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Transcription Conference Call Results of 4Q07 Grupo Pão de Açúcar March 04, 2008

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CONFERENCE CALL FOR DISCLOSURE OF 4Q07 RESULTS

Good morning, ladies and gentlemen, and thank you for waiting. Welcome to the Grupo Pão de Açúcar conference call to discuss the Company’s 4Q07 results. This event is also being broadcasted simultaneously on the Internet via webcast, which can be accessed on the link www.gpari.com.br, with the respective presentation. The control of slide selection will be managed by you. There will be a replay facility for this call on the website. We inform you that the press release is also available at the IR website, www.gpari.com.br. This event is being recorded, and all participants will be in a listen-only mode during the Company’s presentation. After GPA’s remarks are completed, there will be a question and answer section. At that time, further instructions will be given. Should any participant need assistance during this call, please press *0 to reach the operator. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities litigation reform act of 1996. Forward-looking statements are based on the beliefs and assumptions of GPA management, and on information currently available to the Company. They involve risks, uncertainties and assumptions because they relate to future events, and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of GPA and could cause results to differ materially from those expressed in such forward-looking statements. Now, I would like to turn the floor over to Mrs Daniela Sabbag, Investor Relations Officer, who will begin the presentation on the Company’s performance for the period. Daniela, you may proceed. Daniela Sabbag – Good morning everyone, thank you very much for taking part in our conference call. Today we have with us:. Abilio Diniz, Chairman of the Board; Claudio Galeazzi, our Chief Executive Officer, and Hugo Bethlem, José Roberto Tambasco, Enéas Pestana, Caio Mattar and Fernando Teles, president of FIC. Before starting I would just like to let you know that we will shortly be defining the date of the GPA DAY, which will be held in April, as we mentioned earlier. As soon as the date is defined you will receive the invitation with the complete agenda. Let


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me now invite Enéas Pestana to present you with the comments about performance. Enéas Pestana – Good morning everyone. I will perform a reading here of the results of last year, the main lines, to try to contribute to the reading and correct interpretation of these numbers and trends. To start with, you have a presentation, we will start off by talking about page three, which refers to the sales performance. We will always be looking at the performance in the 4th quarter and also in the full year. On page three, we can see then that in the 4th quarter, we had growth of gross sales of 10.6% in comparison with the 4th quarter of 2006 and we attained 7.2% of sales growth in the year. In terms of same stores sales, the increase was 2.8% in the year, fueled by the category of food products with 3.1%, where we emphasize the sub-category of perishable goods. In the non-food category we recorded growth of 1.8% in the same stores concept, affected mainly by the audio and video categories. As we had already been telling you, during the year we really had this impact, particularly of these non-food categories. The positive highlight in terms of format is Pão de Açúcar, which for the 5th quarter in a row presents higher growth rates than the other formats… very interesting growth. Talking about gross income, in first place it is worth emphasizing that we maintain our low price policy, with the pursuit of competitiveness with profitability that we adopted in mid-2006. This strategy is maintained, and we see here some result, growth of sales with growth of cash margin. Looking at the 4th quarter, on page 4, you will see that in percentage of net sales, we had a margin of 27.7% in the 4th quarter, and in the 4th quarter of last year, the same thing, the margin is the very same, yet with growth in cash margin of R$ 106 million. The scenario in the year is also very similar: we have 28% of gross margin versus 28.2% last year, in spite of this with growth of cash margin of R$ 260 million. It is clear that here in the year and in the 4th quarter we have the Assai effect. In the year, without the consolidation of Assai, in the months of November and December our gross margin would be 28.3%, in line with the year 2006. In terms of expenses, we have good control of expenses evidenced in the 4th quarter, when we had a total expense of R$ 843 million versus R$ 840 million last year, practically the same number in nominal terms. It is worth emphasizing that in administrative expenses we had a downslide of 19% and, in selling expenses (which includes a large portion of variable expenses, including advertising), we had growth of 5% in the quarter versus growth of sales of 10%. The scenario in the year is very similar: in terms of percentage we had 20.5% versus 21.2% in relation to last year. Once again, in administrative expenses we had a reduction of 5.5% in nominal terms and in selling expenses, growth of 5%, which also comes below the 7.4% of growth of sales. Hence in relation to expenses, it is clear that we have


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maintained stringent control over expenses and, as a result, the capture of results on the EBITDA line is very clear. This means that if you look at the 4th quarter, as I said, we had R$ 106 million more of gross income than last year. When we look at EBITDA, we had R$ 96 million more, i.e. practically all the gross income improvement is evidenced in EBITDA, because expenses are under control. This has always been a focal point of attention of the market, that we had control over expenses so sales and margin improvement could reflect on EBITDA. And this clearly happens in the 4th quarter, but also in the year, when we attain an EBITDA margin of 6.9% versus 6.4% last year, amounting to R$ 1.26 billion. This represents growth in the year of 15.7%, and the growth in the 4th quarter was 42.1%. This also shows, in spite of seasonality, even in a deseasonalized scenario, a tendency for clear gain of EBITDA margin, especially due to control of expenses. Talking about FIC, it is absolutely in line with what we have also been saying to you over the last quarters: we reached the breakeven point at the end of the year 2007. Looking at the quarter, in 2006 we had loss in the quarter of R$ 11 million and now in the 4th quarter of 2007, loss of R$ 2 million, i.e., it was a recovery of 80%. And the good news is that in December FIC recorded positive results, as well as at the beginning of the year. It is clear that we will provide the disclosure of this upon the closing of the 1st quarter 2008, but we had a good start to the year and ratifying this trend. Hence we can say here that we have entered a new phase at FIC, i.e., a phase of profits. In relation to some numbers for FIC, it is also worth emphasizing the portfolio. We end the year with 5.7 million customers; this represented an increase of 12.6% in the portfolio. FIC’s share in the sales of the Group is 12.5% and this is it: we really expect a year of profits in this operation from financial products and payment methods. Another comment that we absolutely must make is about our operations in Rio de Janeiro, more specifically, about Sendas. We have disclosed all the work done since Galeazzi & Associados was contracted around the month of September, with effective start of work since the month of October, when we manage to see a good recovery of the results of Sendas, especially where EBITDA is concerned. The policy of aggressiveness and competitiveness is maintained in Rio de Janeiro, in a type of logic of clusterization by region defined by the audience or by the profile of customers from each region. Another item that we must emphasize is control of expenses, which is extremely strict. A committee was set up that analyzes each cent, all the money from cash, with the power of questioning the managers for approval of the expenses and avoiding any expense that cannot add value to the business and to the customer.


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As a result, expenses experienced a reduction in nominal terms, the total expense came to R$ 613 million, which represents 22% of net sales, as opposed to R$ 631 million last year, with 22.7%. In the 4th quarter, also to perform a trend analysis, expenses dropped in relation to the same period of last year by 10.5%; expenses amounted to 19.6% of net sales as opposed to 21.6% last year. So it is clear that the work started in the 4th quarter at Sendas really did produce these results, or leveraged these results at Sendas Distribuidora and is focused especially on the issue of effective control of expenses; consequently, the EBITDA margin attained 6.6% in the quarter versus 5.8% last year, which shows growth of 12.7% in the quarter or growth of 11.7% in the year. Finally, as far as results are concerned, net income experienced very expressive growth, especially in the 4th quarter. The growth came to 306%, or R$ 113 million, versus R$ 28 million of income in the 4th quarter of 2006; and in the year, considering the results published last year, of R$ 85 million, we had 146% of growth, attaining final income of R$ 211 million. It is clear that here at Sendas we had, as already disclosed in the 3rd quarter, yet another additional amount of recovery of deferred income tax, which was recorded, given the review of future projections and income of Sendas that, with the improvement of operating results, allows us to obtain additional deferred income tax credit that is only recognized in accounting as future results present the capacity for absorption of this income tax. On page 10 there, with the sole objective of helping you in an interpretation of income, we have a reconciliation between the accounting net income and the cash income; and here the main effects, evidently we only emphasized the main effects, you go from R$ 211 million, I return with equity income, I return with equity income from FIC, it was still a loss and there is no cash disbursement. Provisions for contingency therefore refer to provisions without a cash outflow, they add up there to R$ 53 million and mainly amortization of goodwill, which does not represent a cash outflow either. It has a stream that is totally driven at tax planning and that represents important income tax credits, but that in a profit analysis does not represent a cash outflow. So to arrive at the cash income we add back the amount of R$ 101 million, remembering that these amounts that we are adding up are treated or are net of the impact of income tax to be able to be added to the net income of R$ 211 million. And as a result, we arrive at a cash income of this company of almost R$ 400 million or R$ 394 million so that you can identify this number in our financial statements. As regards the investments made in the year 2007, we attained the amount of R$ 980 million of investments, yet not considering here the investments relating to acquisitions, here we are only considering investments in new stores, purchase of land, renovation of stores and infrastructure (especially IT and logistics). If we were to consider acquisitions, we would have to add R$ 46 million that were invested in the acquisition, in the takeover of the operations of the Rossi Supermercados chain


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and another R$ 226.9 million relating to the joint venture with the Assai chain. The sum of these two investments is R$ 273 million which, added to the R$ 980 million, would allow us to arrive at a final amount, considering CAPEX also plus acquisitions, of R$ 1.253 billion. To finalize my explanation, I would like to briefly touch on the subject of the debt, because I know how important this is in your analysis and projection. On December 31, 2007, our debt attained the amount of R$ 2.3 billion or R$ 2,342 million, of which R$ 643 million represents 27.5% of the total debt, on the short term, and R$ 1,698 billion on the long term, represents 72.5% of our total debt. The average period of our long-term debt is three years. The average cost of our debt today is 99.3% of the CDI (Interbank Deposit Certificate). Our average rate of financial investment is 101% of the CDI, that is, we have a very good level of arbitration in terms of investment cash versus average cost of debt. Well, these were the most important considerations and comments, I will now invite our CEO, Claudio Galeazzi, to address you. Claudio Galeazzi – Good morning. I would like to quickly talk about the points and the policy that are driving the new implementations at CBD. I would like to make a comparison with what was implemented in Rio de Janeiro and, with adaptations and changes, which is also driving what we want to implement at CBD. I would like to say that we are seeking simplicity, agility, empowerment, integration and focus. Focus on activities, but mainly, focus on the customer, i.e., back to basics. I am in the habit of saying that a back to basics at college is worth no more than three credits in personal administration. In the deployment of Rio de Janeiro, we sought to focus more on the customer and on what the customer demands, so much so that a study was prepared and rapidly started in July that was effectively the beginning of our activities at the Sendas Distribuidora. The concern with the customer led our analysis to the creation of eight micro-regions and to the redefinition of objectives and strategies for Rio de Janeiro. I am mentioning Rio de Janeiro because what was implemented there basically, repeating it once again, will drive the implementations in the structure and in the focus that we will concentrate on CBD. We sought to integrate the whole commercial, marketing, logistics and operations area under a single management at the Sendas Distribuidora. You can see in the new structure already implemented here at CBD that we sought and aimed at the same principle: integration and a lot of agility. We also changed, we sought to focus on communication, on pricing, on assortment and on the activities that actually make sales a consequence and not necessarily the main objective.


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In implementing unification of the areas, we managed to focus on the customer, taking the customer what he would effectively like to find in our stores. We formed the cash committee, which seeks to analyze each and every cash outflow: this procedure has also been implemented here already, seeking this analysis. In Rio de Janeiro we formed eight workgroups that address short-term opportunities, obviously without losing sight of the strategic view. The workgroups there in terms of productivity, shrinkage, galleries, expenses, as already mentioned, non-food, shrinkage and stock-out, operational standard and assortment. We conducted a review, a large-scale review of assortment and adapting what would be expected for each one of the clusters and would like to mention that we also organized a review of the assortment and analysis of our inventories, which is also being seen at this time in great depth here in São Paulo. In seeking this integration of the commercial areas, we will also implement a great deal of agility and focus on result, the entire model obviously does not forget the evolution of sales, but seeks at this early stage to maximize results with the resources that we have internally. I would say that initially, these would be the main comments that we could, on this occasion, present. There are various studies in progress at this time that do not yet allow us to project numbers that will be presented in April, at the GPA DAY, in greater depth and with greater consistency and also the numbers that us, as a group, believe we will attain during the year 2008. Basically, these are the remarks I have to make at this moment and would like to invite our chairman of the Board, Abilio Diniz, to address you now. Abilio Diniz – Good morning everybody. I want to talk to you performing my role of Chairman of the Board and what I am telling you also represents not only my opinion, but the opinion of all the members of the Board. This happened last week, we held the first meeting and also all the committees and also the HR committee that studied and analyzed in depth all the modifications that were being made at this time. I would like to say the following: is what has been done in this period of almost three months in the new management with Claudio Galeazzi as CEO exactly what he wants? Not necessarily. What matters is the objective to be attained and the coherence to attain these targets. Yet is anything that is being done something that would oppose me directly? No, everything that is being done has coherence, has motives, has its reason for existing. On the other hand, do I support many of the things that are being done? Yes, many of them. These adjustments, I prefer to talk about adjustments, less even, cooperation, are adjustments in accordance with a thought, a line of thought and seeking to gain efficiency, to gain agility, to gain competitiveness and consequently, at the end, profitability.


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Since the beginning, it has been a work totally aligned with what I believe, with what I think. In these last few years I have taught that you do not cut people, you cut seats, you cut a dream. This is what is being done, what is being sought at this time is efficiency, adjustments are being proposed, and jobs being cut and processes restructured, and consequently, there is a surplus of people. Last week we had some dismissals of directors that, according to what is being done, were no longer necessary. Another extremely important point at this time is that I see the presidency setting the guidelines for my behaviors and the team, the Top Management, the board of executive officers is detailing this entire path to be followed, I think this gives the Board of Directors a lot of confidence, and consequently, a lot of confidence to the stockholders. We have people of responsibility, with profound knowledge of this company, taking the responsibility in each and any change made in the structure. There is no reason for major euphoria and excessive optimism, there is simply a moment of even greater confidence at the company, in what is being done. I think the results are starting to appear and everything we had ahead of us seems very promising for us to manage to do what really is this company’s grand mission: to be focused on the customer, provide the best service, provide the best prices, have the best image, in short, provide the best service to our consumers. QUESTIONS AND ANSWERS: We will now begin the question and answer session, if you have any questions please type “*1”. Jander Medeiros, from UBS Pactual – My question is about sales, the performance of sales in recent months. I would like to understand more or less what this price-volume performance is all about, for example, in January we can see a better performance, I think there will be a better performance in February too than what we observed in the previous months. Now, we also know that the inflation of food, which attained 75% of the Group’s sales, is stronger, but the price is not necessarily moving in the same direction. So I would like to understand more about the evolution of traffic, of volume, some measure of actual growth given its price in the last few months in the part of sales? Hugo Bethlem – Yes indeed, the month of January and the month of February show a positive trend, March has the seasonal effect of Easter, which will also be very positive. There is important recovery both in food and in non-food, non-food specifically in the area of Entertainment, pulled both by the Extra Hipermercados stores, but with very important participation of Extra.com and of the department store, which is Extra Eletro.


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We are definitely pursuing the restructuring of the assortment and of inventories, aligning each one of the communications with the positioning of the respective banner, a request that Claudio announced in alignment that was also made at Sendas Distribuidora and that is being applied to the other regions of Brazil and consequently the results are those obtained. Jander Medeiros, from UBS Pactual – Are you able to give us an idea of the evolution of volume or of traffic when we compare, for example, January 2008 with 2007 or December with January, February? The trend improvement, how is it happening exactly in volume and price? Hugo Bethlem – Actually, you have raised a very interesting point: we always talk about food inflation and forget that when the time comes for us to transfer the prices of products that are offered, it’s never completely adjusted by inflation, so you have some segments that now suffer some seasonal food inflation such as soybean oil, for example, a little in rice, coffee, but mostly, meat is already falling back to a lower level, fruit, legumes and vegetables too; you have very strong deflation in non-food, especially in the electronics and home appliances segment. So volumes are apparently growing more than the prices of products, which means we have productivity that has to increase to be able to keep up with the flow, both in the receipt from our logistic areas and also the fluidity of these products in the display cases. So I cannot give you specific numbers now, but yes, volumes are growing and the recovery of sales both in volume and in number of customers is indicating a positive trend. Jander Medeiros, from UBS Pactual – Excellent. I have a second question regarding the performance of each one of the formats. Actually, we saw here that we will be supposed to look at net revenue, gross income and EBITDA of Sendas, of Assai and of the rest of the company, so I would like, it is very clear to me that there is a positive trend of Sendas and also the contribution of Assai with a very low operating expenses. I would like to understand what is happening with the rest of the company and what to expect from now on. When we take a look excluding Sendas and excluding the Assai effect, we see there an increase of gross margin, I mean we see an improvement of EBITDA margin stemming basically from an improvement of gross margin. I am comparing the 4th quarter of 2007 with the 4th quarter of 2006 and am looking at the rest of the company, excluding Sendas and Assai. So there is an improvement of gross margin there which is almost every improvement of EBITDA margin of the company. My question is whether this improvement of gross margin, at least looking there at the 4th quarter, whether it is all or almost all coming from reduction of shrinkage,


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which is something that we saw very strong in the previous quarters, or whether there is a relevant effect of reduction of promotions? Hugo Bethlem – You are right, I mean, your evaluation is well aligned, I just want to make a correction, there is an important obtainment directly in EBITDA also of gain of expenses, I mean, two specific focal points of this year were productivity, the gain of expenses with personnel, you see that the same stores personnel expenses grows much less than same stores sales, in spite of the collective bargainings that were more than double the growths and two points practically above inflation; we manage very good control over expenses that is captured independently from Assai. On the other hand, in the EBITDA margin, we have a very important gain from the shrinkage reduction project, which is within the margin, i.e., this shrinkage program deployed over the year generated a very positive result and continues on a very positive path this year (2008). Besides the shrinkage project, this entire plan of adequately organizing offers at the right time, in the right amounts, without tearing up money, has brought alignment to each one of its banners. We are effectively practicing the positionings that were defined for each one of its banners. Pão de Açúcar in its own, Compre Bem in its own and Extra specifically in its own as well. Jander Medeiros, from UBS Pactual – Let me just complete my question, we do not have all the data here to do the sum separating each one of the parts of the company Sendas, Assai and CBD, but we manage to see here the combination of the line of operating expenses and of the line of taxes and charges, which I cannot separate, but I manage to see the two together for each format and for each part of the company and, when I look at CBD, excluding Sendas and excluding Assai, I see a gross margin rising one percentage point here in my sum and I see an EBITDA margin rising 1.1 percentage point. So when I look at the combination, removing Sendas and Assai, the combination of operating expenses and that line of taxes and charges that you report after SG&A, I am not yet seeing this decrease of expenses, I do not know whether there was any increase of taxes and charges perhaps that offset this. I would like to actually understand whether this is the effect of the collective bargaining only, which you said was very close to something that you offset in another way or whether, in actual fact, what we have to conclude here is that a lot will happen in the coming months. It is this line that was not very clear to me in the rest of the company, excluding Sendas and excluding Assai. Hugo Bethlem – Just for us to position this, in the issue of margin this recovery really does come from what I told you: breaking the positioning of each one of the banners, it is not due to any price increase at all, Enéas ratified the pricing


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positioning adopted in mid-2006 which continues, but in the specific positioning that was finally deployed for purchases of Sendas, for Pão de Açúcar and for Extra it brought real benefits in this. As regards the matter of expenses, there is a change of taxes, but it is on the line of electric energy and of other public service where some ICM credits that were formed are lost, but the increase of some things of electric energy itself that reflect then, then there are savings on other lines that sometimes do not appear in the complete picture. There will be better results also in expenses over 2008 for us to have better capture still on the last line. Cristina Faria, from Neo Investimentos – I have a question about the company strategy, because when you announced the competitiveness strategy in mid-2006, I think it was clear in the market that the company would be willing to relinquish margin to recover market share and same store sales. Now the tone of the conversations is very different, we see even in the press release emphasizing that there was modest growth in sales but the principal goal was attained that was an increase of profitability. I believe this is leaving investors somewhat confused. Without wishing to underestimate all the effort to cut expenses, which is praiseworthy in a sector that has a tight margin, I believe that what the market was waiting for with all this restructuring was precisely an increase of same store sales, which does not appear to be the focal point now not even with the new management, and on the other hand the cut of SG&A appears to be a good thing, but it is limited. So I would like to glean some understanding of whether a change of focus is really underway, I mean how this sum is finished, and to supplement this question even, with us looking at Sendas (which also had an obviously very positive restructuring), we see that sales did not increase, the gross margin dropped even with the decrease of promotions and the gain comes all from cutting of expenses that once again has a limited gain. I wanted to see what remarks you can make about this point. Thank you. Hugo Bethlem – Cristina, Hugo again. Regarding the issues of positioning I just wanted to make a correction: we ratify that one of the cornerstones of this year is the quest for same stores growth, it is not the growth of sales at any price, it is not the pursuit of sales for the sake of sales alone, it is a sustainable growth in same stores. Recognizing the difficulty of recovering, but absolutely necessary, the food market share and this is in line with the positioning. So when we talk about margin repositioning, and the relinquishment of percentage does not mean to say relinquishment of the cash margin, because the search is in elasticity, for recovery of market share and of growth of sales, this means that this


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objective continues to be totally delineated through adjustments in specific categories such as cleaning or basic goods, rice, beans, cooking oil, etc., which are those that are also part of the basic food hamper of Brazilians and that they have to seek in a single place, trustworthy and also go on the main shopping spree for supplies of the month, even without a major inflationary effect. The other side is the issue of seeking same stores, of non-food, where we have enormous potential room for growth because we only started to structure in 2007 and will effectively finish this structuring and reap the fruit in 2008. As for Sendas, I will invite Enéas to complete. Enéas Pestana – It is true that expenses have a limited compression, but we will look on the other side, aggressiveness in terms of price in Rio de Janeiro for example, it must absolutely be maintained given such a competitive market as that of Rio de Janeiro. This is happening and the strategy of cluster by region, by profile, has proven efficient to the effect of you doing what Hugo has just said, working with a much lower margin, but even so guaranteeing a higher cash margin by elasticity. What we have done is to reduce expenses to bring the EBITDA, see that the EBITDA in a 4th quarter of Sendas was 6.6%. Afterwards we will talk about the 1st quarter with you, but it is still higher than this in the first months of this year. I would say to you that talking about EBITDA of Sendas with this level of margin, around 7% or something of the kind, is absolutely reasonable. Let us say, you cannot expect that at Sendas, given the competitiveness, the formats and the region, we will have an EBITDA different from 7%. So even though the expenses have limits to reduce I believe that we are arriving at a very good level of EBITDA margin, with this level of expenses and with the obtainment of the cash margin. I would just like to resume a bit of the explanation about the separation between GPA, Sendas and Assai. It is true that Assai pulls expenses down, Assai works with a gross margin around 15% and works with expenses around 10.5%. As a result, it produces an EBITDA around 4.5%. If we consider, just for comparability purposes, GPA with Sendas and without Assai to compare with last year, we do indeed have a reasonable reduction of expenses in nominal terms, and considering taxes and charges, as already said, we arrive at R$ 851 million in the 4th quarter against R$ 861 million in the 4th quarter of last year. So in nominal values, not only does the expense not rise but it drops R$ 10 million. So effectively, even if you consider inflation, collective bargaining and correction of contracts, you manage, in nominal terms, to drop R$ 10 million, and there I am excluding Assai from this story, it appears to us that there is indeed effectively a reasonable control of expenses. Can it be improved? It can, but do we have actions for this? Yes, as Claudio said, we are deploying here the cash group that analyzes every cash outflow, following


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the example set in Rio, but we know the compression limit, we know that the customer needs to continue being very well served and we will not destroy this value, but we understand that this is already bringing us and will bring us even more a very interesting EBITDA margin. Cristina Faria, from Neo Investimentos – I understand and agree, I am sure that these gains are very important to the company, but my question is precisely this, as you said, the EBITDA margin cannot go much further beyond what has already been attained, so the gain really comes from top line growth, I would like to understand what is being done in this regard, because again, even with the cut of promotions, of a load of reductions of expenses, we did not have a top line reaction. Abilio Diniz – Cristina, this is Abilio. In this contact with you now, as had already been done personally by the board of executive officers and by Claudio, we want to pass something on, you are concerned about sales. Did the emphasis on sales decrease and will they now place emphasis on profitability alone? And the future, if we are not concerned about the future with sales and with gain of market share, the future is always an uncertainty. And perhaps this is what is you are concerned about right now. I want to tell you, as chairman of the Board and observing everything that is being done. The management of Claudio Galeazzi does not have the characteristic of fighting over sales every day, every moment at every instant. Sales are a consequence of what you do inside the company, they are a consequence of a job well done, the result of all that and of the effort made in terms of work. So the entire set of things was done inside the company results in the top line, as you said, results in the sale. This is what is being done and the emphasis is being placed on this, gain of efficiency, the sale will come. It is coming, but now as you are concerned with the future, with what will happen up ahead, I am transmitting this to you, which is the view that I have of what is happening now. I believe that Claudio thinks this way, now the others from the board of executive officers, I see them fighting over sales, not every day, there is a sales flash at five every afternoon and I see them all with their Blackberries, they are on their computers looking at what is happening. I think you can feel at ease. There is indeed a very clear objective: without growth of sale, without gain of market share, there is no way of valuing the company as we want. This is my view and I intend not to make many more interruptions in what the board of executive officers and Claudio are putting to you. Claudio Galeazzi – Just to add the following: I have always said during all these recent years and here too, that sales should not be the only objective, normally


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sales are a consequence of what you implement. The cornerstones of sale are sustained by pricing, adequate communication, adequate assortment according to regions, services and even display of the products offered. Attacking these cornerstones, sales are really a consequence and not an objective, we often pursue as an objective – obsessive even – sacrificing result, when in actual fact we have to attack the cornerstones. Another thing I have also said is that often you need to sacrifice the future a bit to consolidate the present, to later on seek a brilliant future. I believe that right now we are attacking the cornerstones with a great deal of serenity and with considerable dedication, sales will occur. And as Abilio said, we are seeking same store sales, very daring growth I would say for this year as refers to the maintenance of results also. Daniela Bretthauer, from Goldman Sachs – Good morning everyone, congratulations on the results of the 4th quarter. The question is about whether you already have any possibility of passing on some guidance to us in terms of same store sales or of EBITDA margin that you would like to attain in 2008 and also whether you already have the cost of these recent dismissals or of other restructurings that should occur over the course of the year 2008? Claudio Galeazzi – Daniela, as a reference to the guidelines, let us say, for 2008 we are reviewing our entire budget, all our objectives, goals and obviously, and mainly, which policies we will implement to attain the objectives that we are defining. It would be premature at this time for us to talk about guidelines, for the very reason that the process started now in January. I would say in the second fortnight of January, and we do not yet have everything aligned in order to be able to provide some highlights or a forecast, let us say, of which these guidelines will be. I would like to invite Enéas to speak now. Enéas Pestana – Daniela, about this matter of cost, going further into this topic, about the adjustments mentioned by Claudio and by Abilio. These adjustments have a much greater scope than us talking only about dismissal or dismissal of 20 people. I would say to you that the cost is not high, but what is most important in talking about this cost is to understand that we are doing a job now with the objective of adjusting the management model, the processes, the impacts that have an impact on the organizational structure, but this is not all, we are focused closely on the issue of working capital, and there the discussion of depth mentioned by Claudio especially in relation to the inventory level. Our inventory level rose steeply last year, while our average payment term remained practically stable and we have controlled our cycle of incoming payments well through FIDC. So the focal point for working with working capital is the inventory level. This evidently brings not only a working capital benefit, but also a more streamlined line


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with products with a greater turnover, a lighter company with better sales, and the customer better served without shrinkage and with the product that he needs. This is the focus and is part of these adjustments we are working on for this period. Furthermore, reduction of the number of projects that we had been working on to provide a focus on few projects that are really important from the point of view of adding value. In other words, I will not take long, but what I want is for this set of adjustments that is happening now in the first quarter is: firstly, we know how much you, the market, want to see once and for all these adjustments made, costed, and presented and that, from this point on, this company can change level of result, profitability, growth from this point on. So this is our homework assignment, we are doing this in the 1st quarter, in the disclosure of the result of the 1st quarter, I hope that for the last time, or for a good time, we do not speak about adjustment and at this moment we will talk about all the adjustments that were made in the first quarter, which are their costs, we will identify this and show you for us to get on with life with another type of meeting and of results, from then on, from the 2nd quarter. Daniela Bretthauer, from Goodman Sachs – Just to see if I understood correctly. Basically what you want to pass on to us is that the cost of these dismissals or of these changes is more than offset by the savings and the gains that you will also have over the course of 2008, but you do not know this number yet? Enéas Pestana – Without a doubt, this is the plan, I cannot measure it for you now whether it will be offset in a month, two months, ten months or something of the sort, but you will perceive that the company will have another approach to the effect of agility, of efficiency, of speed in responses and certainly this new level of efficiency will be translated into results, we have no doubt of this. But we are working on result as a consequence, as we are working on sales as a consequence. We know where we have to improve, where we have to gain efficiency for the results and sales to come from there. We will leave this very clear in the report of the 1st quarter of this year. Claudio Galeazzi – Daniela, I would like to remind you that the adjustments are not purely and simply linear, there is an entire analysis of processes, of adaptation and obviously aiming at efficiency, productivity and agility. This is a continuous process, but obviously in this 1st quarter we will try to quantify these adaptation values. Robert Ford, from Merrill Lynch – I have three very simple questions: first, how much were the non-recurring charges at Sendas last year and what do you expect from the taxes and charges for this year?


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Daniela Sabbag – Let me just see whether I understood your question, you are asking me how much the non-recurring expenditures at Sendas were last year? Robert Ford, from Merrill Lynch – Yes. Daniela Sabbag – We do not have this information, I will get you this information and contact you after the conference call, ok? Robert Ford, from Merrill Lynch – Thank you very much, Daniela. Claudio Galeazzi – I just want to mention the following: to show that the study analysis performed when we prepare and then implement an adaptation, it is very profound. In Rio de Janeiro, it had already suffered from the reduction of redundancy, a very high number of people also compromising the stores, so much so that the reductions in Rio de Janeiro were minimum and were really much more adjustments. So there the adjustment in terms of redundancy was minimum and what we effectively sought was to look at the customer, I mean this was the type of approach in Rio de Janeiro, it was much more source than it is being in São Paulo where we are analyzing all the processes seeking agility and adequacy. Carlos Albano, from Citi – Question for Galeazzi. I would like to understand a bit in relation to the strategy, Abilio mentioned that in this restructuring you cut seats, you cut jobs, you do not cut people. I wanted to understand a bit about the departure of Pedro Janot, in the area of non-food, because over the course of last year a lot was said, particularly in the conference call, focusing closely on non-food, and placing emphasis on his name, making major adjustments in the area of non-food. So I would like to understand what motivated his departure? What changes? If anything changes in your non-food strategy and how you are dividing this area. Is there anyone still responsible for non-food and what will this be like from now on? Claudio Galeazzi – Albano, I would like to mention the following: the focus on non-food not only continues but is being considerably expanded. There is a huge concern in terms of extremely efficient and adequate non-food at the present time. Remember that right at the beginning I mentioned that the entire analysis was performed on top of processes, of agility and of the efficiency and great productivity, and when you seek this, obviously, there are often, let me say, boxes that fail to be filled as they were absorbed or even eliminated. In the case of non-food, within the principle of agility and productivity, there was actually a joining of responsibilities, an integration effectively, so the concern continues to such an extent, as I said, that it is even being expanded. So the redundancy there was not due to a question of capability, not for any reason other


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than reintegration and in these integrations there are perhaps modifications in the staffing. Carlos Albano, from Citi – Ok. I do not know whether this has been answered before but Daniela, but will you be able to pass on right now some guidance to us or will everything again be said on the GPA DAY, in relation to the guidance of same store sales, margin, etc.? Claudio Galeazzi – I mentioned a while ago the fact that we are reviewing our entire budget for the year, the objectives, we are seeking very challenging objectives and that at this moment we are not yet in a position to pass on adequate guidelines and would not like to perform a review at this time. But in April, as promised early, and stressed now, we will provide the guidelines. Juliana Rosembaum, from Unibanco – I would like to explore a bit, if it does actually exist, some seasonality in the margin of Assai. We now have a visibility of the margin of the 4th quarter, I would like to know whether over the quarters there is a more or less similar composition, I mean, 15% of gross margin with these 10.5% of expenses/sales and this EBITDA margin of 4.5%, or whether there really is a strong seasonality in the 4th quarter that is different for this format? Enéas Pestana – Hi Juliana, this is Enéas, alright? Based on all the analysis work that we did on the numbers of Assai, I can tell you that on average its margin is indeed yes, around 15%. Despite the seasonality the margin is this, the level of expense around 10.5%; between 10% and 11% and an EBITDA that, given the formatting of this business inside this atacarejo (wholesale/retail) segment, we are talking about an EBITDA between 4%, 5% alright. This should not change and should be the average of the year. Juliana Rosembaum, from Unibanco – Perfect. Furthermore, when we saw the management structure in your presentation slide, we can already see Caio there separate as Real Estate, even on the side there in parallel with the structure. How are we in relation to the timing of this potential separation of the Real Estate business? Claudio Galeazzi – Juliana, this is Claudio. Juliana, we are greatly concerned about focusing on the core business on the company which is retail, it is obvious that the real estate part has significant importance in what refers to expansion and we are paying attention to Real Estate, at first, associated with the core business or in what it refers to the core business, but we are analyzing in great depth and a great deal of criterion all the other issues: fiscal, tax, in short, of a business that can be much larger than what is visible to the market, alright? The moment has not yet arrived for us to talk about this, but on a timely basis, probably during the year we will get back to this matter. At this moment it is being handled separately, not as


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part of the core business, and then it depends a lot, after the Board of Directors, in short which route we will take. I am also passing the matter on to Caio to complete the comments. Caio Mattar – Juliana, good morning, this is Caio. This matter is a matter that has been on the agenda for some time, we are conducting a very in-depth analysis, we do not want to make mistakes here. We are carefully studying this issue, I believe that the timing is right for Real Estate, it is a very important thing, it is a very important asset that we have inside the company. So as soon as we have the results of this study here soon we will divulge them, ok? Juliana Rosembaum, from Unibanco – Ok, thank you. The next question is in relation to the conversions and openings of stores. In these first two months of the year, it is normal to have taken a break alright, on account of the new management, of the new structure, but do you maintain the idea of conversions of stores to Assai format that we had discussed before or is this being reviewed and we do not know, only in April will we know which number of stores will be effectively converted and within this aspect, if it has already been set out how a store that comes from CBD to Assai, as Assai is not 100% from CBD, what this type of potential payment is like, if it has already been set out. Caio Mattar – We continue the conversions of stores as divulged at the beginning of the year, so they are in progress. We are performing intensive studies in relation to how CBD has 60% of the business of Barcelona and Assai has 40%. We are doing these sums and are only performing these conversions into stores that really bring benefits to CBD. We will open an Assai next week already, a store, a conversion next week, we already had one last year and the studies are in progress and soon we will have more up to the end of the year, at least another 14 stores converted into the Assai model. Juliana Rosembaum, from Unibanco – As a last question, if you can. Just going back a bit in this discussion of price policy, when we talk about review of promotional policy and say that the company is not increasing prices, then it is not going back in the strategy adopted since 2006, of repositioning of prices to gain competitiveness, I can assume that what is truly decreasing is the GAP between high and low. I mean, are you effectively changing the structure a bit? And if this is it, do you manage to exemplify that old rate that we always speak about of positioning of each one of the banners in relation to the market? Hugo Bethlem – Juliana, this is Hugo. Within this positioning of yours there are some observations by banner. One of the first things, you get, for example, CompreBem, it is following a positioning that was designed and that is now totally deployed of the concept of everyday low price, where we effectively went, for example, from television that verticalized Compre Bem very strongly. We have


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guerilla warfare for its local markets, today it has 180 stores competing almost with 180 different competitors. So for each one you have a market and in this case, what we do is yes the GAP between the shelf price and the offer price, it is lower because it is not longer necessary to be so high. Different from Extra, whcih has another positioning, Extra effectively has its high low price, which is what makes the customer get ready to go from his house to the hypermarket as a form of attraction of the customer. But within this we have very strong work also developed in 2007, reinforced in 2008 of cross-selling of the supplementary products of margin which are sold on the side, including physically, to motivate the purchase alleviating verticalized sales that has provided a very good result. The most important thing to say that in this work of change of offers, let us say of GAP of margin, is the adequate balance by the respective clusters. In the old days everything was pasteurized and I threw money away on a product focused on the consumer from class C to consumer AB that was absolutely unnecessary. This work, on top of what was done in Rio, is adequately reflected now in the other regions and consequently, the effect that we have on the last line is less verticalization, which does not mean to say, necessarily, less aggressiveness. Juliana Rosembaum, from Unibanco – Great, did it make a difference in that rate where you compare average market price and average price of some banners or not? José Roberto Tambasco – Juliana, this is José Roberto that is talking now. This question that you ask whether we are cooling off a bit this situation of high, low, of offers it is evident that we cannot abandon, I mean, this fight that there is there in the market. The market is very competitive, we are always looking at this. What exists of new now is that we are seeking to provide greater balance between the regular price of some categories, as Hugo has already said, with a better adaptation to each regional market where we are, without however, failing to present competitiveness with offers as well. So what we are trying to do is to pursue an adjustment more over the entire period, but without, however, failing to cause an impact on the market also with promotions this is part of our daily routine. So the high low policy it tends to make the low continue, I mean, we are fighting for more competitive prices, Hugo even mentioned that in the case of the Extra banner we are even more concerned with the basic hamper of products so that we can guarantee competitiveness at all times, but promotions also continue and will be reinforcing this price positioning. Enéas Pestana – Juliana, I would like to make two comments about your first two questions. Firstly the issue of Real Estate, as we have already even indicated to


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you, now we execute a separation of the team, led by Caio Mattar, which will advance in studies and in the development of this business and, as Claudio said, separated from retail, this team is totally focused on the deepening of analysis with the construction of a business plan and all the structuring relating to this business, for us to make a final decision. Evidently when this happens we will, as Caio said, correctly communicate all of you, but one thing we consider very interesting and intend to study in greater depth for this decision, and the benefit of this also is our managing to provide much more focus on the core business of the company. The issue of Assai, I would like to say the following: this company is doing very well, management is closely focused on the execution of business, we are keeping a close eye on the operation of Assai and this increase of the business, this expansion of the business through conversion, we have done it without major problems, precisely because the contract, let us remind you that it is a company, but it is a company in which Grupo Pão de Açúcar has control of this company and we have a contract that protects both sides, but that values or puts almost in a protected manner the expansion of the company. So it will happen and these conversions are done store by store as sales from this store to this company. So a whole calculation of variation is carried out with a basis on multiple of sale, EBITDA, return and we arrive at a price that obviously makes the operation of Assai viable that has this level of margin and expenses, but also that does not destroy value in CBD upon conversion. This is all being done with a great deal of care, Caio and I are taking care of this personally. Ricardo Fernandez, from Itaú – Do you have any idea of whether you want to make the best supermarket company in Brazil? Or do you have a larger view and want to make a company, I don’t know, best retail company in Brazil, which means basically opening or entering into new formats, not necessarily just food, a mixture of food with non-food? Basically I would like to known what your view is at this minute. I imagine it can change, but right now what could it be? Daniela Sabbag – Ricardo, we did not hear the second part of your question, we heard the first where you question whether we want to focus on supermarket or whether we want to be a retail company, not just supermarkets. Is that right? Could you repeat the second part please? Ricardo Fernandes, from Itaú – Basically to know whether you want to be the best supermarket company or the best retail company that also includes looking at other formats? I do not know what your view is now, I do not know whether it can change in a while, but this is the idea. Hugo Bethlem – In actual fact, when we say supermarket, we should talk about food and non-food self-service. This is our focal point. So in this focal point of self-


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service with an assisted sale specifically for non-food we have supermarkets positioned for customers AB; supermarkets positioned for low income customers; hypermarkets; compact hypermarkets now like Extra Perto, adjusting to the segment, whether of verticalized growth of large cities or of cities of lower purchasing power; Extra Fácil in the convenience model; Extra Eletro in the department store model, where you have assisted sale of non-food; Extra.com, which is a strong growth trend; but all them in our segment, i.e., specifically following this. The last acquisition now is Assai, remembering that the two segments that grew the most in retail were the segment up to four checkouts, we gave our response entering Extra Fácil last year and atacarejo, we gave our response entering Assai this year. This is the line of segment that we are doing and it is this line that we intend to do. To be the best company is our goal, to be the largest is the consequence of this goal. Cristina Faria, from Neo Investimentos – Actually, there are two questions: the first is how is the understanding with Sendas in relation to the purchase of the remaining percentage of the family? When do you expect to arrive at an agreement? And the second is whether with the 60th anniversary of the group, we can expect special promotions this year, with an impact of margin resulting from this? Enéas Pestana – As regards Sendas, there is nothing new, as you already know we have a discussion, as Caio says, a discussion in the good sense that we will say it is not a fight, but a discussion about the consummation of the put, especially regarding form and amount. We have already spoken to you at length about this in recent months, and it continues, there have been no changes, we are there with the arbitration panel in progress and so far w do not have any decision made by the arbitrators or any resolution of the issue. We continue discussing and there should obviously be a solution to this in the current year, perhaps right now in the first semester, when this happens will be advise you correctly. The second part, regarding promotions I will invite José Roberto Tambasco to talk to you about this. José Roberto Tambasco – Hello Cristina, you know that the anniversary campaigns, in our business, they are very strong, they end up representing an important event, always when we have an anniversary of each banner. It is clear that with the 60th anniversary of Grupo Pão de Açúcar we are indeed preparing more extensive actions, we are finalizing a promotional plan that might even bring some transversal promotions covering more than a single banner, but as soon as we go out to the market there with the consumer you will also know. This to us is strategic, we will only announce it when we have this plan already in the media.


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FINAL CONSIDERATIONS Daniela Sabbag – I would like once again to thank you all for your presence and participation, always remembering that the area of Investor Relations is ready to answer other questions, including questions made by web we will contact you to answer them.

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