June 27, 2007
Mr. Cassio Casseb
CBD – Companhia Brasileira de Distribuição
Av. Brigadeiro Luis Antônio, 3172 – 2º andar – Diretoria
As requested, we are pleased to submit the attached proposal for the design of a BUSINESS ADVICE and OPERATIONAL MANAGEMENT project for Sendas Distribuidora S/A.
1) To develop and implement a Strategic and Operational Diagnosis Program aimed to evaluate all economic, financial, corporate, tax, equity, commercial, logistic, process and workplace improvement opportunities for a more profitable and competitive organization.
This work will result in the development of an Action Plan to determine the exploration of such opportunities.
2) To manage Sendas on the basis of the Action Plan, with the objective of making the operation competitive, efficient and profitable. The main objective will be to REDUCE AND REVERSE THE CURRENT STATUS OF NEGATIVE PROFIT BEFORE TAX (EBT – DLP BASIS). The focus of this MANAGEMENT process includes:
Our work proposal:
The graph below shows the main phases of this Management Consultancy work.
PHASES FOR SENDAS MANAGEMENT PROCESS
|Phase I||Phases II and III|
|Strategic and||Action Plan||Management||Strategic||Management|
|Operational||and Creation||and Corporate||Architecture to||Transition|
Understanding of Situation
MANAGEMENT – Structuring and Targets
|2 months||12 months|
Phase I: 2.5 months, from July 15, 2007 through September 30, 2007;
Phase II: 6 months, from October 1, 2007 through March 31, 2008;
Phase III: 6 months, from April 1, 2008 through September 30, 2008
At the end of Phase II, Sendas Distribuidora may, at its sole discretion, suspend the work and terminate related agreement without incurring any charges.
Some activities to be developed during the phases of this work are listed below.
1) Main items comprising the Strategic Operational Diagnosis Program:
i) Economic-Financial Analysis;
ii) Analysis of costs and expenses;
iii) Commercial and Logistic Analysis;
iv) Analysis of Product Assortment;
v) Examination of profitability at product level and sales and profitability increase potential;
vii) Analysis of organizational chart;
viii) Analysis of the workplace/organizational environment and Human Resources;
ix) Analysis of environment and conditions for implementation of an empowerment process.
x) Analysis of general aspects.
2) Strategic Architecture and Organizational Framework
i) Strategic Architecture:
1. Development of a short and long-term strategic architecture in line with CBD strategy;
2. Strategy Communication Model for its successful implementation.
ii) Organizational Framework:
3. Design of an adequate Management Model;
4. Recommendation for framework alignment for implementation of strategic architecture.
3) Main items comprising the Action Plan (Sendas Revitalization) to be implemented under the Transient Management:
i) Economic-Financial aspects:
5. Projected Revenues, Margins and Profit Before Tax (EBT) – Targets;
6. Matrix projections of results per group of stores;
7. Development of a Financial Model for future projections in line with the Medium/Long Term CBD Strategy, taking into consideration the accounts impacting DLP.
ii) Costs and expenses
8. Identification of reduction opportunities;
9. Identification of synergies;
10. Action plan to adjust expenses and costs.
iii) Commercial and Logistic aspects:
11. Recommendation on commercial and logistic structure;
12. Recommendation on a remuneration model;
13. Presentation of a plan to leverage sales (potential market base);
14. Inventory management plan.
iv) Assortment Plan:
vi) Climate and Environment
15. Plan to improve motivation and make people committed to results.
vii) Managerial Controls:
16. Implementation of optimal managerial controls;
Model for managerial control follow-up.
The estimated period for execution of services covered by this proposal is up to 14.5 months from the date of start of works.
The estimate above was based on our preliminary understanding of Sendas and will depend on the commitment and active participation of the company’s Executives.
During Phase I, our team will be composed of CLAUDIO GALEAZZI, who will be responsible for coordination of works, and three senior associates, in addition to other specialized G&A professionals, as necessary.
During Phases II and III, Claudio Galeazzi will act as the main executive, while associates and G&A experts will be assigned according to priorities to be established.
Should this proposal be approved, we will require two weeks to provide the team with the adequate professionals before starting the work.
1) Fixed fees: Out initial fees will amount to R$350,000 (three hundred and fifty thousand reais) per month.
2) Variable fees: a variable remuneration shall be paid in accordance with the improvements of Sendas Distribuidora results (as measured by Profit before Income Tax-EBT – DLP basis), at the following intervals:
First Evaluation Period: at the end of Phase II (April 2008) results will be evaluated in terms of Profits/Losses before IT (EBT), and the respective variable fee will be calculated on the positive variation (if any), which will be paid to G&A as an advanced variable fee according to the following table:
|Loss before IT – Base period from 10/01/2007 to 03/31/2008 (R$)||Profit/Loss before IT obtained in the period from 10/01/2007 to 03/31/2008 (R$)||Fee Percentage (%)||Amount of advanced payment (R$)|
|(39,109.0)||A) between 1 and |||| x (Loss A minus (39,109.0))|
|(39,109.0)||B) between  and |||| x (Loss B minus (39,109.0))|
|(39,109.0)||C) between  and |||| x (Loss C minus (39,109.0))|
|(39,109.0)||D) between  and |||| x (Loss D minus (39,109.0))|
|(39,109.0)||E) Positive result before IT (Profit)|||| x 39,109.0 + 20 x Profit E|
Second Evaluation Period: at the end of Phase III (October 2009), 1-year management of Sendas Distribuidora will be evaluated by G&A in terms of Profit/Loss before Income IT (EBT) and the variable fee will be calculated on the positive variation (if any) and paid to G&A, deducted of amounts advanced in April 2008 (previous item) according to the following table:
|Loss before IT – Base period from 10/01/2007 to 09/30/2008 (R$ 1,000)||Profit/Loss before IT obtained in the period from 10/01/2007 to 09/30/2008 (R$)||Fee Percentage (%)||Final amount of fee before the deduction of advance payment (R$)|
|(75,000.0)||A) between  and |||| x (Loss A minus (75,000.0))|
|(75,000.0)||B) between  and |||| x (Loss B minus (75,000.0))|
|(75,000.0)||C) between  and |||| x (Loss C minus (75,000.0))|
|(75,000.0)||D) between  and |||| x (Loss D minus (75,000.0))|
|(75,000.0)||E) Positive result before IT (Profit)|||| x 75,000.0 + 20 x Profit E|
3) Variable fee: it corresponds to % ( per cent) of gains from operational tax planning implemented by Sendas under G&A advice, taking into account the acceptance of the tax planning by external audit and its accounting use and/or Tax Authorities’ homologation.
Our fees are net of expenses, the reimbursement of which is described in Annex I and limited to the maximum of R$50,000 (fifty thousand reais) per month.
Neither party may directly or indirectly hire personnel from the other party during the term of the agreement and up to six (6) months after its expiry or termination, without the prior written consent of the party for which the relevant person has worked.
1 Text marked as  denotes CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.
Either party may terminate the agreement during Phase III (between April 1, 2008 and September 30, 2008) upon at least 60-days prior notice. In such a case, the amount of monthly fixed and variable fee shall be due proportionally, including the prior notice period.
This proposal shall be valid for 30 days from this date. Should you agree with this proposal, please express your acceptance in the attached copy.
|GALEAZZI & ASSOCIADOS|
Annex A: Critical Success Factors
Annex I: General Service Conditions
Annex II: EBT Definition (DLP copy)
Annex III: Monthly EBT – Performance Evaluation Base
ANNEX A – CRITICAL SUCCESS FACTORS
GOOD SENSE AND WELL-FOUNDED DISCUSSIONS WILL ALLOW:
The new management of Sendas Distribuidora to have autonomy to establish the operational management of all Company’s stores;
The use of core services (corporate) provided by CBD to be reviewed and renegotiated by Sendas Distribuidora, which may be replaced by external suppliers, taking in consideration their capacity, quality compatible with the real needs of Sendas Distribuidora, and price below CBD prices. CBD has the right to "first refusal”, provided that the conditions of external supplier are considered and maintained;
Any and all expenses incurred by or paid to Sendas Distribuidora to be questioned and have the payment suspended.
To allow this project for recovery of SENDAS operations to be successful, it is necessary that the PRAETORIANS that will participate in the team are paid a variable remuneration based on results obtained.
It is hereby established that a PACKAGE equivalent to 6 monthly wages of each executive will be created to form a pool where some may receive even more than 6 wages and the remaining will be distributed according to predefined criteria for merits and targets.
For the stores, a package equivalent to 1 wage of each manager will be created. This package will be distributed according to results obtained by negotiated targets. Some managers will receive more than 1 wage while the others will participate as they reach the targeted results. It may occur that some will receive nothing.
ANNEX I: General Service Conditions
Service Tax (ISS) will be charged to G&A fees and added to the total amount of the Invoice. According to the current law, the prevailing rate is 0.5% if the client’s headquarters are located in RJ, and 5% if they are located in SP. Our client will withhold the tax due on the total amount of Invoice.
The Invoice shall be issued and delivered at least 5 days before its due date.
In case of delayed payment of any agreed amounts, delay interest at the market rates will be charged. Dates of payment of fees and debit of expenses shall not be changed for reasons unrelated to our provision of services.
Expenses to be reimbursed during the project up to the maximum of R$50,000 (fifty thousand reais) are listed below:
Expenses will be incurred by using as much internal resources, the policies and the procedures of your company as possible.
ANNEX II: EBT Definition (see copy of standard managerial DLP of Pão de Açucar Group/Sendas Distribuidora S/A)
DLP – Sendas Distribuidora Standard
|NET NET C.M.V.
NET NET THEORETICAL MARGIN
|DC 3 – Contribution Discount|
Additional Deposit/Result CD Financing
Freights on Transfers
Storage / Physical Result CD
|GROSS MANAGERIAL PROFIT|
|COMMERCIAL OPERATIONS - STORE|
|Income from Non-Commercial Operations – Store |
Home Delivery – Store
Financial Sales Result
Financial Store Result
Other Personnel expenses
Third parties’ services – Cleaning
Third parties’ services – Money transportation
Third parties’ services – Inventory
Third parties’ services – Others
Third parties’ services – Total
|EXPENSES NOT MANAGEABLE BY STORE |
Bonus – Cooperative amount
Net Brand Publicity
Third party’s subsidized rentals
Additional rent charges
Taxes and duties/Insurance/Other Fin. Expenses
Direct Division Expenses
Reimbursement of Corporate Costs
|Additional cost of Return on Investments |
Internal subsidized rentals
|OPERATIONAL RESULT BEFORE IT|
|Net income from Galleries |
Costs of Store Opening/Closing
|EBT (PROFIT BEFORE IT)|
|DLP – Sendas Distribuidora Standard|
ANNEX III: Estimated Monthly Losses/Profits Before IT - "BASE” expected for calculation of variable remuneration.
|Months||Profit before IT – EBT base – project (RS)|