Companhia Brasileira de Distribuicao SA (CBD) 2007 Q1 法說會逐字稿

Good morning. Thank you for waiting. Most welcome to the teleconference of Grupo Pao de Acucar. We have present today with us Mr. Abilio Diniz, Chairman of the Board; Mr. Cassio Casseb, CEO; Eneas Pestana, CFO; Aymar Giglio, Treasurer; Fernando Teles, President of the FIC; and Daniela Sabbag.

This event is being simultaneously broadcast via the web and could be accessed in the www.cbd-ri.com.br, where this presentation will be presented. The selection of slides will controlled by yourself. The replay of this event will be available right after its closing.

We inform that the press release on the results is also available in the relations investor site at www.cbd-ri.com.br. This webcast is being taped, and all the participants will be only listening to the teleconference during presentation of the Company. And afterwards, we will start a Q&A session, when further instructions will be received.

(OPERATOR INSTRUCTIONS)

Before proceeding, I would like to mention that potential declarations on the Company's business outlook, the previews on operating and financial results and referring to the Company's growth potential are merely projections and were based on the management's expectations regarding the Company's future.

These projections are highly dependent on market changes, the performance of Brazilian economy, the industry and international markets and are, therefore, subject to change. And that you should understand that overall economic conditions depend upon and may impact the future performance of the Company and may lead to results that differ.

And we would like to give the floor to Ms. Daniela Sabbag, who will start the presentation on the performance of this period. Please, Ms. Sabbag?

Good morning, everyone. Thank you for taking part in our earnings release. I'm going to start with a short comment on the results of the Company. We continue with our price competitiveness strategy and we are focused on reducing expenses. In addition, we have started a sale incentive campaign, "Varejo na alma," where encourage the increase of profitable sales involving all staff. The positive effect of these measures can already be felt in the Company.

You can see in the slides of the presentation available on our site, I'm in slide two. I'm going to start talking about gross sales that clocked up R$4.2 billion in the first quarter and net sales $3.5 billion, a growth of 6.2% and 6.8% vis-a-vis the previous period. Same store gross sales grew 4.8%, and net sales grew 5.6% in line with what the Company expects for 2007.

Still about sales, a highlight was a reversion of the downtrend in the sales of food products. In the first quarter, they grew 4.5%, particularly perishable goods. The growth of non-food products was 5.9%, which is also significant if we consider the comparison base.

And it's worth saying that food products prices reported lower growth compared with inflation in food products, which have contributed, among other factors, to improve the price image of the brands. And this has contributed to increase the flow of lines in the stores, and this has been accompanied by an increase in the average ticket.

In slide three, a few comments about the gross margin and the main operational indicators. As regards the gross margin, it fell 1.9% from 29.7% in first quarter '06 to 27.8% in first quarter '07. And this is explained by the price competitiveness strategy adopted since the second half year of '06. As I said before, this strategy has contributed to improve the margin in all brands, and it has created positive effect in the sales, which is our greatest target for this year.

On the other hand, we are very well succeeded in controlling costs with a program to reduce expenses since '06 as shown in our operating expenses data. Including taxes and rates, operating expenses accounted for 20.5% of net revenue, a reduction of 0.8% compared with the same period last year.

And on the next slide, it's important to talk about the other lines of results. The EBITDA margin, including taxes and rates, 6.6% in first quarter '07 was affected by the reduction in the gross margin, but partially offset by the reduction in operating expenses. The financial result fell nearly 9% compared to first quarter '06. Although interest expenses were lower, owing to lower interest rates, the reduction in interest revenue was still more significant, owing to a lower average cash.

As regards the equity method and the participation of minority shareholders, I'll briefly say something about it and then Fernando Teles, President of FIC, is here, and he's going to talk about that. Today, FIC represents about 12% of group sales, and it reported a negative equity method result of R$5.9 million in first quarter '07. This performance is explained by the growth in the receivables portfolio, nearly 35%. We still expect to reach breakeven in the operation by the end of 2007.

As regards Sendas Distribuidora, gross sales amounted R$796 million, representing 19.1% of total sales. When we look at the previous year, the trend or the sales of the period do not reflect all investments made in competitiveness that were made over past quarters. Operating expenses of Sendas Distribuidora remained unaltered regarding the previous year. But this strategy of higher price competitiveness led us to a drop of 1.7%.

The result in minority stake for CBD was R$22.2 million, stemming from this net loss of $38.6 million of Sendas Distribuidora. The result of all of these variations explained took net income to up to R$36 million in first quarter, and to end up my part, I'm going to talk about a good investment.

A total of R$204.2 million in the quarter, of which R$78 were designed to build and open new stores to be opened, inaugurated in '07. And in the first quarter, four Extra Perto stores were opened, five gas stations, and we also invested in a store CompreBem in Sao Paulo and the construction of two more than -- I'm sorry, four Extra hypermarkets, which are underway.

In addition to these investments, R$68.4 million were allocated to acquire strategic land sites, R$45.5 million in the revamping of stores and R$12 million in infrastructure. These are the comments I would like to make. Now I'm going to pass the floor to Eneas Pestana.

Good morning, everyone. Daniela has already talked about the numbers, but I would like to highlight a few things. In sales, it's important to remind you that we had 2.7 same stores in January, February 4.2, March 7.6, and then we closed the quarter with 4.8. And it's important to remind you of these figures so that you can look at the trend.

The effect of the price strategy has been that since September, we've seen a growth. And it's important to say that the flow of clients has also grown, particularly in brands such as Pao de Acucar, so that with this consistent strategy, which is to be maintained, obviously we will see an effect on the margin. And if compared with first quarter '06, we must recall that we started implementing this strategy in the end of the second quarter of last year.

In the first quarter of '06, margins were still very high because we hadn't started implementing this strategy yet. 1.9% less in margin expenses -- a reduction of 1.9%, we had good results in expenses as a result of projects and restructuring that were started as early as last year, a center for shared services, reduction of corporate costs and also the restructuring implemented at the end of last year. We still expect to capture further gain throughout the year, and we are still very much focused on possible reductions in corporate costs.

Now, looking at the other results, we've seen a growth in sales expenses of 3.2%, and sales grew by 6.2% in overall and administrative expenses, and we nearly have no variable expenses. We were practically flat as regards first quarter '06, R$118 million in expenses against R$117 million last year.

Therefore, total expense of 21.3% this quarter was 20.5% of net sales. So this way we maintain a guidance of 20% in total expenses for '07. Very well.

As regards to the financial results, unless you have any questions, there are no highlights in terms of non-operating results. We didn't have any important results. We had a loss of R$3 million in the first quarter of '06. We had a positive operating result of R$7 million because we were still applying the performance target of FIC. This effect no longer exists. This has been discounted. Therefore, the non-operating result this year is a negative R$3 million owing to three stores of CompreBem that were shut down.

As regards Sendas, I'm not going to comment FIC. We have Fernando here to talk about it. As regards Sendas Distribuidora, I have a few comments here.

You know that in the end of last year, we made a provision for the premium that we had in Sendas Distribuidora, and this caused an extremely significant loss. Now, as of '07, we will start amortizing less premium owing to this realization in the amount of 10 -- less R$10 million a quarter in premium payments.

On the other hand, we no longer recognize the deferred income tax on this loss until this Company starts providing profits. So if we can stop accumulating deferred income tax, obviously this is the accounting effect. For tax purposes, we do not lose the rights to this credit. It is registered at the amount, and as soon as the Company turns around and is profitable again, we will return this credit in the books.

And this quarter, Sendas Distribuidora reported a loss of R$38 million against a total loss of $R27 million last year. And what we can say about Sendas result of the first quarter is that, actually, we had a reduction of R$10 million in advertising the premium, but we also have the effect of waiving on a credit that represented R$13 million.

And as a result, if I had taken this credit, the result would have been R$27 million against - R$25 million against R$27 million last year, but still carrying the effect of lower premium amortization. The difference is in the margin because also in Sendas Distribuidora, we applied the price reduction strategy as of last year. And in the first quarter, it had not been implemented last year. So the margin was still higher.

So the effect that we see in Sendas, the effect of a lower premium amortization is offset by waiving the loans or credit, and the final effect is a reduction in the prices as a result of the competitiveness strategy.

These are my comments. I am open to other questions about the numbers. I am going to pass on to Cassio Casseb.

Good morning, everyone. This quarter we have better sales, better expenses, but we still haven't been able to offset lower margins. Margins are not going to fall further, and I believe we will be able to recover from now on.

Anyway, we've got a lot of work ahead of us. I am very excited. I see that our team is very excited about the integration, about the sales incentive program and the new bonus and the stock options and "Varejo na alma" program. And now, with other initiatives and, in fact, we are facing the causes, we are going to the core of our problems.

We feel today, that if the Company -- that the Company is really focusing on marketing and the strong positioning of brand and taking terms such as dot com and [rapture] et eterac. We are taking it very seriously. We are searching efficiency and process implementation. We are streamlining the corporation, everything is being done with the firm purpose. Rio de Janeiro still shows insufficient reaction and so unfortunately we haven't got very good news about Rio.

In '06 we shut down more stores than opened. This year we are shutting down 10 stores. Four Pao de Acucar, three CompreBem, three in Rio de Janeiro. We are opening another 30 this year. All stores that reported frail results have individual recovery plans. I'm personally following up on these stores and we are strengthening all these faces.

Today we see that the stores that were shut down reported the poorest sales per square meter. Half of the new stores below 500 square meters and these stores represented 0.5% of total sales.

The expansion plan is doing fine, we are performing well. We have been too strong since second half year of '06, we have been anticipating the purchase of land sites, riding a good trend as regards real estate appreciation, we have expanded our acquisitions of land lots. We are buying larger lots now. We have expanded our operations with condominiums and buildings to optimize a search for flow and primary [areas] and the performance has been good.

Sales have been doing fine. We must be very careful with the March/April effect, Daniela, pointed that out. Different weekend numbers from one year to another and Easter as well, but we cannot be fooled by the sales curve accumulated in March and April. And when we have second quarter numbers we have to be very careful in the comparison. But the curve is favorable, I reaffirm our commitment of growing stores by 5% and I also reaffirm all our other targets of expenses et cetera. Everything that appears in the administrative report that is together with the balance sheet of '06.

I'd like to talk about acquisitions. This is always a question that always crops up, particularly now that we lost [Atakadel.] Atakadel was really studded and it could have been a good opportunity if it were not consolidated with the rest of the group. And it had a certain price level, it was not feasible, we lost. To us, this is not a serious problem, we find easier to compete with Carrefour and [Almart] than with smaller and medium-sized companies, which are less formal [set] to us. This change was no problem, but what we intend to do about it is absolutely nothing.

So, first of all, it is good obviously, but we are not willing to pay to be the first ranking. Our organic growth is doing fine and we will always be monitoring acquisitions that will add value and that will provide good returns. But the objective here is to be best, and that's it. And, I believe the reliability continues to be high, we are on the right track.

I would like to pass the floor to Fernando of FIC. FIC has shown very good performance, I believe that we've managed to have a good integration between the machines that didn't use to exist and I believe that this will speed up results. I am very optimistic because I see now that FIC has been accepted as part of the group, that is, we've broke down cultural and language barriers successfully. And FIC is now seen as part of the group and changes have been occurring much smoother. And I pass the floor to Fernando.

Good morning, everyone. I believe that Cassio summed up very well what we will see in the first quarter is a reflection of that. Consolidation of this integration of the operation on the financial company with the stores and the CBD group. And this gives us good results leverage.

Looking at the presentation in slide 8, we can see the total stores operating, 338. Today, 100% of hypermarket and 206% in supermarkets. Projects are all implemented, the portfolio is totally implemented under all brands. Breaking down into consumer products, designed for consumption and relationship products. And here, insurance and personal credit portfolio.

Looking at page 10, we can see a picture of what materializes when this integration becomes a reality. So, we have a growth in clients of 19%, 20%, moving on to 5,200 clients, which is a considerable -- I'm sorry, 5.2 million clients and now 2007 is the harvest time. So our receivables is more than 870%. 30% on top of first quarter '06 and what caught our eye is the growth in net revenue of 95% owing to the implementation of all projects of integration with operations of CBD and the strong growth trend. And this causes a result to rise by 60% and we are focusing on breaking even by the end of the year. Last part, it's only a graphic representation showing the numbers in distribution and breakdown by product. I am at your disposal for any other clarification.

Good morning. I'd like to tell you that as Chairman of the Board, I am very pleased with what's going on. Obviously, as you, I think that these results are still unsatisfactory but I am very pleased at the work that has been done and the trends. It is to no avail to have better results in the first quarter of the year, the important thing is to look at what has been done and the year as a whole. This is only the first quarter. There is a clear recovery in sales. I believe we'll be able to level off the margin despite -- with the good competitiveness that we've reached at the moment and I believe that this is extremely important.

Another point, which I believe is most important of all, is too look at our teams. Increasingly more this team is becoming stronger, this team is learning to work together, to be proficient together, to look at corporate problems as whole rather than each one by himself. With everyone together, we are strengthening a number of sectors in the company, seeking the best professionals, so that they can show performance that we can assess in the future. I believe that this is the greatest task, to feel that the company is increasingly in the hands of its talent, of its professionals.

Results so far, as I said, are unsatisfactory, but the trend is promising. We have reversed a drop in food products trend and despite all the difficulties that we have had in competitiveness, particularly in the industries that are informality, despite all difficulties we've been able to grow the sales of food products. On the other hand, we've braved a few difficulties early this year with non-food products, particularly as regards heavy products in which our result of '06 had -- was positive numbers, I believe that these are adjustments that have to be made. And in brief, my vision for the year is that it will be a much better year than '06 and the company can to report a steep curve in growth with better results.

Now we will start the Q & A session.

(OPERATOR INSTRUCTIONS) Mr. Andrea Teixeira from J.P. Morgan

I would like to know about the comments that Cassio just made regarding April. I understand that we underwent the effect of having anticipated the positive results in March and the effect was around 2%. And I think we should still be excluding this calendar effect of one more Saturday, one more weekend. And I think that perhaps we should try some positive effects and having something around 3% because the trend of removing the calendar effect, then we will have a positive -- still positive things to ourselves.

Hi, Andrea, this is Daniela. We have disseminated this morning the sales numbers for March and April. And we carried out an analysis of the first quarter in order to remove the calendar effect. And when we analyzed the performance it was 4.5% as compared to the same two months last year. So this voids the calendar, annuls the calendar effect last year. And you would this understand this purging, after the purging, how we could have been without Easter and all the rest. So this is the effect.

I apologize but I have not received this piece of information. Well, so could you please give us a view of your projections for the quarter on non-food stuffs and food stuffs. And another question on FIC, what would be the profitability you expect, mainly in terms of individual sales and doubtful debtors, what do you think?

In terms of sales evolution, we're in for the 5% for same stores throughout the year. This is the trend and it is going quite well. So there are no major changes in the -- looming in the horizon. What we have publicized this month, shows a real going up curve.

Andrea, this is Fernando, in terms of doubtful debtors, '06 was a complicated year, like by the rest of the marketplace. We did our homework, we readjusted the credit line granting procedures and we are now undergoing the best moment of our company in terms of our credit portfolio. So all the provisioning is downwards.

Thank you very much. So the result we saw in profitability and beyond the target of reaching breakeven by end year, you still have a trend for improving the profitability for 2008 in this portfolio.

Well, our expectations for '08 is for profitable operations with a growth trend. Thank you.

(OPERATOR INSTRUCTIONS)

Fernandez from Itau Bank.

Good morning. The first question is related to credits and sales. In the last two years with this effort, this drive inside CBD, have you realized or perceived an increasing sales deriving from this credit offer? Have you already some enhanced some figures to share with us?

And also, I would like to know up to what level you think that concrete sales can get today to around 12%? Or get to 15%, 20%? Is there a magic number in your head?

And the last question, what about the internet? I would like to know what is your percentage of sales via the web and what are you doing to increase these numbers in order to grow this part of the business?

Ricardo, I am Fernando, I'm speaking on behalf of FIC. As to sales participation I must say that yes, credit sales have grown the total sales and this is a fundamental move we are doing so that the own brand -- the credit card will be the payment of choice. The participation in sales is 12%, In the long term, we have the goal of reaching 30% of the sales of the group in three years.

Well, if they grow by 5%. What about -- I would like to know what part of this is due to the credit push. Was it 20%? 80%? I am trying to grasp which was the impact of you credit line offering in order of the total sales.

Well, the answer is not as immediate as you may think because 50% of our companies sales are paid cash. And our participation is growing by using -- by referring to other means of credit payment. So we have an increase in average ticket and this is due to credit lines because we are able to provide more financing for people and they buy with a higher average ticket. But I cannot precise percentages.

As to the web sales, internet sales, Ricardo, last year the [astra.com] growth is above the others but it was above 100% growth. This year we had a cumulative growth above 60%, nearing 70% and this has been the trend. but you do not have a total sales percent. Well, is still very low. Around 1% of the total sales of the company,. Well, the important point in our dot com business is not sales. We are currently, and just last month we entered a new system and all the operations and the support, the technological support and the logistics support is giving -- is a full strength in order to be able to be able to grow. Our limiting factor is not sales but structure and we have stabilized this system only two weeks ago so this is very young still, very premature.

Today, [Cajo], [Dedi] and the rest of our team are following in situ all the new implementation and the important point for is to feel sure in order to speed. And that's why we have all the focus on technology and logistics.

Ricardo Fernandez; Okay. So when you think that the credit cards and all these systems will be ready to make this sales channel relevant for the group? And I would also like to know if you thought of putting kiosks inside all the stores in order to buy things that are not in the supermarket shelves but are on the website because this could be a good strategy to installment sales, to credit sales.

Our experience is that this doesn't bring marginal sales. Our problem is not sales. If we open up logistic and technology channels and feel secure with growth, we will grow very easily because our problem is not sales but infrastructure, as I said. I reinforce that we aim to sell R$1 billion by 10/10, and we are getting ready for a quantum leap in 2010.

And I think that Fernando will bring our dot.com team to talk on that. But today, our focus is in support to create a structure and the robustness to grow by 2010 to sell R$1 billion.

But when will you have the structure ready? When will it be ready?

I repeat, two weeks ago, we implemented the new system. It took over a month to become stable. It has been stable for two weeks, and we are at full preparedness level to speed up. And we know that in the next meeting, we will have them here with us to talk.

(OPERATOR INSTRUCTIONS)

Good morning. Could you tell us anything about the gross margin for the year? This is Marcelo from Safra. Since you say that the margin is never more than this, so what would be a reasonable figure for us to work with throughout the year?

In fact, giving you a figure that is subject to seasonality for a number of reasons, the anniversary of a number of brands, it's difficult to give you a trend, but it's not coming down, and there will be a small recovery.

You mean throughout the year, recovery throughout the year?

Purged of the seasonal effect, this is what you're going to see.

So now we'll return the floor to Company members for the final comments.

I'd like to thank you all for being here and remind you that the Department of Investor Relations is always available for any questions you may have. Thank you very much.

This is the end of the conference call of Grupo Pao de Acucar. Thank you very much.

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.