Organizacion Soriana SAB de CV

BMV:SORIANAB

Earnings Call Transcript 2023-Q2

[Operator]

Good afternoon, everyone. Welcome to Organización Soriana's Second Quarter 2023 Earnings Conference Call. With us today are Mr. Rodrigo Benet Cordova, CFO of Organización Soriana; and Ms. Claudia González Romero, Head of Investor Relations for Organización Soriana. Together, they will be discussing the financial performance for the second quarter of 2023 and providing a summary of the latest news of the company.

[Operator Instructions] Please note that the conference call may be recorded. I will now turn the conference over to Mr. Rodrigo Benet Cordova, CFO of Organización Soriana. Please go ahead, Mr. Benet.

[Rodrigo Córdova, executive]

Thank you very much. Good afternoon, everyone, and thank you for joining us in this conference call regarding the financial results of the second quarter. As already mentioned today with me is Claudia Gonzalez, Head of Financial Planning and Investor Relations. And together, we'll be going through the results and other some important information of what happened during this period.

Starting with the store format performance, particularly Soriana Mercado and Express, during the month of April, we launched across different media its new advertising campaign called [indiscernible], in which we were until low prices in a consistent and permanent way to all our clients. Basically, this is part of the efforts that we are making in order to reinforce the strategy of low prices in these discount formats.

Going in the next month, in the month of May, we started our most important and emblematic commercial campaign, Julio Regalado in its sale edition called pressure low cost, in which we work to reach a greater number of clients considering their preference and their purchasing power by offering them a greater variety of promotions, such as volume purchases or price with high discounts in select categories during longer periods, even 60 days of discount prices and also with the special prices in purchases by multiples in our private brands products.

That actually is one of our main commercial strategy pillars that we were planning for this year. Also, for this Julio Regalado addition and as a differentiator to the rest of the summer campaign, we have included in the promotional variety, the category of perishables in products like fruits, vegetables, and meat products, among others, that is the first time that we include as part of the special promotion of Julio Regalado.

As a result of these main important campaigns in April and May, and obviously, Julio Regalado also during June, we closed the second quarter of the year with a total revenues of MXN 44.3 billion, which represents an increase of 6.2% in comparison with the same period of last year, with same-store sales of 5.3%. In cumulative terms, revenues closed in a 5.8% increase, reached MXN 83.7 million. If we break down this increase, basically, the traffic or the transaction, the number of transactions in the quarter show an increase of 3.4%.

And also we are seeing an increase the average ticket of 1.8%. If we take a look in division level, we can outstand groceries, prepare food that obviously, the strong performance in these 2 categories is aligned into the strong promotional campaigns that we focus in that 2 divisions. And obviously, also important purchasing volumes that we involved in that 2 categories.

From a geographic perspective, basically the state that we can say that stood out were Southern Mexico, Jalisco, Colima, Michoacán and Campeche. Likewise, an extraordinary performance in the Soriana Super stores was observed in the states of Baja California, Quintana Roo and Tabasco. And in the case of City Club, we can mention the outstanding performance of Colima, Southern Mexico and again, Tabasco. On the other hand, and as a part of the relaunching activities of our private brands, we use the Julio Regalado campaign to offer a wider and more attractive product offering in select categories of our brands, where we obtained a very positive response from our clients, and we can achieve an increase of 30% in the sales in those categories.

Also, we observed a triple-digit increase in specific categories such as cooking oils, frozen food, canned fish in the private brand products. Going forward, we will continue introducing new products and novelties as part of the strategy of private brand, in which we have to remember is one of the most important bets of the company in order to close the gap against our competitors.

Even in formats like City Club, we can see an outstanding performance in private brand, particularly in City Club, we can obtain an increase of 18% in the sales of private brands. So we believe that the performance that we are seeing as of today is very good, is very positive, and we will continue to strengthen these categories going forward. Regarding our digital business, we are also pleased to see the results obtained from the investments and decisions that we have made in the past months.

So we will continue reaching a double-digit increase in this business. Particularly, we are seeing an important consolidation and strengthening of our [indiscernible]. That combined it with the platform [indiscernible] delivering very good results. And we are seeing that the client is responding to the upgrades in the shopping experience that we have implemented in the last months. Actually, as we are seeing a positive and continuous performance in the e-business of Soriana, we finally launched the e-business platform for City Club. We launched a new site of City Club in March of this year.

And right now, we are already obtaining 5,000 orders per month. And we are seeing a double-digit increase month by month. We are really positive about the performance that we are seeing for the City Club format that actually also this new platform is helping us to increase the base of memberships in this business. And actually, in this quarter, we obtained an increase of 7% in the total base of partners in City Club, closing the quarter with 1.1 million partners -- active partners in City Club.

Going down on the P&L and regarding the other income, basically the one that is coming from our real estate business, we are also continue seeing a better performance going month by month. Right now, the occupancy is 84.7% that compares in the same period of last year with 79.6%. So we are seeing an important increase. We believe that we are on track to obtain the goal by the end of the year of surpassing the 91% of occupancy. As a consequence of the previous mention, the gross profit reached MXN 9.7 billion in this quarter, which represents a gross margin of 21.9% and an increase of 6.7% again last year. We are continuing seeing better performance in the negotiation with the suppliers and also a better performance in the shrinkage management that allow us to expand the gross margin in 10 basis points.

On the other hand, regarding the operating expenses line, basically, this line showed an expansion of 60 basis points, reaching MXN 6.6 billion that represents an important increase of 15.1% as over the income -- sorry, a 10.5% increase and 15.1% percentage as over the income. That we can say that basically the major part of this increase is attributable mostly to the cost of personal, basically in which we are having a better performance of the fulfillment of the back and the coverage of the company and also an increase in salaries. That is something that we are seeing across all the nation.

And also, we are investing very, very important in maintenance as part of the remodeling program of the stores. That is something that we already have a couple of years in which every year, we are increasing the CapEx in remodeling and also the expense in remodeling. And finally, also an important increase in advertising, mainly related with the Julio Regalado campaign. As a consequence of this variation, the EBITDA of the quarter closed with increase of 0.7%. Obviously, this is a part of the consequence of the important expense that we are seeing in the quarter that we can say, and we are pretty sure that this increase in the expenses is basically an investment in the shopping experience and the maintenance of our stores.

So no matter that obviously is putting some pressure in the P&L, particularly n the EBITDA. We believe that is something that the client requires that the company continue investing in maintaining the stores appearance and the stores shopping experience in a good level. On the other hand, and regarding the financial items, the net financial costs closed MXN 699 million showing an increase of 19.6%. Basically, this increase is due to the increase in the interest rate of the debt and also a decrease in the financial products, mainly related with the option that we have to repurchasing of the stocks of the company.

Finally, the net income of the quarter reached MXN 808 million that is equivalent to 1.8% over the sales. As an update of the expansion plan for the year, in the past 12 months, we have innovated 6 stores basically in the state of Chiapas, Tamaulipas, Quintana Roo, Nuevo León and Campeche. And also, we'd like to add in May, a City Club that arrived to [indiscernible] that actually is having a very, very good acceptance from the clients.

Also in the same way, we will continue with the store remodeling plan of the year in order to continue renewing our image and providing to our customers an updated stores and deliver comfort, security and a better shopping experience. And also, we are really happy about this program, mainly because the new stores and the remodeling stores is showing a much better performance than the base of the stores. So going into the future, every time that we can increase the base of new stores and remodeling stores, we also will see a better performance as a total company.

Moving on to talk about the progress with our partner, Falabella. This quarter, Sodimac, our home improvement business showed an important increase of 13.8%. Thanks to the accept in great part of our clients in all the stores that we have opened in the last 12 months. And also with the contribution that every day is more important of the digital business in Sodimac that every month continue growing in an important pace and taking more participation in the total sales.

Regarding the store opening of Sodimac, actually tomorrow, we will have an opening for 1 store. The first one in the Interlomas area. We believe that it will be a very important store in a very important socio-economical level neighborhood that will also help us to continue building the brand awareness of Sodimac in Mexico City. And basically, by the end of the year, probably we will open another 2 stores in Monterrey in order to reinforce the presence of Sodimac in this important city in the north part of Mexico.

In the other hand, I'm talking about the financial business with Falabella, the credit card Falabella Soriana, we are also seeing important growing. Actually, we closed the quarter with a little more of 800,000 credit cards that actually already positioned the credit card Soriana Falabella as an important player in the country and obviously, a very important player in the purchasing method mix in the store.

Actually, in seasons like Julio Regalado [indiscernible], the credit card, Falabella Soriana, in some cases, is the most important method of payment in the universe of the credit card. So we are really, really happy with the penetration of the credit card in our business and the continued growing that we see all the months. And finally, but not less important, I would like to share with you some important activities regarding our social responsibility strategy. in which during this quarter, we support more than 150 institutions along the country, basically attending different needs in important goals like children feeding and support to the community.

And also something very important as part of our social commitment strategy is that in this -- in the past May of May, we welcome 1,400 new students in our Soriana Universidad -- Universidad Soriana Program, sorry, in which the employees can accomplish their elementary school, middle school and high school that is not only a part of the social strategy, but also it's a way in which we can contribute to the mission of being the best place to work in Mexico and obviously give a better socioeconomical level and quality life to our employees. Basically, with this, we can close our intervision and we can continue to the Q&A session in order to answer any doubt that you may have. Thank you very much for joining us, and we can continue to the Q&A.

[Operator]

[Operator Instructions] The first question is from Mr. Antonio Hernández from Barclays.

[Antonio Hernández Vélez Leija, analyst]

Just 2 quick ones. First, on same-store sales guidance. I don't know if there's an update on that given year-to-date performance. And a quick follow-up regarding competition where maybe in which formats or regions have you faced tougher competition?

[Rodrigo Córdova, executive]

Yes. Well, basically, if we're trying to respond to your question, Antonio. First of all, about the formats and the different performance in the same-store sales performance. Basically, we can send that across the supermarket formats or banners. The performance is really similar. Probably, we can have a pretty slight difference. But in general, all the formats of supermarket formats and with this, I mean Soriana Super, Soriana Hiper, Soriana Mercado and Soriana Express is really similar. And the one that we continue to see in probably more than 12, 14 months ago, a better performance is in City Club. As I already mentioned in previous conference call is a format that is surprising a lot of the company probably since 2, 3 years ago in which every month and every year is obtaining very, very positive results.

And actually, that is one of the reasons why we are also including City Club in the strategic organic growth plan. If we talk about differentiation for regions, we can say that in the central part of Mexico and south part of Mexico, we have a little or a slightly better performance than in the north part of Mexico.

Also remember that actually, we have a couple of months, it's not the first quarter in which the north part of Mexico, particularly like an example, the case of Nuevo León, we are facing up a higher pressure. And obviously, this is a result or a consequence that if we analyze the strategy of growth of the competitors, it's really focused in the last 3, 4 years in the north part of Mexico. So obviously, it's putting extra pressure in this region, basically that.

[Antonio Hernández Vélez Leija, analyst]

Perfect. And now in terms of same-store sales guidance, any updates on that?

[Rodrigo Córdova, executive]

Well, if we remember by the end of 2022, we expect to have guidance that we communicate to have a same-store sales increase of 9%. If we analyze as of the end of the second quarter, we are close to 5% without including the JVs, I mean, just the Soriana format. So obviously, we are far away from the guidance, almost 4 points far away from the guidance. We believe that every quarter, we can increase and improve the performance in same-store sales, particularly because we continue with the remodeling program with the new store program with a private bank penetration. And actually, if you see is something that we are coming from the bottom to better performance. But no matter that we expect that in the third and fourth quarter, we will have a better performance in same-store sales. In order to be realistic, obviously, we will not accomplish the guidance.

[Operator]

Our next question is from Mr. Bob Ford from Bank of America.

[Robert Ford, analyst]

The private label seems to be going very well. Can you talk a little bit about where you are in terms of the penetration for private label for the group as a whole? And how you're thinking about that longer-term equilibrium? And when it comes to remodeling, what kind of lift are you getting in the stores? Where you do some of the major remodeling efforts?

[Rodrigo Córdova, executive]

Sure. Well, going for the first question, Bob, for sure private brand is something that we believe is strategic and is key. Right now, the penetration is in the skin area. The penetration as the total sales of the categories in which we participate. In some formats like Soriana Express, we are close to achieve double digit penetration that obviously is something that makes all the sense because the kind of population that we serve in formats like Soriana Express and Soriana Mercado and the idea both in the medium term is to have a double-digit penetration in all the formats, and particularly in the discount formats like Soriana Mercado and Soriana Express.

We want to achieve a penetration close to 50% of the sales of that format. So it's something that -- in which we are working really, really hard. As I already mentioned in this conference call and the previous one, we created a whole new department of private brand inside the company. We hire best guys in terms of branding, packaging, quality that we find in the world to be part internally or externally of the Soriana private brand team. Every month, we are trying to launch new products with the new image.

And very important to mention the new private brand strategy is not only the entry level. We will have entry-level private brands, commercial label private brand and top-quality private brand. Obviously, that will be differentiated by format and by it will be differentiated also then the self-service brand.

We believe that we are in the right truck -- track, sorry, in this. And as I already mentioned, in some of the formats, the increase of the private brand is really, really important. Also, we have closed important agreements with producers in other countries in China, in Canada and the United States in order to produce our private brands in that country, depending on the category. That is helping us in a very important way. So you will continue hearing in this conference call about the importance and the performance of the private brand book. And the second question about, remember me...

[Robert Ford, analyst]

It was about remodeling, any kind of lift you're seeing as a result of the activity.

[Rodrigo Córdova, executive]

Remodeling, Bob, is something, again, that we are really, really happy. If you remember, Bob, you've several years covering Soriana, probably 7 years ago and after deputation of Comercial Mexicana, we stopped in a very important way the remodeling program, mainly because 2 reasons. The first one is that, obviously, we resized the reduction of the debt as part of the strategy of the use of the free cash flow.

And secondly, because the performance of the remodeling stores on that time was not very satisfactory. And we invest an important amount of money, and we just obtained increases of 10%, 8%, something that really doesn't cover the payback of the increase. Right now, both the new stores and the remodeling stores, the performance is really, really high compared to the historical base of stores of the company.

If we go directly talking about the remodeling stores in average book, the increase that we are seeing is 25%. That is really important and much higher than the one that we obtained in the past years when we make these kind of investments. Obviously, this result, the only thing that can prove because not proof -- can prove is that we have an important amount of stores that the shopping experience, the comfort of the stores, the appearance of the store is already altered, is not in the right level according to the competition or the client.

And when we make these changes, and we completely changed the face of the stores declining new responding. So that is why if you see and analyze, Bob, we are expanding an important amount of money that we doesn't make that in the last years -- previous years in remodeling and the idea is to continue increasing the CapEx year-by-year. This year, we increased the CapEx more than 50% against last year. The most important line, which we are making that investment is in remodeling. I mean just to give you a more specific numbers. But in this year, we are planning to invest just in remodeling a little more of MXN 1.6 billion.

[Robert Ford, analyst]

How many units will you be remodeling with that budget?

[Rodrigo Córdova, executive]

20 -- around 20 stores, Bob.

[Robert Ford, analyst]

Okay. It's big. And then Rodrigo, just going back to the private label question, and you said that in your discount formats, you expect the goal -- or the goal is to be over 50% of sales in private label, correct, which sounds a lot more like soft moving toward a harder discount -- hard discounter.

And my follow-up question was just going to be, how are you thinking about your small box strategy and when you look at opportunities to really grow this business, particularly in convenience concepts, how are you envisioning your strategy moving forward?

[Rodrigo Córdova, executive]

If you remember the name of a very famous book, [indiscernible], basically, Bob is something that will happen in Mexico. I mean we are seeing that there is several facts that proves and can prove that the participation of soft discounts and hard discounts in Mexico will happen. Actually, it's already happening. We have important players that start as a region and our local players as more players participate in particular in hard discounts. That every month is opening stores and have good acceptance.

So I think that is not a specific displays are not like the hard discount Europe in which when you enter to the store is really private brand. In the case of Mexico, what we are seeing is that this hard discounts is like low-income brands, not particularly private brands because it doesn't have the ownership of the product, but it's very low prices brand and it is something that we see as a strategic opportunity, Bob, it is something which we are working on.

Actually, we're already starting to work with the new models of Soriana Express in order to give this term more focus in hard discount/convenience, probably reduce the size of the Soriana Express that already is our smaller format. But for sure, it's a space and an opportunity to even a smaller format. So I think that's something that you will see in the following 10 years in Mexico is an important growth of this kind of format.

[Operator]

Our next question is from Mr. [indiscernible] from Itau.

[Unknown Analyst]

Two, if I may. First, could you please elaborate on the 19% year-on-year increase in inventory that we saw in the quarter with a 6% sales growth. I mean it seems to me that inventory in the quarter was kind of 107 days of cost. So that's the second highest level ever for the quarter. So some color there would be great, please. And second question is, although you mentioned this in your remarks, could you provide some more color on the 90% sequential drop on interest gains, please?

[Rodrigo Córdova, executive]

Yes. Well, first, going to the first question, [ Hakim, ] it is not that seems to you. It's a fact that we have an important increase in the inventory level. Obviously, it's related with a bet in Julio Regalado to volume sales, in which obviously, when you contrast that increase in inventory against the increase in sales, it's affecting the working capital and it's affecting in an important way. We have also to remember that Julio Regalado, still, we have a couple of days, actually, weeks of Julio Regalado with important promotion that will help us to reduce that inventory.

But obviously, we will end Julio Regalado campaign with important levels of inventory. It Is something in which we are working on together with us who are suppliers. Probably the only positive thing about that it's that very basic product. It's -- I mean, it's not a winter cloth, it is oil, it is toilet paper, it is very high turnover product that is -- have an important and very low cost that is much more easy to manage and to take it out in the following months.

Obviously, it's not the situation that we want. But it is not a problem that you can expect that we will maintain that very high inventories for months because, again, it's very basic product that have a very important reduction in the cost that is much more easy to take it out in the following months.

I'm sorry [ Hakim, ] the second question...

[Unknown Analyst]

Yes, you mentioned about -- in your remarks about the low interest gain in the quarter. But if you could provide some more details about that, that would be helpful.

[Rodrigo Córdova, executive]

It is not in the interest, gain, [ Hakim. ] It is in the product finance. Well, let me be more clear on that. Accounting clicking is an product of [indiscernible] but it is related with equity swap, Hakim. That is why I mentioned that it was related with the purchases of the stock of the company. Remember that 3 years ago, we make an equity swap at a price level of MXN 15 that obviously we have an important gain against the level of the stock price that we have already in the Mexican Stock Exchange. But because this is a mark-to-market, what happened is that if I don't remember wrong, the price -- the closing price of last quarter was close to MXN 30, and right now, it's close to MXN 27.

So we are reflecting that. Basically the difference in the variation of that. The positive thing -- I mean, obviously, in this quarter and previous quarter, It is not a cash -- it is not a cash line. But no matter the cash line, it will be a cash line until the date of the -- the due date of the equity swap. Obviously, we have a really, really important gain against MXN 15. No matter if it's MXN 30 or MXN 27, the gain that the company obtained with this equity swap is really, really important. Basically it's that.

[Operator]

Our next question is from Mr. Ulises Argote from JP Morgan.

[Ulises Argote Bolio, analyst]

A follow-up here first on the store modeling. So just beyond the 20 that you were talking about there on Bob's question before. I was just wondering if you can give us any color on what that backlog of stores that are subject to remodeling kind of looks like for the next couple of years? And then the second question here, just to check on the tax rate, it was around like 45%, if I'm not mistaken, for the quarter. So just to understand what drove this and how we should kind of think on your effective tax rate kind of going forward?

[Rodrigo Córdova, executive]

Sure. Well, regarding the first question, if I understand right about the remodeling program, it is something that we will continue for the next -- this year and the next 3 years. We have an important base of stores that require to make this update. And if you make the math, it's not like a likely of data, our investment of MXN 70 million, MXN 80 million per store. So it is important investment in the stocks. But basically, that is the rate that we can make for yes, 20, 25 stores. So still we have an important amount of stores that we have to take it under this remodeling program. So it's something that you have to expect to see the next following 3 years.

Regarding the second question, basically, if you see the tax provision, the important change is not in the effective tax rate. We can break down the tax provision into [indiscernible], cash tax and the deferred tax. The cash tax is basically the same percentage of the income or any measure that you want to take and it is really in accordance to increase in the income before taxes.

Basically, when you see the important changes in the deferred taxes and to be completely clear, the important change that you see in deferred taxes quarter-by-quarter, first quarter to second quarter is mainly because in the calculation of the deferred tax that is a provision. We don't adjust the important changes in the inflation that obviously have an impact in the calculation of the deferred tax, particularly in the value of the land of the company in the first quarter, and we made the adjustment in the second quarter basically it is that.

But again, it's completely related with the deferred tax provision in which by a mistake, we doesn't make the adjustment of the expectation of the inflation going forward in the first quarter and something that we made in the second quarter. But if you analyze the cash tax, it is basically the same. I don't know if I was clear with this, Ulises.

[Ulises Argote Bolio, analyst]

Yes. Yes, completely.

[Operator]

Our next question is from Mr. [indiscernible] from Compass Group.

Mr. [indiscernible] withdrew his question. Our next question is [ Alberto Berti ] from BTG Pactual.

[Unknown Analyst]

I actually wanted to follow up on the discounters question, your discussion with Bob. A couple of questions there. Just one, what do you think has driven the consumer to take on more private label over the last couple of years in Mexico. It seems acceptance generally has come up. And I'm just wondering what you're thinking, the consumer's thinking on that front? And two, if you had any comments on sort of how -- we've heard and we've seen more and more some of these wholesalers, whether it's [indiscernible] just to name one example, have kind of delved into, let's say, [indiscernible], how would you describe that shift? Or if you have any comment as to how that might affect Soriana's competitive position, that would be greatly appreciated.

[Rodrigo Córdova, executive]

Sure. Well, first of all, regarding the first question, I think that in general, in terms the acceptance of the private labels in Mexico have different factors that is helping to the increase of this. First of all, and obviously, in particular, seasons of the economy of the country in which, like an example, when you have an important increase in inflation, not for all the people correspond increasing salaries and obviously, they have an impact in the purchasing power. Take the options of private brands that every year have better quality and still have a better price to the client makes sense.

And particularly for certain kinds of products that the differentiation of the add value that can have a commercial brand again the private brand is not really high. And I mean, in general terms, obviously, we can enter into a very specific discuss, but in certain levels, socioeconomical level if we buy -- if that client buy private brand salt or private brand sugar against commercial brand sugar or private brand or if you buy, this is a challenge -- sorry, I don't know how to say that. Onetime you use products. Basically, it will be really complex for a low-income family, justify why you will buy a brand one used plate than a private brand.

So obviously, there is a lot of categories that make a lot of sense, increase the participation in the shelf of the private brand. Secondly, in the past, and we are talking about probably 6 to 7 years ago. When you talk about the private brands in Mexico -- the private brands have the mass of a low-price, low-Quality product. But that is not what happened right now and actually something that I mentioned right now is good quality, low price product and even further more than that, we are developing high-quality, very competitive price product, obviously, more competitive than the high quality of the commercial brands.

So I think that, that makes a lot of sense, and we are seeing an important response from the consumer. And also you have to take in consideration that, again, probably 15 years ago, to develop a very high-quality product in private brand was much more complex because buy the product to a company in Italy was really complex. But just let me give you some a couple of examples. Right now, important participation of the producers of our private brands are companies in Canada with tremendous high-quality production levels. And it's really, really easy to produce in Canada and take it to Mexico in a very competitive price.

So I think that there are a lot of economical sociocultural logistic facts or factors that is helping to the develop of the private brands in Mexico. And obviously, I think that -- I mean, Soriana is a good example of that, but I think that we have another competitor that also can proves and are really good examples about the importance and the opportunity in the private brands.

Going to the second question, this kind of wholesalers not like a [indiscernible], more similar to cash and carry format, obviously have their market obviously, have an important participation. I have to say that in so many cases, these guys are clients of Soriana. This is really, really ironic, but these guys goes to Julio Regalado promotion and try to buy product. That is why we have to put some rules about the number of SKUs that you can buy in Julio Regalado promotion because in the past, these guys go to the stores to buy. Obviously, that means that they doesn't have the purchasing power in order to achieve that kind of promotion.

But I think that no matter, obviously, they are competitors of Soriana. The reasons why a client go to [indiscernible], why go to Soriana or any other supermarkets are completely different. The shopping mission is completely different. And also, the mix of products is completely different and something really important is fresh categories and perishable and all the sea and beef products.

So it will be really strange to see a traditional Mexican family that it will take a taxi to go and buy some groceries to [ Sorobarrotero ] and then go to Soriana Walmart [indiscernible] to buy the perishables and the fruits because, again, probably for you, it's not an important expense. For the average Mexican family going to the supermarket is an investment of time, money, transportation. So again, I don't want to minimalize and obviously, they are competitors and in some categories are important players.

But I think that the shopping mission why a client or family go to a supermarket and go to one of these formats are completely different.

[Operator]

Our next question is from Ms. [indiscernible] from GBM.

[Unknown Analyst]

My question is regarding the Julio Regalado campaign. I mean, it seems that it has not had yet a material impact on your top line for the last several years as opposed to what we have used to see many years ago. So I want to know what's your strategy to reaccelerate same-store sales. And in what extent are you willing to sacrifice margins to expand this top line?

[Rodrigo Córdova, executive]

Well, first of all, yes, I think that the performance of Julio Regalado, 7 years ago and the participation in the total sales or the annual sales of the company was higher. Yes, the response is yes. Something that is very easy to realize and to notice is that one that we take Commercial Mexicana and Julio Regalado, and we take national promotion and not only regional promotion, all the competitors in the summer start to focus to compete against Julio Regalado.

If you see the promotion campaigns and advertising campaigns of all the competitors in the summer period is directly against Julio Regalado and in so many cases, is a copy of the kind of promotion and advertising of Julio Regalado. So obviously, with the past of the years, 8 years ago, probably the only one that have a 3/2 in toilet paper in summer campaign was Soriana [indiscernible]. Right now, you will see that campaign in other formats. Not for us -- in other competitors.

So obviously, Julio Regalado is really important, advertising speaking and marketing speaking is very powerful. But we have to make some novelties and some changes and some differentiation to the Julio Regalado campaign in order to retake again the importance that used to have 3, 4 years ago. Actually, one of the strategies in order to make this refresh of the Julio Regalado campaign is that we introduced very important promotions in Julio Regalado in fresh product than in the past, if you remember, the Julio Regalado campaign was just focused in groceries, I mean, dry products.

So it's part of the efforts that we have to make in order to refresh the campaign. Like an example, also the pressure low cost that is part of Julio Regalado is the first time that we combined very aggressive, not only multiple promotion. That is the core of Julio Regalado. Julio Regalado, remember that is multiple promotion, volume promotion. Right now, we combine Julio Regalado also volume promotions but also with direct price discounts. So you have like pressure low cost, you have a direct discount buying just 1 piece of 30%, 25%, 40%, combined with other promotion in which you have to make a 3/2, 2/1 and 4/3 purchasing in order to obtain discounts.

So yes, we also believe that we have to refresh to reinforce Julio Regalado because the competitors start to copy and start to have same promotions and same advertising in order to retake the importance of the campaign and it's something in which we are working on.

[Operator]

Our next question is from Mr. Bob Ford from Bank of America.

[Rodrigo Córdova, executive]

I don't know if it was a mistake because Bob already made their question. Or Bob, I don't know if you have another doubt that...

[Robert Ford, analyst]

No. It's another doubt. Ulises asked a question about the deferred taxes, and I wanted to just make sure I understood. And it sounded as if you were -- in the quarter, there was a revaluation. I think you said of land of real estate in the period. And I just want to understand how that creates a deferred tax liability, right, because I don't think I've seen that in previous periods.

[Rodrigo Córdova, executive]

No, you see, Bob, and let's make the breakdown. When you see the deferred tax in the first quarter, we have a negative deferred tax of MXN 124.4 million compared with MXN 68.7 million negative deferred tax in the first quarter of 2022. When you see the second quarter in '22, we have MXN 250.9 million deferred tax negative, but we have a positive MXN 6.4 million deferred tax in 2023.

Basically, this important change was obviously, because the difference in the calculation because the change in inflation and the impact in the assets of the company, particularly the land, but it is due to that the provision that we make in the first quarter that negative MXN 124 million, those things have an update of the inflation perspective going into the future. But that we have -- that we don't make. And it's adjusted in the second quarter, and that is why you are seeing that we passed from a negative MXN 124 million to a positive MXN 6.4 million. If we have made it from the beginning of the year, this will be more -- not so important, the change between one quarter to the other quarter. It will be more normalized. That is the issue in this line.

[Robert Ford, analyst]

And when it comes to the balance sheet, where you -- like there's a little bit more than MXN 10 billion in deferred tax liabilities. Do those ever have a date with destiny that's defined?

[Rodrigo Córdova, executive]

Well, remember this negative deferred tax is taxes that we are paying and that the impact that have this is that the provision that we have in the balance sheet, if you remember, actually, it's a very controversial line in these government and to say that a lot of companies have important amounts of deferred tax in their balance sheet but in the case of Soriana, it is MXN 10.2 billion. It is going down because we are already paying that tax. When you see this negative deferred tax is because we are not so aggressive in the deferred tax strategy, and we are paying. And if you see and it is something that has happened in the last quarter. When you compare the deferred tax line in the balance sheet, is going down 3.6% in the liability.

[Robert Ford, analyst]

Understood. Is there a possibly like a litigation solution that could be pursued in subsequent administrations?

[Rodrigo Córdova, executive]

No. Actually, it's happening in this because we are really conservative. If we continue with a very aggressive tax strategy, I will create more deferred tax and the provision in the balance sheet, it will be going up.

[Operator]

Our next question is from Ms. Camila Azevedo from UBS.

[Camila Villaça Azevedo, analyst]

So we heard that payback shut down in Mexico last June. Could you comment on how this affected your service levels and how you plan to replace it?

[Rodrigo Córdova, executive]

Well, actually, I don't want to sound in an incorrect way, but the reason quite payback is going out from Mexico because first of all was going out from Soriana because we represent probably 60% of payback. It is not payback doesn't make -- going to the future fit to the strategy of the loyalty program because we have our own loyalty program that is really strong.

Basically, when we decide to go out from payback, I don't want to speak by these guys, but it's just probably coincidence that when we decide to go out from payback, a couple of months after they decide to go out for Mexico. But for us it is something that was decided several months ago and all that clients migrate to the loyalty program of Soriana. So for us, it doesn't represent any impact.

[Operator]

That was the last question. This concludes the Q&A session for today.

[Rodrigo Córdova, executive]

Okay. Thank you very much, everyone, for joining us in this conference call. And as always, if you have any additional doubt, please send an e-mail or a call to Claudia or to me, we will be very grateful to receive your call. Thank you very much, and have a good day.

[Operator]

Organización Soriana would like to thank you for participating in today's conference call. You may now disconnect. All conference hosts have hung up. This conference is over. Thank you.