Companhia Brasileira de Distribuica Q2 2007 Earnings Call Transcript

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Companhia Brasileira de Distribuicao (NYSE:CBD)

Q2 2007 Earnings Call

August 16, 2007, 9:30 AM ET


Daniela Sabbag - Director of IR

Enéas César Pestana Neto - Administrative Officer

Cássio Casseb - CEO

Abilio dos Santos Diniz - Chairman

Hugo A. Jordão Bethlem - Business Unit Officer of CompreBem/Sendas and Hypermarket


Daniela Bretthauer - Goldman Sachs

Carrizo Buhner - Citibank

Christiana Sheridan

Aaron Morgan - Mainstream Capital

Jean Kanerias - UBS Pactual

Loredana Serra - Morgan Stanley



Good morning ladies and gentlemen, and thank you for waiting. Welcome to the CBD Conference Call. Today we have Mr. Abilio Diniz, Chairman, Cássio Casseb, CEO and Enéas Pestana, CFO; Hugo Bethlem, Executive Officer of CompreBem Sendas; and Hypermarket, and Daniela Sabbag, IR Executive Director.

This event is being broadcasted simultaneously on the internet via webcast, which can be accessed on the link, with the respective presentation. The control of slide selection will be managed by you. We inform that the press release is also available at the IR website This event is being recorded, and all participants will be in a listen-only mode during the Company's presentation. After CBD's remarks are completed, there will be a question-and-answer section. [Operator Instructions]

Before proceeding let me mention that, forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of CBD management and the information currently available to the Company. They involve risks, uncertainties and assumptions because they relate to future event, and therefore they depend on future circumstances. Investor should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of CBD and could cause the results to differ materially from those expressed in this statement.

Now we would like to turn the floor to Mrs. Daniela Sabbag, who will begin the presentation. Please, Mrs. Sabbag, you may proceed.

Daniela Sabbag - Director of Investor Relations

Good morning, everyone. Thank you for participating in our conference call. I will quickly talk about the operating performance and the quarter results, and then I will pass the floor to the other Directors for other comments.

Gross sales of the group amounted to R$4.2 billion in the second quarter, up 5.7% and net sales grew 6.4% up to R$3.6 billion. Under the same-stores concept, gross sales grew 3.86% and net sales 4.6%.

Same-store sales of food stuff grew 3.9%, driven by the 6.5% increase in perishables. Non-food stuff grew 3.7%, a good performance if we consider comparison with 2006. Owing to the World Soccer Cup, this category had grown 18.6%.

The same-store growth reflects investments in price competitiveness and image repositioning. The increase of 1.7% in the customer traffic in the quarter and a 3.9% increase in the average ticket are indicators that reinforce the result of this repositioning and the sales campaign that we carried out.

In slide three, we'll comment on the gross margin and operating expenses. As regard to gross margin which was 28.1% in the quarter, it fell by 1 percentage point against the previous year and a 0.3 percentage point recovery compared with the previous quarter. This is a result of the competitiveness strategy and a better price alignment of this strategy.

As regards to expenses, the Company incurred restructuring expenses that had an impact of -- on operating expenses in 0.2 percentage points. Despite that, the group reported 21% in operating expenses before taxes and charges, which was a savings of 0.3 percentage points in the comparison with '06. And the main reduction came from admin expenses that fell 0.2%.

In the quarter, operating expenses before taxes and charges pre the restructuring expenses showed an important reduction from 21.1% of net revenue in the first half '06 to 20.6% in the first quarter of -- in the first half of '07. This reduction is a result of the expenditure reduction program of the Company.

Now, we're going to talk about the result line. The EBITDA margin after taxes and charges in the second quarter '07 was 6.4% against 7.3% in the second quarter '06. A change explained basically by the reduction in the gross margin as have been said and the effect of restructuring just as they impacted, expenses they impacted the EBITDA in the second quarter.

As regards financial results, they improved by 8.7% against previous year. Interest income fell to 35%, owing to a lower average cash balance and lower interest that also resulted in a drop of 25% in interest expenses.

Slide five, about FIC, a reported negative equity income of R$10.9 million in the quarter. This result shows an impact of incorporation of Credicard co-branded card portfolio and information of the necessary provisions. But the expansion in the co-brand portfolio and this incorporation and the rally in sales will boost growth and profits in the portfolio. So therefore, we uphold our expectation of reaching a breakeven in the operation at the end of '07.

Sendas Distribuidora gross sales amounted to R$783 million or 18.6% of the Group's sales, the gross margin was 26.1%, lower if you compare to the group margin, excluding Sendas. Operating expenses were up 4.3% against the second quarter of '06 owing to an increase in utility bills and payroll adjustments.

So therefore, the EBITDA margin dropped back 0.2% against the previous year and was 1.4%. The result of the minority stake of the group was R$24.6 million, a result of the net loss of R$42.8 million by Sendas Distribuidora in the period.

Before I speak about the net income, I'd like to talk about profit before income tax, which grew by 40.9% and was up to R$31.4 million and against R$22.3 million registered in '06.

Now, moving to slide six, the Company invested R$217 million in this quarter, concentrated particularly in the construction of new stores to be opened in the second half of '07, and R$117 million were allocated to opening and building new stores. And the balance of investments were allocated due to the acquisition of strategic building plots, where R$35 million were invested in the refurbishing of stores -- R$37 million and lastly R$28 million in infrastructure. An impact of R$20 million in income tax was greater this term relating to the previous year and the profit was R$27.6 million.

So this year we have confirmed 9 hypermarkets, 15 Extra Fácil, 10 Extra Perto, 5 CompreBem, 1 Pão de Açucar. And the total 40 stores have been included recently, the stores leased by Rede Rossi and these will be converted into Pão de Açucar -- from Pão de Açucar to Extra Perto stores.

These are the comments that I would like to make, and I'll pass the floor to Mr. Enéas Pestana.

Enéas César Pestana Neto - Administrative Officer

Good morning, everyone. Thank you for participating in this conference. I will try to speak about the results and a few points that we consider very important.

Starting to speak about the indicators, let's talk about working capital. Working capital in the Company compared with '06 was up, grew by three days particularly because of an extension to the prior payment terms and compared to this year. We have gained one day of inventory and we have a very strong plan to reduce stocks, and certainly in the third quarter, we will report a reduction of another four days in the stock. And this will boost our working capital.

Well, I have no comments about -- well, we had a reduction in the net debt of R$120 million or explained by a reduction in the receivables discount in the fund of receivables and this discount should go back to the previous volume in the third quarter.

Gross debt had another effect because we had a debentures operation that it came into place in the second quarter, but there was debt payment in the second quarter. So the effect of the increase in debt -- in gross debt was R$500 million and net debt was R$130 million, not R$500 million, because most of these funds was allocated to settling existing debts. And another part is in the cash balance to make the face-up to the second and third quarters.

As regards net debt over EBITDA, we want to remain around one net debt over EBITDA. We closed the second quarter owing to the hefty investment mentioned by Daniela to R$217 million. We have an indicator of 1.2 times.

Now talking about results, I am going to draw a few highlights. As regard to the gross margin, I'd like to remind you that we've started this strategy about competitiveness and price reduction at the end of last half of '06. So the comparison is not yet appropriate, since this year we have this half year with the strategy at full blast, and last year this was not the case because we had started implementing it in the end of June of last year. And this effect of 1 percentage point down this year.

Talking about expenses, my highlight is the following. Selling expenses should include a few effects. First of all, the variable portion of expenses that is build into selling expenses because of a 6% increase in sales, we have an impact to variable expenses, advertising, leasing and some other variable expenses. So in the selling expenses despite an effort to reduce them, it was still at the limit.

But we must take into account, that because of stores opening compared with last year, we have an increase in staff members that impacts the selling expenses to the tune of R$10 million. So despite the efforts that have been geared and will continue being geared, we feel this effect on selling expenses that prevent us from reading correctly this effort.

As regards admin expenses, we see this effort clearly, and in terms of value we are below last year with a reduction of 1.5%, despite Company growth and the collective bargaining that occurred last year that increased salary base by 4%. So our efforts do appear, and here again we will continue making this efforts in the second half year of '07.

In terms of EBITDA, I have already mentioned, virtually the effect on EBITDA comes from the price reduction strategy and it is 0.9 below last year's. Below that we have interest expenses. As Daniela has mentioned we had the savings. There was an improvement. And the FIC results reflected in the equity method line is important.

It's important to highlight the effect of the incorporation of the Credicard portfolio that boosted loss provision by R$5 million in terms of net profit, net income. Therefore, this result would have been much better, were it not for this incorporation. But by the other hand, there is this positive aspect, for example, the expansion in the portfolio. The portfolio grew 70% up to R$1.3 billion in the second quarter of '07.

Additionally, I'd like to say that income before income tax in the quarter, if we take it against last year's, there was a growth of nearly 41% -- 40.9%. But this increase is not reflected in net income.

And here I'd like to provide you an explanation. And I tried to give this explanation in the first conference call, which regards the deferred income tax of Sendas Distribuidora that gathers all our operations in Rio de Janeiro.

Since the end of last year, we had decided owing to good accounting practices, not to move ahead with forming income tax deferred credit until the Company Sendas Distribuidora reported a profit and a consistent profit projection.

When this happens, we will come back to replenishing this credit, including those which have not been allocated. This is no fiscal effect, because this credit is being recorded and controlled and there is no loss in terms of tax credit.

But what we are doing is we are accounting for this credit according to those accounting practices until the Company can report a profit. And this will certainly happen in the near future. And we will then continue to recognize this credit.

How much of this effect on the income tax line? This effect calculated over Sendas Distribuidora income tax results before income tax would be R$15 million. I mean to say that if we include this credit in the income tax line that was done last year but not this year, the second quarter '07 results would be something to R$242 million owing to the R$15 million results and would be in line with what we had last year.

And I'd also point out that if we consider the cash profit, that is if I went back to this net income of R$42 million, the effect of amortization net of taxes, I would get to R$64 million in actual terms discounted this amortization of R$29 million in the quarter.

So, these are important figures in reading this earnings release, so that we can actually understand the effects of all efforts made in this second quarter.

Now, I will pass the floor to Cássio Casseb, our President.

Cássio Casseb - Chief Executive Officer

Good morning. On the second quarter, the results are within our expectation. This is very frustrating actually. There are some slight changes related to the first quarter. However, things are clearly very slow.

Even though we know that retails work like this and Abilio tells me every week that we are not driving a Boeing, but there is a large ship, there is no use pushing too hard because you have to wait until things happen before you make new decisions.

So, it rather bothers to have poor results. We've been very critical related to these results so far, especially in terms of expenses. Expenses are too slow. It is our responsibility, and we are being slow. Adjustments in personnel generate a lot of dismissal rates, and they mask our effective level of expenses.

In addition, we also had strong hiring, because we want to have experts from different areas. For non-foods, for instance, in addition to our plan, we have experts from textile, electronic, trade and convenience. And obviously, at a given time we'll reap the fruit. We will have a better more focused team, focused on markets when you don't have money to get.

As to expenses at head office, we've been including and revising new processes and embedding technology for adjustments. Things are very slow, but I reaffirm my commitment that the corporation cost at 2% over sales, and by the end of the year we will have 1.5%.

In the chain for productivity programs, we've also been testing different things, especially, in Rio and now we have the rollout for the rest of the country.

On this side things are also slow. The first figures for figures on FTE begin to show a better curve. Daniela as has already talked about expenses, administrative expenses for instance, and as per sales expenses and total expenses.

Adjustment will be by the leverage of the media. We've been testing, Extra Perto, Extra Fácil models in order to have a better media leverage. In Rio de Janeiro alone, we divide a breakdown media into four different banners.

We've also been more critical in our CapEx level. Undoubtedly, CapEx is very high. It's been very high, especially last year and increasingly higher this year. We have two areas here.

First, investment and recovery. IT, software has been renewing our technological system with new database mining structures, electricity of the DemandTec system, new non-food systems that are very costly. Some have been bought and some developed in-house. But effectively, we needed that to be stronger and better prepared for growth.

As to sales in stores, obviously, we don't want to miss any opportunities. We are becoming increasingly critical in our assumptions and also in our decision for acquisitions, greenfields. We've been very strong with these assumptions in order to make things happen with a good ground and a high-level of profitability and return.

Despite poor results for the quarter, the trend makes us very optimistic. Recent figures have improved. Sales for the second quarter in all foods and non-foods categories achieved our goals except for electronics. We are very strong, and last year, we had the World Cup.

This morning, we announced figures for sales for July, 3.6 for old stores. And in July, we had one less Saturday than last year. It will be 5.1 for Saturday, 1.5 more. And July was poor, because it shows the results from Eletro, but you have to say, so the challenges in this area up to 14 of August, we've been doing fine coming back to our normal trend.

Margins have been significantly improved, and we also have adjustments in foods as of July, and renegotiations with suppliers are showing good result. Now, we are doing the same for non-foods. By the end of June and in early August, adjustments for assortment for non-food are also going to provide better fruit for the future.

CompreBem model for the first time show us or makes us more optimistic. So, we are beginning to have results and now we had May, June, and July with positive results for the CompreBem banner. And it's no longer being a problem, and it's becoming a solution.

In Rio in July, we reduced our losses related to the average of the first half of the year in 40%. I was talking to Abilio, and I told him that we are still in diagnosis and figures have been improving.

Many people are asking us about a reassessment of the goals for 2007 that we announced in the release of our last quarter of 2006. We are not going to leave any goals aside. They are very challenging, very difficult, but I do believe that and we are working very hard with my whole team to make them happen.

Even though we mentioned EBITDA in 2007 equal to 2006, representing approximately R$1.1 billion in gains or R$630 million in the second half of the year -- in 2006, the figure was R$483 million. And even though I know that in this quarter we are going to have many dismissals for headcount reasons, I believe we will get there somehow.

If we analyze these figures and we work on them, our goal for same stores will be 5%. And this year, we have 4.3 so far. May be this is the most challenging of our goals. But when implementing a breakthrough, we are becoming more aggressive and creating a better optimization in our supply system. I think we are on the right track.

Gross margin was 28%, and now it's towards 28.3%. Negotiations are proving better results, and I think we have a positive evolution. As for operating expenses so far 20.7% is not as we expected, but remember that we closed at 21.9% in '06. So evolution is still going to happen.

Can we have 20% in the second quarter, half of the year? Yes, this is possible and then the run rate we will be closing effectively based on this 20%.

So the EBITDA margin that was 6.4% considering this trade above, they would be at least 7% in the second half of the year. Remember that the EBITDA for the Company is 6.4%. If we exclude Sendas Distribuidora, EBITDA is 7.6%. So it is possible and we will get there.

We are still searching for our goals. We do not want to compromise our future to have a short-term result. And the future for us is not 2010. It is 2008. I restate what I said from the very beginning. '06 was the year to build a team, to be aggressive, to work on salaries and to have competitiveness on the right track and begin to readjust expenses.

'07 is a year of sales, shrinkage with better figures, competitiveness if we are on the right direction, and we will keep on learning going for our goals and our expense objectives.

'08 certainly would be a year for best results. Trend is very favorable; we are working on our grounds, on root causes. Today, I am positive to say that we have the best team in the market. We are really devoted energy wise.

We are very confident we'll move forward and I believe we will be able to achieve all of those. Thank you.

Abilio dos Santos Diniz - Chairman

Good morning. This is Abilio speaking. I paid a lot of attention to the words of everyone here, especially Cassio's, when he mentioned results and frustrating figures. And I have something to tell you.

The market is very upset with us, unhappiness here. If you think about reports generated by several analysts and if you think about the price of our shares, they have dropped. Obviously, all stock exchanges are going down, but our shares are even lower.

This is the feeling I have that when we the market goes up, I mean, we have to consider what the impact will be. And when the market goes down, we go even lower. So obviously, we are very frustrated as a company, and naturally Cassio is right when he says results are poor and frustrating.

One other thing I emphasize a lot especially for him is that we have to try to control our anxiety. We have to look at things exactly as they are. And something I always say is that we have to look back to see where the origin is, the point where you are now, so we can look for the future with more assurance and comp.

Figures are poor, however, they are something important. We are consistent. All indicators in all sectors show evolution. I am not saying we've already have a light at the end of the tunnel but we can see the end of the tunnel very close to us.

We feel figures, which are still poor, show constant evolution. Constant evolution in sales for instance, would like to be at 10% evolution for same-stores compared to last year. It's not all that, but it is still constant. It is solid. It shows the food of our work.

Results are still small but they are consistent, and they are in line not with the second quarter of last year, but with the first quarter of this year with our budget for this year, our goals for this year and also our expectation.

And we feel very comfortable to keep an eye on our results for this year within our expectations and also to think the future for '08 with results that will be much more pleasant not only for us, but also for the market as a whole.

There is no doubt that whatever is being done is providing results. We have no doubt about it. The most important thing I have to tell you, and it is a personnel who has struggled, is to build our team. I also feel that in that sense, the team is already built.

We are improving constantly. And by the way, we already had worked on our first team with the executive committee, and we are strengthening our lower categories or other management systems in our business. And we feel more confident with our professionals that are in charge of these areas now.

As to stores, they have already been through our test period with two different formats, Extra Fácil convenience store and Extra Perto, which are our smaller extra stores from 2,000 to 3,000 square meters for sales floor.

We have no doubt we have two new formats, we have our business now and we have to move forward to have many stores to open, a lot of conversions to be made and we'll work on that. And in these stores to be converted, we have high increase in sales by square meter compared to what we have now.

This is something essential for us. To make stores that today have a hard time and which don't have a good performance can be covered, become profitable again with an average or with a very high average sale per square meter. And I think this will improve our sales.

As to expenses, I know that this is where we have our main frustration, also on our part, on our behalf. May be we should be reacting faster than we are now. We are doing something that seems to be feasible and commonsense as well.

In addition to what has already been said, I would like to highlight our one timer that can be very expensive in the short-term, especially, for expense figures. We are not cutting even further because expenses will be diluted in the future, considering the sales increased for same-stores.

This is already happening and will be stronger in the future. If we get two on shares, and if you cut down more than reasonable, that will be destroying value on compromising our growth of stores that we already have today, and it will be harder for them to be profitable in the short-term and I think this point is critical.

There is a lot to be done, I know the market is unhappy, not only the market, we are also unhappy. But we have to be careful and always or only cut down on what is really necessary. Casseb mentioned this, this commitment of the corporation. We have to be careful about our values and this has to be done using common sense with solidity and I believe that results will be satisfactory by the end of the year.

Just one last comment, some things that I always say over the last few days or over the last few months, I always tell my people, especially those who are younger or newcomers at the company or Cassio, I tend to say, I have this feeling, I mean, the same that I felt in late 1992 early 1993 based on my experience I am considering what I've done so far.

I think this feeling is true, maybe it is not so strong, as it was in the past because at that time the crises were much more critical, this time what we had... with a decrease in our efficiency and productivity which also led to lower competitiveness and also led to lower profitability, but nothing compares to what happened in 1990.

But I have that feeling that closing feeling especially in early 1993, that's my feeling now, not only for results but also with this team or what people have to deliver and with the consistent projects we have on a short-term basis and that will be vastly implementive. That's my feeling that I would like to convey to you today.

Certainly, in October we won't be delivering outstanding results for the third quarter, but certainly, we'd be delivering results once again consistent and in line with our expectations, in line with our forecast for the year and by yearend I know results will not be outstanding but certainly they will be consistent and slow that will be moving upwards safe and peacefully, that's what I would like to convey based on my experience and with our responsibility from the Board of Directors.

Question and Answer


[Operator Instructions]

Daniela Bretthauer from Goldman Sachs would like to ask a question.

Daniela Bretthauer - Goldman Sachs

Good morning, everyone. Thank you very much for your explanations. I have a few questions. First of all with regards to sales plans for '07, if we do the sum, we see historically we are shutdown in the second quarter. And you end the year so far we see that the area of the Company is practically flat.

Now, based on these new openings for the second half year, what kind of a growth do you expect to achieve, in '07 against '06, this is first question?

Daniela Sabbag - Director of Investor Relations

Hello, it's Daniela Sabbag, now as regards to the openings that we have scheduled for the second half year and this is in the earnings release and this table on page 14, if you can see they are all of the shutdown , all the stores that will be shutdown , we will have a growth in sales area of 10% roughly.

Daniela Bretthauer - Goldman Sachs

Okay. So, this is your number and CapEx remains at R$1 million, does it, R$1 billion, I am sorry, yes. It remains there. Second question, what kind of guidance could you give us as regard to Sendas Distribuidora that if you have any in terms of EBITDA margin for the yearend? And do you expect Sendas to coming to the blue by the yearend and this will help us out in calculating the income tax rate that we will use in the calculations for the Company. So, we want to know about Sendas and income tax rate?

Cássio Casseb - Chief Executive Officer

This is Cássio Casseb. It's difficult to give you a figure. We thought about having EBITDA 5% for Sendas Distribuidora, first half year was really worst than we had planned. We... all our saving that we created were swallowed by the increase in power bills and in Rio and now the Governor has set the salary threshold up by 14%. And there is an impact in our payroll and this will again swallow the results that we had reached. Even then, we believe we will deliver the 5%, so I am still working on this 5%.

Daniela Bretthauer - Goldman Sachs

Okay. Thank you very much.


Mr. Carrizo Buhner [ph] from Citibank would like to ask a question.

Carrizo Buhner - Citibank

Good morning. First of all I would like to congratulate you Cassio for your clarity, you are very direct, very straightforward this is important, I am not congratulating you on the poor numbers, but the way you look at a situation I think is very positive and for the stock... for you stock in for the market and there are other companies that are really trying to hold out and there are other results that we are seeing.

And this gives us a wrong guidance because in the future many Company's can have a downturn in stock. Now, as regards to sales, you still expect 5%, 4.3%. Now, what you see in practice that could recover sales by yearend, is it non-food stuff, is it foodstuffs or any specific segment, any specific region that will give you the confidence that you will get to 5%?

Cássio Casseb - Chief Executive Officer

Thank you very much. This is Cássio Casseb. We are trying to be as transparent as possible. I have had the opportunity to wok in various areas and never in my life had I seen such a complex metrics as food stuffs and non-food stuffs metrics. Its not that it's very sophisticated but there is a little amount of variables and this adds complexity to the system and competition and still the margins are low.

Despite all this you look at it and say, well, yes, we have a net income problem today but look at our EBITDA, we have a very good EBITDA level. So there is a lot to be done and I believe that the road is narrow but those who like intellectual challenges, and this is my case, could not have found a better saying and I am having lots of fun and this war for me is really funny. Myself and Abilio had a very interesting conversation this week and he can tell you about how we restructuring our long-term payment.

In the case of sales, this is really difficult because we have to snap up market share, we have to complete aware that the informal economy is growing and aware that today we are not yet at full blast in the fastest growing segments, that is wholesale and retail is growing, convenience is growing but we are still incipient and central sales or our sales centers are growing, non-foodstuffs is more likely to grow than foodstuffs.

As you see from imports, from the exchange rate, from the opportunities in electric and electronic equipments and tech styles and because we do not have department stores in the country, so we are really muffling up very firmly for strategic moves in non-foodstuffs. But meanwhile, foodstuffs are starting to show a few results.

Many times you look at the foodstuff curve and sales of foodstuffs have improved and margins are recovering. So the foodstuff business is doing very well. Thank you. And the non-food stuff business is in fact, is already providing answers all right seeing that they are there in all categories, so we are prepared for this particularly as regards two steps.

First of all, first step to have a rally in electric and electronic equipment and come to a new plateau, climb up a new step and the second step would be... for the second time, leveraging time this country will start growing more strongly and we must be prepared for that with by strengthening our systems, our people by being able to open more stores and this is our preparation.

We are preparing for a leapfrog, and if you look at Columbia, you will see very similar situation and those who prepared who were already really reaped the results. So I believe that the challenge that we are faced with is in sales and we are moving forward.

Carrizo Buhner - Citibank

Very good. And now, as regards the gross margin of 8.3. What do you think has brought this improvement on less shrinkage, more assortments? What do you think is some improving the gross margin and are you confident that this number will go to 28.5?

Cássio Casseb - Chief Executive Officer

Well, this growth from 20 to 28.3 happened in foodstuffs. It's the result of the assortment adjustments and negotiations with suppliers and expansion of the supplier base regionally. This is a reality, it's the fact. This is where we stand today.

We also expect to see some improvement in non-foodstuffs because now we are doing the assortment adjustment there and I believe that within two months, we will get to 28.5%. I don't believe that we'll go any higher, but I believe will be consolidated between 28.3% and 28.5%. Thank you.


Daniela Bretthauer from Goldman Sachs. Ms. Bretthauer.

Daniela Bretthauer - Goldman Sachs

Well, it was just to wrap-up my series of question, the income tax rate. What kind of guidance could you give us, considering the differed income tax methodology that you've adopted for Sendas?

Enéas César Pestana Neto - Administrative Officer

Daniela, this is Enéas Pestana. This will depend because in fact the income tax that you see is the consolidated income tax. And then it depends on Sendas results. If you take into consideration something around… well it's really hard to say in the mix of the year, but we will move up significantly. Let's work with something around 20 25. This is too low owing to this effect.

A ballpark figure would be, well for the year something between 35% and 40% at least. That is those 10% 15% that we had seen should not be used. No, no, don't use these rates for the time being while we have the situation with Sendas distributors.

This situation of Sendas will be reversed as the Company reports some positive income before income tax, either by an improvement in EBITDA or particularly by leveling off the capital structure. And this is expected to happen after a... this stock transition, and then we could restructure the capital stock and sort out the interest expense problem that is much too high.

In the late last year, we sorted out the amortization premium problem. We realized about R$475 million of goodwill, and we really reduced the amortization of goodwill for '07. But still the interest income, sorry, interest expenses and not in proportion with the results created in terms of EBITDA.

And so we must level off the capital stock. And this will be done timely as soon as disposition of stock holding is concluded. And then we will resume regular income tax credit. And it will be a typical in terms of rate by year-end.

Daniela Bretthauer - Goldman Sachs

Okay. Thank you very much.

Cássio Casseb - Chief Executive Officer

This is Cássio Casseb. I'd like add to what I said to Carrizo of Citibank. Abilio just said that in these store conversions, that we believe will take us to a new sales plateau. I'd like to ask Hugo Bethlem to tell us a little bit about this experience, although it's very incipient tell us about the experience in Ipirangia and Lemo.

Hugo A. Jordão Bethlem - Business Unit Officer of CompreBem/Sendas and Hypermarket

Good morning, this is Hugo Bethlem. We have seen very good results with Extra Fácil and Extra Perto. Extra Fácil is the convenience store. We have 12 stores operating. We opened another one last week, and we expect to open another every month or perhaps two every month.

And the most important is that, we took a store that had been CompreBem, had been Barateiro in the district of Lemo, where there is a huge colorful store, and we converted it into Extra Fácil reducing the air floor space, there is also a drug store.

But most important is that operating costs were cut in the store. And just to give you an idea CompreBem was operating with 14 people and now we are operating with 8 people, I am sorry 8 people.

And on the other hand customers feel that the store has grown, it is more pleasant, the atmosphere is more beautiful, but sales are still showing as if they were CompreBem operations. Therefore, we've had very good results in terms of the bottom line. Now, in the case of Extra Perto Ipirangia has a 3,000 square meters of floor space. It used to be... store, is selling five times as much as it used to sell under the other brand, and has a strong appeal.

Non-food has had an important participation, but more than that we also have the experience of CompreBem put into the store, the human experience. And the store that sells the same as Extra, we moved from 220 employees to 117 employees with hierarchical and leaner structure less cost deferral. As well in the first month we had promising results, high sales, dilution of expenses, low expenses and the results was overall very positive.

This is why we are so optimistic. We are going to carry out a number of conversions by year end. So we are not going to shutdown anything I believe, virtually nothing, because we will have a number of conversion opportunities up to 700 square meters in Extra Fácil and beyond 1500 and 2000 square meters of Extra Perto. In Extra Perto, we have a project for 17 stores by year end, and results are really promising.

But more than that, we have detected about 22 extra stores that today are... have poor sales, and they could filled up for a number of reasons. And the main reason is to tailor the human structure of Extra Perto to it. Although it will not be reclassified from Hyper to Extra Perto and again, we're in for new gains and high profitability in these doors.


Christiana Sheridan, has a question now.

Christiana Sheridan

Good morning. Abilio mentioned something he was confident, he had no doubt that things are slow but we're on the right track. Could you share a little bit more, give us more evidence because its hard on our behalf to have that confidence in terms of the image and the price reduction strategy, at the same time, we expected an increase in shares or sales in terms of gross income. I'm not even mentioning operating expenses.

So could you elaborate on that please? What do you expect? When do you expect to have an expressive targeted impact in gross income, I mean, I know there is going to be a change in strategy, you've been working hard. I believe you have greater results and would like you to share it with us in more details, please? That's my question. Thank you.

Abilio dos Santos Diniz - Chairman

Christina, this is Abilio. I talked about the inconsistent. It is important for you to feel that all the figures are according to our plans or within our budget. It's important to consider all category and that's what they are being measuring here category-by-category. Think about what's taken place in results.

Sometimes changes are too slight, too little, cannot be seen, but if you don't have fluctuations up or down this shows consistency. This shows stability and not in-stability which often time happens in main transformation and reformulation processes that already happened in our Company.

Until very recently, we have this feeling that we had too many ups and downs in our figures. As a consequence of our strategies for the moment, we feel that fluctuations are too mild, they are mild and very much inline with our budgets and expectations.

I understand your concern, you who are outside. It's hard for you to understand. It's hard to check what's happening. I do understand how you feel. Visually speaking, this is not easy, you cannot clearly see a huge increase in gross income or a main expense reduction, but once again let's think about figure consistency inline with our budget.

If you are driving this I mean, if you have your hand on the steer wheel or flying this airplane, it is important to know that you have control over the Company and it is responding according to what you want.

Cássio Casseb - Chief Executive Officer

Just to add, I'll try to show some figures, by the way this is Cassio speaking. I know these are very recent things. But if I consider mild trends, we have increase in sales, lower shrinkages, lower stock out, lower inventories improved with foods and for non-food except for electronics everything is better.

And we also have an increase in food margins, but for non-food margins even though we don't know the figures, we expect to have a good response as to administrative response expenses, they are down, losses in reais are lower, experiencing new models are doing fine and this shows an increase in EBITDA. Thank you.


Mr. Aaron Morgan [ph] from Mainstream Capital has a question now.

Aaron Morgan - Mainstream Capital

Good morning everyone, first of all, I would like to thank the officers, not only for consistency but also to the fast implementation on strategies. This can be seen by the change from Extra Fácil to Extra Perto banner in the same line. I'd like to know about the Company's plan.

On geographical expansion, I believe there is new Extra Perto, then will be very helpful in that sense. My second question has to do with expectations and the overhead of the Company; I mean, what is the potential growth of the Company considering the current overhead?

Hugo A. Jordão Bethlem - Business Unit Officer of CompreBem/Sendas and Hypermarket

This is Hugo speaking. For Extra Perto you are absolutely right. Our goal was to provide more agility but especially considering the extra banner trying to have more visibility outside Sao Paulo.

A typical example with Brazilian we have four hypermarkets that are doing fine but maybe the size to expand in Brazilian would not, well we shouldn't have more hypermarkets but in satellite cities and with the various cities we could have room for several Extra Perto and then we could use Extra to have a further expense dilution and make the most out of the media in these places.

And the same goes for Ceara state. We already have identified a series of Pão de Açucar stores that have deep positioning considering competitors, and maybe we could add Extra Perto brand. It is important to say that Extra Perto brand has limitations in terms of size.

We want to show a compact hypermarket. We're going to emphasize non-food. Non-foods considering this is our uniqueness, vis-à-vis or compared to any competitor.

[Foreign Language]

We can resume now. As I was saying we've identified potential places in the city of Ceara and in the country side also in Paulo we have several stores that are being built also following a successful model, but we believe that Extra is going to leverage that even further, so that's our initiative.

And undoubtedly this opened other positive doors on the Extra brand is already very well known in these areas. As to overheads of the Company even if we have an adjustment for 2% to 1.5% for the year, we can grow, we won't have any problems in that sense.

In such stores productivity plans are moving us to higher levels. We've been trying to make the most out of the best personnel in new stores, so we can use these people, these good people and an expansion plan.

This is not a problem for us, unless the training and education we have our inner schools for butchers and bakers but very prepared and consistent in terms of personnel for our expansion.

Aaron Morgan - Mainstream Capital

Perfect. Thank you.


Mr. Jean Kanerias [ph] from UBS Pactual has a question now.

Jean Kanerias - UBS Pactual

Good morning, my question as to deal with Sendas Distribuidora. We are considering that issues in Rio and can you think of any measure that can have a positive impact in your results for sales in the region in the State of Rio compared to competitors? That's my question.

Hugo A. Jordão Bethlem - Business Unit Officer of CompreBem/Sendas and Hypermarket

This is Hugo Bethlem again, until December last year I was also in charge of Sendas. So, in late last year or in early last year there was a strong change in the Government of the State by the Secretary of Finance.

They were searching for a more moral education for tax evasion in the state. I believe in the mid-term basis we are going to have a new level of competitiveness that undoubtedly will improve Sendas Distribuidora's result.

And certainly we consider that the government has been calling competitors that do not exactly comply with the legislation so they comply otherwise they have to close their establishment. So we can see changes in the state in search for these tax issues.

On the other hand those who already pay our taxes and thereby bearing with this costs because we have pressure from many things, for instance elimination of electric owner due credit.

In Rio it is already 23% higher compared to Sao Paulo and so we have this credit issue for those who used it. As another case you have higher expenses and consequently you cannot pass it on to pricing. And you have competition again.

So as we had already mentioned that we also have an increase in personnel salary on a private basis and these are the decisions made by the state and they have a direct impact on the private enterprise.

Cássio Casseb - Chief Executive Officer

Just to add to what you have said, this Cássio Casseb here again. The same thing that goes for companies goes for the government. If your team is better and if you have competent people, well all it takes is time, the governors in these districts are very serious people, very competent people to be involved in this area, so I certainly believe you have good results in Rio. Thank you.

Jean Kanerias - UBS Pactual

My second question has to do with the performance of the non-food segment. You mentioned a lot about electronics, yesterday IBG disclosed a sales number for June for the first half of the year and overall performance is very strong for the segment despite the comparison base.

I know you are considering the World Cup last year. But I would just like to have a better understanding of non-foods performance of the last quarter that was slightly poor. Do you think this applied only for you region, that is significantly worse than IDGE figure or do you think it is a competitiveness index? I think you were worse than the market?

Cássio Casseb - Chief Executive Officer

This is Cássio Casseb again. I think we had a hard time to put it in practice. We had a sales in the World Cup, and right after that IT was very strong and we keep on being the best IT seller in the country. But we had to address and handle some difficulties. We made changes to our team, to our processes, and once again we are moving into favorable phase.

But things are still in the very beginning and we are not that confident, and we know we are not going to have results in two weeks or one month. But I think that changes in teams and processes are putting us back on track in that segment. Thank you.


Ms. Loredana Serra from Morgan Stanley has question now.

Loredana Serra - Morgan Stanley

Thank you. Just quickly on Sendas, the 5% EBITDA margin goal, is that a goal for 2007? And related to that is, you've talked a bit or a lot about Sendas or lot about Sendas on the call. Where do you see the biggest opportunity in terms of trying to get to that 5%?

I think you mentioned in the press release, you've taken some headcount reductions. You know the environment with tax evasion, I appreciate those comments, but obviously, that's not something that's going to happen in the next six, 12, 18 months. So where is the leverage for you in Sendas to get from that current 1.5 level to the 5% level?

Cássio Casseb - Chief Executive Officer

This is Cássio Casseb. I think it's a bit too early for us to go deeper in to this topic. Rio de Janeiro has been working very aggressively with store productivity, and we have been very strict about integrating our stores as we realized that we are competing against ourselves. We have 101 stores in Rio.

The exercises that we ran, and competition started showing that not only our problems in Rio and from the verticalization of the motions of lower non-foods sales relating to the rest of the country, and we were competing against ourselves.

We promote, we make promotions under one brand and not under the other. And as we set up a single management office, a person who commands all sectors, this started to be reversed. And I believe that this 40% reduction in loss in July against the average of the first six months shows results in this direction.

However, it's not too early for us to go in to further details about the strategy. We feel that we were sure that the measures that we took were not sufficient to take us from 1.8 to 5 and then we hired Galeazzi, has a vast experience to help us to really build this. We were not confident about how much we could deliver.

This results from July shows a favorable trend still with no participation of Galeazzi who today is having the first meeting with us on diagnostics. But I believe that, the fact that he joined us will really help us to get there and I believe that will be in a few weeks, we'll come back to the market to talk about this.

Daniela Sabbag - Director of Investor Relations

This is Daniela Sabbag. We got a question from Juan Paulo Falco [ph] of Paulo. I would like to read out to you. Looking at the balance sheet we see that fixed asset is R$4.4 billion and that a part of that is distribution centers and other properties that could be sold. Is it part of your strategy to sell part of this property, so I'm going to pass the floor to Eneas and he is going to answer the question, Enéas Pestana.

Enéas César Pestana Neto - Administrative Officer

It's a very good question. Yes, it's part of our strategy but we are very careful, because we must preserve our core business which is retail. And we do not want to have leases that are not in proportion to our margins. But I'll take the hook of your question to mention a project, very good project that was started in July, on assets in general.

That includes all our PP&E. And this project, discover this project includes each and everyone of our asset regardless of all other operating action plans. This project aims to look into each one of our assets and find out how much value that asset is adding from the return over capital invested point of view or working capital or how much profitability it is building and for each one of these assets.

We are discussing how we could maximize or reverse, the specific situation of each one either to increase the profitability of property or to maximize the usage of areas or be it in sales, but we are also looking at other assets, which are not fixed assets that could be hampering our return rates owing to very hefty investments and future growth that will support our organic growth.


[Operator Instructions]

If there are no more questions, I would like to pass the floor to the Company for final comments.

Cássio Casseb - Chief Executive Officer

Thank you very much for presence of all and like to remind you that the Investor Relation department is always at your disposal to answer any further question. Thank you very much. This is the end of the conference call. Thank you very much.

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