Raia Drogasil SA
BOVESPA:RADL3
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Raia Drogasil SA
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Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to RD Peoples Health and Well-Being Conference Call to discuss Fourth Quarter of 2017.
The audio for this conference is being broadcast simultaneously through the Internet on the website, www.rd.com.br. In the address, you can also find the slideshow presentation available for download. [Operator Instructions]
Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of RD management and on information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to the future events, and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of RD and could cause results to differ materially from those expressed in such forward-looking statements.
Today with us are Mr. Marcílio Pousada, CEO; Mr. Eugênio De Zagottis, Investor Relations and Corporate Planning Vice President; and Gabriel Rosenberg, IR and Corporate Planning Director.
Now I will turn the conference over to Marcílio Pousada. Sir, you may begin your conference.
Okay. Thank you. Good morning, everyone. Welcome to the presentation of the results of the fourth quarter 2017 RD. As always, Eugênio will present the slides through the results, and before Q&A, I would like to stress some points. Eugênio, please?
Okay, hello, everybody. Thank you, all, for attending our conference call. So just to start with respect to the year 2017 was a very good year for the company. We were able to grow the topline at a very consistent pace. We gained market share and had a very accelerated and high-quality expansion. And as you all know, we faced tremendous market pressure from the huge inflationary gains of 2016 but we were able to gain productivity and achieve expense dilution in '17 towards mitigating and defend all markets. So in the end, I'd say we were successful in doing that.
We have the highlights here. We ended the year with 1,610 stores in operation. We opened just in this year 210 new stores and closed 20. So we exceeded the guidance of 200 store openings for '17. We reached a gross revenue of BRL 13.9 billion, 17% top line growth with 7.2% same-store sales for retail. Our gross margin was 28.8% though as I just mentioned, we had that 80 bps pressure because of the huge inflationary gains of 2016, but we were able to offset the bulk of that pressure through a very meaningful expense dilution. So in the end we reached an EBITDA of 1.8 -- BRL 1.1 billion, 8.2% on margin. So only, 20 bps of consolidated margin pressure. If we look at only our retail margin on a cost basis without the net present value adjustment, we gained 10 bps in our retail operation.
Our net income total was slightly more than BRL 0.5 billion, 3.7%, and we had a negative free cash flow about BRL 50 million with a total negative cash flow of BRL 211 million.
Okay. So next page, Page 4. We have here our historic numbers to put the year into perspective. I think what this chart shows is a very consistent progression, very big top line growth, very big and the increased number of stores, and also obviously, a huge market gain on top of that. So since 2011, when we merged, we multiplied revenues by 2x -- sorry, multiplied the store base by 2x, we multiplied revenues by roughly 3x and our EBITDA was multiplied by roughly 4x. The only reason that made this possible is that the second half of stores we have added ever since, so half the stores pre-existed [indiscernible]. So the second half of the total store base is just as good as the lag in the stores. So they allow this to gain scale, to gain increased productivity and to boost our margin in retail. We are the only drugstore chain in Brazil who have been able to grow at a fast pace on a national basis while maintaining revenues per store on a constant basis, ex-inflation, so as to be positive. Nobody else has been able to this. Nobody. And when we talk about expansion, I can highlight probably the main element on why that's the case, and why we use that opportunity.
On page 5, we also, we can also put the impact perspective as far as market share. We have a market share of 11.8% for the average of last year. In the end of the year, we were right at 12%. So we see here a very meaningful and consistent market share gain since 2007. When you look at the next 2 segments, which are other chains, either part of Abrafarma or not part of Abrafarma, and supermarkets, we have seen that these segments have not been able to grow market share in recent years. When we look at Independents then we see a slight share gain, but in reality, this figure divides in 2. We have cooperatives, which are small chain which are independents with a common brand, mostly popular, who have done relatively well. Then we have a few independents who are doing very poorly. But we see that our market share gain, it's different from the rest of the market. And finally, here on the right of the chart, we see Pharma revenues per store [indiscernible], and it's obvious that we have been able to increase at a very meaningful pace our revenues per store and we built a huge gap over anybody else. So in an industry that's driven by a fixed cost structure, this means that we achieve a much bigger expense dilution at the store even though we offer more service than our competitors. These are very important structural competitive advantages. And when we put these 2 together, which are the scale we have and the efficiencies we have, this is completely different from the rest of the market, and it is what can keep supporting us to go on growing and creating value.
On Page 6, we ended the year with 1,610 stores, by opening 210 stores, 10 more than our guidance, and closing 20 stores. Out of the 20 closures, 7 stores relate to the correction of expansion mistakes, worked from our [indiscernible] the core format. While the rest of these were portfolio considerations, either relocating stores or closing stores and transferring revenues to the surviving stores, which creates value for the company.
We also see here on the right that 35.6% of our stores, they are still due maturation. So we have now a margin of 8.2% on a consolidated basis and there's a -- our margin will be much bigger in the longer term when every store becomes more mature.
Next page, gains on our national presence, and the main reason that has sustained this kind of accretion from our expansion that nobody else has been able to match, we are now present in 20 Brazil states that accounts for 94% of the Brazilian pharmaceutical market. All but 2 of these are very recent. Ceará where we opened 7 stores and Piaui, where we opened 3 stores last year. But all the other stores -- these stores are still unproven but we've seen great initial numbers so it's very encouraging but still too early to tell what we can achieve there. But these 3, forget those 2, we're still talking about 18 states that account for more than 90% of the Brazilian pharmaceutical market while we have our brands, already established. We have very constant revenues from mature stores across all these markets. We have the capacity to grow in every single market here with consistent marginal returns. We're not just chaining Brazil to have a national footprint or to have a fully covered map or almost fully covered map like the others. But we are the only chain in Brazil who makes money on a consistent basis all across this market, who have seen the records from mature stores all across this market and who had capacity to expand and accelerate during the year. So if you could find a national chain as one who's able to grow nationally and make money nationally, we're the only national chain in Brazil. So when we grow and we open 200-plus stores every year, we are swimming in a blue ocean because the pain from fixing the brand, from getting to the nomadic consumer for one, and the advantageous results, they have already -- they happen in several markets but we are far away the best. Now it's a consistent story. Meanwhile, our competitors are trying to swim on a red ocean because for them to be able to grow 100 stores or more, they had to enter many new markets in which they arrived at a very late stage and they will face tremendous bleeding because the new stores, they don't perform in the beginning, huge barriers of entry, gross margin will be lower. So it seems when you look around at our competitors, it's easy to see this picture on their results. I mean, one by one, you can see its secret is in growing with consistent productivity. And this is something we have by any means achieved. Here on the right, we discuss our progression as far as market shares. We reached near the top percent of national market share by maintaining or gaining share in every single market here. So in Sao Paulo our market evolved from 22.5% to 22.9%, still lower than we begin to achieve. In the Southeast, where we came from 7.7% to 8%. In the Midwest, it was constant at 13.1%, and you may remember that in previous quarters, we have lost some share here because Brasil Pharma who bled for 2- 3 years and helped with unlocking the growing margins per store here. Their local corporation was sold, put in [indiscernible] -- obviously, when your entries are there, we need back some of the revenues. But now we have stabilized that and we are much better today than we were when this process started. So we have a very profitable operation there, very high revenues per store. So the whole meltdown of Brasil Pharma was very positive to us. But whatever loss we had initially, when the operations start, when the stores were sold, and started to be refurbished and then started receiving [indiscernible], means that, we have already consolidated and already maintained a share. In the South, we also gained share from 5.9% to 6.6%, and in Northeast, 100 bps gain from 4.7% to 5.7%.
Page 8, we'll talk about the growth here. So in 2017 our consolidated gross revenues grew 17.1%, this still is a very consistent figure. In the fourth quarter, we grew 14.2% but we had a negative calendar effect of 8 bps. So we'd be talking on a neutral calendar basis at a 15% top line growth. This is kind of where we stand by now. When we break down by business, in the drugstore business, we grew 16% in the year and 13.1% in the quarter, which corrected by the calendar we'll be talking about 14% in the quarter. 4Bio grew a meteoric 53% in the year and 49% in the quarter. When we look at our mix of '16 to '17, the main highlight has been OTC. They grew from 17.6% to 18%. Next factor, HPC, which contracted from 26.7% to 25.9%. I think for the first semester, the contraction of HPC was for [indiscernible] and it was related to a cross-channel competition but we believe we have been able to stabilize that. When we look at the quarter, we also see a contraction in HPC, but what happened here is much more seasonal than structural. We had a colder and rainier summer and then obviously, the -- especially the holiday period is very important for HPC. People buy a lot of sunscreen and other products and it was not a very good period because of the climate. And you can also see that by looking at OTC that it increased 17.1% fourth quarter last year to 17.9% this year. So we had kind of an opposite dynamic here, but right now it's more seasonality than it is structural.
On the next chart, Page 9. We can see our comps for the [indiscernible]. So as I mentioned, we grew in the year 17.1% on a consolidated basis and 3.1% from mature stores. So mature stores grew in line with inflation last year. When we break down by quarter, we see a total fourth quarter with 14.2% total growth, which would have been 15% on a neutral calendar basis, where mature store growth of 0.8%, which would be 1.6% on a neutral calendar basis. So we can talk where we are now and this is where we end the year, however we start the year we are 1% to 2% below inflation at our mature stores. Obviously this is not the first time it happens. Life is not a straight line. The only place we can find a straight line is in the models you all develop, but in reality, we have periods slightly better, slightly tougher and we're facing a period slightly below inflation. This also has to do with cannibalization. I mean, if you have a strong advantage, it's likely we'll have cannibalization, cannibalized by the [indiscernible] and last year's inflation was the strongest since 2012. And we saw more competition, we saw a lot of new store openings by competitors, especially in the fourth quarter and it's kept sales [indiscernible] on the future of those growth streams that we don't see as sustainable, although they -- it affects to some extent our comps. So we are 1% -- 1% to 2% below inflation. We have a lot of initiatives on the way and what we would like to see happening is that coverage against working inflation. Whether we see coverages or not, time will tell. But we are not just looking, we are doing a lot of things but that should be possible.
On the next page, let me just talk about the gross margin. We saw in the year a gross margin pressure of 80 bps. This was widely anticipated, as you know. We started to see -- we have talked about price increase, we had a huge inflationary gains. So we lost 60 bps only in terms of inflationary gains. So this year, the pricing match here we lost 3%. The other extra here is that interest rates are now lower than they were in '16. So the net present value adjustment which is a noncash effect, it's a not economical effect but it's part of the accounting here. This is another 20 bps of pressure. So if you looked -- if you took away the NPV adjustment, we'd be talking only about price increase effect of 60 bps. When we look in the quarter, and here the inflationary gain is no longer in the picture, we see a 20 bps price -- 20 bps gross margin contraction. This is exactly to the net present value advantages that which represents 20 bps. On top of that, 4Bio who has lower margins and grows more, we have a negative effect here. But the margin was also lower than the previous year, the pressure on gross margin by 30 bps. But we posted quarter gross margin gains of 30 bps that allowed us to maintain the cost of cash margin, we see beyond the -- not counting the NPV adjustment, or 20 bps contraction with the NPV adjustment. We also had a very -- or had a relatively high cash cycle in the fourth quarter, 49.1 days. It was 44.7 days last year. I think we have 2 calendar effects this year. One is the end of period day, it's not a good one. So the accounts receivables go up and the other factor is that because of the lower sales from 80 bps of calendar for the quarter also inventory rotation is penalized. We expect overall to net gains this year with a cash cycle that's slightly better than what we saw last year, especially in the end of the year.
On Page 11, we can discuss here the highlights of the period, which was expense dilution. So we achieved both in the year and in the quarter, 70 bps in expense dilution. In the quarter, 70 bps came from G&A dilution. Obviously, we had a very heavy G&A in the fourth quarter '16, but there was the 10 bps on labor, 10 bps on marketing and 10 bps from logistics and 10 bps of dilution from 4Bio. We have 10 bps of other gains. We had the 10 bps pressure from electricity. But you all you could see that we had efficiency gains that have been widespread throughout most of the different lines. It's not one [indiscernible], it's not one drastic action, I mean, we're talking about several different and sustainable actions. Our expectation is to maintain this level of expense control as we enter 2018.
And finally, we post that an EBITDA margin pressure of 20 bps in the year, you should take out the NPV adjustment. There is no cash. We'll be talking of select margin on a consolidated basis. And for the retail business, which posted an 8.4% EBITDA markup not counting 4Bio here, if we take out NPV effect you'd be talking about a 10-bps margin gain in the year. So despite the huge gross margin pressure, we were able to maintain constant EBITDA margin at the [indiscernible]. The difference is that the EBITDA which before was inflation-boosted, now it's a fully structural one. So I think it's a much more consistent number than the one we saw last year. And then in the quarter, we -- our adjusted EBITDA increased by 50 bps, 10 from expense dilution and [indiscernible].
Next page. Our net margin was 3.7% for the year, 3.6% for the quarter. So we see in the fourth quarter a 70 bps expansion versus last year. We posted in the year a BRL 0.2 million of nonrecurring gain, which was BRL 2.4 million gain in the quarter, which is tax credits from previous years. We had posted in the first quarter a BRL 2.2 million nonrecurring expense. So the net effect for the year is BRL 200,000 positive and ex the no income tax. Page 14, we had a negative free cash flow in the year around BRL 50 million, which is, I would say, a good number for a company growing as much as we are. It's almost a neutral free cash flow generation. So we generated BRL 850 million resources from operations after the cash cycle and other assets and liabilities. Operating cash flow was BRL 590 million, which almost refunded BRL 640 million in investments. And in the end, after interest on capital and tax paid, we're talking another BRL 211 million negative for cash flow.
One [indiscernible] we can see our share gains. We had a -- our shares performed very well last year, 51% appreciation versus 23% for the IBOVESPA. IBOVESPA had a good year but our shares did better. And for me, what matters is the long term picture here. When -- for those investors who entered the Drogasil IPO have seen a total shareholder return of 32% for the year. Those who invested in the Raia IPO have seen 36% total shareholder return for a year here. So -- and believe it or not, we have a bunch of shareholders who are around, who have maintained or increased their holdings who have been referred into Drogasil since the Raia IPO.
I'll now pass to Marcílio for him to talk about stability and putting the year and our future perspectives in perspective.
Okay, thank you, Eugênio. Before we talk about the strong 2018, I will talk a little bit about sustainability, okay. We grew last year, our essence, our future, in other words, then we also seek better how the company can help build, the society can help, how the place that makes business engage, stability issues. We grow the 3 pillars, 3 different pillars and I will speak about each pillar.
The first pillar is to take care of people's health. We knew this, like our ancestry we take care of the people, we love that. We don't talk. Just take care our employees and the quality of life of our employees, but we need to promote health and the treatments for our customers also and give help with also to make our guidance to what investors shall choose in the future is the first pillar.
The second pillar to take care of the business' health. We know how important it is to keep the company in good profitability without [indiscernible] but also to encourage dialogue with the stakeholders not only financial but also with the vendors, with the government and the to develop [indiscernible] the new state that we are looking for in our company.
The third pillar is to take care of the planet's health. We know what -- we don't have a lot of finalities about our business model, we don't change a lot about the planet's health but it's important too for us, in opening stores, to work with how our construction affects the environment and reduce our waste. And we need to reduce our environmental impact in the distribution process also which are a threat [indiscernible]. We hope this is good for us to follow this every year, we make a report. We call this a sustainability report, we plan to do this every year and you guys can follow our -- or the next steps pillars for the future.
Let's go to the business in Page 17 here. As Eugênio have told you, we are -- we really believe we have the best year for our lives in 2017 -- '18. We knew the best, some say we have challenges, not only because the price increase but also if you look in 2016, we had the price increasing, we had also a very weak compression in same state in Brazil. We talk about South Piaui for example competes against Santana or maybe [indiscernible] in Brasilia [indiscernible]. Easy for us in 2016, 2015 and we took advantage about this competition that they are Pharma. We know that in 2017, all the competitors are much more strong and we know we don't have that advantage of the price increase. Then we should ask to work and sustain 2016 understand better the opportunity in the strongest level. Whereas this small expense in the line is not only the people but to using or reduce the [indiscernible] know the line in the P&L and we did a very, very good job indeed and we really believe that challenges which are that number in the [indiscernible]. We are proud of all that.
We're achieving a lot of milestones, good milestones. We opened 210 stores, not only 210 stores, we open 15 to 20 stores every month with good quality that [indiscernible]. We instead introduced the new identity for Drogasil which is good because we needed to promote Drogasil because it is much better help towards the experience for the customers. [indiscernible] and made sure we completed the stores with the new dining area here, we completed the stores. It looks better than the past and we are ready for the future new stores. We launched the Raia loyalty program and we launched the Drogasil customer loyalty program, using the necessary technology we will be able to get results and data to using the customer behavior, to make a relationship with the customer. It will be good for the future. And we go implementation to a new platform, we are making the rollout right now in this quarter, and this is to help us to price better in our stores. We're also working and coordinating, we're achieving a record low level of stock outs and not only this, we're achieving the record also in the how to then best, as I told you. But we are looking very, very closer and better how you can serve the customer in the stores, how can we can serve the customers at the counter to stock take [indiscernible] how we can give to our customers the best deal for their medicines.
What could we do in that year out? We could do cultural transformation that I told you during the year. We grow all the communication opportunities. New future for the account and just help us for the future.
Then let's go to the next page. What we're working right now for the future, not only for 2018 but also for the next years. For the expansion plan, we are planning to increase a little bit right now. We are counting 240 stores in 2018, 2019. We create a platform to do this. We know how difficult it is in Brazil to open a company that you can and grow organically. We know these days Brazil it is very difficult to market in the South. We knew -- know how to do that. We have had the people brought to [indiscernible], but not only is timing right, location but how to handle the job then increase the number. We know that you can use this number for the future also. We hire the consistent help, consistent company the bank to help us to write a new strategy and end for the future. Then we cowork very, very strongly how to deliver for our customer a digital experience. We know in the future the customer uses the cellular to make the decisions. We need to use all the devices that you have, which all the capillarity of our stores to use the digital screens that customers together for us in the future. We hope this journey
[Audio Gap]
how to do that and you start very strongly here. You can see all the change that we made for this year. Another context to understand better is how to use our healthcare for the pharma. When we bought 4Bio, 4Bio will be a new business for us, a new page and a new market for us and understand better for really 2 paths, 2 different ways. How to extend that as a health business, with how you can integration better the fourth new business we all are 1,600 stores that we have today. We are very optimistic about the business and [indiscernible] to be much better in the future because we have a very consistent business and we have a very consistent market also.
Thank you. [indiscernible] I'll be here for the questions. Thank you very much.
So we have here our earnings calendar for the year and also we highlight the -- some of the conferences we have already scheduled for the upcoming months. So we will publish the first quarter on the 2nd of May 2018. We generally do it inside the month, the exception this time is because of calendar issues, we're doing beginning of May. We will publish the second quarter July 30, the third quarter on October 30.
We have many upcoming investor conferences that we will attend to March 12 and 13. Gabriel will be at the Itaú BBA LatAm Consumer Event in London; April 3 and 4 in Brazil we’ll be all at the Bradesco Conference; April 10 and 11, I will be at the LatAm Investor Forum in Asia, Hong Kong and Singapore through Bradesco; May 16 and 17 we'll also -- Marcílio and myself in New York at the Itaú Conference; and finally, June 5 to 7 I'll be at the CalGEMs Conference of Merrill Lynch in California.
So we can now open for your questions. Thank you very much.
[Operator Instructions] Mr. Joseph Giordano from JPMorgan would like to make a question.
I would like to continue exploring 2 topics we discussed in the first conference call concerning the mature store same-store sales. So I'd like to understand that a little bit better. How the new pricing too may help to bring back the growth to those inflation levels.
Joseph, thanks for the question. I mean, as I mentioned, we -- although last year, we grew overall mature stores in line with inflation, towards the end of the year the number was below inflation. Already in the third quarter even though we published a number ahead of inflation, if you consider that there was the world -- the Olympic games in Rio, it's not that the Olympic games in Rio in the previous years. I mean discounting that the fact we were already kind of underwater in the third quarter. So we ended the year let's say 1% to 2% below inflation and that's the trend we have and we started our [indiscernible]. We have several initiatives lined up to try to convert that. I mean, we're not revealing that because our competitors who also listen to our conference call. But I think the pricing platform is one of the initiatives that can help us. Especially in the front store, we believe we had much lower price granularity than we should have had. Today, if you came to Sao Paulo and compared prices in more of the shopping, where it's a very low-income store than other places, I would say that the pricing would be very similar. And that's wrong. You have to be more competitive when you have more price elasticity, where you have a tougher environment, where you can make more money, where you have less competition so the price, the price will allow us to do that, to have much even granularity. So it's one of the elements but it's not the only element. There are other things in store that will carry for the next months.
Guilherme Assis of Brasil Plural would like to make a question.
I would to follow up on the subject of same-store sales for mature stores. Can you guys comment a little bit on the revamp you plan for Drogasil stores and if you foresee any potential positive impact on the same-store sales growth base for the mature stores?
Guilherme, can you repeat the question? I couldn't understand.
Okay, can you hear me better now?
Yes, that's better.
Okay, so can you comment a little bit on the revamping plan for the Drogasil stores? And whether if you think that it could help to level up the same-store sales for mature stores?
Okay. Yes, I think the revamping of Drogasil is a very important initiative. In the stores where we do it, we generally see an impact. I think it's a much more updated, a strong look and feel lined up with the brand positioning, better customer experience. So I think it's a [indiscernible] ahead of the individual format was kind of tired. But having said that, it's not -- I mean, it's something that takes a couple of years to happen. We are accelerating that. So we validated the format more to the middle or end of the year. So we have a relatively small number of stores refurbished, all already opened with the new format. I think this year will be a big step ahead. Several of the new stores already being renovated, as we speak. And I think this can help but it's not realistic to imagine that we'll have every store done in the year. So it's a more a couple of works in effect as opposed to big bang.
Guilherme, it's much more difficult to remodel the stores than to open new stores sometimes. And just the journey, we did it right now on only 81 stores but 30 new stores and 50's in model 8. We are doing this every year. I don't know how many stores we can do and do we [ spread ] to figure out how this increase will help us in the same-stores. We are sure that if you don't do this, we'll have a problem in the future. This is the point how we handle the latest to us, okay?
Okay. That's much clearer. And if I may just follow up. The [ IMS ] released Drogasil data for January in Brazil and we saw a pickup. I know there was a negative carryover impact from the fourth quarter. But it seems that we're actually rebouncing a little bit. Do you think we could take that potential upside to your same-store sales for the first quarter of the year?
Guilherme, this is a figure that it's difficult to take into account on a month-to-month basis. There's a lot of noise in the number. So for example, I imagine, it tracks data from large chains and it tracks data from wholesalers or those wholesalers [indiscernible] to small chains. And obviously anything that you see. For example, it's a small chain getting ready for the price increase. You'll see [indiscernible] that will show up as a market increase. So if you look at that data, you are [indiscernible] the noise moves out that month-to-month is another data that we take into account.
Mr. Luciano from Bradesco BDI would like to make a question.
As your comment, Eugenio, as life is not a straight line and for the question that you're having on same-store sales, life is much, much, much easier in terms of same-store sales of mature stores is in the line of what inflation and it gets trickier when it's not. So, that’s again, my question is also there. It's very clear to me that you have the execution in the balance sheet and the excess returns to generate -- continue to regenerate value even with same-store sales of mature stores remained below inflation for some time, right? Again, it gets tricky here because it depends of offsetting factors like the SG&A, right now, the increase of competition and your own decisions like to keep accelerating openings. In that sense, could you in the best of your -- of the possibility, I don't know and I'm not asking for numbers, I'm asking for conceptual guidance, conceptual directions here to understand better how to interpret your results along 2018 and 2019. For example, should we find normal to see the same-store sales of mature stores below the inflation for many quarters of 2018 or this was just a separate event that happened in the fourth quarter of '17? Another example, would be acceptable in your plans to see if this same-store sales of mature stores level remains low to see at some point some margin compression and you would be okay to your plans of expansion to see that kind of thing. And in that case, what kind of level should we find normal? What kind of level should we raise a yellow flag that perhaps your store opening could -- your expansion plan should change because of the conditions of the market, competition and whatnot reflecting on the same-store sales of mature stores? Sorry for the long question but it's a conceptual one. Please help the best way you can.
Luciano, thanks for the question. I'll start with a long-term view and then I'll try to bring it to more immediate concerns. We have -- the whole focus of the company's long-term. We are driving in view towards consolidation in Brazil was a factor that expands at a very fast pace in terms of immediate operation, in effect, in which we only have 12% of the market share but we have been more and more in the opportunity [indiscernible]. So our view is structural. We are not here to optimize the year or to optimize the quarter. We are here to create long-term value. If we can do that along with short-term margin expansion, we have nothing against it. But the quarter margin doesn't drive all the season or depends on the season. It's the long-term value creation. So this is the backdrop for everything here. If you look at what you start, I mean, it's not easy, in general, for mature stores to maintain productivity because we are opening more stores and there's cannibalization. We manage cannibalization. We make sure new stores marginally hit enough to carry the cost of capital. But still, cannibalization penalizes a mature store. In a certain way, the more successful we are in the expansion, the pressure will be for the maturing stores because they will donate customers but the new stores they will have enough marginal revenues to make economic sense. But in spite of that, because of the market growth, because we have been gaining competition, we have in general seen way more performance in line with inflation than below inflation but this is not the first -- if you look back, this is not the first quarter below inflation that we have. It doesn't mean there will still always be low inflation but also, I don't have a clue if we'll only be able to grow mature stores in line with inflation and the 200-plus stores. So far we have been able to do. We would of course, we hope it will but I can't swear about that. And even if it isn't, it doesn't mean that we lose margins because [indiscernible] the city for one store to the other, but the new stores are adding more to the pie than were already before. So we believe, even with 1 quarter, 2 quarters, couple quarters, or even if we had a year below inflation. But at this kind of pace, obviously if have 0, we have negative difference, but at this kind of magnitude, which is a slight difference, we're talking 1% to 2%, I don't think it should get in the way of maintaining your margins, I don't think you pressure margins. We have all the levers we have everything in expense that we're doing, we have G&A dilution. It could be the case that we can have a gross margin increase. So we have to look at the whole picture and to also look at the margin we had, we believe we'd be around the same margin, around -- could be [indiscernible], could be 10 bps slope, could be 10 bps up. It doesn't really matter but I don't think we're contracting margin, when we should be in this kind of level but we should be creating external value with this kind of expansion. Another thing here is that we -- competition has also been cyclical. We have seen the effect of cycles of a lot of new store openings but if you look at history, we have been the only company who has been able to grow sustainably in [indiscernible] market. It's as simple as that. You can't make -- well, that could be regional changes have only grown the markets. I mean, they were able to raise that as well. But you can't pick a single company for the last 10 or 15 years, who tried to grow on a large scale on a multimarket basis besides us who has created value. What happened is that those companies phases entered as [indiscernible] the markets and their [indiscernible] selection was not the best in terms of lack of [indiscernible], lack of expansion, too much hurry, and what happens is that the additional stores may deliver revenues to the store below the life of the store, the market contracts and at some point, we have to reduce growth, we have to clean up. So it's just the famous chicken flight. [indiscernible] I mean, you grow and you stop, you grow and you stop. Everybody has been [indiscernible] in flight full tank. We saw now an acceleration again. I really believe it's another chicken flight because when we look at the stores competitors are opening, they can't link to markets that are very difficult right now. What can the fifth brand compound or add to the table? They certainly they can't enter that location. Competing in São Paulo worsens, higher because the rest have fallen on offering -- it's no walk in the park. When we enter difficult markets, like [indiscernible] we think we faced a ton of pain in the beginning. But we faced at a much earlier stage, it was only us and [indiscernible] was talking to São Paulo, for to establish a good player and [indiscernible] add something new to the table on top of this five. Can they add better locations, can they have a better operation, can they create a brand out of nowhere. I'm highly skeptical of that. And it's not only São Paulo, if you go to [indiscernible] and the first challenger to compete with [indiscernible] who's the leader there, it was 4 years ago. This is now, to be whoever enters the [indiscernible] in the market, competing against [indiscernible] competing against the [indiscernible] São Paulo who came before. So can they add something new to the table and create value. I mean, leaning on my experience based on what I have done, I doubt. And by the way when you look at the profitability, and when you look at the growth, when you look at the margins, I mean, you see that the company's weaker and not stronger. So we gathered that the company has deep pockets but if they don't, except when [indiscernible]. Generally the bigger the company, the more structured, the better managed and more disciplined they have to be. So as 3 have opened that don't create value, it's a matter of fact that to be helped and corrected. So it's another way but I don't think it's a structural addition that represents all that we see in the next 1, 2, 3, 4 years. I think we'll see that, then we'll see correction of that history is very clear on that regard. But yes, even though we maintain, even if we'll operate a full year at this kind of level, and 1% or 2% below inflation, which is not essential because we do a lot of things that could help us. I still think we can defend our margins.
Here's another question and a simpler one. You have this new strategic plan process that you're starting this year. This was either, if I understand, is to look at spatial ways to accelerating forward your store openings. Did I get it right? You'll be looking then at the possibility of opening more than 240 in future years. Is that a right interpretation?
Luciano, at this point, I cannot confirm that. What we are doing is -- when you look at our strategy, you have to look at every element that we have. So we'll have pains, challenging what we're doing. So we will work on a market-by-market basis, how competition's doing, how much market share we have, how has been our recent expansion and we will challenge ourselves? Can we be more, or even we you do the same, can we be the same but with a different breakdown of stores per market, can we do -- can we have many new formats for let's say stores selling only BRL 500,000 and not having to sell BRL 800,000. What are the next steps [indiscernible] our view? Is that the final answer for the [indiscernible] markets? It's really more than just securing a number. To increase that number, we don't need this kind of structural revisions. We can get introduced to a bigger number, but I don't have a clue. What I can tell you is that our guidance for '18 and '19, it's already laid on the table. We are going for 30 stores per year and yes, we believe we can sustain that fast pace of growth way beyond that but we don't have any numbers right now. The whole strategy will help us fine-tuning that. And again, it's more about the how than it is about the how much.
[Indiscernible] help us to write the agenda for the future and in the future we can share the agenda for you all, okay? We know what opportunity that [indiscernible] has for us and we only got [indiscernible] to help us organize this agenda and work for this agenda for the future.
[indiscernible] from Bloomberg Intelligence would like to make a question.
I wanted to ask you about e-commerce a bit. When we look at some of the expectations for growth in the Brazil e-commerce market, the highest growth areas over the next few years are in personal care and consumer health. And so I wanted to ask you where you stand now there in that channel and what your plan is over the next year or 2?
Okay, thanks for the question. So this is a very important topic. Achieving that is certainly a huge priority, but achieving will lay beyond e-commerce. E-commerce generally means you're moving goods from a store to a customer house. And yes, we do that. It accounts for something [indiscernible] like BRL 90 million in e-commerce for a company whose total revenue is around BRL 14 billion. So it's still small. When you look at the overall market for e-commerce in itself is very small, and when you around the world in each industry, in the U.S. or Europe, there hasn't been a huge migration towards e-commerce. But having said that, there are customers who want to do e-commerce, who want to use it at home and we are progressing towards that. We launched a new website, we launched our app. We changed our printing process from specific [indiscernible] so over the next 2 years you'll be able to have [indiscernible] in every region, every commerce platform to serve those regions. We have advanced on that and we keep advancing more. But the most important thing here is digital, it's not only e-commerce. Digital means that the consumer will interact with first, we'll start our interaction on a digital basis with an app, regardless if he is buying in the store, if he is buying [indiscernible]. So we believe digital can be made, can remove several of the pain points at our stores. For example, in the app [indiscernible] collect, there's a huge value offering for consumers. Huge adoption for that. And this is great because if you want to come to the store but you don't want to pick a line at the pharma counter you can pre-order, you can have off peak to collect your medicine and you can browse the [indiscernible]. In the end, even if the store will always remain the cornerstone of consumer experience, as long as the store is well-located, it offers experience, it offers service, it offers convenience, it shouldn't affect our core consumers throughout the store. Seniors and women generally, especially mothers, because of beauty and things like that. But some consumers don't want to come to the store, so we'll be able to offer an out-of-store experience which is better than we offer today, and use this to enhance the in-store experience, removing bottlenecks, allowing you, for example, to scan products and get more information for this product. So one of the main vectors of this strategic planning just started is the digital transformation. So we believe a lot in that but we don't believe in e-commerce disruption, because of, I do think when we look 5 or 10 years ahead, the biggest portion of our sales will be inside the store because it will be shaped and powered by digital. And that I think shall be the difference.
I appreciate that perspective. It's really helpful. And if I can ask one more on the selling expenses. You got some nice dilution in expenses in the fourth quarter and really for all of 2017. I wanted to ask what is the couple of main drivers of that were? The better -- the selling expenses as a percent of revenue? And then if you think you can get similar improvements in 2018?
Okay. I think that what we did on the expense side is not a [indiscernible] doing a huge thing on one element. I think we had a certain way of [indiscernible]. So we had improvements in labor, we had improvements in G&A, we renegotiated with suppliers and reduced supplier fees. So there's a bunch of different -- we have been able to renegotiate rental contracts. We have had initiatives on energy efficiency like the lights in our stores, which are more efficient. So it's a lot of smaller consistent efforts that we have been doing for quite a while, and we were fortunate [indiscernible] when we mostly needed it. I think we went down a step but a big one. But I don't think this is a ladder that we can continue to get this kind of dilution year-after-year. I think very likely now, we still [indiscernible] wobbly, and we will try to gain some more over this ladder, but that will be talking marginal gains and not another -- not climbing, not going down another step in the ladder.
Mr. Ricardo Filho from HSBC would like to make a question.
So just follow up on the whole digital discussion that we've been having for a while on the benefits that you expect on the customer experience and also on the pricing. Have you noticed any of your competitors during the same year developed as you were or do you think the competition is way behind you guys on this?
No. I think everybody has seen it coming. I mean you have to be the deaf and blind not to see digital today. So we don't claim the privilege to be the only company trying to work on digital but one thing is the what, the other things is the how. So I think the resources we have are different. We have the budget to invest, I think we have the best people in the industry. We have proprietary platforms for any -- the most challenging thing about this does not have anything to do with a great website. You can buy a platform in the market to do the best website possible or best app possible. The challenge is really integrating the app and the website to the [indiscernible] -- to store part system, to the store checkout system and because we have all those proprietary platforms, we control every nut and bolt of our execution. And you can either move fast on that execution and we can do more things faster than what the others will be able to do. Another thing is that when you look at what this market would look like in 5 or 10 years, I mean, everybody would have you [indiscernible] a very large company who haven't planned in digital. But when you think about small players, independents, small chains, many of them they do not have the resources to do these kinds of things. So I think digital can really separate the men from the boys here. We won't be the only chain to have digital solutions. Our main competitors, all or most of them who have, then come back to what we do better than them and it's our mission to do something better than them, I really do, but I think the top guys will rule, will build a huge gap over the ones behind. And this becomes another driver for consolidation. If digital is important to the market, this should be another driver for consolidation.
[Operator Instructions] It appears there is no more question. Now I will turn the conference call to the company for their final remarks.
Okay, so first of all I'd like to thank you all for attending this conference call. And I'd like to put some of the issues and [indiscernible] 2017 was a very good year for us with robust top line growth until the end of the year. We defended very well the gross margin pressures stemming from the inflationary gains of '16 which were unable to be repeated. But because of opportunity gains, expense dilution of several different lines throughout to defend our margins. So again, if you look just the retail margins, without the NPV adjustments which is an accounting adjustment, only on a cash basis, we think in a similar year we have everything to lose because the gross margins will only come down. So I think the risk -- we are stronger now than we were before. Because before we had an EBITDA which was [indiscernible] boosted, now we have an EBITDA which is very structural. And it's a single EBITDA to the one we had before. In all these initiatives in cost containment and efficiency gains, we were not doing it in expense of the customer. We measure very closely [indiscernible] evaluations that the customer do in our stores, we have a device in every checkout for that. Customer evaluations, medicine evaluations are more important evaluations than that [indiscernible] we have more profit efficiency and consumer efficiency there. This is the best efficiency gain. We remain sustainable. In the year, we grew 17% to 2% of mature store growth in line with inflation. We opened 210 stores, 10 more than the guidance. And this is the strongest [indiscernible] it's also very encouraging. But as I mentioned, we have ended the year with [indiscernible] sales. We were trailing inflation between 1% and 2% and this is the scenario we're carrying to the beginning of the year and from here onwards, it is our job to try to converge back to inflation. We will be able to [indiscernible] I can't swear that this can happen. But we're working on that and even if we'll remain somewhat with inflation, this kind of magnitude with a solid expansion come into play, I think we can do well in the year and defend our margins and I don't think we have to do that [indiscernible]. And yet if you look at our history, we have had many years of in-line or above inflation but we have handled years going below inflation [indiscernible] capacity. The only place where a straight line exists is in the investor models. But life is not like that. So the important thing is our long-term focus is the value we can create for the next decade by exploring the structural tail winds we enjoy like inflation, like leading the consolidation of fragmented markets. We will start a new cycle of strategic planning, focusing on things like digital. We are advancing our expansion, looking at format and looking at healthcare. We have a very unique platform in the market. [indiscernible] What more we can do, [indiscernible] this is a managed care business. [indiscernible] We have a lot on our table that are tactical initiatives, executions from a lot of strategic initiatives that are [indiscernible] but when you look longer term, we will be very optimistic on the company and very optimistic on the business. Finally, I'd like to thank the support for our long-term shareholders. Believe it or not, we have several companies, several firms who have been with us since our IPO during [indiscernible] and who haven't pulled a single share, who have actually bought, some of them bought some more shares, have been through ups and downs. And so we're appreciative of the trust. Thank you very much and hope to catch up with you on our upcoming conferences and roadshows.
Thank you. Raia Drogasil conference call is now finished. Have a nice day. Closing in this connection.