Almacenes Exito SA (EXTO) 2016 Q2 法說會逐字稿

Good morning. My name is Bianca and I will be your conference operator for today. At this time, I would like to welcome everyone to Grupo Exito second-quarter 2016 conference call. (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, Bianca, and good morning, everyone. Thank you for joining us today for Grupo Exito's call.

At this time, I am pleased to present our Chief Executive Officer, Mr. Carlos Mario Giraldo; Chief Financial Officer Mr. Jairo Medina; and Mr. Jose Loaiza, VP of International Business.

We will be following the slide presentation that is available on the website and via the link that was provided to you with the conference call details. On slide number 2, we have the agenda for today's presentation where we will be covering Grupo Exito's operating highlights, followed by the review of the Company's international strategy and the consolidated financial results for the second quarter 2016. The call will conclude with a Q&A session.

At this point, I will turn the call over to Mr. Carlos Mario Giraldo for his comments.

Thank you, Maria Fernanda, and thank you for -- to all of you for being here. I will begin with slide number 3 that speaks about the main operating highlights of the second quarter of 2016.

For this quarter, we had very strong same-store sales growth in Colombia, Uruguay, and Argentina; solid sales performance in Brazil, with a progressive improvement driven by Assai, the cash and carry, and by the ongoing recovery of Via Varejo. 15 stores were opened for a total store base of 2,541 stores in that four countries.

We opened the first cash and carry store in Colombia under the brand Surtimayorista, which is a major event for the Colombian retail panorama. The [allies] continued growing in Colombia, and for the first time, they were introduced into Brazil under Aliado CompreBem brand.

The synergy plan is on track and with dynamics with tangible gains that are expected to go between $15 million and $25 million of recurrent impact on operating profit during this year, and remain at a panorama of 50 basis points for EBITDA margin from now to 2019.

The Colombian real estate vehicle was incorporated. The assets were taken into this vehicle under Viva Malls trust name and it is prepared for future private placement.

Finally, Mr. Manfred Gartz was named as Grupo Exito's CFO and will be starting next month in his post. He has 12 years of expertise in financial functions in Grupo Bancolombia and is a very well-recognized executive.

Going to slide number 4, I will begin with a tangible advance in the synergies between the countries, between Brazil, Colombia, Uruguay, and Argentina. The first one is the cash and carry. As you all know, cash and carry is driving growth both in Brazil and in Argentina markets. It is a phenomenon in Latin America and it drives not only traffic out of end consumer, but also professional customers.

Under the help and under the synergy with Assai, we launched the first cash and carry in Colombia. First months have been excellent, exceeding budget. They have been appealing to different customers. The most important have been mom-and-pops, which is a very big market in Colombia, near to 350,000 mom-and-pops. But also end consumers have been going to the cash and carry. This first result takes us to take the decision to continue with cash and carry in Colombia and to open at least two more stores for next year.

Slide number 5, we speak about some more tangible synergies, especially in the commercial side. We are purchasing jointly commodities for the four countries with discounts between 5% and 15% for the sum of volumes for all the countries. In this first month, we made 60 containers of salmon, apples, olive oil within others.

Negotiations are ongoing in the nonfood business, centralized and needed by Via Varejo, and the first stage of this negotiation is on top benefit for all the countries.

LATAM business encounters, commercial encounters, have been open for the first time. In the past, there has not been a lot of commercial activity between the Andean region and [Meda Cosul]. But through this alliance, it has been opened in a very positive way. We now are exporting with some of our suppliers coffee and flowers from Colombia to the other countries, juices from Brazil and small appliances to the other countries; wine from Uruguay and meat from Argentina, only to mention some of the product categories.

This is starting small, of course, because it is the first time it is being done, but has a very important potential for the future.

Going to slide number 6, textiles, which is a know-how recognized in the hypermarket business of Exito in Colombia, is being piloted both in Brazil and in Argentina. We now opened pilot stores in Brazil and we will open pilot stores in Argentina starting the following two months.

In the first pilot stores, we have had a double-digit improvement in textile category against the rest of the stores that do not have the pilot. It consists not only on having a [Architect] or [Brossini] brand product from Colombia. It also is working with local textile production, but the most important is the business model of textiles, the look and feel, the merchandising, the product mix, and also the introduction as a key strategy in all our hypermarkets in the region of a private-label combination, which, as you well know, in textile is key for the [obtention] of good profitability.

Slide number 7 depicts the introduction of the business model of Aliados in Brazil. Aliados is an innovation business model, very important for the penetration in the informal market in the Colombian market through Aliados, Surtimax, and Super Inter. As you know, we have already completed more than 1,150 Aliados in Colombia and this business model is now being taken to Brazil.

There is an important opportunity for Grupo Pao de Acucar through its brand CompreBem to do co-branding with mom-and-pops in Brazil. It already started, and today we have in operation 45 Aliados CompreBem with very interesting initial results. This is a very clear demonstration of the way in which business models are being taken from one country to the other when they are destined to give differentiation to our commercial proposition.

In slide number 8, we see a very tangible synergy, which is that unique and unified strong, programmed, and predictable high and low proposition, which is being introduced under the same concept and different names in Argentina, Brazil, and Colombia and in a gradual way also to Uruguay. This has been highly successful in Argentina and is helping to pick up sales today in Brazil and in Colombia, in Argentina under the name of Compra del mes; in Brazil, under the name of 1,2,3 Passos da Economia, which is being executed in the extra brand both in hypermarkets and supermarkets; and in Colombia under the [kingsenaso] strategy.

As a whole, synergies are on target. There are 15 main project initiatives that are being coordinated in the different countries. For 2016, as I said, we think that we are going to capture between $15 million and $25 million of recurrent operational profit, which is in plan for the final objective to obtain 50 basis points in the following four years.

In slide number 9, we have Exito's consolidated sales in the four countries. Even though we don't have a base for Brazil and Argentina still, doing a pro forma analysis we come to the conclusion that food consolidated sales increased at 8.6% turned into Colombian pesos in the complete region.

What is important is that in Brazil, we had a recovery over previous quarters, especially in food, where the increase was 8.7%. And in nonfood, for the first time in five quarters we obtained positive figures in Via Varejo with a positive growth of 2.6%.

Slide number 10 makes a focus on the Colombian operation -- on the Colombian commercial operation. I would say this is one of the best quarters that we have had in the last three years in sales in Colombia, with total sales increasing 8% when adjusted by calendar effect and 5% same-store sales. This 8% compares against 6.3% accumulated for the first half. There is a clear progression in all banners in the domestic demand.

Even though the domestic demand has not been strong, as signaled by [dani] yesterday that showed that year to date the commercial demand in retail in Colombia has increased 2% and that in the second quarter the increase was 1.4 against more than 3.5 in the last year.

What has been key for the increase of sales of Exito has been the clear segmentation of formats, the penetration through Aliados in the informal market, the work of a combination of the physical and virtual market with exito.com, and especially our big strategy of EDLP in the textile business, which has been a big success in the Colombian market.

If we go to slide number 11, we make a focus in the Exito brand. Exito brand is almost two-thirds of the sales of Colombia. And the good news is that the Exito brand is vibrant, it is alive, and it is very dynamic. The hypermarkets are getting a very good increase in sales and Exito brand had the best increase in sales of all the segments of our market, with 8.3%. This is a combination of a very consistent strategy, which we have been speaking of in the last three quarters.

There are four big strategies. The first one is textiles. Textiles are around between 12% and 13% of total sales of the hypermarkets of Exito. Textiles have gone into an EDLP with a big, big mix of private brand. Private brand is now more than 50% total textile sales for Exito and there is a double-digit consistent growth in this business, which at the same time helps to drive traffic into the stores.

The second big category is the fresh products. We believe that even in times of e-commerce the fresh product mixture in a hypermarket and supermarket is key, and it is deemed to be stronger than ever and we are looking to be the clear fresh market specialist in the market, and we have been transferring the know-how obtained from Super Inter when we bought it two years ago into the hypermarkets with very good success.

And finally, we have two strategies that are destined to consumer goods. The first one is called precio insuperable or the products of unbeatable products. They are a number of limited categories, around 50, but with a big combination of private brand, [Econo] and Exito brand, and destined to have the best price against even the discount market, and these categories have been growing by 104% and they help a lot for the price perception of Exito with a limited investment of margin.

And finally, we have Quincenazo, of which I spoke before, which is the same Compra del mes in Argentina and Uno, Dos, Tres in Brazil, which has been only for some months. The first results look very interesting, and they are dedicated to branded products, instead of private brands, which is the (technical difficulty) supporting a very important part of the strong commercial performance of Exito in Colombia.

That translates also into consistent operational results in Colombia, as we can see in slide number 12. The first half and the second quarter maintained consistent increases in revenues and also in margins. As you can see, sales for the second quarter were COP2.68 billion, with an increasing revenues of 7.1%, recurrent operating income had an increase of 4.2% for the quarter and 11.5% for the first half, and recurring EBITDA increased 9.6% and 14%, respectively, gaining 20 basis points against the second quarter of 2015 and 80 basis points against the first half of 2015.

It is important to speak about gross margin and SG&A. In the gross margin part, we have a progression of gross margin, which is explained by the business model of Exito that gives a lot of attention to complementary income, real estate, credit, insurance, travel, transactions, financial transactions as we serve as a place for transactions for the most important banks in Colombia.

This real estate development income, the complementary business increase, and some fees that we received from the termination of the contracts with [replay] in our shopping malls explain that increase in the gross margin. In SG&A, SG&A have an important increase, which is explained by something which is present in Colombia today, which is an increase in wages above 7%, responding to inflation, and a very important increase in new activities, responding more to phenomenon of El Nino, which we think is going to be controlled in the following months.

And also, the integration process in which we have created a structure to make sure that the LATAM integration process goes in the adequate way.

So when we look as a whole, the operational results in Colombia, they are dynamic, they are healthy, and margins are there to respond for the operation.

Going to Brazil in the following slide, what we can see is that even though sales are not what we would like them to be and are not above inflation, they are improving gradually. It is interesting to see that in this quarter total sales adjusted by calendar effect increased 4.9%, which compares against 3% in the Quarter 1, that is 190 basis points above the first quarter.

Same-store sales increased 3.2% in Quarter 2 and it compares about -- against 0.8% in Quarter 1, so this is a clear sign that recovery is coming. And more so if we speak about the main business, which is food, because in food when we adjust sales by calendar effect, Quarter 2 saw a very interesting increase in sales, even above inflation, of 11.3% and 7.1% in same-store sales.

Assai, of course, which is the winner format in Brazil, was responsible for an important part of that increase with a more than 37% increase in total sales. The good news is also that Via Varejo, coming from a very difficult situation in sales last year, got positive figures, which we believe will be consistent in the following future. With a plus 2.6% increase in sales, you can see in the chart that it compares against a minus 23.5%, which was in the same quarter of the last year and negative results in the other quarters of 2015.

Finally, Cnova is not having positive sales, but it is in the midst of integration with Via Varejo, which is going to create a very important and powerful consolidated nonfood business. At the same time, it is increasing the share of marketplace, which is very important for the future profitability of Cnova integrated in Via Varejo arriving to a 16% share of marketplace, and this process of integration, as we will speak later, is ongoing.

Operational results in Brazil are shown in slide number 14. We have a better recurrent EBITDA than in the first quarter, with a margin of 4.3%, which is impacted by two main things. The first one is better sales, of course, a 4.9% increase in sales, and the second one is an important impact coming from tax credits, which is something that is benefiting the business of the Company by taking full profit of withholding taxes of the past.

There were important price investments that were made into the market in the Q2. These are very rational decisions to invest in the market, to invest in the long term, and to get strong brands that are going to profit from the recuperation of Brazil. These priced investments were done in Multivarejo with around 160 basis points and in Via Varejo with around 70 basis points.

In the expense side, of course we can see important expenses, some of them nonrecurrent. We see expenses coming from -- there is an important effort in reduction of FTEs in the different formats, around 18,000 in the last 18 months. We have some expenses coming from the very dynamic expansion of Assai, and we have an important expense in Via Varejo because of the end of the tax relief in payroll that we had in the past, which is present in the base and is not present now in the Quarter 2 of this year.

Finally, we have nonrecurring expenses of around BRL481 million coming from Cnova investigation results, BRL127 million tax contingencies, and some restructuring expenses.

Going forward to Uruguay, slide number 15, in Uruguay we continue to have a consistent growth and strong profitability levels. Growth in revenues up 19.7%; same-store sales up 7.4%. Same-store sales are affected by a reduction in demand in Uruguay, but nevertheless, for the first half and bearing in mind the strong summer season that we had in the first quarter, we have an increase of same-store sales of 10.3%.

And the most important factor is that Grupo Disco in Uruguay is gaining market share, and it is gaining market share because of the big players in the Uruguayan market, we are the only doing a real expansion through the Devoto Express. We completed 14 Devoto Express, and by the end of the year we will be above 20 Devoto Express, which is very important because it is the way in which you can continue penetrating such interesting places like Montevideo and Punta del Este.

Going forward to slide number 16, we see the operational results in Argentina. Sales increased at 30.9%. That is below inflation, but with important market-share gains. Even if we compare it against other public companies that have revealed some results, this is a very positive progression of sales for Libertad in Argentina, most of it derived from the commercial strategy of Compra del mes.

Our team in Argentina has done an amazing job in controlling expenses, which is something very key for anybody working in Argentina. As you all know, Mr. Macri has taken decisions in Argentina, which have increased some costs for the Company, especially in things like utilities and other services, which have increased more than 80% for the quarter. And salaries have also increased to balance with inflation.

We think this is a transition period, but we think that the President is doing what he should do for the recuperation of confidence in Argentina, which we see also with the way in which the exchange rate has fluctuated in the last months and also with an expectation of reduction of interest rates.

In our own operation, real estate is an important contributor also to the operational profit, and it has helped us to maintain an adequate profitability level, even though there is a big pressure across in the Argentina market.

Going to slide number 17, we go into consolidated operating performance. Here, what we have to say first is that these results are non-comparable, and they are non-comparable because in Brazil and in Argentina we will only begin to see comparable results in September 2016, because we started a consolidation of the operations in September of 2015. That is to say that only the fourth quarter is going to be completely comparable for the four operations.

It is important to remember that even though when we speak about this COP17.8 billion in sales and COP36.3 billion for the first half, it is important to remind that in the basis, country by country, we have an increase of sales of 8% in Colombia, 4.9% in Brazil, 19.7% in Uruguay, and 30.9% in Argentina, and as a whole we have an increase of sales of 8.6% in food, which is the most important business of the organization.

In recurrent EBITDA, the margin is 4.8%, affected obviously by the biggest impact, which is Brazil, which had a margin of 4.3%, and with a very good contribution of margins coming from a the other operations.

Going to slide number 18, we have a bridge which explains the net result of the Company. Net result of the Company was a net loss of (technical difficulty) [48.8 thousand Colombian million] (sic - see Presentation, slide 18 - COP338,899 million), and it is explained basically by the net loss coming from Brazil, by the nonrecurring expenses coming from Brazil, and by the financial expenses both in Brazil and in Colombia. As you can see here, we have nonrecurring expenses of COP338,000 million coming from restructuring expenses in Brazil.

It is important to bear in mind that in the base of 2015 we had a COP60,000 million income coming from the sale of the Exito pharmacies to Cafam, which are not present this year. Here we can also see minus COP500,000 million of net financial result coming from Brazil and COP110,000 (sic - see Presentation, slide 18 - COP110,000 million) of financial results coming from Colombia, which reflect the financial costs that Exito has due to its debt.

Finally, a net loss that is reflected in the Exito consolidated P&L coming from Brazil is COP30,000 million. That is COP30 billion.

Going to slide number 19 and looking at the debt of Exito at the holding level, not at the consolidated level, but at the holding level, we see that we continue very comfortable with the guidance that we gave that the ratio at the end of the year is going to go from 3.8 times net debt EBITDA of end 2015 to around 3.2 times net debt EBITDA at the end of 2016.

Financial debt today is COP3.2 billion and $450 million. The debt maturity has an average of 3.2 years, and we have a very consistent and very important deleverage plan, focused mostly on working capital optimization, which is valued at $150 million for the complete year of 2016.

The main initiatives in this deleverage plan are, first, decreasing inventories between four and five days. The main plans for this is a productivity excellence plan at store and DC levels, with an ongoing stock strategy; the implementation of vendor management inventory strategies, especially in nonfood and for nonfood suppliers, so that we will only begin counting the days that we have to pay the supplier when the product is effectively sold at the store; and a very important in-store assortment optimization, which has a double effect. It makes it easier for the customer to look at the most important product categories and the most relevant SKUs, and also it reduces that inventory in the stores.

As an average between Carulla, Exito, Surtimax, and Super Inter, we have reduced at 20% the total SKUs present at the stores. We also have in working capital the optimization of receivables correction with a higher frequency of invoicing and, finally, an ongoing renegotiation of terms not only with good suppliers, which is normal in retail, but also with services suppliers, which is something that we have not done in a deep way in the past.

Going to slide number 20, we come to the main conclusions for the quarter and for the medium term. At the consolidated level, we have strong sales growth and solid operational performance in Colombia, Uruguay, and Argentina. As I went in depth explaining, food sales growth, driven by commercial strategies, with total food sales growing at 8.6%; a net loss derived mainly from the loss in Brazil; and the net financial expenses and the nonrecurring expenses.

Our consistent synergy plan, which is ratified in 50 basis points for 2019 with very tangible results in 2016; our clear deleverage plan to take us from 3.8 to around 3.2 by the end of the year; the consolidation of the e-commerce platforms in Colombia around Exito and carulla.com; and the ongoing consolidation in Brazil where Via Varejo is integrating the Cnova to create a very powerful omnichannel player in the Brazilian nonfood market.

In Colombia, the strong like-for-like growth of 5% in the quarter and total sales at 8%; the great acceptance of the Surtimayorista and the decision to go forward with this very modern format in South America; and the advances in the real estate vehicle through the incorporation of the trust, Viva Malls, to prepare for a private placement in the future.

In Brazil, the market-share gains at Assai, and very interestingly the improving trend in Multivarejo, which had been lagging in sales in the past and is now making an important commercial investment to create the perception needed to increase traffic and beginning to have very interesting results in market-share terms; the accelerated sales and recovery of Via Varejo; and the improved trend in operational results versus the previous quarters.

In Uruguay, the consistency in the results at operational levels, and the expansion through Devoto Express, getting to 14 stores in the second quarter of this year; and in Argentina, the market-share gains and the real estate contribution getting to a total of 14 galleries and 152,000 square meters of GLA, which makes together with Colombia and Brazil Exito a very important player in the real estate business in South America.

Looking at perspectives in slide number 21, Grupo Exito is moving forward as a multi-Latina company in the South American retail scenario as a clear leader, consolidating this operation in Colombia, Brazil, Argentina, and Uruguay and becoming also a relevant real estate regional player.

The operation in Colombia is addressing the big dynamics present in the discount market, with other entrants coming into the market in a rational, profitable way. And we are addressing it with our Aliados, with Surtimax and Super Inter leading brands in the discount market, and also with cash and carry being launched, which gives us a huge opportunity with half of the food markets in Colombia of the consumer goods market where we are not present and which is controlled by other channels, like the mom-and-pops.

With the consolidation of the real estate vehicle, as I said before, the nonfood centralization under Via Varejo in Brazil, something to be done during the second semester of this year, and exito.com in Colombia. To create that real omnichannel leader in South America, we really believe in [omnichannality]. We believe that we have what many other retailers would like to have and it is very strong virtual channels. That exito.com is now arriving to profitability is a reality; that Cnova has not arrived and it will take some time, but it is taking the measures through the integration with Via Varejo to get to consistent growth and profitability. That will strengthen our omnichannel position.

We see in the world that many retailers are taking steps forward to get to this type of market, even with acquisitions, and that in our case we have it. We have these assets, and we have now is to integrate them in an adequate way so that they perform in the way in which we all want.

Brazil, with a focus in increasing traffic and volumes, with an investment to the market to get there both in food and nonfood with Multivarejo and Via Varejo, and with a very aggressive expansion in Assai, with 10 to 12 stores still to open up, which two are conversions from Extra into Assai, which is a very important move that we have not done in the past and which is an important opportunity for sales increase.

The integration of Via Varejo and Cnova with synergies which have been quantified in [2,000, in 245 million] reais of synergy in the P&L effect to be captured mostly in 2017 and an inventory synergy to be captured of BRL325 million. And finally, the expansion of convenience in Uruguay and the strengthening of real estate business in Argentina.

Synergies will continue performing, as you can see, in a very tangible way with business models, but also with negotiations in purchasing, which is very important for the retail business. We will continue with a focus on deleverage plan for Exito, mostly concentrated around working capital. A net financial adjusted EBITDA ratio expected to go from 3.8 times to around 3.2 times, and it is important also to notice that there has been a very important evolution in the first half of the stock value of GPA. In pesos colombianos, it has increased its value at 42%, up to yesterday, and Via Varejo has increased its value, asset share value, in Colombian pesos, in 126% in Colombian pesos.

I would like to give some final comments. Exito is a Latin American company today with a long-term vision to become the South American omnichannel leader not only in size, which we already are, but in profitability and in capture of synergies and opportunities and in -- that translation of the winning format from one place to another one.

We have very important upside. We have an upside in Colombia coming from the peace negotiations; hopefully, they will go through the vote, the public vote that is coming in October, and that's an important thing for Colombia because it puts down the flag of violence which has been in the country for many, many years. The Brazil recovery, which will come, we start to see it in our sales. It will probably take some time, but we are seeing [crean] moves in the political side, which should reflect in the economics of the country. And the Argentina taking the right decisions through a transition period in which we are defending ourselves very well.

Colombia and Uruguay has strong, healthy engines, which continue at a very good velocity for this Company. Brazil, with three very important things. I would say the most important things that are being done in GPA are the integration of Via Varejo and Cnova; the Assai strengthening and expansion, very aggressive, one of the most aggressive expansions in the Brazilian market, where many companies are not expanding at all, and the Multivarejo get into competitiveness with a very clear commercial strategy with many steps, one of them the 1,2,3 sales strategy; the synergies which are evident with Aliados and cash and carry as very important business models; the deleverage market efforts going from Exito in the right direction and in line with the perspectives.

And, finally, we keep value creation opportunities, which are on the go and which we are working, the first one coming from real estate first in Colombia and then in the other countries, but first in Colombia.

The second with the complementary businesses, which have been a differentiator of Exito in the past and are being intensified.

And, finally, the monetization opportunities that we have, one of them the monetization opportunity on our customer base, which is the most important customer base in all the Colombian market and which we think can become in the future something like a second currency in the Colombian market.

These are the main messages. I want to thank you again for being present with us and we will go directly to the Q&A session.

(Operator Instructions). Mauricio Serna, JPMorgan.

Good morning and thanks for taking my questions. Just a couple of ones on the operations. First, on Colombia, a very welcomed improvement in same-store sales when taking into account the calendar adjustment. So I just was wondering if you would say this would mean there is a sustainable inflection in the sales. How are you seeing the trend? Especially also, as you mentioned, it's still a very competitive market, so how do you see the evolution of same-store sales into the second half of the year?

And also in a little while, maybe just, on the other hand, would this represent a concern, giving pretty much the sharp slowdown in the same-store sales? Would this represent also a decline in the demand? What are you seeing there?

And finally, you have mentioned your guidance for the deleveraging by the end of this year. But going forward, do you have any other goals, tangible goals, or where do you want to be in terms of leverage in future years? Thanks.

Thank you, Mauricio, for your questions. I will go one at a time.

First, about same-store sales and total sales in Colombia, and I mentioned both because it is important to get into both, for total sales, I think that total sales as we would see them and as we see them until today, they continue in a consistent way to what we have seen during the year. They continue privileging the strategy that we have, especially around the Exito brand and our discount brands. The Carulla segment has been a little slower than the others, but it is also increasing in the same-store sales.

We continue seeing a big expansion coming from third parties, but more concentrated in the discount segment, and this is the reason why we are focusing not only on Aliados, Surtimax, Super Inter, but also on the cash and carry, which is an indirect way to get control of new opportunities of sales in the informal market.

About Uruguay, Uruguay has been a stable market in the last years. Uruguay has always delivered results. There have been some quarters where it has been slightly below inflation or above inflation, but we have already been able to cost control and also through the expansion program to maintain the dynamics in the market.

In the Uruguayan market, there are three big players, Grupo Disco, Tienda Inglesa, and Multiahorro, and today of the three important players which concentrate nearly 90% of the total of the market, there is no expansion different from the expansion that we are having. The reason being is that the law forbids big services in food in the big cities, and the only way to get through this is with proximity. To have proximity, you need know how and you need to do it profitably, and Devoto Express is the only one doing it in the market of the big players.

And this is a big advantage going forward, because it is the way to concentrate our presence in such attractive places like Montevideo and Punta del Este.

Finally, about leverage, what we are seeing is a gradual and continuing effort of the Company in deleverage. This first year, going from 3.8 times to 3.2 times in a moment in which Brazil has been affected in results, in a moment in which interest rates are above what we expected last year, is very important and it has been done mostly out of internal work with our internal working capital, so this will be a continued effort of the Company.

That does not mean that we will not have the CapEx investments that we need to maintain our market share, but that we're going to do it through a combination of more intensive CapEx formats, like Exito, or less intensive CapEx formats per square meter, like cash and carry or definitely like Aliados, and other thing that permit us to maintain our market share.

But deleverage is in the center of the goal of the Company and we know that we did a big move, a very important move, for the history of the Company becoming the South American leaders, but it has a cost, that it is a cost of around $1.5 billion in leverage, but that through the internal work of the Company we are going to gradually bring that down as we also strengthen the operation in Brazil, which is a trend that you begin to see.

All right, thank you very much.

Antonio Gonzalez, Credit Suisse.

Thanks for taking my questions. I have three questions, actually, if I may. The first one is on the nonrecurring expenses that you booked this quarter. Is there any guidance of how much more would you expect for the second semester? That's the first one.

The second one is the overall price investment across countries, right? You have the Compra del mes and the Quincenazo and the Passos da Economia and so on. Per [CVD's] comments, the gross margin in their business declined 160 bps, so I wanted to see if you can help us quantify whether in other markets the impact is lower because you are further into the strategy or do you think more or less we have the same kind of magnitude across the board at this stage?

And third and final, cash from operations was pretty negative, about COP7 trillion per the press release. And, of course, most of it is coming from Brazil. In the GPA numbers, we can see the same dynamics about cash flow from operations. So I just wanted to ask if you have a guidance from your Brazilian team on what's the cash flow expectation for full-year 2016. Would you expect cash flow coming from Brazil to be at least neutral or you think it will remain negative this year? Thanks, Carlos Mario.

Thank you, Antonio.

I will begin by the second one and it is of this strong, commercial, predictable strategy which is Compra del mes, Uno, Dos, Tres, Quincenazo, the impact that it has had on Multivarejo, if it has similar impact in the other countries.

What I will say is that the impact is different in every country and it depends on the maturity of the strategy. If you go to Argentina, the impact is almost zero because most of the investment that is being done in the Compra del mes is to be today being recovered by supplier contribution.

One of the important things here is that this strategy is founded on two important things, first that you capture volumes and you capture traffic and you capture sales increase, so do you dilute your expenses. And the second one is that you get at least between 60% and 80% of it from our recovery from your suppliers.

And both in Colombia with Quincenazo, and in 1,2,3 in Brazil, that is an ongoing strategy by the Company that we'll be seeing gradual results in the future as we capture traffic and volumes increase and also we get part -- an important part of the investment from our suppliers.

The interesting thing about this strategy is that it is not deemed to go in all the products of the Company, of the consumer goods. It is not an EDLP strategy, but it is a focus, high and low, which is very consistent in time and very easy to see by the consumer because he can get in a consistent way 20% or 25% or 33% discount in the most important AAA and AA brands that he likes the most.

I am going to hand the word to Jairo Medina to give an answer to the other two questions.

Thanks, Carlos. So, good morning. Regarding the consolidated cash flows, as you mentioned, of course we have a negative effect during the first half of the year. It is normal and this is linked to the seasonality of our retail business.

The main impact we have comes from Brazil, from the working capital, and the impact is around COP7 trillion. As you mentioned and as mentioned as well, this is normal, so at the end of the year we should be neutral. We should be in line with what we had last year.

Antonio, this is Maria. Regarding the question about nonoperating expenses or nonrecurring expenses, this is a line that we tried to get outside the measurements of the companies for you to be able to analyze properly the performance and operational -- the operational level of the Company.

So, nonoperational, non-recurrent expenses regards mainly to Brazil. If you actually see the date of Colombia that was supposed to be in the second quarter of 2015, we had a positive effect of the sale of the pharmacies to Cafam. But it is an account that is not normally easy to track because it depends on particular events that happened regarding asset sales or (technical difficulty) transactions, yes.

So, it is difficult to forecast the line, as I'm telling you, and regarding the performance of Brazil in that particular line, nonrecurring expenses from the operation in the country regarded to original provision for tax contingencies and expenses related to the senior investigation and [in order] to the integration process. There is certain expenses that you know that we are seeing in the unit of Via Varejo and some asset write-off in the country.

That's very clear. If I may, would you have a guidance of whether these nonrecurring expenses in Brazil in particular might continue in the second semester or there is no specific guidance at this point?

There is no guidance. What you saw in the second quarter was in particular to the [senoia] investigation, for instance, and is not going to see that particular account affected in the following quarters because the process is already finished. So if something else arise, it will depends on any particular extra or additional effects on different accounts. But it is not easy to forecast this type of line.

That's very clear. Thank you all for your comments.

Camilo Dauder, Valores Bancolombia.

I have two questions, and the first is in regard to the EBITDA margin expansion. Can you tell us in which extent this increase comes from the complementary business and in which extent it comes from the weaker business?

And the second question is about the real estate fund. Can you provide us some more color about the process? How or when do you expect to finish it? How many participants are still in the process? Thank you very much for anything you can tell me in this regard.

First of all, the EBITDA margin expansion is coming almost all from the complementary businesses. In the retail, we are keeping our margins with a very positive contribution from in Carulla and from -- and with some investment, controlled investment, both in discount and in the four strategies which I told you about in exit. But credit, insurance, travel, real estate, financial transactions have given us some additional profitability, which permits us to keep very competitive in a market which is quite dynamic while maintaining our EBITDA margins.

This is very important because if you look at the Colombian market and you look what has been happening at different margins, you see that probably one of the only margins that keeps in a very healthy way is Exito's. And it is a combination of being aggressive in the market, keeping what is very near to a 40% market share when we have many other participants in the market, so one year after another one, we have been increasing our market share and today we are at 40%, even though if it is no longer a three-player market, there are five or six players, but we still continue with our market share.

But at the same time, we have not done it at the expense of the profitability of the Company, while maintaining a clear segmentation where the prices of our discount formats are at the level of the discount format entrants and the other margins are at 100% in the case of Exito and a little higher in the case of Carulla because of the value-added proposition that it has to customer.

Going into the second question, which is the real estate process, it is very difficult to say when this process will be concluded because we are in the process of having the offers, analyzing them, going in negotiations with the different alternatives, and that takes some time. For the moment, what I can say is that we created the trust. We made the contribution of 13 operating shopping centers and galleries and six projects, of the main projects of the Company, that in this trust the different projects are being developed at this moment, that we have a total 360,000 GLA in this trust and we have an additional 170,000 GLA which is not been contributed yet because it can only be contributed in 2018 when the legal stability contract of the Company ends.

And also, what I can also say is that we continue at full speed with our projects. Barranquilla, which is going to be the more main shopping mall in the north coast of Colombia with 64,000 square meters of GLA, is going to be opened in the first week of November. La Ceja, which is going to be a very interesting shopping mall for these new development area around the airport of Medellin with 10,000 GLA is going to be opened by the end of this month or the beginning -- the first week of October.

And Envigado, which is going to be probably the most important or one of the most important shopping malls in all of Colombia, and clearly the biggest in Medellin with 133,000 GLA, is already in construction, as you can see when you go through the headquarters of the Company.

To give a prediction of when we will be doing the closing is not easy because these things do not depend only on the Company, but they also depend on the market.

Thank you very much.

Miguel Moreno, LarrainVial.

Thank you for taking my questions. I have two questions. The first is regarding [sensealing] in Colombia. Can you give us a breakdown of how is traffic doing? How is prices doing?

And [with understanding] regarding margins in Colombia, since we have seen the last two quarters that in Colombia was going up there was [appeal] to 20%. In the quarter, it was close to 10%. So, what we should expect for coming quarters? What we saw this specific quarters it was that we saw a good increasing gross profit and gross margin, but also the SG&A did increase to 1%. So can you give us more color about how sales G&A are going to be in coming quarters, and if this EBITDA growth will be close to what we saw in the first quarter or what we saw in the second quarter? Thank you.

Miguel, could you please repeat your first part of the question? I could not get it well.

Sure can. The first one or the second one?

The first one.

Sure. In [central] sales in Colombia, can you give us a breakdown of price and traffic?

I'm going to give you -- we try not to be completely specific on that because, of course, it forms part of our competitive strategy and we have competitors who hear these things.

But what I can tell you is that we have an inflation in food in the Company, which is below the inflation in Colombia. That is that we are retaining an important part of that inflation. Our inflation in food is around 8%.

Second, that our inflation in nonfood is around zero because we have an important strategy of deflation in textiles to gain market share with productivity in our supply chain and increasing volumes, which is paying off, which is very interesting as a strategy. And then as a combination, year on year we're having an inflation inside the Company, which is below the national inflation, and it is between 5 and 5.2. And I'm going to hand the second part of the question to Maria.

Hi, Miguel, this is Maria. The reason why EBITDA is growing lower than the growth you see in gross level is because we have higher depreciation and amortization levels in the second quarter of 2016.

This is an adjustment that accountability regard to Uruguay and the assets we have in Argentina, so you have some adjustments on a consolidated level regarding those operations. And the growth explanation, just Carlos Mario delivered in the question before.

Thank you, and can you give us a [specific] in Colombia with SG&A?

SG&A in Colombia grow higher than the ones posted in the previous year, coming from increased SG&A related to integration process, the 7% increase in the wage base and also in regard to utilities. Our utilities, energy, for instance, have -- grew by, in fact, 20%, so all these extra expenses affected the SG&A level.

Federico Perez, Bancolombia.

Thank you for taking my questions. I have two questions. The first one will be, could you tell us what stake of the revenues coming from Argentina belonged to the real estate business and what stake belongs to retail business? I would be very pleased if you could give me the information for the two quarters you have reported up to now.

And my second question is regarding Brazil. During the quarter, you presented a decrease in the profitability coming from the food business. This is in line with the discounts you have made trying to boost the purchase of the Brazilians. So my question is, how do you see the performance of these discounts for the coming quarters and their impact in margins for the financial results? Thank you.

First, revenues coming from real estate in Argentina, the contribution of real estate revenues to the total profitability of Argentina today is around 60%.

And in previous quarter, I don't have the exact figure, but it was less than that. It was three or four points below, and what we think that in the future as we are in the -- we're increasing the level of rents because there is increasing interest in the world tenants to enter Argentina, which is a fact. And number two, we're having synergies between our real estate team and the Argentinean real estate team, and that's -- one of the most important parts is revenue management and our real estate team has been doing that for a long time. That is going to improve.

And three, we are having expansion in real estate in Argentina, growing this year probably -- as you saw it, we already had a new project and we have 50,000 GLA for the following three years. So, gradually, we believe that there is going to be a higher impact of real estate revenue in the Argentina profit.

And that's good because it helps us in this moment of transition to get to the point in which the country is completely stabilized.

As of Brazil, I want to be very cautious about the kind of investment that we are having today in prices in both in Multivarejo and Via Varejo, and I would only repeat what GPA has said publicly and it is that there is an ongoing strategy to continue to be very competitive in both businesses and that there is a big ongoing initiative also to get an important part of that investment both from volume increase and from contribution from supplies.

Perfect, thank you.

(technical difficulty). [Sebastian Gutierrez], Bancolombia.

Good morning and thank you for the call and for taking the questions. The first question is about deleveraging. The deleveraging you mentioned is going to be achieved by a reduction of net debt or by increasing the EBITDA?

The second question is your view on inflation and how same-store sales can follow inflation in Colombia.

And the third one is, do you have any additional comments on the very low EBITDA margin in Argentina? Given that 60% of income comes from real estate, it is usually a high-margin business. Thanks.

I'm going to take the first two and then I will hand it to Jose Loaiza, our International VP, about Argentina.

Deleveraging, in this calculation we are keeping EBITDA stable according with our calculations made at the initial part of the year, as you have seen in the results of the first half, and so the reduction in the ratio is coming from a reduction in net debt.

Number two, about inflation and same-store sales, I think that the most important part here has to do, first, with the fact that retail in Colombia is growing very little. Second, that our price index is below inflation, as I told you, something between 5 and 5.2.

And so, our goal is to continue to be competitive in prices and try to absorb part of the inflation and not to translate it to the customers. And I'm going to hand it to Jose now.

Thank you. This is Jose.

When you look at the margins in Argentina, they are somehow at historical levels. We don't disclose the breakdown of the P&L of real estate and EBITDA margin, but when you calculate the EBITDA margins of the real estate, it also takes into account as a denominator the sales of retail that brings the EBITDA margin of the Company as a whole down. That would be the technical answer for that.

But given that income of real estate is around 60% of total income, as I don't remember who mentioned just before, that denominator shouldn't affect the margin that much.

Thanks for your question. It gives us a chance to give some clarification. When we said earlier about the 60%, we were talking about 60% of the EBITDA of the Company, not the net revenues or income of the Company, so that probably would need to be clarified.

Okay, thanks.

We have no further questions at this time. Mr. Giraldo, do you have any closing remarks?

Yes. I think we still have a question (multiple speakers)

Katina Metzidakis, Deutsche Bank.

I just had a couple of really quick questions. First, regarding the increase in SG&A, given that the integration of CBD in (inaudible) began in September of last year and just based on what you said about electricity cost and the El Nino phenomenon, is it safe to assume that these expenses should increase at a lower rate into the second half of the year versus what we saw in this quarter and potentially even growing, I guess, at a lower rate than cost of goods?

And then my second question is just any update on your thoughts about the potential for VAT increases in Colombia, timing around this, and how you are positioned to deal with any increases, particularly, I guess, versus competitors. Thanks so much.

Thanks a lot. First, SG&A is coming from integration. Integration started September. Really, most of the effort has been done during the first half of this year, so we will only have the integration costs in the base next year. So we still will have some integration expenses during the years that have no base comparison.

To be frank, the structure that we created for this is not a heavy structure. It is a light structure, but most of the costs come from traveling because we have to have the teams all over the place, taking the business models from one place to another one, and that is important and we will have them in the base, I would say, beginning to start in September, October of this year.

Number two about VAT, the government has been quite secretive about what is going to be included in the tax reform. We have the inform that was produced by the commission of specialists that was named for this, and if we guide ourselves from this commission, this tax reform is not going to have additional burden on corporate taxes, number one.

It will probably treat as it was decided in the beginning as temporal the tax on equity, and so that when the tax on equity is -- the term is ended, there will be no additional tax on equity. And it will increase VAT taxes and simplify it to two, three, or four levels according with if it is a basic product or if it is a luxurious product.

Frankly, I think that VAT tax is the best solution. I know it can impact some sales in the short term, but I think Colombia needs those income. I think that if it is done in a right way, so that basic products get taxed at a very low rate and luxurious at a high rate, it is going to be also equitable and just, and I think that taking all the products into VAT helps a lot the fight against tax evasion, which is an important objective for Colombia.

This is not popular and not easy, but myself, I am supporting that it will be done because I think it is in the best interest of the country, and, of course, of the companies because it also is going to contribute to the fact that Colombia maintains its investment grade as country and economy.

[Marie Ramides], [Casa La Bosa].

Thanks for the conference and taking my questions. I have just one question. I would like to know what do you see for the third -- [fourth] quarter? How is Colombia, Brazil doing in terms of sales and margins?

It is not easy to speak for the complete year, especially in Brazil where things are changing so much. I mean, you know what's happening today. Today, we are going to have a big difference according with what happens in the Congress of Brazil. So I would be very cautious on Brazil.

I would only speak for the reality, and it is that our sales in the Q2 were much better than in the Q1, that nonfood has recuperated, that we are seeing that that recuperation in nonfood is consistent, and that Assai, which drives food recuperation, continues in a very strong expansion mode.

For Colombia, I can speak for the third country -- for the third quarter, excuse me, and what I can see is that it continues in a very similar way to the first half until today, and that even though the consumption has been affected, we still see that there is a positive trend in sales.

Okay, thank you.

We have no further questions at this time. I would like to turn the call back over to Mr. Giraldo for closing remarks.

Thank you very much and I want to thank you all for being with us today.

Grupo Exito is playing for the long term. Playing for the long term means taking the decisions to create stable, increasing profitable Company for our shareholders. Those decisions mean, first, that we have to work in deleveraging, and we are doing so and the numbers are there and they are going to be delivered by the end of the year, and the team is focused there.

The second thing is that we have to work in integration and you saw synergies. It is only looking at the pictures when you see a mom-and-pop with a CompreBem brand opening as if it was in the outskirts Of Bogota. You see that really things are happening between Sao Paulo and Bogota.

The third thing I wanted to say is that of course we are going through difficult economic moments in the region, especially in Brazil and in Argentina, but I really think that when we look a couple years from now back and we see the recuperation of these economies, we're going to see the big, big upside that this investment and that this operation has for Grupo Exito. It is not easy to say that in moments in which sales in Brazil have been hit and expenses are affected by inflation.

The important thing that you have to ask yourself is, do you have the right management, and I think that we have the right management in LATAM. Second, are you taking the right decisions, and I think we are taking the right decisions. Integrating Cnova into Via Varejo makes all the sense of the world and you can see that the stock market has recognized that in the value of both shares, especially in Via Varejo.

Expanding to Assai with 10, 12 stores. Making some conversions of Extra into Assai makes all the sense of the world, and it is being done without any delay. Introducing the winning concepts into the other countries is something that we should have done, we said we were going to do, and we are already doing, and cash and carry in Colombia is a good proof of what is happening.

And the good thing is that while we are going through these transition moments in markets as important as Brazil and in Argentina, in Colombia and in Uruguay we continue with the engine at full speed. And that's very important because that provides the gasoline to look forward to the future.

I want to say the team is fully dedicated to do its job and to do its job not for the short term, but for the long term. I would say, for example, if we were short-term oriented, probably it would be a good decision not to invest in prices in Brazil and not to invest in prices through 1,2,3. And probably you would get a short-term better EBITDA, but you wouldn't be assuring that the Extra brand is going to be strong for the future of the Brazilian market, which is something that we should do.

I want to thank you very much and also to remind you that other than retail what makes Exito different is that it has other monetization strategies around the traffic of our customers, that our real most important asset is our customer, the traffic of the customers, and that out of that we have things as valuable as real estate, as customer base and traffic database, as credit and insurance, which has helped us in different times and will help us to continue nurturing the future. Thank you to all.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.