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Edited Transcript of EXITO.BG earnings conference call or presentation 1-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Almacenes Exito SA Earnings Call

Envigado Mar 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Almacenes Exito SA earnings conference call or presentation Wednesday, March 1, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Maria Fernanda Moreno

Almacenes Exito SA - IR Director

* Carlos Mario Giraldo

Almacenes Exito SA - CEO

* Manfred Gartz

Almacenes Exito SA - CFO

* Jose Loaiza

Almacenes Exito SA - VP of International Business

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Conference Call Participants

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* Antonio Hernandez

- Analyst

* Andres Soto

Santander - Analyst

* Maria Barriga

Davivienda Corredores - Analyst

* Ron Dadina

MUFG - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Richard and I will be your conference operator today. At this time, I would like to welcome everyone to the Grupo Exito fourth-quarter and full-year 2016 conference call. (Operator Instructions) Thank you for your attention.

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

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Maria Fernanda Moreno, Almacenes Exito SA - IR Director [2]

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Thank you Richard and good morning everyone. We appreciate your joining us today for Grupo Exito'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. Jose Loaiza, VP of International Business.

We will be following the following presentation that is available on our website and the via link provided with the conference call details. If you look at the agenda on slide number 2, you can see that we will be covering Grupo Exito's operating highlights, financial results, and the strategy outcome for the fourth-quarter and full-year 2016. We will be then comment on the Company's business outlook for 2017 before concluding with the Q&A session.

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

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Carlos Mario Giraldo, Almacenes Exito SA - CEO [3]

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Okay. Thank you very much to all of you for being at the conference. I would start with slide number 4. Really 2016 was a key year for the consolidation of our Exito Latin American, South American retail and real estate operation. After 15 months of working together in the integration and consolidation of the Colombian, Brazil, Argentinean, and Uruguay operation, we can say that in this full year there are 19 initiatives going on in integration and synergies with a recurrent operational run-rate capture for the year of $25 million. In synergies such as the normal purchasing, both in food and nonfood, the cash and carry entry into Colombia, the allies entry into Brazil, the textile model into most of the countries and real estate synergies within others.

We continued the expansion in the key formats, which are trendy in the region as the cash and carry with 14 openings, the allies to the traditional channel both in Colombia and in Brazil with a 102 Aliado in Brazil and proximity formats. The commercial strength of the organizations saw a hypermarket special strength in all the countries in the four countries, but I have to highlight the Exito hypermarkets in Colombia and the Extra hypermarkets come back in Brazil with a market share gains in the last nine months of the year and with an increase in sales in the last Q that have not been seen in previous Qs.

Our customer satisfaction in Colombia came to a top level with 4.35 point over 5 for Exito given by our customers through Invamer Gallup and 4.4 for the Carulla customers.

In the financial highlights, we have EBITDA growth, both in Colombia and in Uruguay for the full year even in a challenging macroeconomic environment. We have also the good news of profitable online business in Colombia for the first time in middle single-digit EBITDA and sales that continue growing at double-digit every year. And a consistent holding deleverage, which went from 3.8 net financial debt to EBITDA to 3.1, surpassing the expectations that we had.

In corporate governance achievement, we continue with the adoption of OECD corporate governance guidance, which are captured by [Corigo Payis] in Colombia. And one of the most important moves was that our audit and conflict of interest committees are today exclusively conformed by independent Board Members.

Finally, in sustainability achievements, we remained included in the Dow Jones sustainable index for emergent markets and there are key advances in our nutrition vision for Colombia for zero nutrition as of 2030 and the local purchasing to local fruit, vegetable and meat suppliers all over the country.

Going to slide number 5, we can see that in the CapEx for the year we had a total consolidated CapEx investment of around COP2 billion with 70% to expansion and 30% to maintenance, and out of that the Colombian CapEx came to COP564,000 million, which is one of the highest in the whole history of the Company, 38% of it going to real estate expansion and the rest to maintenance that fundamentally to retail expansion.

There is -- it's important to highlight the steps taken towards the corporate simplification process, that is initially the integration of Cnova Brazil into Via Varejo to create a whole unit of nonfood virtual and [physical], and then the announcement of the divestment process of Via Varejo in order to focus our force, our strength, our expansion and our future in the food business in Brazil, that is to choose one of the two battlefields in that battlefield which has the highest potential and which is normally resilient in all economic moments. And to become clearly the food retailer leader in South America with nonfood content that is contained in our hypermarkets.

We launched our Viva Malls real estate vehicle as had been announced in alliance with Fondo Inmobiliario Colombia that acquired 49%. It is controlled by Exito and the valuation was of COP1.6 billion with a cap rate between 8.7% and 8.8%.

Going to slide number 6, this is a key slide because it shows how in the different countries we are pursuing a joint vision and a best practice exchange especially in commercial strategies which have impacted the sales of the most important business units in the different countries. Let me mention first the 1, 2, 3 savings of the month strategy which was initially originated in Argentina, gave Argentina two full years of market share gains. It was taken later to Colombia and to Brazil, first to Brazil. It includes very clear promotional scheme of more than 1,000 SKUs every 15 days and it has been key in the recuperation in the comeback of Extra to the growth terrain.

The textile model coming from Colombia from the Exito DNA in textiles is being taking to Argentina and to Brazil to eight stores as a total and will be taken to 30 more stores in Brazil this year. It is key because if the percentage of participation of the textile business in the other units, in the other countries becomes near to what it is in Exito, it means not only more traffic into the nonfood business, but also an increase in the gross margin in the hypermarket.

Finally, without entering in detail, we have the unbeatable prices or omais barato in Brazil strategy for the basic selected SKUs of basic food having the best price in the market and the fresh product concentration in shrinkage and in the generation of margins in all the countries.

Going to slide number 7, we speak about expansion strategy only to say that for the full year of 2016 we had a 76 openings arriving to a total of 1,576 food stores in the four countries with 566 in Colombia, 904 in Brazil, 79 in Uruguay, and 27 in Argentina for a total area of near to 2.8 million square meters.

In the real estate expansion, it was a historic expansion with 75,000 square meters of GLA, of gross leasing area, in two shopping malls including Viva Barranquilla, the most important shopping mall to the north of Colombia and the sixth largest in the whole country. And in Argentina with an additional 15,000 square meters arriving to a total of 160,000 square meters which makes part of an aggressive plan of increasing GLA in real estate in Argentina and strengthening our position as the first commercial real estate operator outside of Buenos Aires.

Slide number 8 speaks about the strong sales performance in Colombia. Finally, we had a sales growing total 6.9% that compares favorably against the inflation and against the increase of commerce of 2% for the whole year, and we have to highlight that it was the Exito brand and the Exito hypermarkets which leaded this increase in sales with a 7.4% increase in sales and a 5.3% same store sales growth.

Exito sales outperformed the retail market and Exito hypermarkets rebound is not only based on the food content, but also on the nonfood, especially the textile aggressive strategy of everyday low price that we are having in our market with 18% increase in sales for the whole year.

I had the word to Manfred Gartz and I will come back for the final remarks.

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Manfred Gartz, Almacenes Exito SA - CFO [4]

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Thank you Carlos Mario and good morning everyone. We'll start on slide 9 with the highlights of the operating performance in Colombia. During 2016, net revenues reached COP11.4 billion, increasing 7.5% year over year, a growth way above the 5.75% inflation. Gross margin gained 20 basis points mainly due to improved profitability and the contribution of the complementary business such as credit insurance, travel, and real estate even if considering external factors like the high inflation during the year, the transportation strike, and the effects of El Nino.

The SG&A rose 60 basis points throughout the year, mainly from utilities, occupancy cost, and wages. Finally, the Colombian operation show the recurring EBITDA of COP833,000 million and a margin of 7.3%. They are very healthy and very competitive margin when compared with other Latin American peers.

Moving forward to slide 10 and starting with review of the performance of our international operations, I will start with Brazil. Here it is important to say that during the first half of 2016, the food segment in Brazil started the implementation of a serial of commercial strategy and initiatives to improve the top line performance, leveraging on our value proposal and our strong brand positioning. The results showed, and I would say that especially in the last two quarters, a strong recovery of the food segment finishing the year with a sales growth of 11.4% in local currency above yearly inflation and reaching COP36.2 billion.

Same-store sales during the same period was 6.7%. Our Assai cash & carry format continue its double-digit growth with almost 36% yearly growth and a same-store sales of more than 18% both in local currencies. Now Assai represents over 36% of the total food sales mix in Brazil.

On the other hand, Multivarejo benefit for a strong recovery of its hypermarket brand Extra in the last two quarters, reverting the beginning of the year trend and finishing strongly in the fourth quarter at around 5% same-store sales, while Pao de Acucar remained resilient versus competition with stable same-store sales. Just to finalize the proximity format grew above inflation and the Aliados Compre Bem, that's a model inspired by the Colombian model, finished the year with over 100 stores.

Moving forward to slide 11, in COP the pro forma net revenues grew 27.5% in the quarter and 18.5% in the year reaching COP36.4 billion. Pro forma gross margins of 23%, here it's just important to say that the contracting margin when compared with the 2015 in driven by a price investment strategy and the promotional activities implemented especially at Multivarejo that shows increased volumes and market share. Also, the bigger weight of Assai in the sales mix explains the difference.

In terms of SG&A, a much disciplined control of expenses started to show results in the last two quarters partially offsetting the gross margin contraction. The strategy is to continue streamlining cost and expenses and ensure the Company is prepared until the full economy rebounds. Recurring EBITDA margin ended at 5%.

Now please move on to the slide 12 and we'll talk about Uruguay. During 2016 despite the slowdown on its main commercial and tourist partners Brazil and Argentina, sales grew almost 11% in local currency, part of it benefiting from the opening of 14 new Devoto Express stores. Same-store sales for the period grew 8.3% above the inflation.

Net revenues reached COP2.4 billion and a growth of 11% on a year-over-year basis. Inflationary pressures both in cost and expenses were offset by proved productivity during the year as you can see on the table there, and the recurring EBITDA reached COP188,000 million with a 7.8% margin in line with that of 2015 demonstrating consistent growth and a healthy profitable level.

Moving on to slide 13, last year was particularly challenging for Argentina. It was a transition year both in political and economical matters and with an inflation over 40%. Even in that scenario, pro forma sales rose 20% in local currency. Sales benefit from food sale, especially the fresh line, while nonfood had a normal weak performance under this macro conditions. However, the launch of the textile model in Argentina coming from Colombia also created momentum in the country sales.

Net revenue reached COP1.4 billion gaining market share given the positive effects of the commercial strategy that especially contributed to the performance of the hypermarkets, and as you see on the table, given FX variation, growth came at minus 11% in COP.

Also the real estate business proved as the natural hedge for our Argentinean operations offsetting most of the inflationary pressures and protecting the results of the real estate business. SG&A rose below inflation and that is explained by disciplined expense control, and the recurring EBITDA reached almost COP70,000 million and a margin of 4.8%.

Please look at slide 14 to have a look at the consolidated financial results. Top line consolidated net results reached COP51.6 million posting 14.5% year-over-year pro forma growth. I think this results show the commercial strength of the Group across all four countries. Going down to SG&As, as percentage of sales remained flat in 2016 versus the same period last year reflecting productivity efforts and other cost-cutting initiatives that helped offset the inflationary trend in the region that cost higher salaries, higher occupancy cost, and higher utilities.

Recurring EBITDA reached COP2.9 billion and a margin of 5.6%, mainly challenged by the Brazilian operation. Margin in Colombia and Uruguay remained strong while Brazil and Argentina show signs of recovery over the last two quarters.

By -- I think this is public by November of last year, Grupo Exito along with Grupo Pao de Acucar announced its intention to divest in the nonfood business in Brazil. Therefore all results from Via Varejo and Cnova are displayed in our consolidated financial statements under IFRS 5.

When we see the net income from continued operation, it was COP212,000 million out of which about COP100,000 million is attributable to Grupo Exito and the remainder COP112 million is attributable to the minority interest. After the subtraction of our share in the net income from discontinued operation, the net income attributable to Grupo Exito is COP43,500 million.

Moving forward to the next slide, I would like to show you the bridge between the third quarter results and the turnover that happened over the fourth quarter. We'll start the fourth quarter with the result of third with COP147,000 million loss. During the fourth quarter, all four countries contributed with a strong operating earnings totaling COP604,000 million.

After we subtract net financial results, tax provisions, minority stakes, and obviously the discontinued operation, land the net income at COP43,500 million after a net profit for fourth quarter of COP191,000 million. On February 27th, this Monday, this last Monday, the Board of Directors and Grupo Exito's Management team proposed a dividend payout ratio consistent with Grupo Exito track record, 50% of the net income attributable to Grupo Exito. Obviously, as you know, this proposal is subject to the approval by the general shareholders' meeting to be held at March 31st.

Now on slide number 16, we show the landing of adjusted debt ratio. Net financial debt at holding level reached almost COP3 billion as of the end of December 2016. This represent an improvement of over COP600,000 million. The net debt adjusted EBITDA indicator came down from 3.8 times at the end of 2015 to 3.1 times by the end of last year. There was -- I think we did a pretty good job after our guidance of the leverage of 3.2 times.

The Company's strategy to achieve these targets relied on a clear (inaudible) of around $200 million mainly from working capital optimization, increased productivity, and cash centralization in -- at the holding level among other initiatives. I think it's important to highlight a reduction of over five days in inventory coming from continuous and sustainable initiatives in operational excellences.

Finally to have -- on slide 17 to have a few thoughts on the cash flow. At the holding level, the cash increased by COP288,000 million to COP1.1 billion. Higher operational cash flows, working capital improvements, and increased dividends from subsidiaries largely offset debt amortization and higher cost of debt.

I think at this point I'm going to turn the call over to Mr. Jose Loaiza for a follow-up of the Company's international strategy and the synergies process.

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Jose Loaiza, Almacenes Exito SA - VP of International Business [5]

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Thank you Manfred. Hello everyone. On slide number 18, you may see the timeline of the integration process. It's been almost 18 months and we think that we are at full speed. We shared with you before that we expect it to reach during 2016 between $50 million and $25 million, and we are pleased to tell you that we landed in the upper end of that target delivering last year $25 million.

In the next slides, we are going to mention only a few of the projects that are underway worth mentioning. Going to slide number 19, we saw [2006] as having the purchasing synergies both in food and nonfood are the champion synergies.

We successfully renegotiated our regional agreement as the LatAm platform with the big multinational corporations that gave us benefits in 2016 and those benefits will be purely captured on a recurrent basis in 2017 and on. Also we have consolidated a solid process of buying commodities together. We are talking here about apples, salmon, olive oil, wine, among others, and in the Q4 we were able to buy over 300 containers altogether, more than doubling the amount that we did in the third quarter.

Also we gave the chance to the best vendors in each country to export their products to the other countries they are not operating in, so that basically give us the chance to improve our commercial conditions with them as we enlarge our volumes and also be their preferred retail platform.

Going to slide number 20, you may see some images of the replication of the textiles business model in other geographies than Colombia. We finished the year in Libertad Argentina with four stores fully deployed, the same quantity in Brazil, but the message here is that the textile synergy is just beginning. 2017 will be the year of rollout in this initiative having completed Libertad by year-end, that's our expectation. We're talking about the 15 hypermarkets. Will do other 30 Extra hypermarkets in Brazil and we will go one shot with 11 stores that carry the category in Uruguay, so we have big expectations this year with these synergies.

Going to next slide, Carlos Mario already talked about it, we have our SurtiMayorista in Colombia with a early promising results and with expectation to open more this coming year, and as Manfred shared, it is a reality the implementation of the Aliados Compre Bem platform in Brazil finishing the year with over a 100 Aliados and with expectation to reach the benchmark of 500 at the year end.

On slide 22, just to give you the final example of synergies, we are very pleased with what we are achieving in Argentina. With the know-how of the Colombian team, we remodeled two of our shopping galleries in the country. We're talking about Salta and Chaco. We added 15,000 square meters additional GLA reaching 160,000 square meters in total. This initiative will continue this year and our expectation is to reach in the mid-term the mark of 200,000 GLA for the country.

So we are pretty confident about the commitment of all the countries in this process. It has very close follow-up by the top management CEOs of every single country and our expectation this year for the amount of synergies is to least double what we got in 2016.

So having said this, I turn it on to Carlos Mario for the final remarks.

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Carlos Mario Giraldo, Almacenes Exito SA - CEO [6]

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Thank you Jose. Let's go to slide number 23. It's always good to look at the guidance that we gave the previous year and see how we delivered on it and it's important to see here than in most of the aspects, not only we delivered, but also exceeded on the guidance.

Let's begin by Colombia. We said that we would have a growth of high single-digit and the growth came to 7.5%, that the CapEx would be between COP300,000 million and COP350,000 million and really it came in retail and maintenance to COP350,000 million; and additional to that came the real estate CapEx in a very, very active and dynamic year with COP215,000 mostly in shopping malls like Barranquilla, La Ceja and [Embigalo].

For Brazil we spoke about low single-digit growth of the top line and it reached with -- to 11.7% of course with a big impulse coming from Assai, but also with the positive contribution of Extra hypermarkets. We spoke about CapEx of BRL1.5 billion, we came to BRL1.2 billion with focus as expressed before in Assai and Pao de Acucar which are the most trendy formats, one in the base of the pyramid and the popular and institutional market, and the other one in the premium market.

For Uruguay, we spoke about proximity as the axis for expansion and we developed 14 proximity stores which gave market share to Disco group in Uruguay, and in Argentina the focus was in the expansion of GLA to arrive to 50,000 square meters of additional GLA in a three-year plan. We continue to look at this three-year plan to arrive to 200,000 square meters of GLA and during the year 15,000 square meters of that 50,000 square meters were delivered in two shopping galleries.

Going to slide number 25, we can see that we spoke about a consolidation of the region, a consolidation of management, and of the structure of Exito for the LatAm operation. Really I'm not going to go into all the details, you can see it in the slide, but I would try to highlight the entrance into the management team of Manfred Gartz as CFO of the organization, and also the leadership of Luis Moreno in Multivarejo which has been key for the turnaround of Multivarejo and of the Extra brand in Brazil.

We spoke about expected run-rate operational impact of synergies between $15 and $25 million and we came to $25 million of synergy contribution, and finally we spoke about net financial debt to EBITDA coming from 3.8 times to 3.2 times and it was exceeded by 10 basis points as was said by Manfred.

Looking at 2017 guidance in slide number 26, first about the Latin American platform, we are expecting run-rate benefits from synergies at least at $50 million, doubling the contribution of 2016.

New synergies coming into the scenario, one is the loyalty programs taken from Colombia to the rest of the countries, but basically to Brazil where it's a very important part of the strategy of Multivarejo, supply chain and shrinkage as synergies were best practices can give a lot of value to the operational margin of the different countries, especially in Brazil.

Going to Colombia, in Colombia we are speaking about 35,000 square meters of sales area to be added to retailing, at least two SurtiMayorista stores. After the good success of the first SurtiMayorista in Bogota near to the Central Mayorista of Corabastos, we will continue strengthening our Aliados, not only adding the number Aliados to the 1,300 we have, but also deepening the contribution to the sales that we have to these Aliados traditional channel players. In Viva malls, we are planning an expansion above 120,000 square meters of GLA by 2018. In Brazil, cash and carry will have between six and eight openings of Assai stores from scratch and we will have at least 15 conversions from Extra hypermarkets that have not been performing in the best way and that are in the correct area for an Assai proposition, this following the big success that we have had from the first two conversions that were done in the last Q of 2016.

This is a very interesting differentiator in Brazil where no brand has the opportunity that Grupo Pao de Acucar has to do this type of conversions and to create a multiple of sales and of profit out of these type of conversions. Proximity will go to 10 Minuto Pao de Acucar and 5 new Pao de Acucar full supermarket stores will be opened. We will continue with the process of divesting of Via Varejo to focus in the food segment as has been repeatedly said.

In Uruguay, we will increase between 10 to 15 new Devoto Express stores opened in the areas around Montevideo and Punta del Este, and in Argentina in real estate expansion, there will be an additional 35,000 square meters in the following two to three years.

Let's go to the final slide. In the final slide, we speak about the perspectives for 2017. First let's speak about sales in Colombia. We think that sales in Colombia are going to be difficult in the first part of the year, that this is a reflection of the low expectations on consumer which were in the lowest moment in January of this month, and also from the impact coming from the increase in the VAT taxes which has affected the confidence of consumer.

However, we believe that it will pick up in the second part of the year with lower inflation, which is a consistent trend and also with a decrease in the interest rates, which we expect will accelerate as the inflation rate is controlled and which was -- has been down 50 basis points in the last three months.

We will continue with the very positive development of traffic monetization which has been key for the resilient model of Exito and for the gross margin of the Company, and we will of course continue promoting the complementary businesses of the Company, as credit, insurance, travel, financial transactions, et cetera. In the mid-term, we expect that the economic recovery of Brazil and Argentina will come. The expectations are to have a slight positive in both economies, which is very positive coming from many years of negative trend, especially two years of negative accumulated GDP of near to between 7% and 8% in Brazil.

This is mid-term, but we begin to see as we saw it in the last Q, a gradual but consistent recovery in the sales of our operations in both countries. I would say not only because of the country recovery, but especially because of decisions that have been taken in the strategy for the commercial proposition especially in the Extra format and in the Assai expansion in Brazil.

We have key commercial activities in Brazil to continue improving Grupo Pao de Acucar customer traffic and market share levels as has been seen in the recent months. Via Varejo sale proceeds will be destined to strengthen GPA's food profile. Here we are choosing between two battlefields and we think that the food battlefield has a lot of potential in Brazil in many states where we still are weak, and that with these proceeds, we will expand much more our Assai and Pao de Acucar brands.

We will make a lot of focus in all the countries in cost and expense control activities and these target the SG&As which are key in the competitivity of the different operations for this year, and we will be expanding in high return formats like the Assai given the investment that we do by square meter and also the Pao de Acucar or the Exito format in Colombia or the Aliados. We will -- also we expect the devaluation of Via Varejo and GPA in 2016 which you see was 228% in the share of Via Varejo and 31% in the share of GPA will contribute to the value of the share of Exito, which we think is of course absolutely key for our shareholders.

In summary, we believe that the recovery will not be instantaneous, will not be immediate. That is a gradual recovery that in Colombia we are going to work a lot on productivity to be able to face the short-term difficulty in consumer expectations that we believe that the second semester or the last months of the year will be much stronger. We think that Brazil has taken the right decisions in expansion, in conversion, in commercial strategies around Extra, that the margin investment that has been done will be leveled as has been said by GPA in its recent conference, that we will have a very interesting opportunity for expansion in the real estate, that complementary businesses continue to give monetization to the traffic of this organization, and that our synergies and integration to focus in food will continue in a very consistent way.

These are our initial remarks. I again thank you for being present and we are ready for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) [Antonio Hernandez]

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Antonio Hernandez, - Analyst [2]

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Could you please provide more information how this continued operations of Via Varejo impacted specifically every quarter of 2016? We have the impact of discontinued operations for the full-year, but how is this impact distributed among the different quarters?

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Manfred Gartz, Almacenes Exito SA - CFO [3]

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This is Manfred. I will answer your question. First of all, the announcement of the divestment of Via Varejo occurred during the fourth quarter of 2016. Therefore under IFRS rules, we only need to start showing as a discontinued operation as of that time up. Regarding the next few quarters, in the first quarter, if we haven't sold the Via Varejo, we will still show the -- the discontinued operation up on our P&L.

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Antonio Hernandez, - Analyst [4]

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Okay, sure. But then I mean in terms of full-year sales for 2016, they were already impacted by discontinued operations. I mean, Via Varejo was now in the line of discontinued operations. So going backwards in terms of how the impact of this discontinued operations, that information won't be disclosed on a per-quarter basis before the fourth quarter then?

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Manfred Gartz, Almacenes Exito SA - CFO [5]

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If you see the P&L, what happened in the fourth quarter is that all the consolidated figures as of revenues, costs, expenses, financial interest over sum up in a net income from Via Varejo and Cnova and they are added at the end of our P&L. So when you see in the line or in the P&L that is called net income from continued operations, that shows the consolidated figures of the Colombian operation, the Argentinean operation, the Uruguayan operation, and the food segment operation of Brazil. Therefore those numbers add up to that line does not include anything regarding Via Varejo. We have a wrap-up figure on the line called net income from discontinued operation and that captures all figures from Via Varejo.

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Antonio Hernandez, - Analyst [6]

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Okay. Okay. And another question I have, do you have a guidance on CapEx or on (inaudible) distribution between the different operating regions for 2017?

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Carlos Mario Giraldo, Almacenes Exito SA - CEO [7]

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For the moment, what we can advance is that CapEx guidance for Colombia in which we are going to be investing around COP300,000. That's the guidance for Colombia at this moment. And the guidance for Argentina and Uruguay, we will do in a following conference, but it is very around what we said what will be required for 15,000 square meters of GLA in Argentina and between 10 and 15 proximity stores in Uruguay plus maintenance costs.

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Antonio Hernandez, - Analyst [8]

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Okay. Thanks.

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Operator [9]

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Andres Soto, Santander.

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Andres Soto, Santander - Analyst [10]

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My question is regarding cash flow generation and use of this cash flow. During 2016, we saw an improvement in working capital. How sustainable is this improvement? And when you look at 2017, can you please give us some guidance in terms of what are you expecting in terms of deleveraging? Are you anticipating to use some of your cash flow generation to pay down debt or this is going to be mostly used to the ramp-up expansion Colombia that we see now?

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Manfred Gartz, Almacenes Exito SA - CFO [11]

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Hello, Andres, this is Manfred again. As you mentioned, 2016 was a good year for our cash flow generations. What we're expecting right now is a -- as you see, sorry, as you see on 2016, we did a huge effort of lowering our leverage to a more reasonable level and that's part of the normal cycle after a huge acquisitions as that happened over on 2015 with Brazilian and the Argentinean operations. As of now, what we're seeing is that the cash flow generation for 2017 it's good shape.

We're not given a particular guidance on the use of proceeds as of this year; one, take into account that we did the huge effort on 2016; second, on that we want to be cautious regarding the -- as Carlos Mario said, the impacts of the -- in the first two quarters of 2017 of tax reform in Colombia. But nevertheless, we still continue improving our working capital. That improvement that was shown last year comes from sustainable actions and initiatives, and as I mentioned before, we have over -- there was 5.5 less days in inventories that was coming along with the lowest -- with the lowest supplier --

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Maria Fernanda Moreno, Almacenes Exito SA - IR Director [12]

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Shortage.

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Manfred Gartz, Almacenes Exito SA - CFO [13]

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-- shortage on the stores. So I think at the end, what this shows is that this is part of the Company's strategy to continue its operational excellent strategy.

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Andres Soto, Santander - Analyst [14]

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Thank you Manfred. But when I look at your numbers in 2016, I see that 85% of your operating income coming from Colombia, Uruguay, and Argentina was dedicated to use -- to pay financial expenses in Colombia. So it makes sense that you use some of this excess cash flow generation that you're getting in paying down debt. Can you give us at least an idea if this is what you're planning or is going to mostly focused on expansion?

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Carlos Mario Giraldo, Almacenes Exito SA - CEO [15]

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Andres, this is Carlos Giraldo. I think that the reason why we want to be cautious in guidance is because it -- first, we are maintaining our CapEx and that's key and that's very important for the Colombian market. But second, that it depends a lot on the dividends that we will be getting from other operations; and second, that it depends a lot also on the reduction in interest rates both in Brazil and in Colombia.

As you have seen, in Brazil there has been a steep beginning of reduction in interest rates 125 basis points in two months; in Colombia 50 basis points in three months, but we still don't know if this would continue at a higher rate. And that will also have a very important impact in the degree, in the way in which we will have this indicator.

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Andres Soto, Santander - Analyst [16]

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Okay. Thank you Carlos Mario.

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Operator [17]

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Maria Barriga, Davivienda Corredores.

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Maria Barriga, Davivienda Corredores - Analyst [18]

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I have two questions. The first one is regarding Via Varejo sales, when would be -- when would we be expecting to have the transaction completed? And second one is regarding the guidance for synergies. We had seen in previous quarters that your guidance was around $160 million. So with this investment, do you expect the same level or you expect a reduced level in reaching synergies?

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Carlos Mario Giraldo, Almacenes Exito SA - CEO [19]

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I begin with the first one about Via Varejo sale. I want to be very cautious because you know that these processes have to be confidential in order to be successful and in a M&A process, you know when it begins, but you don't know when it ends, and that's as much as I can say at this moment. And what I can say is that it is a discontinued operation, so it means that this -- it is a clear decision to go forward with this concentration in the food business.

And the second thing, I want to make emphasis on the strategic importance of this. Brazil is a huge country and we are into very important markets, food market and nonfood. In both we have very dynamic competitors. So to concentrate other resources in the most resilient market where we have the most powerful brands and where we have the most trendy formats in order to expand and continue there, I think it is the right decision, and it is going to be very good, not only for the financial health of the operation, but also for the growth perspectives of the operation.

I give the word to Jose Loaiza to refer to the synergies clarification.

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Jose Loaiza, Almacenes Exito SA - VP of International Business [20]

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Concerning the guidance, again, this year, we expect to get at least double what we got in 2016. It is $50 million. We said in previous calls that our long-term goal of this whole process is to get the benchmark of $160 million. It is correct saying that with the potential sale of Via Varejo, we'll lose some synergy potential, but as Carlos Mario said, we have come up with new initiatives by loyalty in Brazil, shrinkage in Colombia and Brazil, supply chain best practices in Colombia and Brazil that give us the confidence to make that up and to keep the goal of the $160 million.

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Maria Barriga, Davivienda Corredores - Analyst [21]

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Okay. Thank you very much.

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Operator [22]

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Ron Dadina, MUFG.

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Ron Dadina, MUFG - Analyst [23]

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I have basically three questions. I just want to better understand what is the difference between EBITDA and recurring EBITDA, what items do you include in them or what do you exclude? And the second question is do you expect a further reduction in debt in 2017 and especially at the standalone Exito level in Colombia? And the final question is, is there any plan to reduce the dividend payout in order to further reduce debt?

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Carlos Mario Giraldo, Almacenes Exito SA - CEO [24]

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Excuse me, could you repeat the third one please?

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Ron Dadina, MUFG - Analyst [25]

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Yes, the third question is, is there any plan to reduce the dividend payout ratio in order to further reduce your debt levels?

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Carlos Mario Giraldo, Almacenes Exito SA - CEO [26]

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Okay, I will refer to the third one and then hand it to Manfred for the first two. For the moment, the policy of the Board of Directors to make the proposal to the general assembly is to stick to what has been the track record in the Company and the policy in the past and it is to distribute around half the profits -- the net profits that the Company has.

And it's obviously not myself that has to keep that projection looking forward because it's a collective decision on the Board of Directors, and afterwards by the general assembly, but for the moment what I would say is that we are keeping for this year the general policy that the Company has had in the past.

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Ron Dadina, MUFG - Analyst [27]

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Thank you.

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Manfred Gartz, Almacenes Exito SA - CFO [28]

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For the first two questions, the main difference between EBITDA and recurring EBITDA, I think I need to split that for the different countries. So if we start with Colombia, what you have there is the proceeds from -- proceeds from the claim, of insurance claim that we have. We have also charges in terms of restructuring.

When you go to Brazil, you have the restructuring of the Company. You also have expenses due to some closings, store closings. We have in Brazil also some tax provisions. And I think that's pretty much the parade of the difference, but there are nonrecurring items that happens mainly because of -- as we mentioned, especially in Brazil given the current macro environment, some adjustments that are happening in the Company.

And on second question, that's pretty much in line with what I've just said to Andres. It was that last year we take a huge step forward reducing our debt. At this stage today, what we want to do is to be more opportunistic and try to see the interest rates going down, and trying to see how much of that we can size and probably produce, I would say, any reduction. But as of now, we are being cautious as I mentioned before, first to see what happened in the first half in Colombia and there move accordingly.

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Ron Dadina, MUFG - Analyst [29]

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Thank you.

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Operator [30]

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(Inaudible), Bancolombia.

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Unidentified Participant [31]

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The first one is related with the EBITDA margin which presents a contraction against the fourth-quarter 2015. We would like to know how you have seen the market performance in 2017 up to date, taking into account that consumer confidence is in minimum levels and the tax reforms with the increasing VAT?

And the second question is regarding Via Varejo sale process. You know that GPA has a strong financial position in cash and the net debt to EBITDA ratio is quite low around 0.3 times. We would like to know what will be the purpose of these resources and also if you have considered that this is the right moment of the transaction when the Brazilian economy has began a recovery stage?

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Carlos Mario Giraldo, Almacenes Exito SA - CEO [32]

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I will go to the first one, referring to the EBITDA margin. At the end in Colombia, it was 7.3% even though it was slightly slower than last -- lower than last year, it is a very strong EBITDA margin, and if you consider the competitive scenario in Colombia, I would say to the top of the margins in Colombia, and you have to see that the figures that you see in many of the players show that they're losing money, while we keep our margins at this moment.

And mainly you will see that that margin was not impacted by gross margin because of the complementary business contributions, but by expenses. And in expenses, Colombia had a very particular circumstance, as Manfred was saying. We had phenomenal (inaudible) which was a very strong on utilities and utilities is the second most important cost for the Company after labor cost.

We had a high inflation impact on labor costs et cetera. So today we're working a lot on SG&A to try to level those margins. Number two about the -- what we are seeing in the trend, as I said, I want to be cautious because consumer confidence is down, I don't know how much that will last. It is not -- I think it's very difficult for anyone to say. I think the fundamentals of the Colombian economy are right that we still have some positives coming from exports increasing. That's a new trend which we're seeing from industry continuing to grow from investment in infrastructure, from inflation going down, and from interest rates going down.

You know that interest rates, when they go down, the impact is not immediate, but it's a lasting impact. So that's as much as I would say on this aspect.

As of Via Varejo, of course it is going to be a decision taken jointly by us in the Board of Directors of GPA about the use of proceeds, but what I would say from Exito point of view today is that we want to strengthen GPA, we want those resources to be dedicated to the food business of GPA, and that that would be the best decision in the interest of all the shareholders of GPA including Exito.

And number two, it is that I think the timing is a right timing because of course that Via Varejo will get the benefits of the recovery, but the good thing is that at the same time that makes attractive the process of going to make this type of transaction. And the other thing is that that benefit of recovery will not only be good for Via Varejo, but also for the food business of GPA.

And if you take those resources and you invest them in fully concentrated in a good strategy in one business as the food business, the full benefit of that recovery will be taken by the Brazilian GPA food operation.

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Unidentified Participant [33]

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Okay. Appreciating so much.

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Operator [34]

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

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Carlos Mario Giraldo, Almacenes Exito SA - CEO [35]

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Yes. I want to thank you very much for being in this conference first. I want to thank you for your questions. What I would say is that Exito has done important steps forward in the past. As originally when it was a small local Company and it went into the hypermarket more than 60 years ago. Second, when in 2001 it acquired Cadenalco and became the national leader, and of course it had to invest and it had to get some debt in order to do this step forward.

And now this step to become the food leader in South America. It has taken a lot of work to make the integration and to capture synergies, but I want only you to see what you are seeing and it's clear that synergies are there, and that one expectation that investors had, and it is to see if it was possible to have cross-boundary synergies is a reality. And it is a reality because it's not only about taking merchandise from one place to the other one, but about taking business models which are successful from one place to another and to have one coordination and one management model for that coordination.

The second message that I have is about Brazil. Brazil is the most important country in South America. It is a high percentage of the economy of the subcontinent. And it has gone through two continuous years of GDP reduction, it's historic in Brazil. We expect that this year it will not be a very important growth year for Brazil, but that at least it will level. And I think that after when one economy recovers, whoever is highlighted after is who took the right decisions in the right moment. And clearly I believe that in GPA we're taking the right decisions.

Let's review them. First, we are promoting the growth of Assai. It is the most dynamic brand today in the Brazilian market. It did 13 new stores, it grew 38%, it improved its margin, it reduced its costs. Second, we are continuing with that expansion, but at the same time we're doing conversion of low-performing Extra stores into high-performing Assai stores.

Third, we are keeping the fortress of our Pao de Acucar brand, and finally we are expanding the Extra commercial proposition after taking the decision in the low moment of the economy to strengthen the brand through a big investment in our customers, and the good thing is that customers have answered, and you can see it by the growth of same-store sales of 5% of the hypermarket brand in the last part of the year.

I think that Brazil will come back, it will surely come back as a country, and when it comes back the fact that Exito will have its investment concentrated there in the good brands, in the good moment of the country with the right expansion, and with a Company that is going to be strengthened financially with the proceeds from nonfood is a very interesting expectation. Of course I cannot tell the exact moment and the exact month when this will happen, but what I can tell you is that the good decisions, the right decisions are being taken.

And finally, what I would say is that Argentina has gone through transition period, a very demanding transition period with inflation above 40%, and our operation has been strong because of real estate and because of productivity. Today I think it is going through a lowering of inflation and that's a positive sign in Argentina.

And finally, in Colombia we are going to go through a short-term reduction in demand because of the tax law and because of the state of consumer today, but I believe that the economy is in the long range strong, that we are taking the right decisions against competition, that we are not doing crazy things because the business has to be profitable, and I don't think that it's a good decision to open stores only for the fact of opening stores even if they lose money for a long range, and that we will keep that track record and that positive look to the future, while strengthening monetization of our business, while strengthening real estate, and while continuing with a very clear projection of the strategic decisions that the Company has told the market, and that it's executing internally.

Thank you very much and we look forward to the next meeting.

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Operator [36]

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