TRANSCRIPT OF THE CONFERENCE CALL ON THE SECOND QUARTER 2012 EARNINGS OF GRUPO PÃO DE AÇÚCAR AND VIAVAREJO
JULY 24, 2012
Operator: Good morning and thank you for waiting. Welcome to the conference call of Grupo Pão de Açúcar about the discussion of the Company’s results on the second quarter of 2012. This event is simultaneously being webcast via Internet and is available on the websites www.gpari.com.br and www.globex.com.br/ri where the respective presentation is also available. You will control the slide selection. The replay of this event will be available shortly after it ends. We note that the release of the Companies’ results will also be available on their investor relations sites. This event is being recorded and all participants in the teleconference will be in listen‐only mode during the Company’s presentation, and then we will start the question‐and‐answer session, when further instructions will be given. If any of you need help during the conference, you may request operator assistance by dialing * zero. Before proceeding, we would like to clarify that all statements that may be made during this teleconference relating to Grupo Pão de Açúcar business prospects, projections and operating and financial goals constitute beliefs and assumptions of the Company’s executive officers, as well as currently available information. Forward‐looking statements are not guarantees of performance; they involve risks, uncertainties and assumptions, since they relate to future events, and thus depend on circumstances that may or may not occur. Investors should understand that general economic conditions, sector conditions and other operating factors may affect the future performance of Grupo Pão de Açúcar and may entail results that differ materially from those expressed in such forward‐looking statements. We would now like to hand it over to Mr. Vitor Fagá.
Vitor Fagá (Grupo Pão de Açúcar): Good morning, everyone, and welcome to GPA’s results conference call. We will be discussing our second quarter results with Raphael Klein, Enéas Pestana and other GPA and Viavarejo officers. I will now turn the floor over to Enéas Pestana to begin the call.
Enéas Pestana (Grupo Pão de Açúcar): Good morning, everyone, it’s a pleasure to be with you once again. Thank you for participating in our conference call and we hope our team can answer all your questions. Firstly, in terms of the overall economic scenario, we believe Brazil’s consumer market has all the necessary conditions to ensure better results and significant sales growth for us. The second quarter also had a calendar effect, so the third quarter should be more favorable. In general, Brazil has excellent fundamentals, notably an exceptionally low unemployment ratio, virtually zero in fact, and a likely further decline in interest rates, in other words a very controlled situation. So the fundamentals are excellent, which is good news for the retail sector in terms of income. According to our studies, although household debt has undoubtedly gone up, something everyone is talking about, disposable income has been barely affected, because this debt largely comes from mortgages. This means that families are not paying rent, but paying installments on their home which are lower than the corresponding rent. So the impact on disposable income is less than the upturn in debt. As for default, we believe it is concentrated in the auto segment. Our business has not experienced any – not only has it remained at 2011 levels, but there is even a slight downward trend. So we do not have a default problem. The appreciation of the U.S. dollar in recent months has pressured import costs, but this is being discussed with suppliers so we can avoid any price increases. We are very optimistic about Brazil’s current scenario. The country must believe in its fundamentals, its force, the strength of its domestic market, and take advantage of this
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opportunity to grow, construct and invest. It must not draw back and let this moment pass. Underlining our optimism, we are moving ahead with our investments and maintaining our guidance of R$ 1.8 billion for 2012. We don’t envisage any downward review; on the contrary, these investments are perfect feasible, especially in regard to expanding the sales area. The Group continues to record solid growth in terms of sales, mainly on food retail, and excellent results. We have posted a profit for 16 consecutive quarters, accompanied by significant growth. We expect an excellent second half, with a third quarter better than the second, due to the calendar effect and a possible recovery as of August, and an exceptionally strong fourth quarter. We base this opinion on the strength of our highly‐skilled team, which was structured in line with a well‐consolidated management model, as you know. This model was reviewed more than two years ago and has been working very well, enabling us to diagnose, map and draw up action plans whenever necessary to solve any problems that may arise. In fact, this is a process we carry out almost every week. Our professional, proficient and pro‐active team is both motivated and fully prepared to continue delivering growth and achieving goals in all our business lines, without losing sight of the group’s overall vision and synergies and avoiding conflicts. If the market improves, great; if not, we will make it so, seeking to increase our market share and making full use of our advantageous positioning, whether in the food segment, e‐commerce or electronics/home appliance segments. We have leading positions, with high market shares, in all our business segments, and we have the capacity and the will to increase these shares even further and not just sit back and depend on economic growth. At this point, I would like to mention two important points. The first, as disclosed yesterday through a notice to the market, is the election of the Company's new CFO, Christophe Hidalgo, appointed by Casino. Christophe is heavily involved in finance, with an excellent track record and a deep knowledge of the retail market, having been CFO of Exit, in Colombia, for two years. He is a vigorous 44‐year‐old, who fully identifies with our values of humility, determination, drive, discipline and emotional health. I have been involved in Christophe’s joining the company ever since Vitor assumed the position of acting CFO – I interviewed him in fact – and his appointment was made official yesterday. Vitor has been doing a brilliant job and will continue for a bit longer, as Christophe hasn’t signed the term of investiture yet, there still being some issues to be resolved, such as his visa, change of residence, etc., which will not affect our operations because, as I said, Vitor is doing such a good job. When Christophe definitively takes over as CFO, Vitor will continue to head the investor relations area and report directly to me or to the CEO’s office. So I would like to take this opportunity to thank him for his readiness, competence and professionalism in conducting the Group’s financial affairs during this period. The second point concerns GPA Malls & Properties. As you may know, Caio Matter has been structuring our real estate segment in a highly professional manner, forming a dedicated team, constituting a brand name and instilling processes. Recently, we elected Alexandre Violoncellos, who will be introduced to you in this conference call, as head of this division, with the full support of Caio. Alexandre has extensive experience in the sector. Our real estate segment did exceptionally well this quarter and this was not a non‐recurring result. As I said, GPA Malls & Properties has an excellent structure and will continue to seek operations and transactions to ensure the continuous exploration of our properties, thereby generating recurring revenue and results and helping to create value for GPA as a whole. We are not interested in selling these properties. We will provide you with more information on this later on. Moving on now from the economic discussion, I will comment briefly on the consolidated results on slide two and then turn the floor over to the team, who will detail this information, whenever necessary, so you can get a better idea of the figures and results. On slide two, three important items are mentioned, beginning with our second quarter of 2012 sales. There are two columns, one of which shows the reported result, the one included in the quarterly financial information (ITR), and the other refers to the pro forma result, from which GPA Malls & Properties results were excluded to enable an accurate comparison with the previous quarters. Sales totaled R$ 13.5 billion, up by 7.2%, or a 5.6%
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increase in terms of same‐store sales. Excluding the real estate segment, sales came to R$ 13.4 billion, an increase of 6.4%, with same‐store sales growth remaining at 5.6%. EBITDA totaled R$ 787 million, up by 22.8%, or R$ 692 million excluding GPA Malls & Properties, an increase of 7.9%. This was higher than the upturn in sales, resulting in efficiency gains for the group as a whole, mainly driven by the food segment. Net income amounted to R$ 255 million, around 180% up on second quarter of 2011, with a net margin of 2.1%. Excluding the real estate segment, net income totaled R$ 159 million, a substantial 74.5% year‐on‐year increase, with a net margin of 1.3%. Slide three gives a summary of our first‐half results. Sales stood at R$ 27.1 billion, up by 8.8%, or 7.6% in same‐store sales. Excluding GPA Malls & Properties, total sales grew by 8.4% and same‐store sales by 7.6%. EBITDA came to R$ 1.5 billion, up by 26.3%, with a margin of 6.4%. Excluding GPA Malls & Properties, EBITDA totaled R$ 1,456 million, a substantial 19% improvement over second quarter of 2011, with a margin of 6%. Net income, including real estate segment, amounted to R$ 421 million, up by 88%, with a margin of 1.7%. Excluding real estate, net income totaled R$ 330 million, a 48% year‐on‐year upturn, with a margin of 1.4%. Those are our results and I trust you will make a good analysis. The real estate segment recorded revenue of R$ 98 million, as shown on slide four. Further information will be provided by Caio and Alexandre later. This operation involved an exchange of sites for the development and construction of projects, the most important of which being the Thera project, located in Rua Butantã, in the Pinheiros region of São Paulo. It is worth remembering that we have no intention of selling this project, or the two others to be presented and which have already been developed. Our purpose is to use them to generate recurring results going forward, based on a completely structured business, which is here to stay. On slide four, I will comment briefly on GPA Food’s results as Tabasco and Belmiro will be going into greater detail later on. Gross sales, excluding the real estate segment, increased by 5.9% in the second quarter, while gross profit grew by 8.5%, with a margin of 25.7%, up by 50 basis points. EBITDA moved up by 14.2%, accompanied by a margin of 7.2%. It is worth noting that GPA Food comprises the entire retail operation, including hypermarkets, supermarkets, drugstores, gas stations, neighborhood stores (Minimercado Extra) and Assaí, our cash‐and‐carry segment, just so you are absolutely about what you are comparing it with in relation to the same period in the previous year. Finally, I would like to comment a little on our consolidated debt, which closed the first half at R$ 4.9 billion, virtually identical to the R$ 4.8 billion at the end of the first quarter. The net debt/EBITDA ratio also remained stable, closing the second quarter at 1.5x, versus 1.51x at the end of the first three months. This was certainly due to the Selic reduction, as well as the reduction in non‐interest‐bearing installment payments, especially in Viavarejo, which will be further explained by the team. As I said at the beginning of this call, we will not be reducing our Capex, especially in regard to the sales area expansions in all our business units. We invested R$ 392 million in the first quarter, and R$ 633 million in the first half. In the year‐on‐year comparison, investments increased by 35% and 10.5% in the second quarter and first half, respectively. But the most significant investments were in new stores and land acquisitions, which absorbed R$ 155 million in the second quarter of 2012, versus R$ 34 million in the second quarter of 2011, up by 360%. In the first half, we invested R$ 232 million in new stores and land acquisitions, 100% more than the R$ 111 million in the same period of the previous year, underlining our absolute focus on organic growth. The increased number of new stores – 14 in the second quarter – will be dealt with in more detail later. That’s all I have to say at the moment, although I will remain at your disposal for any questions you may have. I will now turn you over to Vitor, who will continue with the call.
Vitor Fagá (Grupo Pão de Açúcar): Thanks, Enéas. We will now present GPA Food’s results for the second quarter of 2012, including Extra, Pão de Açúcar, Assaí and Malls & Properties projects. Later, José Roberto Tambasco, Quiroga and Caio will briefly explain the business performance during the quarter. On slide six, you can see that sales totaled R$ 7.4 billion, 7.3% up on the same period last year. Gross profit did exceptionally well, with a gross margin of
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26.8%, for an important gain of 160 basis points. This improvement was apparent in the retail food and Assaí cash‐and‐carry operations, both of which made a positive contribution. Operating expenses also did well, corresponding to 18.3% of net revenue, 20 basis points down on the second quarter of 2011, despite the cost pressure suffered by retail and other segments, mainly due to higher personnel expenses, as we have been discussing. EBITDA also recorded a healthy performance, reaching R$ 574 million, pushed by retail food and, especially, the cash‐and‐carry segment. We see a substantial margin improvement thanks to the hard work of Belmiro and the entire team over the past 12 months, especially in this segment. EBITDA margin increased from 1.5% to more than 3.8% in this period. Financial expenses fell sharply, representing 1.8% of net sales. This was not only due to the period reduction in the Selic benchmark rate, as you already know, but also to our strong discipline in regard to the payment terms and conditions offered to our clients. These terms are not expected to worsen; consequently therefore, financial expenses should decrease substantially as the Selic comes down. Finally, we posted net income of R$ 253 million, 170% up on the previous year, driven by higher revenue from Assaí. I will now hand you over to José Roberto Tambasco, who will comment briefly on our improved performance and what we achieved in practical terms in the retail food business.
José Roberto Tambasco (Grupo Pão de Açúcar): Good morning, everyone. Supermarket and hypermarket sales fell slightly over the previous quarters. As Enéas mentioned, this quarter was affected by seasonality – last year Easter fell in the second quarter, while this year it fell at the end of the first, jeopardizing April’s performance. Another contributory factor was the decline in fruit, vegetable and meat prices in April and May. As a result, revenue remained flat despite the upturn in sales volume. On the other hand, certain product categories which have been recording strong and consistent growth since last year due to the increased purchasing power of the C and D income groups, such as personal care items, general merchandise, including home utensils, prepared meals, perishables, cheese, and dairy desserts, which form part of these consumers’ monthly purchases. Prices of these products have outpaced inflation and we expect this to continue now that the fruit, vegetable and meat price deflation is over, so we are very optimistic concerning the coming months. In regard to expansions and the opening of new stores, this quarter we concentrated on transforming the Extra Fácil stores into Minimercado Extra stores, converting a total of 65. In the third quarter, we will focus on the opening of new stores. We will open 19 new Minimercado Extra stores, followed by a further 30 stores in the fourth quarter. We have already opened one hypermarket this month and expect to open another in August, surpassing the annual estimate. As a result, our sales area should expand by around 6% this year, as scheduled, given the opening of these two hypermarkets which were not part of the original plan. As Vitor said, the retail segment’s margin widened as a result of the improved performance of the categories I have just mentioned, which also increased their share of our business, and we expect to maintain these figures from now on. Thank you. That’s all I have to say about the retail segment.
Belmiro Gomes (Grupo Pão de Açúcar): Good morning, everyone. In the second quarter of 2012, we continued to capture the improvements from the restructuring of the Assaí operation throughout 2011 and the changes in sales policy. As a result, our total second quarter sales increased by 11.11%, while same‐store sales improved by 10%. First‐half growth totaled 17.22%, with same‐store sales moving up by 15%. This result was due to Assaí’s new sales positioning, with a greater focus on corporate clients. This was true of all stores, regardless of the year in which they opened. As Vitor said, the second‐quarter highlight was gross profit, which recorded a 32.5% upturn thanks to the consolidation of last year’s change in sales positioning. As a result, together with strict control over expenses, EBITDA increased by 192% from R$ 14 million, in the second quarter of 2011, to R$ 40 million. Changes in the means of payment combined with the lower Selic rate helped the financial result, reducing
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costs by 26%. Accordingly, Assaí posted net income of R$ 19 million, versus a net loss of R$ 5 million in the second quarter of 2011, with a margin equivalent to 1.8% of period net sales. In the first half, we improved from a net loss of R$ 21 million last year to net income of R$ 34 million, showing that the changes made in 2011 not only increased sales but also contributed strongly to the group as a whole. We focused strongly on Assaí’s expansion in the first six months. The new store format is slightly different from the current one, being characterized by a larger area, certain special features to allow more automation, and a reduced sales force. We were able to acquire excellent points of sale, which will allow us to open new units in the second half and also in 2013 and 2014. In fact, the second‐half prospects are excellent. The market has welcomed the cash‐and‐carry model, which has been favored by logistics difficulties in large cities and highly‐developed regions and is becoming increasingly regarded by suppliers as an important additional distributor. So you end up complementing industry supply and helping small companies avoid the need to keep large inventories by using wholesale as a means of replenishing their stocks. For these reasons, we have great expectations for the second half. Thank you. I am now ready to answer any questions you may have.
Caio Mattar (Grupo Pão de Açúcar): Good morning, everyone. As mentioned briefly by Enéas, GPA Malls & Properties was created to enable and facilitate retail expansion, by taking full advantage of the real estate assets associated with our bricks‐and‐mortar stores, considering that we are a factory for anchor stores. The idea is to generate results from the company’s properties to add to its retail results. The results we are going to show you today are the consequence of hard work that began several years ago in a still‐depressed property market. Just to give you an idea, Thera Faria Lima, our first project, was established four years ago. However, since the real estate and retail cycles are very different, the first results are only appearing now. Given the expansion of GPA Malls & Properties and the numbers it is beginning to produce, we hired a permanent CEO to occupy the position I had been occupying temporarily. I would now like to introduce to you Alexandre Vasconcellos, the new CEO of GPA Malls & Properties, who will comment on our results. Thank you and I’ll now hand you over to Alexandre.
Alexandre Vasconcellos (Grupo Pão de Açúcar): Good morning, everyone. I will comment on slide 8 only, which should be on your screen now. As Caio and Enéas pointed out, here we have details of the three projects conducted by the Malls & Properties team over the last four years. Basically they consist of exchange operations, through which we provide the land and our partners are responsible for the sale, construction and delivery of residential or commercial units. The two first projects are included in the current quarter’s results and the third, Bosque Maia, located in Guarulhos in São Paulo state, will be recognized in August. From now on, our aim is to produce recurring revenue, adding value to the group's results. What does that mean exactly? It means that we will analyze our current sites, find out what they are best suited for and undertake developments specifically designed to meet the needs of the surrounding community. This goes for currently available vacant lots and the organic growth of our business. As soon as our stores are installed, they generate traffic, add value and generate a need for services that complement our business. So this is our objective: providing solutions to meet these needs. Thank you, everyone.
Raphael Klein (Viavarejo): Good morning, everyone. Once again, we meet to report our quarterly results, happy, cheerful and motivated. Our same‐store sales, same bricks‐and‐ mortar stores that is, recorded substantial growth in the second quarter, moving up by 6.3%, or 12% excluding inflation. We arrived at this 12% figure based on 7% deflation in electronics and home appliance prices and 1% inflation in furniture prices, according to the IBGE. Our sales mix for Viavarejo as a whole, including Casas Bahia and Ponto Frio, increased by 5.5%
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Double‐digit growth is exceptionally healthy and was helped by the IPI tax reduction and a series of initiatives implemented some time ago and only now bearing fruit. Some examples: a new concept store was implemented in Ponto Frio. The pilot store opened six months ago and became the final model. A total of 21 stores have already been adapted to this new Ponto Frio concept, which is ideal for the brand’s new positioning. A new product mix was also developed as part of the repositioning. Here is a very objective example: Ponto Frio is now Brazil’s leading LCD and LED widescreen retailer thanks to the new store concept and retrofit. Financial expenses are considered in the pricing process and are monitored on a daily basis. Part of the reduction in these expenses was due to the decline in the Selic rate and Claudia will say a bit more about this on the following slide. But what matters most is that we are committed to the company's future. We implemented the retail university, in order to ensure the maintenance of Viavarejo’s characteristics and the way it does its business, in which all store and regional managers are promoted internally. We call it the Leaders of the Future Program, ensuring the company’s essence and perpetuity. In short, we believe we are on the right path. Sales are in line with our expectations. Despite the spin‐off, system failure and restructuring, we can assure you that the company’s core is intact. We are confident in our ability to open between 50 and 60 stores this year, in line with the annual target. Our big challenge is to reduce costs and we are working strongly on this, having introduced several measures to trim operating expenses. We created a cash committee, which examines, approves and controls all the company’s expenses, and recommends ongoing improvements. We believe the fruits of all these measures will become apparent in our second‐half figures. We are very excited about the second half, but we have our feet firmly on the ground, ready to take advantage of Brazil’s growth. Viavarejo is ready for this growth. Thank you very much. I will now turn the floor over to my friend Quiroga.
German Quiroga (Nova Pontocom): Good morning, everyone. As mentioned earlier, we are in a situation of lower demand and fierce competition via promotions. However, contrary to expectations, this scenario is, to a certain extent, interesting for Nova Pontocom. Such situations require a special team, and we have just such a team. As proof of this, I would like to remind you that we were the only e‐commerce company to simultaneously report growth, profit and cash flow. Certain situations require difficult decisions. I particularly remember our decision in Christmas 2010 to stop scheduling deliveries after December 17, thereby missing out on some excellent sales opportunities in order to maintain our clients' trust. And it proved to be the correct decision over time. We are currently facing a similar situation. As e‐ commerce enthusiasts, we are forced to make a tough decision to ensure the health of our wonderful and successful business. What is this decision? It’s to focus on creating value for our shareholders, based on sustainable and increasing cash generation. We will therefore prioritize these two factors, without, clearly, losing sight of healthy growth. As an indication of this, I can tell you that half of our officers’ bonus this year is based on the EVA (Economic Value Added) model. Nova Pontocom generated record sales margins in June and July. In the second quarter, we grew by 10%, including retail, and 14% in B2C, and we should reach annual sales of R$ 4 billion, equivalent to the whole of Globex when it was merged into GPA. We are beginning the third quarter more prepared than ever for the retail fundamentals. We have all the attributes of success: assortment, margins, client satisfaction, top‐class service, working capital and close relations with our product and service suppliers, with whom we have established long‐term strategic partnerships. But above all, our top management is fully aligned and excited over our future trajectory and challenges. I would also like to highlight our efforts to streamline and automate our processes, especially in the buy chain. We have also improved the handling of information on our consumers, structuring a differentiated analytical CRM. We have also implemented a series of social network innovations, such as the launch of wedding lists on Facebook and Social Login, which allows our clients log in to our e‐commerce platform through several social networks. This is a loyalty‐building process. Finally, I would like
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to congratulate our team for reaching record levels of client satisfaction in surveys conducted by the main specialized agencies: e‐bit, Procon and Reclame Aqui. Thank you very much. I will now hand you over to Claudia, Viavarejo’s CFO.
Claudia Elisa Soares (Viavarejo): Good morning, everyone. On slide 10, you can see the results of all the company’s hard work, as anticipated by Raphael and Quiroga. Gross sales stood R$ 6 billion, up by 7% over second quarter of 2011, while same‐store sales increased by 6.7%, an exceptionally healthy figure considering the deflation our sector suffered. Gross profit also moved up, but our gross margin narrowed by 100 basis points to 27.1% of net revenue, mainly due to everything that Quiroga mentioned about the fierce competition. However, this was partially offset by the 66 basis points reduction in our operating expenses as a percentage of net revenue to 23.1%. As a result of this combined effect, we reported EBITDA of R$ 214 million, with an EBITDA margin of 4% of net revenue. We have since been monitoring our financial expenses very closely and we have observed a 30 basis points reduction for Viavarejo to 3.1% of net revenue, our lowest ratio since the earnings release. Given all these factors, net income came to R$ 5 million, a definite improvement over the second quarter of 2011. But Viavarejo wants more. We are very optimistic in regard to everything that we are going to do build because we want to do better in both the bricks‐and‐mortar and e‐commerce areas, using our assortment, top‐quality service, logistics, and high client satisfaction levels as a base. Thank you and I will now hand you back to Vitor Fagá.
Vitor Fagá (Grupo Pão de Açúcar): Thank you, everyone. Now let’s move on to our Question and Answer session.
QUESTION AND ANSWER SESSION
João Mamede (BTG Pactual): Good afternoon, everyone. My first question refers to the competitive e‐commerce environment you mentioned. I would like to know how you see this going forward, if you intend not to insist too much on margin and concentrate 100% on ensuring profitability. In the second quarter, you reported a substantial net loss in e‐commerce despite your prudent measures. This is the first issue I would like to mention. My second question refers to the significant gain in the cash‐and‐carry gross margin. I understand that many stores have been maturing and this will tend to push the margin up in the long term, but it is not easy to see the full potential yet. Could you say something about what you expect in the medium and long term and what kind of margin you believe is sustainable for this business? Thank you.
German Quiroga (Nova Pontocom): Thanks for your question, João. Firstly, in regard to the competitive environment, we are fully prepared for it. In fact, we have been preparing for a long time. Remember that we have the best purchasing scale in e‐commerce, especially in the five categories we lead: electronics, home appliances, IT, telephony and furniture. We have outstanding scale, which is an excellent advantage when it comes to a price war, but we prefer to focus on profitability. Last year we also suffered some slight quarterly losses, but we ended the year in the black. The final quarter is the most important for profitability, given the volume of sales compared to other periods. So we are prepared to resume profitability throughout the year. As I said before, we were the only large e‐commerce company to post a profit last year and we are confident of obtaining positive results again. In my opinion, our competitors will find it very hard to keep up, especially with their level of promotions. In any event, we are fully focused on profitability. We are growing, generating cash and we will generate profits this
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year. This is a commitment. We prepared for it throughout the opening months and we will reap the benefits throughout the second half. Thank you for your question.
Belmiro Gomes (Grupo Pão de Açúcar): João, about your other question, the gross cash‐and‐ carry gross margin is clearly lower than the gross retail margin. Our improved margin was not only due to store maturation, but also to the changes implemented throughout last year. The search tool on the store’s new website has a more reduced assortment and is more streamlined. Wholesale has one special characteristic – there are no installment payments, so credit cards have a very low share of sales. The estimated EBITDA margin for this segment is between 4% and 5%, with a net margin of 2% to 2.5%, a stable level that we intend to maintain.
João Mamede (BTG Pactual): OK. Thanks a lot.
Ricardo Boiati (Bradesco): Good afternoon and thanks for the opportunity. Firstly, Raphael, is the company also facing stiff bricks‐and‐mortar competition, or is this limited to e‐commerce? I also would like to know about the retail food segment, specifically Minimercado Extra. Can we expect a margin and revenue improvement after the conversion of the first stores? What can we expect for this new format in terms of same‐store sales and new store openings from now on? Are you excited about the new format? Thank you.
Raphael Klein (Viavarejo): Thanks for your question. As you said, the bricks‐and‐mortar segment is quite different from the e‐commerce segment. For that reason, we have two independently managed companies to ensure the maximum elasticity and profitability for each. I will hand you over to Roberto who will comment on competitiveness and the situation of the bricks‐and‐mortar stores.
Roberto Fulcherberguer (Viavarejo): Good morning, Ricardo, and thanks for your question. Yes, bricks‐and‐mortar competition has stepped up too, probably affected by e‐commerce; however, our pricing process is doing well and we have been able to increase sales without squeezing product margins. I think we have handled this period very well, adding value with very little margin impact. Tabasco will comment on the Minimercado format now.
José Roberto Tambasco (Grupo Pão de Açúcar): Ricardo, as I said, we concluded the conversion of 65 stores in the second quarter. Sales were slightly jeopardized during the transformation, because some stores were temporarily closed. After the conversion, however, our client numbers moved up substantially, climbing by around 20%, and the average ticket also increased. This is the result we were expecting when we first piloted the format. We are therefore extremely enthusiastic. This type of store adds more value to the consumer and improves margins for the business, offering a more interesting sales mix, in addition to providing a great opportunity for the group to expand, especially in big cities. Of course, we will have to make some adjustments to the assortment, but we are very satisfied with our performance so far. Now our focus is on expansion, as I told you. In the third quarter, we plan to open 19 new stores and by the end of the year we should have between 50 and 55.
Ricardo Boiati (Bradesco): Excellent. Thank you very much.
Tobias Stingelin (Santander): Thank you. Good afternoon. My first question is for Quiroga. How would you compare the current scenario with last year’s business plan presented during Nova Pontocom Day? According to my calculations (which may be incorrect), net revenue growth was around 2% in the second quarter, which was a clear improvement on the first quarter, but well down in the year‐on‐year comparison. So are growth and better profitability
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possible? That’s my first question, concerning Nova Pontocom. Then I would like to know when we are likely to see more aggressive synergies in regard to lowering expenses in Viavarejo. Raphael mentioned something about this cash program to control expenses and I would like to know what it is all about and what we can expect from it. Finally, as I see it, Enéas believes strongly in economic growth and is a little more optimistic than Raphael, who appears to have his feet more firmly on the ground. I would like to understand the difference between the two businesses at the moment. Thank you.
German Quiroga (Nova Pontocom): Thanks for your questions. Firstly, the 2% growth you mentioned refers to net revenue, which was affected by a non‐recurring event we had last year. Gross revenue gives a more accurate picture of our sales growth. E‐commerce grew by 13.7%. Considering Nova as a whole, we are around 10%, because e‐commerce grows faster than bricks‐and‐mortar operations. Concerning the difference in the current scenario, on E‐ commerce Day and Nova Pontocom Day last year, we did not have an estimated global macroeconomic situation or any idea of how our competitors would behave – the level of promotions was absolutely impossible to predict. Everybody is involved in the global situation and there are several possibilities. Nevertheless, e‐commerce has proved highly attractive, even in times of crisis. If you look at the more mature markets, such as the U.S., it has kept growing in crisis periods and this is happening in Brazil as well. Obviously it is not moving up as fast as it would in a favorable economic climate, but it is still outgrowing the bricks‐and‐mortar business. However, our competitors have forced us to rethink and make some choices. But it is worth repeating what I said earlier, perhaps we are once again the first to adopt a more radical attitude. In any event, we are determined to preserve the business. As I told you, it is a wonderful and successful business and we have no intention of ending up in a lose‐lose situation. We are here to win. If the others want to keep losing, that’s fine with us. We can keep playing this game because we are better equipped than they are to fight a price ware, but it is not healthy in our opinion. If you want an example, just look at the TV industry. There was a huge change in technology, from tubes to LCD and LED, but hardly anyone has made any money from the upgrade. It just doesn't make sense. So we are thinking like shareholders, trying to create value for the shareholders, generating cash and maintaining the Company in a profitable situation. This is our commitment for the year. We will continue to make a profit, generate cash and post growth. Will it be as much as the competitors? No, because we don’t want to pay any price for growth.
Tobias Stingelin (Santander): Thank you. But are the competitors behaving accordingly? Is the environment getting better? With the large players being more rational, has the environment improved?
German Quiroga (Nova Pontocom): Our monitoring of the competition’s prices has shown that the other players are becoming even more aggressive. Just to give you an example, several of them are working simultaneously with discounts of 10%, plus 12% for cash purchases, or 15% at certain times for certain categories, with free freight within Brazil. This pushes up costs to 20%, which is above the gross sales margin. So a loss is absolutely unavoidable. It just doesn’t make any sense to us. Nevertheless, we continue to grow, because we have several growth channels. We are expanding the category, we have new business models, we have B2B, we are adding other businesses over time. This will ensure growth, profitability and cash flow.
Raphael Klein (Viavarejo): Thank you for your question, Tobias. I’m here with Jorge, who’s going to help with the reply. We are extremely upbeat. We believe growth of 12% with deflation is excellent growth. We are so confident that we have an aggressive expansion plan, which calls for the opening of between 50 and 60 stores. As Enéas said, we believe in Brazil,
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and we believe in the strong organic expansion of Casas Bahia and Ponto Frio. So, in terms of enthusiasm, we are in line. We are all in line behind the growth we have planned for 2012. In regard to the synergies/expenses question, it is important to understand that we captured a great many synergies last year and others are structured to occur in the second half of 2012 and 2013. One example is joint warehouses. When you take a decision to build a warehouse, implementing it together with the rest of the group takes time. And there’s another factor – The Brazilian antitrust authority (CADE) is still holding us up a bit in regard to the synergies. Unfortunately, due to an Operation Reversibility Preservation Agreement (APRO), restriction, we have been unable to take full advantage of the synergies. We have captured a good deal, but still not 100%. We have various fronts, with Pão de Açúcar and with Pontocom, where we can obtain synergies for the group as a whole. And that’s what we’ll be concentrating on. We have to remember that the history of the company, when it began in 2010, was completely different and it is now undergoing a natural evolution. And some things we will be obtaining in the near future. And don’t forget the Brazilian antitrust authority (CADE) issue. As we have already mentioned, in regard to this issue, we have implemented this cash committee which has produced good results. I’ll now hand you over to Jorge, who will give you more details on what we are doing, such as back office synergies, logistics and the cash committee, among others.
Tobias Stingelin (Santander): Thank you.
Jorge Herzog (Viavarejo): Good morning and thank you for the question. Just to underline what Raphael said, in 2011 we focused on implementing the synergies and the results became apparent in the first half of 2012, especially in the first quarter. Midway through the second quarter we took a decision to take a serious look at expenses to see how we could make the Company leaner. As a result, we identified a series of initiatives which we have already begun to implement, or will be implementing in the third quarter, one of which, probably the strongest or most aggressive, is the cash committee. This fully‐dedicated committee, also known in the market as the expense committee, is responsible for evaluating all the company’s expenses. So any expense we incur will have to pass through this committee for evaluation and authorization (or not, as the case may be). As Raphael said, it will also look into possible improvements, given its broad view of everything that is happening in the Company. So we are extremely confident. We have the expertise to handle this type of business model. And we have a history of this committee, which was implemented in the Group years ago and was highly successful. And now we are implementing it in Viavarejo and we are certain it will be extremely fruitful.
Tobias Stingelin (Santander): Thank you.
Gustavo Oliveira (UBS): Good morning, everyone. I have a few questions and I will begin with Tambasco. You talked a lot about the seasonal impact of Easter in the second quarter. I would like to know if this effect also had a positive effect on the Company’s margins and if your margin guidance, which was 7.8% at the top of the range, could be exceeded because part of the food segment is doing a little better than expected? That’s my first question.
José Roberto Tambasco (Grupo Pão de Açúcar): Clearly the Easter seasonal effect is extremely strong, especially for Extra and the hypermarkets, but not in terms of the margin. What has had a positive effect on the margin is that, in recent quarters but not this one, we have seen a reduction in the more basic product categories, such as rice, beans, oil and sugar, which have lower margins. These categories have lost sales share due to the change in consumer habits. At the same time, as mentioned before, sales of other categories with higher added value and wider margins have moved up, generating a gain in the margin mix. Clearly, competition in the
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food market is fierce. In our last call, we spoke about the increased aggressiveness of our main competitors, which had been somewhat weaker until then, increasing the importance of negotiations with suppliers. So the higher margin is due to a combination of the product mix and greater efforts in regard to supplier negotiations, in order to reduce costs.
Vitor Fagá (Grupo Pão de Açúcar): About the guidance, Gustavo, we are confident we can deliver results between the established limits, i.e. an EBITDA margin of between 7.3% and 7.8%.for GPA Food. Obviously, we believe our final figure will be in the upper part of the range, close to the upper limit, given our healthy performance in recent quarters. But it is still too early to speak of any result exceeding this limit.
Gustavo Oliveira (UBS): OK, I understand, thanks. My second question is for Belmiro: in the last year and a half, you made several investments in Assaí, changing the mix, and the results have been highly satisfactory. Are you prepared for more aggressive expansion in the next two to three years? And what type of growth would you have to implement?
Belmiro Gomes (Grupo Pão de Açúcar): Yes. As we did last year, we put a great deal of effort into internal changes in relation to commercial positioning, products, mix, etc. and since the end of last year we have become extremely involved in and focused on the preparations for expansion. The idea is to close the year with a sufficient land bank for at least the next three years. Clearly we had some difficulties to begin with, but there is another requirement together with the internal changes. The new store format calls for a more automated operation, i.e. less sales staff and more mechanization, especially in regard to stackers. This will require slightly distinctive sites of between 20,000 and 25,000 m2, with 12,000 m2 of built‐ up area and a sales room of between 5,000 and 6,000 m2. So a series of preparations for more aggressive expansion have been implemented and we are definitely prepared for the second half and for 2013 and 2014. We expect to increase our sales area by between 320,000 m² and 380,000 m2.
Gustavo Oliveira (UBS): Per year?
Belmiro Gomes (Grupo Pão de Açúcar): No, total sales area. In terms of built‐up area, we are talking of somewhere between 680,000 and 700,000 m2. One of wholesale’s defining characteristics is that you have a greater in‐store storage capacity, enabling you to make less use of logistics. In fact, around 80% of supply is delivered directly to the stores, eliminating one stage of the operation, so your cost of goods is lower and you can therefore be more aggressive.
Gustavo Oliveira (UBS): Thanks a lot. My two last questions are to do with e‐commerce. In regard to the promotional environment, which is highly competitive, last year you took a pioneering step with the launch of Black Friday in Brazil, even though it was an extremely modest event without a strong marketing campaign. But such a highly promotional event, depending on how it is handled, could affect your profitability. What do you think about this and are you planning any special events for the second half, including Black Friday? That’s my first question. The second is for Quiroga and also has to do with his business: how sustainable is the stand‐alone e‐commerce model? Listening to the discussion and the questions in this call, I am reminded greatly of B2W in 2006, 2007, when there was an integration process. You are doing it better, without a shadow of a doubt; your previous decisions were better, but there comes a time when differentiated logistics or service cease to be the sole values for consumers. How are you thinking about this issue in terms of strategy, about the Nova Pontocom model as an independent model? Thanks.
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German Quiroga (Nova Pontocom): Good afternoon. Firstly, I have no doubt that e‐commerce will be an exceptional business in the future. We have produced results over time and I have put all my midterm and long‐term investments into it. See how the markets have matured and you too will have no doubt. The current scenario in Brazil, together with the global economic scenario, may generate uncertainties in some. In fact I hope they do; the more caution, the better. But in my mind there is no doubt. I cannot stress this enough. This is a fantastic business and it is highly scalable. Consumers will tend to do more and more of their shopping on‐line. The new generations were born into the digital age and are increasingly accustomed to making on‐line purchases. Such purchases already predominate in certain product categories in the mature markets, and this will happen in Brazil too. In fact, it’s already happening. Scale gains are enormous in this business, so we will be reaping fantastic benefits over time. Competition is exceptionally tight at the moment, which is squeezing margins. But we have established a limit and this is important. Recently, we made profitability and cash flow a priority. We were trying to combine the two factors, but given the attitude of the competition, this combination is no longer as feasible as it was so we have to make choices. And the choice was to generate cash and make a profit, which should permit relevant growth. So we should be able to combine significant growth with cash flow and profits this year, as we did last year. Not that growth will be as strong as last year, when the segment grew by 40%. So we will give way on growth for a bit to maintain what we really believe is most important for the shareholders, namely cash generation, value generation and, especially, customer satisfaction. So we are much more strongly dedicated to doing everything possible for our clients, increasing their satisfaction and strengthening their loyalty to our platform. As for Black Friday, last year we recorded our highest one‐day sales figures ever and profits were excellent, despite massive discounts. We spent a long time preparing for the event and were able to combine profitability with exceptionally high sales volumes. I am not going to comment on what the competition did or didn’t do, but I can say that we are beginning to reap the benefits of our multichannel approach, which is definitely the way forward. Even the global players are doing it, although there are some fantastic single‐channel players who aren’t able to take advantage of these benefits. We are preparing to work together as a group in order to capture all the advantages of e‐commerce, and of the multi‐channel system. This is increasingly becoming a reality. We are working closely with Tambasco in Extra and with Raphael in electronics and we will see the benefits in our results in the coming years. I am certain of this. I have no doubts whatsoever. This is an amazing business both in terms of scale and results generation. It is the future. And if anyone has any doubts, fine, it makes things cheaper for us and we will make money going forward.
Roberto Fulcherberguer (Viavarejo): Thank you for the question. In regard to competition next quarter, we expect it to be as fierce as it was last quarter, before improving somewhat in the final three months. We are extremely well‐prepared in terms of pricing to take on the competition in the third quarter. Truly, we are not worried about this.
Gustavo Oliveira (UBS): Why do you believe the fourth quarter will be better than the third?
Roberto Fulcherberguer (Viavarejo): We believe there will be a slight economic upturn, higher than between the second and third quarters.
Gustavo Oliveira (UBS): OK. Thanks a lot.
Andrea Teixeira (JPMorgan): Thank you very much and good afternoon. Could you tell me a bit more about what you expect from the third quarter? That’s my first question. You just spoke about a stronger recovery in the fourth quarter and I would like to know a bit about the third. Listening to the previous questions, from what I understand, in regard to e‐commerce
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you are thinking of an EBITDA margin of 4% and a net margin of 2%, indicating stability. Would this be for the whole of Viavarejo? If so, it’s extremely conservative. Or are you also thinking about the on‐line side, Quiroga’s part? My other doubt concerns the area expansion that Belmiro was talking about. I realize that the group in general is turning over a new leaf and I would like to know if you intend to reaccelerate this expansion in the next 18 months. I would like to reconcile this with the expansion from 320,000 to 380.000 m2 in the next two years you mentioned, just to avoid any doubts. Thanks.
Vitor Fagá (Grupo Pão de Açúcar): Thank you for the questions. We expect an EBITDA margin of more than 5% for electronics – our annual guidance states a margin of between 5.2% and 6.5%. A margin of around 4% was mentioned in this call, but his refers to Assaí’s cash‐and‐ carry business. These are our forecasts for this year and we are confident in our ability to deliver them. I'll now hand you over to Quiroga to complete the reply on e‐commerce.
German Quiroga (Nova Pontocom): Last year our e‐commerce EBITDA margin was more than 5% and we believe it could be as high as 9% given an appropriate competitive environment. However, competition at the moment is well above what we consider to be reasonable, so we have not managed to operate with 9% this year. But we believe it to be perfectly feasible in a situation of balanced competition. As I said, last year it was above 5% and our commitment to profitability, growth and generating cash for our shareholders remains as firm as ever.
Andrea Teixeira (JPMorgan): Quiroga, do you have these 5% and 9% figures after discounting receivables?
German Quiroga (Nova Pontocom): The financial part, the discount of receivables is less than EBITDA. Expenses with the Selic and EBITDA are around 3% of our financial cost.
Andrea Teixeira (JPMorgan): That’s how you get to the 2% I was just talking about?
German Quiroga (Nova Pontocom): Two percent, yes.
Andrea Teixeira (JPMorgan): Thanks for the explanation. Just out of curiosity, Quiroga, if e‐ commerce was completely spun off from the Company, you would have a perfect allocation of expenses? Or rather, with all this multi‐channel approach you were enthusing about, which is so popular, you would have a perfect allocation of your distribution center which is already separate? You would have this kind of profitability if Nova Pontocom was spun off, thanks to costs, suppliers and all the structure you have today?
German Quiroga (Nova Pontocom): Excellent question, Andreia, because it gives me the opportunity to clear up a few points. Since we began operations in 2008 as a totally segregated company, all our costs have been allocated directly. We have only ever received a single capital injection, of R$28 million. Nothing more. All our growth is supported by our own cash flow. That shows you how fantastic this business is – none of our costs are subsidized. What we are doing increasingly is seeking out intelligent synergy options. All our costs related to inventories, operations, the purchase of goods, etc. are totally independent and are booked in our financial statements in their entirety. What we can do from time to time with certain suppliers is try to acquire goods under the same conditions as the group and that is a definite advantage and it is our duty to seek out such opportunities.
Andrea Teixeira (JPMorgan): Great. Just to clarify, under what conditions do you expect an EBITDA margin of 9%?
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German Quiroga (Nova Pontocom): If the market were healthy, perhaps we would have achieved it this year. Let’s hope that the competition realizes that we can all make more money than we are making now, and the sooner the better.
Andrea Teixeira (JPMorgan): OK, great. Finally, just to comment on what you were talking about just now. We have seen a lot in the media about Father’s Day. How are consumers behaving? Obviously there’s a big slowdown, but I would like to hear from you as the country’s biggest retailers just exactly what is happening.
German Quiroga (Nova Pontocom): I’m going to hand you over to Roberto, but I must say that the flow of clients at Pontocom has been fantastic and it has been throughout the year.
Andrea Teixeira (JPMorgan): Great. Thanks again, Quiroga.
Roberto Fulcherberguer (Viavarejo): Just to conclude, the bricks‐and‐mortar world is also enjoying substantial consumer flow. In fact it’s increasing at the moment.
Andrea Teixeira (JPMorgan): Fantastic. Thanks once again.
Vitor Fagá (Grupo Pão de Açúcar): Andreia, let’s talk a bit about the area expansion. It’s important to separate Viavarejo and GPA Food. At GPA Food, we expect a sales area expansion of around 6%, 6.5%, as Tambasco mentioned a few minutes ago, giving a total expansion of around 90,000 m². We are absolutely confident we can achieve this. We opened several stores in the first half and we have another 14 under construction. So we don’t foresee any problems in reaching this figure.
Andrea Teixeira (JPMorgan): Just to be certain, at the end of this year or at the end of next year?
Vitor Fagá (Grupo Pão de Açúcar): This year. It’s an area expansion of 90,000 m² in 2012 over the end of 2011. In the case of Viavarejo, we expect to open 50 to 60 stores, as Raphael has mentioned. That is also important. We currently have 18 Viavarejo stores under construction, so we are on track for completing this expansion by the end of the year. It is important to remember that the number of new openings is much bigger in the second half than in the first. This has been true for some years now and represents a clear retail tendency of taking advantage of the seasonal upturn in end‐of‐year sales.
Andrea Teixeira (JPMorgan): OK. Thanks, Vitor.
Enéas Pestana (Grupo Pão de Açúcar): I would like to return to your first question about the second‐half, or fourth‐quarter recovery. This question is being made with increasing frequency us in all our businesses and I would like to reinforce our expectations for the second half. As I said at the beginning, we are extremely optimistic thanks to our belief in the strength of the market and domestic consumption in Brazil, which is where we operate. It’s a very robust market, which has grown substantially in recent years through upward social mobility, a more even distribution of wealth, the higher minimum wage and real increases in collective bargaining agreements, especially at the end of last year. And there are other leveraging factors in the second half. Firstly, August and September have a more favorable calendar, with more Saturdays than last year and that’s a definite plus in the third quarter. Secondly, we are working on all our businesses. At Viavarejo, Raphael has done a great job of reducing expenses. Many synergies are being implemented, obviously respecting the restrictions imposed by the Brazilian antitrust authority (CADE), but much has been done. The work is
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being handled in a highly structured manner by top management, by Raphael, Claudia and Herzog (who’s really good at this) and by Roberto himself. I’ve seen their plans and their initiatives and we are convinced they’ll succeed, are succeeding, in reaping the benefits this year and on a recurring basis going forward. And the same can be said for all the other businesses. Assaí has substantially reduced its expenses as well as its working capital needs, which came to more than R$300 million last year. Retail has done its homework and we have maintained this in a very controlled way. The cash committees and expense groups have not been disbanded. All this reduction in expenses is aimed at two key issues. The first is improved efficiency, thereby increasing the profitability of all our businesses. The second is an even stronger competitive capacity in every micro‐region where we operate and in e‐commerce in a much more comprehensive way. We also believe strongly in the government incentives, such as the tax breaks on home appliances. We have met directly with Minister Mantega, and we were impressed with his willingness to introduce measures to fuel and strengthen Brazil’s consumer market. This is another reason for our confidence in a better second half. And, of course, there is also the usual upward end‐of‐year seasonality. But what we have been hearing is doom and gloom, particularly in regard to Europe, and even the United States, as well as default and increased debt which end up undermining consumer confidence. And we do believe that what we are witnessing really does have to do with a crisis of confidence and is not due to any particular fundamental, because the fundamentals remain sound. We strongly believe that this is a moment for Brazil to grow. May companies maintain their investments and keep creating jobs so that the consumer market remains strong and Brazil can continue growing. Now is the time to grow, not to shrink. That’s what we believe. Thanks to these measures, we are fully equipped to compete, gain market share and improve our position in relation to our competitors in all our businesses, favored by scale and our leadership position. Remember that whenever we are not the outright leader in our operational segments, we are in second place. We are therefore perfectly capable of generating a profitable second half, growing with confidence in the domestic market. We will be holding Black Friday again, as well as Red Alert, and doing everything necessary to ensure healthy growth with profitability. And we will also be maintaining our strong organic expansion program. Clearly this growth will be based on a robust capital structure. That is something we insist on. We will never do anything to jeopardize our cash position, which ensures liquidity at a low cost and we continue reducing our non‐interest‐bearing sales, as well as our working capital needs. All this to guarantee a return on capital employed. The team is here and is full of energy, as you have all heard. But it’s more than just energy. Our team is highly skilled, with many years of experience in retail, and extremely organized, with autonomy and empowerment, but without losing their vision of the group. I am part of a group, I am part of a team. Sorry, but I wanted to take advantage of your question to reiterate my confidence in the domestic market, in this moment for Brazil. And I trust that people in all the segments are equally confident and will help transform not only the second half but also this moment, which is the time to believe in and build this country, to grow, generate value, create jobs and move ahead. Thank you for the question.
Andrea Teixeira (JPMorgan): Thank you, Enéas.
Operator: Grupo Pão de Açúcar’s conference call is now closed. The Investor Relations Department is available to answer any questions you might have. Thank you all for participating and have a great afternoon.
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