Companhia Brasileira de Distribuicao SA (CBD) 2005 Q1 法說會逐字稿

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

Also, we have simultaneous webcast that may be accessed through CBD's website at www.cbd-ri.com.br/eng. Please feel free to flip through the slides during the conference call. There will be a replay facility for this call on the website. We are informed that the earnings press release is available at the Company's IR website at 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 question and answer session. At that 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 changes 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 comment on CBD's operating and financial highlights for the quarter. Mr. Fernando, you may begin your conference.

Good morning everyone, and thank you for your attendance in this conference call. I would like to begin this presentation commenting on this quarter, first quarter performance, followed by remarks about our strategy and outlook. After this, we can start the Q&A session.

In slide two, we have the main highlights and the top line. For the first quarter, consolidated gross sales reached BRL3.9b, a 15.5% increase over the same period of the previous year. Net sales reached BRL3.3b, a 16.3% growth. Same store sales grew by 11.1% in nominal terms, representing a 3.4% growth in real terms.

Even with the impact of the unfavorable calendar in February, with one day less compared to the previous year, and a favorable March calendar due to Easter positioning, CBD's solid performance is mainly a result of the improved consumption environment in Brazil and increased sales of seasonal products.

Furthermore, we also observed a gradual trading trend, with increased consumption of higher value-added items. Sales of non-food products also maintained a strong performance, with a growth of 19.6%, and food products registered gains relative to past quarters, with a 9.1% growth over first quarter 2004 results.

In the analysis by business unit, Extra and CompreBem formats presented double-digit growth rates, surpassing the Company's average.

Gross sales in Sendas Distribuidora totaled BRL812m, and net sales reached BRL695m. It's also important to point out that Sendas Distribuidora started operating in February 2004, and therefore sales in the first quarter 2005 can be only compared to, only two months of operations last year.

We will now move on to slide three, with remarks about our operating performance. CBD's gross income for the first quarter 2005 was BRL943m, a 16.8% growth over the same period of 2004. In spite of increased price competitiveness, we managed to increase our gross margin, which reached 28.9%, while the first quarter 2004 gross margin equaled 28.7%.

This is a result of scale gains with suppliers, and also Sendas Distribuidora's improved margin, from 27% in the first quarter of 2004, to 29.2% in the first quarter of 2005.

The Company presented important improvements in the first quarter by increasing productivity and reducing its operating expenses. Operating expenses reached 20.5% of net sales, lower than the 21.1% of the first quarter 2004. The highlight was the dilution of G&A expenses that grew by only 5.4%, compared to the same period of 2004. A significantly lower growth compared to the sales growth. Thus, G&A expenses as a percentage of net sales fell from 4.1% in 2004 to 3.6% in the first quarter of 2005.

In sales expenses, pressure coming from public services, personnel and transportation costs were offset by a reduction in advertising expenses, which decreased from 2% of sales in the first quarter of 2004 to something close to 1.5% in the first quarter of 2005.

As a result of reduced expenses and increase of gross margin, EBITDA grew by 26%, reaching BRL272m. EBITDA margin was 8.3%, a 60 basis points increase compared to the 7.7% margin registered in the first quarter of 2004. The continuous improvement in Sendas Distribuidora's profitability was one of the main drivers of these results.

EBITDA margin of Sendas was 5.6%, compared to 2.3% in the first quarter of 2004, reflecting an improvement in sales, as well as scale and productivity gains as a consequence of the renovation and re-modeling process in the stores in Rio de Janeiro, which should be concluded by the end of the first half of this year. Thus CBD expect an EBITDA margin for Sendas Distribuidora of at least 6.5% in 2005.

Financial expenses in the quarter reached BRL170m, a 7.2% growth over the same period of the previous year, which increased the funding costs. On the other hand, there was an increase in financial income, from BRL75m to BRL102m, as a result of higher revenues generated by financial instruments and higher credit-based sales of durable goods since the second half of last year. Therefore, net financial expenses reached BRL68m, compared to BRL84m in the same period of the previous year.

We can see in slide four that as a result of all above-mentioned items, in addition to the income tax provision of BRL13m, net income in the first quarter of 2005 reached BRL58m, a substantial increase of 107% over the same period of 2004, when net income was additionally impacted by an income tax credit of BRL8.6m.

Moving on to slide five, CapEx in the first quarter of 2005 was BRL139m, against BRL127m in the first quarter of 2004. The main highlights were the opening of two new stores, one Pao de Acucar in Ceara, and one Extra in Sao Paolo, construction of two new hypermarkets, renovations of 20 Sendas stores, conversion of three ABC Barateiro stores into Sendas format, in addition to the usual store remodelings, openings of gas stations, direct stores, and also investments in information technology and logistics.

Additionally, in the beginning of May, CBD acquired the CooperCitrus chain, with seven stores and three gas stations located in the countryside of Sao Paolo state. All stores will be soon converted into CompreBem business unit format.

Finally, in slide six we would like to emphasize that the positive results achieved by CBD resulted directly from the attractive positioning of our business units, price competitiveness and service and product offering diversification, which allowed the Company to efficiently capitalize from the Brazilian economic recovery. At the same time, the continued effort, aiming at operating efficiency and higher productivity, widened the margins of our business.

Outlook for 2005 remains, in our view, positive, not only for the gradual improvement in Sendas performance, but also for the expected increase in same store sales for the Company as a whole, high asset turnover and lower SG&A expenses. So I think now we can open for questions that you may have. Thank you.

Thank you. The floor is now open for questions. [OPERATOR INSTRUCTIONS]. Thank you. Our first question is coming from Tina Barroso of UBS.

Yes, hi. Good afternoon, I guess. Can you give us the breakdown of CapEx, how many remodelings, and if you have a new guidance for the year, vis-à-vis your presentation a couple of days ago saying that you are going to spend [BRL2.5b] in the next four years? That's my first question.

Tina, we are keeping the same guidance of store openings that we provided the market in the beginning of the year. We are opening -- the only change is that now we are opening nine hypermarkets instead of eight hypermarkets. So this is the only change. In terms of supermarkets, the numbers are the same. We are opening this year seven Pao de Acucar stores, six CompreBem stores, in addition to the stores that we bought from CooperCitrus, that will be converted into CompreBem.

Regarding your question about the breakdown of the CapEx in the first quarter, we had BRL40.5m invested in new stores, BRL79m in store remodelings and BRL19.5m in IT and logistics.

Okay, thanks. And can you tell us how much is spent in the CooperCitrus acquisition, or what kind of multiple you paid? And is this --?

We can say that we paid a very attractive -- we had a very attractive condition in this last acquisition. We paid less than 15% of annual gross sales of CooperCitrus, which is something -- and the gross sales of this chain is around BRL150m per year.

Okay, thanks. And do you have any, like, the EBITDA margin or the guidance for the year, have you changed it in light of your upcoming real estate transactions?

Tina, excluding the effect of the real estate transaction, we are keeping the same - something between 8.5% and 9% EBITDA margin for the year. But with the impact of the higher rent expenses that CBD will have this year because of the real estate transaction, this number should drop by something around 50 basis points.

Thanks. And going forward, all your expenses will be --?

Tina, let me just correct something. The 50 basis points, Tina, is something in a 12-month period, okay. Remember that the real estate transaction will be reflected in the second half of 2005.

Okay, thanks. And just one follow up - the real estate transaction -- I've totally forgot what I was going to ask. I'll get back in the queue. Thanks.

[But remember we are here].

Okay, thanks.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question is coming from Bob Ford of Merrill Lynch.

Hi, good morning everybody. Just a follow up with respect to that CooperCitrus acquisition. Fernando, you said it was effected in May, and I just want to make sure that you listed it as part of the CapEx in the first quarter. Is it indeed part of the BRL139m cash that was spent in the first quarter?

Bob, the CapEx will be affected by CooperCitrus acquisition just in the second quarter. So the BRL139m for the first quarter had no effect from CooperCitrus. This will not mean any significant change in our CapEx for the year, as long as we pay less than 15% of sales for a chain that sells BRL150m per year.

Okay. No, I understand that, I was just trying to figure out the number, if it had been included or excluded.

And then I was curious, do you plan to close these as you remodel them and rebrand them, or are they going to remain open? And what kind of additional expense do you anticipate in converting the stores?

Bob, the stores won't be closed for the conversions. Our CapEx for those conversions will be around BRL700,000 per store.

Okay, Fernando. And then, just anecdotally, I sense that some regions, some of these smaller tax-evading chains appear to be growing. But simultaneously, this transaction comes up, and I'm just trying to understand your view a little bit better. You have a much better understanding of the dynamics of different territories. What do you see happening with some of these smaller tax-evading chains? Are they becoming a bigger problem, or is the government finally beginning to address some of these illegitimate means of competition - one of these more informal operators? And what's the solution to really reining them in going forward?

Bob, we are not seeing - it's Augusto Cruz - we are not seeing significant [deterioration] or modification in economic environment for the small chain. This is a great opportunity that we have because, as you know, CooperCitrus comes from one Cooperativa. And for us, we are seeing that these seven stores is organic growth, because we going to a city, the country of Sao Paolo. That is a good market. We achieve new cities like Bebedouros, [Bajitos], Olympia, [Olhurngia]. That's no capitalization, no overlap with our stores, great new marketing. That means for us it's organic growth, and very small investment in goodwill. That is quite close to the [eight departments] that there are inside these stores. For us these are new stores. And we will [relocate] like new stores, okay.

And just trying to get a sense, Augusto, of what the climate is like. Are we going to see another wave, perhaps, of consolidation, given the terms of this particular transaction? It doesn't seem as if it was very widely bid for.

Bob, I am not seeing a new wave of consolidation in Brazil. As you know, owning a big stake, are some rumors about this chain. In the last two years, they are in the shelf, but only rumors. I am not seeing a new wave of consolidation in Brazil. Definitely have enough space to happen this. That's why everybody now is focused in organic growth.

Okay. Okay, thank you. And then just lastly, you had a lot of benefit from the shift in Easter. I understand that your April comps are flattish in nominal terms. Could you begin to benefit from a minimum wage adjustment also in the second quarter? I was just wondering what your expectations were. I know it's -- I hate to be myopic, but unfortunately the market forces this to be, and I just want to get a sense of what you anticipate in the second quarter, given the difficult comparison with the Easter shift, but again, the benefit from the wage adjustment.

Bob, you know that I am, I must be an optimistic guy. We had an excellent first quarter. The news in Brazil is good. When you think about the new minimum wage, as you know, it represents a real increase in salaries for a lot of people. We have some estimates that something around BRL5b is coming to the consumer in the market, because of this real increase in minimum salary. It's so early to presume something, because April, without Easter time, was so hard. We are reviewing this, but I am optimistic that at the end of the day, for the number of goods and food, will be an excellent year, 2005.

Great, thank you very much Augusto.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question is coming from Tania Sztamfater of Unibanco.

Hello everybody. Just a follow up on the last question. Talking to the food companies here in Brazil, they believe that the second quarter's growth of their businesses in the domestic market will stay at the same level of the first quarter. And they expect this consumption pick up to happen in the third and fourth quarters of this year. Do you have the same expectations?

Tania, have in mind that we are in the front. The suppliers are in the back. Our judgment that I use, that we are in the front, adjust our inventories. They suffer more than us. That's why we can have some different expectation. But their expectation for the second half is in line with our expectation.

Okay, thank you.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question is a follow up, coming from Tina Barroso of UBS.

Hi. Hi, I remembered my question. Regarding new store openings, who is buying the land now, and who is going to own the real estate going forward? Is it going to be the real estate company, owned by Abilio? And if that is the case, should your CapEx go down going forward? Or -- and the expense you talked about in your presentation will be really just for [building] the store, or really constructing stores?

Tina, this is Fernando. First of all, new store openings will not be part of the real estate company. In the real estate companies we have just the 60 stores that were mentioned in the press release. And obviously, CBD is not interested in real estate investments. So, every time that we can lease a store in good condition, this is the way that we will follow.

Okay. So, but these nine Extra's that you are opening, do you own this land for all of them, or no?

In the case of hypermarkets, you know that usually we have the land, because it is difficult to find a market to rent, or land for a hypermarket. And a hypermarket demands high investment. So, for the nine hypermarkets, CBD will own the land.

And Tina, all these hypermarkets, we already have the piece of land. And two of them we are transforming into big supermarket store, like [San Joseph] [indiscernible] hypermarket. And another one in [indiscernible], we will do the same, to take the opportunity to sell non-food goods in that region, that there are a lot of demand.

Okay, Fernando. [Does that] mean there's actually seven, because two Extra's that you are converting from supermarkets?

Yes, Tina, exactly.

Okay. And the other question, why did you move your receivables bonds from long term to short term this quarter? I didn't understand what happened in the balance sheet.

Tina, what happened is that this is a new instruction from CVM in Brazil. So, we just followed a rule from CVM, and we had to consolidate the securitized receivables in our balance sheet.

Okay. What's the counter entry of that?

No consequence. The only thing is that those receivables were out of our balance sheet, and now we have reflected in the asset side, and also in the liability side. So no consequence, no major consequence.

Alright, thanks.

Thank you. Our next question is coming from Lore Serra of Morgan Stanley.

Good morning. In the conference calls in the past, you've talked about some of your efforts to improve your store efficiency. One of the things we saw in the first quarter was the employee headcount came down a bit on a per square meter basis. I'm wondering if you could update us on some of those efforts, and how you've talked about trying to share some of the administrative and other operations among the banners? If you could give us an update on some of those efforts, where you are in '05, and if you're finding more opportunities as you look into '06?

Lore, we are working in 2005 to have something around 20% of SG&A as a percentage of sales. You know that there are a lot of projects taking place in CBD right now. A lot of -- part of the effect will be reflected in 2006, when we think about the three drivers, of higher centralization of services, of better usage of our internal benchmarks. Also, higher efficiency in corporate purchases.

Part of the positive effect coming from those projects, we will see in our second half results. But the most significant part of the projects will be felt just next year. Anyway, the guidance that we have for expenses in 2005 is something around 20% of net sales.

And Lore, that's important to make clear that this guidance that Fernando talks about is before the recorporation. It means, in the same basis of corporation as today, we are targeting 20% of net sales.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question is a follow up, coming from Tania Sztamfater of Unibanco.

Hi. Sorry, just a follow up on the sale of the real estate assets. Would you be able to give us now the percentage of sales that is still coming from supermarkets or hypermarkets that are owned by CBD? And do you expect that to stay at that level, given the fact that, as you say, you probably keep having owning the land for the hypermarkets? Do you expect that percentage to stay at the current level? And what is the current level, if you could give us?

Hi, Tania. Not considering the new stores that we are opening in 2005, the number of -- the sales coming from own stores will be around 8%.

Okay. And do you expect it to stay at that level? You say that 50% of the area growth comes from hypermarkets, so I'm wondering if it increases back, or if it stays at the same level?

Tania, you are right. As long as we are opening nine hypermarkets this year and all hypermarkets will be owned by the Company, this number will increase. It will be above 8%.

Okay, thank you Fernando.

Thank you. There do appear to be no further questions at this time. So I'd like to turn the floor back over to Mr. Fernando Tracanella for any closing remarks.

Thank you everyone for your attendance in this conference call. I would like to say that we, from the Investor Relations department, will be available for further questions that you may have. Thank you very much, and have a nice day.

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