Companhia Brasileira de Distribuicao SA (CBD) 2010 Q2 法說會逐字稿

Good morning and thank you for standing by. Welcome to the Grupo Pao de Acucar Conference Call to discuss the results for the second quarter of 2010. This event is being broadcasted via webcast and it can be accessed at www.grupopaodeacucar.com.br/ir/gpa and www.globex.com.br/ir. With the respective presentations, the slide selection will be managed by you.

The replay facility for this call will be available on the website. We inform you that the Company's press releases are also available at their IR websites.

This event is being recorded and all participants will be in listen-only mode during the Company's presentation. After GPA's remarks, there will be a question and answer session, when further instructions will be given. (Operator Instructions).

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of the GPA management and 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 GPA and could cause results to differ materially from those expressed in such forward-looking statements.

Now, I would like to turn the floor over to Mr. Daniela Sabbag, investor relations officer, who will begin the presentation. Mr. Sabbag, you may proceed.

Good morning, welcome to our conference call for the discussion of the second quarter of 2010 earnings of Grupo Pao de Acucar. We have Abilio Diniz, chairman of the Board, Eneas Pestana who is our COO, Jose Antonio de Filippo, CFO, besides Jose Roberto Tambasco, [Ramatis Rodrigues], Raphael Klein, Jorge Herzog and Padilha.

(Operator Instructions). Now, I would like to give the floor to Abilio Diniz for his initial remarks. And afterwards, we will be starting the presentation about our earnings.

Good morning. On behalf of the Board, I would like to tell you that things are going very well, results are in line with the projections that we have made for 2010. Our sales are going very well, our earnings are satisfactory, and our organic expansion continues according to what was projected for the current year.

We are bullish about the second half of the year, differently from analysts that are forecasting a drop in consumption and therefore not so good results for Pao de Acucar. However, we are bullish about the second half of the year, and we believe that consumption will not drop.

Consumption depends fundamentally on employment and income. And fortunately, this country continues to decrease unemployment and continues to generate more jobs, and this results in an increase in the population's income, a better purchasing power, and ultimately, increase in consumption.

So the outlook is rather good. I, myself, I'm personally very happy with the environment that we have in the Company and with our management team because these are the people who really lead the Company to good results and to increasing sales.

I would like to say a few words to you about Bahia. I wish to tell you that I am not surprised, but I am so even more pleased with everything that is going on than I could imagine. I believe that the endeavors that we made during the negotiations, and although the differences that we had regarding contracts and amounts, in spite of all that, both the shareholders and myself, as well as Klein Family, we were able to keep a climate like the one that we had in the beginning, of friendship and respect above all. And waiting for the conclusion of the deal, and we have always been very optimistic and we knew that the things would come to a very good end.

And the effort was not small at all. And what we have today, as a result, is a very good relationship, not only among our shareholders, but also between the different -- the two different teams. And I'm very happy to hear person come to me from different sectors and they come to me and they tell me, well, you would never guess how things are going on because they are very good.

We have some committees that we have formed such as the logistics committee, the IT committee working with very competent professionals, both on the GPA side and the Bahia side. And I am sure that in a very short while, in the near future, you will be very pleased with the results that we will be able to present in terms of the synergies that we found.

Many work groups are operating, and as I learn and more about the Bahia professionals, I become more and more pleased with their competence with their level, and above all, with the knowledge that they have, and also with the teachings that we have from the founder of Bahia, Mr. Samuel Klein. He is a true icon in retail and he knows in-depth, what he calls our customers.

It's really surprising. We have good surprises from Bahia every time, every moment. And the knowledge of people of Bahia is really something that makes us very enthusiastic. Work is being very well distributed. And [Michelle] who is the chairman of the Board, he is a major expert in stores. I have never met anybody who knows stores and retail as he does. I think there is some problem with the broadcast.

As I was saying, Michelle is a major expert in stores and retail, and he is looking store by store, POS by POS, and he is considering all growth opportunities, organic growth as well, and our organic growth has been very accelerated in Bahia [state] and Michelle is giving us a great contribution in this area.

Raphael, who is here with us today, not really to answer questions because none of us is really ready yet to answer any questions about that, and we will do that in due time and it will be in the near future. However, he is -- because he has to understand the dynamics of a public company and about conference calls, with the market and the Q and A sessions.

And I am so -- and I have always been telling Raphael that I admire people who really want to learn and who really want to grow, and this is something that he doesn't lack beside the competence that he is showing in leading Bahia now integrated with Ponto Frio, leading Bahia with a lot of common sense, with a lot of equilibrium in order to take things to the right spot with no stress whatever.

Expectation that we have regarding this association between Bahia and Ponto Frio, and the further association with us, there is a lot of work to be done. There's a lot of inspiration, but a lot of transpiration, a lot of sweat. And we are very enthusiastic about it. It has to do with recovery. And as you can see in results, Ponto Frio suffered quite a lot in the first 6 months of the year. We were already prepared to dismantle Ponto Frio, bringing it onboard to GPA. And then Ponto Frio was in limbo, so to say, waiting for integration with Bahia. That, of course, has led to problems and stumbling blocks.

And what happens now is that we shouldn't look back. We should look ahead. We have more work to do, more recovery to do. This is what we are doing, and this is what we will continue to do. The asset is excellent, the stores are excellent, the name is excellent, and we will be using all that in order to bring this new company to the point that we wanted. Our wise investors, shareholders and this management team that is here today, this is just an initial message. And I now would like to give the floor back to Daniela.

Now, we are going to give the floor to Eneas.

Good morning and thank you for participating in this conference call. It is always a pleasure to be able to talk to you and to convey some information to you about how we see the development of the Company, the Company's businesses. And I would like to start by sales. Let's start with sales.

You will see more details, we'd fill it afterwards. But we have been reaching good levels of growth, 12.7% growth reaching BRL5.6 million on a comparable basis. And you can follow this on page number 3 of the presentation on a consolidated basis, which considers Globex as well. Of course, and when I talk about Globex, I'm talking about Ponto Frio only. This does not include Casas Bahia operations yet. We had a 39.4% increase.

And the most important indicator is the same store growth, 9.9% in this quarter in spite of the comparison to the second quarter of last year where we had Easter in this year. Easter was in the first quarter of the year. So 9.9% growth is quite important, which means a real growth of 4.6% in sales.

In the half-year, 12.4%, which gives us a 7% real growth. And if we compare this to the guidances that we gave you for May, we talked about between 4% and 5% real growth. Therefore 7% for the half year, means that this indicator is higher than the guidance for the year. As Abilio said, I think we are right on track.

And in terms of our EBITDA, we had a electronic participation, which was higher in the mix. And this brings pressure on cash generation and EBITDA generation. And in spite of that, we closed the half year with 12.1% growth.

And I would like to remind you that the highest generation of EBITDA happens because of a season, the reason in the second-half. And as Abilio said, we are right on track. We are according to our budget, according to the expectation for the year. So we are sure that we will be delivering the guidance in terms of EBITDA, in terms of sales.

And talking about sales, it is important to reaffirm that we keep the strategy of guarantee of our competitiveness. We do not waive competitiveness in all our businesses in all the regions and microregions where we are positioned. This strategy, for some time already, is in place. And we track this every single week.

We track the competition prices so that we may guarantee real competitiveness in all our businesses, in all our stores, in all our categories. And this has been making our results sustainable, and this is what we have had at least during the last 2.5 years. And of course, in order to do that, this brings some pressure on our margins. In spite of the isolated effect that will be explained, margin doesn't drop, and it is affected by an increase in the participation of businesses that work with lower margins such as Assai and also categories such as the Eletro electronic equipment.

And if we exclude this and the effects of the tax substitution, there is no change. But in spite of that, we control every single line of our expenses in a very strict manner, so that this may subsidize and guarantee this strategy of competitiveness.

In terms of our net income, this will be better explained by Filippo, and we had a net income of BRL82.5 million on a comparable basis. It has a nonrecurring effect below the EBITDA line regarding the [Refees] operation in Rio de Janiero that offered excellent conditions from the financial viewpoint. So we took advantage of that and Filippo will be talking about this later on.

In terms of our capital structure, this is another assumption here because, for quite some time already, we want to guarantee a very strong capital structure with a very high net cash position. And because of that, we were able to go through the crisis without having any negative effect.

And it was rather the opposite because it really brought us opportunities, and these opportunities -- well, of course, we did take advantage of these opportunities and this basis of a strong capital structure with a low indebtedness and with the objective of being always below one time the EBITDA has been maintained and will continue to be maintained for the foreseeable future.

Now, talking a little bit about advancement in organic expansions. We are slightly below the investment that we estimated for the year. So we will see some acceleration in this regarding the second half of the year. This is when we really accelerate expansion, the opening of new stores, and its part of that.

We believe that we will be a little bit below, it will not be, BRL1.6 billion. We have already invested BRL182.5 million during the second quarter and we closed about BRL400 million in the first half. We opened 13 stores in the last quarter and 62 stores already in the first half of the year.

Talking about Casas Bahia, only -- I would like to give you my view about that, and it is along the lines of what Abilio himself said, my relationship with Raphael, who was here with us today, is really excellent. We talk practically every single day and we have work meetings every week.

Raphael has already decided that he wants to establish the work groups as Abilio said, the IT, human resources, logistics, back office, many different groups. And he has already appointed a coordinator who is a member of Galeazzi & Associados. They are helping us in this integration process.

These are people who know the Company already, and they have already showed their capacity in similar jobs in the past, be it in Rio de Janeiro or be it in Ponto Frio, and even in the northeast operations that we have. And they have all been very successful.

And this is why we really want to stick to this collaborations that has been very useful to all of us. Raphael and I are very optimistic. The integration of teams and culture, the process of culture integration is being led in a very careful manner and we are paying all attention to this.

And so this really -- we affirm Abilio's view in a concrete manner with a lot of work being done, of course, and we have been working quite hard, Raphael and myself. I'm giving all the support to Raphael and all our teams, both, from Casas Bahia and Grupo Pao de Acucar.

All our teams are dedicated to this so that we may -- so that the deal may come to a close in the near future. I know there is a degree of anxiety and that you know -- we know that you want to have the guidances and the microguidances for this business, the Casas Bahia business. But talking in a more realistic manner, we will only have this in late September.

We are still very much focused on the ownership structure and the tax structure of this transaction and also on the integration. But we trust that by late September, we will be able to give you guidances regarding our earnings, regarding our capital structure, working capital, and also the present value of the flow of synergies that we had talked about. And we are working very hard on a figure to convey to you by late September as I said before.

And finally, last but not least, I would like to tell you about a job that we concluded in July, this month. We had done something similar at the beginning of 2008, when Claudio Galeazzi came on board and we worked on an internal reorganization. And you may follow what I am saying on page number 4 of the presentation where we show you an initial time light where in 2008, the assumption goes back to basics.

And now it is the integrated management model that may be consistent with the moment that the Company is living today. The Grupo Pao de Acucar is no longer a specific company or a retail company, and it became a true distribution company.

Today, we're a company working with Eletro electronics equipment and food retail strong operations in both areas, but also in other areas such as wholesale, such as drug stores and fuel stations and the consumer finance company, the FIC, that we have in a joint venture with Banco Itau and e-commerce. And we have operations in many different distribution segments, and we -- because of that, we had to make some fine tuning in the organization.

The backdrop was based on the Jim Collins' assumption that is to say having the right people in the right places, and also in order to guarantee that we will have a focus on each one of the businesses, respecting the position of each one of the business, and all the technical specs and the market of each one of the businesses without having any degree of contamination between and among businesses.

The team that is focused on Eletro electronics is focused on that and that alone. And their compensation, their bonuses, their development depend on the development of this specific business.

In the same way, for each one of the other businesses that we have, there is no contamination, there is no loss of focus. And this new model, this new management model and this reorganization was carried out to the service of this objective, to the service of making this even more transparent.

Each and every process that we have becomes more transparent in order to guarantee that we do not lose focus on any of the business. We must have the right management for each one of our businesses; however, at the same time taking advantage of all the synergies that we find with a horizontal view, a group view.

And I think this could be made more clear to you on page number 5, where we illustrate our integrated management model, which is a matrix model. On the vertical axis, we have each one of the businesses. And the main objective is to look for earnings, to look for results, for each one of the businesses and the guarantee of each businesses positioning.

And on the horizontal axis we have the corporate view, the holistic view of the processes where we guarantee centralization or management with a group vision where we can take advantage of all the opportunities of all the synergies, cost reduction opportunities, also the best practices in each one of the businesses by means of this corporate structure. So this further reinforces what was done in 2008 because all the assumptions are kept; the same simplicity, agility in the decision making process and also the empowerment of each one of the executives in their specific functions.

So this was concluded this month, July, in a very successful manner. This is a very broad and very transparent communication process, internal communication process. And it is really awesome. And this further reinforces all this and beyond. Did Abilio described to describe to you, a friendly one, a very positive one, with the right people in the right places, people who are motivated to really rise up to the challenges that we have ahead of us.

On page number 6, we have the new organization chart. This is not so important. We just want to make it clear to you how we are organized. But what makes this management very dynamic is what was said about page number 5 with the integrated management model and the integration that will guarantee that we are really a business group, a distribution company, but always keeping the agility, the speed, the profitability and the returns from each one of our businesses.

So this is the basis for our management, and it will continue to be the basis for our management with all the support that we receive from Abilio, a great support from a man that has a huge experience in retail and who is not -- here not to interfere, but to contribute to the management team and who is very well prepared to rise up to the challenges.

This is a very differentiated management team. We're all very motivated to make this Company an even more successful company, and that they may really offer an opportunity to all of you as investors. So I would like now to give the phone to Daniela to continue with our call.

(Operator Instructions). And we will have the remarks by Jose Antonio Filippo.

Good morning. The idea is to talk about the financial results now. Eneas made a good assessment of the context of the quarter and of the half year. And we will be talking about the financial indicators.

So let's start on page number 7. About gross sales going up 11.5% in the quarter reaching BRL6,287 million without Globex, net or Globex, and net sales 12.7%, with BRL5,641 million. If we separate food and non-food, we will have 7.9% growth and 16.2% growth.

Real growth of the 12.4% for gross and net sales, growth sale represent 7%, an expensive growth in real terms. And if we analyze the consolidated figures with Globex, for the quarter we had gross sales 38.5% growth and net sales 39.4% growth.

On the next page, gross income and gross margin. Gross income for this second quarter was BRL1,298 million. And I would like to talk about the adjustment of the growth margin where we observed an evolution of the second quarter of 2009 to the second quarter of 2010 with a drop of a half a percentage point. That is to say the growth margin dropped from 25.3% to 24.8%.

But there is an association with the higher participation of the Assai division. Although it has added a higher increase in sales, it brings about a lower margin because of the nature of the business. And this represents 0.4 percentage points. And the tax substitution program still inferences this comparison by 0.2 percentage points in the last quarter.

We will see this. And in the third quarter, we will probably not have the inference of this factor. So these two items offset partially by the improvement in negotiations and product mix gives us 1.1% points here.

So 0.5 percentage point drop in the gross margin in the period happened although the gross volume grew 10.3%. And if we analyze the half year, it was even more expensive, 14.8%, reaching BRL2,804 million in the first half of 2010. And if we compare the figures together with Globex, gross income for the quarter reached BRL1,635 million, and in the half year BRL3 -- 307.

The next page, talking about operating expenses, we had here on a variation of 12.6% of gross expenses although in terms of percentage of net sales, we have maintained 18.4%. Therefore, stable vis-a-vis the net sales. But the growth is associated directly to the opening of stores, 62 stores, in the last 12 months. And besides, the expenses was advertising and information technology, a trend which we had already been observing, a factor which we had observed in foremost quarters and which supports the organic expansion of the Company.

Operating -- total operating expenses in the second quarter with Globex reached BRL1,240 million, a growth of a percentage of 17.8% vis-a-vis the net sales. Below, the last quarter last year, without Globex, but the combination Globex, and with new sales, has led us to a dilution of these expenses. So 18.4% last year to 17.8% in 2010.

To follow, now talking about EBITDA margins, we reached an EBITDA of BRL359.7 million in the second quarter and a growth of 4.2% year-on-year. And the EBITDA margin down to 6.4%. This drop reflects the drop of the gross margins we have explained before, and this is in fact it translated directly into the EBITDA. Therefore, we may observe this reduction of 6.9% to 6.4% for the factors, which we have already explained.

In the half year, the EBITDA has shown a growth of 12.1% reaching BRL737 million in 2010. The figures with Globex of BRL394 million in the second half and BRL805 million in the first half of 2010.

On the next page, financial results. We have had a growth of 50% year-on-year and this is because of a growth of indebtedness due to the second quarter and the search for new commercial activities and indebtedness because of working capital. And this was -- had already been forecast and the Company decided to go into this and do this because of the commercial management and also because of sales, electronic sales, and because of the World Cup and the increase of sales during this period.

So this working capital called for a greater debt and this generated expenses with interest. And also these expenses are associated to financing and investment of the Company's growth. This then was one of the factors. And added this to the financial result, we may see a technical of mark to market effect, about BRL9 million impacting the financial result of growth resulting -- compared to the previous because of the future growth of CD -- and the growth of CDI. And this is applied to debt. And the mark to market leads to the growth of debt. This is a technical item; it has no effect on cash, its an economic factor.

And finally, to complete this effect of the financial result, the monetary correction of interests in installments, this gives us a total of BRL30 million and this was the increase of the debts in the second quarter of 2009 to the second quarter of 2010.

In terms of EBITDA and net debts, it's 0.7 times in the -- without groups -- Globex. And with Globex, 1.1 times net debt EBITDA. This was according to what had been forecast and completely in line with the guidance that we have signaled to the market. On the GPA Day, the number for the end of the year was a bit less than 1.1 times net debt to EBITDA.

Following, let's talk a little bit about the FIC, the Financeira Itau CBD. Once again, this has had a very positive participation in the results of the Company and bringing BRL14.6 million of equity income in the second half of the year, more than four times the same result as in the previous year. And in the first half-year, BRL24 million.

FIC today accounts for 15% of the groups total sales. This occurs then through FIC operations. We have today 7 million clients, and the receivables portfolio, which is greater than BRL3 billion.

Therefore, the participation of our financial company has grown year-by-year. And this has increased as Ponto Frio has joined into the sales system. And therefore, it is now possible to use the FIC's cards of Ponto Frio in the Pao de Acucar stores and vice versa. This has led to growth. And once again, the results more than four times in the -- in half a year and more three times in the quarter.

To the next page, talking about net income, the net income was reported to BRL62.3 million in the period including (sic) Globex, and BRL82.5 million including Globex in the second quarter. This income was indebted, as Eneas said, at the beginning of this presentation by an extraordinary effect because of the receipts in Rio De Janeiro under very positive conditions.

And this is a great benefit to the Company. Therefore, the addition to this receipts brought about good effects. We have excluded this impact. We would then have reached a BRL127 million in results without Globex and a BRL103.1 million with Globex in the period, a net margin of 2.3% on comparable basis in the second quarter of 2010.

Now, let's talk a little bit about the two divisions which were highlighted as we had done before, and we will start with Assai, which has maintained a very positive performance observed before; a growth of 47.1% of sales. Gross margin, maintained stable; operating expenses have dropped, EBITDA margin, growth. And we have a total of BRL742.5 million in gross sales, more than 47% growth.

Our growth profits, which was already BRL103 million in the quarter and an EBITDA of BRL22.8 million. Therefore Assai has grown in its contribution to the Group. And as we had said before, due to the nature of the operations itself, the growth margin is slightly smaller. But it contributes with the income in terms of cash.

Following now, and we were talking little bit about Ponto Frio, there has been a gross sales increase in the periods more than BRL1 billion and a growth of 55.8% vis-a-vis the previous year. And also gross margin has grown 17.8% on sales. Total operating expenses dropped 15.1% of net sales. The Company obviously has a comparison basis with the same quarter of 2009 pre-acquisition and has shown this growth up to date.

And now this -- it just couldn't --joining Casas Bahia, much has been talked about that, the expectation that we -- and the expectations that we have of this business in the future. The EBITDA of the [plan] has given us a margin, as you could see on this slide.

Then we will have the growth of this margin and analyzed on half year margins and the negative EBITDA in the first half of 2009 showing us a positive result of the margin in the second half of 2009. And the first half of 2010, another growth of 2.6% exactly because of the management for the increased sales and credit management negotiations, and if that's a mix, a better, more appropriate product mix.

So that closes the discussion in EBITDA for the Ponto Frio. And on next page, we will analyze then the net income of Ponto Frio and net income of BRL36 million in the second quarter of 2010 and a net margin of 2.7. This income had a positive impact and an extraordinary impact in view of a continuation of an asset of GPA because of the association with Casas Bahia. And this, if excluded, would lead to a loss of BRL23.9 million in the second quarter of 2010. Although negative, it shows an improvement vis-a-vis the same period in the previous year, and the reported number was a loss of BRL94 million.

On the next page, talking about the consolidated Pao de Acucar group in terms of investments, we had in the second quarter 2010, BRL182.4 million in investments, but associated BRL46.7 million in the opening and construction of new stores and the acquisition of strategic sites. We have a second item, BRL84.2 million in store renovations and conversions and a third component, BRL51.5 million, investments and infrastructure, basically technology and logistics.

So in the second quarter therefore a BRL182 million, in the first half year BRL389 million, and we have the prospects of increasing this investment in the second half of the year, as Eneas has already mentioned, an expectation that we will have a total of investments in the year a little less in the guidance. But we have already committed to investments in the second half of the year above the first half year.

So the expectation is that we will have big growth and more investments in the second half of the year, although with not achieving BRL1.6 million that we planned initially. We will see, lower down on the slides, the total number of stores under each division 1,102 stores of the Grupo Pao de Acucar at the end of the first half year.

And finally, we mentioned the dividends policy and the policy that determines the quarterly prepayments. So BRL19.6 million will be distributed. The date of payment, August 17, and adjustments in the last quarter, next year when the balance sheet is closed.

We already have, in the first quarter, 2010, BRL38.8 million distributed in dividends which leads us to a dividend yield of 1.1% in the first half year. Thus we conclude the presentation of our results. I would like to ask Daniela to now take the floor and open for questions.

Well, we can start Q&A session then. So we move on to our Q&A session. We would like you to ask all your questions at once please. (Operator instructions).

Mr. Fabio Monteiro from BTG Pactual has a question.

Good morning everybody, I have two questions. One has to do with the administrative expenses. Could you tell us the amount you spent on restructuring administrative expenses and also the expenses with Casas Bahia and how much that was? And the integrated management model, how much do you expect to gain from that and with the SG&A?

Well, Fabio, good morning. Regarding the administrative expenses, we have had no impact of the restructuring at this time. The reorganization, which has been presented, it will come into force now in July. And it's -- the impacts therefore will be felt in the third quarter. Approximately BRL10 million and BRL20 million will be this and that regarding this reorganization.

Regarding the renegotiation of Casas Bahia, the new agreement, the amounts that we have for these expenses have already been positioned at the end of last year. And we have not yet reviewed this. There is no expectation regarding any change, any significant change, of these amounts although we have not adjusted the amount debt. They are the same therefore that were presented last -- the end of last year when the balance sheet was closed.

And the second question, at Globex, you said just briefly about the revenue in the operating expenses. In the releases it says that the amounts would stems from the addendum of the association with Casas Bahia. So in my understanding is that this is a payment which was carried with CDB. My question is a piece of this does not appear. Where is this presented? Could you go into further detail about this piece? Could you tell us what this refers to, what this amount refers to? Could you explain it, could you elaborate, please?

Well, in fact, this is to prepare the agreement with Bahia. Contingencies of Globex are the responsibility of the shareholder of the Pao de Acucar, the CBD. So what have we done? We weighed into an assets of Globex for -- to catch up to these contingencies, which are on Globex balance sheet. Therefore, in the consolidated you will not find this information because this has no affect at all.

The affect which appears is Globex isolated because it has gains on assets, which is equal to a contingency, which was in the liabilities. And this is what we explained in the adjustment of Globex. So this in fact is not something which will be paid in time. It's already reflected in the consolidated results, right, both in the Pao de Acucar and the Globex.

In fact, it will be paid as these contingencies materialize. It is an economic adjustment, but it is a financial liability as these contingencies become real. In fact, there was a presumption of the obligation as they materialized. At some moment it will occur.

Fabio, this is Eneas. Just to add to what Filippo has explained very clearly, this is an effect on both sides, both, Casas Bahia takes on all contingencies prior to the full signing of the agreement and so does the Pao de Acucar. So this, in fact, is just a mechanism to reflect a contractual obligation which is reciprocal. So both Casas Bahia obviously takes on all contingencies as part of the agreement and the Grupo Pao de Acucar also vis-à-vis, the Ponto Frio operations also takes on all contingencies prior to the agreement.

We are not talking about the mechanism used at Casas Bahia because there we have the making up of a totally new company. And this does not have this provision since it is Casas Bahia. The old Casas Bahia will take this on. And that's not clear because this is not the same company, Globex has the Ponto Frio operations and continues and they already had a provision set up for this. Therefore the need to make this adjustment, which does not have an affect on the consolidated.

From the financial point of view, as Filippo said, this will just occur or would just materialize as the contingency materializes. If it doesn't, if we win, this financially will not occur, okay. And besides, just one more point, your question regarding expenses, which have to do with negotiations with Casas Bahia what should occur and what should be accounted for are additional expenses with attorneys and expenses with price et cetera. But it is not all that significant.

But nevertheless, no, we haven't even received the invoices. We haven't even been charged yet. And obviously, this will happen. We have signed -- we signed on the 1st of July. Therefore, throughout this month of July, we will start receiving the bills from attorneys, et cetera. That's it.

And regarding the reorganization, I think he's explained it clearly. This was implemented in July. Therefore, any possible expenses regarding the contract or anything else will occur in July. And this will then be reflected in this quarter of magnitude as he explained in the third quarter. Other expenses regarding restructuring or integration with Casas Bahia, this will only have later on. We don't even have those figures yet to be able to inform you on. We will be able to inform you about the end of September when we would also ratify the question of synergies and so on. Okay.

That's great. Thank you, Eneas.

The amount of the contingencies was BRL85 million, okay. Thank you.

Mr. Gustavo Oliveira from UBS.

I would like to understand the dynamics of the food retail sector. There has been EBITDA growth in absolute values, both, in the quarter and in the first half year, lower than the revenue growth. So both growth and net. And as the margin of Assai is improving year-to-year, I would imagine that the EBITDA should be growing more or perhaps even above the increase of the income. But this is not happening. Could you elaborate, please, or the revenue or what other divisions are having this problem or is there being -- could you explain this dynamic please to know whether this margin pressure that you are having apparently in other divisions is something sustainable?

Gustavo, this is Eneas. I will start to answer and then Filippo or one of the others will please add. Well, we have to be very -- you have to be careful of your interpretation because, as Filippo has explained, the impact which you have on EBITDA in terms of the loss of margin, in fact, if the margin had been kept, maintained with this growth, obviously, it would have the same growth as sales, and the loss of margin is related or significantly related particularly to the increase of participation, particularly of Assai.

Although it has contributed to the increased sales, they work with a much lower margin. It is true that it is growing and it will grow and will grow even more because it has now reached 3.4% in the quarter. Even still or still within a very heated expansion process. The new stores are pulling this margin down.

Therefore in -- although Assai is still going to grow and improve its EBITDA margin perhaps to 4% to 5%, growing at 4% to 5% is what you could expect in the wholesale margin without losing competitiveness and margin and market share. Obviously, this is always going to bring about a reduction of margin, pressure on the margin, not of cash margin but of margin for the Group. This is natural. It is natural that this should occur and [some of it] has been explained.

So this is not explained in your first question as I see it, why this should happen, because once again, I repeat, if you have a growth of sales and if you maintain the same margin, the EBITDA margin, mathematically speaking, I would therefore have the same EBITDA growth in terms of sales growth. This has not occurred essentially in this second quarter because of the greater Assai participation, because as Filippo explained, this leads to an effect in the consolidated margin of 0.4, and then there is -- still there are some other factors as well.

And also, every time there is an increase of participation of Eletro electronic products, there's a growth margin in spite of a large contribution of the growth of sales. So that's what I said in previous quarters, one must be very careful in the analysis of the consolidated margin because it is not the same business consistently losing margin. It is a consolidation of new businesses, which are great and which have good returns considering the different segments, the competitors in the markets, but on consolidated terms exerts this pressure.

And I know we don't give you complete information to carry out all these analyses. But at least we do try and give you the impacts, which are brought about by these businesses, which have lower margins. Therefore, I would like to ask Filippo and (inaudible) to please -- ask them if they could give us some further information.

Well, Eneas, I'm not only talking about margins, I'm talking about EBITDA. The difference should be less, and the difference, in fact, to my mind is greater. You are having a very good participation in the margin of Assai.

Mathematically -- no, the margin, I quite agree with you, but an absolute value of growth of EBITDA should be very close. But anyway, we can talk about that later.

That's okay.

Well -- yes, I don't want to go on and half of this we could -- we must get on. But this is a very interesting discussion and an important point as well. I tried to mention this, but I know that I spoke very quickly during my presentation, but we are -- in keeping with the budget in the second quarter, the second quarter was a quarter of sales leveraged by Eletro electronic products. They work with a lower premium and they exert a stronger pressure on the EBITDA in the second quarter, right.

So it is a quarter, which historically shows a pressure in terms of EBITDA growth. But it's right on the budget curve. It's right in line with the budget, which we have and which is keeping to the seasonal curve comparable to previous years. So there's no concern. There is no yellow light or no increase of cash margin or growth of EBITDA margin. But nonetheless, it's a good debate. And whenever you would like to, come along and discuss this with me.

One last comment, Gustavo, don't forget that we also have a growth program on the opening of new stores, which has led to cash expenses and different expenditures. You know that there are operating expenditures. Percentage rises, and have kept the same percentage, but normally have grown. And this has been an important source of our cash in EBITDA. That is just one more issue.

And the second question regarding the new CapEx guidance, what is the impact that this will have in the opening of new stores and what would be your new CapEx. Can you give us that, this number?

Well, we have analyzed -- well, it's just an expectation really. It's too early to reevaluate this -- the people who are planning the expansion think that they will hit this number. But it's just a question of prudence really. We have invested in the first half-year, we invested almost BRL400 million. Internal information tells us that investment commitment we already have about BRL800 million for the second half-year.

So this would already significantly increase the level of investment. So then we would have still more to do here. But it will not be far from this figure. This is -- so we are just being conservative here regarding this investment throughout the year.

Thank you. And also the opening of new stores, the market seems to be well heated up. So what about the costs of opening new stores? Are these costs going up? Could you talk about that?

Yes, this is a great challenge obviously that we have. Especially, in the large centers the cost of land and real estate is expensive. So this is a challenge, which we always have to face. We have to find the best ratio and we have to be very disciplined regarding our investors.

To open a new store, you have to carry out a study, and then you have to know what your return will be. You cannot approve a new store that won't give you a minimum return, according to our disciplined analysis. Obviously, we realize that. But this can be a challenge for our expansion.

Is this leading to maybe a slight delay?

No, no, no. No, no. No. We are actually stepping on the accelerator on our organic growth because we are very clear about what we want to do in terms of expansion and growth.

We have all our studies ready, as Filippo has said, and investment in Assai and Pao de Acucar, we are very clear on this point. And so there are many difficulties, of course, of drawing up an investment plan as large as the one that we want. Very much more regarding location, because we are not just going to grow just for the sake of growing, just because of the number of stores that we disclosed.

We have an objective. Obviously, we're going after that. Of course, we will have difficulties to find well-located points. As Abilio said, the most important, 10 most important points regarding the retail are location, location, location et cetera.

So we have to be very careful with this heated market, as you mentioned, it becomes even more difficult to find points, because we are not really ones to be looking for places. So of course there's a cost pressure. And of course there's a setup. And pressures that we have not accepted, we won't accept it. We do things within our allowances. We have -- we could -- obviously, we are strong but pressures exist.

It is difficult to locate good points. But to say here to you that, oh, because of this, that or the other, we will not achieve our objectives, no, that is not true. What we are holding back on a little bit perhaps is investments infrastructure, because of what might occur regarding the integration of Casas Bahia in logistic terms and IT.

And that's it. We can't tell you how much. But today, I can tell you that we can achieve the inauguration of the same number of stores that we were forecasting and still reduce investment a little bit because of other investments besides the opening of stores.

Thank you.

[Andrea Jeshuda] from JP Morgan.

Good morning. Maybe you could say a few words about Globex. We saw on the press release that you talk about three effects, receivables, accounting and increasing indebtedness. May be you could say a few words about how much each one of these effects cost and what do you intend to do.

Will you be doing something in the third quarter already because Abilio was telling us about the pace of expansion? So please say a few words about that.

And financial cost, if you could talk about the evolution of cost over the years, will we continue to see an increase in that. And also the growth base. Abilio talked about the food, but not-nonfood. Maybe you could tell us about the nonfood. And the amount that you mentioned as contingency reserve, was there a write-down of this amount already, and if not, when will it be?

This is Padilha. I will be answering the first question about the financial cost of Globex. The change of criterion represented two-thirds of the overall effect.

Only the accounting effect, there is no cash impact from the change. And the one-third would be an extension of the term that is to say a longer term, fourth term sales for our clients, in order to guarantee competitiveness of our sales.

This is a trend. And over the next quarters, few quarters, we intend to finance in an adequate manner all these operations. And I don't really see any problem regarding the possibility of financing this for the next few quarters.

The second part of your question -- Andrea, could you please repeat the second question? Yes, could you please talk slowly, Andrea?

About the contingency that you mentioned, the BRL85 million. that you mentioned as a provision made in December. If this amount was really provisioned, that is to say was it removed from the net incomes last year, in the fourth quarter or will it be coming from the next quarters?

Andrea, this was not a provision made at a certain point in time. This is a contingency balance of the Globex balance sheet. They were constituted over time in the past. It was a contingency balance and they were not taken from the Globex balance sheet.

We established an asset of the same size, of the same amount in order to reflect the obligation falling on the Globex shareholder. So the contingencies are still on the balance sheet. These are not contingencies that were registered. It is the balance of contingencies at the end of the quarter.

I would like to understand if this amount -- if you have more contingencies with the incorporation of Casas Bahia, it would have to provision -- you have to have an additional provisioning, is that correct?

Well, these contingencies will fluctuate and the obligation continues to the shareholder of Globex. One moment, Andrea. This is an Eneas, just to make it very clearly -- very clear.

When we acquired Globex, we received Globex balance sheet and the provision was already there in the Globex balance sheet. It was not constituted by us. It already existed before we acquired Globex. And certainly, it had to do with the overall earnings because you wouldn't be able to establish a provision without doing that. But it was up run by that. We acquired Globex. And with the balance sheet of already what this provision included -- and this mechanism, if I'm not mistaken, functions in the following manner.

Whatever has to be provisioned will be provisioned of normally. What Filippo was explaining is the following, the contingency -- or in other words, the contingencies of Globex, Ponto Frio, up to the date when the contract was signed, are a responsibility of the Grupo Pao de Acucar, as well as all the contingencies until up to the date of the signing of the contract to Casas Bahia, Nova Bahia, which is the company -- the new company.

The responsibility of Casas Bahia, and the new contingencies that might happen or any risks that have to be provisioned for, this has nothing to do with this mechanism. It has to do with the Company itself. The Company has to provision, has to bear the risk, and that's it. I don't know whether --

Yes, you did help. Padilha was talking about provisions and the movement that we had. Of course, there are changes in the accounting criteria. It will continue with the two-thirds. But I would like to know about the average term. Has it been extended during the quarter, and what is the average cost of securitization of receivables that you have today?

This is Padilha again. In the quarter, the extension of the average term has been going on in the last few years, mainly in nonfood retail. This is something that has been going on. And in the last quarter there was a very slight change in Ponto Frio. If we compare with last year, it was bigger, between 7 or 8 to 10 months at the average term.

And today, I would say that retail is stable in this regard because there is a cost pressure for everybody. So I do not believe we will be seeing any further extensions. We have 114 of the CDI or 114 or 115 of the CDI. In July, it's a little bit lower than that. But I would say that this is a very competitive rate if we consider what we -- the fact that we are already working with Pao de Acucar and discounting at the same rate that Pao de Acucar discounts.

So I would say that there is nothing new in this regard. And the account that was created for Casas Bahia, I believe it is not available yet because -- yes, (inaudible) is cheaper and we are -- we have already created for Globex, and this will be 109 or 110, which will bring down the cost.

And this is an important amount when we consider the year and Ponto Frio and for Casas Bahia. We also want to establish a receivable discount fund to have the same competitiveness in the operation as a whole.

We are working in this direction and [Bimas] who is our treasury officer of Grupo Pao de Acucar is participating very actively in the process. I don't believe we will have any difficulty at all. The market has been already telling us that there will be no shortage of capital for Globex or Casas Bahia or the Company as a whole.

You work with a very conservative guidance so far, and with the remark made by Abilio about -- what could we see as Abilio and Eneas said, we will be working to give you guidances as of the second half of September, by the end of September. So the executive committees of the two companies are working together. Galeazzi is working with us and the groups are being formed, and we are working in this direction consolidating these figures.

The market is very heated even post World Cup. In the quarter we had two major impact, Mother's Day and the World Cup. In spite of the fact that Brazil was defeated, we had higher sales, but we only want to give you figures as of late September or by late September. Thank you.

Andrea, this is Eneas. There is something I would like to add and maybe it will be of help to everybody. What Abilio said at the beginning, I would like to refer to it. First, the growth of sales doesn't happen only because the market has grown because we also gain market share.

In all our businesses, we see this very positive trend. We are not working with the hypothesis of a deceleration in the short run. This is an election year. Election year usually brings about a better income distribution, more job generation. And ultimately, this helps retail. So this year is better than last year.

And one thing that Gustavo mentioned a while ago is that we will see no slowdown in the short run. It is quite the opposite because we have the real estate boom. We have so many buildings being launched and the housing segment is having a boom. And this has a direct effect on retail because people who buy a house -- buy home, they want to buy appliances, they want to buy furniture. So we do not have any estimate for a slowdown in the near future. And we are not managing this Company counting on an overheated market so to say.

As I said in my remarks, we are working like in a war room. We have to maintain our competitiveness for a bad market, for a downward market, to compete with everybody. I'm not managing with my team a company while the market is easy and our life is easy, so let's increase our margins and let's make a lot of money. This is not the way we are managing the Company.

We are managing the Company exactly when we are managing it at the peak of the crisis. And this places us in a very healthy position and a very strong position to fight and to gain market share in spite of the fact that we believe that the market will continue to be good based on everything that I have just said.

This does not mean at all that we are just resting on our laurels and that we are counting on a very good situation and a very good market. No, we will continue to keep a very strict control on our expenses in order to guarantee our competitiveness. And if the market goes down, we will be prepared to cope with it. And I thank you very much for your question because it's very important to give us the opportunity to clarify this to you.

You talked about -- could you please clarify what you can do with the price negotiation because at the time you said that this could be done jointly. What else could you be -- could you do jointly? I believe that in most cases, you will not be able to execute anything together yet.

Yes, Andrea, and as we have the officers of the new company Raphael, Herzog and Padilha with us, I would like to give them the floor.

This is Jorge Herzog. Regarding the [APRO], the provisional agreement for the possible reversal of the transaction. It says what you can do, what you cannot do. But as we had said before, there are many things that we can do together, yes, already. And you talked about one of them, which is as a joint negotiation with suppliers -- worthy opportunities of crisis that we have in one or the other company than can be taken advantage of.

And this is a fact that as of the moment, we started to integrate the two companies. We are already organizing this and we also have the opportunity in terms of logistics. Because in terms of operation, I can work together -- we can work together. And this is another point where we will have major results coming from our synergies and we are already working on that.

In terms of back office and service structures, all this can be taken advantage of, and we are already advancing there as well. And one point that we are already getting ready to go, and of course it depends on an approval after the card, of course, we have the extra 11 stores that could be transformed into Ponto Frio or Casas Bahia, and this would give us a better operation for these stores. And also everything regarding advertising, this is already being requested.

And when we get the authorization, we can really change the divisions into one of the other two that I mentioned. And we already have the opportunity of taking advantage of synergies in this integration process. They are being taken advantage of already. And we are already identifying everything in order to include them in the guidances that we will be giving you as of the second half of December.

As Abilio said at the beginning, Ponto Frio in the first quarter was on standby waiting for the integration process. And now we can accelerate the whole process.

Thank you, Jorge.

Mrs. Irma Sgarz from Goldman Sachs.

Good afternoon. My question has to do with Globex. The margin was kept stable at 2.6% of the EBITDA margin. So maybe you could say a few words about two things. In the press release you said that you're working to improve the mix and you also talked about the improvement in your conditions with suppliers. So maybe you could say when you -- or what you believe can still be done regarding the mix with a higher participation or the more profitable products.

And the second part of my question. If you could update us on your vision about the EBITDA margins and how much this EBITDA could increase or you think it could go up to 5% that you have as a target. And regarding the bottom line, the Globex business is still losing money, is still in the red. So what is your view? When do you believe you will get to the break even point?

Regarding the margin, if you go back to the end of the second half of last year when we presented the guidances of Ponto Frio through the next 4 years, one of the points that we had identified as an improvement opportunity was a renegotiation with suppliers taking into account the fact that Ponto Frio and at the time GPA could already have better conditions for negotiation.

And we started immediately at that moment and this brought us already a positive impact on the margin and the change in the mix because Ponto Frio worked with a major focus on categories that had a lower profitability. One of them specifically is furniture where it was not so important in the overall business of Ponto Frio. And you usually work in -- and this was applied in the first half of the year. And it accounts for part of the improvement that we see in this quarter vis-a-vis last year.

And regarding the future, of course, we expect to see improvements with the integration process. And this will be identified and quantified in the next few weeks when we will be able to structure the guidance to offer you. And I have no doubt whatsoever that we will see an improvement in the margin of Nova Casas Bahia.

And your second question has to do with the EBITDA margin, when we can get to 5%. At the time when we acquired Ponto Frio, we prepared this guidance focusing on Ponto Frio, and this figure will be redefined already with the Nova Casas Bahia. And we will be giving you this guidance in the second half of September.

And regarding the breakeven and the bottom-line, this will be included in the guidance that we will be submitting to you in September.

Mr. [Ricardo Boyatiz] from [Herbeas] Group.

Well, regarding the supermarkets particularly and the new stores, what are the expenses as you have an intention to expand? It is not only expenses with marketing and IT, but for the next half year, what are your -- will this continue to pressure the expenses or will there be a dilution of operating expenses? What will be the behavior for expenses with marketing and IT?

Well, this is Eneas speaking, Ricardo. If I understood your question, you were asking about the behavior of expenses of supermarkets now for the second half year regarding marketing and IT, and what we can expect regarding expenses, and whether there will be a pressure or whether we can expect any reduction in expenses. Is that correct?

Yes.

So what I can answer you or -- also the floor is open for other people who would wish to add to my answer. I mentioned in my introduction that this year, as we did in 2008, we did the -- we remade our zero base budget. And once again with the [ads] as we had done in 2008, we counted on their support and the implementation of this occurred just now. The final implementation occurred just now.

This was carried out through the last three months, last four months and the implementation has occurred just now. And what I would like to say with this is that we are working to quite make sure that there is no pressure on expenses in -- despite of expenses in marketing. We already had higher expenses in marketing in the first half year, but in year terms, we are seeking even a more stringent control and the use of CBD will contribute significantly so that there'll be no pressure on the expenditures and so that we may guarantee, as I have said many times before, the strategy and would not give up competitiveness.

Competitiveness must be supported by effective control of expenditures so that this will in no way affect the return of the Company and return for you. So we will not increase pressure on the expenses and I think we could expect, in fact, a reduction in the second half of the year in view of the implementation of the CBD.

I'm not sure if there is anybody else -- if anybody else would like to add to that?

That's great. Thank you very much.

Juliana Rozenbaum from Itau has a question.

Good afternoon everybody. I have two questions. The first, going back to the contingencies and the incorporated results, I saw the mechanics, but I'd like to go back to the rationale and the motivation to do this. In other words, this transfer, this contingencies, is this with a prerequisite to reap Globex's balance clean to make up the new Globex or is it a way of indirectly increasing -- increase Globex's equity? Is this a way to increase the contribution of CBD to Globex's equity? So what I'd like to know what the motivation was.

Well, this is Eneas, Juliana. I would like to start my question again -- no, answer your question. I don't want to interfere, but no, no, no, not at all. The rationale is very much more basic than which what you have elaborated. It is actually very simple. We are -- what we are doing is making up a new company. We have the Ponto Frio on one side and Casas Bahia comes in with the operation of Casas Bahia on the other side. So thus we have a new company, a new association.

So in this case, it is very natural that each one be responsible for their contingencies prior to the signing of the contract. This is natural and this is from both sides, not just one side. And this is what occurred. The contract was written up on this basis. The mechanisms are different according to what I had explained in the case of Casas Bahia.

A whole new company is being formed. So at this particular moment, it does not transfer this contingency to the new company which will incorporate the operations of Casas Bahia and then will be part of this new association, this new company. But in the case of Ponto Frio and Globex, these provisions had already been carried out -- done long before our acquisition. So they were there present on the balance sheet. So we had to device a mechanism to take this into account and how it would fit into GPA.

But both sides took on the responsibility regarding contingencies prior to the signing of the contract. So it is only the mechanism which differs, but the rationale is -- well, since this is a new company, everything which is a previous contingency [exists] on the -- from on one side, it has nothing to do with Grupo Pao de Acucar. And if it has with Pao de Acucar, it does not on the -- something to do with Pao de Acucar and that is rationale and all. It is very much more basic than what you have elaborated.

Right. So that you have a new start up with a clean balance sheet, is there anything more to be done or is everything okay now?

No Juliana. It is not a question of the clean balance sheet. The balance sheet is already clean. It is audited. Everything is fine. It is not dirty, it is clean.

I'm sorry. Bad choice of words.

Yes, everything the contingencies have already been dealt with and in a normal process of making up a company, each one is responsible for previous contingencies. We are responsible for the Ponto Frio and they for the Casas Bahia side. And once again why is this mechanism carried because if the contract says that the Grupo Pao de Acucar is responsible for these contingencies, this must be reflected in the accounts and that's it.

Okay.

Thank you.

And when I looked at this slide of the new organization chart, it seems very similar to the slide which you showed before which was a project. I'd like to understand if there is anything new and perhaps I haven't noticed or is it still the same process which was already started up some time ago regarding a change in the matrix organization or nor or is it basically the same?

Yes, Juliana, it is very similar particularly the design, but it defers at it's line content. First of all, from a corporate point of view, the areas here are different at that particular time and if you have a copy, or if you haven't I have one here; we could supply you with this copy.

If you put it -- put two beside each other, this was a company in the food retail sector. On the vertical axis, you have the divisions and not businesses, different businesses. You have the food retail sector divisions and on the horizontal axis, you have responsibility of management per region.

Here is it is different. Here what you have is a holistic view or corporate view on the horizontal, in other words the people who decide the policies of the Group, the compliance, dealing with synergies and opportunities among businesses. And on the vertical, you have the businesses, which are not divisions. They are businesses, different businesses. They differ among themselves.

So those are divisions, for example our food retail are all on the vertical line, which are retail and so on and so forth. Therefore it is the same in essence perhaps, the essence of the matrix position is the same, but it differs in its holistic approach.

But the retail business, just take one of the categories, it continues to be managed per region, yes. So that matrix which you mentioned, if you take, for example, that the new -- ask, for example, how can you be managing -- how are you managing the retail -- food retail, they will -- if you ask somebody, they will pull out exactly the same structure.

Thank you very much.

(Operator Instructions). Please stand by while we wait for questions. Please stand by. We would like to close the Q-and-A session and I will give the floor to the Company for their final remarks.

Thank you very much for being with us today. And of course if you need any additional information, you should contact the IR department and we wish you all a very good afternoon.

The Grupo Pao de Acucar conference call is closed. We thank you very much for your participation. Have a very good --

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.