Companhia Brasileira de Distribuicao SA (CBD) 2005 Q4 法說會逐字稿

Good morning and thank you for joining us. We welcome you to the conference call of CBD. Today with us, we have Mr. Abilio Diniz, the Chairman; Mr. Cassio Casseb, the CEO; Mr. Eneas Pestana, the Administrative Financial Director; and Mr. Fernando Tracanella, the Investor Relations Director.

A simultaneous webcast of this presentation is available and can be accessed at the site www.cbd-ri.com.br/eng. You will be able to control the slide selection and a replay facility will be available soon after the presentation. Please be informed that the earnings release is also available at the Company's IR site, www.cbd-ri.com.br/eng.

This event is being recorded and all participants will only able to listen to the conference during the Company's presentation. Afterwards, we will proceed to a question-and-answer session, at which point further instructions will be provided. (OPERATOR INSTRUCTIONS).

Before proceeding, let me mention that forward-looking statements made during this conference call related to CBD's business outlook, projection and operating and financial goals reflect the Company's beliefs and assumptions and information currently available to the Company.

Forward-looking statements are not performance guarantees. They involve risks, uncertainties and assumptions because they pertain to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of CBD and could cause results to differ materially from those expressed in such forward-looking statements.

Now I will turn the conference over to Mr. Fernando Tracanella, who will present CBD's quarterly performance. Mr. Tracanella, you may begin your conference.

Good morning and thanks for joining our conference call. As usual, we will begin our presentation commenting on the financial and operating highlights for the year and then for the last quarter of 2005. Later, we are going to have 25 minutes for a Q&A session.

Moving forward to second slide, we have the main highlights regarding the Company's consolidated sales. Gross sales reached R$16.1 billion, while net sales amounted to 13.4 billion, a 5.4% growth and 6.8% growth, respectively, over 2004. Food products represented 76% of total sales of the Company.

The Company's sales performance was mainly affected by a slow deflation in many categories, especially perishables and commodities, and a smaller share of the consumers' income directed for food purchasing due to the financing burden derived from the acquisition of durable goods in the year.

On a same-store basis, nominal sales growth in the year was 2.6%, followed by a good performance reported by non-food products, which grew by 12.5% in the period. Food items grew by 0.1%, impacted by the strong deflation of food products previously mentioned and a lower purchasing of discretionary items.

In slide 3, we highlight some of the operating performance key indicators of the Company. Gross income was R$3.9 billion, and an 8.2% growth year on year. The gross margin improved from 29.2% in 2004 to 29.6% in 2005, resulting from the combination of better negotiations with suppliers and improvement in the Company's pricing management. In the fourth quarter, CBD reported a 5.4% growth in gross income with a 28.9% margin, slightly above the 28.8% margin reported in 2004.

Regarding operating expenses in 2005, the highlight of the year was the fourth quarter, when the Company reported total SG&A over net sales of 20.6%, remaining flat in the year-on-year comparison, even facing additional renting expenses amounting to R$29 million originated by the leasing of 60 stores sold to Grupo Diniz, in addition to a wage readjustment in September instead of December, as occurred in past years.

As a result of the above-mentioned gross margin increase and flat SG&A expenses as a percentage of sales, the Company reported 12% increase in EBITDA with 8.7% margin, compared to 8.3% margin in 2004.

In the quarter-over-quarter comparison, the Company reported an EBITDA of R$312 million in 2005, which represented a 4.5% increase over the same quarter of 2004. The EBITDA of the Company, EBITDA margin was 8.3%, same level of the fourth quarter 2004.

Moving to the next slide, we will briefly comment on the remaining lines of our income statement. The Company anticipated the recognition of the effect of a new Brazilian accounting standard, NBC 19.5, which, among others, modifies the leasehold improvement depreciation criteria.

Therefore, since 2005, the Company has started to account for leasehold improvement amortization according to contractual limits of this provision of the leasing as regarding an expectation of contract renewals. The adoption of this accounting procedure generated an additional depreciation in the fourth quarter of R$86.5 million, and of this amount, 41 million relates to 2005 and the remaining 45 million refers to previous years.

As for the equity income, although the results were negative, as expected, FIC--Itau-CBD Financing Company presented an expressive growth, outperforming all targets. Over the year, 308 FIC units were installed in the stores, going far beyond the initial goal of reaching 156 operating points of sales. The number of clients also surpassed the 4 million target -- 17% above the initial expectations of the Company.

For the second year of operations, the Company still expects negative results, but improvement through the period, with breakeven expected already for 2007.

Regarding sales [indiscernible], the 2005 EBITDA margin was 5.4%, higher than 4.5% in 2004. The performance of Sendas Distribuidora was strongly impacted by net financial expenses of R$150 million, and as a consequence, the minority interest result for CBD reached R$64 million compared to 43 million in 2004.

Financial expenses for the Company in 2005 were 683.5 million, 11% higher than 2004, due to higher average interest rates against 2004 and the resulting impact on that and provisions of the Company.

In fourth quarter, net financial expenses were 45 million, compared to 71 million in the same period of 2004. Net financial expenses for the fourth quarter were impacted by the transfer of financing operations to FIC and by the high volume of sales to no-interest-bearing installments by credit card.

New operating result in the year was R$32 million, mainly as a result of an income of 38 million in the fourth quarter, derived from gains of the joint venture with Itau, which recognition was subject to the fulfillment of some operating goals set previously. Income of R$11.4 million resulting from the sale of real estate assets to Grupo Diniz, for which CBD received an amount higher than the book value of those assets.

And finally, on the non-operating expenses side, we had the write-off of permanent assets for responding to the closing of stores throughout the year.

As a result of the all above-mentioned factors, net income in 2005 was R$257 million, lower than the R$370 million reported in 2004. The comparison between these years is jeopardized by the above-mentioned factors and also by the difference in the income tax slide.

In fourth quarter 2005, CBD reported a net income of 65 million against R$113 million in 2004. The comparison between these quarters is also impacted by the information previously.

In the last slide, we highlight the investments made by CBD in 2005, which reached 842 million. The main investments were directed to new stores opening and remodeling of 60 Sendas stores that were totally restructured and tailored to the Company's standards, and also the conversion of 12 Pao de Acucar stores to CompreBem format.

A share of those investments was designed to anticipate the purchase of strategic land space in the Company's investment plan for the next two years. The breakdown of the investments was as follows -- R$370 million for store remodeling and remodernization of stores; R$319 million to new stores and acquisition of land; and R$83 million for infrastructure, mainly informational technology and logistics.

The [good] growth of the Company in 2005 was expressively the opening of seven hypermarkets and eight supermarkets, seven Pao de Acucar stores and one CompreBem. Additionally, eight gas stations and 42 drugstores were opened. And also, we had the acquisition in the first quarter of a small chain of supermarkets called Coopercitrus in the countryside of Sao Paulo State. And these stores were converted into CompreBem format.

These were the main comments that I had for the results. And we have now some minutes for Q&A session. Thank you.

(OPERATOR INSTRUCTIONS). Robert Ford, Merrill Lynch.

Congratulations on the expense traction that you are showing in the fourth quarter. I know it wasn't really as big of a focus as what we will see this year, but it showed some impressive improvement nonetheless.

My question wasn't with respect to expenses. But in the last call, I think Dr. Giglio mentioned that he sees a big opportunity in discretionary or non-food categories. And as you go into the June quarter, you have Easter, you have Mother's Day, you have Valentine's Day, and of course, you have the World Cup.

And I was curious as to how you feel you are doing in terms of the point-of-sale execution of FIC. You mentioned you have 308 branches now in the stores. But do you think you are getting comparable execution to what we see in a Carrefour or a Wal-Mart with their partners?

And as you get into these important dates, what do you think really distinguishes your offers in terms of the assortments, as well as the consumer credit offering?

[Audio difficulties]

Can you repeat, Bob, because the sound is not very good here. It is raining a lot. So we did not hear clearly your question. Can you do this favor, please?

Daniela Bretthauer, Santander Investment.

Question on a piece of news that was announced this morning by Carrefour regarding its decision to close the [Champion] stores and convert some of the stores into Carrefour [Bayoun]. What do you think of that strategy? I mean, the Pao de Acucar format, your supermarket format, together with CompreBem, has been very successful. But do you expect any pressure from this changing Carrefour strategy? Or how do you view this strategy, if you could comment on that?

It is not for me to talk about Carrefour, their strategy. But about CompreBem or Pao de Acucar, I don't think anything has changed. It is follow the same competition. The stores that Carrefour is closing its stores from the Champion supermarket, and its stores never was a tough competitor for us. And if they decide to open another format and another kind of stores, the competition will be the same.

I think it is quite important -- we competed with Carrefour for 30 years in Brazil and we have a good experience about Carrefour. They are nothing new, so for us, we follow compete with Carrefour and with Wal-Mart and with our tougher competitors that is Brazilian in form of competitors. This is the reality. Nothing changed in the life. And I will follow with our strategy.

And just a second question to Tracanella and to the rest of you. Can you provide us with some preliminary feedback on Easter and the same-store sales performance for the month of March?

Daniela, the only thing we'd like to highlight is that the comparison will be very difficult because of the calendar shift in terms of Easter. This year, Easter will take place in April, while last year it was in March. So there will be a big impact from this calendar issue in the numbers of March.

But definitely, we expect something more significant in terms of recovery just from the second quarter on, excluding this calendar effect in April. As we have the minimal salary increase, we have the higher proximity to elections, we have World Cup, we have many drivers, important drivers for '06 for sales. But don't expect important numbers -- important large [technical difficulty] because we have a huge [technical difficulty].

Robert Ford.

Bob, we are sorry, we couldn't hear your question. Can you repeat, please?

Absolutely, Fernando, can you hear me now? Hello? Fernando, can you hear me now?

Yes, Bob, we are here.

Great. Thank you. My question had to do with really the credit offerings and the merchandising. In the last call, it seemed as if you have some pretty big expectations when it comes to the discretionary or the non-food assortments. And as you go into the June quarter because you have Easter, you have Mother's Day, you have Valentine's Day, and of course, the World Cup, my question was how do you feel about your point-of-sale execution when it comes to credit, especially as it compares to the other big players like Carrefour and Wal-Mart? And what do you think distinguishes your offers, both in terms of merchandising, as well as your credit and point-of-sale credit execution?

This is Eneas. We think that we are totally able to compete with Carrefour and Wal-Mart in Brazil because last year, we really worked a lot with our association with Itau. And we have now complete credit products to offer, credit to offer our customers.

And Bob, just to complement with some figures, we have now about 208 stores with the infrastructure of FIC working. This is almost 100% above the initial target that we had in the beginning of the operation.

So in summary, we believe that for the first year, the results were great. In December, 14% of CBD's sales came from -- were made through products offered by FIC. This is a very good achievement. And we believe that this will be a very important competitive advantage of CBD in the future.

And this is very in line with our objective to sell more than food in our stores. It will help us to develop our non-food business from now on. And we believe that we have a very comparable operation against the main formal players. And we now feel we can be better in the future.

Fernando, I understand that you have 4 million credit cards outstanding now, and does that compare, just to clarify, does that compare with about 3.1 million with Unibanco before the transition?

Bob, the 4 million that I mentioned includes not only private label cards, but all products offered, including contracts for installment sales, for example, extended warranty, etc. In terms of private label cards, the most [reflective] number is 3.2 million cards, which is, again, equivalent to what we had before FIC.

Great, because it -- and how does the productivity of that card base compare to what you had before FIC? Because my understanding is that transition was tremendously disruptive, that they took out a substantial portion of your card base by offering them zero interest balance transfers and some other incentives. Is that correct?

We believe that the key performance indicators of our current operation with Itau, including the productivity, the usage, is above the operations that we had before with Unibanco and the other banks. So we are extremely satisfied with the performance. All those were achieved, actually, we outperformed the goals in 2005. And FIC will be very important for the Company to achieve this objective, being more competitive in non-food.

That's very encouraging. Congratulations and thank you.

[OPERATOR INSTRUCTIONS]. Benjamin Averhoff, Lucite.

My question is in regards to margins. There was a very nice improvement this quarter and over the year. And this is in spite of a very tough environment. When we talk to suppliers, they are complaining that they can't increase their top line, yet you were able to decrease margins. Can you talk a little bit about that, what measures did you guys take and what do you see for the next year?

There were some drivers for the increasing margins in 2005. First, we had something, in terms of gross margin, slightly above 2004 by selecting better negotiations and higher efficiency in pricing. And we believe that on that front, we have many things due to delivery as we made several big changes in the Company in 2005 in terms of the way that we negotiate with suppliers and our strategies in terms of pricing, promotions, assortment, the way that we display the products in the stores, etc. -- what we call category management.

We believe that from now on, we need to be even more competitive. We are doing many different things in the Company to increase efficiency, to reduce expenses and to reinvest into higher efficiency, these lower expenses into lower prices in order to achieve our main objective, which is higher same-store sales that will bring for the company higher [system over] and higher return on capital employed.

So combined with this higher efficiency on the gross margin level, we have also many initiatives to reduce expenses. The first time I think the market could see already in the fourth quarter, when, even with additional rent expenses, we could have something reasonably stable year on year. But there are many things still to happen, and 2006 will be a year that gradually the Company will be delivering in that sense.

Additionally, when we hear from suppliers, they are waiting until the second half of the year to raise their prices, which I guess should put some pressure on margins there. Do you guys have any comment on that?

In fact, we are not expecting something like that. There is no any kind of pressures. We will have more economic activity in the second semester because of the changes in the accounts and World Cup and the elections and everything. But it's not something that we are expecting more or more inflation or more prices and more pressure on prices. I think we need to prepare ourselves with less expenses and better conditions to negotiate. We want our suppliers to be real partners in our business. And we're doing that. So we are not worried about it.

Another quick question about your expansion program for 2006 in terms of opening new stores. Did you guys come up with any number of stores you want to open?

We have already disclosed the plan to have for '06 and '07. We still don't disclose or announce for the market something specifically for 2006. What we have for the two years are the opening of 16 to 20 hypermarkets and 40 to 60 supermarkets, and then increasing the standing area of the Company between 6 and 8%. So this is what we have for now, and eventually we are going to expose more details in the future.

(OPERATOR INSTRUCTIONS). Lore Serra, Morgan Stanley.

I have I guess a general question, which is that you've talked a lot about how 2005 was difficult because the inflation figures, the food inflation figures. But based on that data you've released, it seems to us that the tickets you are reporting on sort of a square meter basis were weak during the last two to three quarters of the year. So it looks like it was a traffic issue as well, at least to us.

So I guess looking into 2006, it is helpful and interesting to learn about the intense focus on cost reduction, but on the issue of getting the revenue line accelerated, could you help us by giving us a little more specifics behind how you plan to stimulate customers to come back to your stores or come to your stores in greater numbers, as well as how you make sure that this intense focus on cost reduction doesn't in any way affect your desire to grow the top line. Thanks.

This is Fernando. I think the answer is still related to efficiency. Company intentions -- we see the Company with many, many opportunities to increase efficiency, to reduce expenses, always with the objective of reinvesting the entire efficiency, lower expenses into lower prices.

So higher price competitiveness; a very attractive assortment, not only in terms of food, but also in terms of non-food; financial products and services; private brands; first priced products are differentials that we intend to reinforce or create to bring more clients, more traffic to the stores. So there is no secret. We are working hard to achieve those objectives. And everything that we are doing is with this vision, with this objective of having higher same-store sales in 2006.

If I can add something for you, basically -- now it is Cassio Casseb. As you know, I am here exactly 56 days. So I am a veteran now. Now I know how to transfer calls, I know where the restroom is and I'm still -- I'm just learning the Company. But some things, we start working very hard.

First, who. And basically, I found a lot of competence in this Company. So this Company does not need a revolution -- is a question of evolution. But we are working in some directly people, like in non-food people, we want a very senior and very strong person to work with us here. This Company is great in food. And non-food is growing a lot and we want to keep the same focus we have in food in non-food. So we're looking for someone very strong in this area. And we are reinforcing our marketing area.

On the other hand, we are trying to add a very strong model of variable renumeration, linked to the people here and not so for the top of the Company, but for the whole Company. We are linking better our focus in expenses and in the [shrinkage], in the directly pocket of the people here. So I think at this moment, we are investing a lot in this process.

In terms of process, we can see that the Company is, despite the success the Company has all these years, we have a lot of internal silos. And we are trying to create a more horizontal structure and less verticalization and trying to find the optimal of the total and not only the optimal of the parts.

And we are creating internal committees and working more in groups, and we are getting the first results on that. So I believe that in a few months, we can feel the difference. The Company is motivated and working a lot. I think we are prepared for the competition in Brazil. And I think the second semester could be great for us.

That is very helpful. And in terms of stimulating the consumer or the revenue line, where do you see your greatest opportunity? You mentioned the non-food focus. But do you think its pricing? Do you think it is assortment? Do you think it's store layout? I take your point that you are still getting -- well, you are a veteran of 56 days. But I'd be interested in your impression.

In fact, I believe that the different segments of this Company, the clusters in Pao de Acucar, in Extra, in CompreBem, all of them are getting stronger on their positions in the market to compete better and better. And the more that we can work hard in our expenses to reduce, again, our expenses and our overhead, and with this, we can transmit this to prices and get better conditions to compete. I think the main important point at this moment is create partnerships with our suppliers and reduce our expenses. With these two lines, we can go there.

And just one last question. How quickly should we see the flow-through of your cost reduction into pricing? Should it be fairly immediate? Or do you think it will be somewhat lagged?

For sure, these kind of things you cannot do in one day. The measures will be taken now. But the majority of the consequences will happen during the second semester. Probably -- a lot of the things do have costs when you implement. So we can see the results during the second semester.

At this point, I would like to turn the floor back over to Mr. Tracanella for closing remarks.

I would like to thank you for your participation of you in this conference call and say that the Investor Relations department of the Company will be available for further questions that you may have. Thank you, and have a nice day.

Thank you, ladies and gentlemen. This concludes today's CBD conference call. You may now disconnect your lines and have a great day.