Companhia Brasileira de Distribuicao SA (CBD) 2004 Q1 法說會逐字稿

Welcome to the Companhia Brasileira de Distribuicao first-quarter results conference call. Today with us we have Mr. Andres Pastrana, Administrative Executive Director, Luis Amarante (ph), Planning Director, Aymar Giglio, Treasury Director and Mr. Fernando Tracanella, Investor Relations Director of the Company. Also, we have a simultaneous Webcast on the Internet that could be accessed at the side, www.CBD-RI.com.BR\eng.com. There will be a replay facility for this call on the Website. The first-quarter results can also be downloaded from this web site. We inform that all participants will only be able to listen to the conference during the Company's presentation. (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 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 will turn the conference over to Mr. Fernando Tracanella, who will present the CBD's operating and financial highlights of the quarter. Mr. Fernando Tracanella, you may begin your conference.

Good morning, everyone, and thank you for joining us in our conference call. I would like to make a few comments on our 2003 first-quarter results -- 2004 first-quarter results -- and then I would like to open the Q&A session.

First I would like to comment on the gross sales performance of the first quarter. Consolidated gross sales grew by 10 percent compared to the same period of the previous year, reaching $3.4 billion reais, (indiscernible) including 509 million reais revenue from Sendas Distribuidora. The same store sales showed a slight drop of 0.4 percent, affected by the strong comparison base since in the first quarter of 2003, CBD had shown an 8.5 increase in same store sales. Certainly, our sales have been affected by the current market of economic conditions in Brazil, which have not shown clear signs of recovery and consequently influence the consumer who does not feel encouraged to spend in this environment market by high unemployment rates and decreasing income. In this scenario, the Company has been investing in its price competitiveness, which provides marketshare gains in the long-term, although it affects negatively the average ticket in the short term. Aiming to encourage the consumption of discretionary products during crisis periods, we enhanced the private brand and second-line products. In the first quarter of 2004, sales of private brands and second-line products showed an increase of 47 percent and 95 percent, respectively.

The highlight of the quarter is the Astra (ph) business unit, which showed a sales and client-base growth on a same-store basis, reflecting its positioning in the non-foods products as well as improvement in the category management and client (ph) retention programs.

Although our first-quarter sales figures were below expectations, CBD believes that the same store sales growth of 2 (ph) percent in real terms is still achievable given the expectations of gradual recovery in consumption in the coming months, and also the weak comparison base of the second half of 2003, when the Company reported an 8.54 in sales in reais terms, same store sales in reais terms. The gross margin in the quarter was 28.7 percent, a 50 basis point increase compared to the 28.2 percent registered in the same period of the previous year. The new (indiscernible) non-cumulative (ph) calculation system affected possibly the margins by 50 basis points in the quarter. The margin would be even better if we exclude Sendas Distribuidora new (ph) operations, which the gross margin was 27 percent. Aiming to recover marketshare and improve the brand's price Emerge Efugenero (ph). Excluding sales of Distribuidora, the gross margin of CBD would have been 29 percent in the quarter, reflecting the gains of scale of paying (ph) the suppliers over the last few years.

Operating expenses in the quarter were affected by noreco (ph) and expenses, which reached 9 (ph) million reais, resulting from Sendas Distribuidora integration being fixed (ph) bill (ph) related to administrative expenses and 3 million trason (ph) expenses. Excluding noreco and expenses, the company registered operating expenses equivalent to 17 percent of gross sales in comparison to 17.2 percent recorded in the same period of 2003. Excluded in total expenses of Sendas, the Company's operating expenses over gross sales would have been 16.7 percent. We highlighted dilution (ph) of general and administrative expenses, which are read (ph) reflective of (indiscernible) gain (ph) generated by the partnership with Sendas, and amounted to 3.1 percent of gross sales compared to 3.4 percent recorded in the same period of 2003. We emphasize that CBD still contemplates some possibilities, some opportunities, to reduce even more its operating expenses with some actions such as electricity power consumption reduction, advertising optimization, renegotiation of service provider agreements, employee working hour adjustments and the development of packages that reduce the need of employees to replace products in the stores. We also highlighted that we had projected additional synergy and productivity gains at Sendas Distribuidora, which will certainly provide positive effect in CBD expense structure in the coming quarters. The potential for cost reduction standard (ph) is that Sac (ph) is (indiscernible) the sign (ph) expenses line, which reached 17.2 percent of the gross sales compared to 3.4 percent in CBD excluding Sendas, due to the larger investments in advertising during this transition period and also due to productivity levels still below CBD standards.

In this first quarter, EBITDA (ph) reached 216.5 million reais compared to 209.6 million the same period in 2003. EBITDA margin was 7.7 percent compared to 8 percent recorded in the first quarter 2003. Excluding Sendas Distribuidora, which posted a 2.3 (ph) percent margin, CBD margin in the quarter would have been 8.7 percent, which indicates that there is still room for further improvement in coming periods and to the total adaptation of the operations. The Company reiterates the outlook that gradually, and through the end of this year, the EBITDA margin for Sendas Distribuidora will be more in line with the margins of the rest of CBD's operations.

Regarding the financial results, the financial expenses were reduced by the decrease in the financial -- in the funding costs in the period. But at the same time, the financial income was also reduced due to lower revenues provided by cash investments. The Cofines (ph) rate increased lower level of advances to suppliers and mostly, lower volume of credit revenues. Regarding credit revenues, we would like to point out a strong promotional environment in the sector and a high volume of installment sales without interest. Concerning CBD, we noticed a decrease in installment sales that represented 1.2 percent of total sales compared to an average of 2 percent in the last quarters. Moreover, sales without interest represented 50 percent of the post data (ph) checks and 80 percent of installment sales with credit cards, which represented 3 to 5 percent of the total sales of the Company. The net financial loss was 83.9 million reais compared to 65. million lost in the first quarter 2003. Of this amount, 20.7 (ph) million reais was due to financial expenses originated in Sendas Distribuidora. Excluding the expenses related to Sendas, the net financial loss was similar to the loss registered in the first quarter 2003. Sendas Distribuidora also affected the earnings before income tax, which reached 14.4 million reais. Excluding Sendas loss before income tax of 25.3 million, earnings before taxes would reach 39. million reais, 15 (ph) percent higher than amount recorded in the same period of 2003. The net income in the first quarter was 27.9 million. This result includes the loss of 8.6 million recorded as minority (ph) interest due to the 50 percent stake held by CBD in Sendas Distribuidora. Excluding Sendas Distribuidora, the net income of CBD would have been 36. million reais.

Now I would like to make some brief comments on the working capital ratios of the Company. Inventory turn over rate was 44.4 days in the quarter, slightly better than the 45.80 days recorded in the same period of 2003. Average term with suppliers was 56.3 days, practically flat in comparison to the number registered in the same period of last year. It is important to highlight that both and factory (ph) position and suppliers -- position in the end of the quarter still reflected the supplies for Easter. The difference between inventory turnover (ph) and average terms with suppliers of operational working capital was 12 days, an improvement compared to the 11.6 days reported in 2003. Regarding the receivables, the average term of receivables dropped from 29 days in 2003 to 15 days in the first quarter 2004, mainly as a result of the receivables securitization operation of the Company.

Finally the investment of CBD in the quarter amounted to 127 million reais, from which 25 percent are related to new stores and lands (ph), 69 percent to stores' remodelings and conversions, and 5 percent were directly to investment and technology and distribution. Of the investments in the quarter, the highlights were the conversion of six Bau (ph) Marchet (ph) stores and two Sendas stores in Rio de Janeiro into asbra (ph) format, the opening of four gas stations, and also the construction of a new hypermarket in Bella (ph) de Soncha (ph), minergerized (ph) state.

I would like to conclude this presentation, (indiscernible) advising that although the first-quarter results were affected by the integration of Sendas Distribuidora, the expansion and consolidation of the Company as the largest retailer Company in Brazil together with the Company's sales strategy to gain market share and through strict control of the operating costs, makes CBD well-prepared to capitalize in the long run with the gradual recovery of the consumption spending in Brazil. So those were the main comments on our performance in the quarter. And we are available to take questions that you may have. Thank you very much.

(OPERATOR INSTRUCTIONS). Tina Barroso, UBS.

First I would like to talk just a little bit about Sendas. I was hoping you would provide some performance balance sheet and income statement for this joint venture. But since you did, I'm going to ask you for some specific data line by line if you don't mind. First the CapEx -- how much was it out of the 120 consolidated? And then in the asset base, how much did you add for investment in PP&E? And then the total debt, how much was it? I thought it was going to be 400 million but apparently it was more than that. And what is the cost of this debt (indiscernible) at this time? And this is my first question. Hello?

Tina, most of the investments made in Sendas Distribuidora in terms of CapEx has been done by the Company since the beginning of the second quarter. So we don't have anything significant amount in the first quarter. The conversions took place in the beginning of April. So we are going to have something more significant in the second quarter. In terms of debt, basically, the increase in the debt position of CBD in the quarter is related to Sendas. The debt that came from Sendas is around 570 (ph) million reais. Larger than the number that you had because Sendas also had to make some payments to suppliers, that generated an increase in your debt position. Is there any other questions?

I am sorry, so first the CapEx, there was nothing. So all this 90 million in remodelings and conversion are pure CBD CapEx? There's nothing on the fixed conversions still that you didn't -- the 90 million is pure CBD because it is a large number?

We have something around 50 million reais, but it's not that significant compared to the total amount.

Okay so it's 90 minus 15 (ph), okay. So the bad (ph) 520, what was this payment to suppliers about? I am sorry.

Basically Sendas, at the end of last year, needed working capital funding. That's why in the beginning of Sendas Distribuidora, the debt is a little higher than the position of 2003.

The other lines I asked were at the fixed assets, how much was it in CPNE (ph) and fixed assets in -- well what Sendas added there in your consolidated balance sheet? I suppose there's no goodwill, right?

Tina, I don't have this number right now. I can try to find it and send it to you later.

Okay, great. The second question is about all your comps in the press release. You are giving everything on a gross sales basis now. I am not sure why you're doing that but it really hurts the historical comps that we have -- ten-year historical really good data that we have on your productivity level. And also, hurts the comparison versus your same-store sales, which is on a net sales basis I understand. And lastly, it hurts the comparison on the cross-country because only Brazil basically publishes gross sales; everybody else publishes only net sales. So if you could add in your press release the net sales comparison back? I know you sent me through an e-mail this morning, but that would be very helpful. But is there a reason why you are publishing on a gross sales basis right now?

Tina, the reason is because we had an increase in (indiscernible) tax (ph) from 3 percent to 7.6 percent that will cause a big distortion in the comparison year-on-year of sales and expenses. So I agree with you. Maybe in the next release, we can publish both gross sales and net sales. But in terms of SG&A expenses and the comment, we have both. We are commenting SG&A as a percentage of net sales but also as a percentage of a gross sales. In our review, it makes more sense to generalize expenses and separate to see SG&A as a percentage of gross sales because otherwise you are going to have the same distortion as we have in sales. You can have a wrong idea that expenses are out of control. So that is why we decided to comment on both. That's SG&A over net sales and also over gross sales. But I accept your suggestions in terms of sales. From the next release on, we are going to publish both gross sales and net sales.

That's perfect, excellent. Thank you, so much. My last question is about J. Baubasa (ph). Do you have an expectation about timing of when this sale will come through and how interested are you, and do you know what are the other bidders apart from CBD? Thank you.

We don't have any new information about J. Baubasa. Our idea is the same. We will analyze any opportunities that we may have in terms of a position, but always have in mind being the right price. This is our policy. We will have also in the region, in the Apas (ph) region, opportunities to continue growing organically. So we will analyze very carefully J. Baubasa alternative. Regarding other possible buyers, we don't have any information regarding this.

(OPERATOR INSTRUCTIONS). Lori Sera (ph), Morgan Stanley.

I wanted to ask two questions. Let me start with the first. On the gross margin comparison, I understand that it's complicated because of the Cofines. But if I read your press release correctly, you had about a 30 basis point increase year-over-year, stripping out Sendas and stripping out the Cofines differential. And I am trying to reconcile that with the view that you're saying that you're becoming more price competitive. So can you give us a better sense of how you are maintaining your gross margin while you are investing in price competitiveness?

Yes, basically, as a result of a higher scale with suppliers, more bargaining power with suppliers, also reflecting positively, the joint venture that we could make with Sendas last year, at the end of last year. This is one of the big points about the association. So this is the good news. We could have a higher price competitiveness without the consideration of the gross margin. Different from other peers when we had to invest in price competitiveness and we had a kind of negative impact in our gross margin. Also, it's important to say, as I commented in the beginning of this conference, that we have seen an important increase in the private brands and big (ph) brands products, that also, as you know, we have higher margins with those products and also help it a little bit -- the good gross margin of the period.

I wanted to ask a question about the Electro division. And I understand it's the smallest division, but I guess a 20 percent drop in sales that you're referencing in the back of the press release, given the interest rate environment, is surprising to me. And I am wondering if you could comment on why you're not seeing more robustness in that category or in the format, rather?

The only thing that we can comment that we have not seen any significant sign of recovery in electronics Brazil. Sometimes we have an effect of very low comparison basis. But we still see something very difficult. I think that the drop in interest rates so far has not been enough to stimulate consumers to buy electronics again. We still see a big potential as long as we have a high pent-up demand for those products in Brazil. But anyway, we have to wait a little bit more and see something better in terms of market (indiscernible) environment. Just to give you an additional flavor (ph), we have seen something stronger in our hypermarkets when you think about electronics, okay.

Joe Lopez (ph), Deutsche Bank.

My question is regarding profitability. You achieved relatively good profitability numbers even though there's still no like-for-like momentum and there is still no positive contribution from the Sendas incorporation. I mean by the fourth quarter, if we do get a rebound in same store sales and you do fulfill the expectation of turning Sendas around to profitability levels seen in CBD, what do you feel is the margin upside?

We are satisfied with the profitability that we had in the first quarter. Maybe even (indiscernible) this initial expectations, considered that we had the integration of a big chain in the period. And we have seen part of effect in terms of higher bargaining power, higher purchasing power that has reflected profitably (ph) in our gross margin. To be conservative, we would prefer to keep at least for now the guidance of 8 to 8.5 percent because we prefer to wait and see a little bit better how consumption will behave in the coming months. And also, we have to take into account that second half is always a period with a higher level of promotions and sometimes we have a lower level of gross margin. So for a while, we prefer to work with this range of 8 to 8.5 percent. But it's possible, but we depend a lot on how consumption will behave in the second half. It's possible that we can beat expectations and we can exceed our goals.

Alexander Kasis (ph), CDC (ph) (indiscernible).

The first question is close to the question on sales. It's difficult to read your figures in this quarter because of the change in the Sendas acquisition and consolidation for Tumond (ph), and the increase of Cofines tax, which concludes to difference both in gross sales and net sales. So the first question is very simple. What is the net sales -- the net sales in Q1 2004 for CBD alone and for Sendas alone? Because you give for both the gross sales. And if you could remind, what is the difference on page 2 of the gross sales of Sendas of 508.8 on Page 2 and on the page -- excuse me -- Page 8 -- the 199? That is the first question. The second question is also looking for profitability, are correct saying that the EBIT of CBD alone in Q1 2004 is lower than the EBIT of CBD alone in Q1 2003, and could be around 105 reais as evidently, your press release is hard to read because of the acquisition and the earnings of Sendas? And finally the last question is about balance sheet and level of net debt. Your balance sheet and in particular the level of net debt seems heavy to us. Do you plan an equity issue or something equivalent to improve your shareholders' equity and to reduce the net debt? Thank you.

Regarding the first one, let me give you the figures. CBD net sales, consolidated, in the first quarter was 2,809,000,000 reais. Of this amount, we have, in terms of net sales, 433.1 million coming from Sendas Distribuidora. Okay, regarding that, Aymar will comment -- will answer a question.

Regarding the debt level of the Company, we consider that this current level is not high, but mainly because interest rates are declining and the Company's currently in a period of low sales. Then in terms of perspectives, naturally this level will improve. But you are right when you consider that this mandatory debenture that will be issued in this second quarter, probably, will reduce and put this level of debt again in our very comfortable position.

Can you repeat the second part of the question, please?

Yes, the second part of the question. Do you hear me? It's about the EBIT of CBD alone, because you do not give the figures this time. So are we correct saying that the CBD EBIT alone in Q1 2004 is lower than the EBIT of CBD alone in Q1 2003, which was 110? And if I am correct, I arrive at 105, but perhaps I am wrong, perhaps I am right. So could you confirm that the EBIT of CBD alone in Q1 2004 is close to that figures of 105?

Hold on just a second so I can locate this. Just one minute. I have 116 million, .4. This is the EBIT that I have excluding Sendas. Basically I have gross margin less SG&A less the depreciation, amortization. If you have a different number, you can call me and we can try to see what are the difference.

Okay, thank you.

Rusty Johnson (ph), Hardy (ph) & Lovener (ph).

I have a couple of questions. One could you perhaps just re-state really the root cause of the consumer weakness? It may be just as simple as basic erosion of purchasing power on a smaller availability of income to spend. But I wonder if there's any other structural issues going on in terms of changing and spending mix and so forth. The other one pertains to your overall business model as it's been driven by consolidation and buying power and cost. But I am just wondering, could we see any evidence of your sort of gaining marketshare or providing a clear value proposition to the customer against some of the smaller mom and pops that ostensibly you are focusing to beat out in the long run? But I seem to have missed much of this acute margin analysis, whether the actual business model is working the way you envision it? I would appreciate your hitting on those two points, please.

Okay. Regarding the change in the consumption environment in Brazil, I think the main point is the increase of consumption of the so-called first-price (ph) products or second-line products and also of private brands. And this has been a deferential -- something -- a competitive advantage of CBD. We have invested a lot in those lines of products and this has been something -- this has made the difference in the competitive environment. I also would believe that we can differentiate ourselves by offering more competitive prices (inaudible) programs that they have in all main formats, more flexibility in terms of form of payments, and something that we have in the Company and competition doesn't have. We have a segmentation in terms of store format. So we can adapt ourselves to attend a much better, the different target customers that we have in Brazil. So this is what we have done. Also additionally, we can comment on the fact that we have opened, I guess gasoline stations in the hypermarkets in order to increase the traffic of customers and also drug stores in some of our stores. So there are a lot of actions in place, aiming to increase the traffic of customers in our stores. And that have generated in our view, gains of marketshare.

Okay. On that point, if you are moving towards a model that does push the second line of private brands, which presumably are lower nominally priced, does that ultimately affect your sort of same-store sales figures? If you are selling more at a lower price but a better margin, is that in any way affecting the mix? Which the market seems to be terribly upset about your real store growth. But if you're migrating to, effectively, a second line product line, wouldn't that have a depressing effect on your sales growth? Or am I reading too much into that?

No, you are 100 percent right. And this is one important driver to our let's say under the expectation, same-store sales performance. But this is how the market has behaved. We have to offer alternatives to the consumers, as we have had a strong and active impact in the average income of consumers in Brazil. So this is something that we believe is the best strategy in a tough environment as we have in Brazil. It has an impact in sales but also, has higher margins with those products. And this is one of the reasons why let's say, excluding the effect of Sendas in this first quarter, we could have a gross margin of 29 (ph) percent, which if I'm not wrong, is the highest since the history of the Company. So we have a kind of compensation in terms of profitability. But you are right. Sales, same store sales, has been affected by a different mix of products.

(OPERATOR INSTRUCTIONS). Tina Barroso, UBS.

Two follow-ups, first on the mandatory (ph) convertibles. So, are you still targeting for 600 million total as opposed to the 900? And why has it been delayed so much? What is going on there? And did CVN (ph) told you how you can book this convertibles as debt or as equity when you issued them? That is my first.

We don't have new information about this issue. The process is going on in CVN and BNDS (ph) (indiscernible). We remain negotiating. We are -- we consider we are in the final procedures of the negotiation. And we have as a target to try to conclude this deal in May. But we don't have anything more concrete to guarantee this due date. And the 600 million still is our target, our guess about the amount of difference (ph).

And will it be booked as debt or as equity?

I (indiscernible). We still have not received any formal opinion about this. So we have to wait a little bit more to be (indiscernible) in terms of accounting.

My last question is about the competitive environment. Can you tell us like in your basket if you are 100 (ph) how are Carrefour aftermarkets today relative to you? And Wal-Mart in the northeast -- have they changed the average pricing since they started taking control of Pompresso (ph) -- how are you seeing pricing there?

For strategic reasons, we cannot give you the precise figure. But what we can say is that our program (ph) in terms of price competitiveness is not against the formal players like Carrefour and Wal-Mart, the ones that pay all the taxes. The problem that we have in terms of price competitiveness -- the total (ph) competition has continued being isolated cases against informal players. Regarding the northeast, in our view, nothing has happened differently in terms of price competitiveness. So we have had a good performance and we have not had problems to compete against Wal-Mart in the region.

Only to complement, our current information about the accounting procedures, in terms of these mandatory deals (ph) makes us comfortable to consider that the deals allowed (ph) won't be considered bad (ph), and it will be considered an intermediary level (ph) close to the averages (ph).

Alexander Kasis (ph), CDC (ph).

Yes, the last question about the breakeven -- is it realistic to plan breakeven on Sendas and net income level this year, for example Q3 or Q4? Another way, how are you confident to quickly reach positive in earnings in Sendas after the job of refurbishing in Q2? Thank you.

Yes, two points regarding profitability of Sendas. First of all, we believe that there is a significant potential to increase the level of sales that we will increase the operational leverage of this operation. That will increase the dilution of SG&A expenses. Secondly, we still see opportunities in terms of productivity. But the current levels are still below CBD's standards, especially when you think about spending (ph) expenses. So selling expenses can be reduced. We can have dilution of SG&A expenses and also we have been more aggressive than usual in terms of price competitiveness (indiscernible) as we intend to recover marketshare and improve the price image (ph) of those stores in Rio de Janeiro.

And the point to be breakeven at net income level this year, is it too optimistic?

It's something achievable; but we prefer to work officially with a target of having maybe the margin and net profit by the end of the year, and maybe the margin closer to what we have in the rest of the Company.

(OPERATOR INSTRUCTIONS). Albin (ph) Isett (ph), Dexia (ph) Securities.

I've got a small question about Sendas. Could you please give us flavor of a growth or decrease you had in sales at Sendas for the Q1? And concerning the EBITDA margin target, could you please just specify if you intend to have the same type of EBITDA margin for let's say Q4 or over the whole year? Thank you.

It is impossible to compare the quarter-on-quarter as we target (ph) formally with Sendas Distribuidora on February 1st. So but that's why before (ph) let's (ph) not compare sales -- first-quarter 2004 sales against first quarter 2003. But we do see a significant upside in terms of sales. Regarding margins, we believe that we can be very close to what we have in CBD, so a margin close to 8 percent. Eventually, probably we will be likely lower in the long-term as we have higher amount of rent (ph) in stores, so a higher amount of renting expenses related to Sendas Distribuidora. Even though we believe -- we reiterate our objective, our target to have something closer to 8 percent by year-end.

Okay. And last question, do you confirm your guidance in terms of same-store sales, I mean 3 (ph) for which you gave at the Two (ph) (indiscernible) Rivers (ph) presentation?

Regarding the target of 2 percent of growth in real terms, we believe that it's still very achievable. The only difference not as conservative as it was in the beginning. But in our view, it's still achievable. We prefer to wait a little bit more before changing if we have to change in the future. But one point has to be considered. The comparison basis will be much easier in the second half. In the second half, we had a decline in real terms of 8.5 percent. Okay? So when you think about the whole year, 3 percent growth over the year that we had a 7 percent decline, in our view, even with this tougher sales environment, is achievable. So let's wait a little bit more before changing this.

I would now like to turn it back to Mr. Fernando with any closing remarks. There are no further questions at this time.

Okay, thank you, very much. Thank you, very much for your attendance. Thank you, very much, again, for your support of the Company. And (indiscernible) for any questions that you may have. Thank you, very much and have a nice day.

Thank you. This does conclude today's call teleconference. Please disconnect your lines at this time and have a wonderful day.