Companhia Brasileira de Distribuicao SA (CBD) 2006 Q2 法說會逐字稿

[Inaudible]. This meeting is being recorded. And all participants will be listening to this conference call during the presentation by the Company. And then we will open for questions from you, when we will give you the necessary guidance. [OPERATOR INSTRUCTIONS].

Before we proceed, we would like to clarify that future statements that may be made during this teleconference about the outlook for business of CBD, projections and operational and financial goals are premises by the Board of the Company or the Executive Committee of the company and also based on information currently available. [inaudible] for consideration and does not guarantee the performance. They depend on circumstance that might or might not occur. Investors must understand that general economic conditions, [inaudible] conditions and other operating factors might affect the performance of CBD. And may lead to results that are materially different from those expressed in these forward considerations.

Now we would like the floor to Mrs. Daniela Sabbag, who will read the opening remarks about the performance of CBD during the quarter. You may take the floor.

[Translated]. Welcome. Thank you for being here. And we will start a brief remark about our earnings results. And then the Chairman of the Board, Abilio Diniz and Mr. Cassio Casseb will make their remarks. We have Eneas Pestana, [inaudible] and [inaudible] with us today. And then we will open for your questions.

Slide number 2 of the presentation. So the total gross sales of CBD with a growth of 4.9% and same stores sales growth of 2.5% vis-a-vis the second quarter of '05. Net sales by CBD totaled 3.3b with a growth of 5.6%, still under the impact of deflation of food prices. The highlight of the period was the Extra-Eletro Division due to the higher presence of non-food products in our sales mix.

Slide number 3. As a result of the price reduction strategy by the Company in order to increase competitiveness, the gross margin of the quarter reached to 29.1% below the gross margin of 30.5% in the same period last year. Regarding operating expenses we kept the same level of expenditures over sales as last year. In spite of the non-recurring expenses coming from restructuring, 5m, and additional renting expenses 28m not reflected last year, EBITDA of CBD totaled 261.5m during the quarter with a margin of 7.8% because of the effect of more promotions and lower dilution of expenditures because of sales and increase in rent expenses and non-recurring expenses. It was also impacted by the performance of Sendas Distribuidora.

Slide number 4. We should stress the net result of 57.3m. So an improvement both vis-a-vis the previous quarter and also the same period last year [inaudible]. Two factors contributed to this result. Lower average interest rates with effect on revenues and financial expenditures and less bank debt. And finalizing our remarks about our earnings, the net earnings during this period was 41m, vis-a-vis 64m last year because of non-operating results, because of the closing of 18 stores during the quarter, 25m, and non-recurring expenditures about our restructuring that we have already mentioned.

Now I would like to give the floor to our Chairman of the Board, Abilio Diniz.

[Translated]. Good morning. Today, we are starting a slightly different way of doing our conference call after disclosing our performance during the quarter. And besides myself, Cassio and the executives – the CEO, we have got other executives so that we may have a more fuller dialogue with you and answer all your questions.

We decided to do the conference call in Portuguese with simultaneous interpretation into English, so that we could have more time in order to tell you about our ideas, to solve your doubts and also to spare you your precious time. Our intention is to be more and more aligned with the market and have more clarity, more transparency and no misunderstanding whatsoever. So that the market may have no doubt whatsoever about what we are doing.

Since 1995 when we did our IPO and we made the Company public, my thought is that the fact that we make the Company public and give more transparency to our data. This increased our responsibilities and could make the Company even more efficient than it was before. We have been trying to follow this.

And still following my thoughts, when last year in the mid of 2005, when we did the business with Casino, I chose to be even more aligned with the market and holding more than 60% of my own stock in preferred stock. And ultimately, much later in time, I can have even all my stock as preferred stock. So all my holdings in preferred stock. And if some day my heirs wish to lead the Company some time, I want them to lead via the market. And the fact that we chose and that I chose myself was this. And I think this is the right path for a Company such as this. A Company that tries to be more and more professional every single day and more and more aligned with the market.

I would like to go back in time after mid 2005 when we changed the CBD management. And when temporarily I took over the function of CEO or at least the operations of the Company. I tried to be closer to the market. And I tried to clarify even further what was going on. I told you about the difficulties that we were facing and a certain loss in our efficiency due to a too fast growth and many acquisitions. And that our objective was to create more efficiency, to achieve more productivity, more competitiveness and ultimately more profitability. So this was the path that we chose.

And we started to work on that very hard. And I disclosed to you that in general we had three major projects. One of them was the expenditure reduction project, which we started at the end of 2004. A very strong work on our part, unprecedented in the Company and it cannot be done overnight. It involves a lot of restructuring. You cannot just cut people -- you cut positions and needs so that we may decrease our expenditure level. So we have been doing this constantly. And I can tell you that right now, of the three goals proposed by us, this is the one that we have achieved more results in so far.

The second project that we proposed was the work that had already been started some years before, which is category management, which involves mainly other things. And also pricing and the sales price. And this involves not only a higher competitiveness but also and mainly the image that we convey to our audiences and the image that we convey to our consumers.

And this work is being done. It is very thorough work and it is a very time consuming work. But the results are already emerging. And our increase in competitiveness undoubtedly is already seen because of that. Besides it is not only about competitiveness. It has to do with assortment, a better choice, big choice of lines, the merchandising of our goods at our stores. And we are very happy with the results so far.

The third point was what was conveyed to you before. We understood that we needed to lower the cost of goods sold. The COGS of the goods that we sell at our stores. And we have been doing this. Last year, a very in depth work was done which was called commercial dynamics. And I have already told you about that before. And this is also a very important work because we restructured our whole commercial activities. We changed processes; we changed some people. And we are on the right track.

Maybe this project is the one in which our results are still weak because after a long time with certain wear and tear with our suppliers -- it's not overnight of course that we will be able to be aligned with our suppliers. And showing them the importance of a win-win game -- a win-win situation and not only a game in which you only have one winner. And this is an in depth work that we are doing. There is no turnaround still evident yet. However, the results are coming along gradually and they start to present some encouraging work or --

Okay, so the projects are underway and you might ask me what about the results. The results are measured by sales and by profitability. Our sales have not been showing a good performance as yet. Our profitability during this quarter specifically was not good. And we will be making remarks about this. And Eneas will be telling you the explanation for this result. However, there are major signs that we are already going uphill and that we are being able to meet our objectives in this regard.

So the market always talks and asks us about sales and sales. I don't know whether it is the market who asks us about sales or we ask ourselves what about our sales. Well, in June or last June [inaudible] we presented the second positive month. The first was January and then we had the second positive results and we celebrated that, and then it dropped. It could be a coincidence or it could be any other reason. But as far as we are concerned, this was a strange situation.

People always ask us about sales and they demand a [answer] about sales. This is a very important measure. Yes, however I believe that market share should be the focus because well, we are not very profitable but we are pleased with the performance, I'd say.

And if you look at our sales performance or the performance of sales of our major, two competitors. They do not disclose their earnings in Brazil but I'm sure that you'll be able to get them. If we are able to get them, you will be able to get them as well. And you will see that whereas in June, we closed but we have not disclosed the results yet. You will see that the slight drop that we had [inaudible] it was less than half the drop of Wal-Mart Super Centers and 20% of the overall drop of Carrefour and their hypermarkets.

And you could say well, is this a good situation? No, no. But at least we are aware of the fact that vis-a-vis the major chains we are still gaining share and we are still growing. Due to the way we are operating, due to our knowledge of the market and due to all that we invested in more and more market growth. Investment in sales. This is something that I told you last time, the gains that we are going to have from these three projects, we intend to -- at least half of the gains that we have we are going to transfer them to competitiveness. Because we want first to have an increase in sales and then a better profitability. But this has to be done very carefully.

I can give you one example. We have been investing a lot in Sendas', a lot in competitiveness. And with the gains that we have been obtaining in restructuring and cost reduction and with even still [non-existent] gains our margin at Senda has dropped from 29 to 25%. And in spite of that, the results are still [inaudible]. You cannot build the image of low price, consistent low price image overnight.

And there is something that we learned long ago. One thing is the fact and the other one is the version of the fact. It is usual for us to sell cheap. If our consumers do not believe and do not consider that we sell cheap. And this is the most important fact. It is how we are perceived by our consumers. It could be useless overnight starting to make crazy offers and bringing people to the stores, if this does not done consistently. And if the customer does not see or perceive us as having a major competitive advantage vis-a-vis our competitors and why they have an advantage if they buy from us.

So we are following this very strictly and we know that vis-a-vis the other organized chains we are gaining share. We are also aware of the fact that a lot remains to be done. And we will be continuing to do and you usually ask us so, so what. So when will we see an increase in sales? When will we see an increase in profitability? When will this happen? We are not working for sales for August or September. And I told you this when I got closer to the market last year. We are struggling to build efficiency in a consistent manner and in an ongoing manner. The result could be achieved next month or maybe in some months.

And this depends fundamentally on two factors. Two very important factors. One is certain price recovery. We continue to have deflation in food products. We continue to have prices, even in commodities, which are very compressed vis-a-vis previous years.

I'm not saying that we are looking forward to a rebound in inflation. No, this is not what we want. What we want to see is a certain change in relative prices. Salaries are indexed; they still go up. Taxes are still going up. The price of electric power goes up. Public services have their prices going up. And food prices are going down. And at a certain point in time, this curve will change and that should present more sales for us.

But even more important than this -- I tell you that in this country, these data are public. We are seeing a real increase in income -- average income. When will this increase in average income be channeled to non-durable goods consumption and mainly foodstuff consumption? So far, this has not happened. This increase in average income is being channeled through the open window of credit. More and more durable goods are being acquired and also existing debts are being paid off. And there is a decrease in the degree of indebtedness. And on the other hand investments made by this whole population, that starts to have a greater access with a income level, which is a little bit better.

And of course you have a cycle. You all know economics and you know that. When this is shifted to consumption of non-durable goods, sales by supermarkets and hypermarkets will certainly improve. You can see published in the newspapers data from ABRAS and [inaudible]. Some days ago the newspaper -- made the headlines of ABRAS [giving] some data saying that supermarkets were having the worst sales during the first half of this year -- worst year in the last ten years.

So I don't mean this as a consolation to anyone and this doesn't make our position any better. And this doesn't mean that [inaudible] and CBD are better. No, we want to be better and better and better regardless of the situation of others.

However, we still have an averse situation, but this is a big [country]. And I still believe in this country. I place my bets on this country and the path that is being followed and I firmly believe in this company. This is the path that I chose. I intend to continue with my holdings here and I intend to continue to be at the top of the management of CBD. And I am certain that we will be able to reach our objectives.

Thank you very much for your attention. And now I would like to give the floor to our CEO, Cassio Casseb.

[Translated]. Okay, eight months with the Company and my major role is to make things happen. It's like changing the tire of your car while it is on the way and riding. And you start having your long-term strategy and you have to make things come true.

During May, we gathered the Board and the Executive Committee of the Company on realigning our expectations -- what we want for 2010 and what was our overall direction. In the last 90 days, the whole Company has been working on that. And this generated a huge amount of processes and debate -- internal debate. And each area has to find its own opportunities and work in depth. So you can imagine to have a dream and to try to make it come true. And have area by area, checking the opportunities, evaluating one by one what can we do with our own brands and creating on each of one of the areas and so on and so forth. All these [inaudible] and then we reach a consistent plan and we try to make the initial dream feasible.

And on the 17th and 18th we will be meeting only the Executive Board in order to check the overall efficiency and the snapshot. And then we will submit to the Board our plan for the next four years.

But our work starts there. It doesn't finish there because then you have to develop your whole [adjustment] plan, the budget for the next year and then the [balance scorecard] in order to reach December 31 with 2007 already defined. And all the points would only then [wait] for all actions to go to war. Together with that we have to work on our daily routine. And this is not easy.

This is a very difficult moment with a very high degree of competitiveness. And if we had to choose one word to define our moment, I would say competitiveness is the word. When I got here, I had to listen, listen, listen to learn. And now when I'm not listening, I'm talking and I'm talking about what -- about competitiveness all the time. But this is a difficult moment and competitiveness will only increase. Competition will only increase and we will have to face the situation in a consistent manner and rise to the challenge. This is not a different challenge from the one faced by other companies. This is a very competitive market and we are getting ready to face it.

Okay, so how are we going to do this? How are we going to work on our competitiveness? There are many factors. [inaudible] supplier strategy and marketing positioning, expenditure and guidance and the mix of products expansion and everything else. I'm going to try to talk about all these points, so that you may have a very clear idea of our direction.

As far as people are concerned, we have a marketing director with clients in our room, changing positions and becoming more daring and the [inaudible] advertising campaign. And it is difficult to make -- we haven't found a non-food director yet. It is very difficult to find somebody with this profile. But even worse than that would be to hire the wrong person. So we have to wait for the right person to come on board and go ahead.

We have been working a lot on people motivation. We have been holding many meetings and the amount of changes are huge. So you have to have somebody managing the change all the time. And the major point is to create a stock option, a very aggressive stock option. More aggressive than the one we have. Our commitment is to have this ready by the end of 2007 and this creates a major relevance and we are going to bring this forward. I believe that during the next presentation or at the end of the next quarter we will have it more clear how we are going to implement that. So we want to be aligned with the market and we are working on that.

We work in the short one, the medium one, with the leadership program, training program -- a more ambitious training program, training them in basic functions and we need that -- and this becomes a more important point for the Company.

As far as communications are concerned, we must strengthen communications bottom up and from up downwards. Personally I held meetings with all store managers in Sao Paulo, in Rio, in Brasilia, in Fortaleza. And still this month I will be going to Recife, then Salvador, Curitiba and two or three others, talking with them, defining priorities, even losing my voice. And we have to be very close to the client.

As far as processes are concerned, we are making the company more horizontal. We have more [inaudible] and we need internal synergy. We have informal coffee shops and many committees -- finance committee, store committee, marketing committee. And we have been trying to decrease the degree of red tape and make the Company more horizontal.

Abilio talked about suppliers. And I would like to tell you that we have been -- [inaudible] I went with Cesar to over 40. We have follow up meetings every quarter with the major ones. And we are trying to create a more transparent and more just relationship with them, with category management and to lead that discussion about price and terms and implementing a fundamental commercial dynamics.

Listening to our buyers and I will have 200 people sitting with us this afternoon. We will listen to them. We will have to listen to small and medium suppliers as well because the problems of larger buyers is not equal to small and medium suppliers and we want to reach the whole community.

On the tangible side we are giving you more figures in terms of how to make this relationship more feasible and achieving high degree of competitiveness. We took the prices of many of the products that was very sensitive. And we founded some major customers surveys and we lowered these prices unilaterally. And then we sat with our suppliers to negotiate. And translating a new moment of credibility where we made the decisions [inaudible] the Company itself in order to make better partnership feasible with our partners.

And so wonderful negotiations are happening and we are creating a much better relation with them. We have been working a lot with the price discrepancies trying to take the 3000 products that are responsible for most of our sales. We removed the major discrepancies. This is the first movement in this direction and we are going to work in that with all products that we sell. Working more and more in the direction of micro markets using the [price] technological process and using the averages aside in order to go in depth in strategy.

And I talked about price and what we mean by that is that our idea is to accept more and more the market and then run after prices, cost and expenditures, analyzing the competitive of each division, respecting their positions. But clearly aiming at achieving a balance between earnings and market share where we have to consider this all the time. Well, the problem could be price, the problem could be cost but the price has to be good for the market.

Company strategy [inaudible] to put more and more strength in its position. And being a differentiated assortment company differentiated services the prices are slightly higher. But the cost benefit ratio still well accepted by the market.

And we do have reality and perception problems. Reality problems are being eliminated and perception where we have to work on two points. The first, and it was identified in our consumer surveys, is the image of having a higher price than it really is. How can we work on that?

First, we took some cities and we saw that the basic baskets of -- [products] is cheaper than the rest. This is a reality. You can go to the dealer's site and you can see the price of the basic basket and compare -- or the staple basket. And the perception comes because we have many beautiful goods like say -- that we work with. And the person comes to our stores and ends up buying a lot of things that they did not intend to buy. And then has the sensation that they spent more. In order to diminish that, we have to separate the staple prices from more sophisticated product prices in order to win this war.

Well, it's [inaudible] it’s war, and there's competition and the only thing that we do is being [less high-high, low-low] and be more consistent in this [high/low]. As CompreBem, this is the most popular division. We have a major opportunity for [inaudible] we believe that for the next two years.

But we still have to find our expenditure and services model -- the optimum one. And we are not there yet. We are reviewing our assortment model, head count, way to work, to reach a consistent model. We have not reached this model yet. And Hugo is here and he's going to talk about that.

On the expenditure side, the aggressive plan is reaching good results. We have been finding good figures. And I can tell you today that in a tangible way, that although we have opened many stores in this last year and we increased the cost of our payroll because of bargaining -- collective bargaining, it is not going to be higher than 2005, nominal. It's like brushing your teeth, it's like cutting your nails. It isn't a total change. It is something ongoing. We are doing this without destroying our character, without destroying our values. We are implementing this as an ongoing thing here.

The guidance is not a short-term guidance. This is homework. And we are using expenditure reduction in order to increase competitiveness, increase market share so that we may have more profits with a consistent market share. So this is the guidance. This is not a short-term thing. It is ongoing.

And we are doing this in a very comfortable way. We work with product strategy, product mix. We see opportunity in food, in some very major categories and many opportunities also in non-food. And we will be working on that more and more consistently.

As far as expansion is concerned and closing of stores -- we closed 21 stores in the last half-year, 18 during the last quarter. And this is good news because they should have been closed some time ago because their contribution margin was negative. And we didn't have the authorization by [inaudible] to close them. This is why we didn't do that before. And these stores existed because of acquisition of other chains.

But at the same we are opening others. And we are working on a very strong plan in order to lead this [Gregorian] plan and go to expansion in a very consistent manner. And Caio will be talking about that. And then I will return. But the change is very big and it is very tangible. Only in lands -- in land alone we have over five times the number of land plots that we had in stock. Caio.

[Translated]. [Fifteen] years at CBD and I have never seen such a good strategic planning as we have this year. We had an expansion plan, an in depth one and a very detailed one, with [inaudible] and with data -- and dates. And which gave us a lot of consistency in our investment. And with emphasis in more creative solutions with reduction in the cost and implementation of [EVA] for the evaluation of our investment. And we have a major focus this year and next year in organic expansion.

In 2006, we do have 16 new stores and we will start still within 2006 at least six new construction stores, starting during the second half of this year for opening in the next year. Just to give an idea of how stringent we are in our investments. We had already been working on cost reduction and our major -- the last set of work that [inaudible] we are closing above our best cost, 15% lower I would say.

So we are pretty much focused on land with a lot of quality and we are very stringent and conservative. Just to give an idea, we bought land, which are located -- with very good location and access. And now we go very deep into the analysis of the cost of these land in order to make it viable. We opened this year with six lands in our inventory and now we have 30. So our land bank is very [expansive]. And we believe it can expand easily next year.

Now I'll turn it back to Cassio.

[Translated]. So if we are to fulfill or to meet our goals that is not still relevant. Maybe we won't use all the 900m, maybe 850. But not only the Gregorian year but we're focusing on the strategy, which is more important now. Buying then building. That's where we focus. And now we have a series of stores opening this year and they're expected to be delivered only in 2007. But the importance is that the plan for the future years is consistent and we're catching up.

Just to conclude, three points. We have new formats. Before you ask me, I won't be talking about anything tangible. Competition has come to stay. But what I can tell you is they are still studying and working on new formats which we believe to be -- well, we have room for that, in the future.

What about FIC? Just to make it clear for FIC, our strategy line for FIC now is to do a consolidation. We want to be closer to business and we also want to expand our growth and not only to focus on results. So I think this should be in line in the next twelve months.

Lastly, via this new format, [inaudible] are trying to come closer to the market, we want to be more tangible. We want to give you clear signs of what's taken place here. So I would like to ask Daniela to be in sync, in tune, listening to everybody, to their highest demands. Because every time we believe that we need a CBDRI or we need [inaudible], we are most willing to do that. So we want to be very transparent here. That -- if there is a need for that we are here to do that and to make that happen. Now I'd like to turn it over to Eneas.

[Translated]. Good morning. Today, I would like to go deeper into the figures of the Company. Actually, it is a reading of our figures and of our statements.

I'll be brief because I want to have more time for the Q&A session and perhaps to give Hugo an opportunity to talk about Sendas. But we have a huge amount of information.

First of all, we never speak so much about our balance sheet. And today I'd like to open my comments on our balance sheet. I think we have [inaudible] include our explanatory note. And now you have a clear image in terms of information on our statement.

Anyway, if we check our balance sheet now on June 30, the major variations compared to the first quarter have to do with reduction of cash available, to 120m as opposed or considering finance payment or debt amounted to 200m. In the quarter we had payments of dividends of 62m and a reduction or payment to suppliers 77m. And our inventory level was virtually the same over these two quarters.

We have an open [inaudible] with orders and dates as Cassio mentioned in order to reduce our inventory levels. And we will go deeper into the process over the second half of the year. Going deep into the debt, our total debt now is 1.9b or 1.850b by the end of June. [Debt profile] we have 24% in the short term and 76 in the long term. Average total price was BRL600 and the average cost is 98.3, obviously including the [inaudible] finance. If we only consider bank loans would be 74, it would be [inaudible]. Our net debt is 453m.

And now I'd like to emphasize, that normally we have a debt concentration in the Company, Sendas Distribuidora. Just in Sendas Distribuidora, net debt is 838m, which means that CBD without Sendas Distribuidora doesn't have a net debt with the net cash of 385m.

In another version, if you consider the net debt or excluding receivables, the net debt would be BRL300m. As to indicators that net debt on equity is 10.4, also improved. And net debt on equity, if we don't consider the receivables deduction is 6.9. Our interest current index also improved around 4.5% related to the first quarter and now we have 1.7 a dollar rate.

Now moving to our result of P&L, I think we have already talked about sales. I'd just like to emphasize some figures in order to have a rationale here. Total for the stores grew 4.9 over the quarter and 2.2 over the first half of the year. And the same store concept, our growth was 2.5 over the quarter and a drop of 1.2 over the first half of the year. However, based on our reports and assessment, we're better than the market as a whole.

And the guidance -- because I know that there will be a question on that, we believe that for the year, we'll keep on better. We'll be having a better performance with a nominal [inaudible]. We expect 0.3% of growth in same stores. As to decreases or drops or even [the stores] for the first half of the year, as written on our management report, actually we had a drop on food products amounting to 2.4 negative and for non-food a growth of virtually 19%.

I'd like to highlight deflation. Abilio and Cassio have already mentioned that. [IPCA] accumulated in 2006 is negative. So there was a deflation of 275 and IPCA for the last twelve months has a deflation of 3.87%. Obviously this is reflected and posted in our performance for food products.

Now to gross margins. Cassio and Abilio have already mentioned that. The reason and also the result of a strategy that was very intense and dynamic in the first two quarters of the year. We had 29.1 against 31.5. I noticed that in 2005, still considering the dilution of the fourth quarter we had 29.6. So there is a significant reduction in terms of gross margin, obviously reflected in our EBITDA in our net income.

In terms of operating expenses, we made a deeper assessment. Over the quarter we had 17.8. If you consider our sales expenses, we closed at 551m or 17.8 from net sales against 557 and 17.7 of net sales in the quarter of last year. The percentage is the same and in terms of cash we are above.

However, for non-recurrent into this quarter, in sales expenses we have [28m]. 28 is not from non-recurrent actually but non-comparable because we have rent and lease of properties that CBD leased and sold as of last year. And they were not considered in the first quarter of last year. So we have 3m for rent and 4m of expenses -- non-recurrent expense is related to our cost reduction project. And therefore they amount of 32m of expenses that should be disconsidered for comparison purposes with the second quarter of last year. Our sales would be 759m against 558m of last year. Therefore in the same level in terms of cash compared to last year, which is in compliance, or which meets with those mentioned by Cassio.

For the first half of the year, we had the same effect however with higher amounts. Additional rent [inaudible] and expenses with restructuring amounted to 64m. That should be excluded for comparison purposes. So we would close that first half of the year with [1.115b] this year against 110 last year.

And for administrative figures, we closed 108 against 115 last year. In the quarter we have 1m for non-recurrent considering our projects. And if we exclude them we close at 117 this year compared to 115 last year. As for the half of the year, if we exclude 115 for administrative expenses -- non-recurrent expenses, we close at 229 this year compared to 230 for last year. So we are little bit lower in terms of value compared to last year.

I would like to highlight what Cassio said before. Because we have effective gains with our cost expense reduction project compared to automatic increases as collective bargain 5.2% we spent compared to September last year. We open our stores, a marginal increase in fees and tariffs. If you consider CBD effect on average there was an increase in public services around 12%.

So effectively in order to be on the same level in terms of cash for last year, this is only possible considering our projects that are doing fine as Abilio mentioned. The implementation of the shared services center has already taken place. And we also have the implementation of indirect sales on [non-saleable] products. And we have savings based on effective sales of these materials. We also have electric energy projects with significant reduction and the Maximum Efficiency program in stores with extensive gains in supermarkets especially.

Moving to depreciation, the depreciation effect. Despite sales of property over the quarter we have higher depreciation due to the adoption of the rule [NBCT] 19.5 of May last year. The Company decided to anticipate the adoption in the balance sheet of last year as we disclosed at that time. So this is the effect.

And in terms of amortization our amortization was 33m versus 36m last year. So there's nothing new in that ground. We still keep to [compatible] level in terms of amortization of our good will.

Financial result of P&L, this is lower than last year. We closed the quarter with 57.7 versus 63.3 last year. And for the half of the year we have 7m lower than last year. Obviously this has to do with debt reduction and interest rate reduction. And it is offset by more aggressiveness in terms of sales for non-interest bearing sales; we have an average effect for the quarter for BRL10m. And for non-operating result or income, the results are in our administrative and the explanatory notes.

Note number 20. We have two major effect in this item. One of them is 25.2m for closing of stores and 7.8m being offset in terms of acknowledgement of revenue and also performance for FIC.

For the accreted income we also have [inaudible] negative 12.1m, which is absolutely on line with the expected results for the first quarter. We still believe we have a breakeven point next year. However, considering the strong increase of delinquency and I believe you are all aware of this. Therefore our [PDT] or our loss per credit or loans operations has significantly improved. And we also have a tendency for increase in June or July. The breakeven has expanded. We don't think it should take place over the first quarter but certainly it will be achieved over '07.

Very briefly, here are some FIC figures. In terms of the number of cards, we have 4m cards issued, out of which 2m cards are already active. There is a huge potential for growth in the card segment. For number of stores 323 and I think we should go back to intense growth late this year. And for the total portfolio BRL762m at June 30. For financial products for FIC, we already have 13.7% stake in the sales of the Company. And for FIC, that's it, and if you have any questions we will be here for you.

So for EBITDA margin, we closed therefore -- we had 7.8% of EBITDA, which amounts to BRL251m compared 291m last year, which amounted 9.2% of the net sales. If over the quarter, we exclude the effect of increasing rent and also non-recurring expenses of 5m, to a total of 33m then our EBITDA would be 229m compared to 291 last year. And in the end, compared to net sales, 3.8. And I want Hugo to mention also the effect of Sendas Distribuidora caused by intense work research for competitiveness that brought EBITDA to 2.6. And if you consider CBD without Sendas, EBITDA would 9.6 in CBD.

Well, basically this is it and now I'd like to give the floor to -- I think we're going straight to the Q&A session. And Hugo is here to answer any question on Sendas.

Now we're going to begin our Q&A session for today's call. [OPERATOR INSTRUCTIONS]. The first question comes from Daniela from Santander Bank.

[Translated]. Good morning, ladies and gentlemen. First of all, we would like to congratulate the Company for this initiative of making available the senior management for this conference call with us and with all investors.

Unfortunately, we didn't have this opportunity before. And considering everything you disclosed, I think our work of asking a good question is even harder now because you really addressed several points that we always ask you. So I'd like to congratulate you on the broad coverage of your information.

My first question is as follows. I would first like to give you some feedback actually. I believe this Company is very important in Brazil. It is a major player for food retailing sector. And in terms of Sendas performance -- in terms of weak performance this doesn't apply for the Company only, it has to do with the scenario for the whole sector.

So if we consider the strategy you've just introduced there's something that -- by the way, I would like you to clarify. The Company had a reduction in the sales area of 2% over the first quarter, considering all the closing. But the guidance for investments this year, you still consider an expansion in the sales area from 6 to 8 and opening 6 to 25 by end and 40 to 80 in Q4.

Considering the Company's investments so far and Caio has already talked about these new stores, it seems to me we won't even come to 6, which is the lower divisional range of the investment. So could you comment on that item? Am I right in my perception? And if that's so, I believe this is going to have an impact on the Company's sales. This is my first point.

[Translated]. I'd like to ask Caio to give you more extensive figures. But I would say that our major effort here is to be focused on increasing our sales in existing square meters. This is our concern here. I would say 24 hours a day we're focused on that full time. Seven days per week, 24 hours a day. But Caio is also going to give you further explanation on our expectation for this year.

[Translated]. Daniela, this growth that you mentioned is for a two-year horizon for 40 new stores. And now we're opening for hypermarkets this year, the 16 stores. In these 16 stores we have 5 hypermarkets. Our increase in sales in new stores is approximately 55,000 square meters. Or approximately by the end of the year a 3% growth compared to last year. I do believe I answered your question.

[Translated]. Yes, you've answered my question. I understood that the plan or the investment plan would be for two years. So you just have three this year -- at least three in '07 to total six. I understood there would be 6 to 8 per year. So we would have 8 hyper per year and 3 supermarkets per year. Was I right?

[Translated]. No, no. We are not slower. Growth increases over the years because it used to be a plan for four years. And just as we're working on 16 stores this year, our planning expects opening 39 new stores next year and so on and so forth. So there is growth in terms of new stores on a year-on-year basis. That's why we're working on a land bank that is very expansive, very safe in order to implement new stores over the years. Because the hardest, the toughest -- what we need more criteria is in the search for good land for expansion.

[Translated]. Perfect. Coming back, what about the guidance? In order to improve the sales for '06, would it be around 3%? Or can it be over that or above that in '07 considering your land inventory today?

[Translated]. It should be like that. Because growth would be even higher if we didn't consider the closings that we did. As Cassio said we were expecting or we believed that we would close these stores because we have an organic, healthier growth. It is healthier because we work on stores that we really want to have.

When you grow by acquisitions, often times if you consider 50 stores, you would initially think about four of that or five of that. And the ones that we are closing are those that come from acquisitions that had to be closed. Obviously considering priority and other issues, whenever you buy a new chain, you don't close the stores next day. Even if they're not good. They have already been [opened].

And sometimes you have some surprises. You can never be absolutely certain all the time. But we are closing what we believe that we are going to do considering the productivity of the Company as a whole. We have considered future closings -- little things though but we are always reassessing that. But we have already closed the stores that we intended to do. So virtually zero now.

[Translated]. Perfect. Abilio said that the importance is sales [inaudible] clear leader. But considering the performance in July, if you consider total sales of the Company there ought to be an impact. We're talking about same store sales and an increase in net sales area and productivity in order to come to the total sales. So the sales area will be smaller and same store sales [inaudible]. So the focus will increase [inaudible] on productivity. Do you think my interpretation is right, Abilio?

[Translated]. Absolutely. I agree with you. We are working on that -- for sales increase per square meter. Existing square meter. I would say this is difficult. It's not easy. So far we're not done but I'm very confident that we will be -- you'll be surprised. We're very confident in the job we're doing now.

[Translated]. And just to conclude my question because I don't want to take more of your time. Just to clarify something Cassio said, in terms of a reduction or cost reduction, he said 25% nominal. And you said it is a long-term guidance but is it a two-year horizon? Could you promise on that in terms of [inaudible], Cassio?

[Translated]. I don't know where you got these figures from. The only figure I said was that for '06, the nominal figure would not be higher than 04, 05. We have a lot of [inaudible] in that sense. We are very excited with the evolution of this process. In March, we began implementation and the value in the first month was not good. We were discouraged and then it improved. Margin was 7.5m and it increased in June and July. We were very excited with the results. But so far we don’t have a specific figure as you mentioned. Thank you.

Our next question comes from Tufic Salem from Credit Suisse.

[Translated]. Good morning. My question has to do with prices. Could you mention the percentage achieved in terms of format?

And what about your competitors? On the first survey that you did with [inaudible].

And you also mentioned something very important in terms of image. In terms of a good price or a reduced price for consumers? Could you be more specific in terms of the strategy -- consumer strategy, or impacts, performance? In order to have a more inexpensive, staple foods basket.

[Translated]. I’m going through the second half of your question. Because your first part was not so clear. Maybe I would ask you to ask it again.

But in terms of price perception it is the same old story. Important is not the fact but the version of the fact. In other words, what is our current strategy adopted in order to convey that better to consumers? Brazil is a high, low market. We have several polls of surveys with consumers. Consumers like, enjoy everyday price. But they are encouraged, they get excited with offers. Special offers. One thing we really focus, is on trying to do some deep listening with consumers. We work a lot on that. We develop many things here at BDD. We listen carefully to our consumers. And this conclusion is not new.

What are we doing right now? We’re trying to be more consistent and more stable for several staple foods. Top ten or top twenty basic products. With a stable price that is extremely attractive and appealing. And in parallel we also work with special offers in other products. Not basic products. We want to convey to consumers that, in addition to special offers, we also have low prices in basic products. This is one of the strategies.

Communication of the strategy is also very important. We try to improve even more in how to communicate that to our consumers. I think we’ve always been reasonably well. But we’re trying to improve it a bit more. We want to convey an image of lower prices.

Just to add something to what Abilio said. So we increasingly try to expand our knowledge on consumers. Listening to consumers even more. And trying to stock products that are more sensitive in terms of high low or what they retain, or how consumers think. And we also try to work on a more sophisticated pricing strategy. In order to have better access. And to work with a more direct advertising campaign. In order to anticipate our appeal and attraction to our market share.

[Translated]. And the first part of my question had to do with benchmarking. What was the price reduction achieved? And what did you do on average so far?

And also how do you compare yourself to your competitors in your own evaluation?

[Translated]. We had a margin reduction. A reduction in our gross margin in the last three months. And you can quantify that, because this is published.

And we are not working in the market as a whole. We are working different areas. Rio de Janeiro for instance. We are much more aggressive in the market, but it’s completely high low, completely, totally high low. What some [campaigns] do in Rio are things that are really unbelievable. And very tough to be followed by us. So we are more aggressive. We have a certain technique in Rio. So we analyze the econ of the areas. And there is almost a strategy -- a little strategy for each one of the areas, almost.

[Translated]. What about having the lower price, area by area, is it --?

[Translated]. When you see the number of categories that we have and the number of differentiated products, both in food and non food, there isn’t an average figure. You have to think all the time, competitiveness per area. A strategy, a different strategy for each one. Some more aggressive. In different areas. I mean, there isn’t a figure. What we have is a strategy. And plans.

[Translated]. Thank you.

Our next question comes from Tania Sztamfater, from Unibanco.

[Translated]. Good morning. My question has to do with your expenses plan. I would like to know if you can disclose a specific plan for Extra Eletro. This is the first question. Can you disclose that?

[Translated]. No. Extra Eletro, we are halfway in our planning in this. Specifically because at this moment some of the points were left to evaluation schedule.

[Translated]. Around when?

[Translated]. Well, 30 days ago this was done so we cannot plan yet. Extra Eletro we left it for a second phase, because we don’t have yet a non-food officer or director. So we are waiting. And there isn’t a specific plan right now So far. Thank you.

[Translated]. Still about the expansion plan, one last doubt that I have. You talked a lot about acquisition of land. And the importance of [having space] for your expansion in the middle and the long run. I would like to understand how you see, in the long run, the share between rented real estate and your own real estate, vis-a-vis what we see today. Because the number of your own real estate was considerably reduced. So how do you see this for the future? In comparison between your own real estate and rented real estate.

[Translated]. Well, we don’ really have this kind of concern here in the Company. Because if you consider between our own real estate and the rented real estate, what really matters is whether it’s feasible or not. Whether it’s a good business or not. And with the dropping interest rates now I think we will be getting many more investors in order to build stores and to rent them to us. So over the years I think that most probably we will have more rented stores than our own stores. But this is not the concern on our part. And we have very compatible rent. And we also build. So we do our math. That we have those feasible. So we don’t have this kind of concern. And we don’t have planning, comparing these two things. It depends on how opportunities arise. And how we make our stores.

[Translated]. But as far as possible do you continue to wish to have a major participation of rented stores?

[Translated]. This is Abilio now. Our core business is not real estate.

[Translated]. No I know that. This is why I’m asking because at the time you did this operation. And you emphasized this importance of that.

[Translated]. Yes. And this is what we are going to continue doing. Most probably we will continue to invest. Because you cannot tie expense into having more investors. [Just let us] do and do and do. And when you have again a number -- a satisfactory number of real estate, then you do a whole block and you do things in block. And the market is becoming more and more exciting to investors. And investors are really looking for investments of this kind.

[Translated]. Thank you Abilio. And one last question regarding the competitive environment. Maybe you could say, if you would, about how you see the second half year. More specifically for Sendas, which is going through dire times.

[Translated]. As far as performance as a whole is concerned, in June, mid June when you saw an improvement, this is also a consequence of having price actions being followed by competition.

Okay. So Hugo is very quiet. And I will give him the floor now. Because I want him to speak specifically about Sendas.

[Translated]. Good morning. Well let us first demystify things. Because there is a confusion as we have the name of the Company in Rio as Sendas Distribuidora. Everybody makes a direct association with Sendas division. I would like to remind you that Sendas Supermarkets have less than half of our operation in Rio.

What happens is that [we use that], we did an alignment early this year. For margin and for expenditures. And first unifying all that. All our divisions, the four divisions, Sendas, ABC, Pao de Açucar. And they’re one same principle. Each one in its positioning, but be more aligned. So that we could have more focused purchases and marketing planning. And more aligned calendar among the four divisions.

And as Abilio said the pricing drop which is per area. And more focus on each one of those areas. Our first concern was to guarantee competitiveness.

And seeking better market share. Which is the work that we have been doing since 2004. Since our association with Sendas. Now going back to increasing the same-store sales participation. You cannot increase that by selling more rice or more beans.

When we remodeled 66 Sendas stores last year, our concern was to add more quality in perishable products. Where you make a difference. Be it in prices or in products or in margins.

But mainly this year we have taken 17 Sendas stores which have the potential and the size for that. And are increasing the sales of non-food products. This is one of our focuses. And Sendas in Rio specifically which had a low performance in non-food this current year, started to have a much better performance in non-food products.

And on one hand this contributed to the decrease in the margin because you’re exchanging a higher profitability to a lower profitability -- for a lower profitability. But guaranteeing a better share. In what the same consumer spends, they spend a little bit more in your store.

[Basically] it’s a highly competitive market. Very high low. And [usage] can be set in absurd manner. No other market users could be [inaudible] like that. Then we have to protect ourselves in order to have the right balance. Between competitiveness and efficiency according to expenditures.

[Translated]. Thank you Hugo. [About a why]. Do you believe that the price strategy which is followed by your competition was one of the reasons why your performance went down vis-a-vis June?

[Translated]. Well in fact June had an excellent performance. And I would like to remind you that the decision that we made -- well, the Rio market as I said before, is a different market. We have been working in a deep restructuring here in our sales policy and our expenditure policy.

And so, in the case of the Company as a whole, we did this job realigning the market for the major products. Products that are more sensitive. Early in June -- well in late May, early June. And just saw that we had some effects. However it is gradual.

You cannot recover. Mainly when you consider a product that has a low price every day like that, you don’t have -- you cannot recover this overnight. So the image has been recovering. And the reflex that we had in June was very good.

In CompreBem we launched [inaudible] campaign in Rio which is called [Josa Genia] which is an effect of promotional [inaudible] like a major, let’s say [sales] of the pink labels. And the results were very positive. Associated to the corporate image of working on the top products. With a much more competitive price in the market.

[Translated]. Thank you, Hugo.

[OPERATOR INSTRUCTIONS]. Our next question comes from [Mr. Guillaume Hude] from Pactual Bank.

[Translated]. Good morning. My question has already been answered. Thank you very much.

A question comes from Tina Barroso from UBS.

[Translated]. Good morning. My first set of questions has a lot to do with what Abilio said about investments and price, etc. Early this year and last year as well, I understood that the idea was to invest in cost reduction first and then gradually go to prices. So that the margin wouldn’t be affected.

And this was one of the reasons why you had the initial guidance of a flat margin. Considering rent and the change in your expenditures vis-a-vis last year. So why have you brought this forward to May? What made you to do that?

And what is the impact of this initiative on your guidance for margin. As you were saying that the guidance is actions on expenditures. And that nominal expenditures will be the same. There will not be any change there. Excluding recurring expenditures [or not] I would like to know.

And why aren’t you having a more aggressive marketing campaigns to consumers. With more traditional media. With your new investment and prices. Don’t you think this would bring you a factor reaction on the part of consumers? Or do you believe that that would maybe trigger a price war? So this is my first set of questions.

[Translated]. I’m Cassio and I’m going to answer your last question first. Well, this is a debate that we have every single day here. But the decision was based on the fact that we still wanted to give the image of having special offerings. And that we have this here on an ongoing basis. This is the reason. Undoubtedly.

How to maintain this? Well excluding the [one-timers], and the initial question, there hasn’t been a change. You cannot say ‘Well, I’m going to cut expenditures and then I’m going to sit down with the suppliers and then I’m going to cut prices’. You just cannot establish a schedule for that. Because this is very dynamic.

As you go, you test per area, per category, and then all the time you look for a balance. It’s like driving a nitroglycerine car on a cobbled road. So you have to focus on sensitivity on all sides. So this is a phase of the process. The process is going to take months.

And we will have discrepancies on -- we remove discrepancies here. Then we have a price test here. And then a certain test on the other hand. The only thing you get guidance -- nobody is going to revoke the market law. The prices go to the market. If we have a problem it’s not going to be a price problem. It’s going to be either cost or expenditure, and not price.

[Translated]. Thank you Cassio. I apologize. I do understand this as a change in your previous discourse. You were focusing much more on competitiveness first. And then you had something more gradual. And now you’re talking about being more aggressive on prices. And it is a change from the discourse that you had before.

The thing about marketing, there are ways and ways of doing marketing. You can market saying that your low price and that you have your own marketing. And I’m sure that you have many advantages here. So I don’t really understand this approach. I believe this approach makes your return lengthier. So maybe the reaction on the part of consumers will be slower. And the results will be slower. So maybe you don’t want to start a price war.

And of course there are other ways of doing marketing. And showing that this is not just special offerings.

[Translated]. Well let’s go to the first point. There isn’t a change in policy. Because these things are being done gradually. You do for the notable items. Then the monitored items. Then the more sensitive items. Then more for a sensitive area. This is a process. We’re neither being more aggressive nor less aggressive than we intended to be. We are doing it as a process.

And you see sometimes that you’re going too fast, then you put your foot on the brake. And the larger dynamic as far as marketing is concerned, it is being done. Last week -- or in this last week, as we started this movement 90 days ago, we have already started to have a slight change in our advertising. Both for Pao de Acucar and CompreBem we saw a change in the last seven to 10 days. So there’s an [inaudible] reversion there.

From the first moment of consolidation. Well first we consolidated and then we started to make a more flexible, [straighter] strategy.

[Translated]. Could you give me an example of this change?

[Translated]. You can see that this bunch of [inaudible] campaign, the products that were shown at second level in that, were focused when the person, the broadcaster showed this shelf. You already saw some of the [products] of the Company in the last leaflet of [inaudible].

You can see on the cover two of the products that are differentiated at CompreBem and Sendas. First we gave the consumers 50 days to understand that that was the new shelf price. If you go to the CompreBem, in the stores, the other divisions have different attitudes, but in each one of the prices we have one additional sign on the shelf saying ‘this price is lower since day X’. To give this image of an ongoing price. And for the client who is already inside the store. So that he or she may buy more.

Now we are doing this with our leaflets also. We do not use the word ‘offering’. We say this is a sales champion. This is a product that you love. And this price is the same since day X. So we have this -- in some places starting next week -- this week.

[Translated]. You say that -- could you give a net figure for rent? Because you have the depreciation also of the stores that you sold to offset. So if you do this, net of depreciation, this is an important figure for us.

What about the CapEx of BRL900m. Are you going to maintain this with these 16 stores? And what about the mix for one year?

[Translated]. These BRL900 we had -- this is Eneas. And I will try to clarify two points. The first remark that I had, regarding your first question. We have been cutting our expenditure for a long time already. For [VBB, CSC] indirect, the purchase of non saleable items. At least 18 months. And the implementation was done last year or early this year. And what happens is that this is not pure math.

And as the project started to generate savings, then we started to attack the competitiveness side of that. You can say that it intensified during the second quarter. From the last half of the second quarter. Because we saw that our project and our expenditure reduction project was giving result. We did our homework in order to give us more muscle and [go] to prices then.

Regarding our guidance, all our programs and focuses and variable remuneration for all our officers are based on values and not percentages. And the value is the Cap or [inaudible] denominal expenditures of the previous year. Our goals are focused and defined as such.

And this is how we link this to variable compensation. Yes, this is our goal, the nominal [look] of last year and I’m not considering non-recurring there. Because sometimes we don’t even know when and how non-recurrings will happen. They could come as a surprise. A good or a bad surprise.

Now talking about rent. In fact we have two effects. We had the sale. And you are right when you say that this adds rent but removes depreciation. But I would like to remind you on the other hand, that last year, we made a decision to adopt the [NBT 19.5] of last year. And we’ve got this for the mandatoriness of that.

And this accelerates sensitivity, it accelerates depreciation. Because it is limited to the maximum of the contractual term. Regardless of having a renewal of the contract, guaranteed by law or by whatever.

So depreciation was accelerated. It didn’t drop during the quarter. It was even lower than the same quarter last year because of that.

So we see the rent effect of course. And of course it affects our expenditures. And I don’t have the debate in -- rebate in depreciation, because of the norm that was enacted last year. Thank you very much.

Our next question came from Andrea Teixeira from JP Morgan.

[Translated]. Once again, thank you very much for the detailed explanations about your plan. And I would like to have some follow up regarding [inaudible] market, and [inaudible] market as well. About the evolution in the sales performance vis-a-vis competitiveness.

I understand CompreBem had a good [result] in July. Similar to what you saw in June. But for the Company as a whole, could we expect a recovery not occurring in August or September, as Adilio said, given the volatility of sales store sales. Do you believe this is -- do you expect what happens during the first month, I think it was June, can you expect this behavior similar to 3.5%. Or should we expect this behavior later on, let’s say during the fourth quarter.

And another question. I apologize for going back to this matter. Regarding your administrative expense, SG&A, you have the nominal value excluding expenditures with rent increases and non-recurring. In fact this is going to go up. But only because of rent. This is just a follow up.

[Translated]. I am Abilio and I’m going to say a few words about sales. I think even worse than not giving you any figures, would be to give you wrong figures. And I would rather tell you the truth.

It is very difficult to make any sales forecast. 60% of our sales, which occurred here in the state of Sao Paolo, and we were excited for the first weekend of August. And then Monday morning we meet here at half past seven. And then we get the first information about the BCC attacks. Even two of our stores. Until the end of the day or by the end of the day, again we had a panic situation. Not only in the city of Sao Paolo but in the whole state.

And early in the evening, there was a chaos in traffic and buses. And our stores were empty. This was Monday. Then on Tuesday we saw an improvement, but people, when night starts falling, people rush to their homes. They try not to stay in the streets.

And our Company was a pioneer in terms of 24 hour stores. And even this kind of thing affects our sales. If we had had this conference call last Friday. Less than a week ago. We could say ‘Well, we’re very excited because of our results in August’. And then a couple of days later we couldn’t say the same. Although the weekend was rather encouraging.

So it is very difficult for us to make sales forecasts with this kind of situation. And with these unforeseen events.

As I said before, this is a process. Economists understand this very well. The increasing sales must be transferred to consumption. And mainly consumption of food. This will happen. However this is not happening yet. It is difficult to give you figures and a guidance which is trustworthy. Because we don’t have it.

[Translated]. Regarding the expenditures, what about the flat guidance?

[Translated]. What is happening with [inaudible] and the increase in the rent, in paying rent -- the interpreters apologize but the sound was cut from us -- I am Eneas. I thank you very much for the question. And this is a chance for us to make it clear. I’m going to talk about the quarter.

And the first information is the following. The additional rent was posted in the expenditure with sales line. If we consider the expenditure with sales during the quarter, we have expenditures with sales at BRL591.6m during the second quarter.

If I remove from here for comparison effect, BRL28m of rent that are included in this group. And BRL4m in restructuring expenses. If I remove from that, BRL 32m, I will be dropping from BRL591 to BRL559.6m vis-a-vis expenses in the same quarter last year of BRL557m.

So we are very close to the figure that we had last year. In spite of the fact that under the same title we had some variable expenditures. And some sales effort expenses. In administrative expenses we don’t have rents.

Here in the quarter I have BRL117.9. And I can only remove from that, for comparison effect, BRL1m in restructuring. In terms of comparable quarters I would have spent in administrative BRL116.9 vis-a-vis BRL114.6.

Again, very close to the same expenses last year.

Of course our goal, all of us officers, this is the task force for the Executive Committee, we have to look for a reduction which may offset this additional rent. But for comparison effect, I have to do this math. Thank you very much.

[Translated]. Regarding the guidance for the year, we see that these processes are having an effect on cost. And the effect will be to further reduce, in order to offset this in the next semester. Or could we think that this would be flat? If you remove rents? And if this is going to happen during the next quarters, in nominal values that would be higher than last year.

[Translated]. Well, the reasoning, the rationale is correct on your part. And I repeat about our goal. And of course there are plans to serve as a basis for that. In our task -- we have a task force. This is the project on the part of the Executive Committee. We must have reduction in order to offset the increase in rent.

Which is rather aggressive, Andrea. If you consider last year, we only had rents during half of the year. Because the real estate was sold in mid 2005. And we analyzed this now. So it’s a huge challenge. And to tell you that it’s going to be 100% offset, well, I cannot tell you that. What I can tell you is that we are working with the same goals.

[Translated]. About the FIC, I understand that you have the 4m cards already issued and activated. So the idea of having 30% increase in revenues -- what about default? Could you tell us a figure about default and the FIC?

[Translated]. Andrea, first there are 4m cards issued. But activation of 2m. And our focus is much more on card activation rather than issuance.

As to provision for losses, or default, it would be too complicated to give you any details now. Default has a very different profile. It varies according to the financial product in question.

[Translated]. Just that the market as a whole, all the figures, they have a strong increase reflected in terms of default. And it has proved to be higher. Including the [initial rise].

[Translated]. So we worked on our projections again.

[Translated]. Early this year we already had or were thinking about breakeven for the first quarter of next year. It will take longer because of this and we're working on that. We want to recover this credit, bringing forth and then highlighting recollection but what's I can tell you right now is that we have a provision for office that is lower than the market.

[Translated]. So on average the market is working with 4%. I'm sorry we're not listening now. The quality of the portfolio is not so good. You were adjusting by region month by month so probably as of the next quarter you're going to have another effect that is not so clear in terms of equity, in terms of. Perhaps there would be a reduction in FIC profitability in the third quarter right.

[Translated]. The quality adjustment is a consequence of the market. We believe our quality has improved actually because we are more stringent in terms of credit policy measures that have been taken earlier this year. If that compromised the second half of the year, this increase in defaults we expect the third quarter to be better than the first and the second and an even better fourth quarter. And we're already working with a similar result, similar to the second quarter, flat for the third and fourth quarter considering this loss or drop in the delinquency or default.

Thank you. Our next question is coming from [Lorre Serra] of Morgan Stanley.

[Translated]. Good morning. Thank you for all the information. Just wanted to ask a few more follow-ups. As you've pointed out a couple of times on the call your cost reduction efforts which have been on-going for 18 months have been productive and your cost control has been tight. I wondered if you could give us a sense for how much more cost reduction you will have if we look forward from where you are in Q2 level. I'd love to have an understanding of how far you are along in cost reduction and what's left both on an overall basis and also if you could also just comment briefly on the Sendas [inaudible] please.

[Translated]. Lorre, [inaudible].

Our next question comes from Juliana Rozenbaum from Deutsche Bank.

[Translated]. Good morning, ladies and gentlemen. I would like to talk about Sendas. I would like to hear from Hugo what he considers to be the price difference now, the price difference in terms of the average of retailers that are not so aggressive in Rio, so to what extent Sendas is lagging behind.

[Translated]. Okay, this is Hugo. In fact as I think it was Cassio has said we are talking about specific positioning for each one of the divisions be it the market vis-a-vis Sendas in the [center] in Rio and in the hinterland of Rio the 16 ABC. For each one of these areas we have a specific positioning and within this micro market I also have specific positioning in the stores competing directly with more aggressive competitors as we said [inaudible] market and even medium sized chains that use a lot of electronics or TV sets and each one has a different positioning.

Last year one of the major programs that we implemented was the economics of the [ladies] or the home economist project. They are homeowners and housewives that are evaluated by us as true economists and they help us. These housewives help us. Early in the morning and soon after lunch they help us carry out a survey of 500 items in the major categories and they have the list of the offerings as well in their hands and they are a major defense for us vis-a-vis of our clients not only in terms of watching what works well with us and goes well with us but also in terms of warning us about situations. We are very well positioned in each one of our micro markets. We are gaining share and we are recovering many clients from these direct competitors of ours.

[Translated]. And when you established a distribution company you were talking about conversion which would be deep. Do you think this is a possibility? Do you believe that the marketplace is different and what about the big margins?

[Translated]. The real market is a very different one. The signs are different. You have a lower purchasing power. More competition. As a consequence you end up producing a lower margin. On the other hand you have higher expenditures and we have to gain efficiency wise in order to reap in higher profitability. I believe that the major work is being done in terms of restructuring. We are very aggressive. This year alone we reduced the headquarters in Rio. We centralized in San Paulo. We eliminated overlastings and at not a great price but we had to adjust 1500 headcount this year and this effort is done and Eneas talked to you about public services going up 12%. In Rio electricity alone went up 22%. Then you have to go back to the area and you have to cut something else. However this comes with the job and this is part of our daily challenge.

Now talking about more practical figures this half year alone if I take only my division, Sendas, not to mention the others we saved over BRL11m net vis-a-vis last year, there including an increase of almost 4m in our electric power expenses. If the margin cannot be as good as it is in other areas then we will have to have lower expenses than we have in other areas and maybe this will be the benchmark for other areas.

[Translated]. And you are telling us that it is 25 the gross margin for Senders. In fact the overall margin for the company shouldn't have dropped a lot. So what about your investments in price? You invest in price. What's happened to enable you so far in terms of price?

[Translated]. In Rio as well when we said that we were [restructuring] our purchases most of our competitiveness was recovered by negotiation with suppliers but as I mentioned for Rio we made a movement towards increasing our share in joint food sales with a lower percentage margin but an important cash margin and this trade-off will continue to exist in the case of other states, mainly San Paulo which has a heavier weight. We have set a strong trade-off and the balance, or the equilibrium, brought about a dilution of the overall Rio effect over the company.

[Translated]. Changing the subject I would like you to clarify your guidance for CapEx? What about the guidance for CapEx? The new guidance for CapEx if you have it for this year and the next.

[Translated]. Juliana, we are going to prepare a press release and when we disclose our sales results you will have this information as well. I would like to take advantage of this moment to answer Lorre's question. This is something that is here to stay. This has to be based on a mentality and a culture as far as people are concerned. We have excess layers in the company and without destroying our company we must carry out this trimming over time not only to generate lower expenses but mainly to generate more efficiency. We have more bureaucracy than we should have still and the cost is not only people. What we did first was the following.

We created the cost implementation and efficiency and reductions. Then you take everything that has low cost and great efficiency first and then you implement all of that. Secondly you leave aside all the high cost and low efficiency items and you choose between high high and low low. The low lows are hundreds with very small values and most of them, well you select the ones that you believe in more and you implement them over time and you just do this cleaning up. And the high highs are more complex and they are related to processes. You have to redesign processes, then to implement technology and then you achieve cost reduction and the increase of the gains that you are aiming at. So in the first year we're working with the low highs and next year we're going to get into the high highs and the low lows.

I would like to apologize to you. I will have to leave now. My other colleagues are staying as I said before. Our buyers, diverse managers and officers will be gathered in a room to exchange ideas and to talk about our actions based on our previous conversations with them. And then we will listen to them in terms of suggestions regarding how to gain more efficiency and more competitiveness and gain quality related issues with our suppliers [inaudible].

[Translated]. My question has to do with stock options. I'd like to mention at the beginning about implementation for employees. I think it is very important you've showed some alignment.

Marcio, can you hear us? I can't hear you.

[Translated]. My question has to do with stock options. Firstly I would like to know if it has to do with preferred shares and secondly if you can give us some guidance, timing, when you are about to implement this and from the moment you have implementation are you going to give us the matrix and performance for employees. Will this be based on a zero based asset or something more oriented to sales growth?

[Translated]. Marcio, I can't answer all these questions. All I can tell you is the following. Early this year when Cassio joined us he refered to that during his talk. At that time we had to reveal all our stock options programs and we thought about something to be done and to wait till 2007. However something that we found important, not only top management and our officers, and not only the executive board but we consider at least 50 people in the company, so we wanted them to be more engaged with the company but also with the performance of these stocks that measure the total value of the company. We believed that the market, by the way, would find it appropriate especially because there was some noise in terms of stock sales to some officers. We have to make it clear that for many years they were not having profit in their capital. So until that moment stock options were something that would add to salaries and now this has to do with equity. So there has been some very significant changes and by the way I already have that on my mind for some time and what's really changed was timing only. So we have something really ambitious now and it's not a commitment, a 100% commitment, but at least we have the strong intention of disclosing our new stock options plan. And this should be done in our next quarterly statement or conference call in 2.5 months from now. Thank you.

[OPERATOR INSTRUCTIONS]: What about Lorre? Can't we contact her? So now we'd like to close the Q&A session. We'd like to leave the floor for the company for their final remarks.

[Translated]. On behalf of CBD I would like to thank you all for joining us and I would like to make the investor relations available for any additional questions. Good afternoon. Thank you.

The CBD conference call is concluded now. I would like to thank you all for joining us. Have a good day.