Almacenes Exito SA (EXTO) 2016 Q3 法說會逐字稿

Good morning. My name is Richard and I will be your operator for today. At this time, I would like to welcome everyone to the Third Quarter 2016 Earnings Release Teleconference. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you for your attention.

Maria Fernanda Moreno will begin the teleconference today. Ms. Moreno, you may begin.

Thank you, Richard and good morning everyone. We appreciate your joining for today's Grupo Exito's call. At this time, I am pleased to present our Chief Executive Officer, Mr. Carlos Mario Giraldo; our Chief Financial Officer, Mr. Manfred Gartz; and Mr. Jose Loaiza, VP of International Business. We will be following the slide presentation that is available on our website, also available via the link provided with the conference call details. The agenda for today's presentation is on the slide number two, where we'll be covering Grupo Exito's operating highlights for the third quarter 2016, followed by a review of the Company's expansion strategy. We will then comment on the consolidated financial results for the quarter, the Company's international strategy, conclusions and perspectives. The call will conclude with a Q&A session.

Before starting please move to slide number three to see the disclaimer related to additional information that we will include regarding the quarterly financial pro forma of Brazil and Argentina, intended to make Company's year-over-year base comparable, taking into account that the operational results of these operations began consolidating [for September] 2015. This pro forma information and additional data regarding debt, expenses and CapEx is displayed as appendices at the end of the presentation; and conclude with Grupo Exito's effort to consistently improve disclosures. We expect that you find this information useful in reviewing the Company's sum of the parts valuation process. The information presented was also subject to adjustments as the consolidation process moved forward.

Thank you for your attention. I will now turn the call to Mr. Carlos Mario Giraldo, for his comments.

Thank you very much for your presence today. I will go directly to slide number four, speaking about the operating and commercial highlights of our Latam operations. The first thing is to say that our integration of the four Latam operations and the synergy process are going on track, meeting the expectations that we have to capture a recurring impact on EBIT out of the synergies between $20 million and $25 million this year in something that is gaining permanently speed quarter after quarter, as Mr. Jose Loaiza will explain later.

For the quarter, we have very positive market share trends in all the Latam operations, gaining market share in the four countries. We can say that hypermarkets, especially Exito in Colombia, Libertad in Argentina and Extra in Brazil had a very positive market share trend during the quarter. And textiles were a great contributor in Colombia, out of a very mature business, but also through its introduction, the new model in the new countries. We have challenging macroeconomic variables in the region; everybody knows that, out of devaluation, low growth and high inflation. But they were partially offset in the operational result by the initiatives in cost expense caught in the different countries.

Let's go to Colombia. Colombia had the best quarter in the year, no doubt about it. Very strong sales, plus 10.6% for the quarter, and like-for-like 7.3%, with a calendar effect of 2.6 points. And it compares, especially favorably, when we see the retail sales in Colombia, which have been going down, and in the last Q, saw only 0.1% increase. This shows that there is a special dynamism in our commercial strategy and mainly in that of the most important brand in Colombia, which is Exito. We had a resilient operational performance, notwithstanding the high inflation and its impacting costs and the partial impact we had out of the transport strike in Colombia, which especially impacted costs, because we had to do special additional efforts in order to mobilize our merchandise.

In Brazil, commercial activities saw a very interesting trend quarter after quarter, especially in the food market. We continued doing margin investment as we have said in previous quarters. And the good news is that this margin investment has had very important results. We are seeing increasing volume, increasing traffic and increasing market share gains, which is now something that has become very traditional in our Assai cash and carry. But the good news is that it has now been translated into Multivarejo, and especially into the Extra brand, and its hypermarkets, which are a core part of our commercial strategy. There was a solid 14% growth in Brazilian reais in sales in the food segment, which is much above inflation and it is the strongest that we have seen since the third quarter of 2014. That is, that we are seeing a recuperation after two years of crisis in the food segment, which should bring us much better operational results in the future.

In Uruguay, as usual, we have a very stable operational performance in local currency, and we continued to see market share gains, mainly through our expansion of the Devoto Express, really the only format that is expanding today in food, in such a valuable market as the Uruguayan.

In Argentina, our hypermarkets in Libertad have been gaining market share, not only against hypermarkets, but against the total market. And it has shown a very interesting capacity to adapt to a tough transition year in Argentina, characterized by huge inflation, near to 43%, and very high devaluation. And clearly, we remain in black figures in positive terrain, independently of the high pressure that inflation has had in the operation. Real estate expansion has contributed in a very positive way.

Going forward, to slide number 5, we speak about expansion strategy, not only in retail, but also in real estate. In retail, we had a total CapEx investment of COP515,000 million, 68% of that into expansion. In retail expansion, the focus of our stores was in Exito stores in Colombia and Assai stores in Brazil, where we have had a pace very similar to one Assai store per month.

In real estate, in Argentina, we continue developing our footprint in real estate, which is especially important to balance inflation and devaluation. Salta Shopping Mall, we opened with 13,500 square meters and arrived to a total 160,000 square meters of GLA in Argentina, as you know, concentrated to the province outside of Buenos Aires.

In Colombia, we recently announced that we arrived to an MOU with Fondo Inmobiliario de Bancolombia for the launch of our real estate vehicle under the name and the brand of Viva Malls. This is expected to have a closing in the following days, for a total investment of our partner of COP770,000 million, for a 49% share of the real estate vehicle. Here, Exito will keep the control of the vehicle with a 51% stake and will render to the vehicle the services of development, commercialization and operation of shopping malls and commercial galleries. The overall portfolio value is COP1.6 billion by the end of 2018. The portfolio includes 14 assets, 10 assets that were operating by the start of this year, two assets that continue under construction; Envigado Shopping Mall, and [Tunga] Shopping Mall; and two assets that recently opened some days ago, Barranquilla and La Ceja. It is important to say that out of the total 440,000 square meters of GLA, 48% of that is constituted by projects that have been financed by the vehicle this year and that they will be funded until 2018, and 80% by the vehicle. This creation of the vehicle and the entry of our partner was negotiated under a very competitive cap rate that in a due moment, we will reveal to the market. This gives us also a medium and a long-term vision, because it's not only this portfolio, but Exito has committed to continue contributing new developed assets into the vehicle, and also to offer the vehicle in 2018, some of its most important shopping malls, which remain today under Exito because of tax legal considerations, and this will be something between 160,000 and 180,000 additional GLA to be offered and potentially contributed in 2018.

If we go to slide number 6, we see some pictures of our two most recent openings in real estate. The first one, to the bottom is La Ceja, a 10,000 GLA. That is a very interesting model, on our capacity to expand real estate to intermediate series of Colombia. But really the news, not only for Exito, but for the Colombian shopping mall environment has been the launch of Barranquilla Mall some days ago, a week ago. It is great news for the country, it is the biggest shopping mall to the north of Colombia, and the sixth biggest in that total country, with a total GLA of 65,000 square meters and more than 200 commercial units at 93% occupation and it has been a great success in its first day, and big news for the Colombian consumers.

Going forward, to slide number 7, we can see the sales performance in Colombia. Very strong sales performance, driven basically by our hypermarket business. As you can see, total sales increased 10.6% and same-store sales 7.3%, with a calendar effect of 2.6%. It was the Exito brand which drove the big increase in sales, even though the rest of the brands and the formats also had a very stable performance. But Exito increased 12.8%. Non-food had an increase of 15% and food of 8.8% within the Exito brand. Textile had a very interesting increase, historic in the last years of the Company, of 26% and fresh products were also very dynamic with an 11%. Our unbeatables, which are designed to create price perception and to compete against other low price competitors; and [Kintenasu], which is the same one, two, three [parts of the economy] of Brazil were very important for the increase in our food business.

And another news in the Colombian retail, we continue with a very good performance of our first cash and carry, which permits us to say that it will be an ongoing opportunity for expansion for the organization. Aliados arrived to [1,250] -- Aliados Partners, and they are a very differentiated way of penetrating that traditional informal market. I would make focus on the graphic that we see at the bottom, where we see that as Exito in calendar comparable figures continues with our very strong dynamism. The market is in the different trend. The market was very near to zero, which shows the strength of our brand performance, of our proposition to the consumers and the resilient condition of the business.

I will pass now the word to Mr. Manfred Gartz, our CFO, to speak about the financial results.

Thank you, Carlos Mario, and good morning to everyone. I would like to ask you to please move into slide eight, as I want to comment on the operational performance in Colombia.

First, quarterly net revenues rose strong by almost 11% to COP2.8 billion. It was due to the strong sales growth mentioned previously by Mr. Giraldo, and the strong progressions in the Company's complementary businesses that rose over 70%.

Gross margin was 24.5%, from higher cost related to the negative impact of the transportation sector strike in July, and also from lagging effects of El Nino still affecting the inflation. As a result, the gross margin decreased by 40 basic points, related mainly to inflation of the food prices. Additionally, there was a 25% increase in the logistical costs, partially offset by improved productivity levels, mainly in shrinkage initiatives.

SG&A rose, related to higher inflation levels and was affected by the wages and general expenses. And those general expenses mainly is in utility bills and maintenance. Occupancy costs also had a hike in inflation. Finally, recurring operation income margin was 4.2% and it was pretty much in line with the overall year-to-date results, whereas the recurring EBITDA margin was 6.2%, with a very slight decrease versus the year-to-date.

Moving forward to slide 9, we will start reviewing the performance of all of our international operations, and let's start with Brazil. The consolidated sales at GPA reached COP13 billion in the third quarter. That means a 4.4% growth and same-store sales growth of almost 2% in local currency. During the quarter, the food business, and that means Multivarejo and Assai, grew by a strong 14%, the strongest in two years. This was despite the closure of 41 stores in the last 12 months, demonstrating great resilience in an adverse macroeconomic environment in Brazil. Like for like levels were almost 9%, the highest in the last three years, reflecting the effectiveness of the commercial strategies implemented at Multivarejo and also from the strong sales trend at Assai.

As for the Extra brand, like for like levels of the food category grew 500 basic points, driven mainly by the commercial activities implemented since the second quarter of this year that allowed the brand to achieve market share gains in volumes.

As for Assai, the format showed significant sales growth, as it has shown all over the year, improving even its own strong trend. This includes three openings during this quarter and we are summing up 12 during the last 12 months, and finally, Assai's solid double-digit same store sales growth significantly outpacing inflation.

In the non-food segment, and that's Via Varejo, it continued its recovery during the third quarter and posted a 0.4% sales growth and 1.8% like-for-like growth. The Via Varejo performance was still above the market and took place despite the impact of store closures and a very challenging macro environment, demonstrating its capacity to adapt to current market conditions.

And finally, CNova Brazil on the e-commerce category continues focusing on improving customer service and increased its market share by over 900 basic points. That means 21% increase.

Please see on slide 10 the operational performance of Brazil. Now in COP, net revenues grew over 40% in the quarter, versus same last period on a pro forma basis. I think that even shows a stronger trend versus the pro forma year-to-date of 5%. Gross margin at a consolidated level grew 10 basic points to 25%. Brazil posted a margin contraction Multivarejo from maintaining competitiveness at Extra that was offset by a slight recovery in Assai, and a margin expansion in Via Varejo, derived from the sales mix, market share gains, and higher profitability. Also, comparing with the pro forma, the quarter shows a strong performance with a 15% growth of the gross margin versus the year-to-date 5%.

Recurring operating income also posted a margin of 2.3%, derived from SG&A that includes strong organic expansion at the Assai banner and reflected the streamlining initiative at Multivarejo and Via Varejo. Nonetheless, GPA continues to experience a more disciplined expense control that is reflected in the SG&A growing in pace with inflation. This can be witnessed in our 7% decrease in the quarter, against the 37% increase in the year-to-date basis. Finally, recurring EBITDA was 3.8% for the quarter, and also for the year-to-date, once again, decreasing only 0.4% versus the year-to-date of 24%.

Let's move now please to slide 11, and let's review the operating performance in Uruguay for the quarter. When we see the sales, the sales grew over 9.3% in the quarter in local currency, and about 2% in Colombian pesos, and that includes obviously a negative FX effect. Sales benefit for the implementation of the commercial event Ahorra in all banners, strong sales levels in Devoto, and increased sales contribution from our Express format and positive strength of the food segment, mainly in the fresh category, PGC and entertainment. Same-store sales reached 8% in local currency.

The Uruguayan operation continued expanding the numbers of convenience store with six new openings in the quarter, and reaching 20 Devoto Express year-to-date. As of today, the convenience formats contribute for about 1% of the total market share in Uruguay. The recurrent operating income grew 25% to a 4.8% margin, and benefit for a stronger gross profit level and from operational efficiencies, such as lower occupancy expenses and that were partially offset by higher general expenses, labor cost increase derived from unions negotiation and marketing expenses. Finally, on a year-to-date basis, recurring EBITDA posted a 7.8% margin, demonstrating consistent growth and healthy profitability levels.

Please move now to slide 12 and have the discussion on Argentina. So, first, I think it's important to mention that despite an adverse economic environment, Libertad sales totaled COP308,000 million and posted about 23% growth in local currency, in both sales and like-for-like. Although growth underperformed inflation, I think it's working out, in that the Company grew above the market and gained market share in both Minis and supermarkets. We expect this to be a transition year and we expect a lower inflation environment in the upcoming months and years. The stronger performance came actually from the proximity format and the food category, mainly in the fresh line, driven by the positive effect of La Compra del Mes commercial strategy. The food mix grew over 500 basic points in the quarter and ended being about 75% of the mix -- 74%, 75% of the mix.

The non-food category continued lagging with the entertainment as the most affected line and I think that's something you can expect, as the economic activity in the country, as you know, remains challenged due to lower consumption, high interest rates and high inflation levels. Also, the resilient performance of our real estate business in the country is visible through the year-to-date contribution from the other revenue.

Just to close the Argentina, the recurring operating margin was 2.7% in the quarter, similar to the year-to-date, reflecting a gross margin deterioration from increase in SG&A, from higher operating costs derived from the increases in utility costs, labor costs due to union negotiations. I think what is worth noting is that the Company's operational efforts led to expenses that actually grows below inflation. The recurrent EBITDA was 3.6% for the quarter and in line with the year-to-date.

Please look at slide 13, to have a look at the Group consolidating operating performance. As you can see on the consolidated topline figures, posted positive growth of about 12% pro forma, higher than the year-to-date 6%. Net revenues growth shows the commercial strength across all four countries. I would like also to highlight the strong growth of the food category that was over 16% and the increase is a stake of the all-over revenues, driven by the contribution of the complementary business that actually monetized the traffic that the core business brings to the stores.

Gross margin levels in the quarter and the year-to-date remained stable, despite the continued challenging consumer environment in Brazil and the inflationary trend in all the regions and the overall price-driven strategy for the Company to maintain competitiveness.

As of SG&A, margins in the quarter and year-to-date reflects at some point the inflationary effects present in the region, causing higher salary levels, occupancy and utility cost. Nevertheless, the Company still focuses on increasing its productivity and cost cutting initiatives and to partially offset this inflationary effects. One example is, as you know, the decrease in labor by 7,000 FTEs year-to-date in Brazil.

Recurring operating margin was 2.7% in the quarter, aligned with the year-to-date and that reflects the Company's productivity efforts during the quarter and the unstable recurring EBITDA margin of 4.2% in the quarter still reflects this. Finally, the net income attributable to Exito resulted in a net loss for the quarter of COP100,000 million. I would like you to move to the next slide to further discuss this.

On slide 14, I would like to make a breakdown of the net results. First, I would like to start with saying that we have a strong operational result in Colombia for the quarter of about COP150,000 million. That was offset mainly by; first, net financial expense in Colombia of about COP125,000 million, that was financial expenses that at some point also reflected the 300 basic points repo rate increase year-to-date, and the increased tax provisions. And finally, we also have the impact of a net loss from Brazil attributable to Grupo Exito of about COP24,000 million.

Then on slide 15, I would like to depict the net debt position at the holding level for the quarter. That includes approximately COP3.1 billion of debt and $450 million debt. During this quarter, we have an amortization payment of almost COP100,000 million made in August. We still confirm our expectations that we might end up this year, by the end of the year, having a net debt adjusted EBITDA ratio of about 3.2x, and that means some significant lowering component with the starting ratio of 3.8x. The Company's strategy to achieve this target relies on a clear deleverage plan that works mainly from working capital optimization that shows about now -- something about $150 million, increased productivity and cash centralization at the holding level, amongst other initiatives.

So at this point, I would like to turn the call over to Mr. Jose Loaiza for a follow-up of the Company's international strategy and the synergies process.

Thank you, Manfred, and hello everyone. It's been over a year within this integration process. A year ago, we had the chance to talk to many of you about our plans for the region. At that time, we had what we call a PowerPoint presentation. A year after, we are very pleased to show you a real execution on the field.

On the slide number 16, would like to begin with the implementation across the region of our unified commercial strategy, what we call one, two, three steps for savings. If you go to the floor to our hypermarkets and supermarkets in Brazil, Colombia, Argentina, you might see this all over. We have also implemented it in Uruguay, in an in and out basis. Results have been encouraging, as Carlos Mario said, gaining market share in a like-for-like basis in all of our markets, with no exception, growing tickets and volume, and this strategy proving to be very successful, competing against the discount formats.

Going to slide number 17, you see the type of synergy that we call replication of business models. On the top, at the right, you may see our SurtiMayorista in Colombia inspired by the cash and carry experience of Assai in Brazil, with very promising results. This store was not built from scratch, it was a conversion. And so far, the sales per square meter have more than doubled what it was before. We are so encouraged that we are planning on having two or three of those for 2017.

On the bottom, you may see the implementation of the Aliados business model from Colombia in Brazil under the CompreBem brand. On the top bar, you may see the before and after look and feel of [Allies] already implemented in Sao Paulo. Performance so far has been above expectations. We are on track to meet the 100 target for 2016 and we plan on doing 300 for 2017.

Going to slide number 18, and continuing with replication of business models, you may see the deployment of the Colombian textile strategy in both Brazil and Argentina, in Brazil through three extra pilot stores and in Argentina through three Libertad hypermarket stores. Results have been very encouraging, with these pilot stores doubling the EBITDA in the section of textiles that they had before, and also increasing significantly within the sales mix of these stores. We believe, as in Colombia, that traffic and margin contribution increases when you have a healthy textile business and this is what we expect for 2017 when we finish the rollout in Libertad, when we deploy the initial rollout in Brazil and also we will begin working in Uruguay.

Going to slide number 19, purchasing is a common synergy within any integration process. We are very pleased with the organization we have come up with to buy commodities together. As of the quarter, we have bought a total of 140 containers, more than doubling the number that we obtained at the end of Q2, getting savings between 5% and 15% and we are talking here about fruits, salmon, olive oil and so on. And we truly believe that this is just the beginning. We are getting the right structure to profit on this and in 2017, we expect to go at full speed. Also, as we speak, we have renegotiated most of our top agreements with the top multinational corporations from food and non-food, improving our terms in these businesses.

On the bottom, we like to briefly show that this integration has also been an opportunity for local vendors to expand their retail exposure to other countries where we have presence. As you may see in the top left, coffee from Colombia and the other countries; in the top right, Argentina meat; in the aisles are the other countries. At the end, this increased exposure is valued by the vendors and we also get improved terms from these transactions.

I like to wrap it up in synergies by saying that as Carlos Mario mentioned, we had a target of reaching this year between $20 million and $25 million. We are very confident with a quarter to go that we will get there and we are being ambitious for the coming year. We expect at least to more than double the amount that we will get in 2016.

Having said this, I turn it over to Carlos Mario to go on with the call.

Going to slide number 20, some words on Via Varejo. The announced integration of Via Varejo with the CNova assets in Brazil was finally executed during the quarter, with very good results and very well received by investors, especially in the quotation of the stock of Via Varejo. It was done under very strict governance rules, creating the omnichannel non-food leader in Brazil. Synergies to be captured, as were said before, are BRL325 million in working capital, many of them starting to be captured during the fourth quarter of this year and BRL245 million in recurring EBIT, most of them to be captured next year.

Some weeks ago, the announced process of looking for strategic alternatives for the integrated business of Via Varejo and Nova was announced and decided by the Board of GPA and supported by the Board of Exito. Later, this announcement was more precise, saying that a sale process of the company has been started. I would like to make emphasis on the clear strategic rational of this movement. First of all, it goes in the right direction of simplification of the structure of GPA and thus, of the structure of Exito. When we started one year ago, we had four public companies. Today, if we do this move, we're going to end with two public companies; Exito and GPA, and two public companies completely focused on the food business and with our non-food business, proper of the hypermarket format.

The second thing is to focus on food. To focus on food, because really when we put together the four operations in the region, we are the food leader and there is where we have the maximum of our comparative and competitive advantages, and also because it is the business that has the best EBITDA margins and also the best ROI coming from the business, as compared with the non-food business.

The third rational is that we have today two battlefields, one for food, and one for non-food. And in all the battlefields we have important competitors. So, to concentrate the resources in the most profitable battlefield, with still very important possibilities and potential for expansion makes a lot of sense. And finally, it gives us the opportunity to strengthen the financial structure of GPA and thus the financial impacts for Exito and the capacity the GPA has to expand in such a successful formats as Assai or Pao de Acucar, our premium food.

Going to slide number 21, we have the main conclusions, many of them have been spoken today, only to put them, to wrap them in one page. In Colombia, very positive commercial performance, above market, with sales at plus 10.8% as compared with what happens in the rest of the retail, that is flat. Number two, recurring EBITDA at a very healthy level of 6.4%, as the margin showing the resilient business model of the Company, and with a positive evolution of our EBITDA in the accumulated of the three quarters.

In Brazil, the best quarter in two years in the food business, with plus a 14.4% evolution and with Assai consistent in its sales growth, but with the novelty of Extra's rebound in its same-store sales and its market share gains. And in Brazil, the Q3 pro forma that we showed, can be very interesting, because you can see a progressive recovery in sales and profits, if you compare it with the year-to-date figures.

In Uruguay, consistency in its operational results and market share gains and expansion in proximity. In Argentina, a stronger performance than the market and most importantly, a very important work to be able to counterbalance a huge transitional inflation of 43 points against a very positive increase in sales of [23 points], much above what happens in the rest of the market.

Finally, at the level of Latam, we see the net results impacted, especially by the financial expenses in Colombia, the higher taxes in Colombia as compared with previous quarters and the net loss coming from Brazil. Financial deleverage continues at the holding level with a net debt to adjusted EBITDA ratio going towards 3.2x from 3.8x in which we started the year. Synergies arriving to $20 million to $25 million as was explained before, and Viva Malls' private placement very near to be concluded with a total valuation of our vehicle of COP1.6 billion, of which 48% are projects that are being financed through the vehicle.

Perspectives, slide number 22. In perspectives, what we see is in Brazil our food business with a gradual, permanent and consistent improvement in commercial activity, as a result of the strategies of which we have been speaking in the last quarters. Quarter number four seems to continue in the same direction with a permanent improvement in food. Customer traffic, volume improvement and market share gains are also consistent and market share gains coming, not only now from Assai, but also from Extra as compared with other hypermarket competitors.

The second thing is Assai continues with its aggressive and accretive expansion. And the first Extra conversion into an Assai was done in November. It was pilares story in Rio de Janeiro and the first sales were more than twice what it sold before as an Extra store. Eight Assai stores are under construction and it includes another conversion from an Extra store into Assai, the [Sumbisent] store, which will be opened in the next days.

For 2017, we have identified a number of potential Extra popular stores that are not very productive under the Extra brand and that have a very important potential as an Assai store. We identified between 10 and 15 conversions to be done during the next year without sacrificing the organic expansion out of new stores of Assai.

GPA in Brazil, with a clear focus in the food segment, consolidating our food business in Latam, simplification of the corporate structure in Brazil, and also in a consolidated level for Exito.

In Colombia, cash and carry has been very successful, and we plan to do between two and three more stores next year under the cash and carry format.

Accelerated expansion in the real estate, especially in Argentina and in Colombia. In Colombia, through the Viva malls, and real estate expansion in Argentina is going to obtain the goal that we had of 50,000 new GLA for three years.

Finally, it is very important to say that even though the Exito share price evolution for this year has been around 5%, what is interesting to see is that the market has been gradually recognizing the upside of Brazil. They see that the trend is going towards that direction. In Colombian pesos, the Via Varejo share has -- valuation has increased its value in 227% this year and GPA, the Grupo Pao de Acucar share has increased its value by 51%, which we think is a very interesting sign for the shareholders of Exito, that with this pro forma, with some of the assets having a public valuation, and with the book value of Exito can do a very interesting sum of the parts valuation and see the potential that there is for the share of the Company.

These are our initial remarks. We are open to the Q&A. And again, I thank you very much for being with us today.

(Operator Instructions) Andres Soto.

I have two questions if I may. The first one is related to your current debt levels and your expectations for next year? Manfred mentioned the financial expenses have been an important detractor for Exito's earnings in 2016. Can we anticipate this to improve next year on the basis of lower interest rates in Colombia and some debt prepayment? And what would be the magnitude of this improvement? And my second question is regarding deterioration in EBITDA margin in Colombia. This quarter, we saw significant increase in expenses, mainly in salaries and distribution expenses. You mentioned the truck drivers' strike and other factors affecting particularly this quarter. Can we expect (technical difficulty) in the next few quarters (technical difficulty) specific targets for SG&A increase in Colombia in 2017?

The first one, debt levels. What we expect is that we will be gradually reducing our debt level out of the deleverage strategies of the Company. This year, we're going to capture a benefit of around [$150 million] in deleverage efforts, most of them out of working capital, between 4 and 5 days of inventories and we are going to evolve from the 3.8x net financial debt level to 3.2x by the end of the year. Of course, you cannot see the net effect completely there, because at the same time, we have not had the cash flows out of the expected dividends from Brazil, as expected dividends from Brazil will improve, number one. As we don't have to focus now on new CapEx for real estate, because it now has its own vehicle that is going to take care of that CapEx, as we continue to reduce our inventory level and to improve our capacity of negotiation with our suppliers. And then finally, as interest rates will begin to go gradually down at some point of the next semester, this shows a gradual reduction of not only of the debt level of Exito, but also of the cost that the debt has.

Number two, about EBITDA level in the third quarter. Of course, the third quarter has some punctual situations that were present, especially things that affected most Colombian companies, like the transportation strikes and the inflation that we had during the previous months that had a lagging effect in the quarter. What we expect is that gradually we are going to be able to control this inflation impact, and that we have to look at the EBITDA accumulated figure, which if you can see, our recurrent EBITDA is at a margin of 6.4% for the year and it is increasing 6.5%. It is difficult to give you a complete outlook for what's going to happen in the fourth quarter, but what we have seen until the day is that we have -- the commercial activity continues to be positive at Exito level.

And then a follow-up question on my first point. Can we assume that the focus of your cash flow generation in 2017 will be debt repayment?

I think it's a balance, because we have to keep also a very important eye on expansion. So we will keep our normal CapEx for expansion, focused on cash and carry, on Exito formats in intermediate cities, and on light CapEx alternatives like Aliados and franchising. But at the same time, we are going to be very strong on the reduction of the debt level.

Jairo Agudelo, Bancolombia.

I have two questions. One in relation to the question that Andres sought, in terms of leverage. You are already planning to divest your stake in Via Varejo in Brazil. I'm wondering, if you can give us any idea of what will be the use of that strong amount of funding, because GPA in the food segment is already in a very good shape in terms of financial leverage. So I'm wondering maybe we can expect something in dividends coming to Exito Colombia in terms to deleverage the Company, or what can we know about that? The other question was already answered. Thank you.

I would make a follow-up answer on the question of Andres first. And it is that we have COP200,000 million of payment of debt of capital next year, which we will perform. So that shows also that we will move in the right direction. As of Via Varejo, it is too soon to say, because the process just started. But what we expect is that, first of all, in the consolidated net debt level, the net debt of Via Varejo would also be going as part of the sale of the company. And the second thing is that the use of proceeds at a 43%, which is the stake that GPA has in Via Varejo will benefit GPA, and will give it two opportunities. One, to reduce its debt levels that as you say, it is very reasonable. But it gives also the opportunity to move forward with more expansion in the most profitable formats. And of course, if this impacts Exito, because as GPA improves its financials, its expansion and its EBITDA, it improves of course the expectations that Exito can have in dividends for the future. But, of course, it is too soon to speak, because the process just only began.

Antonio Gonzalez, Credit Suisse.

I wanted to ask two questions, if I may. First on debt. I just wanted to clarify, when you talk about this 3.8 times net debt to EBITDA going to 3.2 times, in your debt calculation you exclude completely cash flows from Brazil. Is that correct? If you just look at net debt everywhere else, plus the holding company and divided by EBITDA outside of Brazil. Is that the correct calculation that you're looking at?

Yes, Antonio, this is Manfred. Yes, you are right. The debt is at the holding level of Grupo Exito. So, what actually happens is that the debt is calculated on the EBITDA that Grupo Exito has and the parent company can create, including dividend from its international subsidiaries, and then divided by the amount of debt that is at the Exito level. So you cannot see those numbers through the consolidated statement. You have to [gross] them up from the individual statements.

But you do consider the dividends -- not the EBITDA but the dividends coming from Brazil, right?

Yes, what we include here are the EBITDA that is generated by the Colombian operation, the overall perimeter. The dividends that comes from Uruguay, Argentina and Brazil. And in terms also to define the net debt, we only take into account the net debt that accounts in the Colombian balance sheet. So we don't take into account any kind of cash position of the Brazilian operation, (inaudible), we only take the net debt out of the Colombian perimeter.

And if I may, you mentioned this $150 million in working capital improvement. Is there any chance you give us some color on how much you've captured already and what are you doing specifically to capture this amount? Is it very skewed towards the fourth quarter, or you captured it already by the end of the third quarter? And whether it's on the inventory side or suppliers or any other element that you are improving?

Yes, it's a gradual process. But as you know, in a retailer the most important moment for working capital is the fourth quarter. So long as we see comparative figures for third quarter, we're in line with capturing a reduction in inventories between four and five days, that's a part of it. It is by working vendor management inventory with our suppliers. Number two, with a very clear supply chain planning, so that most of the product will be at the store level and not at the depo levels. Third, aligning the payment of our payables with suppliers, with a [bad] margin that they pay with us et cetera. I mean it's like 10 different initiatives, all of which go to a minimum quantity of $150 million.

Finally, apologies for taking so much time. On your comments about -- I just wanted to tie the two comments that you did about the share price of Exito and how today it has not reflected the rally, I guess, in the Brazilian listed subsidiaries. On the other hand, there is this discussion about debt reduction and the potential proceeds from Via Varejo et cetera. At some point, would you consider just lowering CapEx and instead of investing in new stores or reducing debt, just buying back Exito shares, and aggressively launching a buyback program? Or otherwise, what else could you do to support the share price at the Exito level I guess?

I think that none of that has been, for the moment, thought. For us, in the plan looking forward, we want to maintain our CapEx. We think that it's very important, because a core part of Exito is the performance in the Colombian market, and the Colombian market has very important opportunities. And the rest of it is trying to be very efficient, and of course, the expectations that we have of increasing dividends coming from our foreign operations, it will be a gradual improvement. But what we think is that the core part of that is that our operation works well, our sales perform well, and that we are in the position to generate the EBITDA level.

Ron Dadina, MUFG.

Hello, this is Ron calling from MUFG. Thanks a lot for the call. I have three questions. And the first one is -- and then someone already asked the question, but I'm still not clear on that. The first question is regarding the 3.2 times expected net debt ratio as of December. Is that on a consolidated basis, including CBD or is that just on the Exito Colombian operations, including CBD dividends? Can you clarify that? So that's my first question.

The second question is, what do you expect that same 3.2 times net debt ratio as of December, what do you expect that ratio roughly to be by the end of next year?

And my third question is regarding the Via Varejo sales. Any proceeds from that sales, will they be used to pay down debt, or do you expect to use the proceeds to dividend out to the parent company in France, if you could help me with these three questions, I would appreciate it. Thank you.

I would go to the first one to say that when we calculate and foresee a 3.2 times level of net financial debt to EBITDA, it is at the holding level. When you see at a consolidating level, it is much, much lower, because the expectation for example at GPA is that at the end of the year it would be in a positive cash position.

The second question about what we foresee for the next year, we still are not giving that guideline. We will do so, I think, by February of next year, in the next call. And finally as of Via Varejo, still of course, the GPA Board has not taken decisions, because it's only a starting ongoing process, but of course it will be taken in the best consideration of all the shareholders of GPA.

(inaudible).

I have two questions. The first one is regarding Surtimayorista's results. I was wondering if you had any number that you could give us? And the second one is regarding Colombian fiscal reform. So what are your expectations regarding the new project and the impact on the Company's results? Thank you.

[Maria], thank you for your two questions. First one, Surtimayorista, I will first speak about qualitative results and then some kind of data on quantity. Very well received, it is sharing its purchase from professional customers. I would say 50% of the purchase are coming from professional customers, that is mom and pops, restaurants, cafeterias, hotels, what we call the Horeca channel in Colombia. This is very positive, because it's a new market for Exito. I mean zero cannibalization. We didn't have a sale to this professional business, so it's a new profitable increase for Exito. The rest of the purchase is made by popular customers, such as it happens in Brazil, the same trend. Then, what I can tell you is that if we compared this Surtimayorista sales per square meter, to what we sold per square meter before as Surtimax in that same store, which is besides the [Coravastu, Majorista, Central Imbagota], it is more than twice per square meter, which shows a very interesting, I would say, sign. And the third one is that in the last two months, we already saw that at EBITDA level we were at equilibrium; that is that we were not losing money even it has been launched so recently. Those would be for the Surtimayorista.

As for the tax law, the tax project, very difficult to say, because it is changing as we speak and it is now -- the final proposition to Congress is being drafted by the Congress men and women commission. But if we look at the original project, we see that for Exito, it is a benefit. It is a beneficial at a net level. Why? Because the tax -- income tax, which is the most important of all the taxes is going down from 42% to 39%. This 39% is a combination of 34% of income tax and a [assured] tax on income tax for the first year of 5 points, which will be going gradually down. The interesting thing is that having Exito for the next year, a stability contract commitment that 5% of extra tax does not apply. That's the first thing. The second one is that there is a stability for the stability contracts agreement and that still has another benefit for Exito in its investments next year.

In the negative part, we have mainly three, I would say. The first is the possibility that presumptive tax will go up from 3 points to 4 points. And the second is that sales tax general tariff, it will go from 16 points to 19 points. I really favor this, because I think it's the best part where tax can be done and that of course it has to be done for the fiscal situation of the country. I am conscious that it might have an impact on consumption. But I think that this impact, first, it is temporal, and second, that it's going to come in a moment in which the trend of inflation is going down. So it is going to be some kind of balanced by this trend of inflation going down. And finally, I think that the tax on dividend for natural persons, for individuals, and for foreign companies, it is not good at 10%, but probably it's going to go through, and I hope that it does not affect a lot the interest of different people in the stock market. So this would be like the five most important points. But the most important of them for Exito, if you speak of Exito individually, is the reduction in income tax level.

Alonso Aramburo, BTG.

Just a follow-up on Colombia, and the margin pressure there. Can you give us a sense of how much of the margin contraction was related to the truck drivers' strike? So in other words, what would have been the EBITDA margin recurring without the strike? Thank you.

Hi Alonso, this is Manfred again. For your question, I think, it's hard to tell an actual value. What I can tell you is that, that strike put a lot of pressure on prices, and that at some point when you see, for example, the food inflation, when you compare it with the whole year, was something about 10%. So we don't have the actual calculation of the impact solely related to the truck strike, because that was one part of the inflation pressure that we have on the costs. But the other one was a lagging effect from -- I would say, some back-lash still from the El Nino [pendulum] that also affected [cost]. So, it's hard to split that. But it definitely had a seasonal effect in that and that when you see also for example the logistic cost, it also rose through the period. So you have like the impact at different levels, on the inflation of the prices and also in the transportation costs.

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

Yes, I would like to say first that when we speak about our region and Latam, it is important to start by saying that when you look at our operations, the Colombian operation is solid, it is healthy, it is strong and it is showing that it's at the capacity to maintain around 40% market share, regardless of the competitors that are entering into the market, both in food and in the non-food business.

Speaking about Brazil, what we began to see in our most important business, which is food, is a comeback of traffic volumes. But it's not only because Brazil is improving, but because really we are improving within Brazil and the market share gains of Multivarejo and especially of the Extra hypermarkets show that potential.

When we look then at Brazil, I would sign two things that we began to see which are very positive. First, the results of the intense job that management has been doing in reduction of expenses. Expenses for example at Multivarejo in the last quarter were at half the inflation level. And the second is the big potential for the conversions on some Extra popular stores into Assai. If they work as they started to work with the first conversion, it is a highly profitable increase in sales. In the past that was done by one of our competitors with very important gains in the market and it is GPA, who has that potential for the following years.

The third one is our focus on develerage, but without losing mind that we have to continue on with our CapEx expansion according with the most profitable opportunities in the countries. And also the focus in food and in the simplification of our structure that the Via Varejo decisions imply.

The disclosure, I want to make emphasis that we continue with a permanent effort on improving disclosure, on improving reporting and that in the previous quarter, we did it by country-by-country basis, and this quarter we did it also in a pro forma basis, and in the fourth quarter, we're going to have a completely comparable result, because we are going to have in the base all the sales and results of Brazil and Argentina. That there is an upside in our stock, it is something that I don't have to say and I don't have to put a number, but it is something that you look only by going to the book value of the Company, and the potential coming out of its regional operations and what the market has become to do in other places, as what one of you called a rally that has happened in Brazil.

And finally that synergies are for real. They are not theoretical. Many of you have said that other retailers have not captured synergies in other places. The fact is that the pictures speak for themselves, and the figures speak for themselves, and that really this is a Latam operation that is going in a very organized way and in a very disciplined way towards integration.

So, those are the final regards and those are the final comments. And I once again thank you for being here at this conference and look forward to speaking to you later.

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect. Speakers, please stand by for your post conference.