Companhia Brasileira de Distribuicao SA (CBD) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to CBD’s third quarter earnings conference call. Today we have with us Mr. Luiz Amarante, Planning and Control Director, Mr. Fernando Tracanella, Investor Relations Director, and Mr. Aymar Giglio, Treasury Director.

Also, we have 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 inform that the earnings release is available at the company’s IR website, www.cbd-ri.com.br/eng.

[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 belief 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 can cause results to differ materially from those expressed in such forward looking statements.

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

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

I’d like to make a few comments on the third quarter results, and then I’d like to open for a Q&A session. In the third quarter of 2004, gross sales reached R$3.8b, a 26% growth compared to the same period of the previous year. Sendas Distribuidora of our sales represented 21% of the [Estoro], reaching R$698.6m.

Net sales grew by 23%, totaling R$3b. The difference between gross sales and net sales growth is due to the increase in COFINS, tax for social security financing, which occurred in February.

I would like to highlight of the same store sales growth in the third quarter, when CBD registered the best performance of the current year with a 9% growth in nominal terms and 2% growth in real terms.

The 3 main drivers to this performance were – first, the double digit growth in Extra and CompreBem business units; second, the recovery of food product sales, enhanced by consumption of discretionary items; and third, the increase in clients traffic on a same-store basis, reflecting the positioning of CBD in terms of competitiveness and store formats.

This upward trend can be also verified analyzing our sales breakdown by product category. Food product same stores sales grew in nominal terms by 7% in the third quarter, a significant increase from the 0.2% growth registered in the second quarter of this year.

Non-food product sales maintained a strong growth, increasing by 17%. As of today, we still expect that same store-sales in real terms to remain flat in 2004, since this sturdy recovery observed in the third quarter is still diluted by the performance of the first half of the year when same-store sales in real terms decreased by almost 5%.

We will now move on to comments on our operating performance for the quarter. The gross margin for the third quarter reached 29.8%, 100 basis points higher than the previous year’s margin. This represents R$925m gross income in the third quarter, a 27% growth compared to the same period of the previous year.

This margin growth is due to 3 main factors -- first, better negotiations with suppliers; second, the positive impact of new COFINS calculation system, with its non-cumulative nature, leading to gains for the company; and third, greater participation of higher margin items in the product mix, such as private-label products and second-line products.

Regarding Sendas Distribuidora, the gross margin of 30% registered in the period represents a significant improvement compared to the beginning of the operations, reflecting the operating efficiency gains achieved, and also better commercial conditions.

Operating expenses reached 21% of net sales compared to 20.6% in the same quarter of the previous year. Calculating operating expenses over gross sales in order to eliminate the effect of the COFINS increase on the comparison basis, the company’s expenses would have been 17.2% of gross sales, slightly lower than the 17.4% recorded in the same period of 2003.

This improvement occurred even with Sendas Distribuidora recording operating expenses over gross sales of 21.6%, still significantly higher than Sendas’s average, which in our view represents an additional opportunity ahead to increase the productivity of those stores, with a positive impact in the overall operating expenses structure in the coming months.

Once again, the highlight of the quarter was general and administrative expenses, which reached 3% of gross sales, significantly lower than the 3.6% reported in the same period of 2003, as a result of the gains of scale obtained in the period.

EBITDA in the quarter reached R$275.4m, a 34% growth compared to the same period of 2003, representing an EBITDA margin of 8.9%, compared to 8.2% margin registered in the third quarter of 2003. The EBITDA margin of Sendas Distribuidora continued to improve, reaching 4.7%, compared to 2.3% and 4.3% registered, respectively in the fourth and second quarter of the year.

This improvement in margins reflects the company’s successful strategy to gradually bring Sendas operations closer to the operational standard of CBD.

Financial expenses reached R$147.3m in the quarter, lower than the R$185.8m registered in the third quarter 2003, reflecting the lower interest expenses. Of this amount, R$42.9m refers to Sendas Distribuidora financial expenses.

Total financial income also decreased as a result of the lower income from cash investments and the continuation of a very promotional environment for credit sales, totaling R$79.2m compared to R$140.3m registered in the same period of 2003. As a consequence, net financial expenses reached R$68m in the quarter.

The association with Itau generated a net operating income for the company of R$90.8m. This amount was the result of a gross non-operating income of R$280.4m, arising from the association to create Financeira Itau CBD, deducted by installments subject to the fulfillment of performance targets over the next 5 years in the amount of R$152.5m and also asset write-offs.

Total net income in the quarter reached R$171m. Even excluding the non-operating income previously mentioned for comparison purposes, the net income would have been R$84m, 76.4% higher than the same period of 2003.

The company significantly improved its working capital management in the quarter. This improvement was primarily due to the expansion of average terms of suppliers, which increased from 40 days in the third quarter of 2003 to 48 days in the third quarter of 2004. Inventory turnover was 40 days, remaining flat compared to the same period of 2003.

The company’s investment in the period reached R$110m, accumulating R$269m in the first 9 months of the year. The investment in the quarter was distributed as follows –- 30% for opening and construction of new stores, 1 Pao de Acucar store, 1 master store in Sao Paolo, another Pao de Acucar in Brasilia and another hypermarket in Rio de Janeiro, gas stations and acquisition of land.

Another 60% was for store conversions and renovation, and 3% investments in IT and logistics. The investment plan for 2005 as well as the official guidance for same-store sales will be released in coming December.

Before we conclude this presentation, I would like to emphasize that the good performance of CBD in the third quarter reflects its successful position/strategy with its clients, enhancing price competitiveness in our stores, and investing in client retention even during the diverse macro-economic environment over the first half.

Confirming our expectations with a recovery of consumption and [indiscernible], CBD is capitalizing on this strategy and on the operating efficiency gains achieved over the last years. As a result now, the company is even more strengthened to pursue its current goals. Focus on profitability should increase in same-store sales, [assets] turnover, combined with lower operating expenses.

Those were the main comments on our performance in the quarter, and we are now available to take any questions that you may have. Thank you very much.

Thank you. The floor is now open for questions. [OPERATOR INSTRUCTIONS]. Our first question is coming from Bob Ford of Merrill Lynch. Please go ahead.

Hey, good morning everybody, Fernando and guys, congratulations on a very solid operating quarter. My first question was with respect to the reduction in credit card receivables. As a percentage of sales, credit cards are increasing, but on the balance sheet, your receivables have declined substantially, and I’m just trying to figure out what happened if you’re taking some of that off the balance sheet. Are you doing more code-branded card sales that are reimbursed more quickly, or what-have-you?

Good morning, Bob. The reason for the decrease of credit cards in our balance sheet receivables was the increase in the securitization of those receivables. In the third quarter, we made almost R$200m of securitization of receivables, concentrated in credit cards, and that’s the reason why we have this decrease.

And Fernando, what’s the total that you now have off balance sheet in terms of securitized receivables?

Bob, around R$600m.

Great, thank you. And then my second question was with respect to the affiliated income. I remember you have that down as something on [CBT] Tech, maybe in California or something and I was just surprised to see the affiliated income number up, and I was just wondering what that was?

Bob, can you repeat your question, please?

Yes, there’s income up from an affiliate, and I was wondering what that was? It doesn’t appear to be related to Sendas?

Actually, in the quarter we had the write-off of this company that we have overseas, the CBT Tech, and this write-off represented around R$3m.

Okay, and then lastly, Fernando, you were suggesting more operating leverage but your selling expenses when you exclude general and administrative expense are still outpacing sales by a pretty wide margin. Can you explain what we can look for going forward in terms of the behavior of the selling expense line with respect to your top-line growth?

Sure, Bob. What we have impacting our selling expenses is mainly Sendas Distribuidora with much higher expenses than the average of CBD. You know that in the beginning of the operation of Sendas Distribuidora, we see that to attract customers was very low, and the price image of Sendas was not also ideal. So we’ve been investing more than usual in advertising. Also we have some further investments in personnel expenses to take place. And also, with higher sales in Sendas, probably the dilution will be higher and the SG&A expenses as a percentage of sales will decrease.

So this is how we believe that in the short to medium-term, the overall structure of expenses of the company will decrease, mainly due to an improvement in Sendas Distribuidora.

And was there any severance provisioning in the quarter at all?

There was nothing significant, Bob.

And then when it comes to your average to improve your efficiency levels in many of the acquisitions that you’ve made, how are those going, and I guess, where are you in the process in terms of identifying sources of inefficiency and transferring best practices and can you help us perhaps understand the magnitude of that opportunity, because it seems very significant?

Bob, we have – you know that we have constantly a big focus on expenses reduction in the company, and this will be probably the main issue above CBD, or probably one of the main issues about CBD in 2005. We have identified three main drivers to reduce expenses in the company.

First, we believe that we can increase the level of shared services in CBD and as a consequence, we can eliminate some small, let’s say, administrative structures that we have in each of the business units, just to give you an example.

Second, we believe that we can use much better what we call internal benchmarks. We have identified that we have many stores in the company, in all formats, with, for example, same sales area, the same level of sales, but sometimes much different level of expenses, so we believe that we can reproduce the best practices of the most efficient stores in the other stores.

And the third driver will be what we call non-saleable goods or services, every product or service that we have to buy to run the business, much of them products that we have on the shelves to sell to the customers. So with these three drivers, we believe that we can be more efficient in expenses, and this is in line with the goal of the company to increase profitability.

Can you put a number on that for me, Fernando?

Not yet, Bob. We believe that we are not 100% comfortable to give a guidance in terms of expense reduction because we are in the middle of the process but as soon as we have something more precise we will communicate to the market.

And in terms of where you are in the implementation process, especially with respect to the benchmarking of your supermarkets, where would you put yourself?

It’s a new project. We are at the very beginning, so we don’t see in the current numbers any effect from this.

And you said 2005? Does that suggest that you’re not going to do anything before the holiday selling season, you’re going to wait until 2005 to really make these changes?

Yes, that’s right, Bob.

Great, thank you very much.

Thank you, Bob.

Thank you. Our next question is coming from Robert Worthimer (ph) of Morgan Stanley. Please go ahead.

Hi, good morning. I had a couple of follow-up questions on SG&A. At Sendas it looks like SG&A sales were down slightly sequentially but not a lot, maybe about 10 basis points, but it looked like you made a lot of progress in trimming employee count there. Was there – you said, I think, no severance. Was there anything else that would have caused SG&A to bump up its Sendas during the quarter, or are you on track with reducing expenses [as spot]?

Hi, Robert. I think the main point about the performance of Sendas is regarding sales. We need to increase sales in those stores in order to have a higher dilution of expenses. You are right that we have been reducing, increasing productivity in those stores and you can see another improvement in the third quarter. That probably will be better reflected in the fourth quarter.

But anyway, again, the main point regarding Sendas’ continued gains, sales, we believe that we have the potential to sell much more in those stores.

Are you going to put a scope on what you think productivity can be, respective to where it is now, at Sendas?

Robert, in the beginning, the number of employees per thousand meters was much higher than what they have in CBD. Now, it’s something much closer to what we consider to be the ideal level of productivity, so we believe that in the fourth quarter, the number will be even better and we continue with the expectation to have something, not at the same level of CBD by the end of the year, but something at least closer to the level of CBD. And that’s why we are very confident that Sendas will bring us for the overall number a good impact.

Briefly, if I can ask one more on the financing income, you mentioned that there were some competitive or promotional credit environments in the market. Are you seeing that more on rate pressure or on getting the balances, getting the loans?

Not actually. It was actually a result of the competitive environment. It was really a result of what the competition was doing in that period, and we have to follow the market, otherwise we will lose sales. It doesn’t have anything to do with higher funding costs, let’s say.

And that meant you were having to give lower rates to consumers?

We have to offer lower rates to consumers because the competition was doing so.

Thanks.

[OPERATOR INSTRUCTIONS]. Our next question is coming from Tina Barroso of UBS. Please go ahead.

Hi, good morning. The first question is on the market as a whole, I guess. Do you see – you said that the market was more promotional on credit, but do you see, like, in prices, you know, because there’s a pick-up in demand and [indiscernible] power improvement. Do you see the market as a whole being less competitive in prices right now versus last year, for instance?

And the second question is regarding your main competitors. Carrefour is, let’s say, more or less aggressive year-over-year, and finally, how many new Wal-Mart stores were opened in the [south east] of this quarter and do you think they are increasing the pace of their investments in the south east right now or not? Thanks.

Hi, Tina. We don’t see anything much different in terms of food, in terms of competitive environment. The [different] competition that we have continues being from the [four main] players and we don’t see anything much different in terms of Carrefour. Can you repeat the last part of your question, please?

Yes, well, first, is the market like year-over-year or do you think there are more aggressive promotions or not? And the second question is about, I guess just on Wal-Mart, how many stores they opened in the south base this quarter, and do you feel they’re accelerating their investments in the south east or not, or they really just concentrating in the north east at this time? Because I saw a couple of articles saying -

Yes, it’s obvious, thank you. Tina, regarding the competitive environment, just to enforce what I mentioned, we don’t see anything much different in terms of food, but we seem something more promotional, higher competitiveness in the non-food area, especially in [electronics].

Regarding Wal-Mart, we believe they will continue opening stores in the south east of Brazil. They’ve been growing just organically in this region, but they will be also busy in the integration of all the stores that they bought in the north east of the country, their [warm places] stores. But we believe they will continue expanding in the south east of Brazil, especially in Sao Paolo, especially in Rio de Janeiro and Minas Gerais.

Okay, just to do a follow-up on the [indiscernible] deals, I thought you were going to book, like, the R$205m as a net cash, an additional net cash sequentially, and I didn’t quite see you net that improving sequentially by that amount. Can you expand on that? How did you book the money from the Itau deal in the quarter? Thanks.

Tina, the cash position will be impacted by the R$205m in the fourth quarter after we have the spin-off of a controlled company by CBD and Itau. So you can expect, in addition to the position that we finished the third quarter, another R$205m in our cash position that will decrease the net debt of the company.

Okay, thank you.

Thank you. Our next question is coming from Juliana Rosendam (ph) of Deutsche. Please go ahead.

Hi, good morning, a couple of questions on Sendas. First, briefly with same store sales trends in Sendas, in line with CBD’s, are they performing differently? And then, what is your expectation for the level of the EBITDA margin into the fourth quarter, and in which point next year can we expect Sendas’ margins to be at the same level of CBD’s average?

We see improvements in same store sales in Sendas, but below the average of CBD, so we see potential to increase sales in Sendas Distribuidora in the next future, and we believe that by the end of the year, we should have something better than this almost 5% or 3% in the third quarter, maybe something closer to a number around 7% but this is the number that we have given in terms of guidance.

You must bear in mind that Sendas Distribuidora will always have something a little lower than CBD, and why? Because of the structure of the stores in terms of rented stores and owned stores. All stores in Sendas are rented, so there will be always higher renting expenses reflecting in Sendas expenses, so there will be always a difference between Sendas Distribuidora and the consolidation EBITDA margin of CBD.

Okay, thanks, and in terms of the competitive environment as we were mentioning before, what do you attribute the ability to grow both same store sales above your main competitor in the quarter, and why must you keep margins high? Was there something difference being done that has a long-lasting impact on competitiveness going forward?

No, there is nothing different, basically. We have been more efficient in the negotiations with our suppliers, so we have been able to keep a good gross margin, even excluding the effect of COFINS, a good gross margin with very good price competitiveness.

Okay, thank you.

[OPERATOR INSTRUCTIONS]. Our next question is coming from Alexander Kazaz (ph) of Exit Securities. Please go ahead.

Yes, good afternoon, and good morning for you, Alexander Kazaz from Exit Securities in Paris. Augusta Cruz (ph) said on the press release that the big challenge of CBD is now to increase the asset turnover, and larger return on the invested capital. Could you please put numbers and targets on these two challenges? Thank you.

Alexander, not yet. Unfortunately, we do not have official guidance in terms of return on capital employed and the asset turnover, but we are aware that we have to deliver more on this side, and to achieve this, we are really focusing more on higher same store sales, combined with lower expenses. So we are focusing on action initiatives that would bring us higher same store sales, higher sales [this quarter] combined with lower expenses.

And in terms of expenses, at the beginning of this call, I gave you some insight on how we can decrease expenses. But we aware that we have to, definitely, the company is really aware that it should increase asset turnover and increase return on capital employed, but unfortunately, now, I don’t have an official guidance to give you. As soon as I have, we will communicate to the market.

Okay, thank you.

[OPERATOR INSTRUCTIONS]. Our next question is a follow-up question coming from Tina Barroso of UBS. Please go ahead.

Yes, hello again. Can you give us the numbers on traffic on a same stores sales basis versus your average [ticket] so that we can compare that number to your same store sales? And also, do you think your average ticket is growing less than your competition because of private labels, expenses, etc? That’s my first follow-up.

Tina, the growth that you saw in the third quarter, the 9%, was really well balanced between a higher number of transactions on a same store basis or a higher number of clients and the increase in the average tickets. And we don’t see our average ticket increasing less than competition because the main reason, the main driver for same store sales increase, or for average ticket increase, there has been the increase in sales of discretionary items.

So we don’t see that the fact that CBD sales, private label products or first price products are giving us a lower average ticket in competition, a lower base of growth than what we see in competitors.

Okay, I just asked that because in the past, you justified your same store sales being lower than the consolidated, you know, when we look at [Dabadas] or whatever comparison we make, try to do, and this was one of the reasons you cited in the past. That’s why I asked.

And the other question is on the financial income. Do you see your credit sales really picking up going forward, or do you see most of the improvement on the credit side coming from bigger profits in the joint venture with Itau?

Yes, Tina, we believe that in the medium to long-term we’re going to have much more attractive conditions in the credit business, especially after the beginning of the joint venture with Itau. And also, it’s important to see that in Brazil, we still have a very high in-tap demand for the tarmacs, so we see a big potential in the business. We are extremely well positioned to sell [electronics] with our hypermarket, and also with our Eletro stores.

You will remember that now we have 70 hypermarkets. When we look back in the IPO in 85, we had just seven, so now we have a much stronger position in the non-food area in the company, and we basically can take advantage of this higher pent-up demand for electronics. And we will have a much more efficient operation in our view, together with Itau. We’re going to take advantage of the huge expertise of Itau in the financial area, the technology of Itau, and we believe that we’re going to have especially some 2005 [and on] a much better environment for the credit business.

And also, remember that with the joint venture, we’re going to start offering financial products that currently we don’t offer to customers, like personal loans, all kinds of insurance and this will be another source of revenues for CBD.

Thank you. I was just – I think my question was, would we see more profits coming, and I think your answer is yes, you would see more profits coming from the joint venture than from, you know, in your income statement as financial income, as credit card sales increase and these other products that you’re going to offer through the joint venture, but not necessarily a real pick-up in the interest income coming from your credit sales from your installment plans and so [indiscernible]. Is that what you’re saying, just to clarify?

Yes, Tina, we firmly believe that we can be much more profitable with this joint venture. Not only this, we believe that we can increase the traffic of customers in our stores, and also sell more food and non-food in all formats. So we do believe that the rationale of this joint venture is to be more profitable in the credit business and also to attract more customers in our stores.

Okay, thanks.

[OPERATOR INSTRUCTIONS]. There appear to be no further questions. Mr. Fernando, do you have any closing remarks?

Thank you very much for your attendance. Thank you very much again for your support and we are from the Investor Relations department available for any additional questions that you may have. Have a good day, thank you.

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time, and have a wonderful day.