Almacenes Exito SA (EXTO) 2017 Q3 法說會逐字稿

Good morning. My name is Omar, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Grupo Éxito Third 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, Omar, and good morning, everyone. We appreciate you joining us today for Grupo Éxito's call. At this time, I'm pleased to present our Chief Executive Officer, Mr. Carlos Mario Giraldo; our Chief Financial Officer, Mr. Manfred Gartz; and Mr. José Loaiza, VP of International Business.

Today's agenda is shown on Slide #2 will cover Grupo Éxito's financial and operating highlights followed by a review of the performance by country and consolidated financial results for the third quarter 2017. Finally, we will comment on the company's international strategy and outlook for this -- to then conclude with a Q&A session. Thank you for your attention.

And I will turn the call over to Mr. Carlos Mario Giraldo for his comments.

Thank you very much to you all for being in our conference for the third quarter results. We will start in Slide #3 with the financial highlights.

The main message is that the third quarter results show the importance of our diversification strategy on Éxito having its tokens in 4 important markets in South America, where Brazil and Uruguay have been the best performing organizations and divisions for the consolidated results.

At the consolidated result Latin American level, what we can say is that we see a very important improvement in the net result, both for the quarter and for the accumulated with an EPS increase, which is important, very important for shareholders. GPA, with an increasing contribution to the results of the organization, given the recuperation slow of Brazil, but the best performance of GPA within the Brazilian retail panorama.

A growth in top line of EBITDA, despite lower food inflation in all the countries, especially in Brazil and Colombia. And finally, we can see concrete signs of a very dynamic synergy program in all the region that has already reached the target that we had for the year of $50 million.

In Colombia, results have been impacted by sharp food inflation decrease of 840 basis points and by a decrease in the Nielsen baskets for consumer goods, which as of September is negative 3.4%. The cash-and-carry expansion goes on track. We have already opened 3 stores by the end of the Q, 5 stores as of today, and we'll end the year with 8 cash-and-carry stores, which will be selling something like $100 million full year of next year.

Traffic monetization is a unique model in Éxito with an important contribution to our gross margin, and especially in this Q real estate business continues with a very positive performance. A stronger contribution always coming from omnichannel strategy, 20% increase in sales through the e-commerce, the marketplace and direct delivery to our consumers.

In Brazil, solid sales, as you saw from GPA announcements, plus 8.1%, and same-store sales of 3.3% despite food deflation and with a consistent market share gain both at Assaí, Pão de Açúcar premium formats and hypermarkets of Extra. A successful execution of the conversion plan to Assaí with a high return on investment from Extra underperforming stores. In the last 12 months, we have concluded 9 conversions with a sales multiple near to 3x what they sold it before and with an increase -- a total sales increase for Assaí year-to-date for the 9 months of a very outstanding 27%.

Sales volume recovery at Pão de Açúcar, our premium format, the successful implementation of what has been probably the most important innovation in Brazil and in the region, which is called Meu Desconto or My Discount program, where 3 million app have been downloaded by our customers within the Extra and Pão de Açúcar stores, which is clearly not only for promotions but the first step in our complete digital transformation in Brazil.

Uruguay with strong results and recurrent EBITDA at plus 40% out -- especially out of operational efficiencies. And Argentina, despite high inflation from past year in most of the costs of the company, with a resilient business model out fundamentally of the dual strategy integrating the real estate income.

If we go to Slide #4, we can see the operational highlights. To make a big summary, I can say that we have a consolidated CapEx in the Q of COP 626,000 million. In the food retail, we have 18 openings, most of them -- 10 of them concentrated in Éxito mid-size hypermarkets, Assaí cash and carries and Surtimayorista cash and carries, the first one in Brazil, the second one in Colombia.

Our real estate expansion continues at full speed with Envigado, the largest Viva mall, at 47% completion, it's going to have more than 130,000 GLA and opening in the third Q of next year; with Viva Tunja at 20% completion, and it's going to be the most important mall in Boyacá region near to Bogotá.

In Argentina, we continue with the expansion of Paseo Libertad malls and galleries, arriving to a total GLA of 167,000 meters -- square meters in the plan that we have in 3 years to arrive to 200,000 square meters of GLA.

If we go to Slide #5, there are important drivers for growth that have been developed in the different countries that are focusing on differentiation and innovation. To highlight, in Colombia, the launch of cash-and-carry new market for Éxito out of the synergy from Brazil. The fresh market concept for Carulla. It is taken from what we have done in Uruguay and also the best concepts in the U.S. retailing model, like Whole Foods or Wegmans or Trader Joe's, and it's just opened in Bogotá in 102 Carulla (inaudible) which opened yesterday, and it's adding a complete new experience with very important food categories and organic food for our customers. Omnichannel advancing through the expansion of our marketplace and the last-mile delivery in the alliance that we did with Rappi, the last-mile leader in Colombia.

In Brazil, through the Assaí expansion and conversions, which continue and are going to end around 15 to 16 conversions, which adds a lot of value to our operations there and multiply sales, as I said, near to 3x what they sold before Meu Desconto or My Discount.

In Uruguay, our fresh markets and home concepts that continue to deliver differentiation to our Disco, Devoto operations. In Argentina, the dual model of commercial galleries and the textile model implementation that has already been taken to all the hypermarkets in Argentina, multiplying sales in a very important way and, obviously, also the margin within the hypermarkets.

If we go to Slide #6, we see the sales performance in Colombia, which was adverse in the Q. We were minus 6% adjusted by calendar in same-store sales, minus 4.1% total sales for a total year accumulated of minus 2.7% in total sales. This difficult Q had, I would say, 3 main reasons. One is the dynamic nonprofitable expansion in the segment of discounts happening in the Colombian market. The Nielsen consumer baskets decreasing by 3.4% out of lack of confidence from the consumer that has been general rule during all the year. And a very important part of it, given the lower food inflation. If we compare this Q with the same Q of last year, food inflation is down 840 basis points.

Nevertheless, we have very interesting positive things as the contribution of omnichannel, e-commerce marketplace, home delivery with an increase of 20%, something that has been happening in the last 5 years in a very consistent strategy of Éxito to differentiate itself in the most modern channel for the future in all the world retail, and Colombia will not be the exception, with Surtimayorista cash-and-carry increasing 27% in sales and multiplying its sales in an average between 2.5 and 3x what it sold before as Surtimax stores in those that have been converted.

If we go to Slide #7, we see some of the commercial initiatives that we have in Colombia to answer to the different market challenges. One of them is investing in price in our unbeatable products. These are around 200 categories with products of private brand that have an unbeatable price against any competitor that is in the surroundings in the market. They represent around 15% of our food sales, but they represent around 80% of the food sales of our competitors, especially the discounters. We believe that it is very important because it's a focused investment, which we will partially recuperate from the efficiency in the supply chain with our private brand integrated suppliers.

That takes me to the second initiative, which is getting in an improved portfolio in private label through integrated models with suppliers, something very similar to what Mercadona has done in a very successful way in Spain and that is new to the Colombian market where for the first time, there's going to be with a selected number of private brand suppliers, a very close relationship of partnership with open book accounts.

And the third one is the fresh market model through Carulla to add value, to add experience. Clearly, Éxito is different from the rest of the market because it not only gives fair prices to its customers, but on top, it gives differentiating, very innovative private brands as Taeq or Arkitect and Bronzini and also a full experience to its customer, which in the long run makes the complete difference.

If we go to Slide #8, we can see the cash-and-carry expansion. It just started last year with a full deployment this year where we are going to complete 8 stores, and that takes us to feel comfortable to say that in the following years, we will be doing something like between 8 and 10 cash and carries, which is a very productive and profitable way to get to the discount market and to the professional market. At the same time, only to say, in 8 stores, we will have sales around $100 million next year with a -- being profitable from the first year.

This is a clear synergy from Brazil, and it's a format which has an essential, and it is a low operating cost, which cannot surpass 10% to be a -- and very low CapEx per square meter, something around $700 per square meter, which is, I would say, around half what an Éxito store will require or 1/3 what a Carulla store would require, and it obviously will have a very interesting return on investment.

If we go to Slide #9, we can see in this graph our omnichannel strategy that makes us leaders, both in nonfood and in consumer goods e-commerce in Colombia, and where we put together the web, the mobile apps, our marketplace, home delivery, digital kiosks and click-and-collect. In the 3 months, we have had 36 million visits, 837,000 orders by the web. Our mobile apps now represent 55% of the traffic and 22% of the effective purchases. The marketplace already is -- have 700 partners and 40,000 products inscribed, and it plans to arrive to 300,000 products as an offer, a selected offer for next year.

In home delivery, we keep our own direct home delivery, but we closed an exclusive alliance with Rappi, which is going to be an exclusive dealer for Éxito in the last-mile service, and it is having a very aggressive plans to keep and increase the leadership that it is having in this type of delivery.

Our digital kiosks which work within 136 stores and offer more than the products that the stores do not carry and that we can send through our distribution centers. And finally, the click-and-collect, that connects our web services with 300 stores where we can deliver to the customers, giving us a competitive advantage against the pure players in e-commerce.

I can say that omnichannel is going to play a very important role in the future of the Colombian retailing panorama, and here, Éxito has bit ahead and is keeping a very important differentiation with the rest of the competitors. We have 200 people between engineers, experts in marketing, technicians within our web services to be able to reassure this leadership.

In fact, going to slide #10, Éxito has also had and it continues to have a unique model with traffic monetization of our customers. We have created in the past years and it is an important part of our margin, the financial retail business in alliance with Bancolombia; the travel business with Avianca, our insurance business with Suramericana; and our mobile business which works under the platform of Tigo.

We have been increasing also the nonbanking correspondent services both through Aval group and through Bancolombia group with around 16 million transactions that create income and also new traffic into our stores. And most importantly, I would highlight 2 initiatives, which one is growing very much and the other one is going to start next year. The first one is Viva Malls, our real estate. As you know, it has been contributing very positively to the results of the company. It started now with our partner FIC with 49%, with a total GLA of 434,000 square meters, and it is now developing the 2 big projects of Envigado and Tunja and planning to launch new projects for the increase of the Viva Malls assuring the CapEx that we need to have the dual model of real estate and retail.

And finally, the loyalty program, which has been launched through Puntos Colombia, a very interesting brand to have registered between Bancolombia and Éxito. We are having together 10 million unique customers. It is going to start with Puntos Colombia for the issuance and redemption of points in all allied commerces and the financial services of Bancolombia and the retailing services of Éxito, starting April, May of next year. The important part about the contribution that Puntos Colombia will have is not only create new loyalty with customers and new richness to be loyal to the products and to the format of Éxito but also that it has no value in the books of Éxito. So it's a very important value-creation opportunity.

In Slide #11, we have the net sales now going to Brazil. You have seen them in the results that were revealed some days ago by GPA, but clearly, they are outstanding with an outstanding sales performance despite food deflation. There, food has had a deflation of 2.14% this year compared with an inflation of more than 13 points last year. Regardless of that, Assaí had, during the quarter, increasing sales of 25% total sales and same-store sales of 7.7%. The converted stores registered an average of 3x the sales growth that they had under the previous formats. And now Assaí represents near to 43% of all the food business of GPA with market share gains of 330 basis points.

In Multivarejo, there were also very important developments with Extra hypermarket with the best the same-store sales performance in many quarters and also gaining market share same-store sales within the hypermarket. And with Pão de Açúcar regaining an increase in volume, which is very important for this premium format and beginning to do a full renovation of the most important stores in Pão de Açúcar, which is going to arrive to near to 50 stores by the end of next year.

I'm going to hand it to Manfred to continue with the operational results of the company. And then, I will give you some final remarks.

Thank you, Carlos Mario, and good morning, everyone. Please let's move to Slide 12 to talk about Colombia. Top line net revenues reached COP 2.7 billion in the third quarter, decreasing 2.7% versus the previous year, especially affected by lower inflation. Other revenues grew 23%, mainly driven by the performance of the real estate business.

At gross margin, the (inaudible) effect of change of mix and lower sales. If we look at the year-to-date, gross margin is at 24.5%, 10 basis points below last year, benefiting from improvements in productivity, reduced shrinkage and lower logistic cost.

On the side of the SG&As, the company grew 3.9%, including expansion, which is the best performance in the last 3 years. This shows tight cost control considering that many expenses are growing at last year inflation.

Finally, the recurrent EBITDA for the quarter was COP 150,000 million with a margin of 4.3%. Year-to-date, the EBITDA reached COP 389,000 million with a margin of 4.8%. Main impacts come from lower sales and the inflation gap between revenues growing mainly at current food inflation, while expenses grow at last year's inflation.

Please move forward to the next slide for Brazil. In COP top line revenues grew 11.9% in the quarter to COP 10.3 billion despite food inflation and driven especially by: One, customer and volume growth of Assaí; two, solid performance of Extra Hipers; and three, the recovery of Pão de Açúcar, gaining market share at both brands.

Gross margin reached 21.7% of sales, growing 9% in the quarter as a result of commercial strategy, the maturing of the Assaí stores and the implementation of synergies, including shrinkage amongst others.

At the SG&A side, expenses at Multivarejo grew below inflation in local currency, allowing to offset the cost investments for the conversions to Assaí as well as the cash-and-carry expansion plan. The strong control of expenses has the key to increase the profitability of the Brazilian operation.

On the recurrent EBITDA, the quarter ended at COP 511,000 million, resulting in a 5% margin, growing strong at almost 22% in COP.

Please move now to the next slide. The macroeconomic environment in Uruguay improved during the quarter, taking benefit from the lower inflation trend and an improvement in unemployment. Net revenues in COP reached COP 616,000 million growing 8.1% versus last year. Like-for-like adjusted by calendar effect grew 4% in the quarter, supported mainly by the fresh category, textiles and electronics. Gross margin fell in the quarter due to higher logistic cost and higher weight of the promotional activities.

On SG&A, those expenses decreased 0.5% in the quarter due to operational efficiencies, such as reducing the staff base and lowering marketing expenses that allows the company to offset wage increases, higher commissions and higher property taxes.

On recurring EBITDA, it reached COP 40,000 million in the quarter with a margin of 6.4%, recovering for a challenging second quarter. And if you look at the year-to-date, EBITDA margin reached COP 146,000 million with a margin of 7.7%.

Please move forward the next slide on Argentina. In Argentina, I think it's important to highlight that macro conditions have shown some early signs of recovery, such as the strong inflation deceleration to 24.6% and repo rates decreased to almost 26%. Also, a less volatile political environment has improved somehow the consumer sentiment in the country, although it has not been economically material yet.

On top line, net revenues grew 11.6% in COP reaching COP 363,000 million. Net sales in local currency grew 26%, both in total and same-store sales, driven by the contribution of the convenience stores strategy, higher volumes at hypers and the strong performance of the textile and electronic category.

On expenses, SG&A rose slightly below inflation in local currency, where expenses control offset almost all pressures by high inflation, mainly in labor and utility. The real estate in the country continues to contribute and protect results in Argentina, offsetting most of those inflationary pressures.

Recurring EBITDA reached COP 4,000 million with a 1.2% margin in the quarter, as the inflation (inaudible) from revenues and expenses continued throughout the period.

Please look at Slide 16 for the consolidated results. Top line net revenues reached COP 13.9 billion with an 8.5% growth coming from the strong sales performance in Brazil.

Year-to-date net revenues reached almost COP 41 billion with 11% growth. Very important to highlight the performance of the SG&As, which decreased by 50 basis points in the quarter and 30 basis points in the year-to-date, reflecting productivity efforts and other cost-cutting initiatives of the consolidated operation all through South America. Successfully offsetting the change in the inflation trend that has caused salary levels, occupancy and utility cost to rise.

On the recurring EBITDA, it finished at COP 670,000 million, growing 5.5% and reaching 4.8% margin. Year-to-date, EBITDA reached COP 2.4 billion at a margin of 5.9%.

Finally, net result attributable to Grupo Éxito was minus COP 31,000 million for the quarter. That compares with minus COP 100,000 million last year. And year-to-date, COP 178,000 million better versus the first 9 months last year at a positive COP 30,000 million.

Please move on to the next slide for the net result bridge. I think on the operational level, it's important to say that the strong performance of Brazil and Uruguay have compensated the results in the other geographies. At the nonoperational level, 2 main aspects to highlight: One, nonrecurring expenses driven mainly by the Brazilian operation, as they disclosed it at their own third quarter 2017 results conference call couple of weeks ago; and two, better financial result as a consequence of lower interest rates both in Brazil and Colombia and the execution of deleverage process. Also, the positive results from Via Varejo as the discounted operations contributed to the end result.

Finally, now on Slide 18. Gross debt ended at COP 4.5 billion, reducing 1.3% versus the same period last year and net financial debt at holding level closed at approximately COP 3.9 billion, decreasing almost 5% versus last year, aligned with the company's strategy of deleveraging.

And this point, I will turn the call to -- over to Mr. José Loaiza for a follow-up of the company's international strategy and the synergies process.

Thank you, Manfred. We are very glad to tell you that at the end of the quarter, as Carlos Mario said at the beginning of his talk, we already obtained the USD 50 million guidance that we told you at the beginning of the year coming from the synergy process. We expect to finish 2017 doubling the benefits we got in the whole 2016.

Going to Slide #20. We keep benefiting from our growing purchasing power coming from this integration. To the right, you may see some examples of new products coming from new vendors that we have found as a result of our business encounters giving us a differentiation in our stores and also improving our commercial conditions.

Also, as we speak, we are also getting the benefits from the regional agreements that we have gotten with the big multinational corporations coming from our platform negotiated as a regional player. And in commodity purchases, we are at full speed. At the end of the quarter, we have bought 60% more volume compared to that, that we bought in the whole 2016, allowing us savings between 5% and 15%. And just to give you an example, an empty bottle of wine, we have bought together almost 1 million units getting savings up to 30% for the (inaudible) of Assaí, Extra and Éxito banner. And as this example, we have many others that we will be sharing with you in coming calls.

Going to Slide 21, talking about our textile unified proposal for the region. At the end of the quarter, we have already implemented the business model in 41 stores out of the 65 we expect to attain for year-end. To the bottom left, you may see already deployed the concept I am Fashion, soymoda, in all of the 4 countries and a couple of pictures of the implementation in Uruguay in one of our hypermarkets.

On Slide #22, talking about exchange of best practices, not very visible to the customer but very important for our cost and expense structure. As Manfred said, as a result of this exchange of best practices, we are reducing our level of shrinkage in both Extra and Grupo Éxito formats. Concerning supply chain, we keep on lowering our stock out levels both at GPA and Grupo Éxito. And also in the case of GPA, we are increasing (inaudible) synergy from Colombia our level of cross-docking, cleanup working capital and reducing our logistic costs.

To the right, in direct purchasing and IT costs, we talk about all other products and services that we don't sell in our stores but this company needs to operate. We have already a regional purchasing team based in Brazil and Colombia negotiating for the whole region. The amount this year goes up to $50 million of common negotiation and savings between 30% and 45%.

Going to Slide #23, no need to go in further details as Carlos Mario has talked about the cash-and-carry implementation just to say that this falls into the category of a synergy that means replicating successful business models.

Finally, on Slide # 24, we keep on deploying our proximity strategy for the region. These pictures comes from Uruguay. This is our store #28, consolidating our leadership in this format in the country with learnings coming from Colombia and Brazil.

In conclusion, we may say that we feel that we have a very good base with synergies in 2017 already obtaining the goal. We are already thinking of what we are going to do in 2018. We are sure that with the top management commitment that this process has with the integration offices up and running in all of the 4 countries, also with the communication from the top executives of each company, we will keep on pursuing the integration and delivering the expected results.

Now I turn it over to Carlos Mario to finish the call.

I will go to Slide #25 to make kind of a recap of what has been told during the call. First to highlight that the net result is very positive, and there's an improvement of near to $60 million in the 9 running months of this year. Operations in Brazil and Uruguay with a very positive contribution and which reinforces the rationale behind the diversification and international global expansion of Grupo Éxito as today a leader in the food business in South America.

Grupo Pão de Açúcar with a very solid performance even though Brazil has just started to recover, but given the work that has been done in the last years in GPA of focusing in the key formats of developing the cash-and-carry, of converting the nonperforming stores, we can see this benefit in the results of the company and the strong sales growth despite the food deflation.

A consistent work in cost and expenses in all the countries, in all the 4 countries, which started last year in Brazil, and this year has had a big hike in all the countries whose results are being seen during the quarter but will be seeing during the following quarter because this is an ongoing productivity strategy for the 4 countries.

Synergies as a reality and I would say that more than synergies, they show a real business integration where the teams think as one and share the best practices and have been able to have a process, which assures the implementation of the best business practices in the other countries.

With cash-and-carry stores now as a reality in Colombia and as a business leader in Brazil, cash-and-carry as a format is probably today the most dynamic format in all South America. If we see what's happening in Brazil and the size of Brazil, it has already reinforced as the format leader in Brazil above hypermarket. And here, Assaí is with no doubt the most dynamic cash-and-carry, not only in the expansion, in the conversion, but also when we measure it by same-store sales.

A strong contribution from real estate, both in Colombia and in Argentina. And finally, a continued strengthening of the omnichannel format, knowing that for the future this is a key development that is now being material in our operation and that will contribute year-after-year a very strong growth to our sales and sustainability, both to nonfood and to food. And finally, traffic monetization as an ongoing strategy in Éxito which very few retailers in the region have been mastering.

If we go to Slide #26, and I have shown this in the last quarters. We continue to see a very strong valuation of the shares of GPA and of Via Varejo. In GPA, if we measure it in the last 12 months, running months, with the valuation near to 30% and Via Varejo at 134%, and we start to see some reflection of this in the share of Éxito, which we would like to see more reflected in the future as these assets are clearly reflected within the balance sheet of Éxito.

This is the presentation that we had for you today. We open this to Q&A. And then at the end, we will have some final remarks. Again, thank you very much for being here for the session.

(Operator Instructions) And we have the first question that comes from the line of Mr. Miguel Moreno from LarrainVial.

I got 3 questions. The first question is regarding the competitive scenario in Colombia. You mentioned external reasons for the dropping revenues, be it increased inflation. How do you see the rationality of price? Is it still aggressively, if you can give us some more color on the competition in Colombia, it will be great. The second question is regarding the leverage. As the EBITDA is going down, the leverage is increasing. In Colombia, you have a net financial level of EBITDA close to 5.5%. Do you feel comfortable with that? What is your target, if this continue to increase? Or do you have any plan of sale of some assets or something to decrease the leverage? And in line with that macro question, and I know that you are investing strongly in real estate, so if you can give us more color on the expected EBITDA of the new projects of Viva Tunja, Viva Envigado? It makes you, for example, reasonable to expect an EBITDA in -- of Viva Envigado of $20 million in maturity of the mall.

Thank you, Miguel, for your questions. And I will take the one on competitive scenario and prices and on real estate, and then hand it to Manfred for the one on the leverage. The first thing is that the competitive scenario in Colombia is very active. As you have seen, there are 3 players in the discount market that have done a very important expansion in the last years. What we have decided is that we have a clear strategy, which is clearly different from what they are doing. My first thing to say is that we are not doing the same thing that is opening stores at any place with nonprofitable sales as we have seen in the figures. What we have chosen is to have a combination of strategies. The first one is expanding through Éxito stores to intermediate cities, where there's no cannibalization and where Éxito store becomes the cornerstone of the city. Expanding through cash-and-carry, as you have seen, which starts small but is rapidly growing to be a material format and a profitable format, both at EBITDA level and as return on investment. Third, and we cannot forget that, to give full value and experience to our customers at Éxito and at Carulla. Modernization of hypermarket, we are modernizing 25 hypermarkets in the technological type of products, cellphones, TV sets, (inaudible), et cetera, which have had a very good result, and we are modernizing all the textile area of the hypermarkets, which make our hypermarkets clear differentiated from the rest of the market. Our focus in fresh product, there's no fresh product discounter in Colombia. There's no fresh product world leader. So we are the leader in fresh product. Here, our competitors are more regional players. And as you know, in this type of business, in groceries, fresh products are key. The purchase of Amazon to Whole Foods shows how key the fresh product categories are for the future of retailing, and we are now pointing to have more than 20% of share of fresh products in the hypermarket sales and clearly through the Carulla fresh market proposition, making Carulla the real leader in fresh product in upper-side economic brackets and Super Inter, Surtimax in lower brackets economic income. Then, we are making, and this goes to your question, we're making investment in crisis, of course, in portfolio, in each of the formats, but it's not a wide investment in all the products. It's not an EDLP proposition in all our formats. It is concentrated in those products that according with the sensibility show the elasticity to price perception, and these are more than 200 categories of basic products like rice or sugar or oil or tuna fish, et cetera, to speak about some of these categories or basic salt and laundry. And here, it is our private label proposition, which gives us (inaudible) at this -- in (inaudible) we call them unbeatable type of products. And finally, we continue with our omnichannel strategy, which is picking up and gives us also the opportunity to go to the homes of all our customers even though that are not near our stores, and this is more than a proximity proposition, which through home delivery and e-commerce sales, both in nonfood and in consumer goods, makes a very comprehensive strategy. I have also to mention traffic monetization because even though it's not directly related with this competition scenario in selling, it is clearly very important because it nurtures our margins so that we can have all the space that we need to be able to remain competitive at the retail. I'm sorry for being so long in this answer, but I think that it's important to understand the complete scenario and not only an isolated answer. As of real estate, we are not delivering for the moment these EBITDA that is going to be granted by Envigado and by Tunja, but it's important to see that as an average, our EBITDA levels measured by the incomes received by rentals are at a world standard between 75% and 80%. They continue to be that way. And that even in Viva Malls, we not only receive that within Viva Malls, but as a real estate business, we receive the fees as being in charge of the commercialization development and operation of the shopping malls. I hand it to Manfred for the other answer.

Miguel, this is Manfred. Regarding your question on leverage, I would say the following. Éxito has full commitment to control and reduce financial leverage. As of now, Éxito has conducted all the initial plan we have at the beginning of the year, and net financial debt has been reduced accordingly. With all due respect, I do not concur with the calculation of the indicator that you put forward. What I can tell you right now is that it's true that given what we will see as a temporary impact at the EBITDA level at the Colombian operation puts a slight pressure on the indicator but nothing to be concerned about. Still below and under the covenants that we have for the whole indebtedness. And I think things are under control, and we don't have any concern whatsoever regarding that.

The next question is coming from Ron Dadina from Mitsubishi Financial Group.

My question also is both on margins and the leverage. If you see the overall margin at the Éxito level, the EBITDA margin was around 8% before the acquisition. For the 9 months ended 2017, the margin has dropped -- EBITDA margin has dropped by almost half to 4% now. Similarly, the net leverage both at the consolidated level and the Éxito level was almost 0 before the acquisition. Today, the net leverage at the consolidated level is over 2x and at the Éxito level is 6x, so which is a significant deterioration. So just want to better understand whether you're planning to do anything about it or not really?

Thank you, Ron. This is Manfred. I will take both questions. I think the first one regarding margin, I think important to mention that the margins you mentioned were on the Colombian GAAP. It's important to recall that. Up from 2015, the company -- '14, sorry, 2014, the company entered the IFRS as the accounting GAAP use and since that margins lowered from the mid-4% -- 8% to the -- I would say, the 7.4-ish percent. So I think that's one key message here. The second, regarding leverage. I think before the acquisition, obviously, the company did not have any debt. The company was looking for opportunities, and this is something that has happened in the track record of Éxito that every time we make a major step forward in any nonorganic growth, we have initial set of indebtedness that's over the course of the following years we get back to normality. I think it's part of the cycle. It's part of the process, and it's part of the strategy that Éxito has used to grow across LatAm to become Latin America -- South American retail -- food retail leader.

I would also add -- this is Carlos Giraldo, that even though, as Manfred explained, the Colombian GAAP average margin of 8% represents a 7.4% under IFRS. This year, we are not going to be above 7%. We're going to be below 7%. But of course, it is not going to be the margin that you are seeing accumulated to September because we're entering the most important trimester for our sales and where our sales have a high composition of nonfood, especially of textiles, which carry a very important margin and of fresh products for Christmas, which also carry a very important margin.

And the next question comes from Rodrigo Torres from Valora Inversiones.

I would like to have more information about the loyalty program, maybe Carlos Mario can explain us a little bit more. How it's going to be the monetization of the loyalty program, Puntos Colombia? That's the first question. And the second one, can you just explain in a little bit more how many cash-and-carry stores are you going to open in Brazil next year? And how much -- in sales, how much money is going to be in sales for next year in those cash-and-carry stores in Brazil?

Yes, Rodrigo, I will start by the second one, and it is that we still have not given guidance on the cash-and-carry expansion in Brazil for the next year. But you can be sure that it's going to be very dynamic, that it's going to be the main focus of the company, both the expansion of cash-and-carry and the renovation of around 50 Pão de Açúcar stores and that its going to be a combination of new openings as it has been done in the past years and of conversions coming from some nonperforming Extra stores. As of the loyalty program, I will explain that we are working at 2 levels. First, in Brazil, it's a very important synergy because it has collected a lot of the know-how that Éxito had in Colombia in the past with loyalty programs. It has been taken to a new level in Brazil, adding technology through applications and through algorithms that permit that they can offer in a targeted way to each customer the number of products that he likes and the number of products that we come to the conclusion that he would like to buy, supported and financed directly by suppliers. This is Meu Desconto and with a very high record in world retail of 3 million downloads in a few months, which is very enthusiastic, not only for Brazil but what it represents to the other operations starting with Colombia. As of the loyalty coalition, the loyalty coalition, Puntos Colombia, what it means, if you compare it with something similar that has happened in Colombia, it is LifeMiles from Avianca that now has some investment of third parties. What it does is that it puts together an initial database of around 10 million customers. These customers will be issuing points and will be redeeming points, not only within the stores of Éxito and its other formats but also within the different financial products of Bancolombia. And we are bringing allies, that is third parties in complementary segments like restaurants or gas stations or cinema or other services, which in order to attract the attention of this customer base are open to pay for the issuance and redemption of points within their stores. The economic model of this starts with the fact that normally of 100 points that are issued, there is a shrinkage of points. There are points that are not used within 1 year. So the cost of the points for the company is COP 100. Normally, it would have between 20% and 30% of shrinkage. This gives an initial margin of 20%, 30%. And then, the rest of the margins will be the price paid for third parties in order to take profit of all these points. The interesting thing of this economic model is that it not only creates loyalty to those who belong to the ecosystem but also that it creates a very interesting margin out of something with no inventory and with no value in the books of the company, but out of the use of the database, out of Big Data, and the technology that Éxito has developed in the past.

And the next question comes from Nicolas Larrain from JPMorgan.

I had a couple actually. First, one in a more general sense, what do you guys believe is necessary in Colombia to bring back same-store sales? Is it a little bit more inflation activity? Is it a consumer confidence thing? I would like to know your opinion on that. Also, on e-commerce, when looking at the presentation, I see that you guys are making an important effort there just ahead of competition. And I wanted to see if you could help us to get a grasp on how relevant is e-commerce now a days on the food retail as a percentage of sales or something similar? And also, on Puntos Colombia, kind of the same question, if you have a projection that you can share on how relevant this could be for the business?

Yes. I will start with same-store sales. I think that there are 2 circumstances, which will be behind the future trend of same-store sales for next year. The first one has to do with the recuperation of consumer confidence, which we believe that will be gradually back, the recuperation of Nielsen basket, which the last reading that we had was minus 3.4%, but at least, there's a feeling that it's at the level point. And the other thing we'll have to do also with the different strategies that the company has and which I spoke at the beginning, which will be consistent but profitable. I think that what we have decided is that same-store sales are very important, but not at any cost and that we cannot deteriorate the margins of the company attacking all the product lines of everybody. What we have done, as you have seen, is the focused reaction, which we finance with our complementary businesses and with the monetization of our traffic which helps us. Going to the second question about e-commerce, 5 years ago, our e-commerce sales were very low as a percentage of the sales of the company. Now they are going to be ending this year at around 3% of total sales of the company. This is very important because it now gives you something like between $90 million and $95 million, which is material and which is something that now nobody has in this consumer business in Colombia and that we have the technological platform. And the other important thing is that now marketplace is around 25% of the total income of this kind of omnichannel. And this is key because we aspire to become the preferred marketplace platform for the Colombian companies out of the huge reputation of Éxito and also of the solid base of the technological platform and of the logistic services that we can grant also bringing additional income to our business. Finally, about Puntos Colombia. We are not still delivering figures. They will be delivered in the future. But you can see the huge potential of 10 million customer base. And I'm speaking for the moment only of issuance and redemption of points, not what comes after, and it is the active use of the Big Data that we have out of the -- this database, which is probably the most important database in Colombia. And if you want to see comparisons, I would invite you to see the figures that LifeMiles has, which are very positive and indicate the huge potential that such initiative has in the Colombian market.

And our last question comes from (inaudible) from Citibank.

My question is regarding your expectations for the rest of the year, the fourth quarter and 2018, in -- especially in Colombia. What are your views in terms of performance of the indices and recuperation of the (inaudible) that you have mentioned?

Yes, Ronaldo, I would say that the fourth quarter, as we are seeing it, will be very much as what has been happening in the year. There will not be an important recuperation in the fourth quarter. Number two, having said this, what we are seeing is that for next year, we believe that as we have seen in the different meetings -- economic meetings in Colombia that have been organized that there's, what we called, a moderate optimism of gradual recuperation. And the grounds for that are mainly, one, the improvement in the price of petroleum, which is important for the Colombian economy. Second, the reduction in interest rate, as it has been reduced for 250 basis points, it should have a lagging impact in the recuperation of the economy as it had a lagging impact in the deterioration of the economy when it went up for 250 basis points in the last years. The third one is inflation, lowering inflation. We're having food inflation at around 2%, when 1 year ago, it was double digit. This impact sales, of course, in pesos, but it will also give new grounds for consumers to begin picking up on consumption of consumer goods. And especially, when we have salaries increase next year, where I will calculate they will be something between 4.5% and 5%. That means that the consumer will have an additional purchasing capacity to be able to use in the market. And finally, what I would say is that we have some macro things, which are important in Colombia, mainly the recuperation of nontraditional exports and a very, very strong figures that we are seeing and will see in tourism. These are grounds for improvement. I would say, they are gradual. And what we are doing about it is that we're making sure that we work very hard on our complementary incomes to be able to strengthen our margins, and secondly, that we are clearly working very hard on our expenses so that regardless of the panorama that we see next year, we will be working in the strengthening of our operational profit and of our EBITDA margins and, of course, of our net profit.

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

Yes. Even though some of these things that we have said during the conference, I think, that these are key messages about Grupo Éxito. The first one is that our consolidated results are deemed the effect of diversification that the company has done being present in the most important economies in the region. We have an upside, which is the recuperation of Argentina and Brazil as most of the analysts are seeing they are expecting growth in those economies between 2 and 3 points for next year, which is a complete upside for Éxito. We are seeing part of that from Brazil, but Argentina in the last month has improved a lot its expectations, especially as it is bringing inflation down.

The second one is that the net profit of the company, $60 million better than what it was as of September of last year is a good news for our shareholders at this point. Our integration process is going in the right direction with expectations even being surpassed by the reality of the synergies that are being arrived by the different operations working together. We are looking forward to a positive -- gradual positive regional outlook in the 4 countries where we are because of decreasing interest rates in all the 4 countries, decreasing inflations in all the 4 countries, better consumer consumption in at least 3 of the 4 countries and expectations for a gradual recuperation in Colombia. And with the expenses that are being worked in the 4 operations showing very interesting signs in the third quarter of this year.

And that towards the Colombian competitive scenario, Éxito continue its focus with its omnichannel leadership with its new formats, the traditional ones, which performed well like Éxito and Carulla and with the cash-and-carry high return on investment expansion, with innovation and differentiation and with the targeted price investments through our private label selected portfolio of very competitive products.

And then finally, I would like to highlight some value creation opportunities for our shareholders, like traffic monetization initiatives, we mentioned especially real estate and loyalty, but insurance, travel and credit continue to be very important. Travel monetization realities because of the share valuation that we are seeing in Grupo Pão de Açúcar and Via Varejo and because of the upside that we see in the economic outlook of big countries, powerful countries as Brazil and Argentina.

So thank you very much for sharing us these minutes and for your questions. And I hope to be here the next year brining you not only the full year results but also the projections for the next year.

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