TRANSCRIPT OF GPA CONFERENCE CALL 2Q16 ......TRANSCRIPT OF GPA CONFERENCE CALL - 2Q16 RESULTS 4...

TRANSCRIPT OF GPA CONFERENCE CALL - 2Q16 RESULTS 1

TRANSCRIPT OF GPA CONFERENCE CALL

2Q16 RESULTS – Q&A

JULY 28, 2016 Operator: Good morning and thank you for waiting. Welcome to the GPA conference call to discuss the Company’s results for 2Q16. This event is being broadcasted online via webcast. The presentation can be found on the link www.gpari.com.br. The slides selection will be controlled by you. This event’s replay will be available shortly after its conclusion. Please be advised that the press release regarding the Company’s results is also available on the Investor Relations website. This event is being recorded and all participants will only be listening to the conference call during the Company’s presentation. Then we will begin the Q&A session in which further instructions will be provided. If any of you need any assistance, enter *0 to ask an operator. Before proceeding, we would like to clarify occasional statements that may be made during this conference call, regarding GPA’s business perspective, projections and operational and financial goals which are based on the Company’s Management assumptions and beliefs, as well as on information currently available. Future considerations are not guarantees of performance. They involve risks, uncertainties and assumptions, as they regard future events and, therefore, depend on circumstances that may or may not occur. Investors must understand the general economic conditions, industry conditions and other operational factors may affect GPA’s future results and cause them to differ materially from those expressed in such future assumptions. Now I would like to give the floor to Ms. Isabela Cadenassi, the Company’s Investor Relations Manager. Isabela Cadenassi: Good morning to all. Thank you for taking part in our 2Q16 results conference call. Ronaldo Iabrudi, our CEO, will make the initial considerations; Christophe Hidalgo, CFO, will present the results' highlights followed by presentations by CEO's of each business: Luis Moreno from Multivarejo; Belmiro from Assaí; Peter from Via Varejo; and Flávio Dias from Cnova. Then we will open the Q&A session. I now give the floor to Ronaldo for the initial considerations. Ronaldo Iabrudi: Good morning to all. Thank you, Isa, Gabi, who organized this entire conference, the whole GPA staff who is here with us. I will be very brief in this opening. I believe that this will allow each BU more time for their presentation and to answer your questions, if necessary.

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As I have done in recent quarters, I will reinforce the Company’s strategy and let the BUs show how this strategy is being implemented in each business. We have adopted a slightly more defensive posture over the last quarters, in 2015, and also in 1Q16. I would say Assaí and Proximidade are the exceptions. This defensive attitude has led us to prioritize business adaptations to the new reality we have been living in Brazil, since 2015. During these adjustments, which I call defensive attitude, we have been working on several fronts such as enhanced productivity, process optimization, simplification, quality in customer service as well as working capital and investments. More recently, in the last two quarters, we have been working hard on portfolio adjustment, both in terms of closing and store conversion. This work is being carried out in practically every BU, but especially at Via Varejo and Multivarejo. In our view, this work has created a solid foundation, or reinforced it, for the resumption of the Company’s growth. Today, after carrying out this work for foundations resumption and adjust BU sizes to the market reality, we see that BUs have created conditions to implement commercial initiatives. When I say this, I think about Extra, at Multivarejo, specifically at Via Varejo, but we created the basis for these commercial initiatives resumptions in order to ensure growth. What we will see with the presentation of those in charge of each brand is a clear sales growth trend. We still do not have inflation growth, or above inflation growth, in all brands, just with Assaí. But Proximidade has also been showing above inflation growth. But we have seen a market share growth in all brands, despite it being smaller than the inflation, which I think is a crucial point. When I say market share growth, I am also referring to Extra and Via Varejo. I believe there is not much to say about Assaí, Pão de Açúcar and Proximidade as they have maintained continuous market share growth. So what will see today? We will see BUs adjusted to the market size as well as sales and market growth in all of them. What can we see as perspective? Commercial initiatives that in our view will continue to produce results, but that will require small adjustments to increase sales growth and profitability. From an internal point of view, the work to improve and optimize costs, expenses, careful allocation of investment, with continuous improvement of working capital, continues. You will have the opportunity to see the presentation of each one of them. We are also seeking operational improvement for Cnova. Two good examples show this ongoing search for operational improvement: One is the significant drop in disruptions. The other is the search for a higher level of assortment and the implementation of several projects for better quality service. But from my point of view, what is most important and relevant when it comes to Cnova is that the Company completed its investigation process with determination of the final amounts reflected in the financial statements. We communicated this to the market in a recent Material Fact. As I said, I hope you identify the implementation of this strategy in each BU presentation. I now give the floor to Christophe and then, as I told Isa, to each one of the BUs leaders. I will also be with you for the Q&A and for a message at the end of the meeting. Christophe.


Christophe Hidalgo: Thank you, Ronaldo. Good morning to all. Let's start the presentation by commenting on the Company’s main consolidated performance indicators. We are looking at slide one. We see that 2Q revenues reached R$16.7 billion, R$9.7 billion from the food segment, a segment that grew 8.7% this quarter. This growth was negatively impacted by the Easter effect. We estimated this effect in consolidated sales at 2.5%. Next to Assaí, wee see that a high level of growth was maintained, almost 37% in the period. This growth was supported by an acceleration in same store sales growth as well as the voluntary policy on organic expansion. In the period, Assaí opened its first unit in the state of Amazonas, with eight stores under construction and two stores being converted from Extra to Assaí. Today, Assaí already accounts for 34% of the food segment of the GPA Group. In other food brands, Pão de Açúcar’s performance was in line with the market and ended the period with a stable market share. We see that in 2Q, a Pão de Açúcar store opened in Salvador. The convenience was representative, a format that already takes up 1% market share, even though we only opened five units in 2Q. Super and Hiper Extra showed a good recovery for sales and volumes in the food category, which was a result from the commercial strategies implemented throughout 2Q. Next to Via Varejo, as Peter mentioned yesterday, we continue to show a strong recovery in sales trend. This is a result of the consolidation of commercial strategies pursued in recent quarters. This has been reflecting in 2Q as market share gain, as was the case in 1Q. Adjusted EBITDA maintained the previous year's level, reaching approximately R$760 million, that is, a 4.6% margin. Moving on to slide two, we see that the quarter’s gross margin reached 25.4% of sales. This 1.4% variation in margin is primarily due to the mix effect among businesses, as well as the recognition of more significant tax credits amount than we usually recognize. Excluding the effect of these credits in gross margin, gross margin performance would have been roughly equivalent to that recorded in 1Q. On a business by business basis, in which we always portrays those tax credits, we see that Assaí maintained a stable gross margin of approximately 13.8%, despite a negative ramp-up effect of ten stores opened in the last 12 months. Multivarejo sees a decrease close to 160 b.p., reaching a 26.7% gross margin, always excluding those effects. As for Via Varejo, the margin decreased by approximately 80 b.p., due to enhanced competitiveness in the price of products, partially offset by greater efficiency in services. We can also see that SG&A level grew 11.8%. This growth has been produced mainly due to the mix effect. In fact, at the individual business unit level, Assaí’s SG&A increased by 33%, which is less than sales, but in line with our expectation. It was a result of ten stores opened in the last 12 months.


Multivarejo’s SG&A increased by 7.9%, growing below inflation. As to Via Varejo, SG&A were up by 10.1%, as a result of the end of payroll unburdening. Indeed, depicting this effect in Via Varejo, SG&A would remain unchanged. I would like the emphasize that, in 2Q, the Group’s focus on the expenditure control had a reduction of 3,700 employees, 2,000 in Multivarejo and 1,700 in Via Varejo, totaling nearly 18,000 less in a 12-month period. The Company also focused on the ongoing negotiation of leases, resulting in an average reduction between 5% and 6%. Throughout 2Q, as was the case in 1Q, we rationalized marketing expenses. In the other fronts, we are in a continuous and permanent search for productivity in general. It is also worth noting, in this slide two, that we registered R$481 million one-off costs in 2Q. These non-recurring expenses relate to four major concepts: A supplementary provision for tax contingencies in the amount of R$180 million; investigation expenses, as Ronaldo mentioned. The Cnova investigation ended and we have incurred investigation expenses of R$127 million; we also incurred R$75 million expenses in restructuring; and the impact of the stores closing and assets write-off in discount generated R$57 million non-recurring expenses. Although we had to adjust the provision level by contingencies, I would like to highlight that the total contingencies registered in GPA’s balance sheet of June 30 has shown a R$1.8 billion decrease regarding what it was on March 31. The net income not adjusted for the period was R$-583 million, of which R$-491 million is from Cnova. Moving on to slide number three, we see the Group’s financial situation. At the end of 2Q, GPA has a fixed solid cash reverse of R$3.7 billion investments with daily liquidity, also R$2 billion receivables undiscounted and discountable from one day to the next; and additional R$1.3 billion in confirmed credit line, also fixed in a short term. If we look at net debt, we see deterioration of R$1.6 billion, y/y June 2016. This deterioration can be explained mainly by outstanding payments of R$400 million, especially the payment made regarding Morzan’s arbitration proceeding. It is also explained by a R$1.1 billion deterioration of Nova’s debt position, half of it, or a little more than half of it, given to a decline in EBITDA, and the other half to working capital deterioration. If we look at the financial results, we see that it was impacted by the highest interest rates, as well as by the receivables discount policy conducted over 1H. Under these conditions, the most representative reading of the trend can more easily seen in 1H numbers than in 2Q numbers; that is, a representative trend in our financial structure closer to 2.6% of sales and financial results than what is mentioned in 2Q. As to 1H increases, it is aligned with the interest rates increase. The increase in financial results is R$200 million, of which R$100 million is from the interest rate effect and lower cash position due to the receivables discount policy. The other R$100 million, that is, the other half of the financial result growth has to do with monetary adjustments applied to assets and liabilities of 1H15, which did not happen in 1H16, as those updated assets and liabilities were monetized in the period. The key performance indicators of the consolidated Group end here. I will now give the floor to Luis Moreno who will be commenting on Multivarejo’s performance. Luis Moreno:


Good morning. In 2Q, Multivarejo generated adjusted EBITDA of R$384 million, 6% of net sales. This quarter, we began to see positive signs of recovery and improvement trend. Gross margin has a positive impact of tax credits above average by 250 b.p. The margin also has an additional transitional impact of deterioration due to changes in business model and negotiation with suppliers, changing gradually from a sell-in based model to a sell-out, in which part of suppliers’ promotional investments no longer concerns the purchase and is associated with the sale. This transitory impact accounted for 60 b.p. during 2Q. SG&A growth was 7.9% lower than the inflation rate. Costs directly related to the stores’ operations remained stable against 2015, even in an inflationary scenario. With the Extra brand, we recovered our sales, especially in the food categories, with a clearly positive trend that progressed throughout the quarter, in which we implemented three new commercial dynamics, aiming to offer real savings to Brazilian families in the entire amount of their shopping. The first program, ’1, 2, 3 Passos da Economia Extra’, with progressive discounts of 20%, 25% and 33% in 1,000 products, was launched in April. The second program, ‘Hiper Feira’, with competitive daily prices for fruits and vegetables, was launched throughout Brazil during May. And the third program, ‘Mais Barato’, with 300 SKUs representing the market’s lowest price, in a stable and consistent way, was released in mid-June. The combination of these three programs offers a real economy alternative that our customers are adopting progressively, recognizing a new way to save at Extra. This new promotional architecture also allows us to improve the productivity of our stores, optimize logistics costs, improve the disruption level and optimize marketing costs. As specific data, during 2Q, we optimized the Extra staff, increasing productivity significantly by 8%, measuring the number of items sold per hour worked. The volume increase is even more remarkable that the increase in nominal sales, as the price investment in the three commercial programs decreases the unit cost of products. Our suppliers also adhered to this new strategy progressively. They already know the benefits that they can get, working in a coordinated and planned manner. However, not all suppliers incorporated the new strategy at the same time. I can divide the suppliers in three major groups: a first major group is fully engaged and has benefits and growth of sales volumes. They support us by investing in prices and are seeing positive returns. This suppliers group wants to continue participating intensively in all campaigns. They even want to close exclusive negotiations in their main categories by the end of the year. A second smaller group is experiencing a new dynamic, participating with some of their categories to better understand the dynamics, and gradually incorporates itself into the first group. And an even smaller third group of suppliers, which is under analysis, but definitely recording decreases in their shares of our sales. Our intention is to give opportunity to all suppliers to participate and contribute. However, and for obvious reasons, the first to adopt the new strategy are also the first to reap the rewards.


Our customers reactions and the numbers trend makes us very confident that we are on the right path and that Extra’s new commercial dynamics are here to stay. For example: Nielsen’s latest data, corresponding to June, shows Extra’s market share gain in value and an even higher gain in volume. Our Pão de Açúcar and Proximidade brands continue to show a positive behavior with market share gains and positive profitability in line with last year, which confirms the strength of our value proposition. Pão de Açúcar is still focusing on customer loyalty and satisfaction with three pillars: First - continue improving assortment and value-added services. For instance, the wines monthly subscription, launched this quarter, and the food e-commerce, which grew 18% this quarter. Second – enhancing loyalty program and individual assistance according to customers’ tastes and preferences. The Cliente Mais program has already exceeded 70% shares of sales. And third - the implementation of new measurement tools and store to store monitoring of service levels to precisely adjust the levels of resources required from store to store and to ensure the customer satisfaction with cashiers' services and flexibility. Our first Pão de Açúcar store, newly opened in Salvador (state of Bahia) is having an outstanding result in sales, much higher than expected, indicating the growth potential of this format in regions where we do not operate yet. As to our Proximidade formats, we noticed sustainable growth with market share growth as well as profitability, essentially due to scale gain and process improvement. We are more selective in our growth plan, prioritizing Pão de Açúcar Minuto, which shows the best and most consistent return. We also want to share with you that today we officially launched the ‘Aliados Compre Bem’ project to the public, which is a business model of stores in neighborhoods that marks the Company’s entry into a new retail segment and makes GPA the first major local retailer to offer this type of service. ’Aliados Compre Bem’ consists of the GPA partnership with independent retailers, further emphasizing our multi-channel proposal. The main idea is to share the knowledge of the country’s largest retail group to improve and enhance small and medium traders located in the neighborhoods of São Paulo. Besides the multi-channel, which is already a GPA feature, I also highlight the synergy with other businesses in the Cassino Group, our parent company. When it comes to ’Aliados Compre Bem’, the basic idea for the project development in Brazil was inspired by a model already very well executed by the Éxito Group, in Colombia. There are 1,200 stores in this format over there. In this process, the GPA staff worked alongside the Colombian team, adapting the model to Brazil as it had been under a pilot phase since last year. During 2Q, we intended Pão de Açúcar and Proximidade to continue with excellent sales and profitability. At Extra, we are convinced that new trade dynamics are the correct response to the market scenario, and that the format will continue with consistent improvement in both volume and customer traffic. Thank you very much and now I give the floor to Belmiro, from Assaí. Belmiro Gomes:


Thank you, Luis. Good morning to all. As Christophe already mentioned, Assaí, just as in 1Q, had a strong growth this quarter of 36.9%, reaching R$3.630 billions in gross sales, an additional of nearly R$1 billion against the previous year. With this sale volume, we became the largest format with GPA foods, with share close to 20% of the Group and 34% of foods, contributing to the Group in these challenging economic times. This strong performance comes from the combination of a series of factors: from openings carried out especially in 2Q15, that are having an excellent performance, and from an increased customer flow that we have seen in stores. This quarter we also have an increase in commodities which have generated a positive effect in wholesales operations. Due to crop failure, prices of commodities, such as beans, milk and diary products, for instance, increased above nominal inflation causing a positive effect and contributing in terms of sales. In terms of margin, even with this growth, we maintained a stable level against last year, already disregarding effects of tax credits recognition in the period. A major important issue was expenses. We maintain a strong control through various productivity mechanisms. The very increase in sale and dilution lead to a significant drop in operating expenses against last year. As a result, store floor expenses account for 8.96% of net sales. Even with the cost that we are having to assume to keep Assaí’s expansion pace, such as the creation of regional areas and personnel training, we still managed to record a decrease of 0.3 pp in total expenses, which reached 10.39% of net sales or 9.58% of gross sales, almost 0.5 pp less. Single-digit expenses. The combination of this factor results in the period’s EBITDA growing 58%, already adjusted to the provisioning effects with some tax contingencies and tax credits. As this quarter’s major highlight, Assaí arrived in the northern part of the country and opened in Manaus last month. It is a very big unit, with over 16.000 meters of built area and storage capacity of almost 10,000 pallet positions. With this, we are now present in all regions and have in Manaus a basis to expand to other cities, capitals and supermarkets in the North. The half-year closes very much in line with 2Q performance, growing 36% in terms of sales. Assaí surpassed R$7 billion sales this 1S, which was a sale larger than any that we had in 2013. That is, two and a half years later, the company doubled in size. This half-year’s growth plus the growth of the previous six months accounts for a total growth of 72% in two years. EBITDA also increased 52%, discounting the effects, and the net profit, which continues to grow strongly, reached R$75 million and was the period’s highlight. This shows the success of the expansion plan. As it has been mentioned, Assaí has been opening many stores, in new locations and regions. We have had great success. The new stores have had a great and very fast performance, a sales ramp. All that added to our service evolution plan. For 2H, we have a strong calendar for openings as Christophe had already mentioned. We have ten stores under construction at the moment, two of which are hypermarket conversions. This is going to be a powerful calendar for openings.


To give you an idea, these stores under construction now represent 140,000 square meters of built area and will add over 60,000 square meters of sales area to the Group. These are important units that strengthen Assaí’s presence in areas where it has just started to operate, as well as in new regions. I can highlight three capital cities where Assaí will be operating this year so that our 2H is just as strong and 2017 records high growth rates, as has been the case in recent years in Assaí’s business. This is it from Assaí. I now give the floor to Peter, from Via Varejo. Peter Estermann: Good morning to all. As I mentioned in our call yesterday, and as Christoph has already mentioned, Via Varejo showed consistent sales growth and significant market share gains in 4Q15. The company's share gains are at the highest levels in our history. In terms of results, we had 8.7% EBITDA margin, which was positively impacted by the growth of phone categories. During our call yesterday, I emphasized that we completed the implementation of over 206 mobile store-in-store units, with extremely positive results. With this, we have already surpassed 350 mobile store-in-store units in our total complex. It was also positively impacted by the increase of sale of financial services and of our credit facilities, and also the tax credits that were recorded this quarter. We still have a pretty big challenge when we look at general expenses. We have the negative impact, as Christophe has also said, of the end of the end of the tax relief on payroll as well as on the collective bargaining agreement, which increased our ongoing efforts to reduce costs as a whole. Our financial situation is still very solid as is our capital structure, even in this difficult scenario. We reduced our indebtedness by R$763 million and now we post a better cash position. We had an increase in average costs of half-year receivables sales, but it was below CDI rate growth. We also had a lower default level in 2Q15 and in line with 1Q16. This is due to investments we made in our credit approval tools as well as in improving collection effectiveness. We improved customer segmentation by risk level. With this, we are succeeding in adopting lower risk customers and in not approving credit for higher risk customers. I would like to conclude by saying that we continue with our aggressive business strategy to continue leveraging sales. We also continue to show consistent market share gains. On the other hand, we have this additional challenge regarding costs for 2H. As we did in 1H, we will continue to work hard to reduce costs and to get a good balance between sales and margin. Thank you very much. I will now give the floor to Flávio, from Cnova. Flávio Dias: Good morning to all. Although we had a challenging quarter in terms of financial results, we observed significant progress in strategic fronts of Cnova’s operation. Once again, I will emphasize a significant increase in market place shares in our sales. They have already surpassed 3.500 active sellers. We also saw an important traffic increase in all our sites, totaling 257 million visits, of which 40% are from mobile devices.


The quarter was also marked by a very important implementation of all our back office systems. We traded our ERP system completely as well as our WMS system of the Development Centers and service system all at once. It was a very heavy migration and like in every migration of this size, there was a period of stabilization. All issues concerning this stabilization and the problems caused by delays in delivery have been normalized, addressed, and our service level has returned to normality, and the positive side now is that this new stabilized system provides more flexibility, adaptability and productivity, for the Company as a whole, in most operations run on it. We also evolved quite well in the logistics synergy issue with Via Varejo. We expanded operations made jointly, which allowed us to have better service levels with a significant cost reduction. Also, we consolidated our work for rupture reduction in higher turnover items and managed to stabilize this rupture by 8%, a rupture that was once over 20%. Our sales also grew due to search engine optimization, which are free sales, increasing 46% against last year, and due to a new internal search engine which we successfully implemented on the site, which decreased the company’s costs and improved the conversion. We still have some very important priorities for 2H and are focusing on improving operational excellence, since we are now running a stable ERP and have completed the investigation, as Ronaldo said. Logistics synergy will also be completed next quarter, which will give us even more conditions to reap benefits. We are also working to improve the customer service experience by completing and restructuring our systems processes and service systems, and implementing a new mobile platform, which will provide much more flexibility and speed to all sites. We also continue with a strong expansion of our market place basis. Our intention is to close this year with over 5,500 active sellers; We are still going at a very strong pace to attract new sellers. Simultaneously, we started a strong program of qualification of existing sellers basis. We train them and create a new quality program that rewards or penalizes sellers according to their customer service performance. This is it from Cnova.


João Mamede, Santander: Good morning everyone. I’d like to address three aspects with you. First, tax credits in the quarter. I was wondering if you could help me understand this, because you mentioned in the earnings release that both Multivarejo and Assaí margins were positively impacted, if I’m not mistaken, by 250 bps and 150 bps, respectively. From this amount, how much is non-recurring? I believe most of it is non-recurring. And, second, as a follow-up on this, assuming most of it is non-recurring, the impact on the margin we saw this quarter was higher than in 1Q, which we naturally understand as an evolution of the commercial strategy, the maturation of ‘1, 2, 3’, and for a longer period too, since in 1Q you had only one month of the promotion. My question is whether you could shed some light in terms of, for the second half of the year, as this strategy evolves and gains strength, enabling a greater dilution, what we can expect from margins in the second half. And the third thing I’d like to address is, to take the opportunity of Flavio’s presence, understanding Cnova, what we can expect after the restructuring, as of the moment the asset is combined with Via Varejo, in terms of change of the commercial strategy, with the e-commerce working increasingly closer to brick-and-mortar stores. Will anything change in terms of the pricing strategy? I understand the marketplace will become stronger, but how should we look at the online and offline strategies of Via Varejo going forward? Thank you, those would be my three questions. Christophe Hidalgo: Thank you for your question, João. I’ll answer the question about tax credits and consolidated margin expectation for 2H, and then I’ll call on Flávio to complement. In relation to tax credits, it’s important to highlight - first - that those credits are related to PIS/COFINS tax substitution. Those credits, although they were in a higher volume than we usually see, are credits that have, as always, been validated by our counsels, by our audit committee, and by our independent auditors. Please note also that most of the market utilizes these credits, I mean, it’s a market practice. And also that these are quick-to-monetize credits, they monetize in a relatively short period of time. Now, let’s talk about their impacts. The impact on Multivarejo has been close to, considering 2Q alone, R$220 million, and the impact on Assaí, which is your question, was close to R$50 million. In relation to the recurring and non-recurring portions of these credits, it’s hard to tell, because of several reasons. First, we know that part of it comes from years prior to 2016, and we don’t calibrate this amount prior to 2016. The second point is, whether of the same or of a different nature, we know that each past or, supposedly future period, has extemporaneous tax effects, and this reinforces the difficulty in distinguishing what is recurring and what isn’t. Another important aspect that is also valid most of the times is that those credits have also future impacts. This means we cannot consider them, and I insist, as recurring. That said, what we can project, what we can consider in terms of gross margin - in the case of Assaí I’ve already discussed, and Belmiro too - we’ll have conditions to keep gross margin stable, or slightly above the previous year throughout 2016, and especially in 2H.


At Multivarejo, it’s also worth breaking down by banner, because each banner experiences a very different reality. In the case of Pão de Açúcar, as we’ve said before, we’ll maintain EBITDA margin, and to maintain the EBITDA margin, we’ll also maintain gross margin. In the case of the convenience format, the effect has been marginal, so the gross margin we delivered in 1H will be close - excluding seasonal impacts, of course – to the gross margin in 2H. Now, the Extra banner is a different story. In this case, due to the new commercial policies, which are already having positive impacts on the recovery of volumes and sales, we can expect some dilution. In 2Q, this dilution was of approximately 150 bps to 160 bps. We believe this impact will continue and be partially mitigated in 2H, and our bet - Luiz can add on this, obviously - is that it’s already materializing, it’s a bet on volume and sales growth that will enable us to maintain margins in the Extra banner, whether Super or Hyper, in terms of value. In terms of percentage, I think it’s reasonable to expect a decline, as we saw in 2Q and had been seeing since 1Q. Regarding your third question, I’ll ask Flávio to answer. Flávio Dias: João, we had special independent committees created to assess the transaction, and of course we have very big expectations of being able to accelerate synergies and align the commercial strategy of the companies after the business combination. But, like we said in the Material Fact notice, we can only discuss this topic once the business combination is fully concluded. We can talk more about this at a later opportunity. João Mamede: Excellent, Flávio. Thank you, Christophe. If I may just ask a quick follow-up question on the tax credits, Christophe, so we can expect you to enjoy some extra benefit from tax credits going forward. I understand that it’s hard to distinguish between recurring and non-recurring, but you do expect to somehow benefit from PIS/COFINS tax credits in future quarters. Is that it? Christophe Hidalgo: Yes, that’s it. From those taxes and also, as we know, from other taxes. Each period has its positive and negative tax adjustments, it’s part of the tax dynamics. But I repeat, 2Q was marked by a larger-than-usual impact, which does not mean, to answer your question more precisely, that we have to neutralize 100% of the credits in a future projection. João Mamede: That was very clear. Thank you, Christophe. Thiago Macruz, Itaú: Good morning. My question is regarding the selling, general and administrative expenses of Multivarejo. You listed some aspects that deteriorated year-over-over and explained them, but I’d like to understand what we can expect for the coming quarters and how recurring they are. I’m talking about the R$53 million of provision for labor contingencies; also the delinquency on rentals of commercial centers, which


- if I'm not mistaken - is R$20 million; and a last aspect, the project to increase the efficiency of operations, which was more or less R$18 million this quarter. That's my first question. My second question is in relation to ‘1, 2, 3’ and ‘Best Price’, in bringing new SKUs to Extra, do you have any estimate of the volume bump that would be necessary to offset these two efforts? I understand that ‘1, 2, 3’ is based on straight-out discounts, so this question makes direct sense, but ‘Best Price’ may also lead to a decrease in the average ticket, I think, on the outside. These were my two questions. Thank you. Luis Moreno: I apologize, but I’ll answer in Spanish. Regarding Multivarejo’s expenses, the data we published is of an increase of 7.9% in expenses, but the most important part of this figure is that, actually, same-store expenses, all expenses related to the operation and which are not extraordinary, decreased in nominal terms versus the previous year. The decrease on a same-store basis was of 0.1%, led by the following: personnel expenses fell 1.5%; marketing expenses fell 11%; and utilities and occupation expenses were virtually flat. Obviously, there’s a series of extraordinary expenses related to labor provisions, related to delinquency of rentals on commercial centers, and it’s hard to project the size or the impact of these expenses, which are of an extraordinary nature. But the good news is that the actual business-related figures were, in nominal terms, lower than last year. In relation to ‘1, 2, 3’ and ‘Best Price’, which is the volume we have to capture, I'd like to highlight the very notable growth we’ve experienced in the last three months in the Food segment. In the sales release, we had announced the increase of 9% in Food sales in June, and that’s been happening since April, May and June, a very consistent and clear progression. Of course, these programs bring down the unit price of products. That’s why I mentioned in my presentation that our market share gain in terms of volumes, in terms of units is even higher than our recovery and market share gain in terms of value. Thank you. Thiago Macruz: Perfect. Thank you very much for the answers. If I may pose a follow-up question, can we say today, for sure, that ‘1, 2, 3’ at Extra is having a positive net impact on nominal gross profit? Could we say that today? That'd be my final question. Thank you for the answers. Luis Moreno: This entire new dynamic has a maturation curve. Like we said in our previous conference call, the promotional dynamic is based on three elements: sales increase, the partnership with our suppliers, who help offset the price investment, and optimizing in-store operating expenses. The contribution from our suppliers has been very positive, and has been increasing, with an ever higher engagement by our suppliers. I highlighted in my presentation that we had three groups of suppliers. There was a majority group, which includes suppliers that are already fully convinced of the dynamics and are significantly contributing to


funding these efforts. As an example, I can mention a few of these suppliers: Procter & Gamble, Ambev, Heinz, PepsiCo, Colgate, Kimberly, Bimbo, Danone, and many others. So, in 2Q, the equation of cash margin is not positive, but the trend shows us that it will result in a positive equation, and in June it’s already close enough to this level of positive equation of cash margin. Thiago Macruz: Thank you very much for the answers. Irma Sgarz, Goldman Sachs: Good morning. I’d like to go back to something you mentioned about partnerships of the Compre Bem banner, which you will revive or renew, and enter into partnerships that I believe are similar to the project you already have in Colombia. If you could shed some light into how we can see this project developing over the coming months, and when this should start to produce a bigger impact on total sales. I imagine this project will still take some time. Furthermore, in relation to the Extra initiative, should we consider that, from now on, you will repeat the initiatives in the three fronts that you’ve been working on, the commercial campaigns you launched throughout 2Q, or will you have new initiatives in new areas from now on? That’s it, basically. Thanks. Marcelo Bazzali: Good morning, Irma. Regarding the partnerships, as we’ve discussed even in today's earnings release, it's a project that was developed in Colombia in 2013, with ‘Aliados’. It consists in partnering with small retailers. We started this pilot project in April 2015, with 10-20 retailers and today we have 46, and now we've announced the official use of the Compre Bem banner. This is an endorsement we’re giving to these small retailers for a continuous, aligned work, involving the transfer of expertise, like Luis mentioned, in which we can provide them with all our knowledge of the segment, and learn from them, and use all the learning the Éxito group has acquired in Colombia, a consolidated operation, and adjusting to any particularity of the Brazilian culture. The proposal of using the Compre Bem banner is based on a comprehensive survey, both qualitative and quantitative. It’s a brand we discontinued in 2011, and we saw a large adherence from both C and D client profiles, as well as from A and B clients. Ronaldo Iabrudi: I’d like to add, not specifically about ‘Aliados’, which I think Bazzali answered completely, but we talked in 4Q about initiatives we were engaging to capture synergies with Éxito, and I mentioned that, at the time, we had 14 work fronts. One of them was this one we are announcing to the market, after having a structured and defined business plan, with a longer term vision. And there are other initiatives. I think we even mentioned the pilot project we are conducting with textiles in two stores, we opened in Bogotá, in May, a cash & carry store based on the concept we have for Assaí. There have been some rounds of negotiation with suppliers and buyers from Colombia, in Bogotá. There have been rounds of negotiation with Colombian suppliers and Brazilian buyers in Brazil.


Your question, Irma, allows me to update you on that synergy work we mentioned in 4Q14, which continues to evolve within what we planned and announced to the market. I’ll now ask Moreno to go into further details regarding your question about the vision of 2Q. Luis Moreno: In relation to the three initiatives we launched this quarter - ‘1 2 3’, ‘Best Price’ and ‘Hyper Fair’, these are three initiatives that will be continued in the long term and which are part of what we call the architecture of the new way of saving with Extra. The three programs complement each other and offer customers substantial savings in 1,000 products of leading brands, savings in 300 staple products of second and third brands, which until now could not be found in hypermarkets and supermarkets, but only at wholesalers, and savings in daily produce (fruits and vegetables). In fact, customer can benefit from the combination of the three programs and, by combining the three, they are able to save in their shopping cart as a whole. For 2Q, we are very happy with the impact and evolution of these three programs in the Food business, but we’re not happy with our sales in the Non-Food segment. That’s where we’ll focus on in the second half, in order to improve our sales of non-food products. As Ronaldo mentioned, for example, in terms of clothing, textiles, we have already implemented the new textile concept in two stores, which is based on the expertise we acquired in Colombia, and Colombia is a best-in-class in this category in the hypermarket segment. These two stores are Jaguaré and Anchieta, where we have started selling the exclusive brands of our parent company in Colombia, the brands Bronzini and Arkitect. So, just to conclude, the three programs complement each other, they will be maintained in the long run, and we’ll launch new initiatives aimed at the non-food segment. Irma Sgarz: Thanks. As a follow-up on the promotional initiatives, have you seen any reaction from the competition in face of your commercial initiatives? Luis Moreno: The competition is quite dynamic, and we haven’t seen any reaction directly related to our initiatives. We’ve seen some one-off reactions, by some regional competitors, but not something directly related to these three initiatives. Irma Sgarz: OK. Thanks. Andrea Teixeira, JPMorgan: Good morning. Thank you for taking my question. I’d like to talk about margins. With the very aggressive strategy in 2Q, from what you’ve heard from suppliers, and Moreno mentioned that some of these


suppliers have joined you, even named a few examples, and I imagine that now, obviously, the market will migrate to similar prices. So, what will be the new strategy? The game will have to change, or there will be no more impact, margins will stabilize. I imagine that Extra sales still fell, so I’d like to understand, from this 5% decline in sales at the Extra banner, how much was customer traffic and how much was ticket, because I imagine that with this impact from price reductions the average ticket must have shrunk too. If you could add some color as to this evolution, if this 5% decline was indeed due to a decline in prices and, as you mentioned, had not fully impacted 1Q. What should we expect from this effect in 3Q and 2H? Thanks. Luis Moreno: In relation to sales, the figure you see is of -5% at the Extra banner. The data we publish is for total stores, and it does not take into account the calendar effect. We closed two Extra Hypermarket stores, which will be converted to Assaí during the upcoming quarter, and we also have five Extra Supermarkets less than last year. If we exclude this information, same-stores and ex-calendar effect, and if we look specifically at the food portion, the result of the food portion in the quarter is of same-store growth of 5.4%, excluding the calendar impact. If we include the same figure for June, same-store food growth comes to 9%, excluding the calendar impact. So, we must comprehend better the calendar effect and the same-store effect. The growth we are seeing, however, is more closely related to an increase in volume, average ticket and an increase in customer traffic. Traffic has stabilized, and the main factor in this recovery is the higher average ticket. Regarding the impact on margin, if we consider on a net basis, eliminating the impact of tax credits, the impact on the margin in the quarter is of 160 bps, and these 160 bps also include a negative impact from the change we made from the sell-in to the sell-out concept. Let me explain this better: previously, when we purchased goods from our suppliers to meet a certain promotion, the supplier’s contribution to the promotion was automatically accounted at the time of purchase, when the product entered our distribution centers. Now, because the entire commercial dynamics are based on aligning sales and being able to increase sales, suppliers contribute only with the products that are effectively sold to customers, But there’s a cost in this transition, in changing from one model to the other, and we estimate the impact of this cost at 60 bps this quarter, such that the net investment in margin this quarter would be of 100 bps. And, because of this level, what we could initially project going forward will depend a lot on the combination and the partnerships we continue to strengthen with our suppliers. Why do we think our competitors cannot have the same partnerships we have with our suppliers? Because our architecture provides our partners, our suppliers, with an element of exclusivity that our competitors do not offer yet. So, the positive impact on sales is directly related to the exclusive activation of brands in certain product categories. Gustavo Oliveira, UBS: Good morning. Moreno, I have another question on this impact of 60 bps that you are estimating from the change from sell-in to sell-out. Will this be a recurring impact? In other words, will your gross margin


from now on, compared to last year, in the second half of the year, be 60 bps lower because of this change in accounting, or was this an impact on this quarter alone? Luis Moreno: This impact is related to a transitory change. Once we absorb this transitory change, there’s no recurring impact going forward. Gustavo Oliveira: And did this transition end in 2Q? Luis Moreno: It’s been more than 60-70% absorbed. Gustavo Oliveira: So, from now on, it would be more in line with what happened last year, and margins could improve slightly? Luis Moreno: Correct. Gustavo Oliveira: OK. My second question is addressed to Christophe. On slide three, you were very careful and provided a lot of detail – thank you for that – explaining the Company’s debt position, which increased significantly, and you explained the net variation of R$1.6 billion year-on-year, of which R$1.1 billion came from Cnova, and your leverage increased. Now, considering the ownership change of Cnova, you will have a little more direct exposure at Via Varejo. What do you think you'd have to do right away to offset the necessary investments in working capital or any other necessary investment at Cnova? Otherwise, it seems this debt situation will only get worse and not better, which is a very delicate situation for the Company as a whole, and could hamper all benefits you are pursuing in the food business. What do you think you could do now to improve the Company’s financial position? Thank you. Christophe Hidalgo: In theory, the first thing that will follow the business combination is the resumption of positive commercial behavior, in other words, resuming growth within the market scenario. We believe that will be the main impact from the combination. A more aligned strategy, an offer that is more aligned with the market. If we think on very practical terms, in the short term, although the combination is being assessed, examined, without violating any secrecy requirement, an obvious synergy we will capture in the short term – and in the short term because our inventory turnover is of 2.5 months, basically – is that most of the Cnova inventory overlaps with the Via Varejo inventory. In theory, this will be the main synergy.


It’s about absorbing a decline of R$1.1 billion in debt, but it must be accompanied by a resumption of business volumes and margin increase. We worked in 2Q with historically low margins, and for many reasons, such as stockout rates, ERP, etc., which explain this. But the combination of both, to be clear, is the resumption of business performance through the alignment of the commercial strategies and, among other things, a synergy of inventories, which, in theory, will be the main impact. The rest will have a direct cash impact, which will offset, or at least mitigate this decline of R$1.1 billion. I’d also like to stress that, in other businesses, the debt position has been steady. In other words, our solid financial structure has been maintained in other businesses, despite the difficult business trend and despite another important factor: Via Varejo’s decision to tactically and strategically strengthen the level of inventory significantly. Despite all this, other businesses were able to maintain a solid structure, and this is valid for Via Varejo, Multivarejo and Assaí, even though Assaí finances a CAPEX of more than R$500 million a year. Gustavo Oliveira: Thank you, Christophe. Just to conclude, still on the same question, do you think of the food business as independently managing its net debt? Can you really think of the food business independently from the other businesses? Or will there be a point when you'll look at the consolidated results and will say “I have to cut down on promotions,” or “I’ll have to cut several investments I’m making in the food segment to preserve the Company’s financial health?” Christophe Hidalgo: Gustavo, I’m not sure I followed your question, but basically our business is the sum of five large business units, and each has its own management, both in terms of funding and of allocation of funds, which are relatively independent, and this independence is necessary, because each business has its own moment and model. This means that we necessarily look at each business independently. I’d not sure I answered your question clearly, Gustavo. Ronaldo Iabrudi: Let me try to complement: we have three businesses with completely independent governance structures. We have the online and brick-and-mortar business of Via Varejo, which has its own independent governance bodies, and therefore makes its decisions independently. Of course, based on a corporate guidance provided by the Group. We have an independent e-commerce business, and this will be maintained, until the intended business combination is approved, which, once again, has independent governance bodies in terms of boards and committees, also works based on a global guidance of the Group, but making its decisions independently. And we have CBD, which includes Multivarejo and Assaí, and which accounts for the highest share of the Food segment and is also independent, with an independent board and independent committees.


These three businesses, with independent governance bodies, make decisions about their businesses, of course based on corporate guidelines and criteria. Obviously, in a moment such as this, after five consecutive quarters of a complex macroeconomic scenario, the influence and guidance of the corporate policy has an important weight, and our priority is very clear, you just have to see where we are allocating our investments the most, which is in higher-return businesses, namely Assaí, like we said, and the proximity market. I think that’s the positioning, Gustavo, that helps clarify the debt question. Gustavo Oliveira: Thank you. The capital allocation in these businesses is clear. Thank you. Franco Abelardo, Morgan Stanley: Good morning. Thanks for taking my question. I’d like to go back to the question of indebtedness, leverage. The explanation about Cnova was very good, about the increase in debt, but when we look specifically at the Food segment, the net debt in 2Q was slightly above R$4 billion – and I’m sorry if I’m calculating this wrong, maybe because the restatement somewhat hinders the calculation – but this would represent 2 times the Food EBITDA. I’d like to know from you if you’re comfortable with this leverage level. It was mentioned that the problem is not liquidity, you have standby credit facilities, you have receivables from credit cards you can anticipate, but the leverage/debt in itself, R$4.1 billion, it seems quite high. Should we imagine CBD seeking a new capital structure level? Or do you expect to reduce this leverage level? And if so, what would be the ideal level, the optimum level of the capital structure, of debt, looking forward towards the end of this year, if possible? Thank you. Christophe Hidalgo: Thank you, Franco. Obviously, the debt level, like we've said before, has deteriorated, and this was concentrated at Cnova. This doesn‘t mean the debt level of the rest of the perimeter is assessed as excessive. At this moment of very high interest rates, we are seeking to improve efficiency, especially of working capital. This quarter, specifically, we made a different decision to take into account the industry scenario: we voluntarily built inventories, as a tactical decision. To put it a different way, the leverage level we observed at the end of 1H can be improved through better working capital efficiency. In relation to the rest of it, right now, for us it’s important to maintain the high liquidity level, and today we have this high liquidity level. As I mentioned in the presentation, we have R$7 billion in liquid cash reserves, which doesn’t mean we have R$7 billion in cash, but R$7 billion we can access overnight. At this point, that’s what we value the most. To close your answer, I confirm that we are trying to deleverage our position quarter after quarter, which means to be more efficient than in the previous period, although this was not the case in this period. We are not concerned with the leverage level we had at the end of the period. Franco Abelardo:


OK. But is there a target, any guidance you can give in terms of reducing this leverage? I mean, when these working capital improvements, and obviously an improvement in the EBITDA, which would reduce the denominator, can start producing an effect? And, just a quick question, in relation to that R$400 million of payments related to Morzan, to Pontofrio. Was the R$400 million used only to pay Pontofrio or is there something else there? Is this a cash-only effect? I mean, it wasn’t recognized in the P&L, because it had already been provisioned for, right? I’d like to understand the booking of this R$400 million. Thank you. Christophe Hidalgo: I’ll answer your third question. The extraordinary payments of approximately R$400 million are payments for which the impacts on the P&L and balance sheet had already been provisioned for. So, this quarter it was a cash-only impact. Approximately three-fourths of this amount is directly related to Morzan, and the other extraordinary payments are related to non-recurring indemnifications of various natures, whose individual amounts are very small. Ronaldo Iabrudi: In relation to your second question, Franco, we have many targets, both for Multivarejo, to reduce working capital needs. At Via Varejo, as I said initially, we are prioritizing sales a little more, making opportunistic acquisitions, as they were convenient, so it too has potential to reduce its working capital needs. And, like Christophe said, and of course this depends on approval of the business combination, which necessarily goes through independent committees, and only after that point can we effectively work on inventories, we also have an important potential in working capital as of the combination of the e-commerce and brick-and-mortar operations. These are values we have clearly defined, but which we do not publicly disclose. Franco Abelardo: That was clear. Thank you. Guilherme Assis, Brasil Plural: Good afternoon. Thanks for taking my question. I’d like to touch on some topics that were discussed during the conference call, which you have already addressed. In relation to the sales pick-up and same-store sales we’ve seen, it’s been hard to identify any response to these initiatives due to calendar effects, etc. and I think even the macroeconomic scenario hinders the comparison a little. But if we look at the last few months of 2Q, perhaps June, in which I think there’s a lower seasonal effect, what can we expect? Do you think June would be a good proxy for what we should see as a run rate for same-store performance in 2H? Do you expect it to accelerate? And could you also talk a little specifically about July, what was the same-store performance like in the Multivarejo segment? And my other question is regarding this potential acceleration in same-store performance, whether you consider it sufficient to add operational leverage. So far, we haven’t really seen a lot of it. If we try to exclude these impacts of tax reversals from gross margin, the EBITDA margin for Multivarejo is still quite


low. So, when do you expect the operational leverage to start showing results, and eventually would you be able to have a flatter margin, or even EBITDA margin gain in Multivarejo? And another question, I think more of a provocation, I understand you started many promotional initiatives. First, in March, the “rollaoutada”, in April '1, 2, 3', then ‘Hyper Fair' and now ‘Best Price’. Can we say, at the limit, that the strategy is coming closer to an everyday low price? Because, as I see it, now consumers can buy their entire basket of products through a few promotions. Could this be, at the limit, something closer to everyday low price? Those are my questions. Thank you. Luis Moreno: Those are a lot of questions. First off, it’s not an everyday low price. We see it’s a programmed high-low. There are the benefits from high-low and the benefits from EDLP regarding what’s easier to forecast, coordinate and plan with our suppliers, because there's always one product in each category, with the same discount level. So, the sales multiple that is produced can be forecasted. It continues to be high-low, but a high-low that can be forecasted and fully agreed with our supplier partners. The launch of the three initiatives was not by chance. It’s not that we launched one and then thought of the other. The three initiatives had been planned from the beginning and, as I explained earlier, it’s a combination of the three initiatives that effectively enables customer to make their entire shopping with a level of savings that compares that what they would find in a wholesaler. I’d like to invite you to put it to the test: take our '1, 2, 3' deals and our products included in the ‘Best Price’ program, our prices from ‘Hyper Fair’ and experiment yourselves a new way of saving. Every time you change a value proposition so radically, there’s a period of maturation, a period of recognition by customers. Our mission, once these strategies have been implemented, is to try to accelerate the recognition of this new reality by the customers. And we consider this process of recognition to be natural, and it could take from three to six months until customers fully recognize it. We have carried out similar initiatives in other countries, and we are very confident that the evolution we will see here corresponds exactly to what we forecasted and to the pace of recognition expected from a program of this nature. Guilherme Assis: OK. Luis, if I could make a follow-up question, you mentioned that it would be an administered high-low, and that it would be easier to manage. In my head, at least, managing 1,000 products that change every 15 days, which you have to negotiate with suppliers - and I understand that involves partnerships - but they change, both suppliers and products, and executing it at the store level, doesn’t it require a lot of management effort, both in terms of negotiations and in terms of store operation? For instance, if it were an everyday low price, you would already have the terms agreed with suppliers and you would operate in this system. I understand this is problematic in Brazil, that it didn’t work, but in terms of management alone, if you have that agreed and you always have that in supermarkets, wouldn’t it be easier to manage it that way? Luis Moreno:


First, we are also evolving in the partnerships with our suppliers. At this first stage, yes, negotiations are conducted on a monthly, semi-monthly basis. Once this new process matures, we can perfectly plan six months ahead, and this will enable a coordinated and planned approach also from the viewpoint of logistics, supplier costs and efficiency, and of our own costs, while at stores these 1,000 products is lower than the total number of products we would have in a high-low approach within the previous mechanic. There was a point where we had 4,000 products spread out, not in a structured manner in each category, and with levels of discount ranging from 2% to 30%, but which were not consistent or systematic, and the client had no Forecastability over which offers they would find in the store. Now, the offers are not just predictable by our logistics system and suppliers, but by customers too, who can know what to find and elect how to save, whether through one, two or three promotions. In each category, clients can choose what they need. This applies to leading brands, Brazilian brands, and customers can also choose from certain categories in which brands are not the most relevant aspect for them, they can go for the ‘Best Price’. The ‘Best Price’ program is indeed an EDLP, not a high-low program. Which is why we’re combining the benefits from all programs to create a new way of saving at Extra. Guilherme Assis: I see. In relation to the evolution of same-store performance, can you add some color as to where Multivarejo is moving towards? And when do you expect to have positive operational leverage? Luis Moreno: The evolution in same-store sales is advancing very gradually. This quarter, we can see a constant positive progress. Month-over-month, there is between 100 bps and 200 bps of progress, and this progress is maintained sustainably. And we think there’s a big upside to be captured until the maturation period is through, of customer recognition, and we would be talking about a period of around six months. Guilherme Assis: OK. And this evolution continued through July, for instance? Luis Moreno: The sales level we recorded in July was even better than the one in June. Effectively, the evolution continues in the same direction. Guilherme Assis: OK. Thank you. Richard Cathcart, Bradesco BBI: Good morning. I’d like to ask you about the renovations of hypermarkets, whether that’s still a relevant strategy, or whether you’ve slowed that down to focus more on ‘1, 2, 3’. And whether you think you need to further invest in the renovation of hypermarkets, given that Carrefour is still spending aggressively.


My second question is for Belmiro. I’d like to ask about same-store sales, about how much same-store sales in 2Q benefited from the short-term inflation of certain food commodities. Thank you. Luis Moreno: In relation to renovations, in 1Q, indeed, we continued to make renovations, but what we’ve changed in this concept is that, instead of completely renovating stores, part of the learning from previous store renovations is that they would have more impact on certain specific categories. We are advancing in the roll-out of these specific categories, such as mobile, such as the concept of textiles as I mentioned earlier. We are conducting select renovations of certain areas of the stores that have a bigger upside based on changes of equipment, of the way the merchandise is displayed. Belmiro Gomes: Thank you for your question. Yes, indeed we benefited from inflation, especially of commodities. We had an increase, a combination. Usually, commodity prices fluctuate a lot, but this year we had a combination of some important commodities that generated an impact of around 200 bps on the percentage of same-store growth in 2Q. Richard Cathcart: OK. Thank you. Tobias Stingelin, Credit Suisse: Good afternoon. I’d like to ask the following question, because I was in doubt: there was a change in PIS/COFINS, which represents the adjustments related to this year. But, from what I understood, from now on, this has changed. In other words, you are calculating your gross margin differently. So, looking at the food margin, if what I’m saying makes sense, we would have, in theory, the negative effect of ‘1, 2, 3’ pushing margins down, and Christophe even said that in normal conditions, the margin could be pressured by the action, but on the other hand, there’s this change in accounting that will continue to help going forward. There are several moving pieces in the margin. I’d like to know if my understanding is correct and how we can consider these forces into the equation. Christophe Hidalgo: Good morning, Tobias. Thank you for your question. Actually, as we’ve commented before, this effect of tax credits is not related to any change in accounting, but merely to the fact that we used a credit we had not used before, in the past. Considering that the theory has been validated, and I will repeat, by all our counsels, committees, auditors and etc., we started using those credits, like the general market does. This, obviously, will have a positive impact on the margin of future periods. Whether this will offset the negative impacts, the impacts from the new commercial strategy, I don’t think so.


But to give you an idea of how much it will offset, first, I’m not in conditions right now; and second, you know that in the current scenario that’s very difficult, we are not providing guidance for gross margin. I want to keep a certain control over it, so we don’t provide guidance for gross margin. To answer clearly, the negative effect on the Extra banner will be partially offset by the effects of these credits in the future, but the source of margin improvement is more closely related to the fine tuning of operations and the commercial strategy than to the tax gain. Tobias Stingelin: Perfect, Christophe. Thank you. And one last question: when I read the earnings release, I saw those R$50 million of provision for labor contingencies at Multivarejo's G&A expenses. I think you’ve discussed this before, but is the R$50 million entirely non-recurring? In theory, going forward, we should get that information that same-store expenses are virtually stable, or even lower year-over-year. What actually happened was a series of factors that seem to be non-recurring, with the exception, perhaps, of the commercial centers, because that will depend a little on the evolution of the macro scenario. Christophe Hidalgo: Tobias, provision for labor contingencies is never strictly non-recurring. We know that we have a high turnover rate, which has somewhat stabilized due to the scenario, but which is still high. This naturally results in an amount of labor claims, with a relatively stable flow of labor claims. Specifically, about this R$50 million, there’s an effect of reassessment, a bigger effect than we usually see, because adjustments of people, adjustments to headcount were massive in the first period of the prior year. You know that there’s always a gap between the employee leaving the company and the court demand, we have a slightly higher adjustment than usual, and this is related to the substantial adjustment of FTE we made in the first period of the prior year. So, I must say that part of it is recurring and part of it is non-recurring. What I can say is that, especially in the case of labor contingencies, whether or not at Multivarejo, but I could extend my comment to Via Varejo as well, our policy of settling claims prior to the court phase of the litigation is starting to have positive effects, both at Via Varejo and at Multivarejo. Tobias Stingelin: Thank you once again. Two quick final questions: sometimes I find it hard to see the trend for monthly same-store sales, because I don’t know what is the comparison base is. When I saw the 9% growth in the month of June, I don’t know if comps for June of last year were good or bad. I know that, apparently, the performance continues to improve now in July, but are the comps good, are they very bad? I’d like to understand this a little better so as to avoid any sort of distortion. And, second, what is going on with non-food, which continues to represent 20-25% of Extra sales too? Thank you, and sorry if any of these questions had already been made. Luis Moreno:


We understand that the comparison bases are normalized, these are bases we constantly use to compare the evolution of sales. We don’t think there’s any significant distortion in the comparison base, which is why we consider that the evolution we see, like-for-like, month-over-month really represents a positive evolution, due to these normalized bases, without significant distortions. In relation to non-food, this is certainly something we’ll focus on over the coming months. We have also reinforced the commercial teams in this area, where we identified we would have some opportunities, and expect an improvement in the second half. Although, considering the context of Brazil, the non-food categories have been registering the steepest declines, due to the context of the country, but we think that we can improve our own performance in these categories, and we have initiatives we'll be able to share with you in the coming months. Tobias Stingelin: Great. Good afternoon. Operator: The questions and answers section is now closed. I'd like to give the floor back over to the Company for the closing remarks. Ronaldo Iabrudi: Just to conclude, I’d like to stress what I said in my opening remarks. Basically, that the team has worked over this period to adjust the businesses to the market scenario, and that we’ve noticed, and you must have noticed too from our presentations, that we are beginning a process of resumption of sales growth coupled with market share gains. Like I said, and I think Peter also mentioned, and Moreno too, this was widely discussed, there are still opportunities, also in terms of expenses. We specifically talked about opportunities, and we have targets in terms of working capital. There are less significant opportunities when we look internally into the Company, but we have this vision, and we also discussed during our presentation the opportunities for fine tuning of the commercial strategies of each of the business units. Moreno also clearly discussed the very positive participation of suppliers, which we consider a positive evolution. And these fine adjustments, which are being identified based either on improvements, or on small improvements to be captured with client inputs, or on the experience of the team. We are sure that they will enable us to maintain this trend of sales growth and increased profitability. We are very confident that the diagnosis was well done, and that the plans are under implementation based on this diagnosis. Of course, there are small adjustments and small improvements that can be made over time, and that this team that is here is fully prepared, tuned and connected to make it happen. I’d like to close by thanking all of you for listening once again, and say that we are very confident, not because of any other external factor, but because the team has a strategy, has a plan, and the plan is starting to show a very positive trend.


Thank you and have a good afternoon. Operator: This thus concludes GPA’s earnings conference call. The Group’s Investor Relations department is available to answer any other questions or to provide clarifications. Thank you all for listening and have a good day. This document is a transcript produced by MZ. MZ uses its best efforts to guarantee the quality (current, accurate and complete) of the transcript. However, it is not responsible for any flaws, since the text depends on the quality of the audio and on the clarity of speech of participants. Therefore, MZ is not responsible for any damages or losses that may arise from the use, access, security, maintenance, distribution and / or transmission of this transcript. This document is a simple transcript and does not reflect any investment opinion of MZ. The entire content of this document is the sole and full responsibility of the company that hosted this event, which was transcribed by MZ. Please refer to the Company’s Investor Relations (and/or institutional) website for further specific and important terms and conditions related to the usage of this transcript.

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