Companhia Brasileira de Distribuição
Q2 2015 Earnings Call Transcript

Published: 29 Jul 2015

[Operator:]

Ladies and gentlemen, good morning and thank you waiting. Welcome to GPA conference call to discuss the results of the company for the second quarter 2015. This event is also being broadcasted via webcast, which can be accessed at www.gpari.com.br with the respective presentation. Slide selection will be managed by you. There will be a replay facility for this call on the Web site. We inform you that the company's press release is also available at the company's IR website. This event is being recorded and all participants will be in listen-only mode during the Company's presentation. After GPA's remarks are completed there will be a question-and-answer session when further instructions will be provided. [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's management and information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events, and therefore they 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 Ms. Daniela Sabbag, Investor Relations Officer at the company.

[Daniela Sabbag:]

Good morning everyone. Thank you for participating in GPA's earnings conference call. We will begin presenting our results. Ronaldo will make an initial presentation; Ronaldo Iabrudi our CEO. Then Christophe will present the main highlights for the quarter and then we will turn the floor to the business owner who will speak about the performance of their respective units. Ronaldo, over to you.

[Ronaldo Iabrudi:]

Good morning. Thank you Daniela, and the Investor Relations team and all of you for joining us in this conference call. We do not have Libano with us. He is on holidays. But we have [indiscernible], who will be speaking about Israel [ph] and Peter is also on vacation. Christophe, myself and Salvador can answer your questions more related to planning. So we’ll be here for you. The results that we are about to present in each one of the business units provides in our view from this company's dedication to in a difficult year like this one, which was more difficult than we expected. From this Company's dedication to seek sustainable growth, turned in a very comforting way for us because it is very much in keeping with what we had before. So the performance is not off the [indiscernible] it’s not ideal but it is very much in keeping with what we planned. In some of our meetings in calls we have told you that the Company has been trying to adapt itself to this new macroeconomic environment, to the new macroeconomic scenario. We have two important areas of focus, one which is implemented and we are already reaping the fruit of this work. I.e., it is the work that we’re doing to cut down expenses, our integration projects and reduce within [indiscernible] during 2014 in that direction, but you will remember that we had a number of things that we had planned for 2015 and that we are implementing. So this is a more internal work front of the Company and we’re mobilizing the whole team to work strongly on that. And there is another front, another work front that we are following in the same way which is the sales performance execution plan. As you know, we have different business units and you can probably see differences among the businesses which I believe that there is a trend which allows you to see the performance of each business unit, how sales are evolving and in our opinion, we’re in a positive position because again we are aligned with the original plan, with even more rigor and even more detail. We continue with our expansion plan. In the beginning of the year we talked about our expectations even in a challenging year like this one to have an important organic growth and we’re working on that direction. You are going to see the presentation about Minimercado Belmiro will be speaking a little bit about that. Hidalgo spoke about that yesterday. Cnova is also expanding significantly. Now obviously with the cost of capital in Brazil as it is currently, we have to have a lot of rigor and responsibility in assessing and improving our investment. So we are even more diligent, we've been even more rigorous, so it as not to make mistake regarding our investments. Our plans for expense reduction and optimization is also a key priority area for us across the company we started very strong and we talked about this in the present conference call of the year and I want to strengthen it again in this month. We have the cost -- sales declined more abruptly. The company has to adjust but it does not adjust that quickly. So we have elaborated plans. They are being implemented and they have been implemented and we already see important results being arrived along this quarter. We’ll be reaping other important fruits in the coming quarters and in the second half of the year. Input retail, now there is concern. If we think specifically about extra, we continue -- just like we said last year, we continue with our plans to modernize the stores. We are working on the product assortment at the stores. Along this quarter we had a number of renovations in hyper markets and extra source markets. We’ll be speaking about this. Actually even this week, 25 new renovations up to the markets were delivered. And this work is extra and I’m using extra because it is an example that always comes up in our discussions. And those last year we've been talking about those extra -- continue to deliver the results as expected in the plan. I perfectly remember that in the end of the last year we were talking about the actions that we had carried out in the state of Sao Paulo and that we were rolling out for Rio De Janeiro Midwest in the North East and that we expected that in the second quarter of this year we would have a positive customer traffic at stores. Well this is what we expected then. It is now reality, also for extra banner. That’s a de-proximity format and after we’ll talk about this, we continue expand organically with a lot of diligence, with a lot of rigor. But we continue to expand organically and by year end we should have more than 300 units in this proximity model. An important point is that at this market moment it has been somewhat easier for us to find locations for Minuto Pao de Acucar which is a format that has been extremely successful with profitability and return on investment, which is even faster than Minimercado. So we are compensating more in Minuto Pao de Acucar. By year end we expect to have 30 Minuto Pao de Acucar stores. Assai Belmiro will speak about it. Whenever I talk about Assai, I'm always very pleased because it is a winning concept. You just have to visit a store and you’ll see it is wining concept. We are very focused and I believe we are going to have record growth in terms of number of stores in the second half. This is a good side of any crisis. Whenever there is crisis you find more crops of land, you can build faster, you can build at all cost and Belmiro will be speaking about this. Cnova has published its result with significant growth, market share gain. So even in the difficult moment that the country is going through, growing at the pace that [indiscernible] and his team have been growing, well, that makes us very pleased. We are feeling more of an impact and this is the not the first time or whenever we need -- we think about the Via Varejo furniture electronics and home appliances. This is a sector that suffers more at a difficult moment like this. It is a less resilient sector. But Libano and his team presented their earnings yesterday for you. I'm sur that most of you participated in yesterday's conference call. But they’ve been implementing very isolative [ph] measures, both in terms of sales, profitability, cost control and internal synergies to ensure the company's result along the. So I will now turn the floor to the different business units so that we can -- they can talk about their own units. Christophe [indiscernible] with just speaking about the main figures and I would just like to highlight what Christophe is going to clearly talk about the capital structure. But the company continues to be very focused, very prepared to go through this difficult moment of the Brazilian economy. If an opportunity comes up that fits the company's strategy, and that means increasing shareholders value the company is in a position to move in the direction I'm enjoying a good market opportunity. I'll finish for now. In the end I’ll make final remarks but I will now want to turn the floor to Christophe.

[Christophe Hidalgo:]

Thank you Ronaldo, this is Christophe. I would like to begin today's presentation with the main highlights of the second quarter which have find on slide two. We start sales. Our revenues totaled 16.1 billion, up 6.6% and 7.6% in the food segment, Multivarejo plus Assai and 5.3% in GPA non-food which includes Via Varejo and Cnova. In this quarter we had important market gains, particularly in Assai and Cnova, but also in Via Varejo and [indiscernible] and we come from an important recovery trend that we have in the last few years. Well that was performed just ok [indiscernible] closed the first half of 2015 daily market share despite the pressure that we see on sale, and is also the comparative basis with both crop of last year. And we’re see pressure because of the economic environment on the extra banner with the competitiveness of policy administrative commercial dynamics. These will allow us to recover customer traffic and goods sold. These indicators became again positive in the second quarter of 2015. Another highlight is that we confirmed the resilience of our food segment where same store sales which sequentially remained at 4% compared to the first quarter 2015 EBITDA margin of Multivarejo up 7.3% net revenue, in the special highlight to a robust EBITDA growth of Assai of around 17%. At this moment of the difficult economy, it is important to highlight our ability to strengthen our capital structure, increasing our cash reserves to $6.8 billion, that was $1.4 billion more in cash. In this period we maintained policy, strong engagement which translates into long-term organic growth. We had $417 million invested in the period. Investments in this would increase to 51% with 236 stores opened in the last 12 months and 50 stores in this quarter. We implemented a strong program of store remodeling, renovation focused on hyper Extra and [indiscernible]. Lastly before we go to slide 3, I would like to stress that we implemented expense optimization initiatives across our businesses to adjust the Company's expenses and so that the Company can adjust more to the current reality. Please go to slide three. As in the previous quarter, on this slide we showed you comparative figures. In other words, excluding the effect of Cnova's first international operations in this context. Despite the mix effect on gross profit we were able to maintain a relatively stable gross profit 7% of net revenue. In the same period, we generated an EBITDA of R$803 million. They declined particularly because of the pressure moment that impacted the operation’s performance. We adopted some initiatives to reduce expense as along this quarter and along the first half of the year. The effects haven't been totally captured, but still the food segment was able to achieve an EBITDA margin of 26.3% or 6.3% in the quarter. Slide 4 please. This year the main financial performance indicators for the Company we can observe that we maintained our discipline in managing our financial resources. In the period working capital improved by 12.5 days. [indiscernible] surprise increased from 0.2 days to 12.7 days of financial gain amounted R$2.6 billion. The Company continued to significantly reduce its debt level. Net debt over EBITDA ratio fell to 0.4 time from 0.7 times. Still in the financial results in this quarter, as we can observe in recent periods, in the quarter fact that for yet another quarter the increase in our financial results remained below the CDI increased in the period, 22%. Our financial results increased by 14%. Again we maintained the financial expense of 2.6% of net sale. Let us go to Slide 5. Before I give the floor to the business owners, I would like to quickly comment on the key highlights for food segment. I would like to remind you that the food segment first includes Assai Extra Pao de Acucar and proximity stores. In other words, Minuto Pao and Minimercado [indiscernible] I mentioned before, despite a very challenging economic environment posted a significant profitability level -- EBITDA level of 7.3%. Assai has been sequentially showing solid performance maintaining its margin, which remain similar to last year double digits. The quarter was also marked by a significant number of new stores opened totaling 141 new stores in the last 12 months, not to mention that that we dedicated an important CapEx for the modernization of Extra Pao de Acucar and some of our older Assaí stores. I would now turn the floor -- I'd now finish the part about the food segment and I'll now turn the floor over to Eliju for his comments about Pao de Acucar.

[Unidentified Company Representative:]

Good morning everyone. The Pao de Acucar banner achieved resilient sales performance around 6% growth in Q2. We had adjusted adjustment for the calendar effect, despite a strong comparison base with the second quarter of 2014 in which we grew 14.9. The market share gain according to Nielsen remains stable with 26 consecutive months of growth. We keep on paying a keen attention to the banners competitiveness in the premium segment. This quarter our inflation was low than the rate for the segment according to Nielsen. We’ve maintained successful commercial activations like the weekly top 10, the new magazine [indiscernible] and had a very good performance in seasonal days like Mother's Day and Valentine's Day allow to [indiscernible] reached 63% of our total share allowing the Company to better identify consumer behavior. We keep on focusing on the banners differentiators. In Brazil, in the third quarter we have the exclusive launching of Aussie, a hair product line, Miller the beer and Nestlé Gelato ice-cream. The French [indiscernible] launched in Q1 has performed really well. Pao de Acucar's food delivery operation continues to post double-digit growth, increasing volume and gaining new customers. This quarter we fully remodeled five stores and completely revamped 33 smaller stores, working on more than 80% of our whole group of stores over the last 12 months. We opened five new stores this year, four in the third quarter and one in the last quarter. The stores converted in 2014 already show higher sales vis-à-vis extra space and higher profitability. Like Christophe said, considering the challenging year ahead we keep on focusing particularly in competitiveness, selling expenses and a review of our assortments in key categories. The purpose is to maintain our profitability vis-à-vis the previous year. Now I give the floor to [indiscernible] thank you.

[Unidentified Company Representative:]

Hello good morning everyone. I'll be talking about proximity. It keeps on growing very strongly. The second quarter 56.6% positive at above inflation rate. The same concept applied to the world cup. Markets and gains continue to happen. Competitive gains and also priced margins, today we are working with different price levels compare to last year; like for like a generation of new tickets. We closed the quarter with 288 stores, 250 million [ph] and 13 Mini. 31 stores opened in this quarter, 24 Mini and seven Minuto. So that [indiscernible] with the Mini format in his CC as the first date. After Sao Paulo we started with two Minuto stores and one Mini store. And we also started at the end of the second quarter a very innovative project of a pop up stores that were shut down for the winter festival in late July and we are going to have a strong focus on our brand positioning. We have three conversions altogether, two conversions from Mini stated to Minuto. Minuto is a model that is very much adjusted to the 80 cluster and results are above the expectations. And for other conversions, we have an increase of more than 40% sale. Another challenging scenario like Ronaldo mentioned, we are focusing our Minuto store openings. We have been managing to find more locations to rent in 80 social brackets with more convenience and high purchasing power. We have a dedicated DC and we are working very strongly on the productivity of two DCs. We have two and we have taken our gains this quarter of 75% quarter on quarter. The calculation of traffic that goes to our checkout and our headcount. So we have significant cost reduction, very much controlled in the dedicated DC. In this quarter we are working at lower than 7% and in the second half of the year we want to go lower than 6%. We keep on working in cost reduction and increased productivity in all our system expense lines, and also administrative cost and we also moving forward in strong rental negotiations. We closed the quarter with a reduction of 15% by year end in another 50% of the stores. So in the third quarter we are negotiating more store rental. Thank you. And now I give the floor to Marcos Batista for the extra banner.

[Marcos Batista:]

Good morning everyone. The Brazilian macro-economic scenario remains quite challenged to extra. However, we are beginning to see a recovery in sales volume and customer traffic, thanks to enhanced competitiveness and also more assertive commercial dynamics, and also our store renovation efforts. In terms of our stronger competitive edge, I’d like to highlight the Company's agility to make decisions about price and better monitoring of our assortment, particularly in basic stables, which enhance the perception of unbeatable competitiveness by our customers? The revamp program for extra stores achieves 24 remodeled stores. 22 are hyper markets and 2 are super markets, which already give important signs of recovery in same store sales? By the end of July, the revamp program like Ronaldo mentioned will have delivered another 24 - 25 stores in the super market format spread over Brazil totaling 49 stores revamped. For the second half of the year our roll out plan includes the delivery of another 60 revamp stores, approximately 35% of our sales. Please note that in 2015 investment in store renovations amount to R$100 million. The main drivers of these renovations include number one, unbeatable competitive edge with aggressive commercial dynamics in all aisles and as we mentioned before focus on stable foods and product. Number two product assortment adopted to consumers’ profile with a strong share of exclusive brands, our private label brands and price based products. We currently have more than 3000 STUs available, improvement in the level of service, particularly perishables. The sales area was fully renovated with simple modern and standardized communication, and lastly a qualified team of employees to cater to our customers’ needs. In addition, I’ll highlight again our relationship tools, like Club Extra program which has nearly 6 million customers enrolled and now also the extra card which has boosted our sales with exclusive commercial dynamics spread over week days. One of these examples is the meat day on Tuesdays. This quarter we also increased the number of click and collect stations where they service. Our customers can buy products or access website and pick them up at conventional stores. There are total 233 stores strengthening GPA's multi-channel positioning generating customer traffic to the stores. All these points that I mentioned are evidence of the recovery of our sales dynamics and customer traffic to extra stores. Thank you. And now I give the floor to Belmiro.

[Belmiro Gomes:]

Thank you Mark, and good morning everyone. Like Ronaldo and Christophe mentioned before, the second quarter shows the continuity of the strong growth of Assai business. This quarter we've posted growth of 26% in growth sales, R$0.5 billion additionally in sales strongly contributed to GPA's to its growth. This performance stands mainly from the strong growth in same-store sales basis and also the store openings in the second half of 2014 and first quarter of 2015. Sales increase in the second quarter which is more challenging is in line with the first quarter 26.3. The new stores openings in the first quarter also put pressure on our gross income which is nearly in line with the previous one with 0.1 percentage points year-on-year. The biggest impact this quarter stands from the increasing cost with electricity in some locations, and some stores that had 50% vis-à-vis to previous year and several actions that minimize the impact of these expenses; maintaining Assai's expenses at 10.7% of sales which is critical to a low cost business characterize that Assai, increasing 17% increase in expenses. The constant growth of Assai also allowed us this quarter to have significant market share gains over 2 percentage points. We've been strongly investing in competitiveness, particularly partnerships and funds standing from better negotiations with suppliers in order to expand our base supplying mini and small companies. Considering the more challenging scenario right now, we feel a strong impact of the food service segment and the bulk of operators, net borrowers typically to their restaurants have Assai as a strong supplier. On the other hand, this segment also has stronger search by end users for the low price of the model, generating significant increase in customer traffic in our stores. Considering the first quarter and second quarters, we have 26% growth in sales, 27 growth income, 27 expenses going out or progressing 2.3 in EBITDA. for the second quarter and second half of the year as Ronaldo and Christophe said, we expect to strongly maintain our growth, particularly opening new stores. Right now we have seven new units under construction. Seven big units for the new model and seven stores that we’ll open as of August and by year-end they will add approximately another 40,000 square meters of selling area located in extremely prime locations where we have a lot of expectation and they will contribute to strongly maintain our solid growth in Assai as WE have been posting and expect going forward. Thank you very much. Now I give the floor to Libano Barroso [indiscernible].

[Libano Barroso:]

Thank you Belmiro. Like Ronaldo and Christophe mentioned, the short-term scenario is quite challenging with brief and fast changes in consumer profile, consumer confidence and at the end of the day according to PMC we had a fast deterioration in our sales between March, April and May. In this scenario we made adjustments -- short-term adjustments, maintaining our vision and structural plans in the long run. This quarter our net sales was R$4.3 billion, EBITDA margin 5.8% to R$149. The group of stores is 1,047 stores. We opened 21 stores first half of the year, 95 for the last 12 months and 109 stores since January 2014. Our marketing gains year-to-date from January to May 2015 despite the challenging scenario was significant. Like I said EBITDA margin was affected by the lower decrease of fixed expenses. There was a delay between adjustment of expenses and the drop in sales. Considering all the measures we implemented and as of the second quarter, and including [indiscernible] cost structure, adjustment to headcount optimization of rental expenses, freight and marketing expenses, and closure of 19 underperforming stores, we believe in upcoming quarters we will adapt to the cost percentage vis-à-vis our sales according to the Company's track record. Of all the key projects, we had a rollout of Crescer Mais project. Today we already have 45 store in store format stores total F&E in which customers can try out the products in the store and can activate by the product, by the smartphone and have that postpaid phone working, 30 furniture concept stores in which the customer can benefit from the atmosphere, he can see the products displayed and will sell phone solution and have it financed. And we have 30 banner conversions performed to [indiscernible]. We previously have six and now add another 30 conversions. In micro regions that have more [indiscernible] [customers. With that, I give the floor to Hidalgo [ph] to talk about Cnova.

[Christophe Jose Hidalgo:]

Thank you, Libano. Good morning everybody. Another quarter where we had market share gains in the Brazil, 28 consecutive quarters. We have a level of over 20% in GMV. In this quarter we have another growth 26.7% in the [indiscernible] sales of growth 17.5% in global terms and 21% in Brazil. Marketplace share continues to increase in our operations reaching 18.9% in global term and 8.9% in Brazil. We also had customer, traffic was quite well around 38.9% in global terms, 32.5% in Brazil. It's important to highlight a relevant growth in the share of mobile ads that’s accounted for 36.9% of total traffic, 28.2% in Brazil. We also had a sequential improvement quarter-on-quarter in terms of gross margin and EBITDA margins. We continue to be free cash flow positive. Our mobile channel approach continues to evolve. I would like to thank we have the partnership with Via Varejo and GPA. Our Click & Collect system reached 20,493 pick-up locations worldwide. In Brazil these two quarters we have more than 400 locations. We had excellent results in our operating front and commercial front. Finally, I would like to think that we continue firm in our strategy, with 18 networks together with a great ability to adapt business, and proven in the path we work, with very low operating costs. This is one of the pillars of our strategy, and it is very relevant at this point in time the team is more and more efficient and we continue to show passion about ecommerce. I would like to turn the floor to our CEO for his final remarks. That’s our CFO now

[Unidentified Company Representative:]

Thank you, Hidalgo [ph]. We would like to finish this presentation giving some more detail about the initiative to adapt our structure to the new microeconomic environment. We have some measures that focused on Multivarejo and Via Varejo. We confirmed about this to about four or five main points. Headcount optimization. We had a headcount reduction of about 7000 people in the first half of the year. So despite our strong organic growth that we saw in the last two quarters, following a measure to adapt to the new economic context, we had to review the benefits of the executive to renegotiate third--party agreement and optimize our media investment. It is important to highlight that we have a presence in the media which is equivalent to what we had before, but we have to reorganize our expenses overall. Also we revised our logistic expenses particularly for the food segment. So we reviewed our logistics capability and finally we reviewed -- we closed some unprofitable stores. And we'll probably close some more stores in the coming months. So strict expense control as we see on the slide. Now new initiatives, we did not have a full impact. The full impact will be felt as of Q3, but we saw a growth of our G&A of approximately 12% and this derives from the consolidation of Cnova. With that G&A grows overall 5%. Other recapturing partly the effects of some of the measures taken. So we were able to grow last coming inflation although we did not capture the full impact of all of these measures yet. I close my part now. I will turn the floor to Daniela to prepare the Q&A.

[Daniela Sabbag:]

Very well we would like to move now to the Q&A session. We will now open the floor for questions. We kindly ask you to make all questions at once – ask just one question please and wait for the Company's answer. (Operator Instruction) Our first question comes from [indiscernible] Santander.

[Unidentified Analyst:]

Good morning everybody. I have three quick questions. We do understand why the sales performance is not improving significantly in this quarter but what we are trying to say we should start seeing more towards debacle of the second half the positive effects of the reform, the comparative basis will be more favorable. So my question is, is there any granularity? Can you give us some color of sales for the coming quarter? Anything you can give us will be helpful. Second question regarding growth margin in Multivarejo. This is one of the big positives of this quarter. We see some effect working favor, better negotiation with our suppliers, more favorable mix among other factors. So my question is how much more can we expect from that business line, because we have been on the other hand more cautious consumers, not only buying less, but buying cheaper products, that’s a down grade, which makes this improvement in gross margin even more impressive. So my question is, and it's difficult to give us figures but how much more improvement can we expect? Anything will help us. And finally regarding Minimercado extra, one piece of information. The improvement attrition in this quarter was the high number of stores closed at Minimercado which did not happen before. So it's a one time off. Is it part of the natural mortality of retail stores or is there anything more specific in this quarter? Did you revisit the profitability of stores and capitals to close them down or what's happened there? Thank you very much.

[Unidentified Company Representative:]

Normally we cannot tell about future sales, particularly in the current economic environment. I think that Marco Batista mentioned that we continue with a strong program, add extra stores to remodel the stores. We will be reopening 25 stores by the end of the month, more stores coming for the rest of the year. So we are confident that what happened recently will be maintained. But we cannot give you any guidance because you see the economy is changing very fast and constantly. As for your question regarding the margin, while the company is working on all balance sheet fronts. We work on revenue cost expenses and margins; margin is one of the line items where we see an opportunity in a moment like this. We are growing Christophe, mentioned. We had almost 15 new stores opened in this quarter Assai will probably post a record growth. So we do see an opportunity. Customers see an opportunity, our suppliers see an opportunity to work with us and that will allow us to have a more long term negotiation which will be more effective which is what we are pursuing, like a Minimercado stores. I think that Hemato [ph] can answer your question but I can tell you then it is quite of a gain to open stores, to evaluate the stores. If they perform well, good, and if they don’t, you try to make some improvements which are allowed, improvements which we believe will help the stores to be profitable. If they don’t work, the company is very rational. We are quite disciplined. And when I talk about financial discipline this is fundamental if after some time of assessment test improvement to bring the stores with profitable level, if all this do not work, then have to make a decision just like Libano made a decision at Via Varejo. Now if you ask me is this normal, I would say that at this moment as the Brazilian economy what we are doing in absolutely normal, and it is a percentage of store closure which is we've been the natural normal range of our investment.

[Unidentified Analyst:]

Thank you very much. Ronaldo. If I may follow up question regarding sales, I understand your remodeling plan and improvements that will drive from that. But if you could, and it's difficult with an elastic economic scenario. I know that things will be changing overnight and repeatedly. What are you assessing of this remodeling? Can you share with us how much the stores improved? I know there is a first modernization. The first modernization was in the least performing stores but perhaps in this stores the performance delta will be greater, but can you give us any color on the performance after the remodeling of the stress.

[Unidentified Company Representative:]

Well, because of the funds that we are continuing a process. We’re informing that we're going renovate another 25 stores, and there is a third wave of remodeling and the fourth wave of remodeling. This shows and we measure everything as you know. This shows that we are moving in a very positive direction in terms of customer traffic at stores, ticket and revenue. Thank you very much Ronaldo again.

[Operator:]

Our next question comes from Mr. Franco Abelardo Morgan Stanley.

[Franco Abelardo:]

I would like to speak a little bit about a drop in sales at the Extra banner. In the second quarter we saw a decline of about 5% to 6% in sales of super-end hyper markets of the Extra banner. Will you achieve a more modest decline than what we saw in the first quarter? You claim that there is an improvement in customer traffic and sales volume of Multivarejo which includes Extra. So that leads me to believe that you were strongly investing in price at Extra. So let's understand this is a fair statement, and can this price operate the positives in the third quarter and fourth quarter? Should we expect extra sales tourism growth? And why is it that we don't see this price aggressive approach in terms of gross margin. The gross margin is improving but as I as said, this gross margin improvement is an irrelevant contribution from the rental of commercial areas?

[Unidentified Company Representative:]

Your question about the Extra banner, there are some relevant facts for the food segment will have the calendar effect in the comparison with last year's FIFA World Cup and net of all of this, the performance is consistent with the first quarter fiscal year-end with the first quarter, other than the seasonality effect of Easter. So we can see for example the year then is very much tagged -- a year sales that we’re a very tagged to the World Cup. So in this comparison we were negative in the first quarter. In the second quarter it became even more modest because of the seasonality, and again with these comparative days with the FIFA World Cup. We can see for example a marked decline in the sale after effects. So growth is pushed by the full segment. So separating the two businesses, GPA food performs with the same trend. Supermarket have a performance beyond seasonality of the calendar. There is also the conversion of nine stores that happened in the previous year which were part of this base. Net of all of these facts the two models in food have the same trend and perform equally to the first quarter.

[Operator:]

Our next question…

[Unidentified Company Representative:]

Franco let me answer your question about the margin. This quarter's margin increased from 60 bps, increased to 60. By banner we did not observe a significant variation. Modern growth in Multivarejo can grow a little bit more than the rest, that’s one. Two, there is a growing contribution of commercial centers or malls that also increases our gross margins. And you also have to consider, and this was mentioned that compared with 2014 this had a negative impact given the FIFA World Cup. So we have a favorable impact at the rent sector. And we continuously negotiate with our suppliers.

[Operator:]

The next question is from [indiscernible].

[Unidentified Analyst:]

If we consider the future in addition to the store remodeling that you already have, what about your capital discipline that you mentioned before for investment purposes. And what about the opportunity to search for more locations. You also mentioned that before. So we can see that the macro-environment is quite challenging. We also have these opportunities down the road presuming competition can also have an impact. So considering this, could you elaborate more about your CapEx plan and also your growth plan? Do you have any idea or any forecast for growth in area and also CapEx in reals? Any plans for the full year and also maybe for next year? Could you give us some color about that? And by the way something that also happened last year is that you reduced your CapEx guidance, but you've maintained the area guidance. So what about the performance of CapEx per square meter? Do you think that you maintained this or you also have price pressure on CapEx and should expect to see a CapEx increase per square meter or based on the area that you have planned? This is my question, thank you.

[Unidentified Company Representative:]

Basically we have three kinds of CapEx. We have organic and price demand, which are new stores. You saw the number of stores and we are very much focused. And what you're saying, we planned what we do and what we see. Right now in this economic scenario when you think about Mini and rental areas that used to be more difficult in the past, now they have more adequate prices and also a faster pace for renovation purposes because things are more available [indiscernible] have never seen so many offerings of land as he has right now and conditions are far more appropriate, Sometimes in the past, depending on the location it was impossible to meet the amount asked and now things are more feasible. So overall speaking when it comes to the organic approach, we see opportunities to keep on growing at a faster pace compared to what we had in the past in terms of square meters in 2014 and costs are also appropriate. I would say that we've been managing the main costs despite inflation rate. You all familiar with the inflation rate. So that's one point. Second point, we're strongly focusing on CapEx for reopening renovation and conventional stores like Marco said. We're also considering assortment, store concept, more services and we are also focusing more offer in the customers’ internal route. So we're trying to benefit from these tough times so we can work on these investments. A comparison with 2014. If we compare that we are slightly above in term of square meters, but I don't think that this is the right time to give you the full picture, this quarter and upcoming quarter can be quite challenging. We start working July and we'll have a better idea by the end of the third quarter but we keep on being confident that we’ll manage to keep on investing organically and like Christophe mentioned, the Company's capital structure makes us feel pretty comfortable to keep on believing in our growth potential, be it organically or with new opportunities.

[Unidentified Analyst:]

Thank you, Iabrudi. Thank you, Christophe. Now coming back to meeting the title and to this format, you've ended up by closing three stores. I think it also be included conversions if I’m not mistaken. But is there any change to the format, any specific reason behind it, not only because the note format is selling more, but do you feel any need to change the Minimercado card format? Based on your assessment do you believe the market is not giving you, or this model is not giving efficient return? So how do you see that and what is the impact on the growth plan. In areas it may not be so important, but in terms of number of stores, this is the highest number of store openings compared to your original plans. Has anything changed?

[Unidentified Company Representative:]

The open speed remains same; we've made no changes. But what we're trying to do right now is to benefit from the market opportunities, upcoming opportunities precisely during the crisis. We are trying or we are finding new locations. When we speak of A, B social brackets, in the past these locations were more expensive and now we have discounts in old stores and lower prices in new locations and then you can have faster return. That's the strategy. Now about closure, foreclosure is a macro process for proximity in our portfolio management. If you go for better store openings in models that are constantly evolving that's what you do and at the same time you start closing stores that have been there for four or five years which are underperforming. And we focus on expansion allocation. So this model has been working. We are still focusing on it. In our portfolio management we are starting to work on better locations and for stores that are not performing well, despite all changes, we decided to close them. Change is the result of the BU. As to changes for the banner, we’ve been doing normal changes as we do in old banners. We have big sales, prices and even adjustment to assortment. The first quarter we adjusted our formats we have three formats in Minimercado and it followed by pricing, communication and also assortment. It started in the first quarter and will continue till the end of the third quarter with a whole assortment operation making it better and better adjusted to our target public. Thank you.

[Unidentified Company Representative:]

The next question is from [indiscernible] Itaú BBA.

[Unidentified Analyst:]

My question is about G&A. I think there is a number of initiatives backed by the companies to pursue more efficiency in this challenging top line. This quarter more specifically G&A is going up in line with inflation. Do think this might change by end? Do you think your projects and strategies might begin to bear fruit by year end? That’s my question. Thank you.

[Unidentified Company Representative:]

Thiago, we are focusing our efforts to make it happen. The focus is not only what to do but the focus is on the speed to make it happen. It is crystal clear that this has to be done. This is part of our plans and it's up to us to have the right pace, the right speed to be aligned with your question. But it all depends on more things. It is always a percentage of the sales as you know well. So we work on the budget and we revisit it on quarterly basis and we are paying keen attention to each and every opportunity. As you know, we always have possibilities but given you remember then the uncertainty about this item, that’s something we cannot do. But we are moving in that direction. I'm confident. I believe the plans that would be following up would lead us in this direction. But I don’t want to make a statement here. I don’t want to give any guidelines. Thank you.

[Operator:]

Our next question comes from Tobias Stingelin Credit Suisse.

[Tobias Stingelin:]

When I heard this press release and then I heard what was said about the performance of remodeled extra stores, I think that recently was mentioned that you are accelerating the modernization because it's going well. But when we hear about modernization and remodeling of sales growth seems to be expensive. But it doesn’t seem that these stores are performing that well. So what I want to understand, regarding what you have planned, like those you expected 10% sales increase in the remodeled stores, but you’re getting just 5%, are you happy with that? Is it good enough? Or are the remodeled stores performing as planned. That’s my first question. And my second question is in the second half of last year you started expanding violently gross margin. Your gross margin expanded 200 basis points. This year we are going to have a difficult year compared to last year. So how should we expect the performance of the gross margin in the second half of the year? And finally Christophe talked about 7000 people being dismissed. Is this consolidated including the 4,800 employees that were laid off at Via Varejo?

[Christophe Hidalgo:]

Thank you Tobias for the question. We're working to modernize the extra stores. I would like remind you that we started remodeling back in May. And six of these stores were delivered. These stores are performing totaling in keeping what we planned for them. First store based pointed to a very satisfactory performance of these stores, giving you numbers -- well, we can’t give you exact acreage numbers but I can give you some stores within store sales approach. These stores compared to themselves grew about two digits on average. So they are fully in keeping with the plan that we established for them. As for the question about a head count reduction of 7000 people, this is a consolidated number. It includes the people that were mentioned to the headcount reduction by Libano 4,800 people at Via Varejo.

[Tobias Stingelin:]

And what about the gross margin for the second half of the year because last year everybody works for tax with expansion of the gross margin that helps your financial result. This year things are different. So I just want to understand -- what we should expect, and how this translates into competiveness.

[Christophe Hidalgo:]

The competitiveness of policy was not implemented in the second half of last year. In other words, the margin performance actually includes this competitiveness approach. We have to consider better negotiations, we have to consider a significant seasonality effect and now in the current challenging environment, which is somewhat volatile, it is difficult to compare. All comparisons will be difficult actually. This is no different than the other line items. If they look banner-by-banner, always see more pressure on gross profit, but although want to maintain our competitiveness policy, particularly in the food segment.

[Tobias Stingelin:]

I know you can't give any figures or guidance but in terms of direction, should we assume the rest year's gross margin will not necessarily be a reference? I would suspect that the gross margin should be reduced because we’re beginning the year with a lower margin.

[Operator:]

Our next question comes from Mr. Fabio Monteiro, BTG Pactual.

[Fabio Monteiro:]

I would like you to please elaborate on the performance of Extra. Considering that there are still some improvements to be captured by the modernization of stores, but analyzing recent quarters my first impression and I think that Mark has talked a little about this, there was a deceleration in the total sales of Extra Hyper and Extra Super and this leads me to think that there was not enough improvement at Extra but since we didn't have any openings or closing of stores in the case of Extra Hyper since the first quarter of last year, that explains the then situation in the second quarter is a fact that non-improved sector in hyper market. I just want you tell me whether this is a fair statement, because an improvement was not seen because in the second quarter there was a 5.1% sales decline in Extra Hyper and this would be explained by non-food items in hyper. But when I look at the supermarket segment last year supermarket 2.8% by the way a lot of conversions and Michael talked also about that. I think the considering closing and conversions there were nine stores altogether in Extra Super. Even net of these closings there was a reduction of 5.6 in the second quarter. So I guess there is a little bit of seasonality effects there that could compare about 100 [indiscernible]. This is what the company explained to me when you disclosed sales. But just there is a little bit of seasonality, there is also the effect of store closing that would [indiscernible] 2% but still there is a worsening regarding what we saw before for Extra Super. Could you please explain?

[Daniela Sabbag:]

Fabio, this is Daniela. Look there was no worsening, particularly when we are on lines with food category. You repeated Michaels words well. The negative growth happened because of store conversions, not just super and hyper. Through that the level would be similar to what we had seen before and when we talk about Extra Hyper well this is related to the worsening, the deterioration of the macroeconomic environment and the comparison with the FIFA World Cup last year. So when we consider everything else and net of these effects the food category continues to show a sales improvement and improvement in customer traffic. This is what we can see analyzing first quarter to second quarter.

[Fabio Monteiro:]

One last question. In terms of M&A, you mentioned that you were looking to possible opportunities for M&A if any opportunity comes up. I just want to understand is this a move on focus on cash and carry chain or any specific format or would this be a movement to reinforce your regional footprint if you want to increase your footprint in any different region. I just wanted to understand the M&A strategy?

[Christophe Hidalgo:]

Fabio, actually we are looking at any and all opportunities that arrive. You know how this works. I just wanted to say is that we continue to be focused on having a capital structure that will allow us to enjoy an opportunity that might come up. We don't have anything in the radar right now. We don't have any of this new information to disclose about that but I just think it is important for euro investors to know that the company has a capital structure that allows it to grow not only organically.

[Operator:]

The next question is from Gustavo Oliveira, UBS.

[Gustavo Oliveira:]

My question is about costs and then I have another question to Belmiro about Assai more specifically. In terms of costs, I would like to understand the impact of electricity in your margin. Your margin is slightly reduced, more than 100 bps. So what is the impact of the increase in electricity? Belmiro also mentioned a 50% increase in electricity cost with a clear impact on Assai but I believe it also applies to all other food retail operations? And is there any opportunity to lower rental costs? If I’m not mistaken you said that you have 50% reduction in rents for proximity stores and 50% on the stores. It seems to be quite strong. So maybe we can have more operating gains in the future? So first a question about electricity, then rental cost and now to Belmiro about Assai. Belmiro, you've mentioned a couple of things about a slight change in consumer behavior, migrating more to Assai which is positive to Assai. But at the same time there is some concern with food service and how you can manage the food service. So how can you manage that in Assai and what do you imagine the impact will be on your sales in the future?

[Christophe Hidalgo:]

Let me answer the first two questions and then I'll give the floor to the Belmiro. The impact of electric energy, what we see in the food segment, which is being more effected than the others among other things, it is close to 42% in our expenses. We believe that in the second half of the year there will be still be adjustments in the cost of electricity adding some regions. It can be close to 70% increase. Utilities in general like electricity, water, gas et cetera; they will be the second expense in our P&L for classical retail. Second, only two personnel expenses. I don't know the exact impact but the number in bps in the food segment is approximately 35 to 40 bps as additional expenses vis-à-vis the previous year. Considering that Gustavo again, both in the retail segment and multiple issues, we have opportunities to lower rental expenses, not something that is just focused on this opportunity but this is related to opportunities in the real-estate market that are having a real performance and then we can consider adaption of adjustments to utilities and rental expenses. And in the second half of the year maybe we can capture what we’ll be negotiating in the current quarter. I won't give you any number on the magnitude but we consider to have a significant reduction from 10% to 25% depending on the region and the store location.

[Gustavo Oliveira:]

Christophe, just a follow up question before we talk to Belmiro. What about the increase in electricity again? You've mentioned we might even have another 70% increase in the second half of the year or about 42% reaching 70%. I am asking you this because I want to understand the trend in the EBITDA margin. Once we know the gross margin based on what you said, is expected to be stable. The EBITDA margin in the second half of the year, do you think it would still have the reduction of about 100 bps year-on-year or do you see signs of improvement already in the second half of the year despite the more negative impact of electricity costs?

[Christophe Hidalgo:]

Just one comment still about rental, I think it's important. Everything that Christophe mentioned obviously I know and we shall redundant that we are being compliant to our agreements. We are always based on our current contracts; those that are still to be expired to but always in compliance to what was agreed. Everything has been negotiated beforehand. Everything we do is very strictly combined and in compliance with the agreements.

[Belmiro Gomes:]

Gustavo, Belmiro speaking. In Assai the impact of electricity increase is extensive 0.45 percentage point. Both for Assai business and food retail it eliminated lightly our several thrones that lowered expenses and also the increase about a critically but also grab a share of it we expect to have another 18% in August. This not the same for all region to the country it does significantly in August the company both and I say another business also tries to lower expenses in order to minimize the impact that it was actually very strong without in the second quarter of this year and some regions where we track the numbers for a simple comparison what you check the rental stores electricity expenses are higher than the rental amount. So actually it has the second highest cost at expense that is a series of [France] I could give you more detail later on business by business. But that’s what we do to present this impact that reaches it in 70% as to food services and there more small companies we see the impact of the consumer behavior, they are not diving out so often or having happy hours there is no impact on the exact which is of lunch time. But there is reduction in other publics and it was also offset by more consumers that are coming to segment and we expect to have this strength continue in the second half of the year. But we also believe food service already went down as expected. So by the second half of the year we expect to see stable level both for consumer and also merchants.

[Gustavo Oliveira:]

Just another follow up question. Thank you Belmiro for the update on Assai just another follow up question about the profitable impact of the EBITDA margin the second half of the year due to electricity cost. Do you believe there is more room for the margin to grow from the states or something lower than 110 bps, I'm referring to the EBITDA margin.

[Belmiro Gomes:]

I don’t want to put too much into perspective but this challenging current scenario presents them from having any of the outlook. But I can tell you is that obviously we are trying to focus on the trying to maintain EBITDA margin but we have to say that the pressure particularly on extra the pressure of cost and inflation over costs is extra will be towards more reduction. It's hard to give you any figures right now. It we would be just to work as but competitiveness policy allow us to consider by sub categories and maintain the level that we usually have and the same goes for Assai.

[Operator:]

The next question is from Alan Cardoso from Banco Safra.

[Alan Cardoso:]

I have just one question. At Via Varejo we can clearly see the company has been adapting the level of expenses to the current sales level something slightly better than that since the macro scenario is not helping. When it comes to stronger focus food segment and they also not given any figure but any quantitative data that might lead to expense reduction, I understand the company has a number of activities to recover or gain market share in each one of the segment of the food channels at foremost. But when you look at the market as a whole if we consider sales added to 7% ITGE with nominal sales going about five from April and May. So even though Pao de Acucar market share is in line with the market the level of income would not be enough to offset inflation pressure. Just like to what is then better the dynamic and when GPA foods EBITDA margin and Multivarejo might get stable.

[Belmiro Gomes:]

I guess we go back to the final slide explain by Christophe. The work that Libano and his team are doing at Via Varejo we were also implementing at Multivarejo. But the group synergies focus exactly between the two banners Via Varejo and Multi. And that includes IT re-negotiations had come to optimization in our case since we have increased the level of service [indiscernible] well that entailed a significant adjustment at the corporate level and we also carried out an adjustment at the level of the management from the CEOs down to the officers because we believe that this aligns the whole team, ones is the whole team a company with the 150,000 160,000 people employees it is important that everyone participates in this movement of adapting the size of the company. So this is a work that is been carried out strongly at the average with multi Assai is going through the same process Cnova in other words the whole company is working as a cooperation so that we can implement these process across the company because it will help us align our team in the good direction.

[Alan Cardoso:]

Just a follow-up question. If we imagine that your sale will not improve significantly at the same-store sales level and I'm considering the macroeconomic scenario which is becoming more and more challenging your initiatives to reduce expenses will be enough to offset the EBITDA margin of Multivarejo or would you need a second way of headcount optimization and expense reduction.

[Belmiro Gomes:]

We'll go through rounds of actions as necessary. At this point we designed some initiatives now there will always be some delay of course but we believe some delay until we can bear the fruit of the these initiatives, but we’re moving in the right direction .Christophe put it quite right at this moment of the economy the only certainty that we have is better we’re not certain about what is coming up. So it is our duty to follow market movements fairly and to make decisions accordingly. We’re quite alert, now what really matters is the company is very agile in our decision making process. The team that we have sitting around this table is very much aware that we’re going through a complex moment and as decisions need to be made according to the complexity of the macroeconomic scenario.

[Operator:]

Our next question is from Richard Cathcart from HSBC.

[Richard Cathcart:]

Would just like to go back to the gross margin, 60 basis points at Multivarejo. Could you give us a breakdown of the factors that are contributing to this the mid shopping centers et cetera? And my second question could you speak about any improvements of traffic because the customer traffic became positive again in the second quarter, could you elaborate please?

[Christophe Hidalgo:]

Your question about the gross margin, increase of 60 basis points. As we mentioned this corresponds to a number of things, I really don't want to get into breakdown of the factors because we just don't that, now what I can tell you is that almost a 100% of the effects come from the mix effect however the weight of pound [super] in the total of the company the weight of pound the total of the company and the second effect is the growing contribution of the rentals of our commercial centers, as you know this increases the gross margin of Multivarejo. Now as per your second question I will turn the floor back to Marcos Batista.

[Marcos Batista:]

Richard your question about Extra, you asked about customer traffic experts and I've mentioned yes this is performing satisfactorily, we have a very positive trend to recover customer traffic modernize the stores as I also mentioned well showing relevant gap in terms of sales volumes and customer traffic we see a trend of a sustainable recovery.

[Unidentified Company Representative:]

This is [Elijah] Richard. As for Pao de Acucar we expect a second half -- well we have a more favorable comparative basis on the other hand the environment is getting more and more challenging. So what do we have? We have a commercial plan for this banner for the second half which is focused on some strong activities, we have our anniversary in August we will totally redesign significant environment, we’ll be opening five new stores as I mentioned and when you're starting to capture the maturity of stores that were opened in the end of 2013 and end of 2014 these stores are growing, in terms of sales level, and they grow normally in the last quarter of the year. So they said all of these activities will bring us a good performance, additionally we continue to work strongly almost looking at the market and our competitiveness in the second half we have a stronger program to readjust the whole store assortment. I cannot give you any detail but we have some interesting things for the Mais Program our loyalty program and I guess this will help keep on just get results for the second half of the year.

[Richard Cathcart:]

And a forward question about the gross margin. Could you explain is Extra hypermarket growth margin is stable year-on-year or whether it is dropping?

[Christophe Hidalgo:]

Gross margin remains stable.

[Operator:]

Our next question is from Ms. Andrea Teixeira with JP Morgan.

[Andrea Teixeira:]

I just want to have a follow-up question about customer traffic, have you felt any positive effect of your approach of having certain prices, is this showing any improvement in your policy for offerings, sales particularly in terms of the Extra banner, is it increasing customer traffic? That’s one question. My second question is about your risk policy, your risk provision policy, any changes regarding fiscal provisions tax provisions?

[Belmiro Gomes:]

Andrea, about customer traffic, as mentioned yes, we see an improvement and a sustainable improvement with more customer traffic and more sales volume. And this results from our competitiveness initiatives, initiatives regarding modernization and everything we have implemented according to our plan.

[Christophe Hidalgo:]

And this is Christophe now. I just want to add like I said in the main highlights in the beginning of the presentation in Extra and hyper banner volume and traffic when tax to behaving positively despite a difficult comparable basis considering the world cup effect but despite of that in the end of the quarter we resumed a positive sales volume and positive customer traffic which are a positive sense of the recovery of that banner. Now turning to your second question Andrea, indeed, our tax provisions increased in the second quarter an increased by approximately 8% close to R$700,000. The increase corresponds to two main issues regarding the best ability of amortization and this will have a possible impact on income tax. And a second question regarding ICMS credit in São Paulo, so these two issues explain the increase in provisions, I just want to highlight you Andrea that the review of our contingency for this subsequent provision while this is a process that we permanently every quarter, the review the level of provisions that we have and this results from our own appreciation, depreciation of our legal advisors. Finally I want to highlight and I guess you asked about that, we didn't see any changes in the policy that we adopted for provision.

[Andrea Teixeira:]

Perfect, and thank you Christophe, and I know that this is a very long conference call but I think that this is for the benefit of all analysts that are following this conference call and it's difficult to predict the margin, but considering the efforts that the Company is making, you have a more leaning structure. So the 7,000 people who were laid off, can we see a positive impact on SG&A and the other question about marketing expenses the company has a big marketing expense [indiscernible] in Brazil, so I am not considering the average we talked with Libano about this, but as we grew do you see any other opportunities to cut down expenses?

[Christophe Hidalgo:]

Andrea, expense reduction opportunities are endless. We have to adapt to the trends that we have observed in the business. What I can tell you to answer all of your question in fact the initiative regarding headcount optimization. The other one are about rental utilities efficiency et cetera at this point of the account for a little over 10% of the total SG&A of the company.

[Belmiro Gomes:]

We are prepared already to continue reduce expenses in case of our sales remains volatile. And your other question about marketing expense, marketing expenses might seem high at a percentage of sales. However marketing expenses are gauged according to market reality what really matters to us is to maintain our media presence relative to our competitors. By maintaining a relatively high exposure in the media we can reduce our media expenses and that will have an impact on media expenses in the second half of the year just in a nut shell we have a top line impact of 2% on the G&A if necessary by the end of the year we are prepared to change this even more.

[Andrea Teixeira:]

Thank you Christophe for your explanation it is very difficult to navigate to sale in the current Brazil. Thank you very much.

[Unidentified Company Representative:]

So this concludes our call for the second quarter. Thank you so much for joining us today. We also thank the team here with us today. We highlight that we are ready and willing to phase the second half of the year which is going to be quite challenging particularly in non-food. So if you have any questions before we close the conference I'd like to make it clear that we'll hear for you for any questions or you can also contact us by phone. Thank you very much.

[Operator:]

This concludes GPA's conference call. Investor Relations department of the group is available to take any other questions you may have. Thank you all for joining us. Have a good day.