Almacenes Exito SA (EXTO) 2017 Q4 法說會逐字稿

Good morning. My name is Richard and I'll be your operator for today's call. 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.

Thank you Richard, 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; and our Chief Financial Officer, Mr. Manfred Gartz. As per today's agenda, 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 fourth quarter and full year 2017. Then we will review the company's 2017 strategy followed by its business outlook prior to move on to the Q&A session.

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

I want to thank you very much for being at this conference and welcome you to the general review and then to the Q&A session.

We will go directly to Slide #3. Here what we begin to see is that 2017 is a year where we began to see the consolidation of the international strategy of Éxito in retail and in complementary businesses such as real estate that consolidates the company as the South American consumer goods leader.

Synergy plan is going in the right direction with synergies captured at the operational profit level up to $100 million and expressed in the consolidated year results. Joint purchasing multiplied by 3x in volumes of imported goods; also joint purchasing on tough conditions with the international suppliers. Textile model which was originated at Éxito Colombian hypermarkets now implemented in the 4 countries' hypermarkets, and a fresh market innovation taken to 16 stores, fresh market innovation that was first seen at Disco in Uruguay.

As financial highlights, we have a net result that multiplies by 5x what was obtained last year. Yearly top line growth of 9.4% which is very good if we see that the -- most of the countries' consumption was not very good and that it is above the inflation, the consolidated inflation average of the region; recurrent EBITDA increasing by 24%, and a strong performance of Grupo Pão de Açúcar in Brazil, and Grupo Disco behind this growth of consolidated EBITDA which shows and ratifies the importance of diversification and of having assets in different and important markets.

Consistent productivity plan showing results at the level of expenditure levels, especially in Colombia and in Brazil, and as you can see especially in the fourth quarter, expanding in key formats like cash and carry with 28 stores; proximity formats in the main countries; and the fresh market innovation. Traffic monetization, key for the obtention of profitability and the announced launch which will be done in this second -- in this first half of the year of Puntos Colombia in alliance with the main bank in Colombia, Bancolombia; and retail real estate dual model going forward in a profitable way, both in Colombia and in Argentina.

Finally, in sustainability, Éxito included in the Dow Jones index for emergent markets for the fifth consecutive year, and Éxito Foundation continued with the vision for Colombia of [Generation Zero Malnutrition].

If we go to Slide #4, we can see in the financial highlights that Éxito executed a debt refinancing plan in the last part of the year with a syndicated loan of $450 million with 9 international banks and a revolving credit facility of COP 500,000 million in the local market. Our consolidated CapEx for the region for the year was COP 2.2 billion, and the expansion activities were focused in the cash and carry and in the proximity formats.

In real estate, there are 2 big projects in Colombia going forward with big investment in the year, Viva Envigado, 65% completion, destined to be the most important shopping mall in Colombia, and Viva Tunja in the region of Boyacá, while in Argentina we advanced with 10,000 additional GLA in meters.

Going to Slide #5, we can see transversal strategic initiatives in the different countries. It is impressing to see if you look at the 4 countries that there are some initiatives that are already being pursued in most of the countries and they show that integration mode which has been obtained in 2.5 years. One of them in the textile model in all countries present, cash and carry in Colombia and in Brazil, fresh market model in all the markets and a dual retail real estate model for the moment pursued in Colombia and Argentina.

If we look to Colombia in innovation, apart from that, we see a very strong commitment with omni channel strategy having a strong leadership in Colombia, and making a lot of emphasis in modern transversal initiatives in [omnichannality] like the marketplace and the last mile delivery in the main cities of Colombia. In Uruguay, it is convenience format which has been imposing the increase in market share in the gain in market.

In Brazil, it is store portfolio optimization towards Assaí which has given extraordinary results and of course the renovation of our premium format, the most profitable format in Brazil, which is Pão de Açúcar; and finally, in Argentina consistency with the dual format around the real estate proposition.

Going to Slide #6, we speak about the net sales performance in Colombia for the fourth quarter. Top line sales were impacted and also same-store sales by different factors, within them the food inflation deceleration and a weak demand in the Colombian market. In this food inflation deceleration, we went from a food inflation in 2016 of 7.22% to a food inflation of 1.92%. This is great for consumers and is going to promote future growth, but in the short term it impacts the sales in money. The sales figure was COP 2.9 billion, with a decrease in same-store sales comparable basis of 6.2% and total sales of 4.1% in the quarter, and for the full year of 3.5% total sales and 4 -- 3.1%, excuse me, total sales and 4.5% in same-store sales.

It is important to note that as of December, the Nielsen basket of consumer goods which has 27 baskets of the most important categories showed that there was a decrease of 2.8% in the total baskets measured by Nielsen. In the middle of the difficulty of commercial and consumption in Colombia, we have some things that are very important that are being very dynamic and that create a base for future growth. One of them is the omni channel growth, 19%, arriving to around $93 million of total sales which now is material for future years considering that this is normally a market that is going to increase double-digit per year. And the second thing is the cash and carry which arrived in 9 stores and has shown for the year an increase in sales of 52% and in the quarter of 82%.

If we go to Slide #7, we see this innovation initiatives in Colombia which are consistent and profitable. The cash & carry where the 9 stores have 7 conversions and these conversions show a multiple of 2x of what they sold under the previous brand, which show the relevance and good acceptance of the format both by the professional customers, that is mom and pops restaurants and cafeterias and by the end consumer in a very similar result, multiple and mixed of sales as what we see in Brazil. We also see that it is a format which has shown to be profitable from the first year, something that we rarely see in different expansions that are being done in Colombia.

In the fresh market model, this is a great innovation. It started in Uruguay where we have around 9 stores and now it has gone to 5 stores in Brazil and also to 1 store in Colombia, which was launched in Bogota with extraordinary results and shows quality differentiation, healthy products in freshness. This is going to be rolled out to other stores in Colombia and the most important initiatives rolled out mostly to the Carulla stores.

The omni channel strategy with sales growing 19%, mobile application now has 22% of these sales. We launched a very strong home delivery initiative in alliance with the home delivery last miler leader which is Rappi with a 26% growth for the full year, but more than 50% growth in the last month of the year. And with digital catalogues now in more than 70 cities of Colombia accounting for 38% growth in sales and permitting to sell in other stores the different portfolio that the stores do not carry. This is clear omni channel strategy in the best form as it is seen in the most advanced stores in the U.S. and in Brazil.

If we go to Slide #8, we see that initiatives in Colombia that create monetization of traffic and here real estate is at the head of them, we arrive now to near 2,000 rented spaces in Colombia in 29 shopping malls and commercial galleries. Of these, 12 shopping malls, the biggest of them have been contributed to Viva Malls and 2 big projects are under construction. These are Envigado with 240 commercial sites; 140,000 square meters of GLA which will be opening by September-October of this year and will become the most important shopping mall not only in (inaudible), but in the country and we also have Tunja, a very important shopping mall to the eastern part of our country.

Viva Malls had a first very good year with profits at a 100% against budget and our real estate business had a increase in income of 25% and it is going forward not only with Viva Malls, but with the internal developments in Éxito.

Initiatives for monetizations do not include only real estate. If we go to Slide #9, we see the complementary businesses which are ancillary income, which nurtured the margin of the company and permit the company to be price-competitive in the market, while earning money and while having positive EBITDA which contrast with many things that we are seeing in the market.

If you see this complementary businesses, you go to financial retail now with 2.6 million credit cards where the Mastercard which is as innovation and which is having a very interesting performance, arrives to 500,000 cards with the travel business at 210,000 clients, customers in alliance with Avianca, with our mobile business now being a fifth player in the Colombian market profitable and with near to 1 million customers. With our insurance alliance with Suramericana arriving to 1 million customers being the main seller of micro-insurance products in Colombia and our non-banking correspondent making near to 17 million transactions in our cashiers in alliance with Bancolombia and also with the banks of the Aval group in Colombia. All of these complementary businesses are profitable, are improving their profits year after year and they are having a good growth.

Looking forward it is the loyalty program, Puntos Colombia that has a very important upside. It is the largest ecosystem of point issuances and redemptions to be done in Colombia with a customer-base of 10 million customers. First days it will be about the sale and purchase of points and the margin that is created here and the attraction of customers from allies and creating a big ecosystem of customers and of loyalty customers. And a second phase that will go towards the big data monetization potential which is one of the most important things that the most advanced companies are doing worldwide and here we have a unique opportunity to do it first in Colombia and then to take it to other parts within the region.

Going to Slide #10, in Slide #10, we see the net sales performance in Brazil. Top line same-store sales is up in the quarter 6.8% and 8.2% by the end of the year for the full year driven by Assaí increase. I want to make a point here. GPA in Brazil had in 2017 the best growth of all international players with gains of market share both in cash and carry segment and in hypermarket segment going -- managing very well. Once that deflation that we saw in Brazil, which was something that we had never seen in Brazil, a deflation of 1.87%, but we're seeing a very important increase both in volume and in traffic.

This shows that the company is very healthy, that it is gaining market share and that it has given the Brazilian consumer what it wants. That is a very important premium format like Pão de Açúcar which went through 50 renovations and at cash and carry, which went through a very important expansion and conversion phase to arrive to net sales increasing 27.8% and same-store sales increasing 11%.

Now, Assaí represents 41.3% of all the food business in Brazil. Multivarejo at the same time even if it is in the part of the market that is losing ground, again ash and carry has done 2 things which are very important. The first one is to strengthen Pão de Açúcar as the premium format with renovations and with innovation in the fresh market. And the second one is to go through with the digital transformation starting with Meu Desconto, my discount, Meu Desconto which had 4 million downloads in Brazil. Brazil sold for the full year the equivalent COP 241 billion.

I turn it on to Manfred and then I will come back to speak about synergies and the final remarks.

Thank you Carlos Mario, and good morning everyone. We'll start on Slide 11. Quarterly net revenues reached almost COP 3.1 billion, decreasing 4%. Fiscal year 2017 ended at COP 11.1 billion and decreasing 2.8%.

Other revenues grew 15% in the year, mainly driven by the performance of the real estate business, which grew 25%. Gross margin in the quarter decreased 128 basis points, important to note that more than half came from the [GRS] accounting reclassification of in-store replenishing operation, that means moving some cash from SG&A to cost of sales. We know bottom line effect in order to homogenize reporting across LatAm. That's also why SG&A are flat in the quarter.

Macro conditions and consumption environment explains the remainder. Gross margin in 2017 ended at 24.6%, just 40 basis points versus last year out of which about half corresponds to the reclassification. On the SG&A side the operational expenditures grew 3.7% in the year including expansion and way below the inflation of the expenses structure of the company.

That grew on a case-by-case basis between last year's CPI at 5.75% and the minimum wage increase of 7%. It is the lowest increase since the introduction of IFRS in Colombia. This also shows the commitment of the company to protect the bottom line. Finally, the Colombian operation reached an annual record EBITDA of COP 633,000 million and a margin of 5.7%, though below the results of 2016, still a competitive margin.

Moving forward to Slide 12, I'll start with review of the performance of our international operations this time with Brazil. Net revenues grew 7.8% in the quarter and 13.4% in the year reaching COP 40.9 billion, complementing specially the strong and consistent performance of Assaí. Gross margin reached 24% of sales increasing 18.4% versus last year benefiting from clear commercial strategies for the development of non-food categories, lowered shrinkage levels and store maturity.

In terms of SG&A, the strong sales control and the implementation of efficiency initiatives in headcount, logistics, energy, amongst others during the year allowed a dilution of about 50 basic points and grew 10.5%, even offsetting the higher cost that comes from store renovations and conversions.

Recurring EBITDA ended at COP 2.7 billion, growing 48% and resulting in a 6.6% margin. Even after excluding tax credits, recurring EBITDA ended at COP 2 billion and growing 31%.

Please move now to Slide 13. Net sales in Uruguay in local currency for 2017 grew 7.7%, outperforming inflation. These results come as a consequence of assertive commercial strategy and the expansion of Devoto Express format which ended at 33 stores. Same-store sales grew 6.1% in the year again outperforming food inflation especially driven by the fresh category. Also textiles and home categories ended strong.

Net revenues reached COP 2.6 billion in the year, rising 8.8% and gaining market share in the country. The gross margin, it finished the year at 33.9%, 80 basis points below 2016 due to cost increases in logistics and increased promotional activities at the hypers. However, this effect was compensated at the SG&A level by an extraordinary expense control that also offset high wage increases. On the recurring EBITDA side, it grew 8.8% in the year to COP 205,000 205,000,000,000 maintaining a strong 7.8% margin demonstrating consistent growth and solid profitability levels.

Let's take a view on Argentina on Slide 14. Argentina continue experiencing a gradual recovery driven by I will call our required economic friendly reforms, economic stability and improved macro environment of Brazil and Uruguay. However, consumption environment remains complex and as in the other geography of Éxito's footprint, the change of trend in inflation pressured the cost structure of the company.

For 2017 net sales grew 21.1% in local terms while same-store sales grew 20%. Nevertheless, Libertad showed during the year an increase in performance, finishing strong in the fourth quarter at 27% in total sales and 26% in the same-store sales, both of those CPI.

Net revenues grew 5.3% to almost COP 1.5 billion reflecting a more positive retail performance and the contribution of the real estate business. Gross margin increased 20 basis points in the year as volume recovery started to slowly happen and improvement in the real estate performance happened. SG&A grew slightly below local inflation offsetting the pressure of an expense structure that rose somehow at 2016 inflation of 43% versus the current 2017 inflation. Finally, recurring EBITDA reached COP 64,000,000,000 with a 4.3 margin.

Please move forward to the next Slide 15 to see the consolidated results. Top line net revenues reached COP 56.4 billion with a 9.4% year-over-year growth. These results reflect the sales performance of Brazil and Uruguay and the contribution of complementary business particularly real estate in Argentina and Colombia.

SG&A grew below the net revenues and delivered 10 basis points reflecting productivity efforts and other cost cutting initiatives to offset the downward trend in inflation that pressured margins. Recurring EBITDA margin grew by 24% to 6.4% improving 80 basis points. Recurring EBITDA reached COP 3.6 billion in 2017. Excluding tax credits, EBITDA reached COP 3 billion and grew 11.7%, even more than revenues.

Finally bottom line net income group share grew 5x that of 2016 to COP 217,000,000,000, a 400% growth year-over-year. I will double click this result on the next slide. That 5x improvement in net income results mainly as follows. First, a solid and strong performance of Brazil during the year. Two, productivity efforts throughout the region and three, improved financial result as interest rates lowered in Brazil and Colombia.

Regarding the dividend proposal, on February 20, 2018, the board of directors of Éxito proposed a dividend of COP 243.20 per share equivalent to a 50% payout ratio. This dividend is to be paid in 4 installments as in the past. Obviously this proposal is subject to the approval of the general shareholders' meeting to be held on March 23, 2018.

Now finally, at the holding level, net financial debt closed at COP 2.5 billion decreasing 16% aligned with the company's strategy. Cash and equivalents closed at COP 1.6 billion driven mainly by the working capital improvement and increased dividends from subsidiaries. Adjusted net financial debt EBITDA ratio ended at 3.5x coming from the 3.13 ratio in 2016 due to macro conditions and consumption environment in 2017.

Just a remark, last December the company executed the refinancing of an international syndicate facility of $450 million and the local revolving facility of COP 500 million both of which were due on 2018. Now the new date for those 2 facilities are 2020.

Thank you and at this point I will return the call to Mr. Giraldo to continue.

Going to Slide #18, we have a look at the map of the main road that we have followed in synergies in the last 2.5 years where you see that we went from capturing $5 million of impact in operational results in 2015 to $100 million in 2017 and I think that is very, very in line with guidelines that we gave at the beginning of $150 million in 2 years. In 2015 we made a corporate structure definition for integration helped by Accenture. We started 15 projects and we have gone all through 2017 where we have now 28 joint projects execution and the integration office that has representatives of all the countries have shown to do are consistent and incremental work during all the years.

If we go to Slide #19, we see the quantity of $100 million that was obtained last year. In Slide #20, one of the synergies is joint purchases of commodities that are normally purchased in international market. Before every country did it on its own. Today we are doing more than 1,000 containers a year multiplied by 3.5x what we used to do 1 year before, more than $44 million in purchases with a discount that varies between 5% and 15% given the critical mass in purchasing that we are doing.

If we go to Slide #21, we see the textile synergy. Here we have taken to 57 stores in all the countries the look and feel type of strategy in textiles of creating value to our customers through brands in private brands like Arkitect, and Bronzini that are being now sold in all the countries. More than 1.3 million units of textile exported from Colombia, but also beginning to do local production under our designs to make this type of strategy sustainable in the long term.

If we go to Slide #22, we see some images of the Surtimayorista cash and carry in Colombia, which is following the type of sale mix and the type of proposition -- value proposition to customer and profitability path that we have seen for many years in Assaí in Brazil which of course has been the orientation for the cash and carry in Colombia.

In Slide #23, we see a great innovation that has been done in all the countries with the fresh market. We believe that the fresh markets that we can see in Bogotá, in São Paulo, in Córdoba and in Montevideo are at the level of the best fresh markets that we can see in Europe and in the U.S., creating a lot of value to the customers in the different propositions and one of the axis of development in the future is going to be to strengthen the premium formats given the important profitability and the resilience that they have against the competition of other formats.

If we go to Slide #24, we will see also the expansion of proximity in Uruguay arriving to 33 proximity stores, being the main expansion vehicle in this country and very unique as a solution to the restrictions in the Uruguayan expansion legal system.

If we go to Slide #25, we see the real estate projects in Argentina arriving to 170,000 square meters of GLA. Today we are now the third national player in commercial real estate and the leader outside of Buenos Aires, and in the last 3 years, Libertad has been the leader in expansion in the real estate business in Argentina with occupation rates that are now arriving above 90% which is a very healthy level.

In Slide #26, we see that digital transformation initiatives that we are starting in the Pão de Açúcar and extra stores in Brazil, more than 4 million downloads to our Meu Desconto. The application features include personalized promotions from our suppliers, store locator application and also the way of making express checkout by planning the time in which one customer is going to the cashier. This has also been translated to the other countries starting with Carulla in Colombia.

Slide #27, we see the outlook for synergies for this year. We believe we are going to arrive to benefits around $120 million. The split of them is half of them are coming from expansion of business models around the region like cash and carry, express loyalty schemes in all the country, textile model and fresh market and half of them come from efficiencies at cost level in purchasing of goods and also in purchasing of services of IT and also by the best practices for example in the good management of shrinkage and other part comes from the economies of scale in the joint purchasing level.

If we go to Slide #28 and 29 only that you can see them in detail what we show here is the guidance that was given last year for the different countries at Éxito level and the big message is that the guidance is in line with performance in all the countries in expansion, in format focus, in cost exercise, in real estate, in synergies only to stick to some part of this guidance that were given.

Finally in Slide #30, I will give you some conclusions of this conference. Speaking about the full year of 2017, it shows again the benefit of regional diversification and the positive outcome of consolidated results of Éxito at sales level, EBITDA and net profit having the net result improving in a substantial way. We also see a consistent cost and expense level gain in the different countries creating a linear operation in the region which is an ongoing commitment and which is going to show a quarter-by-quarter improvement as you are going to see starting by Colombia.

Annual synergy plan captured as had been previewed around $100 million and surpassing the expected plan which originally was announced above $50 million, a solid contribution of real estate operations in Colombia and in Argentina. And finally something very important for the present and for the future, which is that continuous strengthening of omni channel strategy which is not something new, it is something that we have been working for many years, but with specific and very important chapters like the marketplace, the digital kiosk and also the last mile service which has been already launched. The traffic monetization and the innovative leverage strategies that were shown during the conference, these are all key elements for long-term profitability at Grupo Éxito level.

And then going to Slide #31, having some 2018 perspectives, we see a positive effect in consumption coming from lower inflation and lower interest rates mainly in Colombia and Brazil; a continued gradual economic recovery and operational outcome in Brazil and Argentina; retail expansion focused in the most attractive format starting with fresh market with convenience and with cash and carry; focus on cost and expense controls as was the case starting in 2017; strengthening the omni channel strategy as something which is absolutely key and will become every year more important in these countries as it is today in the developed countries; and traffic monetization to continue improving contribution from complementary businesses.

Looking at the outlook for 2018, normally in this conference we give some guidelines. What we can say for Colombia is that we are pointing to a retail expansion of around 20,000 square meters with at least 8 cash and carry Surtimayorista stores. We are taking fresh market to at least 5 big stores and the best performing transversal initiatives in the fresh market to be rolled out at Carulla stores. Puntos Colombia to begin operations during the first half of this year, SG&A expenses to grow below the inflation rate in Colombia, Viva Malls expansion to around 160 square meters of GLA and with the CapEx excluding the Viva Malls CapEx of COP 300,000,000,000.

In Brazil retail expansion focused in 20 Assaí stores including some conversions, renovations of 20 additional Pão de Açúcar stores, a gradual implementation of fresh market model at Pão de Açúcar level, a CapEx of approximately BRL 1.6 billion in Uruguay and ongoing expansion through that convenience format with between 8 stores to 10 stores and in Argentina an ongoing development of the dual retail real estate business. Finally, at the LatAm platform run-rate benefits from synergies of approximately $120 million.

If we look at the big picture and if we look at the big picture of what we have seen in the exercise in 2017, it has not been the best economic year for all the region. Of course we see some recovery in Argentina and in Brazil, but still to be confirmed in the following years and still not covering the full benefit of the economic recovery. And we have gone through a very difficult economic year in Colombia as everybody knows.

However, if we look at the consolidated big picture results, you have a year which is acquitted at all lines with sales increasing more than 9%, with EBITDA even -- with EBITDA even without exceptional incomes which are operational, but are exceptional, but if you exclude the exceptional income, EBITDA growing at 11.7% with net profit multiplying by 5x and especially looking at strategy and long term with right decisions and right moves in formats in real estate, in omnichannality at cost level and with the force of integration which has been and which has proven to a be very important impulse force for Grupo Éxito in the region with very I would say united and committed and energized teams in all the countries.

So this would be the conference initial presentation for this session and we would be open to a Q&A session.

(Operator Instructions) Our first question on line comes from Antonio Gonzalez from Credit Suisse.

I have 2 questions. The first one on Colombia, the recurring EBITDA of the Colombian business throughout 2017 declined 23%, right, and obviously you've gone in detail through the competitive environment that perhaps might not be very rational and for deflation and the macro deceleration and so on. So I understand the drivers of this decline, but I wanted to see if you can share with us I guess your big picture assessment. I know this is not part of the guidance, but when you see them pass towards recovery, what can you share with us? I mean do you foresee strategically that you will be 2, 3, 4 years recovery or do you think you can recover these lost EBITDA in let's say the next year or so? And also what's your strategic assessment I guess of -- the EBITDA margin of this business used to be slightly above 7%. You have some structural changes in the business, more competition, omni channel and so on. But on the positive side you have the real estate business and some of the efficiency initiatives that you've described. So if you have to guess whenever that stabilization happens, do you think the EBITDA margin of this business can come back to 7% or is it going to be structurally lower than these levels?

I start by saying that when you see the expansion that is happening in Colombia and you have seen even in the last days some scandals going around that, but even if you go to formal players that are doing that expansion, no one today has shown the ability to gain COP 1 in profit after 10 years of work. I think that is not the kind of work that you expect from Éxito. It is easy to open stores everywhere and not to have the productivity for square meter, but we have decided not to do that. We have to play the game differently. So it has to be a combination of different things. First choosing the right format and we are choosing format in the extremes of the formula, that is in the high level which is the premium format which works great in the region and where we are clearly the regional leader in South America in premium format. And number two choosing a different type of a popular format which is the cash and carry which has created structural and profitable revolution in countries like Brazil and Argentina, and I make emphasis, structural and profitable, as we have seen not only in Assaí, but also in competition players like (inaudible) the format of (inaudible). So this is one thing that we are doing. Of course it takes some time. It has to create a material bait and that's why we are opening a quite important number of cash and carries and for example the 9 cash and carries that we have today will be selling something between $85 million and $95 million during this year which now is material after 1.5 year of existence. And the cash and carry also has a very interesting ROI because the investment per square meter is much lower than in other formats. The second thing that is important is clearly to remain a service provider to our customers to keep the alliance of our customers and we are measuring the service levels. And to give you one indication, this year in the Gallup measurement that we have, we arrived to 4.42 which is our very top level under any retailer and the net promoting score for example for the Éxito brand was 67 which is even higher than most brands in retail in the world. So we work here. The third thing is of course we have to target at prices and we're doing it in 200 categories which form the (inaudible) number of what our competitors are working, but for us only represent 15% of our sales and here we are assuring that we have at least the same prices or even below. And we're doing something similar to what Brazil is doing and it is a very important private brand initiative to increase the [competitivity] of our private brands in the basic categories. We have decided to be the fresh product category specialist at all levels, premium, medium, in hypermarkets and popular. This is something that nobody can copy and there's no international specialist in fresh categories, so this is something unique to Éxito and we believe that on top of that traffic monetization is key as we have seen with the different complementary businesses and with real estate, which we call it some kind of ancillary income which contributes to our profitability. And at the same time, we're working very hard at the synergies as we have been and at the cost level. What's going to happen? Nobody knows, but we're aiming that 2018 will be a year of stabilization of our margins. That's our internal aim. We don't want to be bullish about the possibility of recuperating 100 basis points or 150 basis points of EBITDA level that is something that to do you would have to not be committed with competitivity in the market, but of course it means that to keep that level, we invest more to the market, but we get more profit from the complementary businesses, which is fortunately a scheme which is unique for Éxito in Colombia. And of course, in the years to come there will be the possibility to increase gradually our margins, but for the moment, in this year, we're aiming to stability in our EBITDA margin.

And if I may, I wanted to ask a follow-up that is related with the EBITDA levels in Colombia I guess. When I see the leverage that you have at holding company level, you're showing 3.52x net debt to EBITDA rate trailing last 12 months. So perhaps for -- this question is more for Manfred, I understand that the internal target was to be closer or below 3x. I obviously can see that the EBITDA compression in Colombia is having an impact on these leverage figures, but I wanted to hear your assessment of what's the most realistic or updated expectation that you would have for let's say 2018? And I just wanted to ask, can you remind us if the covenants are -- on the debt, are tied to the holding level leverage? Or is it at a consolidated level? Because I understand there's a covenant at around 3.5x rate which gets revised every month of April and so on.

I'll address in -- like in small pieces. I think the first one has to do with the -- with how we ended. At the end of -- when we were presenting the result of the first quarter in May, what we said to the market is that we envision that the covenant, that the indicator would be around plus/minus 10% of what we ended in 2016. And one of the reasons that we said so is that we were seeing macro conditions in Colombia that (inaudible) consumptions condition not reacting properly. And what we said is that if consumption does not react what the end of the year probably will be in the upper range of that sense. And if you see the result that we post as of this year, at the end we're slightly off. So we were pretty much in the range what we discussed. That's one part. The other part that has to do with, I think, is important to recall that we come from a 3.8x indicator 2 years ago, so I think it's part of the trend of the leveraging, that's part of the strategy that the company has. I think this 2017, as Carlos Mario has mentioned, has been a particular year for Colombia and that obviously posted some pressures on the indicator. On -- a little on your question on whatever this is, a holding company or not as per our current contracts, we have both, but this particular one that we've -- that we want to follow, this is at the holding level, this is at the holding level. As of now, the current -- this is -- and also important to notice that this is an incurring test indicator. So it's very important to notice that. This is an incurrence test indicator. And as of now, the threshold that we have is 4x. So I don't know if -- I hope this answer your question.

Holding level, correct, Manfred?

Our next question on line comes from Federico Pérez from Bancolombia.

I have 2 questions. The first one is, at the beginning of the presentation, you guys said that you moved some SG&A expenses to the cost of sales. Can you give us a little bit more color on this? And the second one is regarding Colombia as well, but this one is more focused on the sales. We've seen a very tough quarter for the company where the same-store sales decreased 6.2% mainly driven by a tough consumption scenario here in Colombia. I will like you to ask how you see the performance of Colombia for the coming months, especially the first half of the year, before the presidential elections here we have in Colombia?

I will start with the second one and that is the perspective for Colombia and how we see the things coming. And I will say first that I want to be cautious because last year all of us were seeing that the second semester was going to be better and it didn't work that way, so -- but here I think that there are some grounds to be gradually positive. The first one is that the household expenditure is gradually improving. Of course the first part of that expenditure is going to paying existing credit, but it will eventually express investor consumption. The second thing is that clearly we have low food inflation of 1.92%. This low food inflation has 2 impacts. One is that people are going to have disposable income, salaries are going up 5.9%, so the difference between the 2 is clearly disposable income for people. Here it's interesting because the same happened in Brazil, and what happened in Brazil is that this disposable income, the first impact that it had was a very important reaction of non-food because people bought the same food, but they got some money that they put into non-food. And I think this is a trend that we're going to see in Colombia, that we're going to start an important reactivation of non-food categories such as electronic categories. And the third element to be moderately positive is that the lower interest rate will eventually transfer not only to better investment, and better investment create economic surge, but also to a reduction in interest rates in consumer retail credits. What are -- where are we coming from? It's important to understand. We're coming from a negative basket of 2.8% and we're coming from a negative retail as measured by (inaudible) and we are still at negative grounds in consumer companies, but we are seeing a gradual improvement. At Éxito level what can we say? What we can say is that we are seeing a gradual, still not strong, but a gradual recovery from the lows that we had in quarter 3 and quarter 4 of last year. We are seeing that this recovery is being first expressed in the non-food categories, and looking forward, the element that we have to look to are, first, the electoral cycle, which I don't give a lot of importance; I think it has some reduction in government expenditure, but there have been years in which even if there is elections, the economy and consumption has been strong. We have the World Cup. I think the World Cup creates a positive feeling in consumers, but also it has a good important impact in consumption, both in consumer goods and in electronics. And finally we see that especially for retail consumer credit it seems to be a year much better than last year. This would be like my previews and my first reactions to your question and I'm going to hand it to Manfred to speak about the first part on SG&A.

Regarding your first question, I will start saying that what we wanted to do is to make an adjustment to assure IFRS principles appropriate consolidation practices. What does this mean is that as part of our review as the way to align all the recurring for both internal exercises and control and external communication we need to guarantee that we have the same policy on certain accounts and this is account that comes from the replenishment on products at the stores levels. Those are the employee that after prototype taken from the shelf needs to replenish them new, this is a net account that means that this includes some supplier contribution. Just to give you a sense of how this adjustment work and why it is a (inaudible) adjustment at the end is that when I mentioned that about that little more than half of the 128 basic points difference come from this, I explained you with growth numbers, about 70 basis points come from this, this is roughly COP 23 billion. If you adjust that and you move COP 23 billion out of gross profit and put it in SG&A, what you'll see is the -- like the priors -- reporting that we have in the previous quarters, that would drive and I explained that your SG&As would no longer be minus 0.1% by plus 4%, still very low. Still under the company's commitment to protect bottom line. So what we actually we did here and the fourth quarter what happened is they have the retroactive pack of the whole year in just one quarter. That's why when you see on the yearly -- on the year results, you see that that effect is more contrary -- is less big at the end. I don't know if -- I hope this answers your question.

And if you mind me, I would like to ask another question and it's regarding the cash and carry format. You opened 3 Surtimayoristas during the quarter here in Colombia and you told us you expect these Surtimayoristas to give a 2x increase in sales before their transformation process. How long can this take in time to the -- like selling 2 times the sales that used to produce when they were the old format?

When I speak about 2 times the sales that they had under the previous format, it's an immediate reaction, it's from day 1. So that as an average there are some stores giving more than 2, some are slightly less than 2, but as an average we will give it 2x, then as we come to the first year, there will be a same-stores sales growth as we continue gaining attractiveness for the format and it is something very in line with that trend that we see in Brazil.

Our next question online comes from [Juan Chepatequa] from (inaudible).

I have basically 2 questions, and the first one is if you can give us any insight on the negative result in the equity method that we find in the whole year? And the second one is if you can give us some guidance or some time expectations on the process of divestment of Via Varejo?

Yes, that -- I will start by the second one. The divestment process of Via Varejo is an ongoing process. We have ratified it and that is why we consider and we continue having Via Varejo as a non-consolidated operation. Having said this, you know that it's an M&A process and M&A process take time and especially that between the moment in which the process started and today absolutely material things have happened both in Brazil non-food market and at Via Varejo level which has taken Via Varejo to improve substantially more than forecasted both its sales and its profitability and it has taken its share to go from near to BRL 8 and to BRL 9 when this all started BRL 226 at the point that it today stands. So you can understand that this creates of course challenges in the middle of the process, but it is a good result for shareholders, and I think that the fact that it has taken some time and it has been carefully done has been in the benefit of shareholders. I'm going to hand it to Manfred to go on with the first part of the question.

One -- this is Manfred. Just to be quite sure on your question would you remind specific in your first question please?

(technical difficulty) -- that in the whole year it was a negative value of approximately -- give me one second -- approximately minus COP 36 billion.

I'm trying to get that number to response correctly. What we have, especially at the consolidated level what we'll have is impact from [Sinova] and Brazil, and that were offsetted by [Tuya] and some others associated and that's where I see a negative equity impact at the equity method.

And do you know what happened exactly at the Sinova level?

No, this is the operational results.

Our next question online comes from Nicolas Larrain from JP Morgan.

Just super quickly, if you have any estimates on how Puntos [delegated] program will impact the P&L if you will what kind of benefits will the company reap besides the whole loyalty thing, it will have some benefits for the P&L also, just wanted to get your impression on that?

Still we're not giving a guideline on the result of Puntos Colombia. It is in the phase of pre-operation, a pre-operation. Management is already there and it's working since the last 4-5 months and we are in the process of putting together the specialized IT system that will take the database, the complete database of customers both of Bancolombia and of Éxito and of course have the adequate protection of that database and the segmentation of the same, but only to give you some ideas of the kind of business model, the first one is that today both Bancolombia and Éxito issue points for their services or their product, and these points are redeemed only within each company. That is Puntos Éxito is only redeemed between the products and the services of Éxito. What will happen now is that this points can be redeemed within all the ecosystem and also within the ecosystem of the [Aliados] or [allies]. We have now already 20 allies that are on the vehicle. These allies are people who have restaurants or boutiques of textile or services like gymnasiums or cinema et cetera and they -- of course airline services also, and they give all opportunities of redemption to the customers, but at the same time of issuance, that means that there is also a commercialization of the point. The scheme is that 1 point normally has a cost of COP 1 only to give you an example. Normally between 70% and 80% of the points are used within the year if there's important redemption alternatives and the rest of the points that are not used are kind of shrinkage. That means that they are no longer disposable, so when you have a cost of COP 100 for 1 point, at the end it goes down to COP 80 or to COP 75. And when you go to sell the point to an Aliados, you sell it at different prices according with the attractiveness that this type of redemption opportunities has to the Aliados and his customers. So you will sell it at COP 105, COP 110 or COP 130 and margin of the business is the margin between the price and the cost. What's interesting about this scheme is that it is a database and a technological business with no inventory, with no shrinkage of products and with also a creation of an additional loyalty sensation because for a customer that has Puntos Colombia and he can spend in, in a lot of solutions within them, a very important solution in food through Éxito and in financial services through Bancolombia, it is very attractive to remain within the system. So this is the scheme and of course the best -- you have many loyalty programs of this in England or in Brazil, they work fine, but for the first time the innovation is to have a big coalition where the 2 partners are massive issuers and massive consumers of points like the leading bank and the leading retailer in Colombia. The only other benchmark that you have in Colombia is LifeMiles and you have seen the great value that LifeMiles has given to its shareholders.

And our final question comes from Rodrigo Torres from [Valora Analytical].

I arrived late to the presentation, so I want to be clear at this investment was announced in Via Varejo stores in Brazil, can you please clarify that for me please?

Yes. As we said before, the disinvestment process continues, it is an ongoing process. It has taken time, but at the same time circumstances both in the non-food market in Brazil and in the share value of Via Varejo have changed dramatically and when we started the process, it was a share value between BRL 8 and BRL 9 and today it's at BRL 26 and the result of the company have improved a lot. But to give a straightforward answer, the strategy of the company to focus in food is an ongoing strategy and that means that we continue the disinvestment process.

I have another 2 questions please. Can you give us information about the Éxito [Prime] program that was launched on the April of last year and I want to know how market participation has been in 2017 compared with -- to discount chains and what is the expectation of the guideline for 2018?

First, the Éxito Prime, Éxito Prime is part of the omni channel strategy of the company and as we have launched the marketplace, we have launched LifeMiles service, we have launched digital catalogues for the company, we are recently launching Éxito Prime to give our customers the possibility of having free delivery if they commit by paying a fee and by being a loyal customer to Éxito.com. For the moment it only applies to non-food and we will see in the following months if we expand it to food, but we have to be first cautious that we have all the right systems, IT and logistic systems, so that it will function with a high level of satisfaction on our customers. In e-commerce what we have learned from not only Amazon, but from other key players in the world is that it is not only about selling cheap, but it is about giving a great customer satisfaction and we have been very, very strict about that and the good news is that the last grading that we got from Invamer Gallup on Éxito.com and Carulla.com was above 4.4 which is a very important level of satisfaction, of course with improvement to be done in the future. About the second one in market share, we don't have the complete market share because Nielsen does not have -- does not measure all the discounters, it measures some discounters, but what we believe is that in our market share given their expansion would have been impacted in around 200 basis points, and -- but we prefer to have 44 instead of 46, but 44 profitable market share points instead of 46 non-profitable market share points and of course we are serious about market share, but we are going to target the profitable segments of the market with the profitable formats with the omnichannality, with the innovation, with the focus on fresh products and all the other complementary strategies which we spoke about during this conference.

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

Yes, I want to thank you all for being here and even if I repeat some things, I want to be very emphatic on them. The first one is that when you look at the big picture, consolidated results, it show the benefit of diversification and the benefit of being present in the strongest LatAm economies. Colombia has been strong some years, Brazil has been weak some years, this year it was the other way around, but that's the importance of diversification. If Éxito was completely concentrated in the Colombian market, probably there will be a higher concern from you guys, so it's important today not only to have different tokens in different markets, but also to have that learnings and that integration coming from cross-fertilization in all the markets.

The second thing is that net profit improvement is there and that is important for shareholders and we are keeping the policy of the company of giving around 50% of profit distribution which can be changed in the future, but for the moment it is stable as it has been in the past years. The third one is that the integration process is not theory, it's a reality. You can see it in pictures, you can see it in bricks and you can see it in non-bricks, strategy in all the markets and it is going according with the [plannification] with a very important internal process.

I think that there is gradual positive regional outlook because of decreasing interest rates and inflations in other countries because of improving consumption expectations in Brazil, Argentina and gradually in Colombia and because of good productivity inside our different divisions at SG&A level. Éxito is focused on profitable recipe, in a profitable recipe that includes focus, price, investment. Of course we have to do it in basic categories, expansion in profitable and attractive formats, omni channel focus and fresh product category specialization and strength.

On top of that, it has a unique value creation opportunity for the company and for shareholders which are showing their benefit gradually and they will become more and more material for the company, like the traffic monetization coming from things as strong as real estate, complementary businesses and future lead our coalition, integrated benefits and synergies and the upside that we are receiving and will receive from Brazil and Argentina, being I would say Brazil a very interesting example because internally in the last 3 years GPA has taken the right decisions in the right format and in the right productivity schemes, which are showing their benefits. So this would be my final remarks and again I thank you very much for your presence.

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