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Companhia Brasileira de Distribuicao (NYSE:CBD)

Q3 2013 Earnings Call

October 18, 2013 10:00 am ET

Executives

Daniela Sabbag - Investor Relations Officer

Enéas César Pestana Neto - Chief Executive Officer and Member of Stock Option Plan Management Committee

Christophe Jose Hidalgo - Chief Financial Officer and Corporate Services Officer

Alexandre Gonçalves de Vasconcellos - GPA Malls & Properties Officer

José Roberto Coimbra Tambasco - Vice President of Retail Business and Member of Stock Option Plan Management Committee

Belmiro De Figueiredo Gomes - Wholesale Officer

Francisco Valim

German Quiroga

Vitor Fagá de Almeida - Former Investor Relations Officer

Analysts

Andrea F. Teixeira - JP Morgan Chase & Co, Research Division

Fábio Monteiro - Banco BTG Pactual S.A., Research Division

Tobias Hansen

Alan Cardoso - Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division

Irma Sgarz - Goldman Sachs Group Inc., Research Division

Operator

Good morning, and thank you for waiting. Welcome to Grupo Pão de Açúcar's conference call to discuss the results for the third quarter of 2013. This event is also being broadcast via webcast, and it can be accessed at www.gpri.com.br and at www.viavarejo.com.br/ir where you can find the 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 releases about the company's results are available at their IR website. This event is being recorded. [Operator Instructions]

Before proceeding, I would like to mention that forward-looking statements that are being made 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 GPA's management and on information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, they depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors may also affect the future results of GPA and could cause results to differ materially from those expressed in such forward-looking statements.

Now I would like to turn the conference over to Mrs. Daniela Sabbag, Investor Relations officer of the company.

Daniela Sabbag

Good morning, everyone, and welcome to the Third Quarter Results Conference Call. Today with us, we have Enéas Pestana, our CEO; our CFO, and all the business orders of GPA. I would like to remind you that we are in the silent period regarding the offer of the Viavarejo and therefore, we will limit ourselves to what can be discussed during this call. And before we start the presentation, I would like to give the floor to Enéas for his opening remarks.

Enéas César Pestana Neto

Good morning, everyone. It is a pleasure for us to be with you. Thank you very much for participating in our call. And here, we have the main officers of the company that came to talk to you and to clarify any doubts that you might have and with the limitation that Daniela referred to regarding the silent period, so I count on your understanding. It was a good quarter with acceleration of our sales in spite of a scenario that was forecast as not being very good. And in spite of that, we were optimistic, and this is an optimism that is based on a strategy and not on wishful thinking or a dream. So we have a very clear strategy, very well-defined -- and a strategy that has been in place ever since we started this 3, 4 years ago, and some of them have already been mentioned at the beginning of this year and I will be talking about them further.

So acceleration of sales, vis-à-vis, the first quarter, and this shows the company has consistency of results because this stems from a strategy that is being very well executed.

Regarding our team. Our team is extremely competent. They are all very seasoned and very well organized in terms of management and strategy. And therefore, they have been carrying out a very good job, overcoming difficulties and reaching their targets, and I'm very pleased with the team that we have in place, and this is the first call that we have with the participation of Ali [ph]. I'm very happy. He came on board a short while ago. However, he brought a lot of knowledge to the company and he engaged with the company very quickly. And together with Dezob [ph] and Vitor and all the others that are with him there, they are doing an outstanding job with the execution of the plan and the strategy that we determined last year. And for the first time, we will have the participation of Ali and I hope it will be the first of many, many to come.

Still regarding the strategy, I would like to make one remark that I think will help you understand the issue of competitiveness. Some people ask if the strategy of competitiveness and price management in a structured fashion has anything to do with the macro scenario. Not necessarily. What we are doing is a classical retail operation. We are a retail company, a distribution company and the health of a business such as ours depends on our competitiveness.

When I talk about the structured competitiveness strategy, this means that first, it has to do with intelligent pricing based on information, based on knowledge and with diligence in the category management and in a very careful fashion, in a very intelligent fashion, always working with the mix that takes into account, first and foremost, our client, which is the core of everything that we do, but also all the issues having to do with specificities of region, et cetera, so that we may really transform this into a clear perception, a concrete perception for our clients.

And we have totally competitive prices in all businesses, in all categories and in all locations.

Our strategies are being executed in a very careful manner and with a lot of assertiveness as well. We know our businesses not only include retail but also in Assaí and Viavarejo and also at Nova Pontocom. And this is the basis of the sales group that we have been delivering and that you have been analyzing and proceeding and in a consistent fashion.

In a macro scenario, of course, that is not very helpful. The macro scenario exists for everybody and what we try to do is within this macro scenario or within any other macro scenario, we have to do our job, and we have to do a job with a lot of attention, with our best endeavors and in a consistent fashion with our strategy and our competitiveness strategy is supported by efficiency gains.

We do not have a more aggressive strategy in order to look for market share and for volume increase. We don't do this to the detriment of our profitability and to the detriment of our return on equity. Our strategy is based on effective control of expenses. And that may generate, in an intelligent fashion, the value which is necessary so that our competitive strategy may be consistent and ongoing. This strategy is here to stay because it guarantees the health of our business. So we are doing this and we will continue to do this very well.

So having said that, I would like to talk about some figures of our consolidated results. Very robust growth in our sales 15%, for our total stores it swings toward 10.8%. This is an outstanding growth in this macro scenario that I have already referred to and that is not favorable, and we see still, a consumer market that is robust, the robust domestic market. And more selective, more careful, but in a strategy such as ours, with the right price, the right variety, we are able to make our sales and deliver very good service to our clients, and this is how we will continue.

And still talking about our figures, you can see that our expense control brought about a reduction in our expenses, dropping by 60 basis points on a year-on-year basis comparison. And with that, we have an increase of 7.4% in our EBITDA. And in our net income, we see BRL 417 million, 2.5% net margin, vis-à-vis 1.7% last year.

In terms of our investments, our investments were close to BRL 450 million, reaching BRL 1.3 billion for the 9 months or the year-to-date.

In the number of stores, 132 new stores in the last 12 months. For the quarter, 20 new stores, and this continues. Our cash innovation is very healthy and this -- our work is not limited to expense control. It is also a very effective and assertive work, which is being led by our CFO, Christophe, in the control of our working capital, and this has been giving us a very good contribution to our cash generation.

So we are prepared to continue an aggressive investment plan and looking for our guidance for this year. So I think these are the macro points that I wanted to mention to you.

So I now -- I would like to give you more details and for this reason, I would like to ask each one of our business owners to give you a more precise and detailed information, and I will stay here to participate in the Q&A session. I would like to give the floor to our CFO, Christophe.

Christophe Jose Hidalgo

Good morning, everyone. Let's start with Page #2 of the document. For the period, the opening of 21 new stores, gross leasable area, as you can see, representing 71 new points of sales.

And same-store sales reached 10.8% increase in the quarter. In the food category, 7.9% and nonfood categories as well, growing by 13.1%.

And also the results of our expense control and EBITDA growth of 30.4% due to the strategy of simplifying processes in GPA's Food. And net income, up 69.8% during this period.

Now regarding the outlook for the 5 businesses of the GPA group. The outlook for this period for Food Retail will be reinforcing the competitiveness on all categories and also in this communication strategy and also discipline in the implementation of our strategy.

Assaí EBITDA margin recovery due to the focus on expanding in states where it is already present and Viavarejo will continue to carry out its initiatives for optimization expenses and e-commerce. Strong sales growth for the next few periods and strong gross leasable area expansion; the goal is 35,000 square meters additional by the end of 2013, of which, most of it have already been delivered in the last 9 months.

Now let's go to Page #3. And here, we have the main financial indicators for the group. In the first 3 quarters of this year, sales exceeding BRL 15.7 billion in Q3 '13 of 15% growth total and 10.8% same-store sales growth.

And for the year-to-date, more than 45.6 and with 12% growth and same-store sales, 8.3%, as you can see.

EBITDA exceeded BRL 1 billion. It was BRL 1.036 billion, a 30.4% growth. And also, a 90 basis point improvement in the EBITDA margins, 7.4% in the period from 6.5%.

And lastly, net income reached BRL 357 million. And as we said, is stemming from the permanent discipline in all our businesses, net income growing from 48% [ph] to 86.2% with this growth, vis-à-vis for this year and the year-to-date indebtedness.

The continuous deleveraging of the company is confirmed in the third period of the year. And in fact, the group deleveraged in a relative fashion 3 or 4 [ph] from the EBITDA on reaching a net BRL 4.7 billion net debt from the BRL 250 million less than, or being less than what we had in the previous year on a year-on-year basis. And now, we were able to maintain also net financial expenses close to 2.2% of our net sales.

Now let's go to the next page, and now I would like to talk about the opening of 15 new stores, 12 Minimercado, 2 Assaí and 1 Pão de Açúcar. And we have a little bit more than 1.6. We have 976 stores and sales area of over 1.6 thousand square meters.

In Viavarejo, 5 new stores were opened, 3 Ponto Frio and 2 Casas Bahia, with 975 stores, 1.4 million square meters of sales area.

Now I would like to give the floor to Alexandre who will be talking about GPA malls.

Alexandre Gonçalves de Vasconcellos

Good morning, everyone. As we have been seeing in the last few quarters, this is the real estate hour of our company, our primary goal is to take care of the expansion of GPA Food. We are positioned as a business unit and we have to generate recurrent revenue from our commercial spaces. We need strategically to upgrade these spaces by means of convenience. And this goal of creating convenience by means of the opening of GLA and rental of our gross leasable area, our general results are consolidated here in the results that you have already seen. So we can see that we have created at last quarter, 18,000 -- 18,500 new gross leasable areas, with the creation of new commercial centers together with our extra windows [ph] Minas Gerais. In Minas shopping, we opened the first stage with diversity of the space, allowing a space for the students and this generates revenues for us up to the end of the year.

We will have concluded the second phase, and this venture will receive the second phase and like we opened this year in the last 9 months, we delivered 32.6 million square meters of new gross leasable area, and this gives us a guarantee that we will have 280,000 square meters of gross leasable area by the end of the year.

Now I would like to give the floor to Christophe.

Christophe Jose Hidalgo

So we see the financial performance of the Food Segment. And here, we have on de Açúcar, Extra and Assaí. And we also confirm accelerated growth in the period, BRL 8.4 million and growing by 13%. And the year-to-date, we had growth of 10.8% in sales.

The EBITDA, BRL 546 million and reaching 7.1% in the third quarter and 7.2% EBITDA margin in the year-to-date.

The net profit, we also had a positive performance, BRL 176 million. Net margin, 2.3% of sales, growing to BRL 554 million in the year-to-date, 2.5% up.

The net margin of 2.5% of net sales in the Food Segment.

I'm going to pass the floor to Tambasco, who is going to talk about food retail.

José Roberto Coimbra Tambasco

Good morning, everyone. Talking about retail, food was the extra adjusted [ph] for brands and Enéas has already given you an overview of our plan to increase competitiveness so that we can create more flow into the business. The highlights that we've got here in the third quarter are good sales performance as a consequence of the plan and virtually all brands and locations. And we had a first half year with a good performance in food, but somehow cheap in nonfood, particularly in cheaper supermarkets. And now, in this last quarter, the third quarter of the year, we see a nonfood performance in line with the food category. And this happened because in the first half year, we suffered with the performance of these categories owing to migration of lower tag products. And I've mentioned the sales migration of netbooks and PCs and tablets. This is where exactly where we were betting the sales would grow, and this has become more apparent. And so, we've had growth over the past 2 months in excess of 2 digits.

Our purpose in these 2 brands, Pão de Açúcar and Extra, is to keep up with this policy, pursuing greater efficiency and the control of losses and pursuing efficiency in the operations. And therefore, ensure investments to improve our operations at the stores and to be price competitive so that we continue growing in terms of client traffic and market share. And like Enéas said, this plan is part of our daily routine. And over the past third -- this past quarter, the third quarter, we posted positive results in expense cutting, which enables us to reinforce this plan to grow sales.

Now I pass the floor to Belmiro, who's going to talk about Assaí.

Belmiro De Figueiredo Gomes

Thank you, Tambasco. In the third quarter, we had strong sales growth, 37.7, moving from 1.2 bp [ph] from the third quarter 2012 to 1, 73 and this was a result of strong growth in same-store sales, but particularly owing to the expansion that we saw over the past 2 months. This increase, in addition to the sales volume, we have to talk about the growth in numbers of clients seen by Assaí in this quarter against last quarter with 30%, which shows great acceptance of the stores in expansion process, particularly taking into consideration that we've doubled the number of states. We're now present in 12 states rather than 6 as we had last year, so these are new states. But we've had excellent acceptance by the clients, which is our focus in these new locations. In the quarter is the most -- the elements responsible for the growth was exactly that. And we had increase of 2.1% in net profit, expenses 3.9%, also impacted by operating expenses owing to the new store openings.

When we see same-store sales, expenses dropped by 0.33%, and our pursuit of that expenses that the group has done.

We are very much focused on the expansion of Assaí. The market has shown to be very receptive to our model, which is cash-and-carry. The segment as posted 16% growth and Assaí has grown double that. For the year-to-date, we have more than 33% growth, increasing GPA's position in the segment. We expect the fourth quarter to be strong, with new store openings. We opened a new store at Feira de Santana in the 34th Avenue in operation, and we are focused on expanding and opening at least 5 new stores, reinforcing our positioning on this market.

Thank you very much. And now, I pass the floor again to Valim of Viavarejo.

Francisco Valim

Thank you very much, Belmiro. To me it's a great pleasure to be here for the first time to take part of the [indiscernible] team, particular in the quarter that is bringing excellent news at Viavarejo. In this semester, we had same-store sales growth of 15%, year-to-date 11% growth in sales, which leads us to believe that we have grown market share in a significant way, showing that with EBITDA and profit. We see a significant growth well in excess of what we had in the past. EBITDA with margin of 7.7% grow and growing and 67% up from this quarter last year. And income grew 326% comparing with the same period last year and income over in the year-to-date in 2013 is greater than for the entire year of 2012.

And this growth has been very assertive for our people had been able to capture special commemorative days and even more complex days and holidays that coincided with weekends. Our commercial strategy was very well implemented, ensuring that sales would grow in this quarter.

In addition, we have managed to control cost, as you can see on Page 7. And brick-and-mortar stores could expand their sales. There was a significant cost reduction focused particularly in logistic costs, IT and telecommunications costs, service contracts and other administrative expenses, causing the margins, as you can see on the chart, grew in the same proportion as expenses fell, which is a clear signal that we continue to be aggressive and growing the bottom line, but focusing strongly, our cost structure, keeping competitiveness.

I'd now like to pass the floor to the star of the day, Quiroga.

German Quiroga

Thank you, Valim. It's a pleasure to be with you. Okay, Nova Pontocom had a wonderful quarter. We increased client traffic and commission rate and we had a fantastic result. We had more than 44% growth year upon year, which is double the growth of our markets. It was a very good result.

But the most important is that we have planned profitability so that we'll close the year in the breakeven point. And our growth is supported by the improved process or process improvement and the control of fixed expenses. We have also increased our service revenue and we're having very good cash creation. Our service level is still much better than the competition, which is certified by the Examy [ph] award that we had received and the best company in terms of client satisfaction. And among all the companies, it's the first time that an e-commerce company goes to the first ranking position, and this confirms our focus on the client.

And in this quarter, we concluded the streamlining of our operation cost and our service in the Northeast has improved considerably. This is in Bahia and there was a synergy with Viavarejo. We also have a pipeline in new regional services for the coming years, all of them with synergies with Pão de Açúcar.

Now, I'd like to talk about the achievement, which is the Nike account in Brazil. We had lengthy negotiations. Nike is present in a number of countries and they sent teams to assess our operations, and we like it when the assessment is strict. And this contract is for the next 3 years and will include the World Cup in Brazil.

The Nike store is already live. It took us a year to put it on air or to take it live. The store is beautiful and there's this invitation for you to see it at www.nike.com.br.

And Nike joins another 30 companies that are operating in Brazil: HP, Amazon and Pão de Açúcar as well, which has our technology. And lastly, I'd like to thank the team of Nova Pontocom, a team that really brings lots of pride to us and to the Pão de Açúcar group, and I'm sure we can make a difference if we work together.

Now, Daniela.

Question-and-Answer Session

Daniela Sabbag

Now we can open for questions. Now I would like to open our Q&A session. Please ask all your questions at one same time. [Operator Instructions] Our first question comes from Mrs. Andrea Teixeira from JPMorgan.

Andrea F. Teixeira - JP Morgan Chase & Co, Research Division

The first question I have is about the Baratiero operation. If possible, I know that you are in a silent period now, but I would like to understand what this could bring in terms of synergy to you. And also regarding Nova Pontocom at the evaluation that was made, I would like to know more details. What were the evaluation criteria? And the other question has to do with your results. The outlook that you mentioned is very good regarding Q4, and it seems that you are quite well prepared in terms of inventories until the end of this year. So how do you see the end of the year and could we believe that we will be achieving the same growth level in your sales for Q4?

Enéas César Pestana Neto

Valim will be answering your first question regarding Bartiero and afterwards, we will be answering your other questions.

Francisco Valim

Now talking about Bartiero, your first question, during the general assembly that will be held on the 31st of this month, it is -- well the signs of that, the option exercise will be approved. But of course, this depends on the CADE approval of the process, and we have already made a consultation with CADE. And we understand that today, we consume 100% of Bartiero's production in the Viavarejo and Casas Bahia stores. And the idea is to continue to explore this furniture market, because we believe there is a very interesting opportunity to increase our share in this market. So with this situation, the Bartiero deal should be approved by the board and then we wait for the CADE approval as well. Now regarding the outlook for the year, you see that in Q3, we had demand, as Enéas said, which was a major one. And with this kind of demand, we will continue to gain market share, as I said before, and we see no reason whatsoever to expect any slowdown or a downward trend by the end of the year.

Andrea F. Teixeira - JP Morgan Chase & Co, Research Division

What about Nova Pontocom? Any gains expected in your synergies because the participation now is already aligned with Viavarejo? Could you say a few words about that?

Enéas César Pestana Neto

Andrea, this is Enéas. We will continue to do our job. And by that, I mean we will continue to capture all the synergies that we see and developing our strategy in a structured and aligned fashion as you read in our material fact that was published yesterday. Now, we have a more clear alignment and with the development also of an operating agreement, that will help the strategy of each one of our businesses. This will continue, yes, and we place our faith in the possibility of capturing even more synergies over time and guaranteeing our multichannel operation, which is a major step, or the major step in our strategy from now on. You asked about the evaluation criteria. We cannot talk about that. What we can tell you is that we reached a fair value. That's all I can say because we are in our silent period.

Andrea F. Teixeira - JP Morgan Chase & Co, Research Division

And what about Assaí? I would like to know about the investment that you have been making in terms of beverage and also in the food area. What -- this investment was offset by the lower operating expenses, but I would like to know if these means a new positioning on your part, and whether this should be expected for the future.

Enéas César Pestana Neto

Thank you for the question. Assaí is expanding, and this is a process, and we are getting to other locations, so we have to make investments. And after the investments, then you start stabilizing. And also, you have a different mix of products and we have different needs on the part of our consumers. So we have to adapt our brands regionally [ph] and there is a maturation period for the investment. And the beginning of the year was more difficult. And for the second quarter, we concentrated in the states that we already have our stores, however, with the opening of new stores as well, so we have a very strong expansion process going on. So they are, as expected in terms of results, in terms of expense reduction and same-stores also have been improving efficiency levels, efficiency ratios. So in Q4, we will then have 5 new stores and we should expect a strong increase in our sales and better margin levels and more similar to the ones delivered in Q3.

Andrea F. Teixeira - JP Morgan Chase & Co, Research Division

And Enéas, going back to Nova Pontocom, what changed? Could you tell us the main point of change?

Enéas César Pestana Neto

In the shareholder agreement, practically nothing. Some things regarding resources at corporate governance, and the establishment also of the 2 new committees that will be very useful and this will be very good to guarantee better levels of governance and also the tracking -- or the proper tracking of our strategy. On the other hand, it will give a very good contribution to our alignment because the capture of synergies is very much aligned with -- it has -- the changes have to do more with the operating agreement and not the shareholders' agreement. And there is nothing different from what you can expect from a 3-year learning process. 3 years ago, it would have been impossible to do this. But 3 years later, working hand-in-hand and learning what we have learned, we were able to understand this very clearly and now materializing this in this operating agreement and carrying out this development in an aligned fashion between online and offline. And this agreement is very good in this regard because it is based on the learning curve that we had during these 3 last years, Andrea.

Andrea F. Teixeira - JP Morgan Chase & Co, Research Division

And I understand that you are already using all the tools that will be useful, and I believe that now are totally free to develop.

Enéas César Pestana Neto

Yes. This is how you should make -- and we can guarantee that this will happen, working very strongly on the multichannel strategy. We have already done the pilot, and as soon as we conclude our test, this will be an area and we intend to roll out and develop this initiative. But it is exactly what you said.

Operator

Mr. Fábio Monteiro would like to ask a question.

Fábio Monteiro - Banco BTG Pactual S.A., Research Division

I'd like to go into SG&A for Extra and Pão de Açúcar, Tambasco has talked about this a bit. But the G&A fell 9% and selling went up in line with sales. But I'd like to understand what exactly was the improvement. If you could shed some light on it to understand the SG&A on sales, if there's room for improvement or higher dilution of expenses for the coming years, specifically for Extra and Pão de Açúcar?

José Roberto Coimbra Tambasco

In fact, this pursuit for greater efficiency in expense control is something that started earlier this year. Obviously, we see now this result owing to an improvement in sales performance and precisely because of the investment that we've made to improve competitiveness. Now what we've tried to do -- in fact, we have 2 major fronts. One of them is to seek store efficiency by implementing few technological improvements that will ease our funds to improve customer service and have more effective service. And this also requires investment in logistics and in the supply systems of the stores. But also, because the company is focusing all projects on what can add value to the store, our major focus. So actually, we've made choices that some projects that would not have a direct impact on store performance would be less desired, because we really want to have an impact and to add value to clients and to business results. Now from now on, this is the focus. We are seeking efficiency gains, we are seeking to gain synergies with the other businesses and among the various brands as well with the delivery of Extra and Pão de Açúcar, we are tapping the synergies between the businesses. And the expectation is that we will continue after the improvements and always with this focus, all the expense reduction and efficiency gains should have a positive impact on our competitiveness, price competitiveness and customer service at the store.

Fábio Monteiro - Banco BTG Pactual S.A., Research Division

Another question about Viavarejo. Valim talked about the growth in market share and it's obvious that there was a market share gain in Viavarejo. But I'd like to understand, where do you see where this gain has come from? Obviously, in the new locations, in the Northeast, where you're snapping up share. But I'd like to know whether there's any other region, São Paulo -- São Paulo is a location where you have -- where your growth is on an even keel with the rest of the market. So do you see any players that are getting more small regional players. If you could talk about this, even if qualitatively, about this gaining market share.

José Roberto Coimbra Tambasco

This market share gain is happening in every region. We cannot say that there is a highlight region. Obviously, the Northeast is growing faster, but also because proportionately, we have more stores in the Northeast and therefore, growth is stronger and -- although the market share was smaller. But we do not have precise information because -- and the general impression is that there is an uneven growth with the highlight on the Northeast.

Fábio Monteiro - Banco BTG Pactual S.A., Research Division

Okay. Just another very brief question about Viavarejo. The weight of the booklets was falling, and now it fell from 15 to 12.7. And I'd like to understand, in terms of strategy, if we can expect another full -- what do you think is happening?

Vitor Fagá de Almeida

Well, this is Vitor, Fábio. Yes, you're sure -- you're right, there was a smaller participation of payment books and cards and the means of payments in favor of an increase in the cash payments. So that was around, 25%, 26%, and now it's at 29%. We believe that this resulted from a change in product mix and specific campaigns, specific marketing campaigns and the commercial strategies that attached priority to items which have a more suitable assortment for this kind of means of payment. It's not a trend that cash payment will grow above 30%, and as well as a more drastic reduction in the use of cards or payment books. We expect these levels -- we expected these levels to be the same for the coming quarters.

Fábio Monteiro - Banco BTG Pactual S.A., Research Division

Okay, great. And just confirming, this fall in payment books, this included Nova Pontocom? The statistics that you've shown also include Nova Pontocom,

Vitor Fagá de Almeida

Yes. This participation ended up being impacted by the fact that Nova grew a bit more.

Operator

Tobias Hansen from Crédit Suisse would like to ask a question.

Tobias Hansen

I would like to understand something. The level of competitiveness that you reached now in gross margin and in food, have you reached the point that you wanted to reach? Do you intend to maintain it? Or as Tambasco said before, he said, "Well, we have to reduce more expenses and we'll go further -- become more competitive. So your margin is already much better. You are more competitive than you were in the past. So are you satisfied with this level, or are you going to reach another level because of initiatives that you have implemented recently?

José Roberto Coimbra Tambasco

Tobias, this issue of competitiveness has always been relative to the market. What I can tell you now is that we have reached the level of competitiveness that we consider as very good, but there are changes in the market. This is dynamic and our job is to be prepared to further increase our competitiveness if the case may be and reduce the margin with no impact whatsoever on our results. What I can tell you is that both from the viewpoint of Novo prices and the activation that we have been seeking, we try to increase our activation to make our source more aggressive. So I would say that our level is very good, vis-à-vis, our main competitors. And what I am telling you is what we see, not only in São Paulo but in all the other states where we have stores. And in this business, we have to be ready. We have to be ready to face any reaction on the part of our competition. And if we have to do something else, we will do something else.

Tobias Hansen

Are you being more promotional on certain gauge and events or products or categories, or in general, you are repositioning your prices, I would say your average portfolio? And one last question, please. The change is very big from one year to the other, especially for a company the size of Pão de Açúcar. So you thought that would be the right moment to lead this movement, because it didn't seem -- well it didn't seem to us that the market was so promotional. It is more something that started or was started by you.

José Roberto Coimbra Tambasco

Tobias, regarding whether we were the first to do this in the market and whether we are leading this market, well, 2, 3 years ago, Pão de Açúcar had a very strong growth, and our main competitors were less present. And in the last few years, this changed. However, this was not a decision that we made as a reaction to the market. We made the decision to look for more efficiency so that we could guarantee that the company would be always ready to cope with any kind of situation, any kind of competition, any kind of market situation, and whether in good times or bad times, further improving our competitiveness. And when we talk about competitiveness, it isn't only prices. It has to do with better conditions for our clients, the conditions of our stores. And we have been investing quite heavily in our stores to give our clients a better and better purchasing environment. From the general viewpoint, of course, each one of our brands, each one of our banners, each one of our markets has a different strategic view, either by category or more promotions in a certain location. And the price movement is in all categories, both in the regular prices and also in the promotional prices. Of course, our focus is always on what really makes sense to Pão de Açúcar as a whole and for Extra, and the situation of Eletro, where we really needed to have a bigger endeavor, and we have been able to do that in our hypermarket. So this is on a monthly basis and we further adjust for our competitiveness. We do all the necessary streamlining to achieve competitiveness.

Operator

Alan Cardoso from Bradesco S.A. would like to ask a question.

Alan Cardoso - Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division

I have a few questions. Quiroga, during your presentation, you talked about the prices in Q3 of Nova Pontocom and how you financed the price reduction. Could you give us more details about that?

German Quiroga

You remember that the market was very competitive and we talked about that. And basically, what we were going to do is to preserve our profitability. But we have to prepare ourselves also for further competitive environment. And of course, we were not going to wait growth, quite the opposite. And we said that Nova Pontocom has a very lean -- or had a very lean cost structure, and we have been further improving this on a year-on-year basis. And we also had the opportunity of synergies with the group also in the commercial area. So it seemed to us to be more intelligent, to be aggressive because our competitors were operating at the break-even point. And so we started to prepare ourselves. And some time ago, I said, well, continuous process improvement is something important, and this is what we're doing. We are automating our processes more and more with algorithms and in supply of pricing and purchasing and procurement and many of our processes. And this allows us to be prepared for a higher or approved [ph] scale in our business. And the order of magnitude that we have today, 5 billion, is even higher than we had in Pão de Açúcar before. We have just finished our CBD, a very healthy CBD. This is a very good moment to establish CBD when the company is going well and also, process improvement. Our level of services have been improving. E-commerce is one of the channels and other channels as well, so we have the highest profitability there. And with the help of Pão de Açúcar, it's being financed in Grupo Pão de Açúcar, we have been improving our cash and we adopted many actions to improve our competitiveness. It is going very well, and I would like to thank Valim for coming on board and Tambasco and Diniz. And the synergies have to do with the prices and other strategies, so not only pricing. And we are getting better and better prepared in order to tap into these synergies.

Alan Cardoso - Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division

The second question has to do with the working capital of the food area and the inventory levels. And

[Audio Gap]

with the slight decrease now -- and have you changed your strategy, vis-à-vis, your suppliers and your inventories?

German Quiroga

The situation doesn't mean that things are deteriorating. There are a number of factors. The opening of new Assaí stores and obviously, we have to increase inventories. And this doesn't mean that the situation is getting worse. But there is the preopening inventory that we have to carry, so we carry inventory even though the store has not opened yet, and this has an impact. Another situation that I could mention is the preparation for end-of-year retail sales, and we are prepared, we are stocked up, and it doesn't mean that we are using working capital. This inventory increase is being financed by payment terms offered to suppliers who are rephrasing it. The decision to up inventories does not impact the need to use working capital. And this is a decision that was made in preparation for year-end sales, and also taking into consideration the support the Group provides to Assaí stores opening. Well, in the case of Assaí, we have a strong campaign for the anniversary and a few store openings that are happening. We've had one early this month. One of the characteristic of wholesale is that we do not need to have a logistics and the DC structure to supply, because we receive straight from suppliers. So there is a period to form inventory before inauguration. So this is about 30, 40 days before. So this movement, I mean, the inventory is going up, is natural. When we look at turnover and average sales, average purchase terms, we see that we are in line and in the case of Assaí. So there's always this growth in inventory for end-of-year commemorations and store openings.

Alan Cardoso - Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division

And last question, could you give us more details about the strategy to spur the price competitiveness in food? In fact, are you focusing on specific categories, or -- and do you think there's a disparity among regions? So what's the intelligence behind the price reduction?

José Roberto Coimbra Tambasco

It's Tambasco again. Well, Fábio had asked about this already. I have a team, around 180 people, who spend the whole day doing market research and research in product assortment and exposure at the store. So there's a technical team that helps us and provides us with the information that we need to have the best product mix at the best price range. Obviously, we always look at the traditional pricing for each category. And then when we -- when we include promotions, we have to highlight a few points so that consumers can see the change. So yes, at certain moment in time, you can have certain categories with stronger promotions. But this is always the purpose, that they see the category as a whole. So this is not an isolated movement with a single strategy. This is part of the whole strategy that deals with assortments, promotional pricing and exposure at stores. And obviously -- or at a store display. Obviously, this depends on the store model. What you do at Pão de Açúcar is completely different from what you do at Extra. And also taking into account the competition, consumers behavior in each of the regions as well.

Operator

Irma Sgarz from Goldman Sachs would like to ask a question.

Irma Sgarz - Goldman Sachs Group Inc., Research Division

I have 2 questions. One has to do with Nova Pontocom. You are delivering a very strong growth, and I would like the remark that you made about your competitiveness in terms of prices and with the situation that you described in the gross margin and the net margin. So could you talk about the strategy? Are the same gains that we saw in Viavarejo in brick-and-mortar and logistics gains also in the DC? And you said that you opened a new DC in the Northeast. And I would like to better understand what led you to achieve this increase and whether we could work with this level from now on? And maybe you could also talk about the distribution center strategy. Will you be making new investments in new distribution centers for Nova Pontocom? So these are my 2 questions.

German Quiroga

Irma, thank you for the question. We are studying and focusing on logistics, and this has to do with DCs and has to do with transportation as well. We have been developing the study together with Pão de Açúcar. This is something that we have established a committee for with the participation of all the companies in the group, Viavarejo or Assaí and the others, with the support of our real estate area as well because we have to understand, of course, the opportunities that are made by GPA malls from Alexandre. And this year, we have the first centralization of our heavy cargo and we will further consolidate all the DCs in São Paulo, most probably for the next year. But we have been opening other DCs throughout Brazil, in Bahia, in synergy or partnership with Viavarejo, and we already have a pipeline of many DCs in Brazil scattered throughout Brazil, and increasing our footprint in many regions of Brazil. And we do this when the volumes justify this investment. So we have gains in service level for our clients, and also, of course, for the company. And as we have the opportunity of opening this space in the DCs of the group, this is very positive because we can have minimum cost and we have to -- and we can share this with the other companies of the group. So our planning for the next 2 years is ready. And in transportation, we have just started. There are many opportunities here. Viavarejo has the capacity to deliver products throughout Brazil, and we can work hand-in-hand. Valim has the same view, and he's helping us do this. And it would be a pleasure for us to work with Valim and his group in order to further explore innovative models. We are working together with [indiscernible] and we expect our stores will be ready for Internet operation. The clients that hit our website, they will be able to see all the products and they can either come to the store and pick up the products, or we can have the products delivered to the clients. Some models are already being tested and this will further increase our volumes. We are sure that we will be doing -- we continue to do our work in terms of reducing our expenses. And the moment is the moment of growing as much as we can and with no problems being caused by that.

Irma Sgarz - Goldman Sachs Group Inc., Research Division

And maybe you could talk about your gross margin, the question that I asked about gross margin.

German Quiroga

We have been increasing our category mix. We are -- and some other business models, such as marketplace and others, allow us to increase our gross margin over time. And also something that we are just starting, but we have great hopes of achieving very quick results. And I'm sorry, I didn't answer your question before. I was so involved answering your other question. But we see a very big opportunity to further increase our margin over time.

Operator

Now we would like to close our question-and-answer session, and we would like to give the floor back to the company for their closing remarks.

Enéas César Pestana Neto

This is Enéas Pestana again. I would like to say a few words and start by thanking you again for participating in our call, and reiterate my trust in the work that is being done by this team, which is based on clear, well-defined strategies, with discipline, with focus, placing our clients, our consumers in the core of our decision-making process. We have been doing this in a very professional and precise manner, with a lot of discipline. Our strategy is totally aligned, supported by our controlling shareholders, by Grupo Casino and they are very knowledgeable about the business, that they know of the importance of keeping your company with health, with high competitiveness, with increasing volumes, with increasing market shares, always preserving our profitability and preserving all the capital employed. So this is a major indicator that we use in the group for all our investment decisions.

So I would like to thank our team, and also extending my thanks to the whole group of Pão de Açúcar. These are the people who've really delivered the results. These are the people who really intent our clients. Our people are the most important asset that we have in the company, and they are the ones that really make a difference. They are the reason why we are obtaining such good results.

And I would like to say a few words about the results of a survey that was published by Nova Pontocom, by the demonstration [ph] institute, with over 11,000 consumers, over 300 business leaders. And the result of the survey was GPA as the leader in the whole retail segment in Brazil. 60.3 was the average score, and ours was 71.4, our score. You can see that there is a difference of over 11 points. And of course, we are extremely pleased with the result of this survey. And this indicator is very important because, in our view, what would really make a difference in the future is the reputation of the companies. And reputation is not just prices, it's not just net earnings. It involves so many things because in the world of multichannels and knowledgeable consumers and very quick purchasing decisions, what has to be preserved is the reputation of the brands. And this is what will really make the difference when people choose their channels and, ultimately, choose their products. So this is very important, it will become even more and more important over time. So I'm very happy to share this information with you of our reputation and our leadership in the Brazilian retail. And it is very important for us to continue with our actions in sustainability, our social projects. And in this call with you, we like to talk about results and figures and targets, but you must remember that GPA is a company that takes very seriously its social and environmental responsibility, and we carry out our actions in this area. We have been learning a lot from Casino, and Casino gives us all their support in all these sustainability actions, and we are totally aligned in the continuation of these actions. And besides the bottom line and besides the competence of our executives, our social actions will further contribute to make our reputation and our company stronger and stronger.

We are participants in the development of our country, and I would like to say that I place my total trust in Brazil, in the Brazilian market, in the robust Brazilian market. And we will continue to do what we must do. The government is taking measures that preserve the growth of the Brazilian consumer market, and that guarantees the possibility for retail to continue growing and encouraging investments. And all this, ultimately, will generate a better country.

Now we will get into the most important period of the year, the fourth quarter. We are totally engaged, we are totally motivated to make a great fourth quarter. Once again, I thank you very much for your participation, and all my colleagues and all the members of our Pão de Açúcar team. Thank you very much.

Operator

Grupo Pão de Açúcar's conference call is closed. The Investor Relations Department of GPA is available to you to answer any questions that you might have. We thank you very much for your participation, and wish you all a very good day.

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