Companhia Brasileira de Distribuicao SA (CBD) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen. At this time we would like to welcome everyone to Companhia Brasileira de Distribuicao fourth quarter and year 2004 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 a simultaneous broadcast on the Internet that can be accessed at the site www.cbd-ir.com.br/eng. There will be a replay facility for this call at the website. We inform that the earnings release is available at the Company's IR website, www.cbd-ir.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 question and answer section. At this time, further instructions will be given. [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'll turn the conference over to Mr. Fernando Tracanella, who will present CBD's operating and financial highlights of the quarter. Mr. Fernando, you may begin your conference.

Good morning everyone, and thank you for your participation in this conference call. I'd like to begin this presentation commenting on the fourth quarter and year 2004 performance, followed by remarks about our strategy and perspective. And after that we can start the Q&A session.

In 2004, our gross sales reached BRL15.3b, and net sales BRL12.6b, a 19.6% and 16.3% growth respectively, compared to 2003. Reminding that the difference between gross and net sales growth rates arises from the increase of COFINS rate that took place in February 2004.

Same store sales grew by 5.1% in nominal terms in 2004. Even with the hard period for sales in the first half of the year, the country experienced an improvement in consumption environment throughout the second half. Positively reflecting in our same store sales figures, which grew in nominal terms by 9% and 8.8% and in real terms by 1.9% and 1.4% respectively, in the third and fourth quarters.

It is important to point out that in addition to the overall recovery in the retail sector, efficiency gains obtained by CBD over the last years were crucial for this good performance. Same store sales in real terms, reflected by IPCA, was down by 1.5% in the full year 2004. But as we analyze this same performance, deflated by the food inflation index - which in our view reflects better the reality of the sector - same store sales grew by 1.4% in 2004.

Following the trend observed over the last months of 2004, CBD expects same store sales growth between 2 and 3% in real terms for 2005. In this scenario, the Company remains focused on fostering the same store sales growth, believing that it will create the required conditions to achieve higher asset turnover and consequently higher profitability.

We'll now comment on our operating performance. Gross income grew by 20.8% in 2004, reaching BRL3.7b. Gross margin in the period was 29.2%, higher than the 28.2% reported in 2003. This improvement was mainly as a result of - first, better negotiation with suppliers; secondly, a new COFINS calculation system; and third, the greater participation of higher margin items in the product mix, such as private label and second line products.

The fourth quarter gross income grew by 27.4% in comparison to the same period of the previous year, with a 28.8% margin, 170 basis points higher than the margin reported in the fourth quarter of 2003.

Operating expenses were 20.9% as a percentage of net sales in 2004, compared to 19.8% in 2003, affected by the increase of COFINS tax, which reduced net sales in the period.

Analyzing operating expenses over gross sales, to eliminate the COFINS effect, the Company registered operating expenses equivalent to 17.2% of gross sales in 2004, compared to 16.7% in 2003. Here we highlight expenses line that exceeded the sales growth in the period, mainly in the fourth quarter of the year.

Transportation. With the pressure from higher fuel prices and higher freight service costs in the period, public services in general, third party services, also affected by the COFINS increase.

And finally, high investment in advertising, especially in the fourth quarter of the year, aiming to consolidate the low-price image of the Company in the main markets of Brazil.

EBITDA reached BRL1b in 2004, a 16% growth over the previous year. EBITDA margin remained at 8.3%. Also, consolidated EBITDA margin remained flat compared to the previous year. It's important to highlight that EBITDA margin, excluding Sendas, was 9.3%, 100 basis points over the margin reported in 2003.

In the fourth quarter, EBITDA grew by 12.6 -- 12.5% in comparison to the same period of 2003, with an 8.3% margin compared to 8.9% in 2003. EBITDA margin, excluding Sendas, in the fourth quarter, was 9.2%.

What is important to highlight here is that Sendas Distribuidora has successively improved since the first quarter, when we had an EBITDA margin of 2.2%. And CBD expects to reach an EBITDA margin of at least 6.5% in Sendas in 2005, through an increase in sales and productivity gains.

In the same task, we initiated a restructuring and remodeling process in the stores of Rio de Janeiro, which should be concluded at the end of the first half of this year, and which has already brought expressive results in terms of sales per square meter increase.

Financial expenses reached BRL618m in 2004, lower than the BRL760m posted in 2003, mainly as a result of lower funding costs in the period. Of this amount, BRL133m refers to Sendas Distribuidora's financial expenses.

Financial income reached BRL330m, lower than the BRL575m registered in 2003, due to lower income from cash investments and to the strong promotional environment for credit sales. As a result, net financial expenses reached BRL288m in 2004, compared to BRL185m in 2003.

In the fourth quarter, net financial expenses reached BRL69m compared to BRL16m in the same period of 2003, impacted by the interest rate increase in the last quarter -- especially in the last quarter of the year.

The highlight is that the Company's net debt was reduced by BRL469m during the last quarter of 2004, something that will positively impact the financial result of CBD throughout 2005.

Net income reached BRL370m in 2004, a 64% growth when compared to 2003. Even excluding a non-operating result of BRL5m in 2003 and BRL80m in 2004, relating mainly to the partnership -- due to the partnership with Itau, net income grew by 31.4% in the year.

Now we will quickly comment on the Company's working capital rate in the fourth quarter. Inventory turnover was 37 days, higher than the 36 days registered in the same period of the previous year. Average term with suppliers reached 49.1 days, an important improvement compared to the 42 days reported in the fourth quarter of 2003.

Average term of receivables reached 10 days, also an important improvement compared to the same period of 2003, when we had 22 days.

Capital expenditures in 2004 reached BRL532m, mainly the rapid store modeling, corresponding to 57% of the total. Opening of new stores and acquisition of land, together corresponding to 34% of the total, and investments in IT and logistics equivalent to 9% of the total. The highlights of the year were the integration of 68 stores of the Sendas chain, 8 of which converted to Extra format, and also the migration of 96 Barateiro stores to CompreBem format.

I'd like to emphasize that the positive results achieved by CBD in 2004 were much more than a mere consequence of the Brazilian economic recovery. Most of all, this performance is the result of our search for higher operating efficiency and higher productivity. And I feel that's the evolution of the results of Sendas -- of CBD excluding Sendas.

Thus the outlook for 2005 is very promising. With the gradual recovery in sales in Sendas Distribuidora, higher same store sales and productivity can be expected. Considering that Sendas Distribuidora represents 20% of CBD as a whole, and expecting an improvement of at least 200 basis points in Sendas' EBITDA margin compared to 2004, we will have a quarter impact of approximately 40 basis points in CBD's consolidated margin for 2005. Because although improvement measures went up in 2004, we were very confident that we are prepared to carry on our growth targets.

Our investment plan for 2004/2005, estimated at BRL500m, involves the opening of 21 stores and an 8% growth in sales area, reflecting the positive expectation for the Brazilian economy. CBD will capitalize on this scenario, through the attractive positioning of its business units and by diversifying the products and services offering. The opening of gas stations and drugstores, as well as the partnership with Itau to offer credit products and services for consumers, are all part of this strategy.

We believe that the Company is even more strengthened to pursue its current goals - focus on profitability through the increasing same store sales, higher assets turnover and lower operating expenses. Therefore, we expect an EBITDA margin between 8.5 and 9% in 2005.

These were the main comments on our performance in the quarter and the year. We are now available to take any questions that you may have. Thank you.

Thank you. The floor is now open for questions. [OPERATOR INSTRUCTIONS]. We'll take our first question, coming from Bob Ford of Merrill Lynch.

Good morning, everybody. My first question has to do with profit sharing. For the first time, you've recognized a profit sharing charge. I was just curious as to why, and whether or not this replaces pre-existing compensation programs?

Hi, Bob. Good morning. The reason why, for the first time, we have this profit sharing booked below the EBITDA margin was a result of an agreement that we had with the union. So this is -- was something agreed with the union and that's the main reason why we have this BRL14m booked in a separated line.

Is this a new source of compensation, Fernando, or is this pre-existing? And what did you obtain in exchange, if it's new?

This will be the way that it will appear in all the numbers from now on. And this is part of the negotiation and we get -- part of the negotiation, the result was the salaries readjustment that we could have in the period.

Okay. Can you give me a sense of -- Can you be more specific in terms of trying to understand -- So this is simply making more of the pre-existing compensation variable, is that correct?

And could you also tell me what the wage increase -- typically, you review your compensation and the salary level annually, right? The wage increases were given in December. Could you tell us what that was, and now what proportion of store level employees will receive variable -- or what proportion of compensation at store level will be variable, compared to prior?

Hi, Bob. The salary increase in December was 6.5%. This is a variable remuneration for all employees of the Company that we have, this BRL14m. So we have a combination of this 5 -- 6.5% salaries increase and the BRL14m in terms of profit sharing for all employees of the Company, booked in a separated line.

And Fernando, I'm just curious, did you -- do you get more flexibility from the unions or did you negotiate something else that's -- instead of a more reduced base increase?

Bob, there was not -- there was nothing different. There is no special flexibility. This is just the way that we negotiate, the way that we agreed to show the profit sharing of employees of the Company. And this will be a practice for the future periods. You can expect the same in 2005 and from now on.

Employees in the past had also gotten bonuses, right? So is this -- I'm still not certain. Is this a pre-existing source of compensation that you've just booked below the operating line, before it was recognized as SG&A? Is that correct?

Yes. That's the point. In 2003 this number was BRL12m.

Great. Thank you. And then, with respect to the improving profitability at Sendas, you have a minority loss in the quarter. Could you explain the origin of the minority loss, if indeed Sendas is actually improving?

Bob, basically in Sendas Distribuidora we still have a much lower EBITDA margin compared to CBD, as you can see. We had in the year 4.5% against 8.3% in the consolidated number. Or, if you see CBD excluding Sendas, we had in 2004, 9.3%.

So basically what you have in Sendas is a necessity of higher sales, combined with higher productivity levels. We need to improve the productivity in Sendas stores and reduce expenses, but also we believe that we can sell much more in the stores, because we believe that our locations are outstanding. When you see the minority interest line, we have also the effect of the high financial expenses that we have in Sendas, which are very high considering the current levels of EBITDA in Sendas.

Okay. So, you ran a 4.5% EBITDA margin in the fourth quarter in Sendas, is that correct, Fernando?

No. This is what's the margin in the full 2004. In the fourth quarter we had 5%.

Okay. Then, the way I'm looking at it, the minority interest loss is a minority loss of 6.8 -- BRL16.8m. What do you need to break even in that business in terms of an EBITDA margin, given the cost structure that you have in Sendas?

Yes. We are doing a lot of different things in Sendas that I believe that will bring us very interesting results shortly. First of all, we have been revamping all the stores, with significant results in terms of sales per square meter increase. So we have seen a very good performance in the stores that we are doing remodelings in Sendas.

Secondly, we still see growth in terms of productivity increase in Sendas with lower expenses in all stores. We believe that we can have, in 2005, at least 6.5% EBITDA margin in Sendas. So this is a significant improvement. This will bring us a very good effect in 2005, when you think about the consolidated numbers. Considering again, as I commented before, considering that Sendas Distribuidora is about 20% of the business, we can have, by increasing 200 basis points of Sendas' EBITDA margin, at least 40 basis points in the consolidated margins of the Company.

So we are very confident that this -- the higher same store sales in 2005, combined with a higher profitability of Sendas since the very beginning of the year, will help us significantly in 2005, in order to have this EBITDA margin between 8.5 and 9%, as we have in terms of the guidance.

Great. Lastly, Fernando, can I ask you a question on the competitive environment generally, and the degree of advertising, promotion, pricing, that's occurring in the industry, as well as the outlook for the industry's base growth?

And then maybe you could talk a little bit about the Rio market in particular, because it just seems to me, based on my own anecdotal experience, that the predominance of tax-evading smaller chains seems to be greater in Rio. I don't know if there's a reason for that, versus Sao Paulo, but Rio seems like the Wild West when it comes to tax evasion. And it just seems like the industry, at least when you look at this quarter, the industry seems like it's getting a little bit more competitive.

[OPERATOR INSTRUCTIONS].

Hello?

Mr. Ford, we do ask that at this time, would you please reannounce your last question?

Sure. Thank you very much.

Thank you, Mr. Ford.

Hi, guys. The last question was with respect to the competitive environment. And given the big escalation that we've seen in advertising for you, based on anecdotal observations, it appears as if the industry is getting a little bit more competitive, and I was wondering if you could expand a little bit on what you're seeing in terms of pricing, in terms of competitor advertising, in terms of new space additions, going into 2005?

And then if you can contrast what we're seeing in Sao Paulo with that of Rio, in which it appears that there's a greater predominance of tax-evading smaller retailers. I'm curious as to whether or not that is actually the case, and if there's a solution for that, because it just seems as if these smaller retailers continue to grow at a pretty rapid clip. And based on our own experiences, we see much heavier foot traffic in some of these smaller tax-evading stores than we see in chains that are believed to be more compliant from a tax perspective. Thank you.

Bob, what happened in the fourth quarter is that the Company invested heavily in the recovery of Sendas in Rio de Janeiro -- the image of Sendas in Rio de Janeiro and consolidation of the new form of Sendas in Rio de Janeiro. Also in Pao de Acucar, a [format], because now we have a new advertising company working with us. But you are right when you say that the tougher competition of the retail -- of the Brazilian market, still comes from informal players, the players that don't pay all the taxes.

So this -- the picture continues pretty much the same. CBD has very competitive prices, especially compared to the formal players in Brazil, but sometimes we do have some isolated problems to compete against the tax evasion. So we didn't see anything different in the fourth quarter. It was much more a strategy of the Company, a proactive move of CBD, in order to increase sales in the supermarket models, especially Pao de Acucar and Sendas.

Thank you. Our next question is coming from Jose Galvan of BBVA.

Thank you. Good morning, gentlemen. A couple of questions. Number 1, I don't know if you mentioned this, but considering the competitive environment, Fernando, you are still working with the same range for the gross margin in 2005, between 28.5 and 29%?

And the other one, could you explain a little bit more about your CapEx program for 2005 of these 21 stores? Could you give us that, the breakdown of what will be the formats that you will be opening? Thank you.

Hi Jose, good morning. We still have the same guidance in terms of gross margin. Gross margin around 29% for 2005, and an EBITDA margin between 8.5 and 9% in the year.

Regarding the breakdown of store openings, we have 8 hypermarkets being opened this year, including a new market for the Company. Plus 7 Pao de Acucar stores and 6 CompreBem stores. So this way you have the 21 stores, and importantly, 8% selling floor increase.

Thank you, Fernando.

Thank you, ladies and gentlemen. [OPERATOR INSTRUCTIONS]. We will take our next question, coming from Lore Serra of Morgan Stanley.

Good morning. I wanted to go back to the trend in operating expenses in the quarter. And Fernando, can you give us some breakdown of the factors? You've described it in the press release and on the conference call, the factors that drove the increase, but I'm wondering if you could help us quantify some of the factors that led to the 40% increase in selling in the quarter. Selling expenses, rather.

Lore, we -- unfortunately we cannot disclose line by line our SG&A expenses, but --

I guess one of my questions is, you've attributed it to advertising and if I'm -- if I understand the order of magnitude your advertising --

Okay. Our advertising increased by 30% year-on-year, while sales increased by 20%.

I'm sorry - advertising increased by 30%?

30%, compared to the fourth quarter of 2003. Okay? I cannot give you the exact percentage of -- in terms of total SG&A, because of statistical reasons, but I can tell you that it increased around 30%, while sales, it appeared gross sales increased by 20%.

Okay. And what other factors grew well in excess of sales growth in the quarter?

Transportation, public services, third party services - basically those lines.

Okay. And as you look to the first quarter of '05, how much of that is recurring into '05?

We don't believe that we're going to have the same level of advertising -- special advertising expenses in the first quarter. A lot that happened in the fourth quarter had to do with the seasonality of the period, and also with some events that we had in the fourth quarter. For example, the anniversary of Extra banner, an anniversary of CompreBem and Sendas. So, usually we have higher advertising expenses.

Also, the change in the strategy in the communication of Pao de Acucar banner happened in the fourth quarter, and we believe that we're going to have something a little bit more normalized during the first 3 months of the year. So, we don't believe that we're going to have the same level that we had in the fourth quarter, and we're going to have something more in line with the previous quarters.

Okay. But the factors you're citing in terms of transportation, public service, third party services - those don't sound to me like issues that are going to go away. And I guess I'm a bit confused by your comment on advertising because the promotions you're talking about are seasonal, so surely they were in fourth quarter '03 as well?

Yes. The difference is that we were a little bit more aggressive in the fourth quarter of 2004. That's the only difference. Obviously we have the same events every year. And you're right, some of the expenses are recurring, some increases in expenses are recurring, especially in terms of transportation and public services. So, it's something that we have to live with and we intend to compensate this with higher productivity and higher -- and lower expenses in other lines.

We have a big plan this year to reduce SG&A expenses. We will start in 2005, probably with good results from -- [still in] 2005 but especially in 2006. We intend to increase the level of shared services in the Company. We intend to use better the internal benchmarks that we have in CBD in order to reproduce the best practice of the most efficient stores in the others. And we intend to be more efficient in what we call corporate projects - taking more advantage of our current size.

So we believe that, despite the fact that we have -- we will still have some pressure in some of the lines that you mentioned, we believe that we can offset this with higher productivity and lower expenses.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question will be coming from Juliana Rozenbaum of Deutsche IXE.

Hi everyone. Fernando, I was just wondering - comparing the fourth quarter '03 with fourth quarter '04, in '03 you decided to invest more on lower gross margins for more on price competitiveness. And in this quarter more on advertising expenses. Do you think this strategy paid off? Given the competitive and promotional environment of the fourth quarter, was this the right decision?

Juliana, we felt it was the right strategy. And the reason why also the gross margin was stronger this year is that we've been also more efficient in our negotiations with suppliers. So this was reflected in a gross margin almost 200 basis points higher, compared to 2003.

The strategy of the Company is to continue being very competitive in terms of prices, as we are today, but with a good profitability in terms of gross margin. And a lot of things, again, that happened in the fourth quarter are non-recurring events. And we believe that we're going to have something a little bit more normalized in the next quarters.

And also, Juliana, when you think that we can have higher sales -- higher same store sales during 2005, and higher sales coming from Sendas, I do not see a high evolution of those expenses during the year. Okay? So, that's why we are confident that we can have a good EBITDA margin in 2005, something between 8.5 and 9%, hopefully something closer to 9%.

And you mentioned that you had this 30% increase in marketing expenses in the fourth quarter. Do you have the budget for advertising expenses in '05, how much higher or lower it's going to be in relation to '04?

I cannot give you the number, but we -- you can be sure that we're going to work to have an increase lower than the expected increase in sales this year, in order to have a little bit more of dilution of those expenses.

Just a last question. Given the very difficult promotional environment in Rio, do you think it's Wal-Mart and Carrefour, so the formal competitors, are also becoming more harder to compete against, or it's only the informal players?

Carrefour and Wal-Mart are always tough competitors, but the toughest competition still comes from the informal players in the supermarket model. We now have a very good critical mass of suppliers, so we believe that was -- all the acquisitions and the growth that we had since the IPO of the Company was very important, in order to provide us a good positioning today in a sector that we have the 2 biggest players of the world, and combined with a very strong informal sector. But when you think about prices, the competitive environment is much tougher against the informal players in Brazil.

Okay, thank you.

[OPERATOR INSTRUCTIONS]. Our next question is coming from Jose Yordan of UBS.

Good morning. My question pertains to your comment in the press release about the adoption of EVA in 2005. I'm just curious as to what the -- how deeply you're going to go with implementing EVA. Is this going to be, as you mentioned here, enhancing the analysis of return and leading to better efficient decisions at the headquarter level? Or is this going to be a more profound change in the way the Company is managed, something similar to what happened to AmBev after they adopted EVA in 1996?

This is a project that has already started in CBD. CBD is working with Stern Stewart in order to implement something deep in terms of EVA. Obviously, it will be a gradual process because it's a big change in the culture of the Company. And in the beginning we're going to start seeing the Company more in a consolidated basis, and it will be a gradual process until the moment that we have also the remuneration of [the sector] linked to the system.

So it's something that has started in 2005, but probably the results you're going to see in the future, probably from 2006 on. But it's going to be a big process and we believe that it will be very important in order to create a higher discipline in terms of cost, in terms of new investments, in terms of value drivers in the Company.

So you're saying by the end of 2006 the process will be complete and, let's say, 2007 would be the first year of operation under the new compensation scheme and so forth?

No, actually in 2006 we believe that we're going to start seeing some first results of this new, let's say, culture in the Company. 2005 will be a year that we're going to be very involved in analysis in the way that we can improve the value creation of the Company. But from 2006 on, we're probably going to start seeing some of the results.

Okay. Thanks a lot.

Thank you. Our next question is coming from Bernardo Canjero(ph) of Santander.

Hi, Fernando. I have a question regarding the improvement in net debt that you're showing for 2004. I see that the main leader of this improvement is resulting from the sharp drop in accounts receivable, which I think is related to the securitization of receivables that the Company implemented through its fund of accounts receivable. Do you have an estimate for 2005 of a further drop in net debt? How does the Company see this fund of receivables? I'd like to have an update on this. Thank you.

This is Fernando. Currently, you can see that we have a net debt, the gross debt less cash and receivables, of less one-time EBITDA of 2004. And when you think about 2005, this relation will be even more comfortable for the Company. So we believe that we can have some change -- at least the maintenance of this level -- those levels during 2005. And we believe that this is a comfortable level for CBD.

Yes, but do you have an estimate for the drop in the accounts receivable?

We believe that receivables probably will remain at those levels during 2005. We're not expecting additional -- any additional securitization of our current portfolio. Also, you're going to see a drop as the result of the joint venture with Itau, because these common sales will be made by the new company. Also, regarding debt, one of the projects of the Company is to extend furthermore the debt profile that we have today. Okay? But we are not expecting any significant change in the level of debt that we have -- that we had at the end of 2004.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. Mr. Fernando, there appear to be no further questions at this time, sir. I'll turn the floor back over to you.

Okay. Thank you all for joining this conference call. We remind that the CBD Investor Relations team will be able to answer any additional questions that you may have. Thank you very much and have a good day.

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