Almacenes Exito SA (EXTO) 2015 Q1 法說會逐字稿

Good morning. My name is Kayla and I will be your conference operator today. At this time, I would like to welcome everyone to Grupo Exito First Quarter 2015 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you for your attention. Ms. Maria Fernanda Moreno will begin the conference today. Ms. Moreno, you may begin your conference.

Thank you, Kayla and good morning everyone. Today from Grupo Exito, I'm pleased to present our Chief Executive Officer, Mr. Carlos Mario Giraldo and Chief Financial Officer, Mr. Filipe Da Silva. Today's agenda as shown on slide number 3 will cover the following topics: Grupo Exito's consolidated financial results for the first quarter 2015 under IFRS and a follow-up on the Company's strategy. The call [will finalize] with a Q&A session. There's a presentation available on our website that complements the information that we will be covering today. There was also a link included in the invitations we distributed via email. Thank you for your attention. At this point, I will turn the call over to Mr. Carlos Mario Giraldo for his comments.

Thank you, Maria. On behalf of Almacenes Exito, thank you all for participating in today's conference call. We sincerely appreciate your interest in Grupo Exito. Let's start by discussing the financial results for the first quarter period of 2015 as depicted in slide number 4.

As you can see, net revenues rose by 28.4% during the first quarter, gross profit by 27.4% and recurring operating income by 6%. Net income decreased by 29.2% for the quarter, mainly impacted by the equity tax and the loyalty program adjustment on which we will comment later on. Our results reflected recurring EBITDA growth of 5.9% to a margin of 5.8% as a percentage of net revenues.

Please note, there are two elements of great importance regarding the Company's performance this year. The first is the converging of the accounting policy from Colgaap to IFRS and second is the tax reform effect that particularly affected the outcome for the first quarter. This is the first time that Colombian companies are required to report in IFRS and therefore quarterly financial results are expressed under that new accounting standards to make all the figures comparable. Moreover, we have included commentary on the main effects that resulted from converging to IFRS and added the analysis over the recurring EBITDA in order to isolate the tax effect on the Company's operating results.

Grupo Exito also held a call on May 7, in which we discussed the main effects from converging to IFRS. This presentation and a replay of the call is available in the link provided or you may access this on our website in the Investor Relations section. From this point on, and in accordance with IFRS 8 requirements, Exito will provide information regarding its main operating segments split between the business units in Colombia and international. The Colombian segment includes four business units, Exito, Carulla, Discount and B2B. The international segment comprises the information pertaining to Uruguay.

In Colombia, Exito segment includes all of the businesses under the Exito brand with regards to the sales from hypermarket, supermarkets and express stores, exito.com, virtual catalogs, home deliveries and gas stations. Carulla includes the results from those supermarket and express stores, home deliveries and the Carulla.com website. The Discount segment comprises the outcomes from the stores that operate under the Surtimax and Super Inter brands. And finally, the B2B segment will include sales from business units such as Allies Surtimax, institutional, direct sales and the Company's manufacturing facilities. B2B also includes revenues from that real estate and the mobile businesses units.

On slide number 5, consolidated net revenues increased by 28.4% during the first quarter of 2015 to a total of COP3 billion against COP2.4 billion reported for the same quarter of 2014. The sales mix showed a 26% share in non-food categories and 74% in food category. Sales grew by 28.5% in the first quarter of 2015 and included the impact of a few non-comparable items versus the first quarter of the 2014. For example, in the first quarter of 2015 included that consolidation of Disco Group sales, which were not included for 2014 period as Grupo Exito did not have a sole control over this unit at that time.

Secondly, 2015 consolidated sales included the negative one-time effect from the complete reassessment of the Company's loyalty program. In February, Grupo Exito upgraded this program in what will become a clear commercial differentiator and lever for attracting and retaining customers. From now on, the clients of Carulla and Exito may freely use their points on any product they choose with an exchange rate of 1 point equals to COP1. Suppliers may also team up with us and benefit their sales by granting clients specific point bonuses or to increase available points in their wallets. This loyalty program is aimed towards becoming a real currency, a capture alliance with other complementary retail and service businesses in Colombia and eventually create a high value coalition that offers significant value creation potential for Grupo Exito. The financial effect of the loyalty program regards to actualization of the liability linked to the points that shall be redeemed by customers in the future. The effect in the first quarter 2015 figures amounted to COP17,800 million registered as lower sales and lower margin.

Finally, sales during the first quarter of 2015 included sales from Super Inter of nearly 8%, which made the base non-comparable versus the same period last year as the operation was acquired by the group in the third quarter of 2014. Net revenues in Colombia during the first quarter of 2015 represented nearly 83% of the consolidated net revenues and posted a 14.5% growth versus the same period of last year. Sales grew by 14.5% and included an overall same-store sales increase of 3.4%, mainly driven by food sales as a positive and by a positive calendar effect. The sales mix share in the food category in Colombia was 74% and rose by 20% versus last year, while non-food categories had a 26% share and grew by 6%. Food sales in the first quarter of 2015 posted a satisfactory 20% growth versus first quarter 2014. Non-food sales showed a slowdown and grew by 7%, driven by the Exito promotion and its calendar effect.

In the Exito segment, first quarter 2015 sales increased by 4.5% versus the same period last year and posted a 3.9% same store sales growth. This reflected the positive effect of the anniversary and back to school events which included a 5.5% calendar effect. However, there was a negative impact to sales caused by the lower non-food product sales mainly from the Electro-Digital category compared to a very dynamic first half of 2014, which was influenced by the World Cup and in the textile categories. First quarter 2015 showed a marked slowdown in consumption derived from weaker consumer confidence caused by the devaluation and higher inflation levels.

In Carulla format segment, first quarter sales increased by 1.3% versus the same period last year and posted a negative 0.3% same-store sales growth. The Discount segment contributed to sales performance growing 131% during the first quarter of 2015 and included sales from both Surtimax and Super Inter brands, where the most important impact came from the consolidation of Super Inter. Same-store sales growth that accounts for Surtimax sales was 7.8%, a increase for this business unit reflecting the better sales levels as previous openings of Surtimax stores have reached their maturity stages.

Net revenues from the International segment, which is Uruguayan operation, grew by 205% versus the same period last year and represented nearly 17% of the consolidated results and included the consolidation of Disco Group sales in 2015, which was not included in the 2014 base. It is important to say that Devoto sales were included in the base but not the Disco sales.

Sales in Uruguay for first quarter 2015 period grew by 203% and included an overall same-store sales increase of the 11.5% in terms of local currency. As you can see, Uruguay continued performing positively and showed higher internal consumption. The sales mix in the country showed a 22% share in non-food categories and grew by 18% versus last year. The sales mix share in food category was 78% and rose by 25% versus last year.

Moving now to slide number 6, we can see the gross profit grew by 27.4% during the first quarter of 2015 versus the same period last year. As a percentage of net revenues, gross margin decreased 20 basis points to 25.3% in first quarter of 2015. Gross profit included the negative effect of the previously mentioned loyalty program, the mix impact related to Super Inter's acquisition and the unfavorable margin mix due to the slowdown in terms of non-food sales. On the positive side, margin was benefited by increasingly solid and contributively income coming from the real estate, from the credit card, and from the insurance activities.

Continuing down the slide, selling, general and administrative expenses were 19.5% as a percentage of net revenues. During the first quarter of 2015, efficiency and productivity continued to be the core of our strategic priorities and ensured the SG&A's reduction as percentage of net revenues in comparable terms. Here, we have negative impact from the consolidation of Uruguay, given the fact that the Uruguayan operation has higher SG&A's than the Colombian operation. And as it was consolidated, it has an impact of near to [85] basis points in that SG&A's final result.

Nevertheless, the Company's efforts were offset due to a non-recurrent payment in that valorization tax to assets, the investment in structure enhancements required in certain business units such as real estate and e-commerce. Moreover, SG&As were affected as I just said, by the mix impact related to Super Inter's acquisition, which has a positive impact in SG&As and the consolidation of Disco Group which has a negative impact in SG&As.

Slide number 7 shows that recurring operating income increased by 6% in the first quarter of 2015 compared to the same period of last year and was 3.9% as a percentage of net revenues. It is important to mention that normalized recurring operating income in the first quarter of 2015 isolating the effect of the loyalty program and the valorization tax would have been of near to COP139,000 million, representing a 23% growth and a 4.5% margin as a percentage of net revenues.

Moving down the slide, you can see the recurring EBITDA grew by 5.9% during the first quarter compared to the same period of 2014 from COP169,000 million to COP179,000 million. Recurring EBITDA margin was 5.8% as a percentage of net revenues and 4.8% EBITDA margin when included the effect of the annual wealth tax total accrued in the first quarter of 2015 and registered as a non-recurring expense.

The tax materially affected the operating income by nearly COP60,000 million. As of today, the expected tax rate from 2015 to 2018 is of between 33% and 37%, which will represent an additional tax payment in 2015 of near to COP90,000 million. Normalized recurring EBITDA in the first quarter of 2015 isolating the effects of the loyalty program and valorization tax would have been of near to COP198,000 million, representing a 17.2% growth and a 6.4% margin as a percentage of net revenues.

As you can see in slide number 8, first quarter 2015 results were negatively affected by one-time impacts, which are making more difficult to read the quarter's performance. Hence, net income decreased by 29% in the first quarter 2015 when compared to the same period in 2014. As a percentage of net revenues, net income margin went from 4.1% to 2.3% mainly affected by extraordinary payments of wealth tax, valorization and CREE taxes, which are in the base. The normalized net income in 2015, isolating the one-time effect of loyalty program, of the valorization tax and of the wealth tax and of the revaluation of the investment in Uruguay from the base would have been of near COP119,000 million and representing 20% growth and 3.8% margin as a percentage of net revenues.

Before moving on to the discussion on the Company's strategy and outlook, I would like to mention that all of the proposals presented before the Board of Directors at the General Shareholders Meeting in March were approved. One of them was related to the creation of a special reserve for future dividend payments, aiming to limit the impact of the tax reform over the dividend and the second one related to a 9.4% dividend increase, which rose the dividend payout ratio from 54.2% to 56.7%.

I would also like to mention that Mr. Nicanor Restrepo, President of the Board of Directors passed away last March 14. Mr. Nicanor was one of the most highly respected business leaders in Colombia environment during the last 25 years and he will be greatly missed at Grupo Exito. The Board of Directors in its last session approved among other proposals to hold an extraordinary shareholders meeting on June 11 at Exito's headquarters to nominate and evaluate candidates to be considered for the position held by Mr. Restrepo.

Finally, the Company concluded a transaction with Cafam by which Grupo Exito assured the ownership over its commercial establishments in Bogota following the approval given by the Superintendencia de Subsidio Familiar. The strategic value of this transaction was very significant given the important contribution of 7% market share in Bogota of these stores and 3% market share nationwide obtained since the initial agreement was signed back in 2011. Through this agreement, Grupo Exito assures finally that all the business coming from the Cafam stores will be retained during the following years with no contingency.

Let's move on now to comment on the other activities and business developed by Grupo Exito in first quarter 2015 which are depicted on slide number 9. With regards to our retail expansion strategy Grupo Exito reached a total of seven stores opened during the first quarter 2015, comprised of one Exito store and six Super Inter stores in the city of Cali. Hence, the Company stores count is 539 stores in Colombia and 54 in Uruguay. We continue aiming of a near to 3% to 4% expansion during this year, most of which will be concentrated in the last quarter of the year.

Moving now to view the integration of Super Inter depicted in slide number 10, we are pleased to state that the process has rolled out as estimated. Grupo Exito is currently working on reaching synergies from purchasing conditions since approximately 50% of Super Inter sales stem from branded consumer goods. Other synergies are being transferred from Surtimax strength in industrialized consumer goods mix to Super Inter.

Additionally, other Grupo Exito brands are benefiting from Super Inter's expertise in handling fresh products, which are already being implemented at both Exito and Surtimax stores with promising results. We continue expecting that leveraging synergies and best practices will represent an EBITDA margin increase for Super Inter of between 200 basis points to 300 basis points over the three-year period to come. Super Inter contributed approximately 3% market share of total modern retail in Colombia, allowing Grupo Exito to reach 44% market share position in the country, a higher share than that of the Company's three main competitors all summed together.

Complementing Grupo Exito's activities for the development of Discount format, the Company continues efforts in its Allies Surtimax program at a national level with the first Super Inter Allies in the city of Cali during the quarter. As of first quarter of 2015, the Company reached 850 Allies in a low CapEx high return on investment strategy aimed at penetrating the traditional informal market.

Sales from Allies are increasing rapidly, compelling evidence of the shared value activity, which is good for the society as it formalizes the economy and retail, good for informal players as it drives them to be more competitive and sophisticated as well as encourages them to formalize and finally, good for Exito as it creates a strategy to profitable penetrate other market channels, which account for [nearly 50%] of the total consumer goods market.

Moving now to the real estate expansion depicted in slide number 11, the Company started the construction of the VIVA Wajiira, in the city of Riohacha to create a total of near to 40,000 square meters of construction and near to 20,000 square meters of gross leasable areas. The shopping mall will have an Exito store as an anchor and a great commercial store offering of local and international brands in fashion, services, food and entertainment. VIVA Las Palmas also started construction in the city of La Ceja to create a total of 10,000 square meters and near to 5,000 square meters of gross leasable areas. VIVA Wajiira and VIVA Las Palmas are expected to open by end 2015. VIVA Barranquilla also continues its construction to add nearly to 50,000 square meters of gross leasable areas by 2016. The Company continues with its real estate strategy to develop in 2015 between 30,000 square meters to 40,000 square meters of gross leasable areas in shopping centers in key cities. Approximately 400,000 square meters to 420,000 square meters of gross leasable areas are expected to be completed by 2017.

Other complementary businesses also perform as expected with positive outcomes versus last year. Among them, the credit, the travel and the insurance business, along with the real estate continue strengthening the Company structure to diversify revenues and margins in long run and to complete a full comprehensive value proposal to our near to 6.6 million customers in Colombia.

To conclude, from a macro perspective, we look at the future with moderate optimism as further tax reform at consumer level is expected to happen in the second half of the year. All in all, market sees construction to remain positive among the lowest current unemployment rate for the last decade and devaluation levels that had a further inflationary effect. Colombia has shown a resilient economic model and government expenditures in infrastructure and regional elections in the second half of 2015 shall support an expected GDP growth between 3% and 3.5% in 2015. And Colombia continues being one of the best performing countries in the region. After Super Inter's acquisition, a near to 3% to 4% retail sales expansion is expected in 2015.

With the opening of between 30 to 40 stores mostly planned to start operations in the last quarter of the year, the retail expansion strategy continues prioritizing the premium market with Carulla and convenience stores and Exito compact stores in mid-sized cities where modern retail is not yet present. Grupo Exito continues focusing on dynamic and profitable store openings to minimize the cannibalization effect of same-store sales and prioritizing those with the opportunity to develop real estate projects in the future to increase traffic and maximize returns.

All the above considered, we at Grupo Exito forecast a near to double-digit growth of the topline over the IFRS base and flattish same-store sales levels to the ones in 2014. We expect margins at the gross margin level to have a normal effect of higher penetration into discount market and from e-commerce activities. Among additional investment required in real estate and other innovations activities, the Company continues focusing on cost control and efficiency with the aim of maintaining its recurrent operation income level by deploying an aggressive initiative focused on productivity and dilution of fixed costs.

Grupo Exito's consistent strategy aims at assuring its leadership position and continued profitability in the short and long-term. The Company is investing in the future, focused on innovation and a global implementation of global retail trends before any of our competitors. Such is the case with proximity to our target markets, which is undoubtedly strong in developed countries, but has been a challenge in under-developed countries, the Company has already obtained a leading position nationally with the Exito Express and Carulla Express stores and we are comfortable in aggressively expanding throughout the major cities of Colombia in the coming years. There will be thus a roll out of our proximity format in the following years once it has arrived to a very reasonable profitability level.

Even though discounters in Colombia are expanding aggressively, Exito has consolidated in few years a clear leading position in Discount through Surtimax's organic expansion, through Super Inter's acquisition and the Aliados initiative, covering popular markets currently one of the most dynamic segment in the Colombian market. The Company has ensured a position at least three times in sales versus Number 2 discounter and five times the third one. Our core brands, Exito and Carulla, will be the expansion focus during the years to come, contributing to margin strengthening and answering to a trend with Exito to new middle classes and new series coming to economic force.

The Company is significantly profiting from customer traffic throughout its stores through dynamic and profitable businesses such as credit, real estate, insurance and travel, some of them developed in partnership with specialists. Grupo Exito has also promoted omnichannel comprehensive solutions in Colombia through exito.com and carulla.com, through the alliance with Cnova to launch Cdiscount.com, the development of the marketplace, the pickup points, virtual catalogues and the IT and logistics that are adapting rapidly to this new vision and this new reality. The virtual business including home deliveries posted an important sales growth near to 45% in the first quarter of 2015, solidifying the Company's leadership position as a seller of consumer goods as well as its strong competitive position versus pure players in the food and non-food arena.

Commercial real estate is also offering great opportunities in Colombia around privileged locations and our VIVA model which has taken a lead over other retailers and even other commercial real estate developers. We are aware that this type of strategy will require important CapEx and OpEx investments. However, we note that delaying innovation in Colombia is not an option and that these initiatives will certainly pay off in terms of benefits for our customers and profits for our shareholders. All of this is happening now, while maintaining focus on our main task to expand our retail brands in target regions in Colombia and at the same time analyzing international expansion opportunities throughout Latin America to replicate the positive experience we have had from our operation in Uruguay. This is a clear focus for the following months, making use of our existing financial resources.

Colombia continues as a solid economy with great potential and Exito even in a full competitive environment continues to consolidate its leadership and is ready to enter its proven competency to new territories. We continue to strengthen and modernize our multi-format and omnichannel strategy with rigorous control on expenses and efficiencies that will translate into profitability. Thank you for your attention. Operator, can we please move to the Q&A session.

(Operator Instructions) Antonio Gonzalez, Credit Suisse.

First, I wanted to just make sure from an accounting standpoint, the valorization tax and the wealth tax, this quarter, the impact was, if I'm not mistaken, COP2 billion and COP30 billion, respectively. That's the first question and how much is there to come in the following quarters?

So, regarding the equity tax, I confirm to you that the impact, it's around COP60,000 million. It has been recorded so in the first quarter and there will be no more impact in the next coming quarters in 2015. Regarding valorization tax, we had full impact of COP8,000 million during the year; compared to last year, is effectively COP1,400 million additional. This valorization tax is difficult to tell you if will be an additional or not because that is decided, I would say, by municipalities, by cities and we don't know exactly when it could happen. So, we could have additional impact during the year, but today, we cannot quantify it. We estimate that it will not be so strong I would say in addition in 2015.

All right. Secondly, if you don't mind, the impact on the loyalty program, you mentioned that it's COP17 billion. Why is it a one-off? It's also going to happen I guess in the second, third and fourth quarters and of course, you need to similarly account for the points that are outstanding but not yet redeemed throughout the year. And it only normalizes by next year, is that correct?

No, actually you have really a one-time effect. It's related to the fact that we have revaluated the value of the points. Since we have I would say changed the strategy regarding this point, actually the point was valuing a certain amount of pesos previously and now it's another amount. So, this actualization actually has been done in February and now, I would say we are expecting that this value of the point would remain quite stable in the next coming months. So, you will not have additional impact regarding the loyalty program during the next coming months.

That makes a lot of sense. And finally, if you don't mind, can you give us a sense of what same-store sales in Colombia would have been if we take out the impact of the anniversary campaign and any comment that you can make on what you're expecting for -- what you are seeing already in the second quarter and what you're expecting for the rest of the year? And also, why was B2B down so much, is Aliados specifically going down or is there anything else?

The calendar effect, the impact during the first quarter was near to 5% given the favorable effect of anticipating our anniversary. Then, in the second quarter, what we are seeing is positive same-store sales for food around 2%. It may vary in the months to come, but that's what we are seeing until today. And non-food, we are seeing negative between 4% to 5%, mainly concentrating on the categories of Electro-Digital, given the very, very big base that we have coming from the World Cup.

So, what we think is that even though there is some consumption psychology effect in non-food and I think that will remain for the year, we believe that the most difficult part will be until June when we had a very important base last year of sales, mostly coming from Electro-Digital products. Looking towards that year, what we believe is that sales excluding Uruguay consolidation will be near to low double-digit as a whole and in same store sales, they might vary between negative 1% and positive 1%, tending towards a flat figure.

Perfect. Thank you so much, Carlos Mario. Any comment that you can make on B2B? Is it Aliados going down or is it some other factors?

I think that in B2B, Aliados is having a very good trend. It is increasing and we ended the quarter by 850 Aliados. Last week, even we came to a very interesting point, because we got to our first 1,000 Aliados, now including a number of Super Inter Aliados also (technical difficulty) and coffee region. I really believe this is a great innovation for the market, which hasn't been followed up by competitors. We believe that it is effectively going to penetrate the informal market. However, it takes a couple of years more while you get to a critical mass but the level of satisfaction and of sales increase and of product penetration and private brand penetration in the Aliados is great. And in the future, it will permit us to continue penetrating in the loyalty with this Aliados because they will be open to new products and new services coming from Grupo Exito.

Just to complement on what Carlos Mario is mentioning, is like-for-like, negative like-for-like that we're seeing is [a condition] related to B2B is coming from one shorter sales that we had last year through [Disco] subsidiary that time to time were selling to third parties (inaudible). So, it's coming from that but it is related to new initiatives like Carlos Mario was mentioning, all are going very satisfactory.

Thank you so much. I really appreciate it.

Andrea Teixeira, JPMorgan.

I have two questions. One is more strategic on, I see more of commentary from Carlos Mario and more emphasis on international expansion. So, this is something that, obviously you have a lot of cash and you've done tremendously well in the recent acquisition. So, can you elaborate more, what would be the key markets that you're looking to expand? And if that would entail potentially also taking over Casino's Argentinean operations potentially and then as happened with Uruguay in the past. And also, regarding the margins, of course, there's a lot of moving parts from the quarter as you have this IFRS but on a normalized basis you've been having some growing pains as you grow into Aliados or the B2B. How can we -- I mean I know you've given us guidance but is there something that beyond 2015 that we would hope for improvements there as you normalize the comparisons or you have to be even on the existing formats mix adjusted, you're still investing more into pricing?

First, to the international, we are actively looking for opportunities. Within those opportunities, we can evaluate also the Argentinean operation of Casino, if it creates value to the Company and it has the right price, number one. Number two, we are looking for other opportunities in other geographies, both in the South and in the North of the continent and in these things you can never promise things. But what I can say is that I hope that we can have at least two deals during this year. I believe that, obviously, we have been very cautious in our acquisitions in the past and all of the acquisitions with no exception have created value. You can see it coming from Cafam, which we recently consolidated, you can see it from Uruguay which is a great experience for the Company and it increasingly has created value to Exito and you can see it to date from Super Inter, which gave us the leading position in the Discount format.

Number two, about sales and what we can see to the future. You have to bear in mind that we acquired Super Inter the last year and when you acquire 50,000 square meters, 46 stores, market share leadership in the coffee region and co-leadership in Cali, you have to do the job to integrate it. So, we slowed down our expansion during the last year as you could see, and obviously, today we're having very little sales coming from expansion, having done the job with Super Inter, having integrated Super Inter in the last quarter of last year and the first quarter of this year, having assured that sales which account for 3% of the total Colombian market are completely integrated into Exito and are completely stabilized, it is the moment for an organic expansion and we have now on the move that it's organic expansion. We plan to open as is said repeatedly 30 to 40 stores this year, most of them in the last quarter, that will be near to 4% expansion.

Obviously, most of those sales are going to be seen for next year. We think that this expansion will include at least 10 Exito stores, most of them in middle sized cities which have a huge potential in the new Colombia that is expanding in these new cities which were unknown before. It will include at least 10 Carulla stores, which is a focus of expansion of the Company given the very, very attractive margins that it brings into our mix. It will include at least 15 Exito Express or Carulla Express stores and for the following years, we think that we will do expansion at least at this region and hopefully larger than the one that we have done to date. So, the answer to make a short one is 2014 and the beginning of 2015, our homework was Super Inter. Now, our homework is organic expansion, international acquisitions and to work in the same-store sales in Colombia regardless of increasing competition and of some diminishing of consumer confidence in non-food products.

And on the margin front, if you can help us reconcile?

On the margin side, I will tell you, the short run of the first quarter, but most importantly, what I see ahead. In the first quarter, what's more important is that we have in the margins 20 basis points below. This margin is impacted positively by the Uruguayan consolidation, because it is a higher margin operation, the Disco one, negatively by the Super Inter consolidation because the discount format has a lower margin and by the e-commerce increase of more than 45% which has lower margins and positively by the real estate operations, which has, as you know, operating margins, which are largely above those of retail.

When you go to operating recurrent margins, here in SG&As, the most important impact comes, it's the opposite. Here, we have Super Inter having a positive impact but given the size of Super Inter, this positive impact in SG&As is 50 basis points, around 50 basis points. But then, we have a negative impact coming from the Uruguayan consolidation which has structurally given higher salaries, larger costs, administrative costs. So, this -- I would say, this comparable impact of Uruguayan consolidation is 86 basis points. Then we have 0.5 basis points coming from valorization taxes, which impact negatively, and we have 25 basis points coming from the investment in structure that we are doing for real estate, for e-commerce and for Allies. We have a very good positive impact of 10 basis point coming from productivity initiatives.

So, as you can see, SG&As have as a whole, a 100 basis points negative in the trimester. Most of them explained from this impact and the most material of them comes from the Uruguayan consolidation. Looking forward, I can say that in the second quarter, we estimate that our margins could be stable against the last quarter of last year, of the same quarter of last year or [go past it]. Stable or past it.

Okay, great. Thank you so much, Carlos Mario.

Andres Soto, Santander.

The first question is regarding competitive environment in Colombia. How do you see competitors adapting their strategies to the current environment in terms of sort of a better EBITDA outlook for consumption and especially in terms of the strong depreciation of the peso, are they translating these to their products, are they taking lower margins and based on that, where are you expecting in terms of your own profitability?

And my second question is regarding your segment information. I will like to have additional idea in terms of the relative profitability of each of your segments in order to better include this information in our model and our projections?

I'm going to take the first one and then leave the second one to Filipe. Market trend in Colombia, what's happening, how we see competitors moving, how we see the environment. Colombia today is an expansion market. There is a huge expansion in Colombia, given the attractiveness of the market and we have decided to follow suit. That means that we are not getting behind and that's what we did at Super Inter. With Super Inter, because you have to understand that we went from 41% market share to 44% market share. So, if you look at the Colombian formal market, Exito alone represents more than the addition of Number 2, Number 3, Number 4 in the market.

What's happening? First in the premium segment, we are seeing stability. There is no expansion because there is no other format. So, here, the expansion is going to be done by Carulla and we are going to take care of introducing Carulla in new cities of Colombia, which we think have a space for Carulla and this is very good news for the Company. We are taking Carulla to Pereira, to Bucaramanga, increasing position in Santa Marta, probably to cities like Valledupar, Villavicencio, more of that in Cali, Medellin, Bogota, et cetera. So, this is a very high potential segment, in which our big task is to keep Carulla as a very, very good value proposition, increasingly good in its fresh product offered to and to expand it as much as possible.

The number two thing that we are going is to expand Exito. Exito has not had a big expansion in the last three years, given our focus in discount formats, but now we see a huge opportunity in Exito with commercial galleries going into intermediate cities and a good show of that is what we are going to do for example in Riohacha where we are going to open a near to 4,000 square meter Exito with 14,000 galleries, which is very, very positive for the Company. And what's happening in the market big is discount, because there are many discounters coming into the market. And here what the Company said and what the Company did was to cover this front rapidly and we covered it with Surtimax organically with Aliados organically, but with a big jump with Super Inter.

So, today, you can say that in discount market, we have the same market share that we have with Carulla, it's huge. We have around 3 million customers, which is very big, and we have sales that will be over COP1.5 billion in the discount format. So, in five years, we have gone from zero in discount to being the, I would say that the clear leader in this segment, which if we hadn't done this would be completely uncovered for competitors to enter and to cover. So, fortunately, we have a brand proposition to do here.

Relating depreciation, devaluation et cetera, I believe that Exito is in a very good position, comparative position. I cannot speak for the competitors but I can speak for us and I can say that in food products, 97% of our consumer products come from Colombia and total purchases 93% are done nationally in Colombia. I think no other material retailer in Colombia can count that story. And that's a very important story because it keeps us a natural hedge in moments in which there is a lot of instability in the exchange rate.

So, I leave the second one to Filipe.

So, regarding the profitability per segment, we don't disclose it but what I can give you is, I would say, some reference. In Colombia, on the first quarter, our recurring operating income has been at 3.9% of net revenues. However, this average of the Company performance that you have, of course, Carulla which is the highest profitability for Exito in Colombia, after that you have the Exito hypermarkets. And I would say below this 3.9%, you have the convenience store and discount formats. So basically, how you can see the profitability, I would say is built in Colombia with I would say higher profitability in hypermarket and super market and after with low profitability but I would say with highest return due to low CapEx investment for convenience store and the discount formats.

Katina Metzidakis, Deutsche Bank.

I just wanted to ask you quickly, you mentioned the potential for further tax reform expected in the second half of the year. The President recently came out saying he would not look to increase VAT this year. So, how might this potential increase look in your opinion? Colombia already has one of the highest corporate tax rates?

And then, I have a second question just related to the development of the Cdiscount. I know that part of the plan was to expand this into other regions. So, just wondering how we should think about that process and wondering also how the new pilot programs that you have going, how those have been going and just sort of how to think about online generally?

Excuse me, to which pilot do you make reference, only to be sure of my answer.

I guess in Ecuador and in Panama.

Okay. I will be referring first to tax reform. Nobody knows what's going to happen. You know that officially the government has spoken about a structural tax reform and a high level commission has been created to study it. What I think from the experience and from the reactions that have happened in the market is that corporate tax will not be impacted to higher levels.

It makes no sense to do that and so there will be more a reorganization of taxation, what I think is looking to tax people who are not paying taxes, especially non-profit organizations, which are being used to escape from taxation and also taxing Colombian individuals of the money that they have outside of Colombia and trying to control tax evasion. That's what I think is going to happen, but nobody knows at this moment and I agree with you, Colombian tax levels are extremely high for corporations and they should even be lowered more than being increased.

Number two, about Cdiscount, I try to be very cautious given the fact that we do not control the business. So, we cannot speak for the business. I'm sorry, I have to be cautious about it but what I can tell you is that as minority shareholders in the business, we are very happy of what's happening. We're very happy of the targets it has been complying and that in Colombia to date, it is now a material player taking market share in the core categories of e-commerce.

Mauricio Serna, JPMorgan.

Okay. I think his question was already answered. Jairo Agudelo, BanColombia.

I have just one question and this is related to the Colombian operation. According to the information on the presentation, you have same-store sales in Colombia growing below inflation 3.4%, while inflation in Colombia was 4.55% for March 2015. So, I'm just wondering that if you have the calendar effect already in the first quarter of this year and same-store sales were not having like a positive performance in real terms, can you give us any idea of how is the performance during the second quarter or what are you expecting about these evolution during the rest of the year?

What we expect Jairo is as I said flat same-store sales for the rest of the year. You have to bear in mind that there is a big expansion from everybody including us in the market and we are putting [8 points] with Super Inter that we hadn't before, so obviously that has an impact in the market. And most of same-store sales is coming from food because non-food is having a negative trend in the market and you can see it from most news that are coming outside. So, itbs not an Exito problem, itbs a market structural problem. I believe that consumer confidence in disposable income has been affected by the news recently happening in the market. That can recover rapidly but we do not expect it to be at least in the following quarters.

Juan Serrato, Porvenir.

I have two questions. The first one is, I want to understand better the dynamics of same-store sales regarding the Discount segment compared with Carulla. We see a better growth on Discount segment, but in Carulla, we see a decrease. Why do you see that difference?

And regarding the competitive environment, I want to know, if you think that the competence in Discount sector could affect the market of Exito format?

First, Carulla had a very good performance last year in same-store sales. This year, it is slightly negative. The reason is one, the name is Bogota. Carulla sales, 60% of Carulla sales today are in Bogota and Bogota as a city is a stagnating city today, unfortunately. It didn't happen for many years were Bogota had more dynamics than anybody, but today, given, I don't know, it's confidence, but problems of public administration in Bogota that most of you know about Bogota is not increasing, and most investment has gone out of Bogota. So that's most problem for Carulla, that's the reason also why we are taking Carulla outside of Bogota and into new cities, given that the very good perception that it has.

About Discount, its undoubtedly that any expansion can impact us, especially when the expansion is going to big cities and we cannot prevent that from happening, what we can do is to react and we are reacting with our own expansion, which is going to go to four points this year and I think that's an expansion that can drive us in the medium term to keep market share, which is our most important goal.

And secondly, what we can do is also get into the Company new access of margin that can counter-balance any negative impact that we had from this. And that's the reason why we are accelerating a lot our real estate business and accelerating our presence in credit, in insurance, in travel, in mobile telephone, et cetera. And in real estate, I think that we have a very exciting story for the future. First of all, we ended last year with 270,000 GLA to third parties. I am discounting any rents paid internally from stores to our real estate business, only to third parties, we ended with 270,000 GLA. This year, we're going to open between 30,000 and 40,000 GLA; next year, we're going to open near to 70,000 GLA and that will take us that by end 2017, we will be above 400,000 GLA. That takes us to be very probably the leader in Colombia in commercial real estate with our VIVA brand. We will also consider further consolidation in this market because we know, you know that normally these are businesses that have operational profits, which are huge above retail and that's something that will have a very positive impact for the Company in the future. So, in the market, you cannot control what you cannot control, what third people do. What you can control is what is in your hands. And fortunately, we have not only in our hands a very interesting retail expansion in high margin formats like Exito and Carulla, but also we have an answer through new businesses which will bring margin to the Company and through international expansion.

Mauricio Restrepo, BTG Pactual.

Just one question. Can you describe the main driver of the 23% increase in other revenues and also explain if it includes all the sales of the real estate business or it devalues accounts into sales?

Yes, actually in other revenues, we have I would say all the incomes coming from the complementary businesses, meaning real estate, credit card, insurance and concessionaries. I would say all the other business that are not retail sales. And you have also actually a positive effect of the full consolidation of the trust, real estate trust that we have built for the VIVA that we are now since we control it, we are consolidating it (inaudible).

[Christina Alkire, Banco de Chile].

I would like to better understand three or four different taxes that you're including in the first quarter. More than accounts, I would like to understand what is being taxed, why there are one-offs?

So, in the first quarter, you have equity tax impact. So, I would say, following the IFRS standards, since this tax [has to be paid if you are in activity on January 1] you have to book it I would say on the first month of the year. So, we booked it in January and has impacted the first quarter performance. And we're talking about here, I repeat COP60,000 million that we have booked and there will be no more impact during this year. And after, you had, so we talk about also all the tax related to property, valorization tax that some municipalities have decided to request and so, for example, we have this impact regarding Envigado and that is one-time effect also, since municipalities only can apply once in a year this tax, okay.

Rafael Espana, Serfinco.

I have some questions regarding the financial statements and the other about the strategy. I'm going to start with the strategy. Can you just clarify [with respect] for about two deals in the short-term in the international front that you said to [Teixeira] from JP Morgan.

Another question that I have is, which would be the closest competitor for Carulla, if there is any? I will like to understand a little bit more of that market. And in regards to financial statements, I was thinking about the possible effect or what do you expect for recurring operating income for Colombia, you have said that same-store sales will possible grow past the zero percent growth. But do you expect the same for recurring operating income. I'm talking about Colombia.

And the big payables adjustment, I see a big payable adjustment in the financial statements. I'm talking about the cash flow from operation. Can you give us some color on that change? Can be explained with the adjustment of loyalty program that you have explained to us?

First about international deals. When I say two, what I mean is that we are working in different directions and that we think that we have space, not only for one transaction but for more than one transaction. You know that in these deals you close when you close and that takes time. But I mean we are actively working. I have always been clear because I know what you guys always say what we are doing with our cash and when we're going to move, and I prefer to take time and to move well than to do things that are not good with the cash of the shareholders and we have proved to do that in the past. And I think in this, it takes patience to do good deals and that's what the Company does.

Number two, about Carulla, obviously, everybody is a competitor to any format, but there are targeted customers for each format. So, I can tell you that Carulla competes against most hypermarkets, Cencosud, Olimpica, same against Exito, our own brand for top customers in purchases of big tickets of, for example, the complete purchases that you do every 15 days or one month, but then, Carulla where it has a very premium position, is in proximity for high level food and fresh products and specialty imported products. For example, in imported products, it competes against somebody like PriceSmart, but as a proposition, Carulla is unique in the market even though it has some common customers with other formats for different needs.

And as of ROI, recurring operating income, we are aiming to end the year with a stable March, that's the big task that we have and we're working a lot in productivity to be able to counterbalance any impact we have from flat same-store sales and we are also working in additional income from other origins. It's important and I was going to say this before, when you look at the results that were published recently for all retailers in Colombia of last year, you can see the difference of strategy between Exito and the rest, that Exito being a multi business company with high margin income coming from other origins, has clearly an advantage in profitability over other retailers and that's what permits us to defend our market position and still be able to keep good profitability.

Yes. Go ahead, Filipe.

Regarding your question about the cash flow, so as you can see, we have I would say the trend is positive, since we have increased our position of cash, of ending cash from COP2.1 billion to COP2.2 billion and that despite I would say an acceleration in terms of CapEx investment. As you can see that we have invested higher regarding for example, payment, we have started to pay Super Inter, second wave acquisition and I would say despite that, we see to increase our cash flow position. In terms of working capital, I would say, due to the slowing down of non-food performance, of course, you are having I would say an impact on the rotation of offshore inventory and that is impacting a little bit the performance of your working capital, but I would say that is in line with what is happening in terms of sales is what I can tell you regarding the cash flow.

For the second query, what change in the financial statements can we expect regarding the option call that you guys already exercised for Super Inter?

Basically, the operation has been already fully integrated. So, no impacts are to be expected in terms of sales or I would say operating income. We are currently I would say as approving IFRS for current year reviewing and analyzing the PPA of Super Inter due to the second wave, I would say acquisition. But I would say roughly in the financial statement, you should not expect softer impacts.

Perfect, thank you. In regards to Carulla, I was thinking about the competitors in Bogota, I have seen that [Surtifruver] we call it like that here in Bogota are like everywhere, what do you think about them, what do you feel about the competition that they can be to Carulla and I understand that the mix of the product is not only food, but what you guys expect for that in the following years?

Surtifruver is a very good competitor in fruit and vegetables, especially, but it has been there always, so we haven't seen an important expansion in Surtifruver.

(inaudible), JP Morgan.

I was wondering if you could tell us again the amount of the one-time effects in taxes and also what should we consider as recurring taxes for us tomorrow and the following quarters?

Yes. The one-time impact in equity tax, which is called a tax to richness and to wealth in Colombia, is COP60,000 million which was accounted in the first month of this year as IFRS requires and impact of valorization tax coming from special constructions that in different cities of Colombia which were charged to different economic participants was [COP8,000 million].

And regarding the recurring taxes we should consider for the following quarters (multiple speakers)?

Yes. Regarding taxes, we see the normal tax, which is having an increase in the CREE, which is going to be gradually seen in the following years. But regarding special taxes like wealth taxes, all the impact has already been accounted. What I can say is that, in the second quarter, we will have a positive extraordinary impact coming from the deal that we did with Cafam near to COP40,000 million, because in the selling of our establishments of the pharmacies, we had a very low historical value. So, it's going to create an important one-time profit of near COP40,000 million.

Jose Restrepo, Serfinco.

I have two quick questions. One is, how is the performance of the cap rates in your real estate business, if you can give us a color on that. And the second is, regarding competitive environment, but from the side of the suppliers as you with the Allies are entering in the segment that were they [can start] most of their margin. So, which has been the reaction of the suppliers to your expansion in the informal retail segment in Colombia?

I'll take the second one and Filipe will take the first one. I think that suppliers know it's a reality. And our Aliados channel is not a privileged channel for the branded products. It's a privileged channel for our private brand and for our services. And our suppliers understand that and we have been very transparent with that. We respect to very much the distribution that they have of the product to the traditional channel, but we are being an option and our [Ekono] brand for example is a champion in this exercise and we want to make it a world champion in the traditional channel.

So, regarding cap rate in real estate, as you know these cap rates (inaudible) of the maturity of the project and showing development or operating profits and operating assets. But I would say that we are managing market cap rates, so depending on the maturity from [7% to 10%, 11%].

At this time, there are no further questions. Mr. Giraldo, do you have any closing remarks?

Yes. I would like to thank you for your massive participation, for your questions and I would like simply to say that Grupo Exito is very firm and very stable and very consistent with its strategy. It is continuing to fight for the Colombian leadership. And since one year ago, today, we have 300 basis points more leadership in Colombia than before. That is something that I think that only in a country like Mexico you can see it. You can difficulty see it in other big countries.

So, second, Exito I think is covering the most important segments of the market and being leader in the four important segments of the market; in the premium segment with Carulla; in the medium segment with Exito; and in the Discount segment with Super Inter, Surtimax, and Aliados; and finally, in the segment of ecommerce with proposition of exito.com, carulla.com and through our participation in Cdiscount.

And third, that Exito understands that in the long run, it has to perform and to give profitability in things on top of retail and so our definition is that our business is not only the walls of the stores but our business is the confidence of near to 7 million customers that come every week into our stores or to our sites, and that here, we are building a very interesting, strong and futurist business around real estate, around credit, around insurance, travel, financial transactions, et cetera.

And finally, that we are aware of the challenge that we have to make good use of the resources that Exito has and we are going to do so in things that add value to the Company, to the shareholders and that will increase our sales, but more than that, will increase our profitability. So, thank you very much for you for being present in this conference.

Thank you. This concludes today's conference call. You may now disconnect.