Companhia Brasileira de Distribuicao SA (CBD) 2006 Q3 法說會逐字稿

Thank you for waiting. Welcome to CBD webcast conference. This conference is going to last 80 minutes. We have Mr. Abilio Diniz, Chairman of the Board, Mr. Cassio Casseb, CEO, Eneas Pestana, CFO, Hugo Bethlem, Executive Director for CompreBem and Sendas, Daniela Sabbag, Director of Investor Relations and Caio Mattar, Executive Director for Investments and Construction.

This meeting is available at the webcast under 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. The earnings release is also available at the Company's IR site, www.cbd-ri.com.br-eng.

This meeting is being recorded and all participants will only be able to listen to the conference. Afterwards we will proceed to a Q&A session. [Operator instructions].

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

Forward-looking statements are not performance guarantees. They involve risks and 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 also cause results to differ materially from those expressed in these statements.

We will now turn the conference over to Mr. Abilio Diniz who will present the quarterly performance. Mr. Diniz, you can begin your conference.

(interpreted) I'd like to make a correction. I will give you the opening address and then I'll give the floor to Mr. Diniz. Thank you for participating in our webcast. We will start with brief comments about the quarter results and I'd like to highlight that this call will last one hour and 20 minutes beginning now, and it's going to finish at 12.20, or 20 minutes after 12noon.

In slide number two, for those of you who are on the internet, I'd like to say that net sales have grown 2.5% in the quarter and have reached BRL3.3b. In the same store concept, gross sales have grown 0.2% and net sales, 1.5%. Highlights for non-food that grew 17% in the quarter. The evolution of sales in the same store concept combined with a larger market share show that our competitive new strategy is on the right track. The results below the top line were affected by the provision of BRL94m referred to soybean, of which BRL52m impacted COGs and BRL42m affected our financial expenses.

So, for us to better understand the operating performance, we should isolate this non-recurring item. Therefore, we have pro forma data in our quarter results.

In slide three, excluding the effect of provision we have had a 28% growth margin, reflecting our price competitiveness strategy. The growth margin was affected only one month in the previous quarter whereas, in this quarter, all three months suffered impact by the better competitiveness.

Operating expenses fell from 21.3% in the third quarter of '05 down to 20.9% in the third quarter this year. This performance is quite significant if we consider the current scenario of sales. Small dilution of expenses added to other non-recurring expenses in addition to leasing expenses, which were not in the third quarter of '05. We have been able to increase our investment in price competitiveness, which is considered key for us to gain market share in the future.

Now, to support this competitiveness strategy in the next quarters, we will have an expense reduction. EBITDA pro forma totaled BRL233m. The margin was 7.1%. If we deduct non-recovering expenses and leasing expenses, mentioned above, EBITDA would have been 8.3%. And this is for the purpose of a comparison with the same quarter last year.

In slide four the financial result was impacted positively by lower interest rates. We've had BRL36m negative compared to BRL60m negative in the third quarter of '05. The equity result was negative BRL15m, because we've anticipated some expenses in infrastructure and product development, which is necessary to prepare [thick growth].

The number of clients has exceeded 5m and we've had a growth of revenues that amounted to 40% compared to the previous quarter. We've had a negative impact by non-operating result, BRL12.6m, which can be explained basically because we wrote out some non-operating assets and we shut down some stores.

The participation of minority interest was BRL24m. This is a result of our strategy of more competitiveness and the financial result is still negative in this business unit.

As a conclusion, net profit was BRL31m. This is the pro forma result. Considering the provision effect, we've reported a net loss of R$43m in the third quarter '06. These are the main issues we highlight in the quarter and let me now give the floor to Abilio Diniz, President of the Board, who's going to make some additional comments.

(interpreted) Good morning everyone. Now our goal here today, in these statements that we have with you every three months, our goal is for us to be present and to provide as much transparency as possible so that you know everything, which is going on at CBD.

Now, you may say that here is Abilio again, once again they are showing bad results and they still have hope for the future. Now, you are right to think so, but my view is not precisely this one. Of course the results of the third quarter are very far from what we expected. However, we have quite a few positive results following this track that we have planned and which we are following.

Now, in our expense reduction program to reduce cost, which you demanded from us as well as the market, now this effort is ongoing and our -- this is the program that has provided the best results. This year we have been able to reduce our expenses. Obviously we've had some non-recurring expenses when we shut down, or when we disinvest assets, but the program is working very well and the Company feels happy. We feel satisfied the Company is leaner today. And so, we are more nimble.

Now the second topic, at this time we can tell you that we have increased our competitiveness. Our prices are very well positioned in all business units. The division, or the flag, that has responded more positively is precisely Pao de Acucar. We've had -- we've always had a very good image, very pleasant stores, good assortment but high prices.

Now, today, our clients have started to suspect that Pao de Acucar no longer charges higher prices for its very good service, great assortment and pleasant stores or comfortable stores. This is something which we can see. It is visible although slow. It is a slow, but consistent, process. Our sales -- our general sales show that our competitiveness has improved dramatically. We are much more competitive, our price strategy is much more aggressive in all market segments.

Logically, some markets respond quicker, such as for instance Rio de Janeiro, this is still a difficult market for us despite our better competitiveness.

Now, the other topic I'd like to mention about margin. We have reduced our margins. We were able to do so, because we have succeeded in reducing expenses. On the other hand we knew we had to improve our competitiveness as quickly as possible. Our effort to try and obtain better cost in negotiations with our suppliers is not yet concluded. It is far from concluded, but we've already succeeded in some aspects.

Now, the main performance indicators, if we look at them clearly, these indicators are positive and they give us motivation to continue on the same track, because it seems to me that we are progressing quite well. I have no doubt that by year end we will have better results, especially our sales performance. And, no doubt, this is going to continue also in '07. I don't want to continue any further, because I want us to have more time for questions.

But there is a commitment that I would like to announce on our part, a commitment to the market. As we publicized the second half results we told you that we would disclose our new stock option plan. Now, we have concluded our internal studies. It's been passed by the Board. The Board has given us our go ahead or our green light, so we are already working with formalities, including the approval by the Brazilian SEC.

I believe that our stock option plan is quite aggressive, quite ambitious, it -- in the first phase we will include those who truly make the difference inside the Company, 110 directors -- again, 110 directors, and it allows for this employee or this associate to double his or her pay by receiving bonus as well as stocks. The bonuses will be paid depending on the performance. That is the bonus will be tied to performance indicators. So, if we attain the targets there will be a significant bonus for these associates.

On top of this bonus we have tied both stock options, as well as stocks that will be freely distributed to them. Now that will allow for an associate [note then], for example, who works here, who earns BRL100 a month, this pay could be doubled, or even more than doubled, if we add the bonuses plus the stock options or stocks that will be freely distributed. I believe this is great incentive.

Our goal is that each associate, each Executive Director, can make enough to have a good standard of living, and so that they can lead a comfortable life or comfortable lifestyle. The bonus plus the stocks will be an additional pay -- a significant additional pay for savings or investments or to prepare for the future.

Now this program is part of an idea that I've had ever since we went public, ever since we've had our IPO in ['85]. When we had the plenary at 7.30 in the morning every Monday this meeting was the meeting of executive partners in the Company. That is everyone who held stock met every Monday at 7.30am. Now along the years, and because of market fluctuations, and because of different events, this meeting or this commitment was dispersed somehow.

Now with a new program we will have much more consistency. We will say well we have at least 110 partners. These are executive directors and also partners. So, they are still working for the Company but they're also working for their own capital for a company, which they own themselves.

So I am very happy, because we will be able to introduce this program. It's going to be very helpful now that we are professionalizing even further, our associates.

We want the Company to be more process-oriented and we want to use these processes to gain more efficiency. I believe this program, or this plan, is going to be key in this new effort.

Now, this moment may seem a moment of difficulty for the Company but it is not. I can assure you it is not. I am not excessively optimistic, not at all. I have a very well balanced view about everything that we are doing. I have a clear view of the present and the near future. I truly believe we are going up the slope towards the place where we want to be. Thank you.

(interpreted) I am Cassio. I believe Abilio spoke about the stock option plan. I believe we must make it clear that the stock option plan will double annual bonus. It is quite an ambitious plan and it is tied to performance, and also tied to the ROIC.

We have 110 top associates. The previous stock option plan was less ambitious and it included 600 or 700 people. The older plan will be interrupted and those who are not included in the new stock option plan will be included in a pension plan, so that they will have nothing to lose.

Our focus in the quarter was expense reduction and competitiveness improvement. The problem we had was solved. We now have a more aggressive structure to solve the problems in Rio de Janeiro. We have a new manager and owner of the Rio de Janeiro market, so that we can work better in that difficult market.

And, on the expenses front, we now have some clear good news. You can already see the first figures, the first results. If you look at the earning curve we can become truly optimistic, because we've had a reduction in the last months. So that, although we had a high energy cost we can see that '07 will be a much more favorable year. September was better than August and this is true about most months. That is our expense result is much more acceptable.

In terms of competitiveness, several analysts have asked for more information. So, let me give you some quantitative information. I think that we've done what we had to do. We've done our homework. Last October we had to improve competitiveness in each one of the 536 stores. We defined our direct competitors with a new format where we can define where we want to be positioned in each micro-market. I believe we're closing this effort today. Our competitiveness has been positioned where we want it, so we can proceed from now on.

If you look at the last page of our website we have a chart where I give you some figures. I showed you a Pao de Acucar case. In fact, I compare it to two competitors, the other two hypermarket chains. And if you look at Pao de Acucar curves from April to September we have increased the number of low and very low prices, and we have reduced significantly the number of items with high or very high prices, so that our curve is much more acceptable in terms of pricing, much better than the previous curve.

We also conducted an internal result in the point of sales and we've identified how our competitiveness has started to be perceived. We've asked if the price has improved, if they are higher or lower. And over 40% of the customer have perceived lower prices in our stores. So we begin to see tangible results, which translates into better sales in October. Although we had an improvement of 4.5%, we know that 4.5% is not the true number. It is approximately 2%, because we had some calendar adjustments due to a different number of business days.

Now, October will have the opposite effect of September. In September 4.5% translates into 2%. In October we had a slightly negative number. If we adjust by calendar business days, we will have approximately the same result as in September, around 2%.

For me this is a very favorable result, because it represents a progress. When we look -- I mean, it's the second time in a row we've had positive results of sales in the stores. And, if you look at Sendas in October, November, December this was the time last year when we had the changes and we reopened, and we had some very aggressive investment in television spots. So, we expected a worse performance. But, in fact, we had the same real level as in September. Excluding Sendas, October was even better than September.

Now, in terms of our number of customers we also have good news. In September we had 0.1% positive in terms of number of customers. It is the first time we've had a positive result here and this is great, because this is happening mainly in Pao de Acucar and in the regional units. And, we also had favorable numbers in terms of the average ticket. The average ticket this year has gone up 2.1%.

Now if you look at August, September and October we've had an increase of over 7%. In August 4.7%, September 0.6%, and so we've had great progress also in this indicator, this is '06. Now for the future we've closed our planning until 2010. ROIC will go from 10 to 15%, sales up to BRL25b, nominal figures for today brought to a present value. The idea for private labels is to double our volume until then. Imports, we go from BRL84m and go up to BRL200m in the next two years. In non-food products we want to go from 23 to 33% in terms of our overall sales.

Now these are the guidelines of our planning. The growth is lineal for the next few years. And I believe that the most dramatic changes will be in '07. Now in '07 our focus is sales profit. We want to fix the problems in Rio de Janeiro and then we will focus on sales profits.

This is what I had to say. I feel very happy. I believe that I have truly found a challenge, which I can reach, although it is ambitious. Our team is highly motivated and strong. And I believe that our decision is right. We are very motivated for 2007. That is we paid the price in '06 to have a better year in '07. Thank you very much.

(interpreted) Good morning everyone. I'm Caio Mattar, Executive Director of Construction and Investments. I'd like to tell you what we're doing in terms of investments.

We continue steadily to implement the investment program of the Company. So, this year we'll have BRL860m worth of investments. So far, today, we've invested BRL520m, of which BRL226m were invested in the quarter and BRL340 yet to be invested by year end. We're going to open 24 stores in '06 and two have already been opened and 26 are to be inaugurated in the fourth quarter.

The question is why 28 if in the last call we said 16? First of all, because we've implemented a new convenience store format, Extra [Puerto], which for strategic motives could not be revealed, so here we have another 10 stores to be inaugurated as yet. By cutting costs and increasing competitiveness we could open another two stores, which are in line with our four-year plan to open 160 stores, as we had announced beforehand. So, just to give you an idea, new stores this year will have Pao de Acucar, three stores, CompreBem and Sendas 10 stores, convenience 10 stores Extra [Puerto], which I have just mentioned, and the hypermarket Extra, five stores, for a total of 28 stores.

So, we already have planned for 30 stores. We are much stricter in approving investments. We're only approving new investments with an internal rate of return of 14%. We have worked hard to cut costs in new construction work and renovation work. Work has been going on. Costs have been dropping and, therefore, we've been able to decrease the investment level, although keeping to the number of promised stores. Thank you very much.

(interpreted) Good morning, I am Eneas Pestana and I'm the Financial Director. Thank you. I'm the CFO. Thank you for joining us. I'm not going to go into the results line by line. I think they're self-explanatory. Let's see if you have questions, but I'd like to focus on some other aspects.

For example, going back to expenses, both Abilio and Cassio have touched on that. So, I'd like to go back to make sure that we'll have a very clear view of this aspect. So, talking about the quarter, we have BRL691m in realized expenses in the third quarter, which represent 20.9 of net sales against 21.3 last year, or BRL684m.

Now, drilling down into -- in more depth for us to better understand the level of recurring expenses, of this BRL691m, I should exclude BRL11.5m in expenses for restructuring that happened this term. And, in comparison with the previous year, I'd have to exclude the rents of stores that were sold off last year. And, therefore, in last year's expenses we do not have these rents, which is BRL27.7m in the quarter.

With these two localized adjustments the recurrent expense in the quarter would amount to BRL651.8m -- [BRL51m], or 19.8% of net sales against 21.3% of last year. So these are the comparative numbers, which give us a number, which is lower than what we had last year, with all the public service increases and the collective bargaining that we had.

If we look in the values to year -- to date the BRL2m -- here we should exclude BRL25m of non-recurring expenses and BRL83 in rent -- BRL83m in rent to be able to compare with the previous year. This would take us to an expense of BRL1.997m, or 20.1% of net sales, which is virtually one percentage point below what we had in '05.

Very well, earlier in the year we told you about a few projects that we were to implement as of '06. At that time we could not mention figures, because we were talking about the future. But today, I can give you a few figures, as Cassio himself said, numbers that have materialized already, for example, the implementation of the shared central services saved us BRL45m. Implementation of the zero base budget gave us savings of BRL46m.

The project that we call Maximum Efficiency in supermarket stores that dealt with operating procedures in the stores saved us, over the past nine months, BRL16m. And the marketing project, which called for the implementation of an in-house agency, saved us BRL15m for a total of BRL120m in savings approximately. Obviously many other projects helped us save, but they are very dispersed and so, therefore, I'm not going to mention them.

And, against all of this, against the collective labor bargaining that took place and the higher utility prices. If we take into account exceptional adjustments this is lower than for the same period last year, which I think is excellent news.

Very well, moving away from results and going into the financial topic per se. We know that our capital structure is very little leveraged. It is around more than 80% in equity capital. And we are working to revisit this structure so as to achieve a ratio of 70% of equity and 30% of net debt over the next years, obviously aiming to maximize return to shareholders.

Our indebtedness -- net indebtedness today is BRL538m with a debt of BRL1.950b. And we must remember that half this debt is with Sendas Distribuidora, which is our great problem.

If we consider CBD, in fact, we have a cash flow that exceeds the debt by BRL500m. Today our Brazil rating is high and we want to upgrade this rating. We have important debt expiring next year, so the debt profile today is 42% in the short term and 58% in the long term, with an average age of 2.7 years. Our target is to bring the short term to 30% and long term to 70% over a four to five year window. Obviously, we're going to refinance what expires next year, which is close to BRL1b.

In terms of interest coverage, we are in a very comfortable situation with nearly five times the EBITDA over financial expenses and the net debt over EBITDA 0.5. So, again, this reinforces that we have very low leverage and, therefore, we have lots of room to improve the capital structure and increase our return.

Talking about FIC, which has been mentioned by Daniela, FIC has 5m consumers, 3.5m of private label accounts, 1.5 active accounts, a portfolio of installment sales of BRL77m with 326,000 agreements and our product, a personal loan, that's recently launched has reached -- has gone up to nearly BRL50m. So, the products have performed in excess of our expectations and we're meeting all the targets in our business plan. We're very happy about that.

And as regards the result this year, we've had a negative result. But we're working harder, because -- and we have anticipated -- recognized some expenses. We could have deferred them, but we decided to post them now to this result. And as we have emphasized in the second quarter, default losses increased. They are still very high, although now they are flattening off and perhaps dropping.

Obviously this has elongated our curve [in] the breakeven expected for the first quarter -- first half year of '07 will be in the last half year, still with a loss at the end of the year, but getting to the breakeven. So, we see that we are improving.

As regards financial project performance, we see strong growth. We're very happy about this, but we now need to work very hard to cut expenses at the FIC and try to achieve a breakeven as soon as possible. This is it.

Adding to what Caio said in terms of restrictiveness and the criteria for investment approval, I'd like to add that we have established assets at 14% owing to our [WOK]. Our [WOK] today is about 9%, in nominal terms about 13%. And we've established a real term internal rate of return of 14%. So, that we can ensure that new investments will, in fact, add value and this will give us a civil payback period of 7 years.

Obviously, we are very conservative in establishing the premises or the assumptions of this internal rate of return for approval. We have done extensive market research and on top of these studies, we do an exercise in possible or potential cannibalization in a very conservative way. And on top of a projection that is very conservative is that we work out the internal rate of return there has to be at least 14% ensuring a spread on top of the [WOK]. And therefore value added. Thank you.

We'd like to tell you that this conference should finish at 12.20. Now, we'll have questions and answers. If you have any questions please make them now. Mr. Marcel Moraes would like to ask a question.

(interpreted) Good morning everyone. I'd like to direct my first question to Cassio, because it involves some of the restructuring and what is going on with the Executive Group of the Company. We know that the objective is to streamline the structure. So, the first question is how big was this reduction and the number of Executives in the Company?

(interpreted) Well, an article was out in one of the magazines this week. We cut the number of Executives. In fact, we had added a director -- the Non-foods Director and a Marketing Director as well were added. But we decreased the number of directors by eight.

So, we have minus eight people. And the number of management officers, suffered a loss of eighty people. This is because two layers were cut out. There were certain areas that had directors answering to directors and managers reporting to managers. So, this gives us a better dynamics and a more balanced structure.

And there was news in this area, which was that last week we hired a Sales Director, [Ron Matif] who is going to start on 21.

(interpreted) Very well. But such a restructuring with so many cuts I believe that has to be done very quickly, because it stirs uncertainty in the organization. So, I imagine that you must be working with the possibility that in the short term, you may feel that the managerial ability of the Company will suffer, do you agree?

(interpreted) No, I don't agree, because in fact, what we needed to do was done and it was done very seamlessly. Everybody in the Company knew what was going on and this was not started yesterday. It's not a revolution. It's evolution. We have been working on it and there was great demand on the part of the Company itself to slim down. So, we needed to have a better alignment and we could no longer continue to bang our head against the brick wall. So, there are no surprises, no news, things we're going to get out of the way they should have done.

(interpreted) And most of it has been done?

(interpreted) Yes. Well most of it has been done. But we're going to continue on this process of cutting costs, and we're going to continue to assess our structure and assess our work.

(interpreted) Thank you very much. I have another question to Eneas, about when could we expect to see a turnaround of the 5% drop in net income -- in gross income? You've talked about it, but I imagine that you did your calculations to see at what moment in time will you start to recover your gross profit, as the traffic of people in the stores increases? So, I'd like to understand how much sales would have to increase, and when you expect this to happen?

(interpreted) Marcel, good morning. This 5% drop is obviously very much in line with the focus, which is competitiveness, because we had to cut prices and we had to cut the [LP] gross profit. And this strategy will be retained over the coming months. But what will boost this gross -- this cash margin is sales elasticity or higher sales volume.

As we can see in the report, we've had an important reaction in September. We do not believe it's a trend, but it's an important signal -- an important sign. We're looking at prudently. In fact, our expectation is that over the coming months, taking into consideration 2007, we will have the necessary elasticity to exceed the cash margin that we used to have with higher margins and lower sales volumes.

(interpreted) So, do you expect this to happen by the end of '07 or through '07?

(interpreted) Well, owing to seasonal effects, we say that it will happen throughout 2007.

(interpreted) Very well thank you very much.

Juliana Rozenbaum from Deutsche Bank would like to ask a question.

(interpreted) Good morning everyone. I'd like to ask about the expenses. Do you believe that you have achieved a level as a percentage of sales that is stable? Or do you still have other cuts to be introduced?

(interpreted) Juliana, good morning, this is Eneas. Juliana, in fact, this is what happened. We have a statement here on the wall that expenses are like nails, they have to be cut every day and we follow this to the letter.

And I can tell you that I've given you a few figures of our projects but in fact, the Shared Service Centre has not annualized this saving. So, we can expect more savings from the service centre next year for the maximum efficiency, which is the supermarket project as well. So, we still have to see the effect of annualization that will bring benefits next year in addition to having our savings for this year recurring next year.

Obviously, there are things, such as higher electricity bills, etc. and collective bargaining of workers, although we had a wonderful negotiation. This still represents an important increase in our costs owing to the number of employees that we have. But the current level is very consistent; we intend to stick to it -- to them and improve them for next year.

(interpreted) Thank you. So with -- by maintaining these expenses do you think that -- how do you see the gross margin with more discounts, are you going to go into a comfortable period?

(interpreted) So we will only narrow our margin if we have significant lower expenses.

(interpreted) How do you see the gross margin?

(interpreted) This is Cassio I'm going to start and Eneas will follow. Basically the concern is quite the opposite. I think that we achieved the competitiveness that we would like to. Our indices show that everywhere we got to the competitiveness that we needed. And the signs of sales and client recovery are clear and we're moving in the right direction.

So, expenses are a life-long concern and there's still a lot to be done, still a lot to be achieved, in addition to the fact that we expect sales to increase and this number will be diluted. We're not really concerned about financing new expenses with competitive measures, because competitive measures are already here and they are here to stay. So, whatever we have in terms of expenses in '07 will become a direct result.

But since expenses have been dropping month by month in '06.

In '06, we'll have a very good number vis-a-vis '05. Despite all the changes our figure will be very good in nominal terms. We can fix the number in '05. In '07 the number will be below '06, because there's -- it is dropping owing to our great efforts. So we are very comfortable.

(interpreted) Juliana, I'm just adding to what Cassio just said. This is an Eneas. Daniela asked me to introduce myself.

Now looking at the quarter, for us to be able to see this effect it's for the quarter, because in the second quarter we really cut prices more drastically towards the end. But in the third quarter was really felt the full impact of this price reduction. And this is why the margin came to 28% against 30.4% last year. But even though you see -- take a look at what happened in sales terms, sales -- gross sales amounted to nearly BRL40 -- BRL50m in excess of '05. And even then, we had BRL53m less in the cash margin less gross money. So, you see that the current expense level, considering all the adjustments I've mentioned, BRL27m in rent and BRL11.5m in non-recurring expenses. So, I would have lacked, or I would have missed, compared with last year BRL15m to have the same money in terms of EBITDA.

So, you see that the expense effect in this quarter is really reflected very well in terms of cash effect, or it's fighting the effect of price reduction. So, we're always going to work with these figures but we're looking to EBITDA -- cash EBITDA rather than percentage, because our strategy is to make money and to make volume.

(interpreted) Very well. Now about Extra [Puerto], do you have any indications or any figures about the projects that you intend to sell at Extra [Puerto], anything that we could know?

(interpreted) Well Juliana, I'm Hugo Bethlem. Extra [Puerto] has existed for eight days only. We've opened the first store last week and out of these 10 we'll open the other eight next week.

Now the results so far are quite favorable according to the expectations. I think I spoke a little bit about this when we met. We're going to have to change our frame of mind, because in this concept sales by square meter mean nothing. I can have a highly profitable store selling sandwiches and cold drinks and one more selling rice and beans. So, you sell more by square meter, but in the end you don't make so much money. So, this is a concept of profitability by square meter. This is the most important indicator.

Results so far are quite well aligned. The next stores will open until November 15, and then we shall have more data to give you more information.

(interpreted) Perfect, now, my last question. Are we -- do we still have consistency, approximately 10% of the sales, so that has gained some importance. Now can you give us an idea of gross margin, which you'll get from this new business?

(interpreted) Okay I'm Eneas. The gasoline station growth margin, well we have a lower margin but it's a guaranteed margin. We've had profit in all of our gasoline stations -- all our service stations. It's not difficult to make money. It's difficult to license the station. That is -- requires lots of formalities and it takes time.

Now, our strategy for gasoline and service stations, not only do we want to improve our results, but this is also part of our strategy to increase traffic and to leverage the number of customers in our stores. This is our main focus now.

Obviously, this is a marginal investment, and the focus is of course to make money, because although the margin is thinner, as we open more gasoline stations, then it reduces our margin. But if you look at the cash result, it is important. And, in fact, it leverages the traffic of customers in our stores quite significantly and it also increases sales in our stores.

(interpreted) Would you consider opening a gasoline station far from a store and then maybe open an Extra [Puerto] convenience store in the gasoline station?

(interpreted) Okay, Hugo, yes. Yes, from now on, this is a new market potential for us, which has opened up for our business.

(interpreted) Thank you, thank you very much.

Tina Barroso from UBS Bank has a question.

(interpreted) Morning. I apologize maybe you've answered, but I couldn't hear my call dropped. I'd like you to give me some more information about the new format. I'd like to know the average ticket as compared to the average ticket of the other formats. And what is the margin we can potentially achieve and the targets for '07? That is, I would like to hear a bit more about those new formats?

I know you've spoken about that, maybe you have given this information, but as I said before my call dropped, we lost some 10 minutes of the conference.

So, this is my question and then I'd like to ask for clarification about the stock option plan. What happens to the other people who are not included in the new stock option plan? I didn't understand when Cassio explained that?

And then again, if you are going to include more people in the new stock option plan, maybe management and how long do you expect to retain the target of 15% ROIC? So, I just wanted to confirm this. Thanks.

(interpreted) Okay, Tina this is Hugo again. As I said, I don't know if you could hear that Extra [Puerto] opened its first store eight days ago. That is one day before the holiday. So, we've had the results of eight or nine days only. Next week or until the end of this month, we will open all of the 10 stores we've announced. So, we expect to learn a lot. We've done quite a few things; quite a few concepts have been applied.

However, the best thing is for us to look at customers' response, so that we can truly tell you the answer to these questions in practice that is, as the customers perceive it. So, in our next meeting as we close the fourth quarter, we will have more consolidated data about the new 10 stores. And so we'll be able to give you more information about the new format.

(interpreted) The average size or the average ticket, or do you still need more information?

(interpreted) Well, so very briefly, these stores will have between 150 and 250 square meters and they have their operations fully centralized in our in-house centre. This is an exclusive operation to meet the needs of the new format.

(interpreted) Now, this is Cassio. I'll try to answer your other questions. Now the stock option for the senior management in the past, 10% of the overall bonus were included in the plan. Today, the new plan will have 100% of the bonus amount.

The second level I've answered already, it represented approximately 3% and now these employees who are not included in the new stock option plan will be in a pension plan. ROIC will be between 10 and 15% just like all the other matrix between '08 and '10.

And yes, Pao de Acucar will open three new stores still in '06.

(interpreted) Okay, thank you, very well, my last question about closing. Do you have any more closing information for this year? And I'd like to know about the trends -- sorry, are you going to shut down any other stores? Do you have any news about the shut down of any other stores?

(interpreted) No, no, basically we've studied -- we conducted a study, there were 30 stores being assessed. I'm not very sure about these numbers, I can confirm them. I think we shut down 18 and the other 12 will be recovered. This was in the first half.

Now in September, we reassessed these 11 stores, seven recovered and five will be shut down. And we've shut them out. So, this is basically it, but you have to reassess this all the time. We have no more stores with a negative margin or contribution except for those, which are still in the amortization period.

(interpreted) Okay, thanks.

From Credit Suisse, Miss [Elisa]

(interpreted) Morning everyone. I'd like to know a bit more about the expansion plan now that you have a new format. What is the outlook in terms of sales area growth? What is the prospect for '07? I think it's seven -- I think you spoke about this.

(interpreted) This is Hugo again. Okay Julia, this is Hugo, the number of square meters in the new format is so small that it doesn't add a lot to the floor space. We will have to change our frame of mind, as I said, to understand this new business.

Now for the next few months, we will keep to the 10 stores. Later on in the future we will tell you what's going to happen after we can confirm the figures. In terms of floor space or sales area growth for '07, Cassio will answer the question.

(interpreted) What is your name? Julia, this is Cassio. Okay, the sales area growth will be approximately 7%.

(interpreted) 7%, okay. Thank you.

(interpreted) We will add another 7%.

(interpreted) Okay thanks. Could you give us some more information about your strategy or prospects by the main target in terms of gasoline stations for the Company?

(interpreted) Gasoline station or service station has become an important business unit. It provides a very good image to our stores, but it is quite difficult to obtain the permits and licenses necessary to open up service stations. But all stores where we can have a gasoline station we will do so. So, we want most of our stores to have their own gasoline stations. We also have a problem of space on land. So there are two problems. First the permits and licenses and then the real estate, that is we need land for that. So, we have to look at our property.

So, basically Extra and CompreBem is not close to the stores, it is actually adjoining them. It is inside the parking lot.

(interpreted) Now how could you compare the return of stores that already have a service station compared to the others who do not yet have a gasoline station? Maybe you can make a comparison in terms of sale per square meter, or margins, or average ticket?

(interpreted) Well three points above in terms of the internal rate of return. We've had a very good return in terms of sales, but if we have good sales at the service station and also in the store.

Why? Because it provides a very good image to the store, customers really like it and so they can do everything in one place. It's a one-stop shop. More and more we want to bring customers to the store and give them convenience. That is a one-stop shop.

(interpreted) And is the margin any better because of this, margin or EBITDA at the store?

(interpreted) In cash -- the cash EBITDA is better in these stores.

(interpreted) Okay, thanks.

(interpreted) Question from Sarah [Laing] Unibanco.

(interpreted) Morning everyone. Could you give me some information about Sendas, what can we expect for '07 in terms of margin? And I'd like some information about the competitive environment in Rio de Janeiro? It seems to me that the authorities are acting to stop informal sales or black-market sales?

(interpreted) Okay, this is Hugo. And back to what Cassio said, we have already changed the level of competitiveness we aimed at. Last year as we turned around Sendas, we have implemented a program, which is extremely important. It's called Home Economists, these are basically housewives who live close to the stores and they survey prices. And they also provide guidance to customers and they give us feedback in terms of price comparison, and how customers perceive price differences.

It is now the anniversary of [Juan Arbada]. It's our main competitor in Rio de Janeiro and I have just received the report from our Home Economists or Housewives Economists. And their report for this fortnight or the last two weeks says that [Juan Arbada] anniversary has lots of television spots, street outdoor billboard spreads. Sendas price is so very good that even though we are not airing any publicity, are prices are better than theirs and do not forget that they are celebrating their anniversary.

Now, this is a very favorable report and these Housewife Economists or Home Economists they have everyday contact with our customers. So, it is now a matter of improving our margin. We're still working on expense reduction. We have this new structure in Rio de Janeiro and this is also to help us improve our position in the negotiations with local suppliers.

Now, I don't know if with the new Government in Rio de Janeiro if that's going to change the project in terms of decreasing black-market sales or informal sales. We believe the new Government will continue in this effort.

(interpreted) What about expenses in Sendas can you give us some information about that, what will happen in '07?

(interpreted) Expenses in Sendas, we've done a lot already. I would say that of all our divisions, of all our flags, this is where we've had the most savings at Sendas. But the challenge is still quite large ahead of us.

Taxes are very high in Rio de Janeiro. Property tax, energy costs are also very high, but we've decreased the use of air-conditioning. We've stopped using cameras in some of the freezing chambers. We have optimized working hours. We have invested to improve productivity, or employees' productivity. We want to implement the best practices. With the perishable, we're using a lot of training to improve our performance in perishables. So, this is a continuing effort.

I believe in terms of expenses we have attained a very good level, but we will continue in this effort. Now, most important thing will be sales. That is '07 will be the year of sales and margin.

(interpreted) Okay thank you.

Let me now give the floor to Daniela Sabbag for her final considerations.

(interpreted) On behalf of CBD I'd like to thank you all for joining us this morning. I will be available to answer any questions you may have or clarification about our performance. Thank you very much and I wish you all a very good day.

Speaker statements on this transcript were Interpreted on the conference call by an Interpreter present on the live call. The Interpreter was provided by the Company sponsoring this Event.