Companhia Brasileira de Distribuicao SA (CBD) 2006 Q4 法說會逐字稿

[Interpreted] And thank you for waiting. Welcome to the CBD's Conference Call. Today, we have with us Mr. Abilio Diniz, Chairman of the Board, Cassio Casseb, Managing Director, Eneas Pestana, Director of Administration and Finance, Claudia Pagnano, Executive Director for Marketing, Maria Aparecida Fonseca, Executive Director for Human Resources and Daniela Sabbag, Investor Relation Executive Director.

This meeting is being broadcast by the Internet on www.cbd-ri-english. [technical difficulty] meeting after [technical difficulty] listen only mode during the Company presentation. After CBD remarks are completed, we will open a question and answer section. [OPERATOR INSTRUCTIONS].

Before proceeding, we would like to clarify the forward looking statements being made during this conference are based on beliefs and assumptions of CBD's Management and these are based on information currently available to the Company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of CBD and could cause results to differ materially from those expressed in such forward looking statements.

Let me now turn the call to Daniela Sabbag who is going to open the meeting talking about the performance of CBD in the last period. Daniela you can begin.

[Interpreted] Good morning everyone. Thank you for participating in our call. I will begin with brief comments about the quarterly results.

'06 was a year of consolidation where we conducted important adjustments. Our gross sales totaled BRL16.5b, with a growth of 2.1%. Net sales had an increase of 3.5% as compared to the previous year and reached BRL3.9b.

Now during the year our sales had the impact of a deflation effect and we also implemented our competitiveness strategy so that we had some price reductions in some cases. And the fourth quarter sales had a better performance because of our better competitiveness. And in the fourth quarter, our gross sales in the same stores had a growth of 1.6%. whereas net sales grew by 2.3%.

So volume of customers also had improvement in the first months of '07. The performance of same stores and the traffic of the customers has continued to improve.

Now before we continue let me highlight that for -- to better understand the operating performance, we have adjusted our '06 results and we have netted them of non-recurring items. This is very clear in our slide, if you look at slide number three.

Now these non-recurring items, we've had some provisions for contingencies especially related to soy bean operations and the net results were BRL74.9b -- BRL74.9m sorry.

Non-recurring expenses referring to organizational restructuring amounted to BRL57m. The objective of these adjustments is to make it easier for us to understand our results, especially as regards the operating performance.

Now, if we go onto slide number four, the pro-forma gross margin went from 29.6% down to 28.6% in '06. This is because of our price reduction strategy we've implemented in '06. I've already mentioned that. And expenses totaled BRL2.9b in '06, which is the same as 20.8% of net sales. Approximately the same amount reported in '05.

Now, during most of the year, our expenses were affected because of an unfavorable sales scenario. The pro-forma limit BRL1.8b or BRL1,083m. Margin was 7.8%. The EBITDA pro forma was BRL282m and the margin was 7.2%, compared to 8.3% in the same quarter in '05.

Now in terms of Sendas Distribuidora, sales had a drop, but as of the end of '06, and in the first quarter of '07 we have already observed a reversal of this trend. Sendas's EBITDA had a significant improvement as compared to the previous quarter, coming up to 6.6% margin. This is a positive result of our new price positioning and the expense reduction.

Now, the Sendas [growth] will exert a great impact on the minority interest results of '06. And we also wanted to mention, in terms of investment in '06, in the fourth quarter we've opened 18 new stores, as compared to eight stores opened in the same period in '05.

Now, 21 stores were opened throughout the year. Three Pao de Acucar, nine CompreBem, and four units of the new Extra Perto concept. All in all, the year result was BRL854m. The net profit pro forma for '06 was BRL219m as compared to BRL255m in '05. That's pro forma results.

And the quarterly comparison, especially because of a lower gross margin, the pro forma net profit had a reduction by 9 -- 7.9%, I'm sorry. And these are my comments about our performance in '06.

Let me now give the floor to Eneas Pestana, our Executive Director for Administration and Finance. He is going to make his initial comments.

[Interpreted] Good morning everyone. In fact, I would like to go a bit deeper in our figures, make some comments so as to help aid better reading to facilitate your reading of our reports. I'd like to speak a little bit about our expenses. And I have prepared a slide. This is slide number five. Please have a look at it. As Daniela mentioned, we've had the adjustment. And if you look at the pro forma result, it's already netted of the adjustment we've made. Our pro forma report was not to make the adjustment because of non-recurring items, but we had at least two adjustments we wanted to make. So, these were the restructuring and also the adjustment because of the soy bean factor.

In slide number five, in the first line, you will see the expenses of the fourth quarter as well as the year and our pro forma. But please observe that we had a difference due to the renting that was paid for the 60 stores that we sold in 2006. The overall renting amount of BRL110m compared to BRL27m paid in '05.

In fact, in '05, we had them in the fourth quarter with this amount. So, that has generated a difference in terms of renting expenses. That is we paid more in '06 than we did in '05. We paid BRL83m more in '06 than we did in '05. So, I just excluded that so that we can have a fair comparison.

Now, the net expenses of new stores opened and also stores that were shut down. As we open new stores, we added new expenses and as we shut down some stores, we removed some expenses. So, it makes it more difficult for us to make comparisons and we tried to net this effect. The effect was BRL53m and in the quarter only BRL3m because most of the stores opened in '05 were opened already in the fourth quarter. So the effect was not very significant in the last quarter.

But after we made the adjustments, we can make a comparison because the base of expenses is the same. We're talking about BRL2.75b as compared to BRL2.20b, or BRL2,206m in '05, which means that we had a reduction of 1.9%. Now, in terms of how much it represents of our net sales, it would be approximately 19.8% in '06 as compared to 20.9% in '05. And in the quarter, 20.5% compared to 20.6% in '05.

So, in spite of the fact that we had salary adjustments, and if you look at our expenses with personnel in '06, we had a collective bargaining of 5% by year end, or close to year end. So, all of -- so also, our renting expenses grew as well as public rates, electricity, power so forth. So, we've had an increase of expenses because of these three factors which amounted to approximately BRL110m. This was the increase in expenses because we had quite a few programs to reduce costs and to reduce expense that we had implemented already in the beginning of 2006. We obtained a great improvement in terms of expense control. And this is clear if you look at the figures in slide number five.

Next, if you look at our EBITDA, and it is important to make some adjustments for a fair comparison. So, if you look at renting expenses in '06, and if you consider that the pro forma EBITDA would go up to BRL1,166m, it's very close to the result of '05. I'm not making any comments about the investment we made to improve our competitiveness. But one percentage point of our net sales, that is, if you look at our gross margins in '05, it was 29.6% of our net sales. In '06, 28.6%. It's one percentage point less. What does that represent? Well, approximately BRL140m. And I'm not making any considerations about EBITDA, but I did speak about the renting expenses of the stores we've sold. So, we would have a very similar EBITDA, 8.7% in '05, 8.4% in '06, in spite of our new competitiveness strategy which Cassio is going to describe, and that has already produced an impact on sales.

If we continue to look at slide number five, we always have a difference, an important difference between EBITDA and net profit. So, during this meeting and this conference call, I'd like to discuss about these differences a little bit so that you can understand them better.

If we talk about depreciation and amortization, which is one of the lines you'll find here in the pro forma results, we've had a depreciation and amortization in the fourth quarter of 100 -- I'm sorry, he said BRL97m as compared to BRL170m in '05 and BRL385 -- I'm sorry, BRL97 was the quarter of '06, BRL170 was the last quarter of '05. And as we compare '06 to '05, BRL446m for '06 and BRL385m for '05. This is because we've anticipated the result of the effects of a new legislation on the leasehold improvements.

So, we begin to consider depreciation limited to the time of the leasing -- to the leasing time. So, we made this adjustment in the end of 2005. And that generated a non-recurring effect of BRL86m. If we net our result of this effect then we can have a more adequate comparison.

I am not considering the increase of depreciation because we've sold these stores because at the same time, we had a drop. That is as we shut down the stores we have a drop. But as we open, or as we acquire new stores it goes up again. So, the difference here, the true difference is this adjustment in the leasehold improvement which has anticipated the effects of this new legislation and the 195, or the NBCT 19.5 [sic. see presentation]. So, the year had 3.9% as compared to 4% last year. So, there are no surprises here.

If you look at the financial result, or the P&L, our financial result was pretty low in the fourth quarter. It was negative BRL17m, whereas last year it was BRL45m in the same quarter. For the year, BRL178m compared to BRL237m.

Our net financial result was better than last year because it was much less negative basically because of lower interest rates in '06 versus '05. But now in the fourth quarter of '06, we also had a non-recurring adjustment of BRL26m. This was a program we conducted in the last few months where we reviewed most of our taxes that were paid in a deferred fashion. So, we had a reduction of BRL26m because we paid them before and so we had a reduction because of interest and fines. So, our result that was negative BRL17m will go up to BRL42m compared to BRL45m in '05. And if we look at the annualized result, BRL204m as compared to BRL237m in '05.

So, the financial result is a little smaller than last year and we expect '07 to be even smaller. We've had a program of BNDES, which has been announced. It is BRL187m and we've also issued debentures for BRL800m and this is going to help us refinance our debt with a lower spread than the fifth series, which is going to mature in '07. For this reason, '07 is going to give us a financial result even better than '06.

If you look at page nine, non-operating result, I think it's the first time I'm going to mention this line, especially this year, because it had an important effect. And if you look at our minority interest line, you can also see its effect. But I think it's worth mentioning that we have an amount of BRL264m which was because of a goodwill reduction of Sendas Distribuidora. So it has produced an effect, but it's not going to affect the bottom line profit because we had this Compression cantavalian] effect in that line that refers to the minority interest. We had a provision, as already mentioned and we've also wrote out some property and equipment.

We closed 28 stores in '06 which means that we've had a cost of BRL51m, which is non-recurring. So in '06, we wrote out BRL69m, or we disinvested BRL69m. This was the cost of shutting down stores as compared to BRL18m in '05.

Now we didn't make any adjustment in the pro-forma results because of this effect and why not? Because it is not a non-recurring item. Sometimes in the retail business you do shut down some commercial units, some POS. We did have some stores that were producing at best and this is the reason why they were shut down. As a result of this program, we have in effect shut down a few more stores in 2006. And this was part of the program to prepare our sustainable growth for the future.

Now finally and now talking a little bit about our debt, which you will find in slide number 10, I also prepared a chart so that you can understand that more clearly. By late '05, our gross debt was BRL2,056m and in '06, we have closed the year with BRL1,934m. Now, this BRL1,934m, BRL1,214m is in the short term and the remaining BRL720m are in the longer term. This is especially because we have a debenture maturing soon. We have some debenture issuance. Some of them were considered long term in '05 and they have become short term in '06. That is why we have a much lower amount for the short term. But now with the new issuance of BRL800m, we'll go back to the previous relation. Very close to 80/20. That is 80 for the short -- 80 for the long term, 20 for the short term. 80 for the long term, 20 for the short term. And this is what we expect to have in '07.

Now with that, we close '06 with BRL1,392m in cash, compared to BRL1,728m last year. This is how we came from '05 with a net debt of BRL327m and year end '06 net debt of BRL541m.

So, these were the comments I had. Let me now give the floor to Cassio Casseb.

[Interpreted] 2007 is going to be a landmark for our Company. We are at a very different level right now. In 2006, our number one concern was to build a program of options and bonuses that was quite well aligned with our results. That is, we wanted to pay for Marriot. And this is how we began to set up a team. We selected the people and the [inaudible] price competitiveness and expense adjustments.

Now in 2007, the name of the game is sales. My focus is going to be based on sales. Sales is the number one, then assortment and shrinkage. We want sales, sales and sales. Of course, we always have to think about expenses. We have to be increasingly more efficient. We will continue to have some non-recurring items, but they will be transparent in all cases. But we have done most of the work in that area. Now, things will continue and we will continue to gain efficiency but in a regular pace that is, not as we did before.

When you look at stores shut down in '06, we closed 28. We opened 21. That is, we closed a net of seven stores. In '07, we will probably shut down 10 and open 30 new ones. So, we will have a positive result of 20 new stores open. I'm very confident. I believe 2007 is going to be the year where we will consolidate this new standard, this new sustainable standard where we are in now. And you can remember how we announced our new targets, our goals, in the administrative message. We have merely stated that we will be able to have a 5% higher result.

If you look at the presentation on our website, you will see the chart up to March 28, and you will find CBD curve Same Stores, month-on-month, same comparison to the same month in the previous year. It shows 252 in January, 405 in February, 448 in March. If you open that by division, in Pao de Acucar division, everything is wonderful, 235, 479, 405. CompreBem the same 054, 414, 682.

Now, with Sendas, you begin to see the first favorable response, 142 positive. Extra, the behavior is always very consistent, 260, 329, 337. Last weekend was also a great weekend with a new campaign which was buy one kilo of cod fish and you will be given one kilo of potatoes plus one kilo of onions. This produced a great effect on sales. If you look at the number of customers in the Same Store concept we had [0.8] in January, 1.4 in February, March probably above 1.5%. Average ticket 1.9% in January, 2.6% in February, in March much higher than 4%. So we're no longer talking about promises for the future. We are already talking about our reality. And in '07, you will see more of this.

If you look at our targets in terms of figures, we want to gain 100 basis points more in terms of expenses. That is we want to have expenses below 20% over net sales.

Our EBITDA will have gained 5% and we want also to gain market share. And the ROIC we have a minimum commitment of 11 this year. We are already between 10 and 15. I think we are on the right track, and the focus on sales now, is going to allow for us to truly consolidate this new level.

I'd like to request Maria and Claudia to tell you, very briefly, very concisely, about our sales program for 2007. How we are turning all our eyes and attention to sales. And as soon as you can, please come and have a look at our stores. Look at the stores. Look at what's happening and the atmosphere. Feel the motivation of retail sales in Your Own Soul and buyer interacts with us, come on. Thank you.

[Interpreted] My name is Maria. I am the HR Director. Now you can see the slides of our campaign on pages 15, 16 and 17. The name of our campaign is Retail In Your Soul, or in your heart, something like this. It is the first campaign for all divisions of Pao de Acucar Group in Brazil and it's going to involve everyone in the Company.

As the HR Director I can tell you that sales, retail sales, they always respond to motivation. So, motivation is key. What is our objective? We want to increase sales with profitability. So, it's going to involve 100% of our associates. Everyone in the stores will participate and everyone can receive an award if they attain the targets. So, we are talking about assistants -- from assistants to regional directors.

And here, we have the new figure of the sponsor. The sponsor or the [padrenio] will be responsible for five stores and the sponsor will have this role.

First, keep a high level of motivation and keep all associates involved. They will follow up shrinkage sales and gross profit every day. The five stores will be visited every day looking for the best practices. And the sponsor is also going to celebrate good results together with the associates. The sponsor is going to be a great ally to try and find the best corrective measures and look for the best results.

Now, this campaign is going to be throughout 2007 and our actions and awards will be every quarter. Let me now give the floor to Claudia Pagnano.

[Interpreted] I am the Executive Director for Marketing. Our campaign named Varejo na alma, is not only a motivational campaign, but it tries to translate our strategy into motivation. That is you cannot have a new implementation without a clear definition of who is going to implement the strategy and who's going to implement our 67,000 associates. We want to truly show our difference in our four divisions and we want to have a growth above our commitment. We want to grow more than 5% in our sales. And we also want to ensure a high profitability with this level of sales.

In addition, one of the main indicators, one of our key indicators is going to be client activation and we also want to increase the share of financial products which is a very important focus and FIC. That is not only have our 5m customers that we already have, but we also want to have customers that use all the services that we can provide at CBD.

Cross sale is also going to be a key factor to build customer loyalty and also to grow in the same store concept. We have some accelerators during the campaign. We are going to give awards. Those who attain 50, 75 and 100% for those who attain their target quarterly.

Now, in terms of target for financial products, we will also implement the same strategy. So there are associates will be able to double their performance results.

What do we want? We want to motivate our associates. But not only that, we also want to involve all our associates in the implementation of our strategies and this is part of our strategic planning up to 2010.

The results we are presenting today, they are preliminary results, but we can see that 159 stores have already exceeded the 5%, so that they want to continue in this effort. In these two months, that represents 28% of the overall number of stores. So it's 28% of our stores have surpassed the 5% target. So we have already in hand a very favorable indicator of our quantitative efforts.

That was it. Thank you. Let me now give the floor to Mr. Abilio Diniz.

[Interpreted] Good morning everyone. In terms of operating aspects what I'd like to comment at this time is about the process that we started to professionalize the Company in 2003. Why do I want to speak about this? Because as we look back at these four years I feel that the Company has suffered through this process. The Company suffered especially because we had changes in people and also because we had to be used to a new working style.

Not even in 2003 or not even right now I intend to move away from the Company. I like to look to the future and to believe that I'll keep on working for a lifetime. I would be irresponsible if I kept this Company so dependent on me. Professionalization is something that has to come to say I have problems, I face challenges, performance was not that good. What's happening right now? After 2006, a year of major changes in terms of personnel and also in terms of our working style inside the Company. It was an extremely important year. The entry of a new Chairman, someone very professional with large experience and all the adjustments in the team, they were all very important. They were critical for everything we decided to have for the Company and that is taking place right now. The Company becomes much more professional now and very much profit oriented. People will soon be engaged by knowing that they are rewarded by their merit, by their performance. And not only that, our working style is totally different from what it used to be especially during that transition phase.

And now in current time, ever since January of this year, with the Executive Board that is totally complete and by following what we learned from Jim Collins, that first what and then why, I think we have a Group, everybody in the same bandwagon, and I believe that we have the right people with us. People to make decisions, the right decisions right now. And these changes, these decisions, have been taken since last year and a lot has already been implemented over '06. The first results, the first outcomes are right now in sales. We were losing sales, our performance was not good. Even though our market shares was the same related to our two major competitors in Brazil, we were losing our sales to the market in general in Brazil. But we began to recover. We have a positive trend over recent months.

This Monday we came from a weekend that was very exciting for us. And this is the result of a rising moment in sales and to achieve and gain more market share.

What I would like to convey to you is that it all takes people. We always need people with us and I could not tell you and I would be irresponsible to say that we're no longer -- we're not going to change this team. But I do have the feeling that we have an extremely motivated people, top quality people, everybody fully engaged, focused on the same goal. So we can improve our efficiency, profitability and competitiveness.

Thank you.

[Interpreted] We're opening now for the Q&A session. [OPERATOR INSTRUCTIONS]. Our first question comes from JP Morgan.

[Interpreted]. Good morning everyone, thank you for the presentation, it was very much thorough. As the people work, I would like to hear from you, what do you mean someone who works inside the store, 100% of [technical difficulties] profit in terms of rewards, what does it represent in terms of the salary of this collaborator? And actually on [benefits] could you mention a few words of the evolution of the agreement changes, or when we should or when we should expect to see results and if this should be done in cash or stock, obviously depending on the amount?

[Interpreted] This is Maria Aparecida from Human Resources. We have several levels in the store as you know. So I am going to give you the parameter of the store operator which is the base of our pyramid. This award for him is like two additional salaries at the end of the year but with some advantages. He doesn't have any charges. He has this premium with money on a quarterly basis.

[Interpreted] And do you have a higher retention? So do you have any metrics for that?

[Interpreted] It is still too early to let you know in terms of retention. But for motivation we already have, as a monitor, it is successful campaign. For retention, we will have a better idea throughout the year.

[Interpreted] And what about Sendas?

[Interpreted] This is Eneas. At Sendas what happened is the following. In '07 as foreseen they can work on the put option. We have already said that they're interested in that. But this takes some time especially because of what we would do with our partners is to have a long discussion in order to come to an amount, to a value and to work on that transaction. Today it is very hard to tell the effect in the dilution or decrease because so far we don't have a final value amount. We're moving forward in our discussions and noted that the agreement says that the value will be attributed by hiring investment from resident banks. That we work on the assessment, on the valuation and they have a floor value. We're still in the very beginning and we are working, we are still considering the options in order to discuss values so that later on we can have something more concrete and before we talk about dilution as a percentage. It is too early.

[Interpreted] Right, so just to clarify Eneas. So the put option, the floor will be the minimum investment in the back?

[Interpreted] The floor is not that one. The floor is defined now but in the agreement. But before we talk about the floor value we want to discuss it further with our partners. The assessment by three investment banks, we need to consider that before, to check whether this will be safe according to the floor or not so we can come to a final figure. Andrea, it is too early to work on any simulation or to speculate any value.

[Interpreted] And what about the timing, before the end of the year?

[Interpreted] Considering all these assessments, revaluations, certainly more towards the end of the year. Not in the first half of the year. Probably the second half of the year. More at the end of year, maybe early next year. But we believe this will be said in the second of this year, probably.

[Interpreted] Eneas, as to the sales needed for the 18 stores that are opened at the end of year, do you think -- what is the effect now? Do you think it is going to have a positive effect right in the first quarter in terms of sales growth?

[Interpreted] Andrea, Hugo is going to answer that question. Hugo Bethlem is here with us and he is going to answer your question.

[Interpreted] Thank you

[Interpreted] Hi, Andrea.

[Interpreted] Good morning.

[Interpreted] These 18 stores that were opened last year, their performance is good. They are right on the curve. Right on the growth curve that we expected. And so far both the results of CompreBem and Extra stores and all Extra Perto performance has proved to be beyond our expectations.

[Interpreted] And what about the maturity or [naturation] level of these stores. What is your expectation, how many years?

[Interpreted] All our new stores have been designed for a three year horizon.

[Interpreted] Three year. Perfect. Thank you.

[Interpreted] Juliana Rozenbaum from Unibanco has a question.

[Interpreted] Good morning. I would like to go back to Sendas. As far as I understand it has two channels. You have arbitration and you have Sendas's assets for cash maturity and also the possibility of equity in the agreement. I'd like to hear if you can also work on the possibility of having a smaller offer than the value we intend to have in order to anticipate the payment in equity or by offering cash as a one for a lower value. [Inaudible] do you think it will be possible? And what type of calculation or valuation are you taking into account in case this is really possible?

[Interpreted] Juliana, this is Eneas again. Juliana, obviously they are our partner. Relationship has always been great and will keep on being great. For negotiations, well we also negotiate and we have talked a lot about this. We are right in the beginning of this. The Arbitration Chamber is something very recent. In March we had the arbitration term and it takes some time. The discussion there has to do with the transfer, the control name. But what happens at the end of the day is the put option; if it will take place one way or another. We are always open to discussions. We talked to them a lot last year. And even at the end of last year. What I'm trying to say is that we might come to a solution not through arbitration, via agreement or contract, but a special agreement between ourselves. It is always a possibility and it could happen.

[Interpreted] Do you think it will change something of Sendas's operation? If they no longer have a partner in the sense that you're trying to do something over the year and improving and therefore, I mean, what happened to the full control was specifically from the [inaudible]. Do you have any provision that prevents you from doing that?

[Interpreted] Juliana, from the operational and management viewpoint as a Company the answer is no. We're already doing everything we can as Daniela mentioned before. Our fourth quarter was very good. We moved from 1.8 EBITA to 1.6 in the fourth quarter, which shows that all the actions taken in terms of competitiveness or expense reduction are beginning to yield important results. Therefore, from the management and operation viewpoint trying to solve the financial structure of the Company, well that has been discussed for some time with a partner. And the idea of increasing our capital this has been discussed. We keep on discussing this. This has been on the agenda through formal meetings and assemblies. And we keep on doing so. I cannot tell you that we have been preventing things from happening. Quite the opposite. We will keep on doing our best to order to reconvert our business in Real as in recent years.

[Interpreted] What about cash with Carrefour, about the 10 stores that could be shut down over the years? Do you have any specific market or banners where the closing will be concentrated?

[Interpreted] This is Cassio again. The answer is no. We always analyze it. This is a dynamic process. We always have to check what's happening with the stores. We have to work on recovery stores when performance is core. But sometimes the city migrates to one area or another. There are often changes that make you decide to close or shut down specific stores. We are reviewing and for each one of the stores where we have poor results we try to recover sales or to shut the store down. Sometimes we try to renegotiate the rent. Sometimes you have to work on expansion for parking lots or more area for parking spaces. This is very dynamic. It will always be like that. The first year was very strong. We focused on solid decisions, but now we have a natural trend. We have 10 stores closing down for some time depends. If you have 550 stores, this is reasonable.

[Interpreted] Thank you.

[Interpreted] Lore Serra from Morgan Stanley has a question now.

I have a couple of questions, and I'll ask them one at a time. And I apologize if some of it has been answered already because it is hard with the translation. But let me first ask on Sendas, you saw a big increase in the profitability of the retailer and from the growth sales trend it doesn't look like it was driven by top line as much. Can you just briefly explain to us what were the process improvements that you did to improve margins so dramatically at Sendas at the end of the year please?

[Interpreted] At Sendas actually what we did in the fourth quarter was to continue and conclude the [generation] of several properties that were already underway ever since about two years ago. But we were even more focused in terms of improving our productivity which led to our reduction in the headcount and also by reducing marketing and advertising expenses with a better focus on negotiations.

I think all these paid back. For instance, there were a couple of things that we did in electric energy, like eliminating air conditioning and replacing them by fans, results were only seen six months later. And these six months began to be concluded in the last quarter of last year. So part of that was very important, gains in productivity because when you work on productivity effect you have one shot that are early dismissals and you have the costs in the same month. When you go to another system then you begin to get through the benefits without considering additional expenses.

So I think the important moment was the fourth quarter. Profitability remained over the first quarter of '07, so I think we are on the right track in terms of Sendas profitability. Just to add that the [inaudible] they are beginning to see the first signs changing the customer perception or awareness and we can see sales recovery in Real.

Terrific. And the second question I have is, in terms of the selling and administrative expenses, they looked fine on a year on year basis but we saw big increases in some of the expenses sequentially and that wasn't in sync with maybe the trend you had in the beginning of '06 where expense control was tighter. Was there any reason for that?

[Interpreted] Could you repeat please?

Sure, the trend in your selling and administrative expenses were -- there as a lot more growth in those expenses if I look in the fourth quarter then we expected there to be. And specifically, if I look at the administrative expenses you had about BRL120m a quarter and it jumped up to BRL175m. Similarly, the selling expenses went up although I guess I understand that better. So I just want to understand it seems to me that the selling and administrative expenses were not as well contained in the fourth quarter as they had been earlier in the year and I wanted to see if there was any reason why?

[Interpreted]. If I got what she said maybe I could add to what I was saying. If I got that right she was referring to the fourth quarter, selling and administrative expenses. Apparently it is not consistent with our sales growth. We've explained part of that related to rent expenses but when you have, and when we pay rent expenses the way you have a difference. We also have one-timers when they have things that came back again when we shut down those stores and dismissed people. We were referring to sales -- or expenses on sales. 21, 20.9% this is no longer the Company's reality. The running was below 20%. But we cannot see the effect due to some factors --

I was asking about expenses in fourth quarter of '06.

[Interpreted] Pro forma data here. Our growth in total expenses for the fourth quarter was 3.9% compared to a sales growth of 4.5%. In other words a total expense growth pro forma is below the sales performance. Without having the pro forma adjustments then you have a higher growth because of the effect of the BRL32m in restructuring that affects both the sales or selling and administrative expenses. The impact is very strong. As a pro forma, 3.9% growth over the fourth quarter is not so -- it was kind of expected if you consider the seasonal effect and variable expenses such as advertising over the fourth quarter that are normally higher then during the first three quarters.

Okay, and my last question, just looking at the gross sales numbers you are seeing stronger momentum in the Supermarkets and less so in Extra. And I am wondering if you could comment on how your new price promotion strategy, if there is reason why it has not been so successful in Extra as it has been, to date anyway, in the Supermarkets?

[Interpreted]. Lore, this is Claudia. We can see growth, an impressive sales growth in our Supermarket format. All our initiatives, competitiveness initiative, had an impact in some centers than others due to our discrepancies last year in these formats. And in the first quarter of '07 we can already, we conclude have good results of Extra Hypermarkets. This is very well adjusted to the price strategy of this model and therefore in '07 we already having the benefit. March, by the way, was very positive for the Hypermarket format. This is where we adjust prices of key sellers but also for the whole line, the whole portfolio of our Hypermarket business. But we're beginning to see Hypermarket performance in the same trend that happened in the Supermarket performance.

Thank you.

[Inaudible] Ricardo Fernandez from Itau has a question now.

[Interpreted]. Good morning. It is still morning here. I have three questions. The first has to do with working capital. Do you have any idea if it will be positive or negative? And how fast can you work on inventories or to expand savings to suppliers?

The second question basically has to do with the product mix. I wonder if in the same Supermarket like CompreBem [inaudible], do you have any idea if you will be able to have more aggressive increases in the non-foods in order to leverage consumption and to sell more at credit? I think about 5% in same store sales is not exactly outstanding comparing the rest of the sector. So basically I would like to know if you have any policies when you have something more oriented to non-food products?

And my last question is what is the value, or how much would you be willing to pay for the rest of Sendas, in million Reais or in terms of revenues sales, EBITDA, just to give us a flavor, just to give an idea of the amount of that additional purchase?

[Interpreted] Eneas will answer the first question and then Cassio will answer the third one.

[Interpreted] Ricardo, good morning, this is Eneas. The working capital by the end of '06 actually we had an increase, it was more positive especially in our inventory levels. And also there was an effect in our receivables especially with commercial agreements. We were strongly orientated in order to extend our terms with suppliers in '06. And our commercial agreements that are scheduled to create news also increased and then the effect in terms of working capital is in there due to an impressive increase in our receivables. This should become more normal over '07 owing to a reduction in our inventory levels. We will keep on doing that in order to come to lower inventory levels than the ones we currently have. And we also want to move a little bit away from trade notes from suppliers so we can expand terms for suppliers without having a side effect in our receivables from commercial agreements. So this is the trend with an increase by the end of the year that could be reverted and become normal over '07, especially in the middle of the year.

As for your third question that has to do with Sendas, the value of the amount we're willing to pay is a fair amount considering what we've done. But measuring that would be -- well, it would be too early to come to a final figure as it is still being discussed. As we said before, we still have a long way to go over the year.

[Interpreted] This is Hugo. As to non-food product, I think it's important to say that the Company has been strongly focused on that including by hiring our Director for Non-Food Products. We are trying to have a more extensive participation or share. However, we always have to consider a rebalance in terms of working capital. This will allow us to improve our turnover in non-food products by reducing our inventory levels at the grocery level or perishables. It is important in terms of margin contribution and sales contributions on a same store basis. I would think about 5% in that case because we have deflation for both food and non-foods. Whenever it has more technology a new product is cheaper than the one we had before. So this is our current situation in our market. We are encouraging payment and use of our system of our own card and our credit or loan system in order to improve non-food products into the market or other formats.

[Interpreted] Coming back to the last question do you have any idea if you are going improve that room in Supermarkets for non-food products or maybe 2 or 5% more, or could you improve it for 10 or 20% in order to reap the benefits that you mentioned?

[Interpreted] We have that in mind but basically we are using the same stats. I mean, basically more focused in Supermarkets not in Hypermarkets.

[Interpreted] And so will you working on the supply or are you going to improve the total supply of non-foods?

[Interpreted] This is Hugo again. You have three different directions with Supermarkets. First is to effectively increase. The second is to provide a wider assortment that meets the consumers' needs of these products. And, third, specific operations, now or never especially CompreBem in the ABC regions. These operations have to do with non-food products with special prices for one or two days. And there is an improvement in the physical share or participation. So we can display the product in the store and also an impact on sales and results from these stores.

[Interpreted] Still you don't have a specific figure, for instance, 5% of the room of the sales in order to improve the sale of non-foods or 20% or 30% in two years?

[Interpreted] We have different formats. We have different formats so you have stores in San Paulo down town for instance, CompreBem, Sendas. These are new stores, and they have been growing from 1 or 1,200 to 1,500 or 2,500 square meters, so this is devoted to non-food products.

Thank you.

[Interpreted] [OPERATOR INSTRUCTIONS]. [Jeremy Skiders] from [inaudible] has a question.

Mr. Skiders you have the floor.

[Interpreted] My question is about DS Supermarkets. I have seen quite a few stores. It seems like following on your Extra Perto stores. Have you seem this movement of DS Supermarket? Is that a concern? Is that something that poses any concerns you? Do you have any strategy to fight against this action by DS?

And also I'd like to know a little bit about tax rates for next year because we did not see much happening this year. We had a lot of non-recurring items, so I would like you to speak a little bit about the tax issue.

[Interpreted] Okay, this is Hugo again about DS Supermarkets. Yes, it is growing. They have about 300 stores to date. Very different models compared to ours. There model was set up as a discount store or a value store and to date just a regular supermarket. But we have the best locations and so they are trying to improve their locations as well. This is only natural. This is a free, this is a competitive market. If you look at our model, I mean, what the model we have to fight against DS is CompreBem. And also at Alberto because it is much closer to consumers. Now for any competitors we always have our eyes open at whatever actions they take, and this is the same with DS Supermarkets. Thank you.

[Interpreted] Now with the tax issue, Mr. Diniz, good morning. Look in 2007 the tax rate is going to be lower. This is what we expect. We have disclosed the operation where we have incorporated VR and also we've used Directive 311 by the Brazilian Securities Exchange Commission so with that we will probably have some tax credit. We do have some good -- we will be amortized so that we already have some tax credit, but we will now have some more credit due to the 311 regulation by the Brazilian Securities Exchange Commission. So, I believe the tax rate is going to be low in 2007 because of these credits we already have. And this new operation, that will at the end of the line, give us an important credit in terms of income tax.

[Interpreted] Okay, thanks.

[Interpreted] [OPERATOR INSTRUCTIONS]. We do not have any further questions. [OPERATOR INSTRUCTIONS]. Andrea Teixeira from JPMorgan has a question.

[Interpreted] Yes, I have one more question since I have the opportunity to ask it. This is about Extra Perto. I know that the 30 stores to be opened do not include Extra Perto. So when are you going to include Extra Perto and if you have decided to continue with the Extra Perto, actually how many stores will be opened in '07?

[Interpreted] Well this is Hugo again. Eight Extra Perto stores have been opened. Two are in construction. So our project is to have these 10 stores operational up to the mid point '07. And as and when we have the results we will present them to the Board. So far the results have been favorable and the Board will make the decision as to what to do the last part of the year.

Okay this is Hugo once again about Extra Perto. We have eight stores open, two in construction and our commitment to the Board is to keep these 10 stores being tested up to the mid-point of '07. After that we will forward the results. So far the results have been quite favorable, and as soon as we receive the green light from the Board, let's see what we can do in the last half of '07.

[Interpreted] Now, adding to the comments that Cassio made about ticket rates and traffic and average ticket, we had 1% improvement in both. I'd like to have the exact figures and what we expect for April and for the next few months. Do you expect to continue in the same trend, or was it only in March because of the positive calendar effect? That is I would like to hear a bit more about these tickets.

[Interpreted] This is Cassio again. Let me add to what Hugo said about Extra Perto. The figures are very favorable for Extra Perto. We are very enthusiastic about this project. We believe it is going to exceed expectations. We are now waiting for the adjustments that have been made to the test but we are very happy with the first results. The figures I gave you are up to March 28. So the last weekend of March is possibly going to help us improve that even further. Daniela is going to announce that so I believe that March is platform. As far as April, April is going to be even better than March.

[Interpreted] Thank you.

[Interpreted] Thank you.

[Interpreted] We will now open the floor for final considerations.

[Interpreted] Okay I'd like to thank you all for being with us today. The department of Investor Relations is at your service if you have any further questions please contact us. Thank you.

[Interpreted] The CBD conference call is now closed. Thank you.

Portions of this transcript that are noted "interpreted" were interpreted on the conference call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.