Companhia Brasileira de Distribuicao SA (CBD) 2004 Q2 法說會逐字稿

Good morning ladies and gentlemen. At this time we would like to welcome you to this Companhia Brasileira de Distribuicao second quarter earnings conference call. Today with us, we have Mr Luis Amarante, Planning and Control Director, Mr Fernando Tracanella, Investor Relations Director, and Mr Aymar Giglio, Treasury Director.

Also we have a simultaneous webcast on the internet that can be accessed at the site www.cbd-ri.com.br/eng. There will be a replay facility for this call on the website. We are informed that the earnings release is available at the Company's IR website, www.cbd-ri.com.br/eng.

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 Q&A session. [Operator instructions].

Before proceeding, we 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 beliefs and assumptions of CBD management and of 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 can 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, you may begin your conference.

Good morning everyone and thank you for joining us in our conference call. Today I have with me Luis Amarante, Planning and Control Director, and also Aymar Giglio, Treasury Director, in addition to the members of our IR team.

I would like to make a few comments on the second quarter results and developments, and then I would like to open for the Q&A session.

In the second quarter of 2004, gross sales reached R$3.7b, an 18.8% growth when compared to the same period of previous years. Sendas Distribuidora sales represented 23% of this total, reaching R$814.4m. Safe sources in the period resisted a positive performance of 2.6%, which is expressive considering the strong comparison basis in the second quarter 2003. The same store sales grew by 10.7%. The 5.2% same store sale growth in June, the highest since August 2003 indicates in our view a better scenario for consumption in the country for the second half of the year.

The highlight of the quarter was Esso hypermarket, which outperformed the Company's average growth. The overall trend can be also verified analyzing our sales breakdown by product category. First half performance remained flat in the quarter when compared to previous year, but specifically in June, same store sales of food product grew by 2.2%. Non-food sales increased by 13.7% in the quarter, highlighting the double digit growth in general, merchandise, textiles and [indiscernible]. Even in real terms our same store sales performance, deflated by IPC, already have a last negative performance in the second quarter, with a 2.7% drop compared to a 6.7% drop in the first quarter of the current year.

When deflated by food inflation, the Company had a real growth in every month of the quarter, accumulating our performance - a positive performance of 0.8% in the period. In addition to the beginning of the recovery in economic activity, the improvement in sales performance can also be attributed to the Company's efforts to circumvent the effects of the adverse conditions, also in price competitive and increasing customer traffic in our stores.

Now these efforts strategically position CBD as they provide long term market share gains and allow the Company to capitalize from the large economic growth expected for the second half of the year.

We would like to reiterate that in July, the Company's same store sales continued to show important signs of recovery, confirming our view of a more favorable scenario for consumption in the second half.

As of today, we still expect, we are still keeping our guidance for the year of our same store sales in real terms flat compared to 2003. We will now move on to comments on our operating performance for the quarter.

The gross margin for the second quarter reached 29.6%, 100 basis points higher than the previous year's margin. This represents a R$906.8m gross income in the quarter, 18.9% growth compared to the same period of the previous year. This gross margin is primarily due to three main factors. First the positive effect of the [Cofine's population] system, which, its non-accumulated nature has led gains for the Company. Second, better contracts negotiated with suppliers and third, higher participation of higher margin items in the product mix, such as [Delux] brand and second line products, or first price products.

Regarding sales through the operations, we can also highlight the gross margin of 29.8% achieved in the quarter. Our revenue reflecting operating efficiency gains and also commercial conditions similar to those of CBD, supported also by store re-openings in the period.

Moving ahead with our presentation, operating expenses reached 21.2% of net sales, compared to 20.3% in the same quarter of 2003. Calculated operating expenses over gross sales, in order to eliminate the effect of [Cofine's] increase on the comparison basis, the Company's expenses would have been 17.4% of gross sales, compared to 17.2% of the same period in 2003.

It is worth highlighting the dilution of G&A expenses, which increased by 13.1% in the year, in the year to year comparison, lower than the gross sales growth of 18.8% in the period. Sendas in the quarter resisted operating expenses over gross sales of 21.7%. This is significantly higher than CBD's average which, in our view, represents an additional opportunity we have to increase the productivity of the stores, with a positive impact in the operating expenses, the structure of the Company in the coming months.

EBITDA in the quarter reached R$254.5m, a 15% growth compared to the same period the previous year, representing an EBITDA margin of 8.3%, identical to the margin registered in the second quarter 2003. EBITDA margin of Sendas Distribuidora was 4.2%, which is, although considerably lower than the CBD's average, that represents a significant growth compared to the 2.2% margin that we had in the first quarter.

Financial expenses in the quarter reached R$158.1m, lower than the R$201.2m registered in the second quarter 2003. Although lower funding costs contributed to the decrease in financial expenses and it is important to know that Sendas Distribuidora's financial expenses, in the amount of R$37.7m, had a negative impact on these expenses in the period.

Financial income reached R$91.3m lower than the R$143.3m in the second quarter 2003. However, it showed an improvement in relation to the first quarter of 2004, when we had R$74.9m as a result of the recovery in delivered goods in the period. Net financial expenses reached R$66.7m, an improvement compared to the previous quarter, but was still higher than the R$57.9m registered in the same quarter 2003.

Net financial expenses in the first half of 2004 were R$150.7m, above R$123.2m in the same period of last year. Net income reached R$58.2m, R$2.6m higher than the net income in the second quarter 2003, but considerably affected by Sendas Distribuidora's results, especially regarding financial expenses.

Company investments in the field reached R$132.1m , accumulating R$259m in the first half. Investments in the quarter were distributed as follows - 54% for the opening and construction of new stores, gas stations and investment in new land for future stores-- future store openings. 35% for store conversion and renovation, in addition to investments in IT and logistics, which represented 11% of the total investments of the quarter.

For the second half of the year, CBD plans to keep its investments in the stores for renovations, which, with an objective of leverage in same store sales. We have also confirmed the opening of two new hypermarkets and five supermarkets until the end of the year.

Finally we highlight the recently announced cessation between CBD and Itao, which aligns the Company with the strategy adopted by major retailers in the world. We have increased focus on the retail business and establishing a firmer future to explore better the financial services and products. The cessation will generate operating synergies and lead to a broader and better range of services and products offered to CBD's clients, primarily including product label cards, own cards are exclusive use in CBD's stores. Also core branded cards, with widely accepted sponsors, consumer credit and personal loans. This association and exploration of the new company will offer additional resources, totaling to R$280m. Of this, R$75m will be capitalized in the equity of the new company. Part of the remaining balance, in the amount of R$152.5m will be tied to the fulfillment of performance targets by the new company over the next five years. The net effects of the association are being calculated and as soon as we-- as soon as they are ready, they will be announced by the Company.

The new company with [Itao], we will set up financial services units in the 555 stores and also in the stores that the Company should be opening in the coming years. Our [frame], financial products and services to customers that this will build and generate more than-- currently more than 40 billion transactions every month. With this partnership, CBD expects to average customer traffic in its stores and increase the revenue in coming from financial products and services.

I would like to conclude this presentation by stating that even in adverse market conditions in the first half 2004, CBD succeeded with its growth strategy and consolidation of the larger retail industry, without [indiscernible] from the strict control operating costs. Additionally, the Company therefore increased price with [competitors] in stores, investing in prioritization, makes CBD well prepared to capitalize in the long run with a recovery-- expected recovery in consumption in Brazil.

So those were the main comments on our performance in the quarter and we are now available to take questions that you may have.

Thank you very much. Operator, we can take the questions. Thank you.

Thank you. The floor is now open for questions. Our first question comes from Martin Lopez from Deutsche Bank. Sir, please pose your question.

Hi Fernando. Good morning. First of all congratulations on a very good quarter.

I had a question on sales per square meter at the remaining 60 Sendas stores. According to-- it seems like there was slight decline on a quarter over quarter basis. I wonder if you could give us some more color why this happened and what your outlook is in terms of improvements for sales per square meter at these stores.

Good morning Martin. In Sendas, we still see a big potential, big up-side in terms of sales. The expected increase in the EBITDA margin, our objective of having something around 7% until the end of the year is very related to an increase in the sale performance-- of our sales performance in [Eugeneo]. You are right when you say that the Sendas underperformed of the Company in the second quarter, the whole Company in the second quarter, and also have some differences compared to the first quarter.

In the first quarter we had extremely aggressive promotions when we reopened all the stores. But as we saw in June for the whole Company, Sendas is also presented in June a good recovery and we are much more optimistic for the second half. So the increase in EBITDA, the objective of having something around 7% up to the end of the year is not related only to expenses reduction, special expenses reduction, but also related to our expectations in terms of sales performance in Sendas.

Thank you Fernando.

Thank you, our next question comes from Daniel Parker, from [Beyer Sterns]. Sir, please pose your question.

A couple of questions for you. First I was just wondering in terms of your gross margin, you obviously had a very strong increase year over year. Can you break down roughly what the contributions were from the change in the [Cofines] tax? How much was coming from better pricing from suppliers and what was coming from the higher margin second to your brand?

Daniel. Good morning Daniel. This is very difficult to give you something precise, but roughly, when you think about this 100 basis points increase in gross margin, we can say that half of this came from Cofines and the difference, the other 50 basis points, came from better negotiation with suppliers-- an improvement in our pricing policy and also the improvement verified in the mix of products.

Okay, great. My second question is, can you talk about selling expenses, obviously they increased more than revenues did if you look at it either on a gross revenue or on a net revenue basis. I am just wondering what's going on there. Was that related to perhaps increased marketing in Sendas or what was going on there?

Yes Daniel. The reason is that we have, we still have much higher [set] expenses in Sendas compared to the average of CBD. And that is why in the second quarter when we had Sendas, this lasting in the full quarter and not just in two months as we had in the first quarter, it impacted negatively the total [set] expenses of CBD. But this is, in our view, an opportunity that we have for the second half. We still see many opportunities of increasing productivity in those stores and this is one of the focus of the Company in the second half.

That's due to, let's say, less efficient marketing at Sendas than you guys do or is that because you guys are sort of increasing the advertising marketing to promote the stores?

Yes Daniel, you are right. We have a more aggressive advertising strategy in Sendas in the beginning and now they are to recover the traffic of customers and recover the price image of Sendas in Rio de Janeiro. And this is also combining with a still higher number of employees per store, something that we intend to gradually adjust in the second half.

If I recall correctly, you cannot, you cannot fire employees at Sendas until [Cade] finally approves the transaction, is that right?

No, that's not right Daniel. We have some growth, we have some mergers, some metrics that we have to follow and we have to be in line with the product and [liables] of the five largest companies in the sector according to our best rank.

Okay, and just the last question. I noticed on the balance sheet that goodwill increased, I think it was around 550m reais. I assume that was related to Sendas, but could you just give us a little bit more detail on that?

That's right, the goodwill, what you see in the goodwill line increase is exactly with Sendas. But in the first quarter was accounted in investment line and in the second quarter we had a migration of this amount of goodwill to defer assets.

Okay great. Thanks very much guys.

You are welcome Daniel.

Thank you. Our next question comes from Alexander Kasis, from CDC. Sir, please pose your question.

Morning, Alexander Kasis from CDC XE Securities. Following the last question on goodwill, could we have an amortization on goodwill on Q2 of this year, and perhaps the amortization on goodwill for the first half of the year? That's the first question.

The second question is about the [guide and sell]. You just have said at the beginning of your presentation that despite of the [Ruckerwin] sale in June and also in July you maintain your guidance of last May 2004, so flat there, like for like. I just try to understand why you are now more optimistic that in May and why you don't change now as you have said of that good sales in July and June. You are [indiscernable]. I have more questions, but I try to ask that question after. Thank you.

Let me start with the second part of the question. We haven't changed it so far, the guidance of same store sales for the full year because when we gave the outline as we were already expecting the initial-- the beginning of this recovery at the end of the first half. We have to remember that we have much easier accounts for same store sales, especially for the second, especially after September. From September on, we are going to have much easier accounts and we are very comfortable with our guidance of a flat number in real terms. And for now, we are not changing the guidance, even though sales in June and July in this field have been above our expectations.

For now, we are keeping the guidance and we believe that it is very achievable. We are really more [domestic], we have seen improvements. Not only, in all formats of the Company, including the supermarkets and hypermarkets and a growth well balanced between number of transactions and average [takings], and a good recovery also in food. That was a kind of concern of everyone in the first half of the year.

Regarding your question about goodwill amortization in the first half. We have in the second quarter R$22m. Okay?

Yes. Can I ask more questions or do I have to wait for more questions?

I think you can ask.

Okay, just to-- just to understand what you action on [working] capital because in fact I don't achieve the same figures that you gave on this press release, because in fact, as inventories is up today's in a year, that is just a year. I don't have the same. Could you please tell us exactly how do you achieve that [working] capital better? That is the first question.

And another question is about Sendas. Is it realistic to have a break-even in 2005 year, not for full the full year, but I don't know, for Q3 or Q4, or is it too early to understand what could - what could be a Sendas to achieve Sendas in next year?

Regarding Sendas, we definitely believe that the break-even will be achieved in 2005 and we have also chances to see this achieved in 2004 in our view.

Regarding working capital, the way that we calculate is the average, in terms of, for example, inventories all over, we have the average inventory of the quarter based on the monthly position of inventory. So I can calculate in a more precise way than you because you have just the balance of each quarter and I [inaudible] every month, so that is why you have a kind of distortion. And we can say the same about [indiscernible].

Okay, thank you. Great for that answer. Just coming back to Sendas, when you say break-even in 2005, is it in the quarter or is it break-even for the full year? So is it positive net income for the full year? Just to be-- to understand.

Our expectation is that next year we can have a net profit in Sendas.

Okay, thank you very much.

You're welcome.

Thank you. Our next question comes from Tina Barroso from UBS. Ma'am, please pose your question.

Yes, hello. I have a couple of questions. First on total sales, I noticed that gross sales, if you exclude Sendas, total gross sales of CBD stand-alone declined 7% to 8% year over year. Can you reconcile that with the same store sales number of 2.6 for the quarter? I'm just trying to understand how that happened.

The second quarter-- the second question, I'm sorry, CBD EBITDA margin stand-alone, if I did the calculation correctly on the back of the envelope, was around 9% to 9.4% in this quarter, excluding Sendas. Is that right? Is that sustainable? Is this, I guess you said in the first quarter that [Cofines] was about 50 basis points, had a positive 50 basis points in the EBITDA margin in the first quarter, so does that mean that in the second quarter it had 100 basis point effect or am I reading that incorrectly? These are my first two questions. Thanks.

Hi Tina. Regarding the sales of CBD without Sendas, we have to remember that the transfer of three stores from CBD to Sendas Distribuidora, so that is why when you see this you have this difference. So that is the first point.

Regarding [Cofines], in our view, in our calculations, the effect continued being around 500 basis points, because it's by the fact that we have gains with the new methodology, we have credit. We have also pressure in terms of cost [of good sorts] coming from suppliers that were incurred with those increases of Cofines. So we believe that the impact in the number, is a good estimate for the impact in the quarter was again around 500 basis points.

50?

Sorry, 50 basis points. Thank you.

Sure, but in the first quarter was this two months right? So I suppose in the second quarter must be a little more than that?

Yes, even though we had a full quarter with this new methodology, we had also more pressure from suppliers and we had some changes in the law and some products became expensive from Cofines.

Okay.

And products came with zero Cofines rate.

Okay. How come Sendas' gross margin is now higher than CBD's stand alone, 29.6% versus the consolidated-- I'm sorry, 29.8%?

Tina, the reason is that, first of all we have now in Sendas, similar commercial conditions. They are the same commercial conditions that we have with CBD. Okay, the same purchasing power that we have with CBD and also Sendas [indiscernible]to CBD as a whole a higher purchasing power, so that is why also CBD as a whole had a great gross margin in the first quarter. But this is specifically about Sendas, we have also the [re-elaboration] of our stores and out of the [empiric] like this, we have even better conditions with our suppliers. So this, and lastly also from the efficiency gains that we have in operation. But I think the main point is better conditions with suppliers, stimulated by the [re-elaboration] of the stores.

So this is not sustainable you think?

I think Sendas should have a gross margin of close to the average on the Company from now on and up higher.

Okay, and my last question is that, about net debt. It increased 170m reais quarter over quarter. There was a big reduction in cash in financial investments that was not quarterly offset by bequeathing that, so that as a matter of fact was an increase in net debt. Can you explain why? And then finally can you just update your guidance for the year in terms of margins for the consolidated? Thanks.

Our net debt, Tina. in a quarter on quarter increased basically because of-- because of higher working capital needs, also a dividend payment. So this was the main points that made us a little increase in the net debt position of the Company.

Okay, thanks. Can you update the guidance? Gross margin and EBITDA for 04?

[Probably] Tina. We are expecting for the whole of 2004 a gross margin, we think between 28.5% and 29% and an EBITDA margin between 8% and 8.5%.

Thank you.

You are welcome.

Thank you. Our next question comes from Mr Robert Whitmire from Morgan Stanley. Sir, please pose your question.

Yes, good morning. My question is on the transition period of the credit cards. Will the new entity be able to cancel outstanding cards and reissue, and if not, what is the average term of cards outstanding? And I guess related to that, would they be able to issue a card to someone who already has one to replace it?

And second, just could you run down the cards currently outstanding by division and who the financial sponsor is? Thanks.

It's Aymar speaking. The [resistance] of this new financial institution, we will never shake with our current [cards] and credit cards, price label credit cards and corporate credit cards. It is a mild process of migration from the current cards to the new cards, to avoid the possibility of creation of a tension with the client. It is not in the interest of CBD, Itao, in the current partner's credit cards, unit bonds, etc. to create any kind of problems for the client. Then, we will view in the next 90 days or 120 days, a process of migration that will avoid these kind of problems.

So you believe you will be able to sort of migrate them to the new financial institution in the near term rather than over a couple of years? Existing cards?

At the least a really good part of the existing cards and with sole-- at the same time that we foresee a high potential of new clients, because we consider that currently our offer of cards was under our possibilities.

And do you have the current cards by division? Current breakdown?

Currently, we have 1.8m credit cards in [Axa] and the rest in the other divisions, divided between [Polica Suca] and [Complidan]. In [favor] of the current brand of credit cards, we don't have the division for the different brands, but we have around 500,000 core brand credit cards. But the biggest number is the [price label] in extra division, around 2m cards.

Thank you.

Our next question comes from [Guyerme Rudolph] from [Pactoil]. Sir, please pose your question.

Hello everyone, this is actually Gustavo. Most of our questions were already answered, but if you could give us some guidance for July in terms of sales, if we could already expect a positive figure for same store sales in that month.

And also I would like to know if you have already started to work on the budget for next year, and if so, what type of CapEx and also same store sales growth you are expecting now. Thank you.

Hi Gustavo. This is Fernando. We-- we so far have seen a very good month in July for all divisions, either for food and non-food and we believe that we are going to have finally a better figure in real terms. So we, it's better than June and we believe that it's something that indicates a very positive trend for the coming months. We see, in our view, a big pick up in Brazil for many products and this combined with improvements in economy. And also the extremely good position of CBD in the retail market. We will certainly make our same store sales performance in the second half much better than the one that we had in the first half.

Okay, thank you. And regarding 2005, have you already started to work on the budget? Is there any guidance you can give us related to growth?

Gustavo, obviously we have already started with our budget, but we would prefer to wait a little bit more before giving the market guidance. We prefer to see better how things will behave in the second half.

Okay, thank you very much.

Thank you. Our next question comes from Juliana Rosenbalm from IPAU. Please pose your question.

Hi everyone. I was wondering what's the current stance with the Sendas, the [vat] convertible ventures that they have with BNDF. Are you paying that, or negotiating? What are you doing?

Hi Juliana. Currently we are paying the interest of those ventures, that are reflected in our balance sheet. It's part of the 47m reais of financial expenses for Sendas in the second quarter and we have been trying and we have been negotiating with BNDF, but we don't have a solution for this. So far, things remain the same.

Okay, how about the change in [Cofines] taxes for some kind of basic food products. I know it's recent but are you already seeing a kind of improvement in terms of competitiveness against the informal players?

Juliana, I think this is a very good point because we firmly believe with this new methodology of Cofines and also with the decrease of Cofines for many basic products, in some cases it is at zero rate, this will reduce the power of the [informals] in Brazil, which is, in our view, the biggest problem in terms of competition. The toughest competition for CBD continues being the [informal] players. Everything that can reduce the power, the flexibility, in terms of taxes is a very beneficial possibility.

But would you have any formal exercise in terms of what that could add in terms of overall margins? Any kind of exercise or estimate?

No, unfortunately, currently I don't have anything about this to give you Juliana.

Okay. Last thing, did you update or revise your store openings guidance for the second half of this year?

We have confirmed the opening of 2 hypermarkets and 5 supermarkets to the end the year. This is what I have confirmed and if we have changes, we will let the market know.

Okay. Thank you.

Thank you. The next question comes from Daniela Burcow from Santander. Please pose your question.

Good morning. Fernando, I want to make the devil's advocate here and we think CBD revised downwards the same store sales estimate, but given what we saw in June and what you have seen in July, is it possible that there is room for upward revision in the Company's same store sales guidance for the full year? That is the first question.

Then second question is, so, given that you have no solution for the Sendas [venture], should we expect additional impact on the Company's financial expenses for the rest of the year? Thanks.

Daniela, regarding same store sales, we prefer to give the guidance of a set number in real terms, there is not yet an accumulated figure for the year, despite the recovery in June and what we have seen in July. It is still negative, around 5% in real terms. So it is better to have something, which is, in our view, very achievable, instead of having something more aggressive, and we can frustrate the market at the end of the year if we have not achieved the goals.

Regarding Sendas' financial expenses, CBD reflect in-- we have reflected in our financial expenses since the very beginning of the transaction, since February 1. Until we find a solution this will continue being reflected and we have to say that this is not the most expensive portion of our debt. We have a cost in Sendas around-- 4% a year, which is, in our view, not a big deal.

Okay. Thanks.

Our next question comes from Robert Ford from Merrill Lynch. Sir, please pose your question.

Good morning everybody. Fernando first off, I'm still confused with respect to the deal with [Itao] and I don't understand how the 305m reais will be reflected-- or how you will retain control I guess over the 305m reais. How and when? And if you could go over that, that would be interesting because it sounds as if you recognize it on your balance sheet, but you don't-- you don't have a control on the contingent on certain-- the certain achievements of certain objectives over time. And if you could just clarify how that occurs.

And then also could you point out it will fall through your income statement and there I would expect the entire R$380m amount to be-- to be income [indiscernible] when it comes to the income statement impact. But I'm not sure if that's correct either.

Bob, the investment in [Itao] and the partnership was about R$555m. Of this amount, Itao capitalizes R$65m with the association with CBD and R$380m goes to CBD. Out of this R$380m, R$75m CBD will capitalize in the new company. The remaining difference of the R$305m will reduce, by consolidation, will reduce the net debt of the Company. We have after the signing of the agreement, R$152.5m. That should take place some time in the second half of the year. The remaining difference, the other R$152.5m, will be released to CBD gradually in the next 5 years according to the achievement of some growth, which is, in our view, very achievable, we don't see any problem in achievement of those goals.

So that's how things will work. Since the beginning, since the finalize of the agreement, we are going to have financial revenues based on R$305m and that is how it will impact our financial income line.

And then you'll-- and then just again, you will obtain R$152.5m in the second half, right? When you sign the deal? That you can control? And then you will have another R$152.5m and you know, contingent upon certain objectives but you won't be able to control it immediately. Is that correct?

That's right Bob. We will have the impact of 205m reais in the second half, but there again, we will be able to use however we want R$252.5m and here the difference will remain, this difference will generate financially [inaudible] should be used within five years.

Okay, Fernando, with respect to the R$380m sum, how does that roll through the income statement? What portion will you recognize as an extraordinary?

We don't have the final number, but we are measuring all the effects and as soon as we have, we are going to announce to the market.

Okay, it's fair to say though it's going to be a number in excess of R$300m that you will recognize in the third quarter right?

Bob, I don't have the numbers, so [unfortunately] and have the final numbers, the precise figures before I give an estimate to the market.

Okay, and then with respect to the percentage of assortments that are now reflecting either an exemption or a reduction in price because of the change in [Cofines], you know, you're saying it's a big improvement in terms of your ability to compete with tax evading retailers, right? But at the same time, it sounds as if you're capturing that value in the form of a higher gross margin, so I'm confused. Are you giving it to the consumer in the form of a lower price, by which you can compete more effectively with the informal retail segment or are you capturing it in the form of a higher gross margin?

Bob, I think in the second-- what we can say is that in the first half we had this impacting our gross margin. But in the future, as long as we have a more favorable environment for consumption, we can be more aggressive in pricing and we will be more competitive against the informal market in Brazil.

What happened in the first half is that consumption was very depressed, so we have to have the good balance between pricing and gross margin. We could have been very aggressive in pricing, more aggressive in pricing, but we were, without adequate return in sales and the final result would have been that CBD would present lower sales and lower margins. But in the future with more favorable environment for consumption in Brazil, we can use this as a very important competitive advantage, a kind of weapon to fight against the informal players in Brazil.

Okay, that's great Fernando. And just can you tell me what percentage of your assortments will be influenced and what will be the average price benefit or cost benefit as a result of the tax change?

Bob, what we have currently with lower Cofines, is basically all fruit, vegetables, eggs, rice and beans, basically the items of the days [indiscernible] of consumption.

Great. Thank you very much.

You're welcome Bob.

Our next question comes from Tina Barroso, from UBD. Ma'am, please pose your question.

Hi, I have a follow-up. First on the CapEx, can you update the total number for the year? I think it was close to R$500m before, but I think you lowered the number of store openings you were planning for the second half. I heard 11 openings, before you were talking about 7. And the five supermarkets, can you tell me how many are, from Sendas [indiscernible], how many the Companhia Brasileira?. That's my question.

Tina, it's possible that we can have something a little more, but it is a fact that probably the store openings will be lower than the initial guidance. We will be more focused on store renovation, store conversion and land. And also when we talk about store conversions and renovations, they have to remember Sendas. So for now, we are keeping the same number, but if we have something different, we will announce officially to the market.

Okay, so you're keeping the R$500m?

yes, for now we are keeping the same number.

Okay. There's a line called taxes in [Selmas] or something, R$300m in your liabilities. What is the interest rate you are paying on that and I think you have 10 years to pay that? Should we include that in your net debt and how is the [CPM], the other ones that you have still got in provisions, how is that going? Do you expect the final ruling on that soon?

Tina, the only correction, the only adjustment that we have on this line is [DOD]. And the term that we have to pay is 120 months.

120 months. Okay. And any update on the other issues on the taxes that you are fighting with the government, those provisions also [with them]?

No Tina, not so far. We don't have anything new regarding this.

Okay. And my last question, if you are guiding to 8% to 8.5% EBITDA margin for the year, but on a stand-alone basis you already had 9% or above 9% for CBD and you are saying you expect to reach 7%. Are you being super-conservative or do you expect to be more aggressive in pricing and then lower your margins in the second half? Or what's the deal because it doesn't - I mean it looks like you can do much better than that, looking at the numbers now?

Tina, we prefer-- first of all, we prefer all this to be a little bit more conservative in the guidances, but also we have to keep in mind that usually the second half, especially the first quarter is always very important in terms of promotions. It's a very promotional period. Usually we have a lower gross margin in this period. And the weight of the first quarter from the full year is very important, so that is why we have this guidance.

Okay, great. And in your land bank, how many pieces of land do you have and how many more do you want to add? Is that the finance of 10% growth, because it seems that you decrease you're your organic growth guidance. You're not talking about 10% per year any more, right?

Actually Tina, we believe that [further along] are going to grow to become more important possibilities than ever. You know that we grew a lot since 95, since [APO], very concentrated in our position. We believe that [former one] positions will probably continue, but at a lower pace of this kind of [best] and again growth within stores will become more important.

I don't have here with me the current number of our land, but have in our, what you call bank of land, but we had 7 in the second quarter of the year and this helped us to understand a little bit about its effects.

okay, great. Thank you.

Thank you. It looks like our last question comes from [Luis Sawyers] from SVS. Sir, please pose your question.

Hi Fernando. You fired almost 1000 people, employees in this quarter. I would like to know if you-- you can give us any targets for the year or if you have something to improve your productivity in these lines? You are just not cutting Sendas, but you are cutting all over your different types of [models]?

Hi Luis. We don't have a target in terms of number of employees for the end of the year, but remember that we closed 9 stores during the quarter and this explains a little bit of the decrease. It's in line with our policy of closing stores with the productivity and the profitability levels below the average of each [format]. And this is something that helps us to understand the decrease in the number of employees in the period.

Okay. Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr Fernando Tracanella. Sir, the floor is yours.

I would like to thank the attendance of everyone and say that investor relations department of CBD is available for further questions that you may have.

Have a nice day. Thank you.

Thank you, this concludes today's teleconference. Please disconnect your lines at this time and have a wonderful day.