Conference Call Transcript Grupo Pão de Açúcar November 5, … · 2017-11-22 · 3Q08 Results Grupo Pão de Açúcar November 5, 2008 Right now we would like to introduce Ms. Daniela

Conference Call Transcript

3Q08 Results

Grupo Pão de Açúcar

November 5, 2008

CONFERENCE CALL 3Q08

Operator – Good morning and thank you for waiting. Welcome to the Grupo

Pão de Açúcar conference call to discuss the Company’s profit figures for the

third quarter of 2008.

This event is also being transmitted in the Internet webcast, and may be

accessed at www.gpari.com.br where you will find the respective presentation.

You, Ladies and Gentlemen, can control the slide selection. The selection’s

replay is available after conclusion.

We inform that the press release on profit figures is also available at the

Investor Relations website www.gpari.com.br. This event is being recorded and

all participants will be only listening to the conference call during the Company’s

presentation, after which we will start the questions and answers session, with

more instructions provided. If any of you should need any assistance during the

conference, please request assistance from an operator by dialing “0”.

Before proceeding, we would like to make it clear that any statements made

during the conference call in connection with the business outlook for Grupo

Pão de Açúcar projections and operating and financial targets are beliefs and

assumptions by the Company’s senior management, and are based on

currently available information. Future estimates cannot be construed as

warranty of performance. They involve risks, uncertainties, and assumptions, as

they refer to future events and hence depend on circumstances that may or

may not occur. Investors should understand that general economic and industry

conditions, plus other operating factors, are likely to affect the Company’s future

performance, possibly leading to profit figures materially differently from those

shown in the future performance figures.


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November 5, 2008

Right now we would like to introduce Ms. Daniela Sabbag, Investor Relations

Officer, who will begin the presentation on the Company’s performance for the

period. Please, Ms. Sabbag, you may proceed.

Daniela – Good morning to all. Welcome to our conference call for the 3rd

quarter. We have here with us Abilio Diniz, chairman of the Board of Directors,

Claudio Galeazzi, our CEO, and the Group’s executive officers: Enéas Pestana,

José Roberto Tambasco, Caio Mattar, Silvia Leão, Jorge Herzog, and Claudia

Eliza. As usual in our conference calls, we will start with comments by senior

management in the first part, and then we will proceed to the issues raised by

all of you. I would like to invite Abilio Diniz to make the initial comments.

Abílio – Good morning to all. At the turn of the year the Board of Directors

resolved that we had to react against the previous years’ results. The Executive

Board made efforts to strengthen the Company’s foundations and to really

encourage our people’s outlook, advancing firmly in IT and logistics,

restructuring our capital, with a more solid capital structure. In conclusion,

taking care of details that jointly would improve the Company’s profit figures, in

connection with sales as well as with margins and performance.

We are here now, very pleased to show our profit figures for the third quarter,

really meeting our goals, doing the job that we designated for ourselves.

I would like to say a few words to you about this stage of the global crisis, how

we see the situation, and how this has affected or affects us. In fact, we have

been preparing ourselves for times such as these since early this year. It is

obvious that none of us is a fortune teller, none of us has the ability to predict

what was to come. Nobody in this world could imagine the extent of the global

situation, ourselves included. But certainly the 140 years of experience – mine

and Claudio’s together – plus the youth of our executive officers, this has

represented something. In the early days of the crisis, the so-called “black


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November 5, 2008

Monday” on September 15, we had a R$ 1.3 billion cash position and from then

on we attempted to increase this a little.

With this cash position and feeling at ease, we avoided large steps, we waited a

little to see what awaited us, what was happening. A lean company, a prepared

company, endowed with a very good operating performance, aggressive in

sales, aggressive in performance. Our sales were not affected, our cash

position is very healthy. We concentrated more on inventories, as decided by

Claudio Galeazzi, in order to really increase our turnover. It is obvious that at

times such as these, it is rational to take advantage of every purchase

opportunity, to prepare ourselves for a great year-end performance. This is what

we are doing.

At this time we are very comfortable in terms of capital, and more so with regard

to our cash position, our net indebtedness is less than 1.0x our EBITDA, which

fact makes us feel very much at ease.

We have no derivatives outstanding, the company’s treasury policy is to avoid

foreign exchange exposure, all our liabilities are denominated in Brazilian reais

(R$), which fact makes us feel enormously at ease.

We did not take on any derivative transactions, we always kept away from the

attractions of increasing earnings through derivative transactions. We enjoy a

very comfortable position in the Company.

This said, let us look forward. What does the future have in store for us? I think

the world will improve, the world will become more realistic. There was a lot of

wind being sold, too many people selling wind and many people buying it at the

other end. In my personal opinion – and I have discussed this with Claudio who

shares my views – we were never very good at selling wind. Well then, I believe

we will do better in this situation by selling concrete things.

We believe that the world will be more selective, investors will be more

selective, and hence our Company will be viewed with more attention and care.

I am totally confident in our Company. And equally, I am totally confident in this


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November 5, 2008

country. I have no reason for complaints to date. I think the government has

acted very wisely, very serenely in all of its actions. I am often away from Brazil,

I see what goes on in other countries and I believe our situation is much more

comfortable, and privileged to a point. I have no doubt that investors will be

looking at Brazil in this manner when they really decide to invest with

determination.

I am sure that this country will not lack credit for key activities. Credit will not be

scarce for agriculture, credit will not be scarce for exports, credit will not be

scarce even for civil construction, because Brazilians are very much in need of

housing and of the jobs created by civil construction.

I am sure that the country will continue to be well managed and will continue to

grow. It may be that we may not grow at first at the previous rate, yet we will

continue to grow, I have no doubt about that. We at Pão de Açúcar are

prepared to keep up with this growth.

Of course, we also have a few projected pessimistic scenarios that may be

faced. We are prepared to face any more adverse situation, but I do not believe

this will take place.

We are extremely prepared, including in terms of credit, we have FIC and its

operating losses that we supported for four years, and which is currently solid,

healthy, fully able to meet the demand for credit by our consumers.

We have an extremely structured company, aggressive, prepared to sell and

above all, prepared to grow. It is true that we will grow more carefully, looking

closely at our Capex and the growth of EBITDA. We will invest only when we

are certain that there will be a corresponding growth in EBITDA.

This is the Company we have today and that I expect to continue so, certain

that the executives guiding it are very capable and will continue to keep the

Company on this course.

Thank you very much. I will now ask Enéas, our Chief Financial Officer, to

speak and provide more information on the Company.


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November 5, 2008

Enéas – Good morning to all, thank you for participating in our conference call. I

will go into the figures in more detail, into more technical issues, and what we

fail to mention, we will answer your questions. A summary of what we will talk

about is a 50% EBITDA growth and a 138% increase in net income for this

quarter.

To arrive at this performance, starting with sales, the Company displays for the

quarter a 22.4% increase in gross sales and of 26% in net sales. This difference

is a result of a decline in the proxy taxation burden. Same store sales growth

was up 10.3% (gross sales) and 13.6% (net sales). If we look into this by

categories, we will find a 16.1% rise in non-food products and an 8.5% rise in

food products. This is also above the period’s inflation rate for these categories.

What we find important here is that this growth in sales is supported by

increased customer traffic and a rise in the average ticket. In other words, this

does not result from price increases. Pricing efficiency is what gives rise to

increased customer traffic, which also raises the average ticket owing to a

greater value-added mix, higher value-added goods, now a part of this basket

and resulting in this expressive increase in our sales.

As for accrued sales, we can see a 19.4% increase in gross sales and 21.9% in

net sales. For same store accrued sales, we have a 7.7% growth, which

adjusted for inflation will result in a 2.1% real increase. I would like to point to

the fact that our guidance as disclosed in April was for a 2% real growth rate,

i.e.: we are slightly above the year’s guidance and on the path to deliver it by

year-end.

Continuing on sales and with regard to banners, it should be pointed out that

growth by the Extra and Extra Eletro banners, as well as the CompreBem

supermarket banner, and of course the “dot.com” which has displayed a 3-digit

growth, and this quarter increased 185%, now has a 2.2% share in the Group’s

sales.


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November 5, 2008

Now then, with regard to margins. This quarter’s consolidated gross margin was

27%, which means 170 basis points (bps) below last year’s third quarter.

However, there have been no price rises, much to the contrary, we have

maintained a strict competitiveness policy since 2006, which has been

intensified based on a clusterizing and pricing strategy, from market to market,

region by region, a successful experience consolidated in the performance turn-

around in Rio de Janeiro. Hence, considering this quarter’s 27% margin, it was

benefited by improved margins by the Sendas and Assai banners. Sendas

Distribuidora displayed a 28.6% margin for the quarter, with 16.4% for Assai.

We will go into Sendas and Assai further on.

If we should explain this 170 bps change in three steps, we would say that the

first is competitiveness, accounting for a 40 bps change in the quarter’s margin.

In addition, consolidating Assai with its 16.4% margin brings performance down,

and the effect is a 80 bps change. And finally, the issue of proxy taxation, which

as I explained for the previous quarter, results in increasing net sales and the

cost of goods sold, by allocating taxation as a cost of goods, which fact creates

a 50 bps effect on the margin. If we add these three items, we will arrive at the

effect on the quarter’s margin, which is consistent with the effect on the accrued

margin and which for early 2007 was of 28.2% and now for the nine months of

2008 rises to 26.4%.

One of the best news has to do with expenses. We will find in expenses a

consistency with declining expenses in the course of the year. We were clear

when disclosing the issue in connection with adapting processes and

organizational structure early this year. On the arrival of Claudio Galeazzi, this

was the first major task undertaken by this management team this year, which

emphasized gains in efficiency. We have been able to gain, now in the third

quarter, now more mature, a 300 bps decline. 300 bps in any retail company is

extremely expressive. Hence, last year’s third quarter expenses of 21.9% of net

sales, have now dropped by 300 bps to 18.9%. The accrued figure was of


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21.6% and for these nine months resulted in 19%, a 260 bps drop against the

same period last year.

Owing to this decline in margin and the rebate in expenses, the EBITDA margin

was significantly affected in the Assai and Sendas consolidated figures,

meaning an 8.1% margin and R$ 357 million in cash terms. This is the largest

EBITDA seen by this Company for a third quarter, which represents a 50%

increase as compared to last year.

As for guidance, as I had explained to you, sales would rise by 2% in real terms,

which is what the year tends to show. With regard to margin, we had

announced between 26.5% and 27% of net sales. Guidance regarding

expenses was of 19%. We now see here 19% for this nine-month period, within

our guidance, and as for EBITDA, we had announced an EBITDA margin

between 7.5% and 8%. We have achieved a pro-forma EBITDA of 7.5% for the

nine-month period, and for this quarter we arrived at 8.1%, within our guidance.

The accrued increase in EBITDA was of 37%. If we remove the non-recurring

effect of restructuring early this year, this growth rises to 45%. This is in fact an

excellent performance for the third quarter.

This quarter’s financial performance figures also deserve special mention for

the quarter, also based on Abilio’s comments on our capital structure.

Performance was R$ 81.5 million in the red, slightly above what we expected,

from R$ 75 to R$ 76 million. This is the level we expect for the fourth quarter,

net of the seasonal issues for December. We are going to take action with

regard to interest-free installment payments. The idea is to achieve a better mix

of interest-free and interest bearing installment payments, thereby reducing our

financial costs without causing any impact on sales or on our customers, much

to the contrary. As highlighted by Abilio, FIC is very well prepared and we are

absolutely certain that it is in a much better relative position than the general

market average, and ready to respond aggressively to any need for a reaction

to supply credit and to maintain the sales growth we have obtained.


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November 5, 2008

Continuing on financial performance, when compared to last year the greater

effect arose from increasing interest rates on our net indebtedness, currently of

R$ 1.3 billion, and also had an important effect on our contingencies. At a

reasonable level, it should stand between R$ 75 and R$ 80 million, and we are

managing all this bearing in mind the interest-free installment payments, the

management of which we undertake jointly with Company pricing.

This presentation’s page 8 shows total indebtedness of R$ 2.7 billion for the

third quarter. It should be pointed out that 86% of this debt is long term with an

800-day average tenor, very different from last year’s third quarter, when we

had 31% as long term, and now we have 86%. Our indebtedness position is

comfortable enough, with a coverage ratio in excess of 4x. This results in Net

Debt/EBITDA below 1x, as Abilio pointed out, we ended September with R$ 1.4

billion in our cash position. We have no debt exposure in foreign exchange, all

our debts are denominated in Brazilian reais and indexed to the CDI (local inter-

bank rate). As Abilio mentioned, our policy is very strict and we have an internal

control area, also because of Sox, that looks at this issue very carefully. This

policy is very strict in terms of treasury, not only with regard to contracting

perfect hedges, but also in not permitting derivative transactions intended for

some kind of gain or increased profits, as Abilio has already made reference, so

that the Company runs no risks of losses in connection with derivative

transactions.

In connection with the preparation mentioned by Abilio, after Claudio’s arrival

and the Board of Directors’ decision to exploit the Company’s foundations, one

of these being the capital structure, we tried to raise the Company’s minimum

cash position, to stretch out this indebtedness. Relevant funding will only take

place again in mid 2010, when we roll over the PAFIDIC. We worked hard to

reduce the need for working capital, and we still have very aggressive goals for

this year with regard to inventories. We already disclosed the decrease in

Capex early this year. All this puts us in a very strong position to face any less


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November 5, 2008

favorable scenario likely to appear owing to the global crisis. We have worked in

simulating a number of scenarios, and we have action plans for each one of

these, ready to be implemented if required. But in any case the Company is

very strong and very confident, and we are able to assert that this year’s

guidance will be complied with.

We have FIC in the equity income accounting method. This quarter we decided

to invest in the sale of private label and co-branded cards, and when you do

this, you anticipate expenses a little, so that the profit figures remained

practically at break-even for this quarter. Nonetheless, card sales were 85%

greater than for the same period in the previous year, which led to our customer

portfolio rising to 5.9 million customers and a receivables portfolio of R$ 1.4

billion. FIC’s share in Company sales rose to 14.2%.

This quarter, Sendas managed to obtain an improved gross margin, as I already

mentioned to you, rising to 28.6% or 190 bps above the same quarter of last

year, and represents R$ 200 million in gross profit. Expenses continue under

control, we can see the consistency of the efforts to reduce expenses in Rio de

Janeiro - also based on a review of processes – and thus Sendas Distribuidora,

albeit showing a slight loss owing to the adverse financial performance figures

and indebtedness, displayed a very good EBITDA with an 8% margin, as

compared to a 3.5% EBITDA margin for 2007. And going back to the third

quarter of 2006, the margin was of 0.9%. As for the improved margin this

quarter, I repeat what we stated in the latest conference calls, Rio de Janeiro is

an extremely nervous and aggressive market as far as competition is

concerned, it is ve ry verticalized. This really applies and will continue to do so.

For the first quarter, our margin rose to 27.6%, 25.5% for the second quarter,

and now 28.6%, which means that depending on the campaign, on the time we

discontinue a campaign, promotions and competitive work that takes place in

Rio, we may obtain higher or lower margins. For the future, we recommend you


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to bear in mind an accrued margin between 27% and 27.5%, which is what

should be shown at year-end. For the nine months, we have achieved 27.2%.

Assai was able to obtain a 16.4% gross margin, higher than that shown for the

1st and 2nd quarters, which rose on average to 13.5%. In this regard, we also

invested a great deal during the first and second quarters in price image, while

readapting processes and adapting the Company to CBD processes and

standards, including Sox. During the third quarter, we were able to review this

margin mix, take advantage of opportunities for discussing bonuses, adapt

Assai’s contracts to the same profitability levels as the Grupo Pão de Açúcar,

which made it possible to obtain a 16.4% margin. Expenses were limited to

11.5%, which led the EBITDA margin to rise to 4.9% and the nine-month margin

to 3.1% now in September. Assai’s gross margin, also thinking of the future,

should not remain at this 16.4% level, it should be lower, in the region of 15.5%

to 16%.

And now we come to income before income tax. I would like to highlight income

before income tax because during last year’s third quarter the Company took

advantage of a R$ 34 million deferred income tax credit in Sendas Distribuidora,

which converted the income tax item into a credit balance, and evidently this

year we were not benefited by this credit. But there is a better picture in the

income before income tax line, whereby in last year’s third quarter we profited

R$ 27 million and for this year’s third quarter we obtained R$ 124 million in

income before income tax, a 353% increase, which is expressive enough.

Despite the income tax credit that I mentioned, regarding net income, the

Company obtained a 1.9% net margin which represents R$ 82.5 million in net

income, and last year with the income tax credit these profits rose to R$ 34

million, a net margin of 1%. An analysis of adjusted net income results in R$

107 million for the third quarter and R$ 270 million for the nine months.

In conclusion, let me speak a little on our investments. Capex during the third

quarter rose to R$ 107 million, and totaled R$ 331 million for the nine-month


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period. Seven new stores were inaugurated during this last quarter, of which

three convenience stores with the Extra Facil banner, two Extra stores, one of

which a hyper and the other a compact, and two additional Assai stores. We

plan to open a further 12 stores during the fourth quarter and to make five

conversions to Assai. Total investments for the year should be in the region of

R$ 500 million, yet below what we disclosed early this year, which totaled R$

730 million. I would like to explain that this has nothing to do with changes in

strategy. This initial plan included sums for the acquisition of land, intended to

accelerate even more Extra Facil and Assai. In Assai’s case, as we mentioned

to you, we made the decision to invest more intensely in adapting processes

and therefore we delayed a little the opening and conversion of stores. We are

now going back to speeding things up. In the case of Extra Facil, we should

accelerate things as of next year, and there are no strategic changes with

regard to these stores. And as for the issue on the land, there have been no

changes in strategy, except that we are currently stricter in decision making and

feasibility studies in connection with our investments, with a very strong focus

on profits and returns, so that in addition to a very well located site, we should

have increased consistency in the feasibility of any venture we may initiate.

This may lead to a more selective process and may slow things down a little,

but there is nothing to prevent us from accelerating in the coming months and

restoring these investments. I will now give the floor to Claudio, before going to

questions and answers. Thank you very much.

Claudio – Good morning, it is a pleasure to be here with you, and I will try to be

as objective as possible, and brief as well. It is obvious that the “back to basics”

policy is what Juliana - currently with Itaú Unibanco – mentioned, our constant

mantra of attacking sales pillars, viewing sales and profits as a consequence of

all the dedicated work is providing a very expressive result.


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November 5, 2008

It is important to know that we prepared ourselves in the course of this last year

to be able to expand, obviously, before this crisis. An aggressive enough

expansion program, but common sense will prevail, and as Enéas said, we

have a number of triggers to speed up or slow down as common sense and

convenience may dictate.

The important thing is that we control the accelerator and the brake. Owing to

our cash position and indebtedness, to our position as a whole, including our

bargaining power with suppliers and our ability to provide improved conditions,

we currently have a really competitive edge.

I would not like to go on excessively, because we spoke a great deal during this

year of our entire team’s project approved by the Board of Directors, the “back

to basics” project: returning to basics, not being overly creative, also being

mindful of the retail trade’s arid aspects. Normally, retailers will stay within the

choreography, it is much more interesting, much more dynamic, with a lot more

adrenaline. But being mindful of the arid side, the financial aspect, with working

capital, having increased our indebtedness early this year within absolutely

consistent limits – and a reduction in Capex – owing to caution and also to

enable us to review all of our models, in the end left us much more prepared

this year-end for any of the scenarios simulated by us and which we are able to

adapt to very easily.

So now I would like to answer any questions you all may have.

Operator – Thank you. Ladies and gentlemen, we will now begin the questions

and answers session. In order to ask a question, please press *1. To remove

the question from the list, please press *2.

Our first question comes from Ms. Cristina Sarian, from Neo Investimentos.

Cristina Sarian , Neo – Good morning to all, congratulations for the excellent

profit figures. I have three quick questions. The first has to do with margin


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November 5, 2008

guidance. In the light of Sendas' 8% margin in such a competitive market, and

the Group's accrued nine-month margin at 7.5%, with the 4th quarter being the

strongest, greater dilution of overheads, etc., it seems to me that guidance fell a

little short. I would like to know if you are going to review margin guidance

upwards. The 2nd question has to do with the 2009 expansion plan, I don’t know

whether you are able to disclose anything on this. And the last one regards

discussions with the Sendas family. Thank you very much.

Enéas – Cristina, thank you for your questions. Regarding guidance and our

disclosed margin, first, Sendas did in fact provide a 28.6% gross margin this

quarter, or an 8% EBITDA margin, but we have to remember that our accrued

figures are 27.2% for gross margin and 6.4% for EBITDA margin. The 4th

quarter is very competitive in Rio de Janeiro, greater than in Brazil. No,

guidance did not fall short, we are maintaining this figure between 26.5% and

27% despite the effect of proxy taxation. If the latter has a 50 bps effect on

margin, and we maintain guidance between 26.5% and 27%, we will require a

one-half point in margin in order to deliver the same guidance we disclosed. We

already had in our budget Sendas with an EBITDA margin of roughly 6% to

6.5%, as a part of total guidance. I can say very assertively: guidance is not low.

As for the Sendas family, we had an extremely sad event with the decease of

our partner Artur Sendas, who was also Chairman of the Board in our joint

venture Sendas Distribuidora in Rio de Janeiro. This has no direct impact or

prevents ongoing discussions, but evidently this has caused a certain delay.

There is nothing new, following arbitration we once again discussed exit with

our partners – because exit is confirmed – they gave us notice in January 2007.

This put notice is irrevocable and irreversible, so what is left to do is discuss

price and manner of exit, albeit there is a contractual deadline for this, which I

imagine we may be able to resume very shortly, and see a solution in the

coming months, this is the exit we expect. Evidently, in case of disagreement,


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the contract again provides for arbitration, we will do everything possible to

avoid this, everything points to our reaching an agreement for this exit.

For 2009, whether with regard to investments, expansion, or even to mention

income figures, we are in the process of concluding our 2009 investment plan

for approval by our Board of Directors by late November and early December,

so that we are unable to make any comments on 2009, but we plan to hold a

GPA Day in late February and early March, during which we will disclose a

structured and official notice on our 2009 guidance.

Cristina Sarian , Neo – Very good. Thank you very much.

Operator – Our next question will be by Mr. Marcel Moraes, from Credit Suisse.

Marcel Moraes, CS – Good morning to all, congratulations for the profit figures.

Enéas, my first question has to do with sales, year-end sales performance, and

maybe some feeling and not guidance for 2009, in connection with non-food

products. We have seen interest rates rising, as well as of prices of imports or

those goods with imported components. What is the trend here, what is the

feeling by the Company’s management regarding such sales?

Enéas – I‘ll start and then transfer to Tambasco, who will talk briefly on feeling.

He is the executive officer in charge of all the commercial and operating area,

and certainly his feeling is better than that of the rest of us. Replying on 2009,

unfortunately we are unable to say anything, neither feeling or plans for 2009.

As for the query on non-food, there is one thing I can say, from the financial

angle and regarding the crisis, we really don’t know how this will develop. We

even joke around here that anyone who says he knows is misinformed, we

need a little more time to find out how things will develop. Considering more

difficult scenarios, non-food products in the light of the lack of credit, we have


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discussed this a lot, among other scenarios. What I am able to say is that FIC is

currently very healthy as far as defaults are concerned, we have the lowest

market indicators owing to a simple issue of being very strict in granting credit, a

very conservative credit scoring arising from the policies put in place by Itaú

itself. So that we have room and stamina to become fairly aggressive in a

restrictive credit scenario, and to be in a better relative position than the

competition, not losing sales more than anyone else in a scenario in which we

don’t know how difficult it will be owing to this impending crisis.

Tambasco – Enéas in fact mentioned all this briefly, we are unable to guess

what awaits us ahead, but to date our expectations are to keep up this

performance which we have been currently showing. And for everything that

has been covered by Abilio, Claudio, and Enéas. Internally, the Company is

currently much more prepared for the fray in this competitive market. These

data point to a great gain in market share, including in non-food. Last year and

early this year we had a poor performance and we are now recovering our

share, and our expectations are that we will continue to move forward in the

market during this year-end. Externally, it is true that a crisis such as this one

will have some effects, but the economy in general also enjoys more stable

foundations. During recent months, we have witnessed increased purchasing

power, in particular by class C, and therefore we believe that the impact was

less severe with regard to food products and semi-durables, including the entire

non-food category, and the fact that we are able to grant credit. This card basis

mentioned to you by Enéas means to us a very large availability of credit to the

benefit of our customers, which allows us to be aggressive in terms of payment

terms and interest rates vis-à-vis the market, and to rely on keeping this up until

the end of the year.


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November 5, 2008

Marcel Moraes, CS – Perfect. Have there been any adjustments to the

Company’s sales policy since September owing to the lack of credit, any sort of

adjustments likely to have affected payment terms for certain categories of

goods, or prices? And how are dealings with suppliers, I imagine a scenario of

increasing prices for imports, is there any sort of discussions with suppliers for

more favorable terms?

Tambasco – From the consumers’ viewpoint, nothing has changed in

connection with our payment terms, in particular regarding non-food. We have

kept up our same aggressive policy. If you look at what Extra is doing, we even

increased disclosure of the more aggressive plans in terms of interest rates and

installment payments. Nothing has changed. What is happening is an opening

for us to adopt a more aggressive position in the market. When considering

discussions with our suppliers, it is obvious that at first there is a standstill, until

everybody comes to realize better what to do with their goods, so discussions

do become a little more difficult. At no time did we accept that this changing

market as a whole could affect our acquisition prices. We have been very

inflexible in our discussions, and we have been almost entirely successful.

We did not stop buying, except for a brief period until our suppliers came to a

better understanding, and we are following our plans to purchase regularly, to

enable ourselves to celebrate Extra’s anniversary, which we will hold this

month. We had no problems with the lack of goods, discussions are proceeding

almost normally. You may even think this is strange, but it is obvious that when

there is a crisis going on, discussions are difficult to begin with, but they tend to

bring a greater balance to everyone, whether in terms of costs, price positioning

by suppliers vis-à-vis the market, because it is obvious that nobody is willing to

raise prices without being sure that these prices will be accepted by consumers.

And the market is not paying, the market is very competitive, which fact helps

us to come to an agreement with suppliers on price levels very close to those


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November 5, 2008

we had been practicing. Guessing what awaits us ahead is no easy task, but we

have been very successful and you can see in the newspapers that even the

greatest pessimists have begun speaking of a balance, a new adjustment with

suppliers to make not only discussions possible but also consumer sales. It is of

no use to agree on a sale price now and then to be unable to transfer it. As for

payment terms with our suppliers, nothing has changed, we have maintained

our policy of working with inventory levels at a closer adjustment with sales

demand, and we are seeking to maintain a balance between payment terms

and inventories in order not to jeopardize, or even to improve our cash position.

Marcel Moraes, CS – Perfect. Thank you Tambasco and Enéas.

Operator – Excuse me. Our next question comes from Ms. Daniela Bretthauer,

from Goldman Sachs.

Daniela – Good morning to all. Congratulations on the income figures. It seems

that 2008, to use an expression, is “in the bag”, and the question is: what now?

What can we expect from the Company for 2009? Will we have positive

surprises with regard to margins and cost reductions? What can Claudio tell us

on the 4th quarter and on 2009?

Claudio – Daniela, about what Enéas mentioned, we are still in the process, not

of preparing our budget which is already concluded, but we are examining the

different alternatives according to each scenario. But we are not yet prepared to

disclose any information, as this has not been approved yet by our Board of

Directors, which will take place in early November, and we will inform on

guidance early in the new year. What I can assure you of, is that we are

preparing a number of mantras to serve as our guide for 2009. And as far as

possible they will be aggressive, obviously with common sense prevailing, but


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November 5, 2008

we are very well prepared, in terms of cash position as well as working capital,

inventories, and planning. In conclusion, prepared not only for this year-end,

which deserves our full attention right now, but as for 2009 we will come back to

this topic early in the year.

Daniela Bretthauer, GS – Let me ask the question in a different manner. Do

you still see chances by the Company for reducing costs and for margin gains?

Claudio – In principle, no company should ever abstain from seeking out

improved margins and greater cost reductions. When it does so - obviously you

don’t have this in the same proportions, it becomes ever more difficult to reduce

costs and seek out margins, but this is a permanent effort. Also, don’t forget my

nickname.

Daniela Bretthauer, GS – Claudio ‘scissors hands’. All right then. One last

question regarding the competitive environment, did you detect any changes in

September, more specifically in October, on whether the market slowed down.

Was it normal, did sales proceed well?

Tambasco – Daniela, what we have seen in the market is that our performance

is above the market’s. When you look at data disclosed by the supermarket

association, you will see that we were sometimes a little below the market in

general, and today we can show an expressive enough difference in connection

with projections disclosed by the Brazilian Supermarket Association (ABRAS)

itself. From the angle of competition, what we feel is that it is difficult for us to

say what is causing this impact. Whether it is the change in the proxy taxation

system, the invoices that supermarkets now have to issue, or the incentives

provided by government. All of this may cause a market impact and we have

seen a slight change in our competitiveness, chiefly when you see the


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November 5, 2008

CompreBem banner, which operates amidst what we can describe as a more

informal competition, we detect a gain in competitiveness of roughly 150 to 200

bps, without any change in strategy by us. Our strategy with CompreBem has

been to maintain a stable pricing policy, very competitive. But this movement

towards gains in competitiveness has a share of the impact from the

competition’s price adjustments. In this competitive environment, and owing to

everything it did to date, Pão de Açucar has the ability to achieve and to keep

up this performance, of seeking out gains in the market, with all its banners.

Claudio – Let me add a few words to that. Imagine that at this moment we are

in a favorable negotiating position. The question is: if they raise prices and we

don’t buy, what are we going to do with the inventories? We may have gains in

margins, but we may transfer this advantage we have to the market. That is a

question on our policy at the time, of circumstances. I refer to this coming year-

end

Daniela Bretthauer, GS – All right. Thank you very much, congratulations, and

good luck.

Operator – Our next question comes from Mr. Ricardo Fernandez, from Banco

Itaú.

Ricardo Fernandez , Itaú – Good morning to all. I would like to go on a little

more regarding the changes in banners that you showed in the 3rd quarter’s

press release. How does this work…. which informs that Extra Perto has 10

less stores than allocated to Extra, Sendas here gained 14 stores from

CompreBem ABC. I would like to understand how this works, did they in fact

change banners or is this covered by… what is the logic behind this change?


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November 5, 2008

Tambasco – Ricardo. Nothing has changed. In the case of Sendas, ABC

CompreBem is a banner still maintained in Rio, in the Lake and the Mountain

regions under the brand name of ABC CompreBem, there was no change, none

of these stores migrated to the Sendas banner. But all of them are a part of

Sendas Distribuidora. Here at Extra Perto, there was indeed a change in store

concept. We had separated these stores, Extra Perto, stores from 1500 to 4000

sq. mt. What we did was: all the stores above 2700 sq. mt. in sales area, we

simply renamed them Extra, with the “Perto” surname. Because the latter is a

hypermarket with the complete hypermarket product line, of course, with slight

changes in assortment, without eliminating a category or a session, not likely to

describe it as a hypermarket. That is why you will hear us speak a lot more on

Extra and compact Extra, but all under the same policy, the same strategy. No

changes as far as customers are concerned. When they go to a compact Extra

or to an Extra hypermarket, it is as if they were in the same store.

Ricardo Fernandez, Itaú – Does this mean that the Extra Perto format is being

discontinued?

Tambasco – No. We are keeping the Extra Perto stores, those stores with

areas below 2700 sq. mt., of which I spoke, they have more of a supermarket

nature, but with an assortment that complements supermarket purchases, such

as general merchandise and household appliances, larger than a conventional

supermarket. It is not a hypermarket, but a more complete supermarket. But

they don’t have textiles, heavy home appliances, so that this Extra Perto banner

will remain with this concept.

Ricardo Fernandez, Itaú – Looking at revenues per format, you will see

Sendas in the 3rd quarter with a 36% increase in revenues. A part of this comes

from stores previously under CompreBem and which you placed under Sendas,


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November 5, 2008

and CompreBem grew a mere 1.8% because you took a number of stores and

placed them under Sendas, is that right?

Tambasco – That is correct. I don’t have the numbers right here, but there was

no change, it simply is a part of Sendas Distribuidora. And when we speak of

Sendas as a market, we look at the Rio de Janeiro region as a whole.

Ricardo Fernandez, Itaú – All right, but the CompreBem stores in Rio were

already a part of Sendas Distribuidora, correct?

Tambasco – Yes.

Ricardo Fernandez, Itaú – A second question refers to the taxation issue,

invoices, proxy taxation, etc. Do you have an idea of the extent of proxy

taxation, how many goods per annum or what percentage of goods sold are

covered by this system, to have an idea on whether on 1, 2, 5, or 10 years

ICMS tax will disappear.

Enéas – This issue of the migration of goods to the proxy taxation basket is not

such a recent procedure, the state of São Paulo was late in adopting it. Other

states in the country – Rio, for example – already have a basket of goods under

the proxy taxation system, much larger than São Paulo’s. The former governor

himself, Geraldo Alckmin, dedicated a lot of effort to strengthen this system.

And this year, as we have found, an extensive migration is occurring. It is

evident that the government or the tax authorities are behind this, as under the

proxy taxation system there is a much higher level of tax efficiency. Hence, with

regard to tax collections and costs of inspections, this system is much more

efficient. As for us, we have no reservations in this regard. In the case of formal

companies such as ours, this is very good as there is a trend to reduce


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November 5, 2008

informality, creating a much fairer competition in the market by companies

under the same rules and that pay their taxes.

We often end up discussing the size of the tax basis, the margin attributed for

the purpose of calculating ICMS tax under this system. This is good for formal

companies, for the state, and for the country, in particular when it is combined

with other measures such electronic invoices and now with SPED. We are a

partner of the tax authorities and the state, and pioneers in this pilot project

involving electronic invoices and recently also SPED. I don’t have here any

information on the number of goods already subject to this system, which I

would have to separate according to each state, as there are different baskets

for each state. Yet I can assure you that São Paulo and also other states are

advancing steadily in this direction and we expect that by the end of the year

there will be a larger number of liquid goods included in this basket. Any

questions?

Ricardo Fernandez, Itaú – Liquids such as detergents and beer?

Enéas – Not detergents. Beverages in general.

Ricardo Fernandez, Itaú – Your understanding is that the state governments

are focusing on, with time, the great majority of goods in the retail market, if not

all of such goods, to be placed under this proxy taxation system at the

manufacturing stage and not in the retail stage.

Enéas – Exactly. It is evident that there are other systems, for example the

basic retail basket, in summary, other taxation systems, in our view everything

that can possibly migrate to a proxy taxation system, governments should go

ahead, and it is easy and evident to confirm that is what has been done in the

course of the recent months and years.


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November 5, 2008

Ricardo Fernandez, Itaú – Under this scenario, do you think of paying more

attention to gaining a market share in the same stores – same store sales, as it

seems to be the case – or are you more inclined to buy out smaller chains, the

margins of which have declined progressively as they have to pay more taxes?

Or both?

Tambasco – With regard to sales, our expectations are to keep on gaining

market share, the data which Enéas referred to currently exist, this gain is

spread out in gains owing to the average ticket and gains owing to the number

of customers. Before, total growth was due to an increasing average ticket, and

now we can clearly see gains in the number of customers. This is the result of

this competitiveness we have placed in all our banners. In connection with

expansion, I will ask Caio to speak a little more to you on this subject.

Caio – Good morning. Our expansion efforts still include the opening of 12 new

stores by year-end. As for the smaller chains mentioned by you, we are keeping

an eye on every opportunity and studying anything likely to give us some

benefit, using a lot of caution. Some studies have taken place, yet we have

nothing concrete. We are considering, which does not mean we have

something for right away.

Ricardo Fernandez , Itaú – Very well.

Operator – Ladies and gentlemen, may I remind you that to ask a question,

please press *1. Our next question is by Ms. Juliana Rosenbaum, from

Unibanco.


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November 5, 2008

Juliana Rosenbaum , Unibanco – Hello, good morning. I would like to

congratulate the Group for all it has achieved to date. First, I would like to

understand a little better the margin’s volatility by Sendas.

Operator – Excuse me. The line used by Ms. Rosenbaum has disconnected.

Our next question is by Mr. Marco di Tulio, from UBS Pactual.

Marco di Tulio, UBS – Good afternoon. Congratulations for the income figures.

I would like you to give us an idea of a comparison between the food and non-

food margins.

Tambasco – This can vary from one banner to another, and from category to

category. You have textiles operating with margins slightly above the

Company‘s average, and electric and electronic appliances slightly below. We

don’t disclose these figures, but what has happened is the following: We have

had a margin performance that I am able to say is uniform. There is no one area

that contributes to an improved competitiveness and that reflects on margins

differently from other categories. This is a stable enough position. Even in our

planning all the sales growth guidance that we disclosed for food and non-food,

they have remained fairly balanced. There are no data likely to present new

facts to us, worthwhile talking about.

But there is an expectation, our guidance and that of all the strategic planning

points this out to us, on the need for the Company to seek out an increasing

share in non-food. And despite the crisis, we are still under the expectation that

this gain will materialize through market gains, which is already happening.

Marco – Let me end with another question. Has this gain in margin taken place

in other categories, was there no category that performed better than others, is

that right?


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November 5, 2008

Tambasco – We have looked for competitiveness in all of these categories.

The margin’s impact is not any larger or smaller in any category likely to bring

about a meaningful difference.

Marco – Thank you.

Operator – Our last question is by Mr. Marcel Moraes, from Credit Suisse.

Marcel Moraes, CS – During the presentation by Enéas, you remarked that

margins for the 3rd quarter, by Assai as well as Sendas, were slightly above

what we could expect as recurring. I would only like to make it clearer as to

what would these margins be for both companies. And whether the fact that

they were above what we should expect is a result of the fact that there were

less expenses with promotions during the 3rd quarter.

Enéas – Our expectations for Sendas are that the gross margin should return to

a 27% to 27.5% level for the year. As for Assai, we are speaking of 15.5% to

16%. These would be adequate levels, without the effects of encouraging

results and margins through mix, competition, and pricing opportunities as seen

in the 3rd quarter. I’ll ask Tambasco to say a few words on the commercial

feeling for this topic.

Tambasco – Guidance will not change. We should see no changes. We should

look more closely at this margin regarding the nine-month period than that for

the 3rd quarter. In Sendas’ case, what you see is a very competitive market in

Rio, but this is a quarter in which there is less concentration than what the retail

trade normally shows, which are anniversary campaigns. These campaigns are

very aggressive and force you to reduce your margins somewhat, to maintain


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November 5, 2008

your presence in the market. And during this last quarter there were very few

actions in this direction. But this is not so for the last quarter. You have more

anniversary actions, including Sendas’ own anniversary, which took place last

month. This is a gain arising much more from a seasonal event than from a

change in strategy. If you should consider a comparison with last year, there

was in fact a decline in the margin, owing to this pursuit of greater

competitiveness under all the banners.

Marcel – Very good.

Operator – We will now end the questions and answers session. I would like to

go back to the Company, for the final considerations.

Daniela Sabbag – Thank you for everybody’s attendance. Should you have any

queries, please get in touch with the Investor Relations department. Thank you

very much and good afternoon.

Operator – The Grupo Pão de Açúcar conference call on profit figures is now

over. The Group’s Investor Relations department is available to reply to any

other queries or issues. We thank you all for your attendance and have a good

day. Thank you.

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Conference Call Transcript Grupo Pão de Açúcar November 5, … · 2017-11-22 · 3Q08 Results Grupo Pão de Açúcar November 5, 2008 Right now we would like to introduce Ms. Daniela