Companhia Brasileira de Distribuicao SA (CBD) 2010 Q3 法說會逐字稿

Good afternoon, and thank you for waiting. Welcome to the Grupo Pao de Acucar conference call to discuss the results for the third quarter of 2010. This even is also being broadcasted via webcast and can be accessed at www.grupopaodeacucar.com.br/ir/gpa and www.globex.com.br/ir with a respective presentation. The slide selection will be managed by you. There will be a replay facility for this call on the website.

We inform you that the Company's press release are also available at their IR website. This event is being recorded and all participants will be in a listen-only mode during the Company's presentation. After GPA's remarks are completed there will be a question and answer session. Should any participant need assistance during this call, please press asterisk or star, 0 to reach the operator.

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 Company and information currently available. 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 condition, industry condition, 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.

I would now like to ask you please to control -- to press control F5.

Now we'd like to pass the floor to Mr. Vitor Faga, IR officer. Please, Mr. Vitor, you can proceed.

Good afternoon, everyone. We'd like to thank you very much for being here. We're here to discuss the results of third quarter 2010. We have the presence of Mr. Abilio Diniz, chairman of the board, Eneas Pestana, CEO, Raphael Klein, CEO of Ponto Frio - Globex, Hugo Bethlem, executive VP, Jose Filippo, CFO of Ponto Frio, (inaudible), CFO of Globex, and other managers.

I'd like to pass the floor to Mr. Abilio Diniz for his initial consideration.

Good morning, everyone.

I think that the most important I have to tell you at this moment is about the Company's management board and the moment we are now living. We are reaching our targets. We are overcoming all difficulties. And this is owed to the people of this company who are at the leadership of the Company.

This Group is 62-years-old and we've been in the supermarket business for 51. And as far as I can remember, never have we had such a wonderful management period with recognized efficiency and such a nice atmosphere as we now witness. With Eneas as the CEO, he has imparted stability. The atmosphere has been very friendly across the Company. And this has leaked to other levels and we can sense what is happening at the base.

[Four] days ago, here at the Company, we had the visit of Jim Collins, who is today perhaps the greatest management guru in the world. We met him -- met with him in Boulder, Colorado this year during a two-day awards show. But he didn't know us, didn't know our people. And he came over and he spent the entire morning with us and he delivered a talk, more than a talk. He had an exchange of ideas with our people, with the head management. We had 300 and some people at the auditorium.

Jim was actually impressed with what he saw and he heard, by the quality of the questions that he was asked and particularly with the excitement that he felt from our people. And he thought this company, like Jim said, he said that being good or great is not something that happens by chance. It's a matter of choice. And this company has chosen to be great, to be efficient, to be a winner. And we can feel this from everybody in the Company.

This is a juncture that we are living now. Perhaps it's one of the most important things. I'm not going to go into the results, into the earnings results, because they look very good to me, in line with what expected this year. But I must emphasize the -- how proud I am about management.

And also I'd like to say a word about Brazil. Brazil is living through a fantastic moment. I think that increasingly [democracy] has consolidated, has just come out of an electorate process that was really aggressive. It was tough. The campaigns were tough. I believe that the President Elect, Dilma Rousseff, represents continuity of everything that is good of all the achievements that we saw during the eight years under President Lula's administration.

And it also means an advance in terms of management. I know Dilma and I know that in terms of management, she is extremely relentless. She will surprise the country. And she is in a position to correct mistakes that may have been made in this past cycle. I am really excited about Brazil, about our future, everything that is waiting for us at the -- in the future, strong result.

And everything that foreign investors see in our country is true. They look at us and say yes, this is the country. And I believe that employment will continue to grow. And we must be ready to tackle this increase in demand to grow and serve well our clients and consumers, which is what we are here for.

I think this is an extremely positive moment for the country and for this company as well. I hope this will continue into the future. I expect we'll have a strong increase in sales, with lots of happiness and joy. And this is what I wish not only for the Company, for all our employees, but to all of you who are listening to us.

We'd now like to pass the floor to Eneas Pestana, who's going to start presenting our earnings.

Good afternoon, everyone. I hope that we'll be able to provide you with lots of information to help you understand not only the numbers, but, as Abilio said, to interpret the juncture of this company and its ability to grow in the future.

I will follow the slides that you've received, so let's go straight into it. I'm going to start on page 2. I'm going to talk a bit more about people, about the business model, and about issues related to economic fundamentals and the economic juncture of the Company. And I'll give you an interpretation of what can be captured by the retail trade and by the Company and how prepared we are for this moment.

On page 3, well, Abilio mentioned Jim Collins visit to the Company, which was very important. And these principals have been guiding our company and now Jim Collins visits us, it was really reason for excitement and for great pleasure and honor. We had more than 300 people in the auditorium. And it's an exercise that really contributes to the professional development of our team.

On page 4, here we mention the values that we've been fostering among our people from the visit that we paid to Jim Collins in May. So we picked four values to be reinforced. And this year we had about 20 workshops with the leadership, with management and -- management and officers. And during these workshops where I was present we reinforced our values. This is extremely important to us to build up a strong team.

First of all, the issue of humility. We must always be open to listen, to learn, and to pursue excellence in company management.

Discipline, which is very reinforced owning to the great speed of our business and the Company. Discipline to implement what we have planned at the speed that it requires.

And third, determination and will. This value is part of this company's DNA. This is something that Abilio has always reinforced, and he is an unquestionable example of determination and will to overcome all the challenges and obstacles that we face in our daily routine.

And lastly but not least important, emotional balance. Again, our company and retail trade is a segment that undergoes lots of pressure. So emotional balance is an invaluable asset so that we can -- we can deal with positive and negative moments evenly. And so this is what we have been promoting. And I've been very dedicated to promoting the values. Abilio as well has been present in some workshops.

On page 5 we're talking about our team. This is not an organization chart. It's just to show you our team so that you can get to know them. The first line under corporate executive officers, I'm not going to mention each one of them. You have the pictures and the names. But I'd just like to mention the quality, particularly as refers to background, the experience of each of these officers. Right underneath we see the sequence and how this happens in a management model.

In business officers, we also have highly qualified people, people who have keep knowledge of their businesses. They own each of their businesses, and therefore many of them respond or report directly to the board. This is not a functional organization chart. The highlight here is the experience and the quality of management. If it were possible for me to add the years of experience in retail trade of these people it would come up to 200 years. And this is a value to be extolled. And this is what makes this company what it is.

On page 6, you see the dynamics and the interaction between these officers. Here we have a matrix of our management model. On the vertical axis we have the businesses. So you see retail, wholesale, specialized businesses, electronics and .Com. And here again, for each of these businesses, there is an owner. We call them owner.

Obviously this is a high position, an executive officer or a VP that, to us, he's the owner of the business. He's the person who knows the business and fights for it, is responsible, accountable for the results, for the return from that business. There's no contamination between business lines. Each president or each owner has their own team and they're focused on that specific business.

Horizontally, we have the corporate officers. And their main responsibility is to ensure leverage among the businesses, capturing its synergies, absence of conflicts, and the establishment of policies and compliance since this is part of the Pao de Acucar Group. So we are a listed company. We're subject to Sarbanes-Oxley and many other acts. And this is how the management model occurs.

This is not new. It's been implemented since June. And it evolved from the model implemented in 2008. And this has been consolidated in the company. Therefore, it also establishes or gives us a guide regarding variable compensation method, [forms everything is] consistent with this management model. And it is this connection that ensures that this model works as it was planned to work. And this is what has been happening and this is what has enabled us to achieve the results that we're going to present to you.

Now going on to page 7 and talking about the economic scenario, I will not speak about macroeconomics. But I'd like to emphasize a few factors so that we can contribute for your interpretation of how these facts or these issues can be understood in our business.

Well, if you look at the Brazilian economy, we see growth. We see relevant GDP growth in 2010. And social rise, I'd like to speak about the social rise a bit more because it generates a direct effect on our business.

Also, the credit offer, it is clear to see how the credit offer has brought for the consumer market, the retail market, and that has happened in the last 10 years. We've seen banks entering this new market, which somehow replaced the stores' own credit systems. But the amount of credit is today much higher than what we could do with a retailer's own funding.

If you look at the fourth line, it says that in 2014 Brazil may become the fifth largest consumer market in the world. Today we rank eighth, so we shall advance three positions in this ranking so that we will be behind U.S., Japan, China and Germany only. So that is a very significant position in the world scenario.

Another expectation is that in 2020 the consumer market will reach R$5 trillion. It represents a 130% growth vis-a-vis the figures we have today. So not only do we have a fantastic economic moment today, but when we look at the future, the outlook is extremely favorable. This is good and we have to be prepared to capture all the benefits of this trend.

Going on to slide number 8, let me talk al little bit more about the social rise. It is truly impressive. You can see this information in the media. It is impressive to see how classes B and C have ascended. They used to represent 48% of the population, and today, in terms of market share, and today -- well, not today, in 2009 they accounted for 74.2%. If you look at class B, for example, it came from 33.8% and 19.5%, and class E almost disappeared. It used to be 13.2%, today 1.8% only, because we had a social ascension.

Of course, we must highlight the government programs that have contributed for this social migration or this social rise. And we must also acknowledge how the standards of living have improved, especially for Brazilians who live in social classes C, D and E. Now, the government programs we are referring to are both funding, Minha Casa, Minha Vida, and more recently the electrification program Luz para todos.

I am sure you know about this, but if you look at this program from our viewpoint, the idea was to have electricity for another two million people up until 2008. They reached this number in May 2009, but these families, they bought 2 million television sets, 1.7 million new refrigerators, which they purchased from retail stores, in addition to hundreds of thousands of other household appliances.

In addition to more access to food products or higher value-added food products, which were the result of this government pogrom named Luz para todos. So we must acknowledge that this has not only improved the standard of living for Brazilians, but it has also contributed to our business.

There are other indicators we could mention, but let's move on. And slide number 9, still talking about the economic scenario, it is truly impressive. This was a story published by Exame Magazine in August, speaking about the social migration of classes E and D to classes B and C. That is the social ascension, and more purchasing power that is today the social classes, especially D and E social classes, did not have access to all of these products, which they now do.

Now, that has represented higher sales in all of these products, not only electrical appliances and food products, but also travel, for example. Of course, we don't sell travel, but we sell suitcases, we sell things that people can put inside their suitcases to travel. So even though we're not directly benefited by this, we also have an indirect benefit.

Moving on to slide number 10 and still talking about the economic scenario, I'd like to repeat that this is one of the most relevant factors when we look at the positive effects on our business. Now, this is talking about the participation of different social classes in the overall income. The overall income has grown from R$973 billion in 2002 to R$1.32 trillion in 2010, which represents a growth of over 40% in these eight years.

If you look at class C, it ranked second in its participation and the overall income was 28%. It's gone up to 31%. And in terms of absolute amounts, it's even more important because class C represents R$428 billion in terms of income available for consumption.

Now, in terms of social ascension or social rise, we must also speak about class D, which had 15% participation in 2002, and currently has 26%, coming up to R$330 billion in income available for consumption. So it's very important to highlight this because it has a direct impact on our business.

I'd like to repeat a phrase said by Abilio Diniz. He said, "As far back as I can remember, this is the first time Brazil is growing and at the same time distributing wealth." Now, all of us agree because we never thought Brazil would one day be able to do this, to have this performance.

Now, in slide number 11, talking specifically about retail, we have a few highlights. First, increase in the purchasing power. Also, an important reduction in unemployment levels. We have higher employment, focused on the middle class, reduction of the informal economy. Again, this process occurred in a very disciplined and favorable fashion through the implementation of government policies, not only at the federal level, but also at the state and local levels.

The tax substitution regime change has helped reduce the informal economy, especially in the retail industry channel diversification. And it is important to emphasize, well, this is going to be a future event, but it's already included in the Company's agenda, which is the 2014 World Cup and the 2016 Olympics.

Now, we must also highlight the real estate boom in the country, which also produces a relevant impact on the sales of furniture, electrical appliances. And we can say that we are very well positioned today to capture the higher purchasing power and the income available to buy this kind of product, especially after the integration of Ponto Frio and Casas Bahia.

Now moving on to slide number 12, here I just wanted to emphasize when you talk about formats, the truth is that this company prepared developing different formats to be able to serve different target publics and different purchase intent. So we have supermarkets, wholesale/retail, hypermarkets, proximity stores, and now specialized stores after we were able to complete the agreement with Bahia and e-commerce, which has boasted very impressive results. And we also have great prospects for growth in the next few years.

So we have a multi-format structure scattered in 19 states and hundreds of municipalities, which means, once again, that we are very well positioned to capture this strong economic momentum and this growth Brazil is enjoying.

Now, next and equally important, this is something we place under the umbrella of specialized businesses. So we have 80 gas station, 153 drugstores. We have recently inaugurated a new distribution center for drugstores that is specialized in drugstores. And this will bring us much more efficiency, avoiding breakage and providing higher efficiency and growth in the drugstore business.

And also our properties unit, GPA Malls & Properties, has already business in 3,500 stores, with 185,000 square meters of areas for rental, and three real estate projects ready to be launched, and a few others being prospected. Actually, this company was founded already as a big company in terms of its assets. And now, with real estate credit available in the country, this company will probably grow at a fast pace in the next few years.

I do not wish to give you details about our results, but we do have some highlights in slide 14. As you have seen, we've had an important growth of sales, consolidated gross sales amounted to R$7.9 billion, which represents 15.6% growth. In same-store sales we've had a 12.5% growth. Gross margin also evolved favorably. We were able to grow half a percentage point and we reached 25.9%.

And in Globex, although the current level is 19.8%, it actually represents a growth of 4 percentage points, or 400 bps. Therefore, our consolidated EBITDA was R$493 million in the quarter, margin was 7%. Now, in GPA food, including Assai, we come up to 7.5%. If we exclude Assai, then the EBITDA margin would be 8.1%. At Globex, 5.1% EBITDA, which represents a significant growth compared to the third quarter last year.

In terms of net income, R$115 million, still impacted by interest expenses or financial expenses. And we will speak about this in further detail. Actions HAE been taken, especially regarding the availability of consumer credit payment means. We've reinforced sales with interest. So we have already started a few initiatives to improve this figure in the fourth quarter.

Dividend distribution, we will pay out dividends. This is going to be the third and last advance tranche. And next year we will have dividend distribution based on 2009 results. Now, the dividend distribution for January 1st will be R$19.6 million.

And finally, it is for us a great pride and joy to announce the approval of the association, the formal association, and we needed this formal approval to finalize the agreement with Casas Bahia. The extraordinary shareholders meeting was held on November the 9th.

And so from now on we shall continue to work capturing synergies. We have challenges ahead of us, but we are perfectly aligned to our plans for Ponto Frio and also now for the integration of Casas Bahia. And Raphael will speak about that.

I'd like to conclude by thanking you for your hard work, for your participation, and tell you we are highly motivated and energized to attain our goals.

Let me now give the floor to Hugo Bethlem. Thank you.

Thank you, Eneas. Happy to thank you.

Good afternoon, everyone, thank you very much for your interest in following our call. You have received the press releases of GPA and now we talk about GPA food, talking about our operations, not including Globex. And in GPA food, we also talk about the consolidated results. Let me apologize in advance because we did not open GPA's food results in the balance sheet and results of page 15 of the press release. But we will improve this for the fourth quarter 2010.

Let us look now at the chart on slide 17, where we see gross sales of food going up to R$6.2 billion, 10% above the third quarter of '09, representing a 7.7% growth in gross same-store sales. Let us highlight a few segments, textile, personal care, household cleaning, bazaar or merchandise, and beverages.

Now, when we talk about different format, we must highlight two. First, Assai, our cash and carry operation, and Extra Supermercado, our conversion model for (inaudible) stores, which had a growth in the same-store concept 10% for Assai, 19% for Assai and 24.1% for Extra Supermercado.

Next, we will look into more details here. But it's important to say that in the first nine months of 2010 we've reached R$18.8 billion sales, which means that we are quite well aligned to our guidance. We are only short of R$7.2 billion. And the fourth quarter is going to be stronger. It has been historically stronger than the other three quarters. So growing 15.8% compared to the third quarter of 2010.

And if we compare the fourth quarter to the third quarter of 2009, and the end of the year we had a small recession, we grew 19%. So 15.8% is quite feasible. On the fourth quarter we would be growing 6.7%. That is the result we posted last year compared to the third quarter 2009. And this year we have already grown 10% compared to the third Q.

On slide 18 we see more details about the Assai format. Third quarter 2010 results [audio gap]

Hello? Ladies and gentlemen, you may proceed.

Okay, page 18, then. Slide number 18, please, on the screen. All right, on page 18, the third quarter 2010 results. Sales of Assai were R$816 million. And it's worth remembering that we acquired this business in October 2010. And at that time, sales were R$1.3 billion a year, and now we have R$816 million in just one quarter, which would trend right into over R$3.5 billion annualized.

Gross margin is 14.7%, 100 bps above the same period last year. And expense of 11.3% of net sales, it's almost 1 percentage point, 800 bps, below the expenses of the second quarter 2010.

Now, last year we had prices division of 8.1% in GPA sales, but now Assai accounts for 10.3%. It's a very positive result because we have improved our gross margin. In the third Q we have -- we have opened two new stores and we have completed three conversions, one of CompreBem, two of Sendas (inaudible)

New logistic operation. For the first time we will be able to capture synergy gains, centralized synergy gains. We've built two distribution centers dedicated to store operation and one distribution center dedicated to external encounter sales. Now, the productivity, in the past the stores used to receive 100, 110 trucks a day, and now they receive between 13 and 20 trucks every day. In addition, breakage of centralized items has fallen by half, and breakage in stores was reduced by 35%.

Now if we move on to slide 19, we look at the Extra Super model or format, which proved to be a right move. We've opened two new Extra Supermercado stores in the third quarter 2010 and we've converted 12 CompreBem stores and 6 Sendas stores (inaudible). Up until the end of 2010 we will have a total of 70 converted stores and each converted stores has very positive contribution, adding more than 30% over same-store sales.

Now, what was the rationale for these conversions? Eneas spoke about the new members of the Brazilian middle class when he spoke about the social rise. So we begin to see more class C consumers. So the conversion from (inaudible) to CompreBem was in 2004. And we also acquired Sendas in 2004. That model was adequate for that population.

However, the population has changed. They have more income, but they are still living in the same neighborhood. Now they are able to purchase more goods. They are able to refurbish their homes. And they buy more, they consume more. They buy frozen food, meat and yogurt, which they couldn't afford to buy at that time. So the growth of this business is above 20%.

We have captured synergies with Extra brand, and we gained important leverage for [Quarta Extra] and other promotional campaigns we conduct on weekends. In addition, we have the best assortment and layout, as you can see on slide 20. In this very simple format, our assortment has grown from 13,000 to 16,000 SKUs, so it's an important growth, but a very selective growth, with more fruit and vegetables, more bakery products, frozen food and meats. So perishable areas that bring a higher average ticket, a higher quality basket, and better margins.

Now, on slide number 21, as Eneas mentioned, we have all of these formats to better serve our target public and also different purchasing situations. We are also prepared to capture the benefits of the social rise in this very strong economic growth period. As the informal economy is reduced through the change in the tax substitution system, we are better prepared than any other competitors to capture the sales of these previous informal economy and grow our sales even more.

Now, when we go on to slide number 22, we have improved our position compared to our competitor. You can see our performance compared to our competitor and also compared to the overall supermarket industry. Since 2008 our performance has been better than the category, which means that we gain market share year after year.

And as we compare our performance to that of Carrefour, we can see that in the third quarter of '09 we grew 9.7% and they grew 3.9%. And in the third quarter of 2010, we grew 7.7%, they grew 5.2%. Although the third quarter is their anniversary celebration date and this year, 2010, they received significant funds to prepare for their anniversary party, but even with that, our result is better.

So it shows that in the last nine consecutive quarters our growth has exceeded Carrefour and our sales growth was two times higher than that of Carrefour. So we have better results because we have been able to conduct better negotiations with suppliers because we have improved operational management, a specific pricing management tool, [Dimetak], which has been implemented at 100%. 70% of food sales is now using this tool.

And the change in the tax substitution regime to fight against the informal economy so we can now have a more balanced pricing policy. We gained 1 percentage point compared to the previous quarter and 1 percentage point compared to the third quarter '09.

On [slide number 24] we must say that expenses of R$1 billion representing 18.4% are under control. Additional expenses we decided that this year have been planned for and measured, especially regarding advertising, marketing and personnel, and other recurring expenses, for example IT. They will bring benefits in different lines.

And the opening of new stores -- the opening of new stores consumes expenses or translates into expenses in the first phase, but then it trends late into more sales and benefits. This type of scenario both means expenses were in line with the third Q '09 and the second Q '10, which shows a dilution in other expenses.

Now, the consequence is clear. On slide 25, EBITDA reached 7.5%. That's the consolidated EBITDA for the third quarter 2010. If we exclude Assai, then the EBITDA margin becomes 8.1%, the best third quarter margin ever since 2007, and consistent from now on.

As we go on to slide number 26, now here we have homework to do. Our financial expenses have grown very much. We must make important adjustments. But let's understand them in three different blocks. 1.8% on net sales is broken into one point, which is interest on the net debt. And because of the increase in this debt, which we can see in slide number 27, and also the SELIC increase, which was 18% from one half of the year to the next, and we also had received [a BOS discounts] which was higher because of the SELIC rate increase. But we are taking action about that.

(inaudible) page 27 we'll see these two factors. First of all, growth of net debt occurred for a number of [causes]. To buy Globex at R$792 million, but for the total R$665 million, and to ensure organic growth. Keeping within our expenses, our net debt EBITDA ratio is close to 1 time. And this is seasonal and this has been signaled in the guidance.

Now, the second part, which is most important recurring side, refers to the initiatives that we are taking to bring down our interest cost through the discounted receivables. This (inaudible) is in the past. The volume that we now have is past. From now on we need to bring forth a strong credit. That purpose is to strike a balance that is by providing better credit to consumers who actually need credit and minimizing financial impact on the group.

Our objective is to reduce no interest terms. And here we have a specific example of an announcement that we are already showing. Here we have this TV set and we are selling this for those who do not have R$2,392 and somebody who can pay only R$146. And you see that in the end, the addition over 18 months was less than R$200. And here in the case of GPA, what we had up to 18 months no interest (inaudible) and more than that with interest. Now we have eight times no interest and eight times in other credit cards. And we are offering 18 installments within interest at 0.99% a month. And most important, there is no impact on sales.

On page 28, the results of our partner has grown significantly. It has grown more than four times between the third quarter '09 and third quarter '10. And by the equity method our participation is R$9 million. They're still issuing cards every month very aggressively. But most important is that 50% of these cards already build in churn sales and in (inaudible) supermarkets we have 19% interest in the FIC card. And finally, net income of GPA food R$144 million adjusted to non-recurring. That is 2.6% net margin.

Of this amount, we have -- there was a growth of 1 percentage point and non-recurring effects in this quarter were only R$2 million, owing to the (inaudible) and second quarter and R$6 million owing to the restructuring expenses from (inaudible) concluded in July that we have told you already. Therefore, the net income amounted to R$138 million in GPA foods, with net margin of 2.5%.

Now I'd like to invite Raphael Klein, recently inaugurated as CEO of Globex, to talk about Ponto Frio and the beginning of the integration with Casas Bahia.

Thank you very much, Hugo. Good afternoon, everyone. Thank you for listening.

I think that the 9th, November 9th was a great day in the history of retail trade in Brazil. We had a very smooth shareholders meeting and lots of consensus.

Now, talking about the team, we have a high performance team today. I can say that the team is complete and lean and ready for the challenge. Today, all because of Bahia training teams are inside Ponto Frio stores, about 400 teams receiving training, all store managers, coordinators and particularly sales reps, being motivated to deliver what we expect from them.

We have improved our product mix. We have increased the participation of furniture with 10% at Ponto Frio to 13%. And this is a great leap. We could improve our effectiveness in our advertising. It's more aggressive advertising. We are very confident for the year end. We're very well positioned. Results are starting to show. And now we must work very hard so that this year end will be the best ever for Ponto Frio.

Thank you very much. And I now pass the floor to Hugo for the details.

Thank you, Raphael.

Now, on page 32 we see gross sales of R$1.7 billion, a growth of 42% on third quarter '09, a significant increase. And it breaks down as follows. 14.2% increase in same-store sales. That is we have continued growing despite the end of the World Cup. And in September we sold more TV sets than in June. And in October, which is already part of the fall end quarter, we sold more white goods than ever. e-commerce has a very important participation with an important capture of market share. The market grows about 20% and we grow about 62% without cash burn.

Now, slide 33, gross profit is R$300 million, with gross margin of 19.8%. This is huge, 4 percentage points above third quarter '09 and 2 percentage points above second quarter '10. Now, just as a reminder, the first quarter '09 was the first one under management of GPA Group, where we implemented the beginning of turnaround through better negotiation with suppliers. We tailored the project mix and expense level.

Now, as of July, as Raphael said, we started capturing synergies with Casas Bahia. We reinforced our negotiations with suppliers. After all, they can buy much better than we can. We've improved the project mix, tailoring the projects. And as Raphael said, 30% up in the participation of furniture, which brings in important contribution. And we started the first commercial actions together.

Although this is the best historic margin ever by Ponto Frio, there is still a lot of room to grow. This is only the beginning of these synergies. Capturing this margin, our stocks are for 60 days. And the refresh of this inventory with new projects and new margins will be adjusted throughout months and will be captured towards the fourth quarter.

Now, expenses of R$223 million are also very positive, 14.7% of net sales. But I must say this is the beginning of a journey aligned with our plans. And the main initiatives, elimination of Ponto Frio core structure. We don't have anything else (inaudible). And the use of the back office platform in GPA San Paulo or Casas Bahia (inaudible), installation of the expense committee, and most importantly, we had 17 directors in Ponto Frio and now we have 5.

Now, additional benefits will be captured in the coming months with our synergies. As a result, we have EBITDA margin of 5.1%. This is the number we promised we would give you when we took over Ponto Frio. But we can say that this is the beginning of a journey that we have ahead and still there are many synergies to be captured. But there is no time. We must hurry.

Slide 36, again, our homework. This is the great challenge, but also wonderful, a great opportunity. Non-recurring that we had R$18 million was explained in the second quarter and reinforced in the one-to-one that we had with you. this refers to a change in the accounting standards and recognizing discounted receivables. And there will be an improvement in the fourth quarter and then it will be over.

4.7 that we achieved are very much in line with the line -- with the number that we announced September 9th and still very high. And today we can say, like Raphael said in his introduction, that this is part of the past. We took the decision -- we made the decisions and the necessary adjustments and we already see a result, on page 37. And here, a few factors have been very relevant in the case of Ponto Frio and Casas Bahia.

We could launch SELIC for Ponto Frio. This required exceptional work from our treasury people, [Wymar Padelia] and [Victor Anaroso], where we captured R$1.1 million, in fact R$1.3 million at fantastic rate, 107.75%, and the discount was about 115%, 116%. So we profited about 800 basis points, with a rating of AAA by Fitch [and demand] in excess of R$2 billion if we wish to tap that.

The initiatives that we implemented very important and different from GPA food. Since this is electronic appliances that requires credit, this is very important, particularly in reducing the average term for those who do not need credit. So this would be no interest payment terms. And quicker than we thought, we have captured two months of the reduction (inaudible).

This means a reduction of one month in the average term, reinforcing what Victor and I told you in our one-to-one meeting, that reflecting as of October, the synergy, 4.7 that we see in the previous page, was represent 3.8. That is 0.9 percentage points below, or 90 basis points reduction.

Now, on page 38 we have FIC participation. It is growing. They are issuing cards. In the case of durable goods, 50% clients of -- new clients have insurance here, 75% of clients are insured. And if we are happy about 19% of participation of FIC in company sales, here in Ponto Frio this share moves up to 26%. That's very important to point out that we have 12% in ecommerce sales. And last -- one year before it was less than 5%.

Slide 39, here we see there's still a long way to go. We are -- we reinforce that this is the beginning of a journey, in line with our plan, and there are many accomplishments to be made, so you see that. Although we moved from negative 4.7% to minus 1.2%, we still have a loss. And this result is not in our vocabulary.

Therefore, slide 40, here we will reinforce the guidance that we issued in May. Sales are totally in line and we will get to R$33 billion. Real terms (inaudible) same-stores 7.2% and our guidance was between 4% and 5%. EBITDA, it's R$1.3 billion, and our guidance is exceeding R$1.8 billion. And our net debt over EBITDA, it would be less than 1 time and it will be less than 1 time.

Now, concluding, investments and area expansion, organic growth particularly. In the foods business, this is slide 41, we see that by year end we will invest R$1.3 billion. And this is in line with the revision that we provided in the second quarter 2010. Sales area should reach more than 1.5 million square meters, a 7% organic growth over '09.

And then the fourth quarter there's still a lot of work to be done. We will open up another five Extra hypermarkets and nine Assai's, more than 70,000 square meters in new sales areas.

And finally, slide 42, Eneas talked about dividends distribution. We will apply the necessary adjustments for the fourth quarter.

Thank you very much for your attention, for your time, and I will now pass the floor to Vitor Faga, who will open up for questions and answers.

We now open the Q&A session. Please ask all your questions at once, and wait for the answer. (Operator Instructions)

First question Gustavo Oliveira, UBS.

Good afternoon, everyone. Well, results have improved dramatically in food compared to second Q. I see a lot more stability since our last talk. But I have certain questions about food. First of all, I'd like you to help me. Perhaps you could correct me in my math. But in food, same-store sales in Assai, if there's a percent of these new converted stores is 30%, can we infer that same-store sales in Extra is about 6%, Extra hypermarkets about 6%? Is this the level that you arrived at?

Gustav, good morning. It's Hugo. Thank you very much for your question. Is this your question, or do you have other questions?

So this was the first question. My question is for me to understand when do you believe that Assai would go into a maturity curve and what would be the maturity of same-store sales perhaps closer to Extra hypermarkets.

But second question is about the Dimetak tool, pricing tool, you said that 70% has been implemented in foods. But that does mean that the gains have been maximized. So I'd like you to comment on that.

And if you could comment also regarding the gross margin increase. It's the first time that you have a gross margin increase in a year. Do you think this is stabilized or do you believe that you will still have a falling gross margin for investments without distortion?

And last question about foods is a longstanding debate that sometimes comes back to the fore regarding inflation on food, food inflation. Now the perception is that Brazil is again reporting food inflation. I'd like to know what your strategy is in this cycle. If you intend to snap up market share and pass on this increase to food prices. Thank you very much.

I'm going to invite, (inaudible), vice president -- operation vice president, to talk about sales and same-stores and about Assai and market share. And then I will come back again talking about Dimetak.

Good afternoon, Gustavo. As regards hypermarkets, the figure is slightly below the total growth because it's influenced by Assai's figures. but the performance is above hypermarkets, as Hugo said, above the competition.

Now, a figure that pulls this down in CompreBem and Sendas' figures because they're now in a transition and there is a slight loss during the conversion. And but this is quickly recovered with the new Extra model and this is where we have had fantastic growth.

As regards Assai, as these stores move on in the maturity curve and organic growth has a massive weight you tend to strike a better balance in results and sales growth. There is a slight impact by the stores of today. We have about 50 stores, the trend for dilution. But it's good to remember that still Assai is where we must report strong organic growth and therefore we will continue witnessing a gain in the maturity level of these stores, as they trend -- or as they tend to grow during the first and second years.

So you believe that as of the third year these stores will be more mature and will be growing in line with the rest of the Company?

No doubt. An impact of the new stores will be less and less, owing to the number of stores that is much bigger.

Gustavo, about margin, about Dimetak is an optimization tool (inaudible) electricity demand versus price. And this is for current price, sales prices. Now, sales, we have gained significant margin there for two reasons. In addition to the tool, it enables you to be more competitive vis-a-vis competitors who are no longer informal. Second, margin mix, all the categories -- not Assai. But supermarkets and hypermarkets are optimized. Food category 70% of this category.

Now, commodities, for instance, are not in this, fruits and vegetables, meat, breads, et cetera. What is there is industrial products. Despite that, we have a gain in margin, lots of competitiveness, and perhaps some stability within this level without losing our competitive edge. The competitive edge is king. We must be the lowest priced player in each of the positions. And today, just to reinforce, nobody can sell food at a lower price than Assai.

But the gross margin trends do believe it is sort of stable or will it fall?

I think it's stable with a slight recovery. It shouldn't fall anymore.

Next question, Tobias Stingelin from Santander Bank.

Good morning. Congratulations on the results. Quick question. Can you tell us what is your feeling, especially regarding sales, after you changed your credit policies? Same-store sales we knew exactly how it was growing up until the second quarter. But I'd like you to elaborate a bit more perhaps compared to the previous months, just for us to see how quick the reduction of consumption is after you changed the credit policy.

Do you want the other questions now? While [Kapacs] R$1.3 billion, will that be accomplished because you've made R$700 million until now, so you still need another R$500 million. And in stores, maybe I didn't work the numbers well, but you would have to spend another R$200 million. So I don't know where these R$300 million will go to. I'd like to understand this a bit better, please.

Only these two questions, Tobias?

The last one, to speak a bit more about the different formats. You spoke a bit about Assai, but I know you also want to grow in Extra a bit more. So what do you think about that, I mean why your hypermarkets have a better performance? Are you going to other regions? Is it because the center itself is doing better? I'd like to understand a bit more about the Extra format or the Extra brand. Thank you.

Thank you, Tobias. Let me -- about sales and the credit policy change, I'm going to give the floor to [Bydelia], who is our CFO for Globex.

We have reduced the number of installments and we have also reduced the noninterest installment sales and we want to increase the interest bearing installment sales. But we're very careful. This is a very cautious movement. The results at the end of October have been very positive. And I said we were cautious. I said we're careful because we don't want to grow slower. We want to keep the same pace of growth.

We believe we have been successful because the pace of growth was even better in October. We grew even more in October and I believe we are actually gaining market share compared to informal competitors. So, yes, we are extremely cautious because we do not want to cannibalize sales of the first line.

About the growth of Extra, [Tom Bosco] is going to talk about the Extra format.

Tobias, well, about the extension of hypermarkets, for a period of time we had a low number of new openings. Now, this year we've opened a few new (inaudible) focusing basically on the regions where we could see a strong growth of the demand and coupled to a small presence of our company. This is the case of the [Center West], where we had operations basically in (inaudible) [and in Brasilia]. But we are now penetrating the regions of (inaudible) we will open the first hypermarket of this capital city.

It's not the first Extra, but it's the first hypermarket in this city. In addition to the northeast, where we've intensified our expectations of organic growth, in addition, we also seek expansion in the San Paolo region. This year we will open in (inaudible) very important marketplace in San Paolo state. And we did not have presence in hypermarkets, only (inaudible), in addition to reinforcing our presence in other places of San Paolo such as [Campinas].

So Extra, beginning this year, and this is our expectation for the future, is that we can have more new openings. Not only in the 7,000, 8,000 square meters hypermarket, but also the compact format, stores that have the same assortment of hypermarkets but in a smaller sales area, approximately 4,000, 4,500 square meters, either for small towns or in places where we already have other stores. So it is true, yes, we are expanding the number of hypermarkets.

And about Kapacs, Tobias, yes, just adjusting your account, what we still have to expend of the numbers of R$250 million approximately. That's Assai and hypermarkets. In addition, you have all the store conversions, so 70 new Extra supermarkets that we still have to complete conversions to each property purchase and a range of investments which we usually do every year to reinforce our logistic structure so as to make sure that we will have capacity for year end and for the following year.

Next question, Mr. Gustavo Oliveira from UBS.

Hello. Thank you for the follow-up. Two questions. One about foods, I'd like to hear about your strategies.

Next, credit policy, when I look at Ponto Frio results, you have gained market share in flex card and FIC card. But you are losing market share in cash sales. And that also generates an impact on working capital. so I'd like you to talk a little bit about this, what is your strategy from now onwards. If you would like to gain more market share in third party cards, or if the cash payment has already -- has already been reduced to the levels you expected.

Okay, Gustavo. Let me give the floor to Tom Bosco. He's going to talk about food product inflation. And after that, Bydelia will speak about FIC cards versus cash sales.

Okay, Gustavo. About food product price inflation, we have seen it in the media, yes. We do have a higher food inflation, particularly in the last few months, but very much because of the commodity price increase. So this is possibly a seasonal variation.

Now, the change that will possibly be maintained is meat prices because there have been cost pressures. The price was low. We have a high volume of exports. So the price is higher now and we believe it will be capped at this level, 15% or 20% above what we had before. So this is something we have already felt in terms of change in consumer behavior.

So, if we have lower sales of beef because of the higher prices, we shall make up for that by having higher sales of both fish and chicken. So these two kinds of products, fish and chicken, tend to be market share in the next period of time. For us, this is a great opportunity because the fish category has received a lot of investment in the last few months, not only in hypermarkets but even in the initiative of conversion of CompreBem and Sendas as do Extra super. They now have a fish section.

Our expectation is that these prices will still press the inflation indexes upwards, but not very much above our goal of 4.7, 4.8 inflation for the year.

Gustavo, this is Hugo. Have your question been answered?

Yes. I just wanted to know if you are going to pass on lower prices and also if there is an opportunity for private label for a faster growth of private label considering the food product inflation.

(inaudible), our commercial VP, will answer these two questions.

Hello, Gustavo. Well, in terms of passing on the inflation, there are some things -- sometimes we cannot pass on the full cost increase. In the case of beef, for example, only half of the cost increase has been passed on to the final price because we have to maintain competitiveness. But what happened was that we had a sales volume reduction, so that was the direct impact. Although we have a migration to other types of products such as fish and chicken to make up for this sales loss of beef.

Now, we truly want to grow our private labels. In terms of private label, yes, you're right, we are currently growing 30%. We've hit record growth, which has made up for the price variation in these categories. Thank you.

Now let me give the floor to Bydelia. Bydelia will answer about credit cards.

Well, Gustavo, first, this is not limited to only two actions, that is to reduce the number of installments and reduce the share of noninterest installments. There are other actions, too. First, make our card the most favorable payment means in our stores. So that will translate into different benefits. First, loyalty. Loyalty of our customers.

Second, our card is cheaper. For each transaction we have half the cost as if we were using third party cards. But we also want to begin to charge interest when we sell in installments because when I do that, I receive the money in advance. So then the funding is provided by the bank. So we spoke about two actions, but we have a full set of actions being taken. We have seven or eight actions that are being conducted and together they will bring benefits to working capital and a reduction of our financial cost.

Okay, Gustavo, have your questions been answered?

Yes, thank you.

Thank you for your questions. I wish to thank all of you who have participated in this call.

At this time we have no further questions. As we have no further questions, I'd like to give the floor to our speakers for their final consideration.

Well, I'd like to thank you all for participating in this call, the third quarter 2010 conference call. Let me tell you that our investor relations team is at your service if you have any further questions, and also to speak about our business prospects. Let me give the floor to Hugo for his final consideration.

Ladies and gentlemen, one more time, thank you very much for your hard work, for your participation. This intended to be a broader call, showing more information and building a stronger relationship with you. As we've said in our one-to-one, this team wants to be closer to you, providing more transparency and being more available for you so that you can build your decisions based on information on our paper.

Let me now give the floor to Raphael Klein for his final consideration. Raphael Klein, CEO of Globex, and next Eneas Pestana, CEO of GPA.

One more time, thank you, everyone, for participating in this call. On behalf of Globex and our team we have an opportunity. The bigger the challenge, the bigger the opportunity. But above all, we have mapped this. We already have an action plan. We know where we have to improve, where we need just fine-tuning, and we are acting according to a discipline. We want to capture these synergies in a disciplined fashion without bringing burden to our customers. We want to bring them bonus, but not burden.

Let me now give the floor to Eneas. Thank you.

Thank you, Raphael.

I also wish to thank you for your participation, for being with us this afternoon. This call was much better than the previous one. We know we did not do very well in the previous call and we also know that the first half of this year we were late. We were late with the actions of integration of Ponto Frio because we opened up new negotiation. We accelerated some projects that increased our expenses. We do recognize that. So we had to gain control again over all of this.

The association with Bahia is a spectacular business transaction. We are now together working in a very positive agenda to capture synergy. Everything we talk about, we talk about huge volumes because we do have a large scale. So we expect to have very good news. And more than that. When you look at the resilient economic scenario, it is completely different from previous years.

And if you look at the Company scenario, beginning from the first, what is truly important is that we have a highly motivated management team with very clear responsibilities, each one dedicated to his own business area, working to help to contribute to more business. A team that works united, wants to make money, wants to work for shareholders, and make this company the best company in this country, thus contributing for the development of this nation and the retail industry.

It brings great joy to us. I hope you have actually been able to feel our energy and the union of this team. No doubt, this will help us meet our challenges and achieve our objectives in the future. We will have good news. We have this integration with Bahia that will add a lot of value, the real estate, the conversations to be completed. We will also grow organically.

We do not lack challenges. But we expect to have a fantastic year end sales and we are ready, we are prepared in terms of assortment, logistics, operational efficiency. So I can tell you I can ensure that this team is fully dedicated to make it happen. We wake up early and we work hard to get to these achievements.

This is how I would like to end this call. One more time, thank you for participating in this call. See you next time.

Thank you. the GPA call is now over. The investor relations team is at your service to answer any further questions you may have. Thank you for your participation and I wish you a good afternoon.

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.