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Edited Transcript of SORIANAB.MX earnings conference call or presentation 26-Jul-19 5:00pm GMT

Q2 2019 Organizacion Soriana SAB de CV Earnings Call

Monterrey, Mexico Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Organizacion Soriana SAB de CV earnings conference call or presentation Friday, July 26, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Rodrigo Jesús Benet Córdova

Organización Soriana, S. A. B. de C. V. - Director of Administration & Finance

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Conference Call Participants

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* Antonio Gonzalez Anaya

Crédit Suisse AG, Research Division - Senior Analyst of Latin American Equity Research

* Benjamin M. Theurer

Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director

* Jennifer Romero;BBVA;Analyst

* Rodrigo Echagaray

Scotiabank Global Banking and Markets, Research Division - Analyst

* Ulises Argote Bolio

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon and welcome to Organización Soriana's Second Quarter 2019 Earnings Conference Call. With us today is Mr. Rodrigo Benet, Chief Financial Officer; and Ms. Claudia Gonzales, Head of Investor Relations, who will be discussing the financial performance of the quarter, along with a summary of the latest news of the company.

At the end of the presentation, there will be a question-and-answer session in order to answer any questions you might have. (Operator Instructions) Now I will pass the call over to Mr. Benet. Go ahead Mr. Benet.

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Rodrigo Jesús Benet Córdova, Organización Soriana, S. A. B. de C. V. - Director of Administration & Finance [2]

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Thank you very much, and good afternoon or good morning to everyone. Thank you for joining us in this conference call. I'm with Claudia Gonzales, who as you know is in charge of financial planning and also Investor Relations. Basically, together we will be reviewing the quarterly results of the company that we just released a few moments ago, and some other topics of interest and finally move to the Q&A session to solve any doubt that you may have in this regard.

In the second quarter of the year, the top line of our income statement show an improvement over the previous year, mainly due to the beginning of Julio Regalado campaign, the most important commercial campaign that we have in our company, which in this particular year give us the opportunity to show our customers a completely different image to the one that we showed last year due to the drawback experienced during the integration period of the special moment of Comercial Mexicana.

After months of hard work as a single team and by leveraging the operational and commercial best practices of all companies, we were able to overcome those drawbacks and keep working hard to recover traffic and the market share that we lost in our stocks. Referring specifically to the results of Julio Regalado for the month of June, I can share with you that we have a very good response, showing a double-digit growth against the previous year campaign in '18 at pace with the Mexican reform, namely in the north and center of the country which we have the best performance.

Going to the performance at format level. Soriana Super continues to be the leading and showing the greatest growth in the different markets we serve. Even though the growth show our top -- over the total company reaching a 5.3% in the same-store sales for the month of June.

Soriana Hiper have a very mixed situation in which we can see that in the quarter among in the historical Soriana stores, we had seen our same-store sales ranging from 2% to 46% against the previous years. While in the other camp, we have the integrated stores that are the ones that are coming from Comercial Mexicana that have a range in the month of June from minus 35% to 18% positive.

And this, it is precisely the mix, the one that gives us the results at a format level is slightly below the company's average. This is very clear difference between Soriana old stores and the stores coming from Comercial Mexicana, primarily due to a longer stabilization period of our systems in the Soriana stores, and therefore, avail operational implementation of the new systems and commercial strategy in the old Soriana stores. That basically make a more significant and faster market recovery in the regional Soriana stores. Likewise and regarding our first format focus on low right, Mercado, Express, they were showing an outstanding performance in sales that surpassed the inflation rate for the quarter and particularly achieved a growth of 7.3% in the month of June, the beginning of Julio Regalado.

Finally, City Club, our membership club format, continued showing a very positive and sustainable trend since there has not -- have been no impact regarding systems or supply chain because it operates in a totally independent manner and each time we have a better understanding our focus on the target cost, covering and exceeding their consumption expectation. Thus, the top line ends, we're at 2% increase in total stores and 2.4% in same-store sales. That is important to consider that this number, 2.4%, is also affected by the closing of 15 units during the last 12 months that account for almost 1 point of the sales in the quarter.

Regarding the gross margin. It showed during the quarter a 30 basis points decrease against the previous year as a result of our greater promotional advertisement for Julio Regalado campaign, reaching a profit of MXN 8.5 billion, representing a 21.8% as percentage of the sales, an increase of 0.6%.

Likewise, operating performance in operational management could be observed, reducing the percentage of shrinkage that was during the previous quarters as a result of the change made to the logistic systems. In the operational expense side. That line shows a 3.6% decrease in the quarter against the same period of the previous year as well as an increase of 90 basis points or 6% to reach MXN 5.5 million, which is equivalent to 14.1% of all the revenues. This decrease is due in part to the reclassification of the lease expense under the IFRS 16 rule adopted in 2019 that amount to MXN 351 million in the quarter.

Excluding the previous accounting effect, the nominal increase would have been just 1.6%, a very well controlled view and is far lower than the inflation rate. This basically is a result of our expense control plan implemented at the beginning of this year at the company level where the objective has been to be more efficient in the use of all of our resources. As a result of the aforementioned variations, there is a MXN 13.0 billion, equivalent to 7.7% of all the sales with an expansion of 50 basis points and an increase of 9.5% versus the same period of the previous year.

Regarding the net financial cost. There was an increase of 57.1% in this quarter. This incremental effect is primarily due to incorporation of the IFRS 16 standard that I already mentioned, which report our reclassification in operating expenses for leases with an impact of MXN 280 million. Finally, in terms of the income statement. Net cash income was MXN 1.6 billion, accounting for a safe percentage of 12.2%.

In some operative news. During the second quarter, 2 units were closed, one of which will be used to build a Sodimac store in the state of Veracruz; and the other was a definitive closure of a leased store in the state of Mexico as part of the efficiency measures that we have carried out on our platform in recent quarters. Ending the second quarter, we have total 808 operating units. In this way, we continue to seek to consolidate micro markets and promote higher sales per square meter metric as well as improve the sales for profitability by optimizing operating expenses from which we have already obtained a very good result. Therefore, we will continue to advance in this operating strategy in order to use the growth business platform in a more efficient way. As for the progress of the business with our partner, Falabella, I can tell you that 3 Sodimac stores is now open, have been very successfully received by our customers. Given the value proposal that we have offered saying that we will be further consolidated this year with 3 more open.

In terms of a strategic ploy for a better management of the relationship with our customers, and as I previously announced, we just signed a 4-year alliance with PAYBACK Mexico, out of which we delivered 800,000 cards this quarter with a 93% contact-ability level. This project is key to fulfilling the vision of the loyalty program and customer management reform since it will allow us to communicate customers in a targeted manner in order to meet their needs, while we obtain an improvement in our sales.

In addition to the foregoing and as we have already discussed, the company also is entered to an agreement with (inaudible), the English company that is a world leader in digital analysis. In this new project, basically right now we are working in 3 main areas: The first one, we are already setting up the tools, the system tools that will allow us to incorporate customer metrics into the business management; secondly, we are working in the segmentation of our customers by group, by consumption characteristic, considering elements such as their sensibility to drive, quality, last date of purchase, amount, frequency, gender, age and some other variables that we are completely sure that will give us a better understanding of the consumption trends of our customers; and finally, as the third stage of this agreement, we also -- we are already working in the business alliance with our suppliers in order to allow them also to use this very useful information in order to take better commercial decisions together with our suppliers and our partners.

Finally, regarding e-commerce strategy. I can share with you that the business continue with a steady triple-digit growth. Our products offer continuous increase and our catalog grew 196% compared to the same period in 2018. The visits and users on our web page grew by 115% and 125% respectively. With this growth in traffic, we have been able to increase the number of orders by 96% in 2019.

The investment and projects planned for this year follow the implementation process, which will allow us to increase sales according to our plans and continue providing our customers with an omnichannel experience increasingly tailored to their needs. Basically, with this I end my speech and we move to the Q&A session in order to clarify any doubt that you would have. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Ulises Argote of JPMorgan.

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Ulises Argote Bolio, JP Morgan Chase & Co, Research Division - Analyst [2]

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Rodrigo, can you comment on the recent trends around the Julio Regalado campaign? I know you commented on good performance during June, but I was wondering if you can share some color on how things have performed now in July. Any issue there with inventory now that you're like at the core part of the campaign? And then I have a second question.

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Rodrigo Jesús Benet Córdova, Organización Soriana, S. A. B. de C. V. - Director of Administration & Finance [3]

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Sure. Well, basically, we are happy with the response of our clients. We know that Julio Regalado will be the opportunity to show that we already fixed, basically, the inventory problem. Particular in the main promotion of Julio Regalado, we have had a very good success.

Probably, right now, my only worries about Julio Regalado is not regarding sales because it is very clear that we have a positive trend, making the difference that the Soriana stores have a much better performance also in Julio Regalado than the Comercial Mexicana stores. But probably right now, the main concern is that Q2 we bet to have a better performance. We also make our bet to buy more product. Probably we will end with a level of inventory that is not the best one, I mean is not the optimal. We are working on that. We are working in order to be even more aggressive in the promotion or even down with the promotion in order to decrease the inventory bet that we buy an important amount of money from the suppliers that particularly promotions doesn't have the success that we bet. That doesn't have a good success in years that we'll make an even better bet in the purchasing agreement, and we are working on that.

But sincerely, it's not something really, really deep or really, really important. It's just that probably that is the only thing that we are not completely satisfied. But in general sense, Julio Regalado is going very well. And also something that is really important is that we have seen that the client is coming again to store. And that gives us an opportunity to recover part of the market share that we lose in the previous quarters.

And again, if we analyze just June, the month of June in which -- in the second week of June, start of the Julio Regalado campaign, basically, in all the Soriana Hiper Market, the whole Soriana Hiper Market, basically grew almost in double-digit increase; supermarket is high single-digit; Mercado and Express double-digit. So basically the one that is still very far away from the performance is the stores coming from the Comercial Mexicana, particularly the stores that are in the Mexican -- in Mexico City and the surrounding states.

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Ulises Argote Bolio, JP Morgan Chase & Co, Research Division - Analyst [4]

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That's perfect, Rodrigo. And just one question more there. Is there any spillover of the promotional campaign into August? Or is it that hard stop once July finishes like calendar wise?

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Rodrigo Jesús Benet Córdova, Organización Soriana, S. A. B. de C. V. - Director of Administration & Finance [5]

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No. Basically, it will take a little more than 1 week of August.

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Ulises Argote Bolio, JP Morgan Chase & Co, Research Division - Analyst [6]

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Okay. Perfect. And then the other question that I had is, we feel, as you mentioned, all saw some store closings during the second quarter. One is going to be reconverted into Sodimac, but going forward, I mean in July, you already opened a new store. What is kind of the plan there?

How are you feeling there in terms of more store openings or closings for the rest of '19? And maybe if you can share some also on what's the view for 2020?

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Rodrigo Jesús Benet Córdova, Organización Soriana, S. A. B. de C. V. - Director of Administration & Finance [7]

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Basically, we are trying to be very smart in choosing as we have to make the investment. We have to remember that we would have a lot of the stores that would have to invest money in all the stores that needed improvement. So basically what we are doing is choosing the states that have an important potential in which it makes sense to open our new stores, also prioritizing the investment in that stores that if we make our improvement is very -- or the probability to obtain high-growth response from the client is very important.

And basically because we doesn't have unlimited money and we have to make our appraisals. In the other part, we are closing the stores that doesn't have the better performance and that have the characteristic that in the same surrounded area, we have another store that can cover the same market. So obviously it's not something that like us a lot, but we have to be realistic. We have to make the results. We need money and we need to be more efficient. I mean, the reasoning behind this strategy was close the stores and focus in the more profitable market that we have.

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Ulises Argote Bolio, JP Morgan Chase & Co, Research Division - Analyst [8]

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So overall, I mean for 2019, you would still expect to see, I don't know, like any more closings?

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Rodrigo Jesús Benet Córdova, Organización Soriana, S. A. B. de C. V. - Director of Administration & Finance [9]

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I think that probably you can expect 2 things. Obviously, the very well-announced stores coming from COFECE, that in some part of the future, we have to disinvest. And in addition to that stores probably, we are talking that we will move, disinvest around 5 to 8 stores in the coming -- in the next 2 years. Some of them will be converted into our recent formats. But we will be disinvested from the format that is operating right now.

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Operator [10]

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We'll take our next question from Benjamin Theurer of Barclays.

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [11]

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Just wanted to follow up a little bit on the commentary you had around the issues of the performance of the former Comercial Mexicana stores and just not doing as well on Julio Regalado. If you could elaborate a little more on what are the issues. Is it because of the systems and the inventory management? Or is it because of the competition because you've highlighted particularly Mexico City as being difficult. Is it because of the competition with La Comer doing their promotion at the same time? If you could elaborate a little bit on that.

And then secondly on the performance. Just same-store sales you've highlighted. June was about 4.3%. Could you give -- I might as well missed it out on it, but the composition of traffic and ticket of that 4.3% figure in June, that would be much appreciated.

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Rodrigo Jesús Benet Córdova, Organización Soriana, S. A. B. de C. V. - Director of Administration & Finance [12]

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Sure. Regarding the first question, going deeply into the difference between the old Soriana stores and the Comercial Mexicana. First of all, the systems are already the same. Everything is so well integrated, and we are working like a single -- just one company, just one team. Something that we have to assess is that the new system is much very well used and accepted in the old Soriana stores and the new Comercial Mexicana stores. We are working to make more training on the use of the systems in more Mexicana stores, in which we still see that the store managers still have some problems to make their orders to the distribution centers and to understand the commercial strategy.

So I think that what is missing is time. We are seeing that the comparative structure of Comercial Mexicana is taking longer to adapt to the new system and to learn the new way of operate in the new platform. Because mainly the base of the region of that platform is probably 70%, 65% Soriana. So the Soriana platform is more easy to adapt the new way process, the new way of working. So I believe that basically we have to continue working with the operating side in order to train our people, to train our personnel and allow them to be more efficient.

Secondly, the other important effect is that the Soriana stores in Mexico City is also growing. In the past on which by Comercial Mexicana -- the only store that have that value proposition that is very aggressive in Julio Regalado used to be only the Comercial Mexicana stores. So what is happening with us is that all Soriana stores also have that promotion. Every year, they manage the promotion in a better way, they show the growth in a better way. They have a better management of the inventory. So every view that a Soriana store in the same area in which we have ex-Commercial Mexicana stores continue growing, there is like a cannibalization impact.

So also there is a recent client -- the Comercial Mexicana stores have this differentiator or (inaudible) because even the (inaudible) is taking participation from that. In a minor way, this is something that we have to assess. And finally, you're completely right. Mexico City and the central part of Mexico is very, very aggressive in terms of our competitors' presence. But if you ask me which is the main reason why this differentiation is basically an operative implementation. So we think that will enhance, make this step change.

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [13]

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Okay. Perfect. And then the commentary around the same-store sales data if you have the composition traffic ticket for the June data?

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Rodrigo Jesús Benet Córdova, Organización Soriana, S. A. B. de C. V. - Director of Administration & Finance [14]

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Yes. Well, just give me a second. We could consider the total company. No. Basically, it seems very balanced between ticket and -- oh, sorry, sorry, sorry. I was looking at the wrong number.

Basically, in terms of clients, we are slowly positive. Tickets are at medium -- mid-single-digit growth. So basically, it's more ticket than traffic but both are positive.

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [15]

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Okay. If I were to assume 4% on ticket and 0.3% on traffic, I'm not too far off. Is that a fair assumption?

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Rodrigo Jesús Benet Córdova, Organización Soriana, S. A. B. de C. V. - Director of Administration & Finance [16]

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So you say how much is the ticket?

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [17]

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4%? And then a lot lower 0.2%, 0.3% on traffic?

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Rodrigo Jesús Benet Córdova, Organización Soriana, S. A. B. de C. V. - Director of Administration & Finance [18]

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It's a little higher in traffic but you are not far away.

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Operator [19]

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(Operator Instructions) We'll take our next question from Antonio Gonzales of Crédit Suisse.

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Antonio Gonzalez Anaya, Crédit Suisse AG, Research Division - Senior Analyst of Latin American Equity Research [20]

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I wanted to ask you if you leave aside the logistics and distribution and system issues. When you look at the more commercial part of the business. Assuming that you get rid of all the systems hiccups in the next quarter or 2, where do you think you need to invest more in prices? Is it more on the Soriana stores? Is it more on the Comercial stores? And once you consider these price investments, your gross margin was suffering over the last, I don't know, 18 months or so because of high levels of shrink, and excess inventory in some stores and et cetera, right?

Now you won't have that anymore, but you will be investing in pricing on the other hand. So net-net, do you see a period where gross margin is flattish going forward? Or can gross margin actually improve in the coming quarters?

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Rodrigo Jesús Benet Córdova, Organización Soriana, S. A. B. de C. V. - Director of Administration & Finance [21]

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Well, actually if you see the accumulated gross margin is 10 basis points higher 2019 than 2018. So as you well mentioned, Antonio, basically balances. We have a few ways to offset between the positive things and the low things. Particularly we believe that the positive things that is basically the reduction in the shrink is a per month in effect. Basically, it was due to very specific things due to logistics problem and then the investment that we have to make in Julio Regalado, very particular in Julio Regalado. And as you see, it's not so happy with the previous response. So our expectations is that going into the future we can have a not very high, but a couple of basis points business gross margin than last year.

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Antonio Gonzalez Anaya, Crédit Suisse AG, Research Division - Senior Analyst of Latin American Equity Research [22]

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Okay. And then are you investing more aggressively in prices or reinvesting in prices more aggressively one set of stores versus the other, Soriana versus Comercial Mexicana? Or is it...

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Rodrigo Jesús Benet Córdova, Organización Soriana, S. A. B. de C. V. - Director of Administration & Finance [23]

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No. That is the other question that you make and the response is no. Basically -- obviously, the different regions can have different session in the commercial strategy. But basically, we are looking to have the same level of competitiveness in the older formats, particularly the Hiper markets of Soriana and also Comercial Mexicana. Probably, we would have some differentiation with Super and with Mercado and Express, those are of a totally different format.

But when you compare a Comercial Mexicana Hiper market to Soriana Hiper market, basically they have in it to have the same level of competitiveness. So the answer is no. We see a difference in their operational efficiency and the adoption of the new processes and the new system. And also, it's also important to understand that the client of Comercial Mexicana, those clients of Comercial Mexicana have different characteristics than the old clients of Soriana.

In many areas, the clients of Comercial Mexicana is less responsive to price than the Soriana store because if you remember, basically, Soriana tradition, we are more focused in low income sector. The Comercial Mexicana stores have a physical position more situated into medium to high socioeconomic level. So we also have to work not only price but also in more important things for that specific target in that it was talking about catalog. It was talking about variety, about quality, in culture, we are working but we feel comfortable with the level of aggressiveness is working. And basically, in older formats, we will serve Comercial Mexicana. It is important to mention that it is improving. Even the stores of Comercial Mexicana are improving. We are coming from a much worse number. It's just that it's taking longer and for a few parts of the explanation, apart from the operative side is that the clients have some difference.

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Operator [24]

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We'll take our next question from Rodrigo Echagaray of Scotiabank.

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Rodrigo Echagaray, Scotiabank Global Banking and Markets, Research Division - Analyst [25]

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Just a quick question on how the Board or perhaps the controlling shareholders think about valuations at these levels and if you believe that they may eventually consider buying out shares or doing something more strategically around the company. I mean the valuations at which Soriana trades now is essentially in the below 10x PE or so and about half of what you probably pay for commerce fee stores. So it seems like valuations, I mean, some of that is obviously macro driven, but do you think about that at all? Do you think the Board spends time looking at that? Or any thoughts on that would be helpful.

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Rodrigo Jesús Benet Córdova, Organización Soriana, S. A. B. de C. V. - Director of Administration & Finance [26]

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Well, I think that it is very clear and very obvious that the valuation is probably the highest discount that I have ever seen. It's practically for free, the price of the stock. It is a fraction of the value of the real estate. I think that I'm very clear with this. It's a fraction of the value we are valuing the company.

We are aware of that. Obviously, it's something that doesn't like. And if you -- when you say that if we have more strategic thoughts about this interest, implying that if we would make a very aggressive share buyback program or even thinking to make a buyback. Obviously something that we haven't analyzed, but is not something that we will implement in the short term or may be, and right now it's nothing in the scope of the company.

Normal is that, obviously, financially speaking, if you have any -- if I have the money and trust what I was doing, buy the company, not sell more (inaudible) not more stock. It is completely undervalued. But now it's not something that right now is having like a strategic value to that. The answer is no.

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Operator [27]

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We will take our next question from Jennifer Romero of BBVA.

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Jennifer Romero;BBVA;Analyst, [28]

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I have 2 questions. The first one, regarding operational implementation. I want to know if you have an approximate date of when are we expecting to see a recovering margin.

And the second question would be in the e-commerce business, could you tell me please the milestones or where the business is going, please?

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Rodrigo Jesús Benet Córdova, Organización Soriana, S. A. B. de C. V. - Director of Administration & Finance [29]

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Well. First one, something like a specific date is what we really, really (inaudible) We are seeing a positive trend in all the formats. Even in the Comercial Mexicana stores, we are seeing a positive trend. It is still negative, but it is coming from very negative, to just negative, and the other formats are doing very well. I think that this would be something gradually that we will continue in the following months, continue recovering traffic. But particularly -- problem is we have already ended the IT transformation and implementation. But recovering traffic is more complex and more slowly than the changes that you have to make in the IT. So I think that it will take the whole year to come back again to the numbers that we want. But everyone, you will continue seeing an improvement.

Talking about sales. Talking about gross margin. I'm pretty sure that in the following quarters, as I mentioned to Antonio, we will see steady gross margins and probably a little growth in margin expansion at a gross margin level.

And talking about the operating expenses. I think that the company has done a terrific job in [culture] on in paying the expenses far away from inflation growth, no matter the "operation," and also in utilities, particularly in energy. I think that in that, the company is doing the things really, really well. Even if you take out the IFRS 16 effect, the growth is now more than 1.7%, 1.8% that will allow the ones that we can fix or we'll continue with this positive trend in the sales. We'll start to create operating leverage and start to see highest growth in the EBITDA level.

So basically, that's how I -- we feel in control, starting that we are on the right track. It's just that we need time, and probably the speed of the recovery is not the one that we want, but we are on the right track.

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Jennifer Romero;BBVA;Analyst, [30]

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That is excellent. And the second question regarding the milestones in the Comercial Mexicana?

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Rodrigo Jesús Benet Córdova, Organización Soriana, S. A. B. de C. V. - Director of Administration & Finance [31]

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Yes. Basically right now, we are working in parallel initiatives. Probably, the most -- one of the ones that have biggest impact in our results in e-commerce is the drop-shipping vendor strategy that allow us to increase substantially every quarter. The number of fiscal years that we can offer in our workday without having an impact in inventory because we're adjusting -- quoting-ly speaking, we're adjusting all that inventory. It's just that this drop-shipping vendor strategy allows us to show how important catalog is growing to our suppliers without buying the product. So that is really important our long tail strategy. It is working and we will continue with that.

At the same time, we already start and still we're adjusting the blueprint in the very first stage of this. But we're already following a strategy in order to develop into the future, the marketplace strategy of Soriana. But we are convinced -- but not Soriana, in general, with the electronic e-commerce players. I think that it's very clear that the marketplace strategy, the one that is winning, not only in Mexico, but around the world. And we need to have a platform that allows to have that kind of a strategy working. We just started with our implementation.

And also, I think that something that is very important, not only for e-commerce but to the omnichannel strategy is that we are in the final stage of the project in order to offer Internet access in all our stores. Probably we are in 95% of implementation, and that is a very important milestone going to the future because we'll allow the clients to connect their experience in the mobile, with their computer with the physical stores. So also we are working, not only in e-commerce, but the omnichannel and connect the store with a screen. And obviously, it's something that is probably not very fashionable, but it's important that we continue working in all the logistics and the supply chain that will be behind the e-commerce business.

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Operator [32]

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We'll take our next question from [Nicole Saragoza] of JPM.

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Unidentified Analyst, [33]

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My question is regarding your great free cash flow generation. I was wondering if you could give us any more color in your working capital performance. How are you handling your inventories and suppliers?

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Rodrigo Jesús Benet Córdova, Organización Soriana, S. A. B. de C. V. - Director of Administration & Finance [34]

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Basically, normally still we have some opportunities particularly in the management of inventory. We feel comfortable. Right now, if you ask me, "Which is your main worry about working capital?" It's in accounts receivable, particularly the one that are related with the VAT. But as you know, the government changed some -- made some changes in the law in order to have something that is called complementary power. The electronic tool of the payment that we make to the suppliers that right now is a mandatory thing that you'll need to have in order to come up for the VAT reforms. That obviously implies important change inside the company and the (inaudible) the deals in relation with the suppliers.

So right now we have an important effect of close to MXN 2.6 billion that have to be in the cash and right now it's in an account receivable. So right now, that is the main concern that we have in terms of working capital. And we expect that probably by the final part of the third quarter, beginning of the fourth quarter, probably we will be already again on [the function]. I mean, already -- we think we already fixed that problem for that time.

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Operator [35]

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(Operator Instructions) At this time, there are no further questions in the queue.

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Rodrigo Jesús Benet Córdova, Organización Soriana, S. A. B. de C. V. - Director of Administration & Finance [36]

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Well, thank you to everyone who participated with us in this conference call. Actually, if you need something else or you have any other question or doubt, please send me an e-mail, to me or to Claudia. And we will be glad to answer those as soon as possible. Thank you very much. Have a good weekend.

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Operator [37]

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Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.