Companhia Brasileira de Distribuicao SA (CBD) 2012 Q3 法說會逐字稿

Good morning and thank you for waiting. Welcome to Pao de Acucar's webcast to discuss the results for the third quarter of 2012. This event is also being broadcasted via webcast which can be accessed at www.grupopaodeacucar.com.br/ir/gpa and www.globex.com.br/ir where the respective presentation can be found. The slide selection will be managed by you. The replay of this event will be available right after the ending of the session.

We would like to inform you that the Company's press release are also available in their IR website. This event is being recorded, and all participants will be in listen-only mode during the Company's presentation. Right after that, we will initiate our Q&A session where further instructions will be provided. (Operator Instructions)

Before proceeding, I would like to mention that any forward-looking statements that will be made during this conference call about Grupo Pao de Acucar's business outlook, projections and financial outlook are just assumptions and uncertainties as are also available -- that are currently available. Future events are therefore no guarantee of performance because they depend on circumstances that may or may not occur in the future. That's why they are just uncertainties and assumptions.

Investors should also understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Grupo Pao de Acucar and therefore 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. Vitor Faga, Executive Director of Corporate Relations for the Company.

Good morning, ladies and gentlemen, and thank you very much for participating in Pao de Acucar's conference call. We have here Eneas Pestana, the CEO of GPA. Also we have the four officers from our four business units, Jose Tambasco, Belmiro Gomes, Raphael Klein and Quiroga. And also we have here the CEO of Pao de Acucar, Christophe Hidalgo and the CFO of Viavarejo, Claudia Elisa, in addition to other directors of the Company.

Now, I'll give the floor to Eneas Pestana so that he can begin the presentation.

Good morning. It is a pleasure to be here once again. Thank you very much for your attention. First of all I'm not going to take your time speaking about the economic landscape, but it's important to reinstate that we are still very optimistic and also very confident with the Brazilian consumer market and the strength of the market be it by looking at the fundamentals of the economy of the country which is experiencing a good momentum and also be it for the more current measures adopted by the government to boost the consumer market. And we are already noticing some important effects of these measures in the next coming year and at the end of this year as well. Well, therefore we are continuing to follow a very professional and integrated approach to our businesses, seeking the growth of the Company and the good results.

We are now concluding our strategic planning for the next three years and also the budget for the next year. This process should be concluded by year end. And I may just say to you now that we will keep the focus and we will boost our approach more particularly to organic growth. It's also important to say that in 2013, for next year, we have already acquired most of the land for the construction of our buildings.

In terms of people, we are in a very effective process to hire and select staffs, and also training and in educating people. We developed some internal training persons to train our people because we do not want that to be a limiting factor to our expansion. So, in general, we are still working to ensure return on deployed capital, to ensure low indebtedness level and to reduce our financial pressures, reducing working capital by promoting more efficiencies in our inventory through our vendors as well and constant search and effective search to reach efficiency gains.

Our main focus will be in the better-return approaches in terms of Minimercado, in Assai and in the supermarket, focusing on the south and southeast regions. In the northeast, I would like to refer to the [Internet] operations, very concentrated in the northeast in the next coming years.

Now, looking in the third quarter, we have a presentation that I'm sure you are following, on page 2, we begin to say that in consolidated figures we were able to have 8.7% growth, or same-store sales was up by 7.1%. EBITDA in consolidated terms had a margin of 6.6%, which was up 11% vis-a-vis the same period of last year. And net income experienced a significant growth, reaching 1.7% margin with a final number of BRL210 million.

On page 3, still talking about consolidated results, I would like to say that if you look at the column that does not include gains in real estate projects, our growth was 8.5%, and the -- there was 14.7% diluted in terms of gross sales. EBITDA in that same period reached 5.9%, and now it's 6.2%, so that was up by 15%, reaching BRL2.2 million EBITDA during that period.

Net income again had significant growth. So excluding real estate projects was almost 60% growth. And EBITDA margin was 1.4%. This margin vis-a-vis the year before, last year the third quarter had 0.8% of net margin, so that was a growth of 0.6 percentage points of which we can say that half of that comes from operating efficiencies, and the other half comes from reductions in financial expenses.

The next page, page 4, it's also possible to notice that indebtedness level still is in keeping with that of the last quarter in terms of net debt. And I would like to say that this net debt also includes CDCI or debt with installment payments. And then in terms of EBITDA, there was a reduction from 1.52 to 1.46. CapEx, the last nine months was BRL1 billion and in the fourth quarter -- in the third quarter, BRL400 million. For the year, the guidance is BRL1.8 billion. And there are still many stores to be opened by the end, until the end of the year. And half of that BRL1.8 billion is invested in the expansion of the Company.

In terms of financial expenses, we've been talking a lot about this reduction. And this strictly reflects reduction in the SELIC rate. But, most importantly, we also did some important work when it comes to (inaudible) or changes in means of payment which caused significant reduction in the installment payments with no interest bearing. And with that, I show you the consolidated figures, and then I will give the floor to Vitor to talk about the breakdown figures.

On slide number 5, we have here some important highlights for the quarter. One of them being the acceleration of our new stores, particularly with non-food operations. We announced that foods, 15 new stores were opened in Q3, Pao de Acucar stores, Extra Hiper, Extra Super and Minimercado.

Well, if you look at the indicators, there were 36,000 square meters that were added to the Group sales area, which gives us a growth of 2.4% in the quarter when we talk about our sales area base which was a significant growth, and also more significantly if you look at the figures for the last quarter. So year to date, 3.2% of growth.

And in the fourth quarter of this year we hope to keep the same opening pace for, in terms of store opening. So by the end of the year, we will be very close to 100% in terms of sales growth for GPA Food, covering the different format of stores. Particularly in the fourth quarter we will see that there will be a growth in the opening stores of Assai. At least four new stores will be opened in the last quarter.

Now, in non-food or Viavarejo business, there were nine new stores that were opened, mostly in the northeast and midwest regions. Year to date then we have about 950 stores and approximately 1.4 million square meters in total sales area, which totals 2.9 million square meters if we consider the food and non-food segments put together.

Now, I will give the floor to Jose Tambasco who will tell us about food retail in Q3. So we are on slide 6.

Good morning. I would just like to reinstate some of the figures that were mentioned by my two colleagues, especially related to organic growth of hypermarkets and supermarkets. I will refer to this sector that is part of the food retail business. And after my presentation, Belmiro will refer to Assai more specifically.

Now, talking about hyper and supermarket, we highlight the opening of 15 new stores and 3 hypermarkets which is part of that 15 figure which is above the guidance for this year of only 4 stores but already 5 to date. And we are going into different geographies like Varzea Grande and other cities in the interior of Sao Paolo where the Extra brand was not yet present such as Taubate -- such as in Taubate.

Also we would like to highlight Minimercado's new stores in the first half of the year were mostly concentrated in the 60 stores that we had, Extra Facil to Minimercado, and the repositioning of the stores in terms of their proximity. And then in the second half of the year, we are focusing in the opening of these new stores. In this quarter, we already opened eight new stores. In October, we opened eight new stores. And by year end, as the guidance said, we will have a total of 15 new stores. And all the stores have a good sales performance. They have a covariance 20% -- above 20% growth, which is a big highlight.

Also in terms of supermarkets, I would like to say that it has been a year since we converted the stores and the performance, the sales performance was above average when compared to the regular retail numbers.

Now, speaking of hypermarkets, in addition to organic growth, I would like to highlight two important things -- there are two things that I would like to share with you. The first thing has to do with our most recent launch yesterday. There was [Extra Delivery] to launch. We had already that with Pao de Acucar there, but for Rio and Sao Paolo we launched Extra Delivery for food. And with that, Extra is ahead of the curve adding more services by integrating the online and the physical world.

Our expectation is that by next year Extra will be able to reach the leadership position when it comes to food delivery in Brazil. The second highlight, also speaking about supermarket, has to do with changes or the repositioning of this category. Within Extra, we hired some designers like [Marcele Oli], and we are already noticing the effect of that. According to some research institutes are telling us that the consumers are reacting to this new approach. And we are now more confident in terms of accelerating this approach in the supermarket industry.

We are now rolling that out to other 20 supermarkets in Brazil, so we are remodeling this section here, this category of the stores so the stores are becoming more aligned with textile products and more adequate to accommodate textile products. And Extra is now being more also oriented towards working with some expert areas. This is for the non-food area in supermarket.

And this has brought about many positive results, also reinstating the belief that we are close to consolidating supermarkets, taking the leadership in this area, also in Brazil.

Now I would like to give the floor to Belmiro so he can talk about Assai.

Good morning and thank you. The third quarter was in keeping with the last quarters of the year. We had a very good performance in the Assai business, also represented by 14.2% of gross sales with a highlight in the same-store sales space. And also the main highlight was the improvement of the gross profit. There was -- it was up by almost 28% when compared to the same period the year before. And we still have -- expenses are 0.2 percentage points below the same period when you compare to the -- to Q3, and there was also changes in payment means because there was a great volume coming to contribute to our financial results contributing with 42% which gives us net income of BRL50 million against BRL3 million of negative figures the year before.

Changes in our Assai business model resulted in a very good improvement in our results. Nine year -- the past nine months was 13.1 in terms of sales evolution, 14% for same-store sales. And there was a reduction in the level of expenses of -- from 11.36 to 10.7, which was a very, much lower level, very good one. In terms of net results, the BRL15 million of net income against a loss, a net loss that we experienced the year before. We are very excited with the past quarter. The market is very favorable to our business and business formats, which has been demonstrated by our results in October. We had an increase in the same-store sales and along the year as we also introduced many changes in our business model. We are also working in this new format of Assai stores. We want to have stores with greater sales capacity and a larger sales area. It goes from 1,500 square meters to 5,000 square meters, higher storage capacity.

Now, we want to increase by eight-fold for storage capacity and this will help us decrease logistic cost and lower expenses cost as well will be obtained by the reduction of expenses. So we are working towards improving this format and also to allow to benefit from these changes very soon.

As Eneas said, we already have new points of sale for 2013. This new point of sale, we worked very hard to allow to double the number of geographies where we operate. By the end of 2013 we will double the number of geographies from 7 to 14 states where the supermarkets will be present.

Now, going to slide number 7, we will briefly talk about some main highlights of GPA Food. In terms of gross sales there was a 6.8% increase in same-store sales, actual increase of almost 2% in the period. All stores grew by 9%. So in the fourth quarter, what we see is an increase of all store growth vis-a-vis the growth that we had before mainly due to increased growth that we talked before, gross profit increase of 8%.

Gross margin, I would like to say that there was investments in competitiveness as the Group promoted this quarter. And as we already talked to you before, competitiveness is a key element in the business. And we are closely monitoring that by format, by geography and also category, and certainly to keep the same level of competitiveness is something crucial to ensure the sustainability of all of our results. Also associated to some promotional campaigns that we had this quarter, one of them is the red alert in the Extra network.

In terms of operating expenses, we were able to achieve efficiency gains, reducing operating expenses as a percentage of net sales by 3 percentage points. And this was managed even in an environment full of pressures and costs related to staff. We already talked about that referring to other quarters. This is the reality in the Brazilian market. And even with that pressure we were able to achieve good efficiency gains with this reduction in relative terms. And this resulted in a very stable EBITDA, in terms of margins with 7.3% and a nominal increase of 8.4% when compared to the same period of the year before.

Financial expenses, Eneas briefly talked about the important reduction in financial expenses mainly associated to the drop in SELIC rates and the maintenance of means of payments with the reduction in the percentage of sales with no interest bearing. And this is a trend that is noted in both businesses, both GPA Food and GPA non-food. And here we also see a reduction of 1 percentage point in financial expenses for GPA Food when compared to the same period of last year, which gives us a 30% reduction in nominal terms. And this combination of increased EBITDA and reductions in financial expenses lead us to an increase of 20% in net profit when compared to the year before, which gives us a margin of 2.1% and an increase of 0.2 percentage points vis-a-vis the same period of the year before.

Now let's -- I will give the floor to Klein who will talk about retail breakdown and the business outlook.

Good morning. It's a pleasure to be here with you again. I will try to be very brief. And I will talk about the third quarter, and I will talk about physical sales, and then Quiroga will talk about Pontocom.

In the third quarter on 2012 the numbers were good, very good. We are very optimistic because we expect an even better fourth quarter. We experienced an increase of 8.2% same-store sales. In our business, we experienced a slowdown which will lead us to a 13.4% growth in the last 12 months. And this was mainly influenced by many factors, improvement in the [tax fees], reductions in the IPI tax. And as we understand it, it will last until December 31, 2012.

We were also able to reduce operating expenses. And now we are beginning to harvest what we planted one or two years ago when we made changes to our [com setters]. The other thing we did is that we revisited our personnel headcount. And then we are harvesting the good result which will be reflected in our end results.

In terms of the highlight, I would like to mention our staff as well. We also are registered Academia de Lideres. This is something that already existed, but it was not well-articulated. And in this new program, Academia de Lideres, we will develop managers to be used in our new stores. So we want to have people well-trained and educated. These people started as sales people -- sales persons. And with this training, we will be able to expand our culture in the way we operate in de Lideres.

Another important highlight that I would like to share with you is that I am leaving the presidency of Viavarejo. On November 22nd, I will leave the executive -- my executive position. I received this Company with lots of losses and many challenges, but now I'm delivering back the Company with sustainable profit. I'm not going to get into details. But the results of my management really reflect the results of the Company.

I would like to thank you all very much who joined me during this period. And that's all I have for now, and we can have more later. Now I'll give the floor to Quiroga.

Thank you, Raphael. Good morning everyone. We have a very important moment, another quarter call. In our latest call we mentioned that we had the demand picking up (inaudible) and as a result we decided to focus our profitability and cash generation to the Company. And then that we had the best quarter in the given year in terms of net income. This is despite the slight [trouble] in the second quarter. On a consolidated basis, we have a single digit growth, percentage growth.

It is even more (inaudible) if you remember and it happens it was strong [base] in 2011, more than 40% last year, which was about twice the market at that time. But better than that what really encourages me is that the Company is ready for the fourth quarter enough to grow more than the market despite things related to our focus and profitability and cash generation this quarter. Just as we had in the third quarter of 2011 we believe we'll grow above the market and also ensuring positive and increment cash generation for the Company.

This year we had BRL4 billion sales. For that size, it was applied in 2009 by (inaudible). This happened over three year when we were talking the Company was about BRL190 million in 2008, and basically it had half the support of (inaudible).

About highlight is (inaudible) that we are launching over the fourth quarter. They have been (technical difficulty) the most important one in the market. It is a model that will bring Brazil in a unique manner we already have several marketplaces launched in Brazil. But mostly in a window that has been (inaudible) taken to e-commerce, for instance. But there's more favorability on several partners, with several segments. And the year introduced for the second time (inaudible) single shopping carts. So this model provides the best in Internet users experience -- shopping experience and a retailer can also generate cash result and it recovers to market (inaudible). Although it is more labor intensive (inaudible) model.

Now, over the full quarter if we are to be involved in (inaudible) our business model, we'll be focusing on agencies, travel agencies and also travel packages. There are several competitors in the market today closely related to promotion very strongly when it comes to ticketing. And we believe this model is cost structural compared to what we are addressing now. And the kind of product that we had taken has not been offered to the market. So we try to multiply our Internet user flow to this kind of business. And now we have Barateiro.com for products, and that's the website that we imagine will have (inaudible) and we also have a unique model that we'll be presenting over time.

And lastly now at Pontocom, Nova Pontocom. At the Company level we have started the business unit with B2B solutions. Basically here we are meeting the demands of companies that are focused on incentive campaigns and also corporate sales for small companies to buy large volumes. This is growing the Company with very impressive profitability. And one of the reasons that explains this growth is our high level of service. Companies decide to come to us whenever they choose the right partner to deliver prices of an incentives or quality expectation.

For companies that can be reliable, whatever they need, different products but some level of reliability in terms of service. Lastly, I would also like to address our commitment. We retain our top commitment to [describe] our option. From the very beginning we decided to focus on customer satisfaction. And this is unique, vis-a-vis our competitors.

In the third quarter we have the highest level in our track record according to [IBIT] and other agencies that monitor performance. We would like to thank our in-house team for the excellent performance. This is it. And we'll be happy to take your questions during the Q&A session. Thank you very much.

Now, I would like to give the floor to Claudia Elisa so she can address the main highlights and the performance of Viavarejo and Nova Pontocom.

Good morning, everyone. Like Raphael mentioned during his talk, this quarter we had a consolidated result between brick and mortars also online where we exceeded sales on (inaudible). In other words, growing almost 8%, 7.5% for same-store sales. And if it (Inaudible) contributor, we get to almost 13% real growth which is very significant. As to our gross profit, in the third quarter of 2012 our gross margin was 26.9%, a decrease of 2.7% (sic-see slide 9 "0.7%") vis-a-vis last year. And operating expenses at 21.2%, improving 3.1 percentage point year to date.

We would also like to highlight an explanation that is in the release of (inaudible) stage three. We explained in fact based on geographical expenses that were in the expense item due to the cost reduction effect we have COGS and one is BRL16 million (inaudible) in our gross profit in the third quarter of 2012 or BRL16 million, that also helped expenses or adjusted expenses.

(inaudible) 26.9 versus 27.8, a reduction of 1.8 vis-a-vis the growth margin of the third quarter of 2011. And other expenses rather than 21.2 will be pro forma at a level of 22.4, improving 1.9 percentage points vis-a-vis the third quarter of 2011.

With that -- and with that explanation on profit and expenses, the Company's (inaudible) was BRL300 million or 16% profit year to date. EBITDA margin of 5.7%, pro forma 5.5%, above the third quarter of 2011 at 0.2 percentage points. And the good news here for the selection (inaudible) also help us in select range, we managed to reduce 0.4 percentage points in our financial expenses contributing to our net cash generation of [68] or 720% growth in the third quarter and 1.8 percentage points at net margin.

Now I'd like to give the floor back.

Before we close this presentation, I would like to give the floor to Eneas (inaudible). Then we can move to the Q&A session.

Okay, so that was a very straight forward summary of the third quarter of 2012. We are ready to take your questions now. And as to Raphael's comments for the completion of management terms, I would just like to highlight some things. From [QPE] side how do we see that? That's a natural process. It was foreseen. His term will be concluded in November, we all knew that beforehand and we are comfortable with that.

(Inaudible) in our vision that we afforded to consolidate the professionalization process of the Company. This process is to be taken (inaudible) according to the roles and also the corporate governance of the evaluation. We are absolutely comfortable. We are neutral, respectful for the best interest of (inaudible) as a Company. So that's our position. So now let's start the Q&A session.

So the fourth quarter presentation will happen only next year, so Christophe has just arrived, it's his first call, his first meeting, he's here with us right now. But with Vitor and Christophe, I'm not here together with the heads of each one of the businesses. We'll be holding a meeting or also a call with all of you early next year in order to give you the guidances for next year. So today we are not going to make comments on guidances for next year. So once again now I would like to start the Q&A session. Thank you.

We will now open the floor for questions. We kindly ask you to make all your questions at once and wait for the Company's answer. (Operator Instructions)

Tobias Stingelin, Santander.

Eneas, I was wondering if you could give us some shade about the choice of the new CEO of Viavarejo. What are the parameters taken into account? Some (inaudible) were in the media, can you make any comments of that more specifically? That's my first question.

Second question. I like to have a better understanding of the lower gross margin for foods, BRL70 million more specifically. Does it have to do with fierce competition? Your competitors seem to be stronger. So is that non-recurring or something that we can envisage for the future?

And, lastly, I would just like to have a better understanding of the BRL19 million as compensation that Pao de Acucar have to pay vis-a-vis (inaudible). Is that related to the whole discussion in the media about lack of accounting consistency? And what about the BRL26 million that were paid by Globex, reimbursed by related party? What exactly is that? And what can you consider for the future? Thank you, Eneas.

Tobias. Good morning and thank you for being with us. Thank you for your question. In terms of the process or the conclusion of Raphael's term and another professional taking over, like I said, this process follows the corporate governance rules of the Company. And this was discussed at Viavarejo's human resource meeting. The process is very respectful, smooth and focused on (inaudible). Obviously I don't have any names to give you right now. This will only be known as announced after the proper governance process at the right time. Obviously we do need someone to continue the search for gains and efficiency and everything expected from a big Company like Viavarejo. And that assumed a qualified professional and administrator that is skilled enough and also with the right qualities to take the challenge.

Obviously we have to be careful governance-wise so this person is skilled enough and qualified to take the challenge. That's what I can tell you for the moment. Obviously, in a timely manner we'll be announcing as necessary about that case. Thank you.

Can you just tell me about the human resource committee, who is heading that? How many people are involved? Can you give us a scope (inaudible) when it comes to the choice?

These committees don't have the power of decision. They are an arm of the Board of Directors so they go deeper into this matter about human resources. And at Viavarejo we also have a financial committee dedicated to technical issues related to resolving the finance. And we also have an expansion committee and this is underway, and this is more devoted to sales expansion and breakdowns. It does not have the power of decision. However, it does have the cash to go deeper into discussions, the technicality in order to make recommendations to the Board, and the Board has the right of decision, the power of decision. So as what we will at Viavarejo regardless of the case. So basically this is it. It does not have the power of decision, but that's a key component of the process and will be respected in this process. Is that okay, Tobias?

Thank you.

Okay. Now, I'll give the floor to Tambasco so he can answer your second question. Tambasco.

Tobias, good morning. A couple of words on the margin for retail and foods, just highlighting what Vitor said before, this growth, this healthy growth in this kind of business actually happens through the search of higher competitiveness in every sense of the word, and price is one of the components that is maintain in our banners. Right now, obviously, like we said, we have (inaudible) market opening and they do affect the margin in the stronger opening period. But they are very positive when it comes to the supply of all these stores and also reinforcing our price positioning.

In addition, like Vitor said, we have intensified our promotions. As Vitor mentioned the red alert promotion. This promotion is very similar to Black Friday. In every (inaudible) we've been carrying out these very strong promotions and customer flow is very strong in our stores. And even in September when we closed the quarter we have ensured to have two of these promotions, very strong promotion, and it does have an impact on the percentage margin.

On the other hand, when it comes to cash margin, these are very significant to all of us. Therefore it shows a different trend compared to what we had in the past.

Okay, just to have a better understanding. I think we had a first drop in the gross margin since 2010, and it seems to come -- to go up. Should we expect this margin to be more stable or flat, or we you expect to see more changes such as we are doing right now? We are prepared in terms of promotions till the end of the year, so that's a strength at the end of the year, so we will stick to that undoubtedly. On the other hand, like I said, high reinforcement of some categories in our stores, the goal is also to add more sales where we have higher margins.

Textile, for instance, the textile area (inaudible) margin significantly. And as we move forward grow and then we have very strong plan for year end. Our expectation is to have additional margin gain in these categories and this product mix can offset this higher price aggressiveness. Thank you.

Answering your last question, I would just like to comment that these launches are [Frank Milan], [CDD] and then Globex that we highlight in those press releases and not associated to any news recently announced, particularly to what we've been doing by KPMG.

Just a brief comment, just highlighting our official announcement. We have told you we are not going to be involved in kind of speculation for any media news that is not -- doesn't have any grounds. Just like to highlight this effort (inaudible) is due underway, and this is being performed by the big four company when it comes to auditing. This working is still underway, it hasn't been completed yet. And there is no kind of error or lack of consistency.

So obviously any payment or any operation involving Viavarejo right now or this quarter, obviously there is no relation whatsoever what is still underway and that is expected to concluded soon. These two posts are related to an association agreement between CDD and the Klein family, Ponto Frio and Casas Bahia.

This posting has (inaudible) with conditions (inaudible) in partnering process. Each partner is responsible for some contingencies generated prior to the partnership (inaudible) after the partnership, that's what happened. So I think it has generated both effects and also Casas Bahia which prior to the partnership were materialized only after that timeframe. And what happens right now is that the Company has to be developing these expense and that's why we have a positive posting of BRL26 million Viavarejo coming from the partners. And also negative posting for [GPE] due to the part related to GPE. So this can offset the Viavarejo. Over the year, here we have two different postings that are foreseen in the agreement, in the partnering agreement in order to protect the Company's sales, any contingencies for liabilities that were prior to the process that were reported by the partners. Thank you very much. Have a good day.

Marina Braga, Raymond James.

I would just like to go deeper into a topic or some of the topics mentioned by Quiroga, and that relates to the new possibilities or business plans for Nova Pontocom. More specifically, Quiroga, I wonder if you can comment on the entry of your travel business, what are you goals in that segment? Because this segment is very competitive if you think about (inaudible) and other players. So what about the marketplace model? And how is this going to improve the profitability at Nova Pontocom. So that's the first part of my question.

Good morning, Marina. Thank you for your question. First answering about our travel business. We've been in this segment for quite a lot of time now, several alternatives of entry. They include potential M&As and other potential opportunities. (Inaudible) business and we have three key models in order to create something a little bit unique in the market. So we are focusing on (inaudible) discounts, particularly for textiles. We are going to sell (inaudible) and also tickets. Travel tickets will be aggressive, but our focus is in the travel package.

And for that, we decided to become a travel agency. So over time we'll be expanding our operator package. We already have one, an operator that is very key in the Brazilian market, so we'll be joining forces. The agreement has already been entered into and we are testing right now.

Again we move to the travel segment, trying to explore it so we can have better margins. Particularly in our main segments I cannot disclose the margins right now. But I can tell you that it is higher compared to the margin we have in our main categories.

As to marketplace, like I said, this model already exists in the US, the marketplace model. And this model reassures a lot of cash generation and profitability. So how does that work? Basically, we make agreements with partners with good level of service and with good reputation and good level of (inaudible). And they become part of our assortment. So if someone visits our website right now we are not using our brands, but as of next year we want to include that model in our main brand. So we're going to use one brand at a time.

And we have a brand that is ideal to start with as of next year. As we're making use of the specific brand that we used in previous businesses to support our e-commerce in marketplace. So we needed to find out brand for this intermediary market. So we will be testing a bit over time. And in the fourth quarter you will find our main products in all our websites, Casas Bahia and others. And the policies will be very similar to what we already have in our current (inaudible) but next to our products we also add products from different channel partners. Right now we are selecting the big partner by category first.

We signed agreements with leaders of different segments like children's toys, babies, food segments, delivery. And it's important to highlight this launch that is very significant for us. It is the Extra delivery segment. That will be very helpful to continue the Extra brand. So this is unprecedented in Brazil. And our financial studies show that we'll generate and improve our model line and cash generation. So this is the proper model. We have been investing our time to build this platform. So our retail partners can understand what's happening, control the orders and also manage the whole operation in order to ensure a good level of service.

First you test the model, but we test -- that we believe it will be even better to improve our (inaudible) via the Company. Thank you.

Coming back to the second question about Assai. Assai improved its contributions in the Company's results. You said it should double from 7 to 14 states with Assai. Which states are you addressing more specifically? Could you elaborate on that? And will that happen over 2013? When will they be enforced? Can you share more details please?

Thank you very much for your question. Obviously I cannot disclose all the details because part of that will happen in 2013. This month we are inaugurating the first store in the state of Paraiba. The area covered is 12,000 square meters of build area and capacity is quite interesting. The store had an excellent performance the first month after its opening.

We wanted to double the size by 2013, but we have to date four construction sites, three will be inaugurated next month and then the others early next year. But I do want to disclose anything at this point. But I must say that we will double the number of sites for Assai by the end of next year. But it's more in the northeast.

In what region, could you tell me a little bit about that?

Well, it's mostly focused in the northeast. But also we have stores in the north.

What will be your competitors in this market?

The main competitor is [Apacardo]. They are present as well in the same states where we are. There is [Macro]. This also has domestic coverage. And there are some other smaller ones.

In the non-food segment it's also occupying the space of others, other companies. The raise of logistic costs that we have experienced in Brazil is becoming -- is strictly in this new business model. And now, even smaller competitors can play an important role because they don't need a lot of working capital but they can turn their products much faster.

Fabio Monteiro, BTG Pactual.

My question is about expenses, particularly at Viavarejo. I would like to hear from you what kind of opportunities do you see in the pipeline in terms of rationalizing expenses and even margin improvements in the next coming years for Viavarejo?

Good morning, Fabio. I will start answering your questions, then I will give the floor to my colleague from our expense committee. We are experiencing good results. But I would like to remind you that we still have a few opportunities for 2012-2013. And we would like to reduce things further. What's important to say is that we do see good opportunities for next year as soon as [Kagi] approves our profits.

Now I'll give the floor to Jorge who will be able to give you more information about expenses.

Let me just say a few words. Financial expenses, our process to reduce expenses -- I'm sorry, the sound is cut off. Fabio, I'm sorry, I think I will -- I should start again because the microphone was on mute.

Well, our expense reduction process started with the integration process where we saw many opportunities of obtaining synergies between the two companies. And as we said before this is a process that has been consolidating throughout the years. And it was this year that we were able to capture the benefits of this process. But as of the middle of the year we realized that we could move forward in that proposal to reduce expenses.

And so as Raphael mentioned before, we introduced an expense committee or target committee as people know it in the market. It's a committee made out of people that looks for reduction opportunities but also they seek for better control.

And the results of that process is, are quite interesting. And they are reflected in our Q3 results. And we know that as we get approval from Kagi they will certainly be other opportunities that can be tackled as well. We are specifically referring to logistics, to operations because we know there are still some additional opportunities to be captured. And after Kagi releases it's final opinion, we will certainly be able to do more about that.

Still talking about Kagi I would just like to take this opportunity to say that we have very good expectation. We hope that the final decision will come before the end of the year. And we feel that Kagi is very much focused towards solving this impasse until the end of the year.

They have asked us for further clarification, and that has been already sent to them. That's why we believe that the final opinion will come before the end of the year.

But, now, still talking about your last answer, what are you doing internally, I mean, what in your view, what could be a possible restriction imposed by Kagi? We know that there shouldn't be anything very vulgar or serious, but I would just like to have an idea of what is in the pipeline.

I mean, we hope that the opinion will be released without restriction. There were some limitations at first but none of these limitations will impact the business. And throughout process we had few moments where we asked them to be more flexible, and we were promptly heard. And so our expectation is that the final opinion will come with no restrictions.

Thank you. Thank you very much.

(Operator Instructions)

[Andrea Sumeria], JPMorgan.

I would like to ask you about Viavarejo. But I think the number one question has to do installment payments with no interest bearing or sales through a slip booklet, and what about sales and how is that performing?

And also when you talked about projects for new businesses, how can we affiliate that with future CapEx and also any expectations about when the Company will be next to Nova Pontocom and totally neutral positive?

Hi, Andrea, this is Roberto from Viavarejo. Thank you for your question. Well, you asked to refer to me the payment. In fact, we are still experiencing a very strong evolution in our pricing model. Well, installment payments with no interest, I mean in terms of credit sales it's stable. Credit card sales, as Eneas said at the beginning, is very, very stable. We are increasing our sales, and everything is being articulated in such a way that there is no impact in our final sales results of Viavarejo.

Well, thank you for your answer. Can you tell me what is the level today and was it last year in terms of no interest payment?

So credit card payment or sales accounted for 60%, non-interest sales, and today we are below 40%. We are still promoting a further reduction, and we've been successful. So we should expect better numbers in the fourth quarter.

Thank you. What about the installment payment booklet, doing the installment payment approach? There is increase in competitiveness in this kind of means of payment. Will you see that, any changes because of that process? What -- I know that the rates you have are very competitive compared to SELIC. What's the right moment to increase it? I know that if you look at year-on-year, there has been an increase.

Installment payment is something that is performing in a very stable way. But in view of everything that is happening in the market, we were able to maintain the stability of this means of payment. We are not seeing any major [stress] for this means of payment. Installment payment by means of a monthly slip. So it is still stable and with the same share.

What about other kinds of, means of payment or delinquency, is delinquency still stable?

I'll give the floor to Claudia to talk about that.

Andrea, thank you. In terms of delinquency I can say that delinquency levels are very stable and under control, no surprises in this area.

Could you please tell me what level of delinquency you have for installment payments?

Usually we don't talk much about it. But when you look at the balance sheet and our [CDDI] portfolio, we usually refer to 6.5% to 7%, and this is what we've been keeping. Even though delinquency, historically speaking is lower, is lower reaching, the utmost low of 6.5%.

And finally, I don't know whether Quiroga can tell me a little bit about e-commerce, CapEx and cash flow.

Yes, Andrea, thank you for the question. This year our CapEx is below 1% when compared to net sales. Usually historic levels were 2%. In the fourth quarter with the launch of new businesses will be below 2%. Next year it will be around -- I mean, between 1.5% and 2% if net sales. And the cash flow will be higher as of next year because we are making launches this year but next year we will benefit from all of these launches. So thank you for your question again.

[Hugo Rodriguez], Goldman Sachs.

To conduct all these plans in that cash flow of Nova Pontocom, what are the CapEx expenses that you anticipate? Maybe not only for 2013, but also from now on so that you can indeed put together a technological platform. And what are the investments necessary for the logistic side?

Thank you for the question. Well, these are not in absolute values but our sales will be total about BRL4 billion but it will be about 1% to 2% in terms of CapEx net sales for this year and next year, at the most 2%. So for the next year we anticipate growth. But in terms of investment, we are already contemplating investments in logistics, in technology and also new businesses.

Historically, we're -- in percentage terms or also absolute value investments were low and we were able to make the business grow at the speed we mentioned, reaching BRL4 billion this year. This is very different when you compare to the rest of the marketing percentage terms, we are investing in people in a very consistent way, and that has proven to be very assertive. Thank you.

Juliana Rozenbaum, Itau BBA.

I would like to learn more about Assai's positioning. In a certain way, Assai is going back to its origin. It is focusing -- I mean, after [floating] with the end consumer now we understand that you can have better margins with the processor, and what was the capital invested in CapEx? And how do you see the return on the invested CapEx with this new focus on the processor and whether this is the kind of profitability level that we can anticipate from now on, and what is the return of this investment? Thank you.

In fact, Assai grew, as we found it, in Greater Sao Paulo with the features of its geography. The changes that we implemented were more towards extending our target audience to embrace -- people will utilize merchandize, and resellers like mini-markets and other that will not use the product for processing, they will resell it.

It does not reflect the position a few years ago what the situation is today. We changed the positioning because the business has characteristics that were only applied to Sao Paulo but once transported to other Brazilian states it did not have the same appeal. So the change was to make this business model much more assertive and much more adequate.

We had to do a very heavy assortment review. We have two new --- 2000 new people involved. We changed some sections and closed some others to decrease the presence of consumers in terms of buying lower volume tickets and companies be it processors or resellers, and as a secondary audience we have consumers especially those who buy a lot of volumes or buy for some particular celebration like birthdays, et cetera. So we changed the positioning of Assai, changes were made to the business model, and that was applied to certain stores. What we started to execute now is the second phase of this work in new store format.

We had smaller sales area and lower inventory positions. But now in terms of equipment and how these stores operated, all of that has changed. So logistics and inventory levels changed as well.

We used a new business model. Our expectation is that with this new format we will be able to see very positive impact in the results of Assai. We have logistics that have a cost. We were able now to introduce better storage areas and at the same time promoting lower expense level. We are working with operating expenses of around 10% to 10.5%. Part of that is also impacted by investments in people who put all of that in place. And this new format, I mean, we are still considering the low digit, two digits.

Thank you very much. But before I conclude I have two other quick questions. In many --- I'm sorry. I forgot the word. After you refurbish the stores to suit the mini-market concept now, so including the organic expansion with new stores what do you think could give you a much better margin gain? Maybe you can tell me what kinds of margins we should expect.

Juliana, good morning. Here is Roberto. First of all, we are very confident about our new positioning with Minimercado. Now, in terms of the margins of the business, we are still operating only in Sao Paulo. So it's a very limited geography, but we also want to grow into other geographies. And to do that, I mean, we have to look at other implications such as logistic costs, et cetera. So currently we are restructuring the future growth. So it will be a little premature to talk about the final margin at this point.

However, this is a business of lower sales, and the margins are also lower when compared to the retail average but the potential to grow is very significant and at a low investment level. And this will allow us to, even though we will have margins below the retail average, the return on invested capital will be very significant.

And my last question is just out of curiosity, the launching of delivery, don't you think that it cannibalizes the brick-and-mortar store or the delivery consumer will end up by migrating. Part of the shopping will be at Extra and the other part will be at Pao de Acucar?

That is something that may happen, but I've -- we've been also telling you that we have consumers that operate in multi-channels. They can meet their needs by many different channels. They interact with Assai, Extra and Pao de Acucar. And what we want is to just guarantee that the client will be with us no matter what channel we use it.

Of course, we have to look at the cannibalization amongst the different businesses. What matters is increasing the share. Pao de Acucar has a very, very specific audience. And Extra is different because Extra expands the base very much not only in Sao Paulo but also we also see opportunities to grow that throughout the country with very high brand strength not only focused in the cosmopolitan audience coming from Rio and Sao Paulo. I believe that we can expand that a lot.

So if there is some cannibalization, the expectation is that we will be able to add new sales with the food delivery business. Not only that, but we will be able to strengthen the Extra's position in the online world. And outside the large metropolitan areas the stores will also have distribution for the online customers.

Well, on the food side at first Sao Paulo and Rio, but we are -- we also foresee the expansion into other locations where Extra is present. In terms of cannibalization, well, my view is a bit different, and what is interesting is that the flow of digital customers, they are already accessing Extra.com, so we have a lot of people accessing the market online, especially in Sao Paulo.

And another interesting piece of information is that when we look at the three brands and the overlapping of the brands and talking about cannibalization, it's overlapping. Between the two brands it was only 2%. So we have similar products, but we are working towards making greater distinction to differentiate the stores. And once as products are very similar it is natural that you see an overlapping. But we see people buying other Extra products now online. Thank you.

The conference call for Grupo Pao de Acucar is now concluded, and the officers from the Group Investor Relations will be available to take any further questions that you may have after the conclusion of the session. Thank you all very much.

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.