Almacenes Exito SA (EXTO) 2017 Q1 法說會逐字稿

Good morning. My name is Karen; I will be your conference operator today. At this time I would like to welcome everyone to the Grupo Exito first-quarter 2017 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, Karen, and good morning, everyone. We appreciate you joining us today for 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.

Today's agenda, shown on slide number 2, will cover the following financial and operating highlights, the review of the Company's international strategy and the consolidated financial results for the first quarter 2017. The call will conclude with a Q&A session.

Please note that the Company has posted a presentation that is available on our corporate website and a link to this presentation has been provided on the invitation that we distributed via email. Thank you for your attention. I will now turn the call over to Mr. Carlos Mario Giraldo for his comments.

Thank you very much and thank you for your presence. I will start with the financial highlights of the first quarter of 2017 in page number 4. We can say that the consolidated results show a strong operational result for the quarter. I can mention four reasons for that.

The first one is transversal commercial activities in all the countries, which, even if there are weak economies, have produced very good results and same-store sales market share gains in all the countries with no exception; clear advances on expense controls, especially impacting the results coming from Brazil and Colombia because of their critical mass in the results of the Company; clear early signs of recovery in Brazil and in GPA in Grupo Pao de Acucar that have a big influence in the consolidated results; and finally, the dynamism of the synergies which captured in the first quarter $25 million. That is the same level achieved in 2016 for all the year.

Colombia with same-store sales outperforming the market with a very good result in expenses in line with inflation and with the best performance in the last two years, which contributed in a very good way to protect the EBITDA margins of the Company, even in a difficult consumer environment; and innovative activities that will have an important result for the future in customer monetization coming from Viva malls, execution and the new customer loyalty program announced.

In Brazil, the improved sales levels coming quarter after quarter and in this quarter two times the national inflation. Market share gains both at Assai and Extra level, Assai even compared against cash and carry and Extra compared against other hypermarkets and supermarkets. A very dynamic conversion plan going forward and excellent results from the first two conversions made from Extra's into Assai's. And finally, a very strong operational performance as was seen some days ago because of efforts in expenses and the deployment of key strategies -- commercial strategies.

Uruguay with a sustained recurring EBITDA and market share gains coming from an expansion in proximity. And Argentina with a difficult inflation situation, productivity effort even in inflation around 33%, and fortunately with a great contribution coming from real estate.

Going to page number 5, we can see that key commercial drivers which are common to all the countries. We have the same concepts applied in the different countries with a different flavor, a local flavor and a clear market adaptation. The first one in the commercial model is the 1, 2, 3 savings of the month. It is applied in the four countries. It is [apply able] to national brands. It is financed very partially by the national brands and it has contributed to the market share gains, especially in Brazil and Argentina.

The second is the unbeatable prices that is the first price portfolio which are at the same level or below the cash and carries and discounters and has applications in Brazil with omais baratos in Argentina with el mas barato and in Colombia with 186 references of precio insuperable, unbeatable prices, which are destined to compete against the discounter market.

The fresh products as a clear differentiation not only with the best assortment in most of the markets, but also becoming with a big initiative to control shrinkage which is an important synergy given good results both in Brazil and Colombia. And finally the deployment of the Exito textile cluster in the different countries taking this look and feel and private brands of textile to the different markets, especially Argentina and Brazil.

In page number 6 we see the operational highlights with CapEx for the first quarter at [COP545,000 million], in Colombia, [COP185,000 million], 35% of it into real estate, arriving to 1,559 stores in food and with a real estate expansion in Colombia around Viva Envigado that is now near to 30% of completion and will open in the second half of 2018, and Viva Tunja which is at 5% completion. And in Argentina with two commercial galleries. You can see at the bottom the Calima store that is a very important Exito store opened in Bogota in one of the most important commercial parts of Bogota where we were not present yet.

Going to page number 7, we have our loyalty program, Puntos Colombia, launched some weeks ago in alliance with Grupo Bancolombia, which will start to be effective in the first quarter of next year. Today it is working in the technological part and in the management part and which will be an ecosystem of points issuance and redemption and it will attract allies from different sectors of the economy.

Clearly it starts with around 10 million customers of Exito and Bancolombia with exploiting the customer knowledge that we already have, the rich databases of both companies and in a strategy that looks to the monetization of our assets and especially of the customer base.

In page number 8 we have the sales performance for Colombia. In a difficult quarter for the Colombian economy we sold COP2.6 billion minus 1% corrected by calendar effect where the best performing format was the hypermarket Exito. The reasons for this economic trend were especially the VAT increase in the first month of the year, consumer confidence fall and a de-accelerated food inflation trend going from 12.4% last year to 3.7% in this quarter.

Textile continues to be the best performing category taking market from some importers because of the quality of our products, but the low price strategy and the help also of the Colombian peso against the dollar. The discount segment, here we privileged profitability over sales at any cost and clearly I can say that Super Inter and Surtimax had one of the best profitabilities in many quarters. And Surtimayorista in a very positive trend is selling 2.7 times per square meter what it was before the conversion. This gives us a clear route for the expansion of the cash and carry in Colombia as one of the key synergies.

In page number 9 we see the sales performance in Brazil; strong food sales, as you know from the results of the GPA; a clear recovery of Extra, which is sustainable because it has been there now for three quarters; and a great contribution as many years it has been seen from Assai. Sales going up 9.5% in local currency, two times food inflation and 5.6% at same-store sales.

It's true that Brazil gradually improves as a country as an economy, but within Brazil Grupo Pao de Acucar is the winning actor with a consistent strategy and showing tangible results that are now being recognized both by the market but especially by our consumers, by the customers.

Assai is a success, sales up 28.8%, same-store sales near to 13% and it now represents around 38% of total GPA food sales. 2.5% sales are being seen per square meter in the Assai converted stores as compared to the sales that they had before as an Extra.

In Multivarejo, we have improved traffic and volumes, especially at the Extra hypermarket which continues with its rebound, and with market share gains during the last 12 months, and with same-store sales corrected by calendar effect of plus 5.4% in this period.

Pao de Acucar stable in market share and the 150 allies with Compre Bem name coming from the synergies that are being applied at a LatAm level. I give now the word to Manfred Gartz, our CFO, to continue with the financial results.

Thank you, Carlos Mario, and good morning, everyone. We will start on slide 10 with Colombia. During the first quarter net revenues reached COP2.7 billion, decreasing 2.2% versus the first quarter of last year, as per the detailed view provided by Carlos Mario a few moments ago. Other revenues grew 3.6% mainly driven by performance of the real estate business.

Jumping into the gross margin, gross margin grew 3.4% reaching 25.4% of sales and gaining 140 basis points mainly due to improved productivity from lower shrinkage levels and lower logistics costs. Also real estate business contributed to the results.

On the SG&A side, the operational expenditures grew 4.9%, the lowest in the eight previous comparable quarters. When I mean comparables it's after the implementation of IFRS at the Colombian level. This positive result is part of the Company's initiative to protect the bottom line despite macro conditions and its focus on the deployment of operational efficiency strategies at all levels of the Company to control expenses.

Finally, the Colombian operation showed for the quarter a recurring EBITDA of COP150,000 million and a margin of 5.6%, in line with last year, showing the resilience of the operation despite a challenging year start for the retail industry in Colombia.

Please move now to slide 11 to continue with Brazil. In COP, net revenues grew 19.1% in the quarter to COP19.8 billion confirming the strong and consistent performance of the Assai format and the recovery of the Extra Hypers. Nonetheless I think it's important to notice that this resulting COP is partially boosted by a stronger valuation of the Brazilian reais that happens around 11% quarter over quarter.

Gross margin reached 22.4% of sales gaining 20 basis points driven by our precise and successful investment in promotions and after a faster maturity of the Assai stores that opened last year.

In terms of SG&A, the much disciplined control of expenses that started last year showed its benefits and with a noteworthy reduction of over 100 basis points with a growth of 12.7%, significantly below growth in sales and even below the CPI in Brazil. Most efforts were in electricity costs, labor and productivity initiatives at stores and at distribution centers.

Recurring EBITDA reached COP503,000 million resulting in a 5.1% margin, 130 basis points above the same period last year. Given the level of operating improvement in this period, FX effects at the EBITDA line is way lower than it was on sales.

Moving forward to slide 12 with Uruguay, during the quarter and even with the tailwinds of the Argentinian economy, Uruguay sales grew 6.7% in local currency and in line with inflation and ended at COP668,000 million. Despite a decrease in inflation during the period, top line maintains its dynamic mainly due to the openings of 14 convenience stores under the Devoto Express format in the last 12 months, gaining an aggregate of 1.8% marketshare up to this date.

Like for like growth was 5% in local currency after the adjusted calendar effect and was driven mainly by double-digit growth in textiles and home categories. Gross margin gained 70 basis points from efficiency in commercial activities along with improved negotiation terms with suppliers that offset increases in wages and the base effect in the D&A in 2016 that distorts last year's figure and subsequently the recurring EBIT evolution.

Finally, the recurring EBITDA margin grew 5.8% and remained stable at almost 10%, reaching COP67,000 million in the quarter demonstrating consistent growth and healthy profitable levels and the Uruguayan operation.

Moving forward to Argentina on the next slide, the first quarter of this year continues to be challenging for the operation due to the -- Argentina's macro condition, a weak retail sales level on an overall lack of consumer confidence in the country. Net revenues reached COP348,000 million and, as in prior quarters, gaining market share and that's very important.

Also the Company opened to Petit Libertad premium convenience stores filling the proximity format that in this period grew 48% in local terms, way above inflation with a very competitive commercial proposal mainly in the fresh line. Net revenues growth came at minus [0.7% in COP].

The real estate business continues to be the natural hedge for our Argentinian operation, offsetting most of the inflationary pressures and protecting the results of the country. SG&A rose below inflation under a very controlled expense program that offset expenditures pressure by inflation this year and that was pretty much onto labor, utilities, marketing expenses amongst others. Finally, recurring EBITDA reached COP11,000 million with a 3.2% margin.

Please look now at slide 14 and see the group's consolidated financials. Top-line net revenues reached COP13.5 billion. We're at 12.9 year-over-year growth coming basically from two sides: the strong sales performance in Brazil; and two, the contribution of complementary businesses especially real estate in Colombia and Argentina.

Gross margins gained 30 basis points to reach 23.9% and reflects the cost efficiencies at all four operations, mainly in shrinkage, logistic cost and other commercial efficiencies.

SG&A decreased by 30 basis points in the quarter reflecting productivity efforts and other cost-cutting initiatives to offset inflation in the region that caused salary levels, occupancy and utility costs to rise. I think it's important to notice that although the inflation this year is low -- is lower than the inflation last year, many of the costs are adjusted by last year's higher inflation. So this creates a gap that needs to be operationally reduced.

Recurring operational income margin grew by 40.5% to 3.6% of sales in the quarter and reflected that productivity effort despite a very complex economic environment in the region. Recurring EBITDA margin grew to -- 35% to 5.4% in the first quarter with a 90 basis points improvement maintaining a consistent progress since last year.

Finally, after the subtraction of net financial expenses, participation method, minority interest and our share of the net income from discontinued operations, the net income attributable to Grupo Exito is minus COP7.6 thousand million that I will explain in the next slide.

In this slide, on slide 15 I would like to show the bridge between the results in the first quarter of last year and the valuation that led to this quarter net result. On the operational level a positive quarterly valuation of the recurring operating income of Brazil of almost COP160,000 million more than compensated the operational results in the other geographies.

On the nonoperational level, on one side a negative valuation in financial expenses of COP37 million comes as a consequence of mainly: one, FX effects when consolidated Brazil due to its revalued currency; and two, on a much lesser degree as a consequence of the accounting of [various] hedge in Colombia.

On the other side taxes in which for the first quarter of the last year we had an income of almost COP6,000 million. For 2017 taxes returned to be an expense posting a valuation of almost minus COP6,000 million. At the end the net result of the quarter ended at minus COP7.5 thousand million.

Now please move on slide 16 to show the evolution of the net debt situation at the holding level. First, net financial debt at holding level closed at approximately COP3.9 billion decreasing 8.2% and very aligned with the Company's strategy. Second, it is important to notice that cash and equivalents increased almost 9% to COP580,000 million mainly from working capital optimization mainly at the inventory level. Third, gross debt, including the scheduled repayment ended at COP4.5 billion, reducing 6.3%.

Finally, I would like to end my presentation with a view that the landing of the net debt by year end would heavily depend on the evolution of the Colombian operation, the Colombian macro condition and what we expect to be the recuperation in the second half of the year.

At this point I will turn the call to Mr. Jose Loaiza for a follow-up on the Company's international strategy and the synergies process.

Thank you, Manfred, and hello, everyone. We would like to start by saying that at the closing of Q1 2017 in the benefits coming from synergies we have attained that amount that we got for the whole 2016, this is to say USD25 million.

On slide 17 you may see what we are doing in the purchasing of food which is a cornerstone of the synergy process. As we speak we are benefiting from the agreement we renegotiated last year with our main vendors that are becoming a recurring benefit.

Also, so far this year in the purchase of commodities we speak about fruit, salmon, olive oil and so on. We have brought together the four countries, the equivalent to 64% of the volume that we bought last year, which means that we will surpass that volume and attain additional benefits.

Also we have finished in the four countries roundtables with local vendors willing to export to the other countries. This is an ongoing operation that has allowed us to improve our relationships with those local vendors and in the meantime improve our commercial conditions.

On slide 18, we may see our activities concerning textiles. Colombia has become kind of the textile hub for the region for the four countries. Buyers from all the countries, Brazil, Argentina and Uruguay, come here twice a year to pick their season collections out of a showroom of about 1,000 references working on a tag on methodology in an orderly fashion. This allows us to project our Arkitect and Bronzini textile brands as a regional brand for the other countries.

For those products that we don't produce locally, we are also traveling together to Asia adding up our volumes, dealing with the top factories and getting savings up to 27%. As far as layout and implementation is concerned, we completed seven stores in Argentina, six stores in Brazil. We expect in this 2017 to finish the jump in Argentina, to get close to 30 stores in Brazil and to begin deploying the strategy in Uruguay.

Going to slide number 19, you may see the ongoing implementation of the Aliados project in Brazil under the brand Compre Bem and join now a very good media coverage. As you may see, we completed 150 stores in the Sao Paulo area. On the bottom of this slide a quick word about the performance of the first Surtimayorista cash and carry in Bogota, Colombia multiplying 2.7 times the sales of the previous store before the conversion and getting sales 57% coming from professional buyers.

Finally, on slide number 20, consistency on the commercial model in the four countries contributing heavily to the gain of market share on a same-store basis. Also a word about shrinkage, specifically in fresh produce.

Each country has very important projects to reduce shrinkage that were presented to one another implemented in the other countries. And this synergy has become one of the most significant ones contributing to the results that you may see in the slide, in Brazil in the Extra brand a reduction in shrinkage of 227 basis points and in Colombia that up 41 basis points.

In the back office these companies need to buy a lot of stuff to work it properly going from software to shopping carts. We have set in motion a very orderly regional process to buy this together and we are getting significant savings there up to 30%.

To wrap it up, we are very satisfied with the results obtained last year and the results of this Q1. We are also very satisfied with the level of engagement of all of the countries and the cooperation between the teams. And we are confident that we will attain the goal that we set ourselves for this 2017. Now I turn it over again to Carlos Mario Giraldo.

I will go to page number 22 to the main conclusions. The first big conclusion is that we have had the strongest quarterly consolidated results since the acquisition of a participation in GPA and of Libertad more than 15 months ago. And this is given by two things.

First a strong recovery from Grupo Pao de Acucar and the second is the resiliency of the operations of Colombia and Uruguay that even if sales were not as expected, they were able to keep their EBITDA margin.

Second big conclusion is that there is a consistent and visible effort in cost and expense control mainly at the Colombian and the Brazilian level. And you can see as a result that costs and expenses go up 2 points below that increase in sales in the consolidated result.

And the third big one is that the synergies are on track, that we already captured in the first quarter what was captured during all the past year, and that is a very strong sign of the integration process in all LatAm. For Colombia the resiliency of the operational performance and the out-performance, the over-performance in comparable basis against the retail industry.

In Brazil how the commercial innovative activities both in Assai and in Extra are giving excellent results and market share positive volumes and traffic. And also how the conversion of two Extras into Assai opens the window for a very interesting accretive activity in the following years. And finally, that we have SG&A reductions from productivity efforts in Brazil.

In Uruguay, a stable market with very high margins and with Disco -- Grupo Disco being the only with a real expansion through proximity in market with regulatory restrictions. And in Argentina, that even though all businesses in Argentina are through a transition moment in which inflation is creating a big pressure, we have an additional characteristic that makes us different and it is the real estate business supporting that partially covers and protects our margins.

Going to page number 23, we speak about the outlook for the rest of 2017. At Latin American consolidated level what we see is synergies exceeding $50 million which was our initial guidance. Second, we see a gradual decrease in interest rates much more rapid in Brazil than in Colombia, but it's a reality for both of them that will have an impact in lowering the finance expenses in the middle- and long-term for Grupo Exito. And more than that, they will eventually drive consumption levels in both countries.

A mid-term economic recovery that we see in Brazil, it's more evident in Colombia. It will come; we expected to begin in the second half of this year. A focus in cost and expense control in all countries. And an expansion focused in the cash and carries, very aggressive in Brazil and starting to take speed in Colombia.

A high potential for store conversions from Extra to Assai and a very important plan of renovations of premium stores both in Brazil through the Pao de Acucar premium stores and in Colombia through the [Carulla] stores. In Brazil, we see that Assai will have between 6 to 8 new stores this year and between 10 to 15 conversions from Extra this same year. That Pao de Acucar will go on with its store renovation plan and with the enhancement of customer experience and that the ongoing disinvestment process Via Varejo is on the track.

In Colombia, a gradual recovery of consumption that we expect for the second half of 2017. A real estate expansion of Viva malls of 120,000 square meters by the second half of 2018. A consistency in the profitable activities to face competition that is the unbeatable products, the cash and carry, the Aliados, our first pilots of franchisees, and the private label enhancement in Colombia, and finally Puntos Colombia to be launched effectively in 2018.

Finally and before closing, here are some charts on page number 24 that show how there's a strong increase in valuation of Via Varejo and Grupo Pao de Acucar shares which are clearly not fully reflected in Exito's share price. You can make your own calculations, but only looking at the value of the shares between January 1 of 2016 and today, we can see that while Exito's share has increased in value by 18%, Grupo Pao de Acucar has done by 73% and Via Varejo by 267%.

If you make it in a shorter period, that is year to date in this current year, you see Exito's share at around 7% increase, Grupo Pao de Acucar at 35% and Via Varejo near to 12%.

This would be the final remarks. Again in the name of all my team and the Company, I will thank you for the presence and we open the session to a Q&A.

(Operator Instructions). Andres Soto, Santander Investment.

Thanks for this presentation. Carlos Mario, my question is regarding your outlook for 2017. Can you please give us some additional detail in terms of what are you expecting in terms of same-store sales and consolidated CapEx for this year?

Yes, I will refer first to Colombia. In Colombia we were speaking about the CapEx around COP300,000 million and we keep it that way. It is been more concentrated around the cash and carry around Exito stores which are being opening in intermediate cities where there is no cannibalization. And mostly we are going to [destine] a lot to reform of the most important flagships of the Company.

In a market where there is a lot of expansion coming from non-profitable discounters we believe that it's very important to protect the productivity of the profitable stores and to launch stores which are profitable from the first year and, in our case, with no exception that's what we are obtaining.

As of same-store sales it is very difficult to predict. What we believe is that they will continue probably in negative grounds during the first half and that probably there will be a recuperation for the second half. And my reason for estimating this is: first, normally the VAT impact in consumer confidence is medium-term, that has been the case in previous years; second, inflation is going down, it is at [466] as of April and that is important to create competence for consumers.

We have -- because there is a real increase in salaries if you consider that salaries have gone up as an average around 7%. We have a reduction, a gradual reduction in interest rates in Colombia, minus 75 basis points in the last central bank move to 7%. And that's important in the medium-term to foster consumption and investment and consumption of retail credit business.

We are having exports going up and it's important to stimulate certain areas of Colombia and certain businesses and the creation of employment. We are having a very strong tourism activity into the country and infrastructure, even though it has been going through some difficult months because of the (inaudible) bridge scandal, we believe that most of the infrastructure projects are going to continue in a dynamic way.

Finally, because in the second semester we have weak comparison levels as of last year. So that's what makes me to be a moderately optimist for the second half of this year. As of Brazil, we continue to see strong consumption levels as of GPA. Clearly there is a big issue and it is unemployment, which is above 12% at this moment. But there are very positive signs in inflation going down and interest rates which have been in a very aggressive way reduced by the central bank.

So these are some of the reasons that give us an optimism. And in Brazil also our own work. And our own work shows that at this moment we are in the conversion process of five Extra stores which have already been closed and by the end of the year it will be between 10 and 15 conversions. If they have similar reactions to the two that we did initially, that means also a very positive impact in the commercial activity.

Marcel Moraes, Deutsche Bank.

Hi, good morning everyone. My first question is about Colombia and how fast you want to expand this Surtimayorista model in that market.

Marcel, it's a good question. Our initial job was to make a trial and error with the first store. It has been there now for more than eight months with very good results and we have seen a multiple of sales up 2.7 times. It is already profitable and that's a very good sign. And it has been very well received and has the kind of consumption that we see in Brazil. That is 20% of the customers are professional and they make around 50% of consumption and the rest, it's end consumers.

For this year we are going to expand between two and three more Surtimayoristas and still we are defining the guideline for next year. But clearly this is a format in which jointly with our other formats, because we cannot discard the Exito stores, the Exito stores perform very well. It's not a big hypermarket, it's a medium-size hypermarket and there is still medium cities where we have a lot of opportunities.

We just opened last week an Exito store in Florencia with an excellent result and another in (inaudible) with an excellent result. So this would be like the two focuses for expansion. And of course we don't discard to continue working with allies and as franchises are mastered this is another area for expansion.

Thank you. My second question is about the deleveraging process. And my understanding is that the reduced interest rates and also the agreement for the creation of the Viva Mall JV would help with the deleveraging process. So the holding Company has a debt at around COP3.9 billion, and if you could just give us some view on where should this indebtedness level be at the end of the year or how fast should the Company deleverage, it would be interesting to hear your thoughts. Thanks.

High, Marcel, this is Manfred Gartz. I will answer you that question. As you know, the Company has a strategy to deleverage to a certain level. However what's been happening since last year, we did a huge effort from coming down from 3.8 to 3.1 of the indicator. We have been working, as you see in the results, on a lot of initiatives to protect results despite also a challenging macro condition especially at Colombia's level. And we have a scheduled program of debt repayment as per the obligations we have already in place.

Our view is that, and I hope you understand this, that given the current circumstances especially at Colombia and that -- it will depend on how it evolves and how rapidly the trends change. We expect that that happens on the second half, as Carlos Mario explained that earlier. What we would expect is that our level of deleverage that we can reach by the end of the year will depend mainly on that recovery and also on the sustainable recovery from Brazil.

So having said so, what we expect is that the indicators of leverage of the Company will end up something in the range between plus and minus 10% of last year's indicator. So, how it's going to end once again depends on the evolution of the macro conditions, but we are aiming to be toward that range.

The 10% -- just to make sure that I understood correctly, when you said minus or positive 10% in relation to the ratio, it's the 3.1 net debt to EBITDA?

Yes, yes, exactly. What I am saying is that if things correct rapidly and the macro conditions evolve in a positive way we will continue our deleverage as programmed. If not we will protect our cash in order to maintain growth through CapEx investment and everything. So it's a balance that we need to find and that's -- once again, that depends on the evolution of the macro conditions especially at the Colombian level and this is the range that we are aiming.

Perfect. Thank you, Manfred.

Jairo Agudelo, Bancolombia.

Yes, hello to everyone. I have just one question and it's in relation to the Colombian performance. We have seen during the first quarter a stronger macroeconomic -- let's say a deceleration in macroeconomic (inaudible) Colombia. However, financial results of Exito has been quite positive in our opinion.

What I want to know is -- the forecast that you see on the second quarter, given that maybe the Colombian economy is suffering a lot and the cost structure that you have seen during the first quarter improved mainly for the additional complementation of the complementary businesses such as the real estate and other stuff, we can expect a still positive performance (inaudible) Colombia even though the strong competition you have seen from hard discounts?

Thank Jairo you for your question. There is always a level of uncertainty, but as of what we are saying today, we see that the macro situation still continues to be weak, even though, as we could see, there was a partial recuperation in March which had partially to do with the calendar effect of holy week. Having said this, we expect to protect our margins and that's something that we are working very hard to have and it is working in commercial activities intelligently.

How are we doing that? I will give you four or five key elements. First by the very dynamic business of real estate which is a big contributor. Second by a reduction in shrinkage. As Jose Loaiza said, there is a big initiative in synergy in best practices in shrinkage between the different countries and that's impacting the shrinkage in fresh products in Brazil and in Colombia especially.

And the third one is by the [financiation] with suppliers of many of our activities in private brand suppliers for the unbeatable products and with the national brand suppliers for the 1-2-3 Savings of the Month. That's at the margin level. And at the SG&A we are being very drastic with SG&A, as you could see in the first quarter, and we expect that to continue during the second quarter.

It is interesting, as Manfred said, that many of our costs come from the inflation of past year: salaries around 7%, occupation costs also have an indexation around 7%. But in the first quarter we saw that reaction of the internal cost and we expect that to continue. So my answer is that we continue with the objective of protecting EBITDA margin.

Thank you, Carlos Mario.

Alonso Aramburo, BTG.

Hi, good morning. Thank you for the call. I guess one question on the nonrecurring expenses. Can you just give us some color as to what exactly is in the nonrecurring expenses and what should we expect going forward from that operating line or non-operating line?

Hi, Alonso, this is Manfred again. On the nonrecurring line what we normally have is restructuring expenses and that has to come when, for example, talking in Brazil when we need to close one extra store to convert that into an Assai. That particular period of time those expenses are taken as nonrecurring. Also certain sales of PPE and I think the (inaudible) ends with certain recuperations of tax credits.

That given some difference in the IFRS policies and methods that we apply systems that we apply between the different countries, as you know. IFRS is not just a single system for all countries, you have some certain difference that are accounted different on the Colombian and Brazilian operations. But in general terms they are like the three (inaudible) items on the nonrecurring items.

Okay, so as long as the conversions continue in Brazil we should continue to see some of these expenses in the next few quarters, would that be fair?

Yes, yes, and also as we have mentioned a couple of times in this call, there's a lot of initiative at the cut expense strategies that for certain moments they might include certain nonrecurring items on that line.

And do you have any sense of what this number of nonrecurring expense could be in coming quarters? Do you think it could be similar to what we see in the first quarter of this year?

I think that depends on how we put the foot on the gas in terms of conversions for that particular line. That depends on how we evolve in our cost and operational excellency program. And also that depends on how we can recuperate some tax credits. So it's hard to give a sense of a proper number.

What we are expecting is that, especially for the tax situation, I think we have a plan of conversions that there has been some guidance on that. And we expect to continue our SG&A protections in order to protect the bottom line at all operations. And at some point that also includes the reduction of certain FTEs that at some point may also impact this line.

Okay, thank you.

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

Yes, first I would like to thank you again for being in the call and for your questions. I would begin to say that in this quarter we began to see the importance of the strategy that Grupo Exito has had to, as we say here in Colombia, to put the eggs in different baskets and in important baskets. Because not all the baskets go in the same direction and at the same velocity.

It was difficult to expect some months ago that Colombia would have a slow 2017 but it's happening. And this is the moment in which the good performance of Brazil is paying back for the Company. And of course we will continue working in the integration process within all the operations.

As of Brazil, what I would say, there's a comeback, comeback of country but especially of Company. During the crisis the companies have a big challenge to take the right decisions and we believe that during the crisis Grupo Pao de Acucar took the right decisions. That is to focus on a clear, popular, seductive format like Assai to make the conversions, to start with the conversions. And to bet on Extra and to bet on Extra in a commercial way and even with an investment, a temporal investment in margin.

The third thing is that here in Brazil in the conversions we have a great opportunity and we are seeing it and we will see it because as we multiply sales and we maintain or improve the margin that it had under performance Extra, it's a very accretive move.

As of Colombia, amidst a challenging consumer moment our big emphasis, as I said when I answered to Jairo, is to maintain a profitable expansion that is to use very well the pesos that we are investing in new stores and margin protection via productivity actions. In Uruguay to continue to expand in our proximity. And in Argentina to work to face intelligently the inflation trend and to continue promoting our real estate expansion.

On top of this there are three or four things that are important. The first one is that synergies are evident. Many people said some months ago that synergies were not possible. The pictures are there, the figures are there and the money is there. And the big difference is that we are not focusing the synergies on taking things from one place to another one in transporting goods. Okay there is something of that.

But the most important part of synergies are best practices. That is to take a best practice like the textile one to hypermarkets everywhere or shrinkage in fresh products or supply chain know-how from all the markets to others is what really makes the difference. Or new formats that have not been tried before. Why? Because there was no knowledge about those formats. But if you have the knowledge coming from another country in [your own] operation that adds a lot of opportunities.

My second on top observation will say that we started in the last months two innovative monetization moves. And that you should have a look at that because that's going to create value for shareholders, not only Viva Malls but also the coalition in partnership with Bancolombia.

And finally that there is an upside for Exito's share. It's only to make the calculations on some of the parts and that some of those parts are already receiving that part of the valuation. So thank you very much again and we will be with you in the next quarter sharing the results as always.

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