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Edited Transcript of CHDRAUIB.MX earnings conference call or presentation 25-Jul-19 2:00pm GMT

Q2 2019 Grupo Comercial Chedraui SAB de CV Earnings Call

Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Grupo Comercial Chedraui SAB de CV earnings conference call or presentation Thursday, July 25, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carlos Smith Matas

Grupo Comercial Chedraui, S.A.B. de C.V. - CEO of Bodega Latina

* José Antonio Chedraui Eguía

Grupo Comercial Chedraui, S.A.B. de C.V. - CEO & Director

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Conference Call Participants

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* José Antonio Cebeira Gonzalez

Actinver Casa de Bolsa, S.A. de C.V., Research Division - Fundamental Analyst

* Luis Rodrigo Willard Alonso

GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst

* Rodrigo Echagaray

Scotiabank Global Banking and Markets, Research Division - Analyst

* Rodrigo Alcantara

UBS Investment Bank, Research Division - Associate Analyst

* Andrés Ortiz

Crédit Suisse AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Chedraui Second Quarter 2019 Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

At this time, I would like to turn the call over to your host, Andrés Ortiz from Crédit Suisse, Consumer Analyst. Please go ahead.

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Andrés Ortiz, Crédit Suisse AG, Research Division - Research Analyst [2]

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Thank you. Good morning, and thank you for joining. Welcome to Chedraui's Second Quarter 2019 Results Conference Call. Today with us we have Mr. Antonio Chedraui, CEO of Chedraui; Mr. Humberto Tafolla, CFO; Mr. Carlos Smith, CEO of Bodega Latina; and Mr. Arturo Velázquez, Investor Relations Officer.

Before proceeding, let me mention that forward-looking statements are being made, which are based on the beliefs and assumptions of Chedraui's management and in the information currently available to the company. They involve risks, uncertainties and assumptions because they are related to 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 Chedraui and could cause results to differ materially from those expressed in such forward-looking statements.

Now I turn the conference over to Mr. Antonio Chedraui, CEO of the company. Antonio, you may begin your conference call.

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José Antonio Chedraui Eguía, Grupo Comercial Chedraui, S.A.B. de C.V. - CEO & Director [3]

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Thank you. Good morning, everyone. It is a pleasure to be here with you today in this conference regarding Grupo Chedraui's results in the second quarter of 2019.

During the second quarter, consumer spending in Mexico remained strong and then allow us to grow 5.1% in our same-store sales. This 5.1% increase is greater than the 4.3% shown by the ANTAD in the same period. In the United States, same-store sales at El Super increased 1.2% in dollar terms, while Fiesta sales continued on the same improvement trend as Q1 of '19.

Now I will review the results related to the second quarter of 2019 starting with the relevant facts of the period, and then we will go over the financial figures. Our same-store sales growth in Mexico, as I've said, 5.1%; same-store sales in the U.S., 1.2% in dollar terms; consolidated EBITDA growth of 18.1%; the opening of 1 store in Mexico; and invested CapEx in 2019 of MXN 2,169 million.

I would go over the financial results. Total consolidated sales increased 13% to MXN 31,586 million. Retail Mexico achieved same-store sales growth, as I have been saying, of 5.1% with overall growth of 10.7%. Note that this fourth quarter in overall that we have showed positive results reported by ANTAD. This, I've mentioned, was 4.3% in the second quarter. In Mexico, during the last 12 months we have incorporated 28 openings which resulted in 6.2% in total floor same-store growth.

Our Real Estate division continued to perform well in the second quarter reaching MXN 269 million and growing 17.7% versus prior. This revenue growth is due to lease agreement that allow for rates to increase with inflation. Total leasable area of 17,149 square meters was added in the last 12 months, which represented a surface growth of 4.9%.

Gross profit. In order to maintain our positive sales in Mexico, we decided to increase our promotional activity during the quarter which impacted gross margin on a temporary basis. However, the remainder of the year, we expect to maintain gross margin at similar levels to last year.

During the second quarter, we achieved consolidated gross profit of MXN 7,047 million, which is 14.5% higher than the previous year and represent 22.3% of sales.

Expenses. We continue with our control over operating expenses in all segments. However, the higher participation of the United States, which operates with a higher expense structure than in Mexico, dropped the segment growth at the same pace of sales. Total operating expenses of MXN 4,748 million grew 12.9% and represented 15% of consolidated figures.

Depreciation and amortization increased 30.5% versus the prior comparative quarter. This increase reflect not only increased technology and maintenance investments but also the additions of 28 stores in Mexico, 5 in the U.S. and the incorporation of 61 Fiesta stores that contained only 2 months of results in the prior comparative quarter.

Going to the EBITDA. Retail in Mexico generated an EBITDA of MXN 1,329 million, which represents growth of 6.3% and 7.1% as a percent of sales. The Real Estate segment obtained EBITDA of MXN 190 million, which is 7.7% higher versus the prior comparative quarter. Regarding retail stores in the U.S., the obtained EBITDA was MXN 780 million, which is an increase of 50.2% in relation to the previous year. EBITDA as a percent of sales was 6.1%.

Additional EBITDA reports will be addressed in the upcoming segment discussion. And -- well, finally, at the consolidated level, we achieved an EBITDA of MXN 2,299 million, which represents growth of 18.1% versus the prior year and 7.3% of sales.

Going over the financing costs. These costs increased 15.9% versus the prior comparative quarter to MXN 753 million. This increase includes not only the interest for the loan used to finance the Fiesta acquisition but also the interest resulting from the adoption of the new capital lease accounting standard required under IFRS 16.

Net profit. Consolidated total net income generated by the business in Q2 was MXN 423 million and represented 1.3% of sales.

Carlos, if you allow me, please, can you discuss the results of the U.S. operations?

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Carlos Smith Matas, Grupo Comercial Chedraui, S.A.B. de C.V. - CEO of Bodega Latina [4]

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Yes, my pleasure, Antonio. Good morning to everyone. As we do in each quarter, we will refer to the results before the acquisition of the Fiesta stores as El Super. The Fiesta acquisition will be referred to as Fiesta and the combined total as Retail in the United States.

Sales at El Super increased 3.4% to MXN 7,282 million due to an increase of 1.2% in same-store sales in dollar terms and the incorporation of 5 new stores in the last 12 months. Consolidated sales at Fiesta reached an amount of MXN 5,442 million. Second quarter EBITDA at El Super was MXN 542 million, representing 7.4% of sales. Higher gross margin, controlled expenses and the existence of nonrecurring acquisition expenses in last year's base allowed EBITDA to grow 48.2% versus the prior comparative quarter.

At Fiesta, EBITDA was MXN 238 million and reflects the results of the initiatives that we have been implementing since the end of 2018, which include a more aggressive pricing strategy and an aggressive strategy to lower operating expenses. We believe that we are on the right path and that these strategies will lead to increased customer accounts and the subsequent improvement in sales.

Total EBITDA in Retail in the U.S. was MXN 780 million representing 6.1% of sales. Important to mention that at Fiesta, we are quickly implementing many of the operating and IT systems and metrics that we utilized successfully at El Super. These include business intelligence tools, merchandising software upgrades and inventory control, which we expect to be fully implemented by the end of 2019 or early 2020.

In this quarter, the exchange rate for the conversion of financial statements was MXN 19.12 per dollar which is 1.9% lower than last year. Thank you, Antonio.

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José Antonio Chedraui Eguía, Grupo Comercial Chedraui, S.A.B. de C.V. - CEO & Director [5]

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Thank you, Carlos. Well, finally, financing and expansion. By the end of June 2019, the ratio of our net bank debt to EBITDA ended at 1.17x with an amount of MXN 12,198 million. Invested CapEx during this quarter increased to MXN 2,169 million and our expansion plan for the fiscal year continues as expected.

Now if you allow me, we will proceed to the questions-and-answers section, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Luis Willard from GBM.

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Luis Rodrigo Willard Alonso, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [2]

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Congrats on the results. I have a couple. The first, Antonio, how do you feel with respect to your guidance that you provided at the start of the year, from the metrics that you set as goals, what do you see either challenges or low-hanging fruits for the remainder of 2019? That will be my first, and then I have a follow-up on Fiesta.

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José Antonio Chedraui Eguía, Grupo Comercial Chedraui, S.A.B. de C.V. - CEO & Director [3]

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Thank you, Luis, for your question. Well, we plan to achieve the guidance we proposed at the beginning of the year. We are seeing, I would say, a decrease in the expansion dynamics of consumption in June and July, but we think we have reasons to explain these. So that would be probably beyond the potential risks in the coming months. But at the moment, we believe we will be able to achieve the store expansion that we projected as well as the margins at the end of the year.

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Luis Rodrigo Willard Alonso, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [4]

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Okay. And regarding Fiesta, you've mentioned in the press release that Fiesta is still below your budget in terms of gross margin. Could you talk a little bit more about that and -- or if this is a need of being more price aggressive? And my follow-up, in terms of sales per square meter, the Fiesta expense, were you -- have you planned it? Or do you think there is still potential upside there?

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Carlos Smith Matas, Grupo Comercial Chedraui, S.A.B. de C.V. - CEO of Bodega Latina [5]

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Luis, this is Carlos. Yes, part of what -- part of the strategy, as I've mentioned before, is Fiesta traditionally has been more of a grocery-centric company. And we believe the model for addressing the needs of the Hispanic consumer in the U.S. is a tilt to more perishable -- a sales mix that's tilted more to the perishable side, more meat, more bakery, more produce. And those are the changes that we're making structurally in many of the stores where we're opening up some of those departments. We're featuring those departments in a much better fashion at some of the stores, and we're just not that quite there yet in shifting all of that mix. Our promotional activity is geared to do that. We've got to get the infrastructure at store level to mirror that strategy. And as soon as we get that mix in the right balance, there is -- we believe that there is significant upside for gross margin improvement.

On the sales per square foot, yes, we're not as productive as we -- as #1 as the El Super side there, but certainly, we think that there's huge upside, well, significant upside to get it there relatively quickly. But some of the store sizes that we have on the Fiesta portfolio I think will allow us to, in some of the stores, even have better metrics than on the El Super side.

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Luis Rodrigo Willard Alonso, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [6]

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Okay. And so how far do you think you are from getting the right mix in our Fiesta? I mean that's still needed to -- yes, sorry.

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Carlos Smith Matas, Grupo Comercial Chedraui, S.A.B. de C.V. - CEO of Bodega Latina [7]

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Okay. I think we were very clear from the get-go that we had a very detailed 5-year plan to get Fiesta where we want it to be. I think we're on track to do that. So like I said earlier, we're on track. We're implementing our plan both on the merchandising side and operational side. And right now, by the end of the year, we're going to get our IT systems in place, and that's going to be a big, big issue for us as we improve our out-of-stock position both with our wholesaler as well as some of the other vendors.

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Operator [8]

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Our next question comes from Rodrigo Echagaray from Scotiabank.

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Rodrigo Echagaray, Scotiabank Global Banking and Markets, Research Division - Analyst [9]

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A couple of questions from my end. On the one hand, can you maybe talk a little bit about wage pressure, especially now that the secondary legislation has passed and given all the minimum wage increases we've seen? Any update on whether you're having conversations with the unions? Or anything you think that you may want to touch on in terms of wage pressure, that will be great. And I'll follow up with a second one.

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José Antonio Chedraui Eguía, Grupo Comercial Chedraui, S.A.B. de C.V. - CEO & Director [10]

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Rodrigo, thank you for your question. You're talking about basically the unions in Mexico or the U.S.?

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Rodrigo Echagaray, Scotiabank Global Banking and Markets, Research Division - Analyst [11]

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In Mexico specifically.

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José Antonio Chedraui Eguía, Grupo Comercial Chedraui, S.A.B. de C.V. - CEO & Director [12]

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In Mexico. Well, at the moment, we have a very good relation with the unions, and we are introduced. We are working very close to maintain the communication with them, and we have not experienced any difficulty with the relationship we have either with the union or the -- our employees. Actually, the attrition has been reduced, that we are rotating lots of employees due to weather we had in the past year. So we are very optimistic about this continuous trend. At the very beginning of the year, we had pressures only in one store, one [TD], that is Matamoros, Tamaulipas, but that was the only one, and it was completely avoided and gone dead.

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Rodrigo Echagaray, Scotiabank Global Banking and Markets, Research Division - Analyst [13]

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Great. That's great to hear. And secondly, I guess more of a strategic question. In light of where valuations are currently for the stock and obviously, some of that is likely country related, but do you think about potentially repurchasing shares? I mean needless to say, that would be very negative for liquidity, but how do you think about that? And in terms of your capital deployment going forward for the company, any thoughts on that would be greatly appreciated.

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José Antonio Chedraui Eguía, Grupo Comercial Chedraui, S.A.B. de C.V. - CEO & Director [14]

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Thank you, Rodrigo. Well, we decided as a company to keep this a public company. I think it brings us benefits that, probably at the moment because of the situation of the market potential, that we believe that being a public company will open up the possibility for future expansion and opportunities. So we have repurchased a certain number of the stock. At the moment, we have a little over 1.5 million stocks repurchased -- I'm sorry, 8.5 million, that is around MXN 300 million that we need to think to reach a -- I mean which is what we think is reasonable.

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Operator [15]

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Our next question comes from Rodrigo Alcantara from UBS.

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Rodrigo Alcantara, UBS Investment Bank, Research Division - Associate Analyst [16]

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I have 2 quick questions if I may. On Mexico, I was wondering if you could give us an update on your e-commerce strategy especially on the grocery on-demand segment. My second question would be kind of a follow-up at Fiesta. So could you remind us what had been the main drivers that contributed to this EBITDA recovery at Fiesta relative to the operating volume you reported in for June '18? And given this quick turnaround we have seen, as you said, are there upside risks to your EBITDA margin guidance for 2019 in the U.S.? That would be my 2 questions.

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José Antonio Chedraui Eguía, Grupo Comercial Chedraui, S.A.B. de C.V. - CEO & Director [17]

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Thank you, Rodrigo. I will go over the e-commerce question. We're growing quite strongly in e-commerce. This year, we're growing over 50% on select e-commerce. We plan to raise that by 50.3 -- 1.3% of our total select in Mexico -- or e-commerce in Mexico. We have an omnichannel program that includes not only our own platform, but we have agreements with sales and platforms that, together with us, are being in that to service our customers. Most of these e-commerce transaction come from higher-end stores basically in big cities, such as Mexico City and all those important cities in the states where we participate. So it is important. It is growing quite strong, and it is currently in the projection what we projected in Q2, 1.3% of our sales this year.

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Carlos Smith Matas, Grupo Comercial Chedraui, S.A.B. de C.V. - CEO of Bodega Latina [18]

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Rodrigo, it's Carlos here. Yes, it's just that nothing's special really on the EBITDA turnaround from previous year really on the Fiesta side, just continuing to do what we're planning on doing for 2019. I think that we've got some stability on the margin side. Some of the investments that we're making at store level were seen paying off. And not only that, but some of the introduction of the new IT tools are allowing us to dig a little deeper in certain categories from the merchandising side.

And on the expense side, well, a very aggressive strategy to review labor expense and other important expense drivers and looking for opportunities to consolidate activities with the El Super division. And slowly, some of those things are taking hold.

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Rodrigo Alcantara, UBS Investment Bank, Research Division - Associate Analyst [19]

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I see. And just given this quick turnaround that we have seen, do you think that perhaps there are an offset risk here in terms of EBITDA margin regarding your guidance for 2019? Or are you -- or your guidance remain unchanged in the U.S.?

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Carlos Smith Matas, Grupo Comercial Chedraui, S.A.B. de C.V. - CEO of Bodega Latina [20]

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Well, I mean we're -- this is our plan for 2019. We just have to continue to execute. And we're working very hard at doing so, and we think that we can deliver in 2019. So as long as we keep doing what we're doing, we're going to be in good shape.

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Operator [21]

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Our next question comes from Jerónimo Cobián from Actinver.

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José Antonio Cebeira Gonzalez, Actinver Casa de Bolsa, S.A. de C.V., Research Division - Fundamental Analyst [22]

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Congrats on the results. This is José Cebeira. I just want to have a little more color about the openings. We have seen a significant slowdown in the construction industry here in Mexico. Most of them talk about permissions, but I would like to know if there is any kind of concerns about 2020 in terms of openings.

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José Antonio Chedraui Eguía, Grupo Comercial Chedraui, S.A.B. de C.V. - CEO & Director [23]

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Openings in this year were pretty much in line with what we projected. We don't see any change in -- from our guidance, Jerónimo (sic) [José]. 2020, we have not closed our plans yet, but we will share with you the plans by the end of the year. But at the moment, we don't see any change from our plans. That's pretty much what I can tell you. If the situation stays, actually that means consumption will stay a little bit.

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José Antonio Cebeira Gonzalez, Actinver Casa de Bolsa, S.A. de C.V., Research Division - Fundamental Analyst [24]

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Okay. Perfect. And just a follow-up, talking about Mexico and the southern part, I want to know if you have seen any improvement in talking about sales during this quarter.

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José Antonio Chedraui Eguía, Grupo Comercial Chedraui, S.A.B. de C.V. - CEO & Director [25]

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Yes. Thank you again for your question. Well, we held up into -- to see the numbers that the South is showing in our company. We have expected a decrease in sales in that particular region. And for [East/West], probably we want to be able to grow same-store sales in the region even higher than the [median] of our space for the first quarter in 3 years. And it keeps going stronger from the region in the month of July. So we are surprised with the numbers that the South is showing, and that is good news for Chedraui, of course, here on.

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Operator [26]

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(Operator Instructions)

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Andrés Ortiz, Crédit Suisse AG, Research Division - Research Analyst [27]

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Andrés from Crédit Suisse. Could you please comment on the competitive environment in Mexico, particularly as we are seeing economic indicators have started to show a slowdown in the economy?

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José Antonio Chedraui Eguía, Grupo Comercial Chedraui, S.A.B. de C.V. - CEO & Director [28]

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(foreign language) Thank you for your question. Well, the situation in Mexico at the moment, after this past quarter, consumption has been good for us. I would say that the only region that, in particular, is not growing as related to the company for us is the metropolitan area of Mexico City. In the quarter, it showed dynamics completely different from the rest of the country, and we see the same trends there in July. I think that at the moment, we don't have enough information to predict or to project if the number is going to reinstate, but the only big change that we see is the metropolitan area of Mexico City.

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Operator [29]

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(Operator Instructions) I show no further questions in the queue at this time. Please, you may continue.

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José Antonio Chedraui Eguía, Grupo Comercial Chedraui, S.A.B. de C.V. - CEO & Director [30]

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(inaudible) went over the final remarks. Or do you want to say something? Well, I just want to thank everyone for joining, and I hope to be talking to you again by the end of third quarter. Thank you very much for joining the conference.

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Operator [31]

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Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may all disconnect. Good day.