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Edited Transcript of PCAR4.SA earnings conference call or presentation 31-Oct-19 1:30pm GMT

Q3 2019 Companhia Brasileira de Distribuicao Earnings Call

Sao Paulo Nov 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Companhia Brasileira de Distribuicao earnings conference call or presentation Thursday, October 31, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Belmiro de Figueiredo Gomes

Companhia Brasileira de Distribuição - Real Estate Business Director & Member of the Executive Board

* Christophe José Hidalgo

Companhia Brasileira de Distribuição - CFO, Corporate Services Officer & Member of the Executive Board

* Frederic Garcia

Companhia Brasileira de Distribuição - Executive Officer of Proximity

* Isabela Cadenassi

Companhia Brasileira de Distribuição - IR Officer & Member of Executive Board

* Laurent Maurice Cadillat

Companhia Brasileira de Distribuição - Head of Pão de Açúcar

* Peter Paul Lourenço Estermann

Companhia Brasileira de Distribuição - CEO & Member of the Executive Board

* Rodrigo Machado;Director of Operations, Extra Market

* Ronaldo Iabrudi dos Santos Pereira

Companhia Brasileira de Distribuição - Co Vice-President of the Board

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Conference Call Participants

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* Gabriel Disseli

Santander Investment Securities Inc., Research Division - Research Analyst

* Gabriela Katayama

UBS Investment Bank, Research Division - Associate Analyst

* Joseph Giordano

JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst

* Thiago A. Bortoluci

Goldman Sachs Group Inc., Research Division - Research Analyst

* Tobias Stingelin

Citigroup Inc, Research Division - Director

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Presentation

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Operator [1]

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Good morning. Thank you for waiting. Welcome to our GPA conference call to present the results of GPA for the third quarter '19. This conference is being simultaneously broadcast via webcast, which may be accessed by www.gpari.com.br with the respective presentation being there available. Slide selection will be managed by you. There will be a replay right after the call is completed. We inform you that the press release about the company's IR result is also presented via our website.

The event is being recorded. (Operator Instructions) Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of 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. This is why 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.

With that, I would like to turn this over to Isabella Cadenassi, IRO.

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Isabela Cadenassi, Companhia Brasileira de Distribuição - IR Officer & Member of Executive Board [2]

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[Interpreted] Good morning, everyone. Welcome to our conference call results for the third quarter. We have here with us Ronaldo Iabrudi, Co-VP of the Board; Peter Estermann, our CEO; Christophe Hidalgo, our CFO; the owners of Assaí, [Belmiro Gomes], and the owners of Multivarejo Extra, today represented by Mr. Rodrigo Machado, Pão de Açúcar; Lauren Cadila and Proximity and Drugstores, Fred Garcia.

I would like now to hand it over for initial considerations by Peter.

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Peter Paul Lourenço Estermann, Companhia Brasileira de Distribuição - CEO & Member of the Executive Board [3]

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[Interpreted] Thank you, Isabella. Good morning, everyone. Thank you very much for participating in our call for the third quarter of 2019. I would like to start by highlighting that in this quarter we had a very significant progression of our business strategy with some key highlights that I'm going to make comments about.

First of all, the performance of Assaí, which has maintained consistent results for one more quarter with sales performance that has also had a solid flow of clients and market share gains. Stores opened in 2018, they have had very accelerated maturation. As a consequence, we are highly confident in our strategy of expansion, which is going to get, by the end of the year, with 20 more open stores in our portfolio.

For Multivarejo, I would like to highlight the process of adjustments and review of our portfolio of stores. Starting from Pão de Açúcar we've reached 28 renovated units in the last generation, Generation 7, with significant growth of same-store, a double-digit growth, showing the excellent compliance with the model and very good receptivity of our clients. We have been progressing quite successfully in our schedule of renovations until the end of the year. The fourth quarter will be a very important period during which we are going to deliver 20 new stores that will be renovated, amounting to 50 stores operating in the new model.

I would also like to highlight the results of stores Extra Super, converted into Mercado Extra and Compre Bem with a very significant progression in sales. We are doing fine. We have really sped up our conversions. We are going to open 18 more stores of Mercado Extra and 15 of Compre Bem in the fourth quarter. And they are going to be very important to further speed up the sales that we are expecting to have during this period of retail. With the store of Extra supermarket fully renovated, we are going to reach 70% of our portfolio within our model, Compre Bem and Mercado Extra.

Let me also emphasize the performance of the business of Proximity. Every quarter, it has been delivering more consistent results with a double-digit growth. Last year, for example, our growth has also had a double-digit growth. So it means growth over growth, increasing volume, flow and market share gains. We have maintained a very consistent evolution of our initiatives of digital transformation. Food e-commerce, which is a leader in the market in the country, has obtained a growth over 30% of sales with a very significant progression of the models of express deliveries, which is same-day delivery. We already have 107 stores in this model and also Click & Collect, which we had a very great progression. We have 113 stores in our Click & Collect model and clients are receiving it quite well.

In this quarter, we have also achieved 20 million loyal customers in our program Pão de Açúcar Mais and Clube Extra, amounting to 10 million active downloads of our loyalty apps. It favors direct communication with our clients. Our Last Mile delivery program or James Delivery is progressing significantly. We've had a tenfold increase number of orders for the past 10 months, and we are also operating within 12 cities in Brazil, aligned with our strategic plan, 50% of online orders in our stores where James has been working. And Cheftime, which is our second startup incorporated this year in the company, we have expanded the portfolio of options offered in the stores with a very significant increase in the number of meals served with some additional options of ready-to-eat in some stores in São Paulo and outside São Paulo.

Let me remind you another important point of our strategy, of exclusive brands we are further increasing penetration, is very satisfactory. We've already reached 12.7% penetration in food categories at Multivarejo. And I think that private label, together with the process of digital transformation will be strategic references in a very competitive differential and advantage for the company in upcoming years.

So these are some of the highlights that I would like to share with you. We have also been putting in place some other initiatives in terms of operational efficiency, for example, improving productivity, service level and reduction of costs whose results are already being observed and are going to get more intensified in the short term.

Thank you very much for your attention, everyone. Now let me hand it over to Christophe, who's going to go into the financial data.

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Christophe José Hidalgo, Companhia Brasileira de Distribuição - CFO, Corporate Services Officer & Member of the Executive Board [4]

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[Interpreted] Thank you very much, Peter. Good morning, everyone. Thank you very much for participating in our call. I'm going to start by presenting our key financial highlights of GPA. In this quarter, we had good results, which has met our good expectations also for future periods to come.

Starting on Slide 4, I would like to highlight that we have had a very strong growth of gross sales of 9.5%, despite the decrease of 240 bps of inflation of foods over the first half of 2019. The key highlight is a very significant performance of Assaí, which grew 18.9% in the quarter. This is the result of the excellent quality of the expansion of stores and also attractiveness of the format, which is still increasing the flow of clients. As a consequence, we have had a significant growth above that of the market range.

In terms of gross margin, GPA Food reached 21.3%, which is a level which is the key consequence of greater representativeness of Assaí. Similarly to Multivarejo, it has presented a level of competitiveness very much aligned with what the market requires right now.

SG&A in the quarter has presented a dilution of 80 bps, thanks to the initiatives of control and reduction of expenses in Multivarejo and in Assaí.

Slide 4, we can still see EBITDA adjusted for food GPA has presented a solid advance of 10%, maintaining our level of margin of 7.4% after considering IFRS 16. It results from a very consistent breakthrough in profitability of Assaí and very significant evolution in the margin of Multivarejo compared to the second quarter of '19. Therefore, net profit fully consolidated of the controlling shareholders reached BRL 214 million (sic) [BRL 216 million] with an expansion of 43%, reaching a net margin of 1.6%.

Now let's go into Slide 5, and we can see here financial results of BRL 147 million, just going over 2.2% of sales to 1.1%. This reduction is a result of the reduction in the interest rate and also a reduction of financial revenue in the quarter. This amounts to 3 key factors: first, the fact that we have higher cash available with the sales of Via Varejo, amounting to BRL 2.5 billion of positive effect on cash; secondly, the positive effect of resources that have been raised for the tender offer that we have launched at the beginning of this year, which amounts to BRL 8 billion; and the third factor that explains the increase in financial revenue results from adjustments of money, especially the balance of ICMS and the exclusion from PIS and COFINS basis, it has been captured as it would benefit in August of the lawsuit that has been confirmed and is already ongoing at CBD.

Now concerning indebtedness, we have maintained a level of leverage which is very low, 0.8x of EBITDA, with a net debt of BRL 2.5 billion without considering our leasing liabilities. We had a reduction of 28% compared to the previous period. We have closed the quarter with a cash position of BRL 12.7 billion as a result of additional resources that are going to be directed to our tender offer.

And finally, to closing this slide, our CapEx in the quarter reached BRL 723 million with a very significant growth of 48%, and it puts in a new perspective because it's part of our acceleration strategy and the transformation of our store portfolio. It's important to understand that by the end of the year, investments will be stable considering what they had been in the previous year, very close to BRL 1.8 billion. Said in a different way, we are going to have a difference in our schedule, really because of the calendar year, more than anything else.

Now let's go into Slide 7 of Multivarejo. Here, I have some comments that I have already made in the previous slide and some points that are going to be complemented by the heads of each of the banners.

In sales, let me emphasize the significant performance of the renovated stores of Pão de Açúcar, which grew more than 2 digits, and also converted stores of Mercado Extra and Compre Bem, which has grown much more than 2 digits. Not to mention the acceleration and continuous acceleration of the performance of Proximity format.

EBITDA margin, I would like to highlight that it has maintained the continuity of our promotional investments. They are partially offset by the decrease in expenses aligned with the initiatives that we have already adopted, but they haven't impacted the level of services provided to clients. We've reached a level much higher than the second quarter '19, or 7.6% EBITDA after IFRS or 5% before IFRS 16. This journey is highly promising, especially for the periods that come afterwards.

Let me now hand it over to Rodrigo Machado for the comments about Extra. Thank you, Rodrigo.

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Rodrigo Machado;Director of Operations, Extra Market, [5]

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[Interpreted] Thank you, Christophe. Good morning to everyone. It's a great honor to introduce the results of Extra banner third quarter 2019. Generally, we register important advancements for our business Super and Hiper with evolution and conversion of Mercado Extra and Compre Bem strengthening the nonfood hypermarket and improvement in the digital front lines and new partnerships in the store-in-store. Starting from the format of supermarkets with the development and performance of stores like Mercado Extra, which amounted a growth of sales of the same stores of 7% in face of a strong base were 24.9%. We closed the month of September with 82 stores, which represent about 60% of our average growth in sales volume and ticket. And I also like to highlight the opening of 10 new stores in 4 different states in the Northeast: Pernambuco state, Ceará, Paraiba and Piauí. Mercado Extra is still the main participation in the private label for GPA. That represents a leverage of loyalty and competition to our business.

Another important information to highlight is that our Mercado Extra stores, they encompass 15 consecutive periods of gain in the market share according to Nielsen Data, impacting positively our results in the business units for Extra. And we are planning conversions that will continue for the fourth quarter with additional 18 units that we will be opening between October and December with a total of 100 stores in the Mercado Extra that will amount 70% of all the stores contributing to a positive growth in Multivarejo. At Hiper, we register a regrowth in the performance of other category of nonfood with important and significant market share gain with a focused work in commercial activities that will reflect a better experience from the customer experience. We also expanded our portfolio store-in-store in this third quarter with partnerships with [Swift], (inaudible) and 9 hypermarkets in addition to profits in some specific areas. The promotional calendar and commercial actions, they are very active throughout some campaigns such as (inaudible) during the weekends and the Father's Day, Cyber Monday followed by the launching of the day of the single people in August and the promotion of 30 years of the brand Extra in September. We also had strengthened our strategy with a focus in the app Clube Extra, where all leaflets and promotions, they became digitals in addition to the offers broadcasted on TV with mild discount. We also closed some partnerships with the program Meus Premios throughout (inaudible), Espaço Laser, (inaudible) and PlayKids. And we also focus in the digital leaflet impacting positively the reduction of expenses. Still during this third quarter, we exceeded the importance of our brands, 6.7 million of downloads throughout our Clube Extra app. Our sales were identified as part of our program of loyalty in a level 6% against 2.3 in the first quarter, which had overcome 60% of the total value, improving our profit.

In Digital, we strengthened our e-commerce operations, and we are focusing the Express and Collect Extra. We keep focusing on the delivery of a strategic plan, business unit Extra, and we would like to conclude by thanking the whole Multivarejo team and Extra. And I thank you for your dedication, partnership, and we are all fully committed to continuous and evolution and speeding up to deliver good results for Extra.

Now I would like to give the floor to Laurent.

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Laurent Maurice Cadillat, Companhia Brasileira de Distribuição - Head of Pão de Açúcar [6]

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[Interpreted] Good morning to all of you, and thank you so much to participate in our call of results. Our third semester shows an improvement in the banner Pão de Açúcar in relation to the previous quarter, and that has been pushed due to the strong performance of renovated stores. That banner also showed some market share gain during the quarter, supporting the excellence of compliance of our goals. We also have to highlight the strong recovery in terms of volumes, that now has reached a level of 1 digit in the month of September, a total of 28 stores. They are responsible for a strong growth amount to 12%. This is a result which [strengths] the efficacy of this new model that will speed up our business in the next quarters. This representativity is responsible for a total of 25%. We intend to keep on accelerating our fourth quarter with new units.

For 2020, we confirm the expectation to renew about 20 new stores in addition to expand approximately 10 new shops. The project -- the excellence -- the operational excellence project rollout, (inaudible), has reached 125 stores, which represents 7% of our total plant. They represent a level of 10% higher productivity in relation to those stores that have not yet implemented that model. The loyalty Pão de Açúcar Mais program has amounted in this third quarter over 6.7 million clients; that represents an evolution of about 40% since the release of our app. We identify superior sales amounting 85% sales active size throughout the mail discount. They represent 25% of penetration in the banner tickets.

The food e-commerce has reached an evolution of 2 digits as a consequence of strong promotional actions and operational growth throughout Express and expansion and continuous improvement of the level of services. Cheftime and gastronomic solutions has a very significant growth, which was based by the launching of the new line of products ready to eat with -- throughout 40 new e-stores and the innovation of new gastronomic kits that developed 150 e-stores in between São Paulo, Brazil, and the state of Paraná. We will have new releases, new shops that we will open in the city of Rio de Janeiro and Fortaleza, a total of 35 new shops. And to close, I'd like to thank our team for all their commitment, dedication, we are working hard to keep this growth and to deliver consistent and sustainable results. Thank you so much to all of you.

And I would like to give the floor to Fred Garcia. Thank you.

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Frederic Garcia, Companhia Brasileira de Distribuição - Executive Officer of Proximity [7]

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[Interpreted] Thank you, Laurent, and good morning. Now I would like to comment about the main issues that took to that format of Proximity during the third quarter. For the fifth consecutive period, we closed our third quarter with a growth of 2 digits, where we reached 17.5% of growth with continuous gain of tickets and volume. We registered also consistent growth in the market share with 3.2 points in the Mini and 2 points in the Minuto in face of the regression of the Proximity market. And we also opened a new for Minuto Pao de Acucar and we still have 9 new units under construction, which we hope to open them during our fourth quarter. Mini Extra, we keep that positive trend with a very strong sales growth based on 2 digits growth in relation to the past year. Our sales growth aligned to a consistent productivity improvement; decrease in expenses had allowed us to reach 200 bps of EBITDA. And in relation to 2018, exclusive brand participation represents over 15% of all shop sales, keeping that positive (inaudible) of 20% of those past years. We will open new -- 2 new shops which we will consolidate the success of this new format. Minuto Pao de Acucar has a consistent sales growth in face of the previous year, keeping that strategy of differentiation of the format in synergy to commercial actions conducted by Pão de Açúcar. We hope to open 5 new stores of the new cluster of Minute which is named as Office, implemented at the headquarter of the company. Initial results allows us to implement several cooperative actions such as the shop that we will open at the Assaí headquarter to support our collaborators. We opened a Nova Minuto in the city of Santos at street Tolentino Filgueiras at Gonzaga's neighborhood with a sales performance of fourfold higher with a higher number of clients and tickets, exceeding our expectation. Our nossa plataforma is specialized in beverage Pão de Açúcar Adega showed a growth of approximately 30% of clients.

The chemistries, they reached 2 digits in accordance with the previous quarter and they keep growing in number of clients. We also registered a sales growth, thanks to exclusive brands, a new line of products in with diapers and perfumes, and that represents a significant growth of drugs at our shops. Sales evolution is keeping a margin, allowing an improvement of 6 bps of it versus 2018.

[Postos], they still keep growing in relation to 25% of the third quarter, the gas stations. We have some gas stations that are forecasted to open by the end of the year. In addition to that, we had just opened 2 new gas stations that were under renovation in the city of João Pessoa and another one that will be reopened in the next few weeks.

And to close, I would like to highlight the fast evolution of our model B2B of those aligned mini-markets that are being leveraged by 2 main levers, customers and expansion of new customer base. We are expanding strongly towards that Proximity business. We had to just open our second shop of Pão de Açúcar Minuto in the neighborhood of Vila Mariana, and we will open few more, concluding our set of new shops by the end of this year.

And I'd like to thank the whole team for your commitment, as well as our partners from Multivarejo, and we are growing strongly towards consistency and solid results for Proximity business. And now I'd like to give the floor to the next speaker.

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Unidentified Company Representative, [8]

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[Interpreted] Thank you. Before I go into numbers, we don't have Daniela Sabbag, our Institutional -- now manager. She is administrative financial manager, supporting the team in this growth and expansion and all the challenges that we have internally, and she's going to be replaced by Isabella.

Well about the numbers of the third quarter, as heard from Peter Estermann, we had a very good third quarter in terms of increase in sales, BRL 7 billion, and now going to 52% of the participation of sales of GPA or 18.9% increase compared to the first year. But it meant BRL 1.2 billion -- of this BRL 1.2 billion, EUR 1 billion comes from sales of new stores, the 19 new stores opened that have been filled as Christophe had said of sales performance and especially of ramp up results of margin because of the mix and the location of the stores, which characterizes one of the best performances in terms of volume of sales. The average sales per month of this new part is the best result that we had had in the past 5 years since when Assaí had been part of this expansion. So it shows a very assertive expansion. The performance of stores, volume of sales, new clients and margin shows that we are on the right track and maintaining an excellent performance and acceptance of Cash & Carry format in Brazil, and also, the model we have of Assaí. The BRL 1 billion is translated into BRL 2 billion transactions per month added in the stores; out of BRL 2 billion, even not all sales of new stores are to new clients, of course. Approximately 10% of clients, especially corporate, they used to buy in some previous stores of Assaí. Here, we have a combination of a massive customers who are corporate and some who are individuals and the corporates are not limited to a [primate] area of a store, which is expected whenever you have a new store, part of the existing clients will go to this store because they are also looking for prices, better prices. 10% of the new clients that we have today had already been buying in another stores, and it has impacted the other stores that already had a presence of Assaí. It had an impact on our same-store basis of 2 percentage points, especially because of the mix and the corporate seek for best prices.

Same-store also had a satisfactory effect where we analyze a decrease in inflation rate. For wholesale, we tend to see that better. We can understand the IPCA even in advance. When prices are going up, corporate try to buy larger volumes. And likewise, when they see a possibility of stability, they tend to reduce the levels of inventory.

As a consequence, there is an oscillation in participation between corporate and individuals in stores. So combined to cannibalization, that gets to a 3.2 percentage of same-store when we compare the historic mean of Assaí is the same. But when we have the internal inflation rate and the data, we still had 1 percentage point in the same-store share. The main highlight of the quarter is in margin. We have been working very hard, especially in dealing with logistics and shortage of inventory. We had optimized our initiatives. We have very assertive marketing, promotionally and institutionally, in all the different groups of clients seen by Assaí, and bringing together all the efforts, we had 0.8% margin increase over the same period last year. Despite the aggressive expansion and BRL 1 billion increase in sales, we have had a very significant increase in margin.

As a result of this vast percentage, we also have a direct correlation with the mix of the opening of the new stores. They were concentrated in regions where we already had a brand awareness, a track record of prices. So the level of aggressiveness whenever opening a new store is adjusted according to the presence of the banner and the competitiveness profile of the region. Expenses were under control. We have gained in the same-store basis, but they have had a constant pressure for expansion. We have a very aggressive calendar for opening new stores in the last quarter, plus the distribution in different regions of the country and headcount and all the elements, as you know, are done regionally. Assaí is a complementary distributor of the industry, so we have to get adjusted to the state and its characteristics, and we are going to explain that later when we talk about expansion and strong investments coordinated by our team of people management in capacity building so that we can maintain the same level of customer care. It has impacted our expenses. Even so, considering the expansion, the expenses have been very stable. As a consequence, our gains in gross margin were captured by EBITDA of 3.6% pre-IFRS and 7.10% post IRFS, very significant growth as Christophe pointed out, 31.3%, especially when we compare to the 18% of sales for a company that has been expanding continuously year-over-year.

Card Passaí, which is an offer also for the financial market which is also somewhat more limited for credit approval, our card has been gaining more attention, more than 5 percentage points in the sales -- in our sales. And the main highlight is net profit, because we have maintained financial expenses without the effect of our capital runs, because of [assets], we have EUR 176 million to EUR 233 million in the quarter, which is the final number, where we consider the results of everything we have done.

Now thinking about the fourth quarter, Assaí has 14 new ongoing stores in 12 different states of Brazil. Those 14 new stores will mean 77,000 square meters of more space for sales and 6,300 more direct and indirect job offers, very significant investments, more than 4,000 people working in civil construction of the brick-and-mortar stores. 11 of the stores will be this year, and 3 stores will be opening in the first month of 2020. We are going into new regions. In the fourth quarter, we are going to open the first store in the state of Amapá, capital city Macapá. The banner is going into the state of Rondonia, opening a store in Porto Velho and also in Santarém. All the other units are distributed in other states: Mato Grosso do Sul, São Paulo, Rio de Janeiro, Bahia, Pernambuco, Piauí, Brasília. So it's a very distributed expansion. Our strategy is to keep on getting more space in new markets, the example of Porto Velho and Macapá. But Assaí is also reinforcing its position in existing areas where the knowledge, policy and banner have received much attention. We are going to close the year -- we have 153 open stores, and we want to close the year with 164 stores, reinforcing our guidance for the year.

So we want to go over BRL 30 billion in gross sales, 6.3% EBITDA with a massive EBITDA of EUR 1.73 billion. It has an influence because of the new openings, somewhat unpredicted yet, but it seems that we had an excellent third quarter, and we have a very challenging fourth quarter, especially concentrated on this expansion so that Assaí in fourth quarter and next year will keep on presenting this positive evolution in sales and in contributing to better results to GPA.

I'd like to thank enormously our Assaí team. We have been expanding our team, and they have been delivering excellent sales and performance, and it's the result of the efforts of so many people. This year, we are going to have 42,000 staff members as opposed to 6,000 in 2011. So of course, it requires work on culture, process and systems to maintain this rate of growth and the same level of results that we have presented.

We have been recognized in the market Estadão Empresas Mais among the categories observed for the first time, auto service or cash-and-carry, and we have ranked first, showing how important this format has been for consumers and also considering our social status in Brazil. In addition to that, we were also awarded as the company that presented consistent EBITDA. It's based on all these indicators, and there were 1,500 companies as part of the analysis Empresas Mais.

Now let me hand it back to Isabella.

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Isabela Cadenassi, Companhia Brasileira de Distribuição - IR Officer & Member of Executive Board [9]

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Good. So now we are ready for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Joseph Giordano of Banco JPMorgan.

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Joseph Giordano, JP Morgan Chase & Co, Research Division - Senior LatAm Healthcare Analyst [2]

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My first question concerns what you have been observing in terms of inflation for foods. We've seen some change in the market. What have you been observed in terms of trends? And the second question to Belmiro, and it concerns the market cannibalization, generating value in [format]. But I would like to understand the component within 2 or 3 years, how do you expect to see that for cash-and-carry segment? Do you think we are coming close to the maximum density of the format? And maybe it would be time to adjust size of stores, et cetera.

And the second question, concerning Multivarejo. I would like to understand further how the omnichannel strategy, especially considering James Delivery, how it's going to contribute to improve your revenue next year in addition to the changes you've been made.

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Peter Paul Lourenço Estermann, Companhia Brasileira de Distribuição - CEO & Member of the Executive Board [3]

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Now, Joseph, answering the first part of your question about food inflation, it really depends on the category mix of each format, especially when we talk about food wholesale and retail and Assaí, we are going -- depending on the mix, it will be between 3.5% and 4%. This is what we expect for the food inflation.

Now the second question about omnichannel and what would be the impact of omnichannel on the growth of revenue for next year. We are working on our strategic planning for 2020. And what I can anticipate is that the growth for omnichannel initiatives will impact the growth next year between 80 bps and 100 bps.

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Belmiro de Figueiredo Gomes, Companhia Brasileira de Distribuição - Real Estate Business Director & Member of the Executive Board [4]

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This is Belmiro speaking. When we work on the projects of new units, we analyze the market. And when we analyze the numbers, we are considering corporate and individuals who have profiles and needs which are completely different. The expansion in greater São Paulo, the stores that were planned, when we consider the average ticket, if and when you just consider the effect of having a corporate client who is seeking for best prices, even if you are 1 kilometer away, when you open another store, if the prices are more attractive, corporate will go there. And this is normal, very expected movement. Whenever we have a project within this same region, we first study and calculate that.

So results are very positive. We also expect a period of accommodation of stores which were in the same area of influence. After a while they start regaining some of the customers. And there are some stores in Greater São Paulo which are small. They were built at an older time, and they cannot really provide services to all customers. That's why we need more stores. So I can assure you that our movement has been very positive.

It wouldn't be -- if you just analyze stores stand-alone, the stores that have this kind of effect is exactly where you can no longer provide services to clients. For example, adding 2 million new clients in the customer bases within a 12-month period with 90 new stores. In cash-and-carry, there is a different level of penetration in different states in Brazil. There are some states in which 80% of share in the market, and then, of course, the format won't be able to extend further. But there are markets in Brazil where we have very few options of cash-and-carry. So we still expect for the next 3 years to grow aggressively. Then, we are going to revisit our strategy.

But one thing is expansion of the format. And the other thing are players in the format. For example, the unit we opened in Contagem, which had 12 cash-and-carry, it was a conversion of Extra Hiper. And it's one of our best stores in sales in the state of Minas Gerais. So we cannot simply analyze format independently. We have to consider competitiveness of each player in the format, and it really reassures us that we can keep on going even when we have cash-and-carry regionally and nationally.

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Operator [5]

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Next question by Ruben Couto from Santander.

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Gabriel Disseli, Santander Investment Securities Inc., Research Division - Research Analyst [6]

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This is Gabriel, actually, I have a few questions. The promotional strategy for your Multivarejo, it does not seem to show a very strong result in terms of revenue. How do you see that impact in terms of promotion? Was that more from a macro perspective or not? And how can that promotional strategy keep on going for the next quarter and for the coming year?

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Peter Paul Lourenço Estermann, Companhia Brasileira de Distribuição - CEO & Member of the Executive Board [7]

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Thank you, Gabriel. Thanks for your question. As you said really well, that effect has taken place due to a higher competition into the macro scenario. And what we expect, we expect to have a deceleration from an offer perspective in the promo share outside those seasonal periods during the fourth quarter, which encompass Black Friday and those parties by the end of the year that they end up impacting the common share, but we hope that we will be able to add margin during the fourth quarter, regardless of the season.

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Operator [8]

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We have now Thiago Bortoluci representing Goldman Sachs.

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Thiago A. Bortoluci, Goldman Sachs Group Inc., Research Division - Research Analyst [9]

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We have actually 2 questions. One, addressing Assaí, in case the market becomes higher competitive in relation to prices and promotions, do -- are you willing to follow this greater fierce market to be more aggressive throughout additional investments or price increases, even though if that would mean to put aside some additional margin? Or would you say that that wouldn't make any sense since this is a format which is mainly based on prices, and that made -- not make any sense to increase your level of -- to be aggressive in the market?

I'd also like to hear your opinion about what is taking place with the renovated stores. I understand that they are doing really well and that you have in mind some additional stores to be renovated, but you keep talking about this new generations, new sorts of stores. You had thrown several successful promotion attempts with a number of discounts with all those stamps that allowed additional flow to the store -- to the shops. But how about those that were not renovated. It seems that they are losing around 2 digits in terms of sales. What's happening then? Is that happening due to a higher competition or due to a macroeconomic level? What's going on with those shops that did not go through any renovation?

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Peter Paul Lourenço Estermann, Companhia Brasileira de Distribuição - CEO & Member of the Executive Board [10]

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Thank you for your questions. I would like to start answering -- talking about Pão de Açúcar's renovated stores. Let me emphasize that we are closing this year with approximately 50 new renovated stores, and we might have another 15 stores to be renovated during the first 4 months of the coming year. With that, we will be concluding this first phase of stores conversion, which is aligned to a sales growth and an increase in our margins with stores that we hope to convert during the first 4 months of the coming year.

We will increase Pão de Açúcar's revenue where our EBITDA participation will be closer to 60%, which is quite significant. Parallel to that, what we are already doing and what we hope to speed up once the conversions are done, and parallel to that, we are increasing, which is the rollout of the main initiatives, which were successful throughout the Generation 7 type of stores and which can be also applied in those remaining stores at the micro regions where they are based.

The second phase of this new program is the rollout for the new stores which were not encompassed in the Generation 7 model, as they are stores which are based in some regions which are more or less comprised to that model. We do not have any significant issue about those stores. But those who are not part of the Generation 7 model, we have to accelerate the rollout of those initiatives, initiatives that are well succeeded in the G7 model.

As to margin and competition, of course, we keep following some of our competitors in some specific regions. That is key. We have to be present, and we have to follow some of these margins, sure. But we try to reach a proper balance between competition and margin. This is a hard work, especially considering this macroeconomic scenario in level of consumption, which does not favor us so much. Well, let's keep competing and let's look after the best balance in terms of margin.

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Thiago A. Bortoluci, Goldman Sachs Group Inc., Research Division - Research Analyst [11]

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My question regarding margin competition was regarding Assaí, but I thank you for your answer.

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Peter Paul Lourenço Estermann, Companhia Brasileira de Distribuição - CEO & Member of the Executive Board [12]

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Well, that's about the same strategy, but we'll go into details about Assaí's strategies. Well, the wholesale format is a format that is directed for prices to improve customers' experience, and to be assertive and aggressive is part of this business model. We do not see any margin decrease trends. We might have that depending on the expansion mix of new places, new sites when we estimate margin. That allows a very shallow analysis. But the opening of new stores or renovating old stores, that may differ from site to site. But for the time being, addressing the existing sites, we are more concentrated in operational gains and to put additional efforts towards our consumers.

And this is not an isolated measurement, but we will do our best to be very competitive and to deliver best results. This is part of our management challenge. This is part of any commercial company. At the moment, the pressure that we have so far, that has to do much more with suppliers as that channel has grown actively with more participation, and this is a channel with a lower operational cost. And sometimes they see that consumer channel with the lower operational costs, and they understand they need more investment. We have to be very cautious to avoid that the efficiency of the sector will end up being absorbed as a margin to other channels. So we imagine a trend of stability to that margin.

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Operator [13]

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Next, we have Gabriela Katayama from UBS.

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Gabriela Katayama, UBS Investment Bank, Research Division - Associate Analyst [14]

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In fact, I have 2 questions to you. My first question is still along Assaí's margin and EBITDA. We know that the idea is to expand a little bit more than what EBITDA margin is. You had mentioned that there was an increase in the operational cost. Can we say that it has already reached its peak or the inflection point? Second question about digital approach in the retail market. Can that add any additional impact in the sales volume?

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Peter Paul Lourenço Estermann, Companhia Brasileira de Distribuição - CEO & Member of the Executive Board [15]

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Thank you, Gabriela. As I answered before, both gross margin and EBITDA, we are talking about a company that is facing continuous expansion year-over-year, 15% of the sales for new shops. So while we keep or we maintain continuous expansion, neither of them see that as an expansion. When we have a mature market, we have a higher EBITDA margin that goes from 0.4% to 0.5%. So the expansion components by themselves, they lead to a dilution of our percentage, as you do not open new units in your limit, in terms of margin, sales or EBITDA. So that will depend on the level of expansion.

Our perspective takes a mature perspective, which is higher than the total margin, which has been impacted by new units. If we decided to speed up expansion or maybe new conversions for hypermarkets where we will speed up, and then you have a higher participation of new units, that will automatically generate a dilution effect, which does not mean that a mature store (inaudible) or those stable stores will have a dilution. So some part of that dilution is due to initiatives and also due to that expansion mix, which was more favorable. But in the fourth quarter, we will have opening of new sites, which will require more investments in margin, but our mature portfolio, they follow significant gains in the fourth quarter but also benefited by a better expansion period of time.

When you mentioned the digital leaflet, that had 2 positive effects observed in the Multivarejo. First, cost reduction. We had a significant and positive impact in our marketing expenses once we motivated digital flyers and also it has a very positive impact in our margins, and we are very confident that the pathway for digital flyers to follow is exactly that, and they will add positive results as that allows a more direct and effective communication with our customer base.

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Operator [16]

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Our next question is from Tobias Stingelin from Citibank.

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Tobias Stingelin, Citigroup Inc, Research Division - Director [17]

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Belmiro, let me see if I got that right. The whole impact of that cannibalization is of about 2%, 2% or points. Is that what took place during the third quarter?

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Belmiro de Figueiredo Gomes, Companhia Brasileira de Distribuição - Real Estate Business Director & Member of the Executive Board [18]

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Yes. During this third quarter, due to the mix, that was exactly the percentage as several units, they were opened to strengthen our presence in some markets, such as the store at Aricanduva community, which is next to our headquarter with some Assaí stores next to it.

I'm taking this as an example, but we have some other in the north area, Zona Norte and Casa Verde, they were based at the primary zone with 6,000 square meters. Still, they could not serve our customers as expected. And now based on this new format, part of our corporate clients that are after price or maybe those who are in the primary zone, they may migrate to other areas. And this is not just a consequence of this quarter, but that has happened in different times of the year.

In this specific quarter, that has a 2% impact, which does not mean that this will be replicated in the third quarter of the coming year. We have opening in the coming quarter with no Assaí presence where you'll not offer an impact after you opening your own new stores.

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Tobias Stingelin, Citigroup Inc, Research Division - Director [19]

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I have some other questions for Christophe. How about the liabilities? How much -- equities? How much -- what has happened in the FIC, F-I-C? I'm sorry if I did not see that information. Please talk about shareholders' equity. What was the impact over ICMS? Can you precise it?

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Christophe José Hidalgo, Companhia Brasileira de Distribuição - CFO, Corporate Services Officer & Member of the Executive Board [20]

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Thank you, Tobias. Well, in terms of shareholders' equity, for GPA food, not consolidated, reflects the result -- a part of the result. Compared to the previous year, we have doubled that, going from BRL 20 million to BRL 38 million. It can be explained on the one side by the excellent performance that we have observed by the real growth of the performance of FIC. And the results of -- since 2008 in the third quarter, BRL 20 million -- 2018, I mean, had been accepted by the first effect, which really reflected the bad debt provision differently, and it explains the significant variation. But what really has supporting us is the good performance throughout the third quarter and the 12 months.

The second point is the impact of ICMS on the financial revenue. It was almost multiplied by 5x, going from BRL 50 million to BRL 240 million. As I've said, the most significant of the effects resulting from raising funds, BRL 8 billion, it has been in cash for a while, it has a very positive effect. Compared to previous year, we sold Via Varejo for BRL 2.5 billion or BRL 10.5 billion of additional cash, and it means over BRL 50 million in terms of profitability per month. So as you can see, most of that evolution impacted.

Concerning in terms of -- indexation and update are also significant, somewhat below BRL 90 million, net, which amounts to the effect of sales and our lawsuits from August, which were finally confirmed. This confirmation of sentence also had an effect on operational activities and operating activities, I mean, but there is a low provision of better-quality credit. The only effect on the recurring financial demonstration is of about 35% or 30% of the total financial revenue.

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Tobias Stingelin, Citigroup Inc, Research Division - Director [21]

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You said BRL 90 million adjusted, and we shouldn't expect additional impact. You just had one-off adjustment, right?

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Christophe José Hidalgo, Companhia Brasileira de Distribuição - CFO, Corporate Services Officer & Member of the Executive Board [22]

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Well, what we have to bear in mind is that in the mix we currently have, no effect on the Latin American operations, as the level of the financial results in the past was somewhat below 1% of sales that -- in terms of consolidated data concerned -- or concerning Assaí, that does not need to have financial results and Multivarejo that needs more financial performance.

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Tobias Stingelin, Citigroup Inc, Research Division - Director [23]

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So you are saying that you were excluding the impact of that? So you would think 1% of revenues over the revenue approximately?

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Christophe José Hidalgo, Companhia Brasileira de Distribuição - CFO, Corporate Services Officer & Member of the Executive Board [24]

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Well the financial results, regardless of the credit effect, the financial results will be somewhat below 1% of sales, and I'm talking exclusively about Brazil, our current operations in Brazil. We cannot talk about the rest of the operations for a while.

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Operator [25]

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(Operator Instructions) Our Q&A session is now finished. Let me now hand it over for the common -- for the closing considerations of the company. Thank you.

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Peter Paul Lourenço Estermann, Companhia Brasileira de Distribuição - CEO & Member of the Executive Board [26]

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Well, thank you very much for your participation during this call. I would like to emphasize that we are strongly working towards delivering the planned results for the fourth quarter. As you all know, this is a period very important for retail operations. I would also like to say that the company is prepared to meet the demands of consumers during Black Friday and also during the holiday season.

I'm also very confident towards a more positive perspective and the consumption in the last quarter. Together with all the initiatives that we have carried out in the company, we are positive that we are going to get to the end of the year with the company fully prepared to start the first quarter of 2020.

Finally, let me update the process of acquiring Éxito. As we communicated 2 weeks ago, it is aligned with our schedule, and you are all familiar with that. Once we finish our tender offer, we are going to go into the integration process with Éxito, and we are also going to start this year with the procedures of migrating into Novo Mercado, where we are going to have the conversion of the preferred shares of CBD into common shares in a proportion of 1:1. This is a process that is expected to be closed by the first 15 days of February '20.

Let me really ask Ronaldo, whether he has any comments.

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Ronaldo Iabrudi dos Santos Pereira, Companhia Brasileira de Distribuição - Co Vice-President of the Board [27]

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I share with Peter and the team here and celebrate this very positive moment we have had in the company. I have already comment to some of you that this platform of operations for Latin America had been considered during a period with a different kind of scenario. But you see, we always project different scenarios, but we never thought that we would be working in Brazil where we had decrease in interest rate. We haven't predicted that. And there is also the possibility of having it again this year. Maybe there's going to be one more reduction in 2020. So as a consequence, this operation, which was already interesting with our scenario from the beginning of the year, has become even more attractive, considering our current situations.

Peter has also talked about integration. And it's not an integration of a company as had been the cases with other companies in which there is a risk involved in the integration. For Éxito, we've been working together since 2015. So we are highly confident of an easy integration. And you see, Peter, I think it's worth mentioning the conversions that are ongoing.

In terms of acquisition, we have a much better and more positive perspective, and from Assaí perspective, all the conversions we also have very promising expectations for beginning of next year. So I think this is something that deserves additional comments. While concerning ongoing conversions, we have progressed very significantly this year of the conversions of our stores and our portfolio, especially Pão de Açúcar and Extra supermarket. Conversions are going to be completed by the beginning of the first quarter 2020, just taking the company to a completely different level in the market, expecting very positive impact on the results of the first half 2020.

The additional issue -- and I've already talked to some of you -- we still have to deal with the necessary adjustments, especially in the format of hypermarket. We have evolved significantly in our internal discussions involving all the teams of the company, including Assaí's team. For the first half next year, we are going to go towards renovating some of our stores, adjusting the value proposition according to the regions where the stores are located. And we are also discussing conversions of some stores from hypermarket to Assaí.

There is a change in the perspective of the market, especially in São Paulo. Some Assaí stores with operations that cannot be extended anymore would have an additional possibility of having conversions of Extra into Assaí. We are working on planning all of that, but it really indicates something differently from what we used to have, a potential of conversions which is very sizable, and this is going to change the value proposition of some of our hypermarket stores.

We have a very clear vision of the market we should have for hypermarket, and this is going to have a very positive impact on the results of GPA Food and Multivarejo. I'm really confident in this perspective.

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Peter Paul Lourenço Estermann, Companhia Brasileira de Distribuição - CEO & Member of the Executive Board [28]

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And with that, Ronaldo, we close our plan of transformation, renovation and conversion of stores in the first half next year, and then we'll be able to focus on the growth that we still have to do in our format of premium stores Pão de Açúcar and also the format of Proximity stores. So in my opinion, we are going into a very positive cycle of activities.

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Ronaldo Iabrudi dos Santos Pereira, Companhia Brasileira de Distribuição - Co Vice-President of the Board [29]

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Well, I thought this was a very important point to make. And I think Belmiro has emphasized the sales of BRL 30 million. Considering in what you've just said about speeding up our activities and also carrying on with conversions, we are going to do things even faster expanding Assaí. And based on what Laurent has said about Generation 7, Rodrigo talked about the conversions of Extra, and Fred talked about the Proximity market, I am sure we are going to provide a very specific profitability of Multivarejo format. So this is good news. Assaí will go faster with conversions. We are going to speed up the development of models and markets that customers are asking for.

I wanted to emphasize that because I think our company has got to a very mature moment in its history. And it's time now to enjoy all the excellent work that had been done in recent years. And saying that, I would like to thank all of you for your work and dedication, especially the leadership of Peter, Christophe and Belmiro and the Multivarejo's leaders in this wonderful transformation of Grupo Pão de Açúcar. Thank you all very much.

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Peter Paul Lourenço Estermann, Companhia Brasileira de Distribuição - CEO & Member of the Executive Board [30]

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Thank you, Ronaldo. Thank all of you for being with us. And with that, we close our conference call. Thank you.

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Operator [31]

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Thank you very much. The conference call is now closed. The department of investor relations department of the group is available for any further questions. Thank you very much for your participation, and have a nice day.