Companhia Brasileira de Distribuicao SA (CBD) 2006 Q1 法說會逐字稿

Good morning and thank you for joining us. We welcome you to the conference call of CBD. Today we have with us Mr. Abilio Diniz, Chairman; Mr. Eneas Pestana, CFO; Mr. Fernando Tracanella, Investor Relations Director; Mr. Aymar Giglio, Treasury Director.

A simultaneous webcast of this presentation is available and can be accessed at the website 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.

[OPERATOR INSTRUCTIONS]

Before proceeding, let me mention that forward looking statements made during this conference call related to CBDs 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 performances guaranteed. 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 as a forward looking statement.

Now I would like to 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. We will begin our presentation commenting on the financial and operating highlights for the quarter. Later on, we will open the floor for a Q and A session.

Moving forward to the second slide, we have the main highlights regarding the company's consolidated sales. Gross sales reached R$3.9 billion down by 0.5% compared to the same period of the previous year. Net sales amounted to R$3.3 billion a 1.2% growth compared to the first quarter 2005.

The company sales performance was impacted by the continued retracted consumption scenario and deflation in food products. Additionally the year on year comparison was affected by the absence of Easter in the first quarter of 2006. On same store basis, sales fell by 4.6% jeopardized by the above mentioned scenario and by the strong comparison based in the first quarter of '05 when sales grew by 11.1%.

Back in the previous quarters, the non-food product sales presented a stronger performance growing by 14.5% contrasting with a 9.8% fall in the food product sales, again under strong impact of Easter and calendar effect. For the [inaudible - heavily accented language] as a whole, food products represented 74% of gross sales. The performance of each business unit was driven mainly by the breakdown between non-food and food products in its sales mix. Therefore, it's worth to highlight the performance of hypermarkets and Extra-Eletro stores.

Sales within the Rio de Janeiro State also performed well even with adverse scenario due to the calendar shift as a result of the improved positioning and pricing and benefiting from advertisement made in store remodelings. In slide three we highlight some of the operating performance indicators for the company. Gross income was R$983 million, a 4.2% growth compared to the previous year. Gross margin improved from 28.9% to 29.7%. This improvement was partially due to the calendar given that the absence of Easter in [inaudible - heavily accented language] promotions from this quarter.

Operating expenses already reflected the early results of the company's initiatives aiming at increasing the efficiency and productivity. Selling expenses over net sales reached 17.8% effected not only by the adverse calendar effect, but also by the additional renting expenses totaling R$27.5 million resulting from the leasing of 60 stores sold to a group [inaudible - heavily accented language].

The effect of these additional rent expenses, [inaudible - heavily accented language] expenses over net sales remains almost at the same level as of the first quarter of '05 at 17%. Administrative expenses over net sales fell from 2.7% to 3.5%, again as a result of the company's [inaudible - heavily accented language] to increase productivity. In the quarter, the company reported non-recurring expenses of R$8.5 million, R$4 million in sell expenses and R$4.5 million in G&A, mainly deriving from restructuring closings of stores and a warehouse.

The increasing gross margin offset a lower dilution of expenses previously mentioned leading to a 2% growth in EBITDA for the quarter. The margin reaches 8.4% higher than the 8.2% margin report in the same period of 2005. The next slide shows the consolidated income of [inaudible - heavily accented language] for CBD. We have already commented on revenues, gross margin, operating expenses, and EBITDA. We will now briefly comment on the remaining lines.

The [inaudible - heavily accented language] resulted from [inaudible - heavily accented language] the CBD financing company reached -R$14.8 million in line with our expectations, consistent with a pay off curve for financing products and services, and also reflects adjustment in allowances for losses due to the increase in the financing portfolio.

It's worth mentioning the number of private label cards that surpassed the R$4 million mark during the quarter and reminding that the break even for 50 is expected for 2007. Minority interest amounted to R$60 million in first quarter comparing to R$12.7 million the first quarter 2005, resulting from the net loss of R$27.8 million in Sendas Distribuidora's. Performance in Sendas Distribuidora's was effected by the combination of increased competitiveness in Rio de Janeiro State, Easter calendar effect, and resulting lower dilution of expenses, as well as some restructuring costs. Additionally net financial expenses, in Sendas were too high totaling R$40.6 million for the quarter.

As for consolidated CBD financial results, financial expenses and financial income came both in line with the amounts reported in the previous year totaling a net financial expense of R$67.2 million. For the year on year comparison, it's worth to mention the transfer of the credit portfolio to [inaudible - heavily accented language], the increased expenses arising from securitized receivables, an increased volume of sales paid to non-interest bearing installments.

These factors were offset by the increasing financial income arising from the inflow of funds in 2005 that arrived from the sale of properties to form the [inaudible - heavily accented language]. Non-operating results in first quarter 2006 total R$7.3 million and are mainly related to accomplishment of some of the goals set for the joint venture with Itau. Finally, as a result of the above mentioned changes, net income for CBD amounted to R$60.2 million, a 4.2% growth when compared to the R$57.7 million in the same period of 2005.

In the next slide we have the highlights for the investments made in the first quarter that reached R$141 million. Out of the total, R$75 million were directed towards the opening of new stores, construction of gas stations, and drugstores and special acquisitions of lands for the new stores and gas stations that we will be opening in 2006 and 2007. Store remodelings represented R$45 million and investment in IT, logistics, and others were R$20 million in the period.

Before closing this presentation, we'd like to highlight initial development and execution of projects that were structured over 2005 aimed at increasing efficiency and reduction of expenses. The company will reap the benefits from these initiatives throughout the year and the real effect on numbers will be observed starting the second half of 2006, although the part of trends already notable in the first quarter of the year as previously commented.

Before [inaudible - heavily accented language] is increasing at this turnover and the company plans to transfer efficiency gains to lower prices for consumers; therefore, increasing the sales volume and delivering higher potential sales. Aligned with this [inaudible - heavily accented language] is the commercial dynamic project in which the whole organization framework was changed concentrating the category management formerly operating under the business unit and purchasing [inaudible - heavily accented language] out of the same commercial area.

In addition to the new management model, this project also involves new processes and methodologies, a definition of assortment pricing, promotions, and product exposure in the stores. We expect these big changes in the company's commercial structure will result in competitiveness gains throughout the next quarters.

Additionally, the first quarter the company areas were aligned with the [inaudible - heavily accented language] goals and several actions that will bring results over the next quarters were implemented, among which the creation of sales service incentives and non-saleable products purchasing area responsible for many products that we use currently and now we are going to reproduce the same expertise that we have in the products that we will sell in our stores. A significant ratio that already affects the company's initiatives to increase productivity is the total number of employees per thousand square meters of sales area, which decreased 5.5% year on year from 54 to 51 at the end of the first quarter.

These are the main comments I had for the results and now we have the Q&A session. Thank you.

[OPERATOR INSTRUCTIONS]

We have a question coming from [Andrea Velho].

Hi it's actually Andrea [inaudible - heavily accented language] from JP Morgan. I just wanted to, [inaudible - heavily accented language], explain more in terms of this effect of securitization. I understand if, you know, [inaudible - heavily accented language] explain that you have more financial expenses regarding this. In that sense when you do this consolidation, you're just assuming the 50% increase, and if you can just break down how much of that was increasing in allowances and also the expenses in securitization.

My second question is regarding the selling expenses which were pretty much at least the same as first quarter of '05. If you can perhaps give us guidance in terms of the improvements that have been seen in category management and a lot of the other initiatives if we can see this more on the selling expenses or more into the administrative expenses in general. So, those are my main questions. Thank you.

Good morning, Adriana. [Inaudible - heavily accented language]

It's actually [Andrea]. I'm sorry. Thank you.

[Inaudible - background noise] compare the first part of 2006 with the first quarter of 2005 the volume of securitization increased. We have at least 150 million payments in this quarter higher than in the first quarter of 2005 in terms of securitization. Although the interest rate fell, the cost of -- the present value of the securitization increased in this quarter.

In terms of peak results in the first quarter of 2005, we didn't have this kind of percent and in this first quarter of 2006 peak had a quarter with around 15 million of negative results in terms of equity results and this result is in line with what we expect for the year. The second quarter will be something in line with this figure but the third and the fourth quarter we will show definitive improvement in peak results and we can expect the break even coming in by the beginning of 2007. Then we expect this result because peak forecast for the quarters are in line with the results and what we can expect for the year is a continuing improvement in the peak results.

Okay. That's great, Aymar. Just wanted to -- so in general you're going to be having these effects as an equity income as we expect before, but also you have some extraordinary in the financial expenses? Is that correct, or not? I mean, assuming everything's coming from equity income, right?

Yes. All the effects of peak will come in equity income.

Okay. That's great. Okay and perhaps, Aymar, if you can talk about more in the selling expenses and also give us some light on the same store sales for April. I know you're going to be disclosing next couple of weeks, but in general how is your feeling [inaudible - heavily accented language] the guidance is just to have a positive same store sales. Thank you.

Andrea, when we see the sales expenses as a percentage of sales in the first quarter of 2006, excluding the additional rent expenses, we have something very similar to what we had last year even though we did not have Easter, so we have a period without more [inaudible - heavily accented language] dilution of expenses.

We've been doing many different things in the company and most of the initiatives that we have will be reflected in the results, especially the second half. But, already in the first quarter we could see some kinds of improvement in productivity that are coming from a higher store productivity, some reductions in marketing expenses. Also some improvements in supply chains, some really good [inaudible - heavily accented language] of contracts, and we have just beginning of the potential cost savings that we have coming from some initiatives like the [inaudible - heavily accented language] Services Center or the non-saleable products.

It's the beginning. There is a learning curve. We have much more to deliver in the second half and again it's always good to reinforce that we will be doing many different things in the company with a main objective -- the main goal that we have in the company is to increase the [inaudible - heavily accented language] so to reinvest gradually the higher efficiencies of the company to lower prices to consumers in order to increase sales volume and to increase same store sales.

Regarding the restructuring the commercial area of the company, the main benefit that we will see is not in sales expenses. It's much more related to a higher efficiency in the company in terms of pricing, in terms of assortment, in terms of promotions, in terms of how we display the products in the stores. This will be much more reflected in the gross profit line. So, we're going to be more efficient at the gross margin and the other initiatives that I mentioned here will affect SG&A.

Okay. That's great. In terms of any light on the April same store sales given the [inaudible - heavily accented language]?

The number in April will be definitely positive because we have the calendar effect. Excluding the calendar effect, will be something similar to the prior month. In April we still didn't see any significant sign of recovery so, excluding the calendar, will be something similar to the first months of the year.

You mean like it's going to be still quite negative for -- In April is typically almost a month more for you, right? Easily the Easter holiday. What is exactly the effect for you in terms of additional days?

The calendar -- the Easter effect is around 10 points, so what I'm saying is that if you see the correlated figure of March and April, this will be similar to what we had before in the previous months. It's true that we have also a higher number of Saturdays. Saturday there's a -- more positive [inaudible - heavily accented language] also coming from a higher number of weekends, but also we have three holidays in Brazil that also made the sales performance a little bit more difficult. The guidance I can give is that when you see the correlated figure of March and April, the number will be similar to what we were presenting before.

So you mean March and April taken together will be similar to January and February?

Yes.

So, taking out -- so it's going to still be negative, March and April taken together vis a vis January and February, so it's like the same -- it doesn't show yet the improvements in all of the initiatives that you had mentioned before?

No. Not yet. April was too a weak month for sales.

Okay. Thank you.

Thank you. Our next question is coming from Laura Sara.

Yes. Good morning. Fernando, can you talk a little bit more about the category management project? When it was, in fact, that you completed that sort of consolidation and give us a sense of the timing of which -- or the magnitude of which we'll see the change onto your commercial strategy. I assume there's a pricing impact, but I assume there's probably an assortment impact from that initiative. Thanks.

Hi Laura. Good morning. The first quarter was a period that we had some very significant changes in the commercial structure of the company. In 2005, last year, we revealed all the systems, all the tools, all the strategy of the category in terms of pricing, assortment, promotion, how we display the products in the stores.

In the first quarter of 2006 was a period that we incremented all the initiatives that we had implementation of this project. We had a very big change in the organizational model, in the management model, of the company now we have the category managers, together with the buyers, in the commercial area of the company and we believe that by all the initiatives related to this project, the company will gradually become more efficient in very important activities like how we define the pricing policy, how we define our assortment, promotions, how we display the product in the stores, meaning that we believe that CBD will become much more competitive in terms of prices and the expected results will be higher sales volume, high average peak, and then higher traffic of customers in our stores.

Can you give us a sense of where you think you need to be more price competitive? Is it across the stores, I guess if we think about maybe the hypermarkets, or is it in certain departments and can you give us a sense of when we'll see you start to adjust pricing? Have you done so already as we're sitting here in May?

Laura, gradually CBD has already been investing in lower prices, so it's been already investing this higher efficiency into lower prices and this will be a trend for the whole 2006. We need this for all formats. We have, in Brazil, we still have very tough competition coming from informal players so we need -- this is a very important thing for the company.

We are aware of this necessity of having lower prices in the stores and we believe that by having more competitive prices combined with the [inaudible - heavily accented language] that we have in the company in terms of customer service, in terms of non-food, in terms of financial products, now with the [inaudible - heavily accented language] with Itau, CBD will gain market share and we will achieve the main objective of having higher [inaudible - heavily accented language] and higher same store sales.

Great and maybe a question for Aymar. If we look at the formerly incurred part card holders that are now under [inaudible] I guess these are your core consumers. Can you give us a sense of what the overlap was to Itau's existing customer base?

Laura, I didn't understand what you want to know about -- what we have before in terms of overlapping with Itau is our store card holders and now?

No. You know have 4 million under the private label card, correct? Four million card holders. What I'm trying to understand is the overlap between those and sort of Itau's customer list before the JB. I'm trying to understand how many card holders are new customers for Itau.

Okay. Look, we had -- by the end of our former private label program with [inaudible - heavily accented language] we had 3 million card holders. Now one year after the first card issuance currently we have 4 million card holders. Then in one year we got 1 million more cards than we had before. Okay. Even in the figures that we have until now. Itau estimates that probably 20% of our clients, of peak clients, are clients of Itau too. Okay. This is probably the overlapping of clients. There are a awful lot of changes along with the offer of the card in the stores. The cards made in the stores -- in the last program was very low offered. Now we have stores of peak inside our stores offering the card. Then the possibility of increasing more and more these amounts are higher now than before.

Perfect. Thank you.

Thank you. Our next question is coming from [Lillian Rosenbaum].

Hi. It's [Juliana]. I'd like to start out with the net sales that you did in the quarter. I mean, [inaudible - technical difficulty] distributed between a store level and headquarter and also what's the expectations and the same breakdown that we should see going forward.

Juliana. Sorry, we couldn't hear well. Can you repeat the question?

Sure. I'm trying to explore the businesses that you did. How they break down because we no longer have the data by store in terms of number employees, so I would like to know how do you break down between headquarters and store levels and going forward if within the break down that you would expect between second quarter and second half of the year as well.

Juliana, we had this move in other [inaudible - heavily accented language] of the company and also in headquarters and we had -- it's difficult to give you a percent of distribution because a lot of people will benefit from the very high turnover that we have in our structure. We had to also some stores that were closed. This is not the big focus of the initiatives that we have. The big focus that we have is not in terms of reduction in the number of employees but it's very focused on higher efficiencies, review of processes, and eventually as a consequence of this, we can have reductions. I can say for you that it was reasonably well distributed among the [inaudible - heavily accented language] here in headquarters.

Okay. But anyway, the number of employees per thousand square meters actually fell year over year, so I was just wondering how did you do this? I mean, is there any change in the structure of the store? Are you offering less services? It is more related to standards where you actually changed the model a little bit, so it looks like [inaudible - technical difficulty].

No, Juliana. We are not jeopardizing our relationship with the customers. The productivity gains that we have had are much more related to the back ups of the stores, for example, here in headquarters the benefits from the centralization of internal services here in San Paulo, in our head office, and not in the level of services that we offer to the customers. We [inaudible - heavily accented language] in CBD and, again, it is in a culture that competitiveness is not just price, it's competitiveness beyond prices. We need to offer low prices, but also combine them with some differences in terms of customer service, in terms of again commercial products as Aymar mentioned.

The opportunities are much more in terms of the [inaudible - heavily accented language], in terms of administrative services, in terms of purchasing of non-saleable products and services, reduction in advertising expenses in order we are not using more external marketing in groceries. We've been doing everything related to marketing here internally. There are many initiatives and we believe that there is still a lot to show in the next quarter.

Very good. [Inaudible - technical difficulty] continue to see these net sales going forward?

It's not a focus of the projects, but can be a consequence and we don't have a number. It's something that is not the main plan for us.

Okay and another question. You recently hired a new director for the non-food department. I would like to know if you are already seeing or already doing anything with them in that sense? Are you already effectively adding more non-food in the supermarket [inaudible - heavily accented language] bank? I would like some color on that if possible.

Juliana, this is a very good question because non-food is a key part for the company. One of the main points of our strategy is to be more efficient, to be more aggressive in the offer of non-food products and that includes clothing, that includes the [inaudible - heavily accented language], [inaudible - heavily accented language], gasoline, drugstores, and also ecommerce. This is a very important part and that is why we hire someone to run this big area in CBD. You know that CBD recently hired [Rodolfo Nagine], the former CEO of [inaudible - heavily accented language] and he will be the leader of this very important area in CBD.

We created a new big area in the company exactly to give the right importance that we see for non-food. We've been doing many successful actions in the supermarkets, what we call in and out promotions, when we sell a product that doesn't belong to the permanent line of the store but it's usually a non-food product that we sell a very high quantity and we increase significantly the traffic of customers in the stores, in one weekend for example. We have had very, very positive experiences that we sell thousands of products in two days. This is one thing that we've been doing since 2005 that we intend to intensify gradually this year.

Obviously the core of non-food will be in the hypermarkets as we see a big potential, especially considering that we have a very fundamental section in all categories and we have this lack of department stores in Brazil. We firmly believe that the hypermarkets can play a very important role in non-food and also this will be very important for the possibility to have good margins in most of the products.

Can you tell how much non-food was as a quarter of sales in first quarter?

26%.

26? Okay. Thank you.

Yes, Juliana, 26%.

Thanks.

Thank you.

[OPERATOR INSTRUCTIONS]

Our next question is coming from [Bob Ford].

Hi. Good morning everybody. Fernando, I had a question, if you could just broadly discuss market share trend with respect to the informal market as well as your share versus other compliant supermarket operators. And then if you could also give us a sense of where price gaps have been trending recently.

Good morning, Bob. The scenario continues to be the same in Brazil. We have a very tough competition from informal players. It's been difficult to compete against the small chains or medium sized chains. That's why it's very urgent for the company and that's why it's the most important [inaudible - heavily accented language] in CBD to decrease expenses, to become more efficient in the category management, in negotiations with suppliers, because we need to decrease the prices and believe that with lower prices and also the differences of the company CBD has a huge potential to gain market share in Brazil.

The situation has been the same, very difficult, very tough environment in terms of pricing and not only from the big players that you have in the country. Actually the toughest competition is not coming from them [inaudible - heavily accented language]. The tougher competition are coming from the small chains. That's something that we have to live with. We are not waiting something from [inaudible - heavily accented language]. We are doing our part here to become really more competitive and the effect that can present very significant changes week by week. Brazil is a high-low market so it's very difficult to give you a number, an average, of this price gap, but in some cases it is significant.

And, Fernando, can you give us a sense then on where you think what has happened with market share over the last 12 months, if you look at compliant retailers, all the big chains that presumably pay their tax bills versus the more fragmented/more informal part of the trade?

Bob, we don't have precise figures, but our feeling is that eventually, let's say [inaudible - heavily accented language] lost a little bit of market share for informal players.

Do you think it's a point? Do you think it's 5 points?

I have no idea, Bob, because we don't have figures from that and actually we don't have figures even from formal players in Brazil.

I think you'd have to go to your vendors and try to find out exactly what percentage of sales you represent for your major vendors that are [inaudible] and then try to back it out that way.

Okay. That is something that we do frequently, but we [inaudible - heavily accented language].

I understand. Then, with respect to Sendas, in the press release you mentioned one of the reasons why you have the greater loss in Sendas is the greater financial expenses year on year. Can you tell us what financial expense was for Sendas this year and what it was last year? And I also understand that there's been some pretty significant changes in Sendas in terms of the administrative structure in Rio. Can you talk a little bit about what's been done, when it was done, and when we'll being to see some of the -- you know, what kind of impacts do you expect from those changes?

Hi, Bob. The [inaudible - heavily accented language] of Sendas Distribuidora is around R$750 million and the net [inaudible - heavily accented language] expenses in the quarter were something around R$40 million. We know that the problem, obviously and we've been doing many different things in order to increase the cash generation [inaudible - heavily accented language] in order to dilute more the [inaudible - heavily accented language] expenses and present, finally, a net profit.

The situation in terms of competitive environment in Rio de Janeiro is extremely difficult so the gross margin that we have to have in Rio de Janeiro is recently lower than the gross margin that we have in the whole company. What happened the first quarter is a combination of low gross margins because the prices are very low, calendar effect because we didn't have Easter, restructuring costs because we reduced a lot of expenses in Rio de Janeiro, and high financial expenses.

It's something very important to CBD and we need to do many different things in Sendas Distribuidora, but I think it's something that will have consistency as far as we need to see the bigger long term. We've been investing [inaudible - heavily accented language]. We've been registering very good same store sales growth and [inaudible - heavily accented language] as a result of mainly of higher number of customers, so the customers are around in terms of stores and gradually believe that we're going to be able to recover the performance in Rio de Janeiro and present lower numbers.

Also from the second quarter, especially from the second half on, we're going to see some balances coming from lower expenses. We've been doing many different things in Rio de Janeiro especially centralization of internal services as a result from our administrative and commercial structured in Rio de Janeiro that will be reflected in the results from the company from the second quarter on.

Good Fernando. In addition to some of the productions, the expenses, do you think you can gain from the benefits by leveraging your procurement power a little bit more centrally, a little bit more effectively or is it just purely going to be a reduction in some of the administrative overhead?

[inaudible - heavily accented language], Bob, we have -- we expect we can benefit [inaudible - heavily accented language] for the whole company with a new commercial area we developed [inaudible - heavily accented language] in terms of technical management and [inaudible - heavily accented language]. The same things that we see for CBD, we see in Sendas, higher efficiency when we define the assortment, when we define the pricing, when we define strategies in terms of promotions and how we display the products in the stores.

This is the assumption that we will, in fact, the whole CBD including Sendas. It's not just a matter of lower SG&A; it's also a matter of a higher competitiveness and purchasing and category management.

Great. Thank you, very much.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Fernando Tracanella for closing remarks.

Thank you everyone for the attendance in our conference call and the investor relations department of the company will be available for other questions that you may have. Thank you.

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