions].

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 that 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 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 joining us in our conference call. Here with me is Leonardo Rocha, CFO and our investor relation team members.

I want to make a few comments on our 2003 performance and then I'd like to open the Q&A session.

As you could notice in 2003 the retail was considerably affected by economics in areas and according to the Brazilian Supermarket Association, 2003 was recorded as the worst year for the food industry in Brazil since 1991. Even with such scenario, we were able to achieve results comparable to the vast international prices for the world food industry with a substantial improvement in our operating performance compared to 2002.

Gross sales rose 15 percent in 2003 which in $12.8 billion realized in the year $3.5 billion in the fourth quarter.

Economic environment market by high unemployment wages, consumer income reduction and high interest rates affected our sales by a higher consumption of basic products who (inaudible) more such as full price products and private brand products.

Even in certain Third World scenarios for (inaudible) a 6.3 increase in the same (inaudible) sales or 7.1 jobs in real terms adjusted by IBC.

Regarding growth margin, the Company reported a 20 business point increase year-over-year achieving 28.2 percent resulting from the combination of three main factors.

First, efficient of price management. Second, gain of scale with suppliers and third increasing margins on first price and private brand products.

In this quarter even with seasonal reducing of the gross margin, it was (inaudible) second quarter 2002 levels, 27.20 percent against 26.9 percent.

In 2003 we finalize (ph) CBD was very careful in the control of operating expenses and for all that it was possible, in the initial stage to keep those expenses in the same percentage level of net sales.

The highlights was the fourth quarter of 2003, when we reached 18.3 percent of net sales more than the 18.5 percent which existied in the fourth quarter of 2002 resulting in 8.9 EBITDA margin the period.

We can also highlight some matters taken by the company of already begun to possibly reflect in our previous quarter results such as additional personnel expenses, while the total number of employees was reduced by 4 percent in first of the year in 2002.

Reduction in electricity power expenses throughout the (inaudible)usage and the utilization of more generators in the hours.

Rationalization of product deportation throughout (inaudible) of deliver frequency itinerary and transportation contacts with the association.

Reducing opportunities in (inaudible) gains in reducing the expenses. Some of the actions to be carried out in 2004 included the development of shelf life packaging, what we reduced the replacement personnel identification also of more need of responsible inter-use for checking products arriving from our distribution centers. This is a high efficiency level which is use by all our logistics operation.

The backbone initiatives combined with additional (inaudible) possibility the reduction of our operational expenses as a percentage of net sales in 0.5 to 15 basis points to 100 basis points in 2004.

The competence of high level (inaudible) as well as the maintenance of expenses level and as like gross margin growth as percentage of net sales, recording fees in EBITDA reaching 101.70 from 2003 with an 8.2 percent margin in the year and 15.4 percent increase year-over-year.

With costs at (inaudible) a little bit at 98 percent of (inaudible), remind that our (inaudible) internal (inaudible) 80 percent (inaudible) and with a four percent including that (inaudible) between 2002 and 2003 our financial results for the year were penalized. This increase in interest rates has also negatively affected our (inaudible) which are extremely sensitive to the interest rate variation. They dropped from 3.1 percent in 2002 to 2 percent of total net sales.

In the fourth quarter recovery fine as a consequence of the prime interest rate the (inaudible) level the from appliances groups, sales rephasing.

Net, financial expense in the fourth quarter reaches $1.62 billion (inaudible) 2.7 million in the same period of 2002.

In the fourth quarter 2003, we have not retained fiscal product benefits resulting in our path of positions and it will (inaudible) automation that our performance in this year was a record basis on operational quality presented.

In 2003, our profits before taxes reached 250 million almost 7 percent higher than 2002 results.

Those were the main factors that resulted in 256 million net income in the year, even though our results were lower than in 2002 our net income gain had much more qualities.

In 2004, we focused more and more on the (inaudible). One example of it was the partnership with Santors in a joint venture eliminated SANTORS (inaudible).

An important consolidating movement of the group is the largest Company in Brazil and in the retail markets.

CBD will be responsible for the management of this new company with 106 stores and annuals worlds revenues of 3.5 billion. Such initiative will see the complete strength CBD's does in the market so important such as huge generator (ph).

In 2003, we made a maximum that 539.4 realized for which 54 percent are related to store reforms and conversions; 34 percent contribution of new stores and 12 percent were active transactions and technology, distribution and others.

First investments are 500- 200 (inaudible) would be applied to open of new stores to each of five hypermarkets and 10 to 15 supermarkets; 140 million of the (inaudible) for the stores performing. 100 (inaudible) in lands and another 60 million (inaudible) to information and distribution technology. Those advancements will generate any growth of our sales between 5 and 8 percent.

Another in (inaudible) for 2004 is the expectations of a same store save increase in real terms of three percent and also we are providing the guidance message of the EBITDA margin arranged between 8 and 8.5 percent. So, those were the main comments on our performance in the year and in a moment we are able to take the questions you may have. Thank you.

[Operator Instructions].

Your first question is coming from Tina Buroso with UBS. Please pose your question.

Hi good morning again. I have two questions. First on the CAPEX for the year the R540 million was about 20 percent above most recent guidance I could remember 450. Why did that happen? Are you more confident in the near future? I understood that 2003 was best for a year for food sales and the best (inaudible) so what make you so confident at the end of the year to spend so much money than you were expecting or guiding to the market during the fourth quarter? And that's my first question.

Tina, basically we had some bold initial guidance because of land acquisitions that we made in the third and fourth quarter of 2003 and also because we started the construction of some stores that will be open in the first half of 2004 in that advance in the second of 2003. One example is a hypermarket that we are opening in (inaudible) in few weeks and also on the superstore here in San Paulo capital city. So, this was the main reasons why we have been so bold initial guidance.

But that doesn't mean that you're diminishing your 500 million '04 I understand so this was not really an anticipation that you'll still keep it at 500 for '04 right?

Yes, the 500 (inaudible) are taken into consideration the investment that we made in advanced so we won't change the 500.

OK on the joint ventures, just a clarification on the CAPEX of the venture. You said before that the R30 million was previously announced, I couldn't find it but that really - just to clarify is this just your stake the R30 million or the same venture or is this the total CAPEX for the joint venture in '04? And also on SENDAS, your stores last year or the last two years in the Rio did they have the same EBITDA margins that the Consolidated Operations have - I mean that we made 8.5 in '03 for instance?

I would imagine this would be a smaller scale there et cetera so just to clarify that and if you think that even with SENDAS can you get the same lab that you have in San Paulo by the end of the year. Thanks.

Tina, first of all regarding SENDAS. The total CAPEX that we intend to invest is basically in the store that we have small in the joint venture. Regarding margins, we believe its very significant because the dilution of expense will be very high. We see may synergies in terms of G&E also some synergies and potential for dilution of certain (ph) expenses.

(inaudible) was carrying a very big structure in terms of administrative expenses and we don't intend to the (inaudible) see between both companies so the protection in the G&A is significant and also citing as charge and expenses will be also something important as long as Astra will double its size in the United States after the beginning of the joint venture. So - a the gross margin is something that we can fix - that we've been able to fix almost immediately as long as they - since they won we've been adding we've been incorporating the purchasing power of CBD so the relationship with the suppliers has changed significantly since the very beginning.

OK, sorry I just a last clarification. Are you saying the (inaudible) will double so you converting now the (inaudible). Do you have the timing and the conversion and is all included in the 30 million CAPEX which is for the joint venture, right so you're spending actually the 15th of CBD money. That's the last clarification. Thank you.

Yes, it's included in the four million dollar that I provide you and yes all (inaudible) shares should be converted into our brand Astra. In 2004.

OK, great thanks.

Thank you. [Operator Instructions]. Your next question is coming from Laurie Sara with Morgan Stanley. Please pose your question.

Yes, actually I have two questions. But let me just follow-up on this SENDAS question. Could you give us a sense of the timing of the implementation of the changes at the Sendas level. When will you be reducing the selling expenses, the administrative expenses. Have you already started that process? When shall we expect to see some of the improvements following through to the financial statements?

Laurie we believe that our expenses will be gradually reduced in this first moment CBD has been very focused on the improvement of the some the (inaudible) of (inaudible) relations like reduction in stock opt live (inaudible). Improvement in assortment so in this first moment, we are really focused on the store creation, but we have also started to make some adjustments in G&E, in the G&E line that will be reflected in the next quarter and we believe that the (inaudible) can use that (inaudible) we're going to have everything 100 percent adjusted in terms of expenses

OK and I have two questions just about the financials. We saw the gross margin dip in the fourth quarter like it did last year, but it hasn't always dipped in the fourth quarter. I'm wondering if there's something that's changing about the promotional environment in the fourth quarter that we should expect to see this on an ongoing basis. And the second question is you mentioned the target EBITDA range of eight to eight and a half percent, which given that you were comfortably in that range last year and you're expecting a sales pickup seems conservative. Are you being conservative on your margin guidance or are you intending to really reduce pricing fairly aggressively at the consumer level in '04? Thanks.

Laurie first regarding growth margin that there was nothing usual in the fourth quarter. It's been always very promotional to us. You know that we have the anniversary of our hyper markets taking place in November. Something that we have every year. So the assumption that you can expect for the following years - this is (inaudible) very strong and this the characteristic of the fourth quarter so there's nothing unusual. Second question, I can't remember Laurie.

Your EBITDA margin guidance of 8 to 8.5 percent. I asked if that's conservative or are you going to start some aggressive rollbacks?

Despite the fact that we will have probably safe environment in the year and more operational leverage we prefer to work initially with this guidance - with this range because we believe that also competitiveness will continue very strong so some of the deficiencies will have to be passed around to consumers and also we have to keep in mind that centers will be integrated - incorporated during the year so this is also intercoms of integrational sales.

Great thank you.

[Operator Instructions]. Your next question is coming from Alvin Essair with BSX Securities (ph). Please pose your question.

Yes good afternoon. Alvin Essair BSX Securities in Paris. I've got two questions. The first one is about SENDAS. Could you clarify the way you're going to account for this JV in your accounts? And the second question is about your tax rates. Could you provide us with guidance about your tax position for 2004?

First question. We consolidate 100 percent of the joint venture in our numbers. With the adjustments in the minority interest line. I mean we have 50 percent so we have to have this adjustment. So, as we have 50 percent, and the consumer management we have to consolidate with - it's better to consolidate 100 percent. And regarding income tax rates guidance. The guidance that we have provided is something between 10 and 15 percent in 2004.

OK and concerning the first question. When do you intend to (inaudible) three dates and ask. Can we assume that it will be for six months in 2004?

See the first quarter - see if the first quarter numbers you see and the numbers consolidated - follow first the numbers will be consolidated into USCB numbers.

OK, so it will be probably all year?

Next question please.

Thank you. Your next question is coming from Jose Garvon with BBD Securities.

Good morning. Just a quick question regarding the opening schedule for next year. Could you give me the details regarding which four months - how many four months will be open and the breakdown, please.

The future (inaudible) hypermarket in supermarkets and I believe initially you can work with a kind of balance between upon the (inaudible) supermarkets (inaudible).

OK, thank you very much Fernando.

Thank you. There are no further questions at this time Mr. Fernando. Please proceed with your final remarks.

Thank you very much for your attendance. Thank you very much again for your support and a ,we, from the Investor Relations Department is available for any questions that you may have. Thank you.

Ladies and gentlemen the CBD Conference Call is over. You may disconnect now. Thank you.